UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of January, 2004
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(Translation of registrant's name into English)
400 GODIN AVENUE, VANIER, QUEBEC, CANADA G1M 2K2
(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 January 7, 2004, EXFO Electro-Optical Engineering Inc., a Canadian
corporation, reported its results of operations for the first fiscal quarter
ended November 30, 2003. 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 first fiscal quarter of
the 2004 fiscal year. This press release and information relating to EXFO's
financial condition and results of operations for the first fiscal quarter of
the 2004 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.
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: /signed/ Germain Lamonde
-------------------------
Name: Germain Lamonde
Title: President and Chief Executive Officer
Date: January 19, 2004
[GRAPHIC OMITTED -- COMPANY LOGO]
EXFO
PRESS RELEASE
================================================================================
1 800 663-3936 info@exfo.com - www.exfo.com Fiber-optic test,
Tel: (418) 683-0211 measurement and
Fax: (418) 683-2170 monitoring equipment
EXFO REPORTS 11.4% SALES GROWTH QUARTER-OVER-QUARTER
o Net book-to-bill ratio at 1.06, best booking in last five quarters
o Gross margin* up 5.2% to 51.0%, best in last four quarters
o GAAP net loss improves to US$0.03 per share
QUEBEC CITY, CANADA, January 7, 2004--EXFO Electro-Optical Engineering Inc.
(NASDAQ: EXFO, TSE: EXF) reported today sales growth of 11.4% and a 5.2%
improvement in gross margin for the first quarter ended November 30, 2003.
Sales reached US$16.0 million in the first quarter of fiscal 2004 compared to
US$14.3 million in the fourth quarter of 2003 and US$17.7 million in the first
quarter of 2003. The net book-to-bill ratio increased to 1.06 in the first
quarter of fiscal 2004 from 0.98 in the previous quarter and 0.89 in the first
quarter of 2003.
Gross margin amounted to 51.0% of sales in the first quarter of fiscal 2004
compared to 45.8% (excluding inventory write-offs and a non-recurring gain) in
the fourth quarter of 2003 and 54.7% in the first quarter of 2003.
Net GAAP loss for the first quarter of fiscal 2004 totaled US$2.0 million, or
US$0.03 per share, compared to a net loss of US$10.1 million, or US$0.16 per
share, for the fourth quarter of 2003 and a net loss of US$2.2 million, or
US$0.03 per share, for the first quarter of 2003. Net loss in the first quarter
of fiscal 2004 included a non-recurring tax gain of US$1.4 million or US$0.02
per share.
"Sequential increases in sales, bookings and gross margin, combined with a tight
control on operating costs and a non-recurring tax gain, have brought us closer
to our goal of reaching break-even, despite the negative impact of the Canadian
dollar," said Germain Lamonde, Chairman, President and CEO of EXFO. "Thanks to
our strong R&D program, we are introducing new and exciting products to respond
to market opportunities, and strengthening our strategic position while placing
a strong focus on improving our gross margin and efficiencies. These initiatives
should help us to increase revenues through market-share gains and return EXFO
to profitability."
SEGMENTED RESULTS
(IN MILLIONS OF US DOLLARS)
LOSS FROM
SALES OPERATIONS**
----------------------------------------------- -----------------
Q1 2004 Q4 2003 Q1 2003 Q1 2004
------------- ------------- ------------- -----------------
BUSINESS SEGMENT
Telecom Division US$12.2 US$10.8 US$14.2 (US$2.4)
Photonics and Life Sciences
Division US$3.8 US$3.5 US$3.5 (US$0.7)
* Excluding inventory write-offs and a non-recurring gain.
** Segmented loss from operations is not available for comparative periods.
[GRAPHIC OMITTED -- COMPANY LOGO]
EXFO
PRESS RELEASE
================================================================================
1 800 663-3936 info@exfo.com - www.exfo.com Fiber-optic test,
Tel: (418) 683-0211 measurement and
Fax: (418) 683-2170 monitoring equipment
BUSINESS HIGHLIGHTS
EXFO successfully completed its business reorganization in the first quarter,
consisting of two separate divisions to better serve its end-markets and
maximize revenues.
The company also introduced seven new products in the first quarter, including
the 10+ Gigabit Multi-Rate Transceiver designed for the next-generation
SONET/SDH equipment manufacturer market. This new product introduction is
aligned with EXFO's strategy to expand both into the protocol layer and system
manufacturer markets.
Finally, EXFO has been working with lead customers to help them efficiently
deploy their planned fiber-to-the-premises (FTTP) networks.
OPERATING EXPENSES
Selling and administrative expenses amounted to US$5.9 million, or 36.7% of
sales, in the first quarter of fiscal 2004 compared to US$6.0 million, or 42.1%
of sales, in the previous quarter and US$7.3 million, or 40.9% of sales, in the
first quarter of 2003.
Gross research and development expenses totaled US$3.6 million, or 22.4% of
sales, in the first quarter of fiscal 2004 compared to US$3.9 million, or 27.0%
of sales, in the previous quarter and US$4.2 million, or 23.7% of sales, in the
first quarter of 2003.
BUSINESS OUTLOOK
EXFO forecasted sales between US$14.0 million and US$17.0 million and a GAAP net
loss between US$0.09 and US$0.06 per share for the second quarter of fiscal
2004.
CONFERENCE CALL AND WEBCAST
EXFO will host a conference call today at 10 a.m. (EST) to review its financial
results for fiscal 2003 during the course of its Annual and Special Meeting of
Shareholders and cover first-quarter results for fiscal 2004. To listen to the
conference call and participate in the question period via telephone, dial
1-416-695-9757. Germain Lamonde, Chairman, President and CEO, and Pierre
Plamondon, CA, Vice-President of Finance and Chief Financial Officer, will
participate in the call. An audio replay of the conference call will be
available between 7 a.m. and 11 p.m. until January 14, 2004. The replay number
is 1-416-695-5275. The audio Webcast of the conference call will also be
available on EXFO's Website at www.exfo.com, under the Investors section.
------------
[GRAPHIC OMITTED -- COMPANY LOGO]
EXFO
PRESS RELEASE
================================================================================
1 800 663-3936 info@exfo.com - www.exfo.com Fiber-optic test,
Tel: (418) 683-0211 measurement and
Fax: (418) 683-2170 monitoring equipment
ABOUT EXFO
EXFO is the recognized expert in the global telecommunications industry through
the design and manufacture of advanced and innovative test and measurement
solutions. The Telecom Division, which represents the company's main business
activity, offers fully integrated and complete test solutions to network service
providers, system vendors and component manufacturers in approximately 70
countries. One of EXFO's strongest competitive advantages is its modular
platform design, providing PC-based, Windows-centric test solutions that
maximize technology reuse across several market segments. The Photonics and Life
Sciences Division mainly leverages core telecom technologies to offer
value-added solutions in high-tech industrial manufacturing and research
sectors. For more information about EXFO, visit WWW.EXFO.COM.
FORWARD-LOOKING STATEMENTS
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 that refer to expectations, projections or other
characterizations of future events and circumstances. They are not guarantees of
future performance and involve risks and uncertainties. Actual results may
differ materially from those in forward-looking statements due to various
factors including global geo-political, economic, competitive and market
uncertainty and our ability to execute successfully in these uncertain
conditions; capital spending levels in the telecommunications sector; market
acceptance of new products and upcoming new products; limited visibility of
customer orders and the timing thereof; the competitive landscape; and
successful integration of our acquired and to-be-acquired companies. Assumptions
relating to the foregoing involve judgments and risks, all of which are
difficult or impossible to predict and many of which are beyond our control.
Other risk factors that may affect our future performance and operations are
detailed in our Annual Report on Form 20-F and our other filings with the U. S.
Securities and Exchange Commission and the Canadian securities commissions. We
believe that the expectations reflected in the forward-looking statements are
reasonable based on information currently available to us, but we cannot assure
you that the expectations will prove to have been correct. Accordingly, you
should not place undue reliance on these forward-looking statements. These
statements speak only as of the date of this document and shall not be revised
or updated to reflect events after the date of this document.
FOR MORE INFORMATION:
Vance Oliver
Investor Relations
(418) 683-0211
vance.oliver@exfo.com
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED BALANCE SHEET
(in thousands of US dollars)
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2003 2003
----------- ----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 5,322 $ 5,366
Short-term investments 52,301 52,010
Accounts receivable
Trade, less allowance for doubtful accounts of $604
($568 as at August 31, 2003) 11,611 9,639
Other 1,373 834
Income taxes and tax credits recoverable 5,744 6,003
Inventories (note 3) 15,787 15,602
Prepaid expenses 1,434 2,041
---------- ----------
93,572 91,495
INCOME TAXES AND TAX CREDITS RECOVERABLE 2,984 1,377
PROPERTY, PLANT AND EQUIPMENT 21,921 21,641
INTANGIBLE ASSETS 13,348 14,068
GOODWILL 18,668 17,673
---------- ----------
$ 150,493 $ 146,254
========== ==========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 4) $ 11,868 $ 12,026
Income taxes payable - 2,200
Deferred revenue 424 148
Current portion of long-term debt 110 110
---------- ----------
12,402 14,484
DEFERRED REVENUE 648 352
DEFERRED GRANTS 1,089 1,139
LONG-TERM DEBT 427 453
---------- ----------
14,566 16,428
---------- ----------
CONTINGENCY (note 7)
SHAREHOLDERS' EQUITY
Share capital 492,513 492,452
Stock-based compensation plans (note 2) 5 -
Contributed surplus 1,525 1,519
Cumulative translation adjustment 15,680 7,643
Deficit (373,796) (371,788)
---------- ----------
135,927 129,826
---------- ----------
$ 150,493 $ 146,254
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTSYEARS OF EARNINGS
(in thousands of US dollars, except share and per share data)
THREE MONTHS ENDED
NOVEMBER 30,
--------------------
2003 2002
-------- --------
SALES $ 15,962 $ 17,748
COST OF SALES 7,815 8,031
-------- --------
GROSS MARGIN 8,147 9,717
-------- --------
OPERATING EXPENSES
Selling and administrative 5,857 7,262
Net research and development (note 5) 2,829 3,311
Amortization of property, plant and equipment 1,321 1,272
Amortization of intangible assets 1,285 1,434
-------- --------
TOTAL OPERATING EXPENSES 11,292 13,279
-------- --------
LOSS FROM OPERATIONS (3,145) (3,562)
Interest income, net 156 256
Foreign exchange gain (loss) (470) 27
-------- --------
LOSS BEFORE INCOME TAXES (3,459) (3,279)
-------- --------
INCOME TAXES (note 6)
Current (1,451) 3,760
Future - (4,881)
-------- --------
(1,451) (1,121)
-------- --------
NET LOSS FOR THE PERIOD $ (2,008) $ (2,158)
======== ========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.03) $ (0.03)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S) 63,058 62,359
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S) (note 8) 63,657 62,753
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTSYEARS OF DEFICIT
AND CONTRIBUTED SURPLUS
(in thousands of US dollars)
DEFICIT
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2003 2002
--------- ---------
BALANCE - BEGINNING OF PERIOD $(371,788) $(316,838)
ADD
Net loss for the period (2,008) (2,158)
--------- ---------
BALANCE - END OF PERIOD $(373,796) $(318,996)
========= =========
CONTRIBUTED SURPLUS
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------
2003 2002
--------- ---------
BALANCE - BEGINNING OF PERIOD $ 1,519 $ 1,487
ADD
Premium on resale of share capital 6 8
--------- ---------
BALANCE - END OF PERIOD $ 1,525 $ 1,495
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTSYEARS OF CASH FLOWS
(in thousands of US dollars)
THREE MONTHS ENDED
NOVEMBER 30,
--------------------
2003 2002
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (2,008) $ (2,158)
Add (deduct) items not affecting cash
Discount on short-term investments 231 257
Stock-based compensation costs (note 2) 5 -
Amortization 2,606 2,706
Future income taxes - (4,881)
Deferred revenue 531 (274)
Deferred grants (122) (42)
Change in non-cash operating items
Accounts receivable (1,861) (375)
Income taxes and tax credits (3,147) 5,305
Inventories 850 2,195
Prepaid expenses 730 31
Accounts payable and accrued liabilities (791) 113
-------- --------
(2,976) 2,835
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (25) (36)
Issuance of share capital 61 -
Redemption of share capital (2) (6)
Resale of share capital 8 14
Share issue expenses - 4
-------- --------
42 (24)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (79,925) (88,749)
Proceeds from disposal of short-term investments 82,841 87,389
Additions to property, plant and equipment and intangible assets (405) (1,649)
Business combination - (1,841)
-------- --------
2,511 (4,850)
-------- --------
CHANGE IN CASH (423) (2,039)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH 379 (8)
CASH - BEGINNING OF PERIOD 5,366 9,128
-------- --------
CASH - END OF PERIOD $ 5,322 $ 7,081
======== ========
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 November 30, 2003, and for the periods
ended November 30, 2002 and 2003, is unaudited. In the opinion of
management, all adjustments necessary to present fairly the results of
these periods in accordance with generally accepted accounting principles
in Canada have been included. The adjustments made were of a normal
recurring nature. Interim results may not necessarily be indicative of
results anticipated for the entire 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, except for changes as
described in note 2. 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.
Certain comparative figures have been reclassified to conform with the
current period's presentation.
2 NEW ACCOUNTING STANDARDS AND PRONOUNCEMENTS
On September 1, 2003, the company implemented the documentation required by
Accounting Guideline 13 of the Canadian Institute of Chartered Accountants
(CICA) handbook, "Hedging Relationship", which concerns the identification,
designation and effectiveness of its forward exchange contracts for the
purposes of applying hedge accounting. Consequently, the company's forward
exchange contracts, which are used to hedge anticipated US-dollar
denominated sales, continue to qualify for hedge accounting; foreign
exchange translation gains and losses on these contracts continue to be
recognized as an adjustment of the revenue when the sales are recorded.
On September 1, 2003, the company prospectively adopted the amendments made
to handbook section 3870, "Stock-Based Compensation and Other Stock-Based
Payments". These amendments require an expense to be recognized in
financial statements for all forms of employee stock-based compensation,
including stock options, using a fair value-based method. The fair value of
the 60,000 stock options granted to employees during the three months ended
November 30, 2003 amounted to $115,000. The corresponding stock-based
compensation costs were amortized using the graded vesting method,
resulting in stock-based compensation costs of $5,000 recorded in the
selling and administrative expenses in the statement of earnings for that
period.
However, the company is still required to disclose pro forma information
with respect to net loss and net loss per share as if stock-based
compensation costs were recognized in the financial statements using the
fair value-based method for options granted in fiscal 2003. Therefore, if
the fair value-based method had been used to account for stock-based
compensation costs related to stock options granted to employees in that
fiscal year, the net loss and net loss per share figures would be as
follows on a pro forma basis:
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 ENDED
NOVEMBER 30,
-----------------------------------------
2003 2002
------------------ ------------------
(UNAUDITED)
Net loss for the period $ (2,008) $ (2,158)
Pro forma adjustment for stock-based compensation costs (54) (57)
------------------ ------------------
Pro forma net loss for the period $ (2,062) $ (2,215)
================== ==================
Basic and diluted net loss per share $ (0.03) $ (0.03)
Basic and diluted pro forma net loss per share $ (0.03) $ (0.04)
These options, which have a weighted average fair value of $0.89 each, will
generate aggregate stock-based compensation costs of $928,400 over their
vesting periods.
The fair value of options granted in 2002 and 2003 was estimated using the
Black-Scholes options valuation model with the following weighted average
assumptions:
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2003 2002
------------------ ------------------
(UNAUDITED)
Risk-free interest rate 3.1% 4.2%
Expected volatility 103% 80%
Dividend yield Nil Nil
Expected life 41 months 29 months
In July 2003, the CICA issued handbook sections 1100 and 1400, "Generally
Accepted Accounting Principles" and "General Standards of Financial
Statements Presentation", which are effective for fiscal years beginning on
or after October 1, 2003. Among other things, these new sections define
generally accepted accounting principles (GAAP), establishe the relative
authority of various types of CICA Accounting Standards Board
pronouncements and clarify the role of "industry practice" in applying
GAAP. The company will adopt these new standards on September 1, 2004 and
has not yet determined the impact they will have on its financial
statements.
3
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)
3 INVENTORIES
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2003 2003
----------------- ------------------
(UNAUDITED)
Raw materials $ 8,260 $ 8,188
Work in progress 1,355 1,022
Finished goods 6,172 6,392
----------------- ------------------
$ 15,787 $ 15,602
================= ==================
4 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2003 2003
----------------- ------------------
(UNAUDITED)
Trade $ 4,836 $ 4,227
Salaries and social benefits 3,168 3,462
Warranty 406 687
Tax on capital 566 381
Restructuring charges 1,875 2,468
Other 1,017 801
----------------- ------------------
$ 11,868 $ 12,026
================= ==================
5 NET RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------------
2003 2002
--------------- -------------
(UNAUDITED)
Gross research and development expenses $ 3,573 $ 4,207
Research and development tax credits (741) (881)
Government grants (3) (15)
--------------- -------------
$ 2,829 $ 3,311
=============== =============
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)
6 INCOME TAXES
During the three months ended November 30, 2003, the company recorded
$1,406,000 for the non-recurring recovery of income taxes paid in previous
periods following the receipt of a tax assessment during that period.
Furthermore, considering current market conditions and because the company
recorded operating losses for the current period and the last two fiscal
years, the company no longer recognizes future income tax assets on
deductible temporary differences, which causes its income tax recovery to
be distorted in relation with its pre-tax accounting income.
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.
On April 19, 2002, the plaintiffs filed an amended complaint containing
master allegations against all of the underwriters in all of the 310 cases
included in this class action and, also filed an amended complaint
containing allegations specific to four of the company's underwriters, the
company and two of its executive officers. In addition to the allegations
mentioned above, the amended complaint alleges that the underwriters (i)
used their analysts to manipulate the stock market; and (ii) implemented
schemes that allowed issuer insiders to sell their shares rapidly after an
initial public offering and benefit from high market prices. As concerns
the company and its two executive officers in particular, the amended
complaint alleges that (i) the company's registration statement was
materially false and misleading because it failed to disclose the
additional commissions and compensation to be received by underwriters;
(ii) the two named executive officers learned of or recklessly disregarded
the alleged misconduct of the underwriters; (iii) the two named executive
officers had motive and opportunity to engage in alleged wrongful conduct
due to personal holdings of the company's stock and the fact that an
alleged artificially inflated stock price could be used as currency for
acquisitions; and (iv) the two named executive officers, by virtue of their
positions with the company, controlled the company and the contents of the
registration statement and had the ability to prevent its issuance or cause
it to be corrected. The plaintiffs in this suit seek an unspecified amount
for damages suffered.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
In July 2002, the issuers filed a motion to dismiss the plaintiffs' amended
complaint and judgment was rendered on February 19, 2003. Only one of the
claims against the company was dismissed. On October 8, 2002, the claims
against its officers were dismissed pursuant to the terms of Reservation of
Rights and Tolling Agreements entered into with the plaintiffs.
On June 26, 2003, the Plaintiff's Executive Committee announced that a
proposed settlement between the issuers and their directors and officers
and the plaintiffs had been structured. A Memorandum of Understanding
("MOU") to settle the plaintiffs' claims against the issuers and their
directors and officers has now been approved as to form and the process of
obtaining approval by all parties to the MOU is now underway. The parties
will be required to prepare many complex documents necessary to consummate
the settlement, which will be submitted to the Court for preliminary
approval. Final approval will be required by the Court following notice to
class members and a fairness hearing. If this tentative settlement is
successfully finalized, the company and the individual defendants will be
released from the litigation. Any direct financial impact of the proposed
settlement is expected to be borne by the company's insurance carriers.
Since the settlement process is subject to a fairness hearing and final
court approval, it is possible that it could fail. Therefore, it is not
possible to predict the final outcome of the case, nor determine the amount
of any possible losses. If the settlement process fails, the company will
continue to defend its position in this litigation that the claims against
it, and its officers, are without merit. Accordingly, no provision for this
case has been made in the interim consolidated financial statements as of
November 30, 2003.
8 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:
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2003 2002
------------------ ------------------
(UNAUDITED)
Basic weighted average number of shares outstanding (000's) 63,058 62,359
Dilutive effect of stock options (000's) 456 179
Dilutive effect of restricted stock awards (000's) 143 215
------------------ ------------------
Diluted weighted average number of shares outstanding (000's) 63,657 62,753
================== ==================
Stock options excluded from the calculation of diluted loss per share
because their exercise price was greater than the average market price
of the common shares (000's) 1,970 2,577
================== ==================
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 diluted loss per share for the periods ended November 30, 2002 and
2003, was the same as the basic loss per share since the dilutive effect of
stock options and restricted stock awards should not be included in the
calculation; otherwise, the effect would be anti-dilutive. Accordingly,
diluted loss per share for those periods was calculated using the basic
weighted average number of shares outstanding.
9 SEGMENT INFORMATION
In September 2003, the company reorganized its business under two
reportable segments: Telecom Division and Photonics and Life Sciences
Division. The Telecom Division meets the physical-, optical- and
protocol-layer test and measurement needs of network service providers,
system vendors and component manufacturers throughout the global
communications industry. The Photonics and Life Sciences Division mainly
leverages developed and acquired technologies for high-tech industrial
manufacturing and research markets.
EXFO's President and Chief Executive Officer ("CEO") has been identified as
the chief operating decision-maker in assessing the performance of the two
segments and the allocation of resources to the segments. Each reportable
segment is managed separately. Earnings (loss) from operations represent
the primary measure used by the CEO in assessing performance of the
reportable segments. The accounting policies of the reportable segments are
the same as those applied in the consolidated financial statements.
Until August 31, 2003, the company was organized under one reportable
segment, being the development, manufacturing and marketing of fiber-optic
test, measurement and monitoring solutions for the global
telecommunications industry.
The following tables sets out information by segment:
THREE MONTHS ENDED NOVEMBER 30, 2003
--------------------------------------------------------------------
PHOTONICS AND LIFE
TELECOM DIVISION SCIENCES DIVISION TOTAL
------------------- -------------------- --------------------
(UNAUDITED)
Sales $ 12,142 $ 3,820 $ 15,962
Loss from operations $ (2,380) $ (765) $ (3,145)
Unallocated items
Interest income, net 156
Foreign exchange gain (loss) (470)
--------------------
Loss before income taxes (3,459)
Income taxes (1,451)
--------------------
Net loss $ (2,008)
====================
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)
Comparative information for the loss from operations is not provided for
each reportable segment because this information is not available and is
impracticable to determine.
THREE MONTHS ENDED NOVEMBER 30, 2002
--------------------------------------------------------------------
PHOTONICS AND LIFE
TELECOM DIVISION SCIENCES DIVISION TOTAL
------------------- -------------------- --------------------
(UNAUDITED)
Sales $ 14,204 $ 3,544 $ 17,748
AS AT
AS AT AUGUST 31,
NOVEMBER 30, 2003 2003
---------------------- ----------------------
(UNAUDITED)
TOTAL ASSETS
Telecom Division $ 126,266 $ 121,173
Photonics and Life Sciences Division 24,227 25,081
---------------------- ----------------------
$ 150,493 $ 146,254
====================== ======================
10 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
20 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 consolidated annual financial statements
and provides a quantitative analysis of all 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 LOSS TO CONFORM WITH U.S. GAAP
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2003 2002
------------------ ------------------
(UNAUDITED)
Net loss for the period in accordance with Canadian GAAP $ (2,008) $ (2,158)
Stock-based compensation costs related to stock option plan 98 (53)
Stock-based compensation costs related to stock purchase plan (61) (71)
Stock-based compensation costs related to restricted stock award plan (173) (347)
Unrealized gains on forward exchange contracts a) 601 -
Amortization of intangible assets - 239
Future income taxes on amortization of intangible assets - (80)
------------------ ------------------
Net loss for the period in accordance with U.S. GAAP (1,543) (2,470)
Other comprehensive income (loss)
Foreign currency translation adjustments 7,614 (601)
------------------ ------------------
Comprehensive income (loss) $ 6,071 $ (3,071)
================== ==================
Basic and diluted net loss per share in accordance with U.S. GAAP $ (0.02) $ (0.04)
SHAREHOLDERS' EQUITY
As a result of the aforementioned adjustments to net loss, significant
differences with respect to shareholders' equity under U.S. GAAP are as
follows:
SHARE CAPITAL
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2003 2003
--------------------- ----------------------
(UNAUDITED)
Share capital in accordance with Canadian GAAP $ 492,513 $ 492,452
Stock-based compensation costs related to stock purchase plan
Current period (14) (75)
Cumulative effect of prior periods 2,403 2,478
Reclassification from other capital upon exercise of restricted stock
awards
Current period - 1,582
Cumulative effect of prior periods 4,852 3,270
Shares issued upon business combinations
Cumulative effect of prior periods 65,584 65,584
--------------------- ----------------------
Share capital in accordance with U.S. GAAP $ 565,338 $ 565,291
===================== ======================
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)
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AS AT
NOVEMBER 30, AUGUST 31,
20003 2003
--------------------- ----------------------
(UNAUDITED)
Deferred stock-based compensation costs in accordance with Canadian
GAAP $ - $ -
Stock-based compensation costs related to stock-based compensation
plans
Current period (115) -
Cumulative effect of prior periods (1,278) (2,867)
Amortization for the period 280 1,483
Reduction of stock-based compensation costs 13 106
--------------------- ----------------------
Deferred stock-based compensation costs in accordance with U.S. GAAP $ (1,100) $ (1,278)
===================== ======================
OTHER CAPITAL
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2003 2003
--------------------- ----------------------
(UNAUDITED)
Other capital in accordance with Canadian GAAP $ - $ -
Stock-based compensation costs related to stock-based compensation
plans
Current period 115 -
Cumulative effect of prior periods 10,281 10,963
Reduction of stock-based compensation costs (138) (682)
Reclassification to share capital upon exercise of restricted stock
awards
Current period - (1,582)
Cumulative effect of prior periods (4,852) (3,270)
--------------------- ----------------------
Other capital in accordance with U.S. GAAP $ 5,406 $ 5,429
===================== ======================
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)
DEFICIT
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2003 2003
--------------------- ---------------------
(UNAUDITED)
Deficit in accordance with Canadian GAAP $ (373,796) $ (371,788)
Stock-based compensation costs related to stock-based compensation
plans
Current period (136) (832)
Cumulative effect of prior periods (11,406) (10,574)
Unrealized gains on forward exchange contracts, net of related
future income taxes
Current period 601 1,102
Cumulative effect of prior periods 1,451 349
Change in reporting currency
Cumulative effect of prior periods 1,016 1,016
Future income taxes on acquired in-process research and development
Cumulative effect of prior periods (1,380) (1,380)
Amortization of intangible assets
Current period - 832
Cumulative effect of prior periods 1,071 239
Future income taxes on amortization of intangible assets
Current period - (279)
Cumulative effect of prior periods (359) (80)
Write-down of goodwill and intangible assets
Current period - 6,178
Cumulative effect of prior periods (56,379) (62,557)
Future income taxes on write-down of intangible assets
Cumulative effect of prior periods 1,154 1,154
Valuation allowance on future income tax assets
Current period - (252)
Cumulative effect of prior periods (252) -
Amortization of goodwill
Cumulative effect of prior periods (17,716) (17,716)
--------------------- ---------------------
Deficit in accordance with U.S. GAAP $ (456,131) $ (454,588)
===================== =====================
ACCUMULATED OTHER COMPREHENSIVE INCOME
AS AT AS AT
NOVEMBER 30, AUGUST 31,
2003 2003
--------------------- ----------------------
(UNAUDITED)
Foreign currency translation adjustments
Balance - Beginning of period $ 6,104 $ (9,870)
Change during the period 7,614 15,974
--------------------- ----------------------
Balance - End of period $ 13,718 $ 6,104
--------------------- ----------------------
BALANCE SHEETS
The following table summarizes the significant differences in balance sheet items between Canadian GAAP and U.S. GAAP.
AS AT NOVEMBER 30, 2003 AS AT AUGUST 31, 2003
--------------------------------------- ----------------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
(UNAUDITED) (UNAUDITED)
Goodwill
Cost $ 94,624 $ 103,573 $ 89,721 $ 101,397
Accumulated amortization (75,956) (94,176) (72,048) (92,610)
------------------- ------------------- ------------------- --------------------
$ 18,668 $ 9,397 $ 17,673 $ 8,787
=================== =================== =================== ====================
Shareholders' equity
Share capital $ 492,513 $ 565,338 $ 492,452 $ 565,291
Stock-based compensation plans 5 - - -
Deferred stock-based
compensation costs - (1,100) - (1,278)
Other capital - 5,406 - 5,429
Contributed surplus 1,525 1,525 1,519 1,519
Cumulative translation
adjustment 15,680 - 7,643 -
Deficit (373,796) (456,131) (371,788) (454,588)
Accumulated other
comprehensive income - 13,718 - 6,104
------------------- ------------------- ------------------- --------------------
$ 135,927 $ 128,756 $ 129,826 $ 122,477
=================== =================== =================== ====================
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)
STATEMENTS OF CASH FLOWS
For the three months ended November 30, 2002 and 2003, there are no
significant differences between the statements of cash flows under Canadian
GAAP as compared to U.S. GAAP.
RECONCILIATION ITEM
a) Forward exchange contracts
On September 1, 2003, the company put in place the documentation
required by the Accounting Guideline 13 of the CICA handbook "Hedging
Relationship" for the identification, designation and effectiveness of
its forward exchange contracts, for the purposes of applying hedge
accounting, as described in note 2.
With this documentation in place, the forward exchange contracts
entered into by the company after September 1, 2003 will qualify for
hedge accounting treatment under U.S. GAAP. Consequently, changes in
the fair value of these contracts will be charged to other
comprehensive income. Changes in the fair value of contracts entered
into prior to September 1, 2003 continue to be charged in the
statements of earnings. Since September 1, 2003, the company did not
enter into new forward exchange contracts.
NEW ACCOUNTING STANDARD
On September 1, 2003, the company prospectively adopted Statement of
Financial Accounting Standard (SFAS) 123, "Accounting for Stock-Based
Compensation", under the revised transition provisions of SFAS 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure". Upon
the adoption of SFAS 123 and SFAS 148, the company recognized stock-based
compensation costs for stock options granted to employees since September
1, 2003, using the fair value-based method. This new method of accounting
is similar to the new method adopted under Canadian GAAP, as described in
note 2. Consequently, no difference arose upon the adoption of this
statement.
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 ECONOMIC UNCERTAINTY, CAPITAL SPENDING
LEVELS IN THE TELECOMMUNICATIONS AND HIGH-TECH INDUSTRIAL MANUFACTURING SECTORS,
FLUCTUATING EXCHANGE RATES AND OUR ABILITY TO EXECUTE IN THESE UNCERTAIN
CONDITIONS; THE EFFECTS OF THE ADDITIONAL ACTIONS WE HAVE TAKEN IN RESPONSE TO
SUCH ECONOMIC UNCERTAINTY (INCLUDING 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 NEW
PRODUCTS AND OTHER UPCOMING PRODUCTS; LIMITED VISIBILITY WITH REGARDS TO
CUSTOMER ORDERS AND THE TIMING OF SUCH ORDERS; OUR ABILITY TO SUCCESSFULLY
INTEGRATE OUR ACQUIRED AND TO-BE-ACQUIRED BUSINESSES; OUR ABILITY TO
SUCCESSFULLY REALIGN OUR STRATEGIC BUSINESS PLAN; THE RETENTION OF KEY TECHNICAL
AND MANAGEMENT PERSONNEL; 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 COMMISSION. 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.
INDUSTRY OVERVIEW
Network service providers (NSPs), the first link in the global
telecommunications supply chain, continuously reduced their capital expenditure
(CAPEX) budget levels during the last two-and-a-half years. In the first quarter
of fiscal 2004 (ended November 30, 2003), however, some NSPs incrementally
increased their CAPEX spending which can be attributed to seasonal budget
flush-outs.
This moderate increase in spending necessarily produced a trickle-down
effect throughout the telecommunications industry. System manufacturers
benefited from increased pockets of activity in metro and access networks.
Optical component manufacturers, who had been hardest hit by the downturn, still
struggled due to few deployments of next-generation optical networks. Some test
and measurement equipment vendors attracted the attention of NSPs and system
manufacturers as their products enabled customers to reduce both CAPEX and
operating expenses (OPEX).
1
COMPANY OVERVIEW
We introduced seven new products in the first quarter of fiscal 2004,
including the 10+ Gigabit Multi-Rate Transceiver with deep channelization and
mixed payload concatenations for next-generation optical networks. This
protocol-layer test module simulates and monitors live traffic on each
individual channel, enabling system manufacturers to reduce test time and
increase test thoroughness on the production floor.
NEW BUSINESS STRUCTURE
At the beginning of fiscal 2004, we reorganized our business under two
new reportable segments: Telecom Division and Photonics and Life Sciences
Division. Our objectives behind this reorganization were to simplify our
business model, adopt a market approach rather than a product approach and
increase accountability throughout the organization. Our Telecom Division, which
consists of former Portable and Monitoring and telecom-related Industrial and
Scientific product lines, meets the physical-, optical- and protocol-layer test
and measurement needs of NSPs, system vendors and component manufacturers
throughout the global telecommunications industry. Our Photonics and Life
Sciences Division, which includes previous non-telecom Industrial and Scientific
product lines, mainly leverages developed and acquired technologies for diverse
high-tech industrial manufacturing and research markets.
This simplified business structure - with respective sales, marketing,
manufacturing, research and development and management teams for each division -
enables us to better serve our diverse customer base and maximize shareholder
value.
EXFO's President and Chief Executive Officer ("CEO") has been
identified as the chief operating decision-maker in assessing the performance of
the two segments and the allocation of resources to the segments. Earnings
(loss) from operations represent the primary measure used by the CEO in
assessing performance of the reportable segments. Please refer to note 9 of our
interim consolidated financial statements for detailed segment information.
Until August 31, 2003, the company was organized under one reportable
segment; that is the development, manufacturing and marketing of fiber-optic
test, measurement and monitoring solutions for the global telecommunications
industry.
OUR STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER RESULTS
For a complete description of our strategy and the related key
performance indicators as well as our capabilities to deliver results, please
refer to the corresponding sections in our most recent annual report filed with
the securities commissions.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a complete description of our critical accounting policies and
estimates, please refer to the critical accounting policies and estimates in our
most recent annual report filed with the securities commissions. The following
details the changes in critical accounting policies that occured since our most
recent annual report:
HEDGING RELATIONSHIP. On September 1, 2003, we implemented the
documentation required by Accounting Guideline 13 of the Canadian Institute of
Chartered Accountants (CICA) handbook, "Hedging Relationship", which concerns
the identification, designation and
2
effectiveness of our forward exchange contracts for the purposes of applying
hedge accounting. Consequently, our forward exchange contracts, which are used
to hedge anticipated US-dollar denominated sales, continue to qualify for hedge
accounting; foreign exchange translation gains and losses on these contracts
continue to be recognized as an adjustment of the revenue when the sales are
recorded.
STOCK-BASED COMPENSATION COSTS. On September 1, 2003, we prospectively
adopted the amendments made to handbook section 3870, "Stock-Based Compensation
and Other Stock-Based Payments". These amendments require an expense to be
recognized in financial statements for all forms of employee stock-based
compensation, including stock options, using a fair value-based method. The fair
value-based method involves significant subjective assumptions such as the
expected volatility of our stocks and the expected life of the options. The fair
value of the 60,000 stock options granted to our employees during the three
months ended November 30, 2003, amounted to $115,000. The corresponding
stock-based compensation costs were amortized using the graded vesting method,
resulting in stock-based compensation costs of $5,000 recorded in the selling
and administrative expenses in the statement of earnings for that period.
However, we are still required to disclose pro forma information with
respect to net loss and net loss per share as if stock-based compensation costs
were recognized in the financial statements using the fair value-based method
for options granted in fiscal 2003; i.e., before the adoption of these
amendments.
3
RESULTS OF OPERATIONS
The following discussion and analysis of our consolidated financial
condition and results of operations for the three months ended November 30, 2002
and 2003 should be read in conjunction with our interim consolidated financial
statements and the related notes thereto. Our interim consolidated financial
statements have been prepared in accordance with Canadian generally accepted
accounting principles (Canadian GAAP), which conform in all material respects
with United States generally accepted accounting principles (U.S. GAAP), except
as described in note 10 to our interim consolidated financial statements. The
following table sets forth interim consolidated statements of earnings data in
thousands of US dollars, except per share data, and as a percentage of sales for
the periods indicated:
THREE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
---------------------------------- ------------------------------
2003 2002 2003 2002
---------------- ---------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
Sales $ 15,962 $ 17,748 100.0% 100.0%
Cost of sales (1) 7,815 8,031 49.0 45.3
---------------- ---------------- -------------- --------------
Gross margin 8,147 9,717 51.0 54.7
---------------- ---------------- -------------- --------------
Operating expenses
Selling and administrative (1) 5,857 7,262 36.7 40.9
Net research and development 2,829 3,311 17.7 18.7
Amortization of property, plant and
equipment (1) 1,321 1,272 8.3 7.1
Amortization of intangible assets (1) 1,285 1,434 8.0 8.1
---------------- ---------------- -------------- --------------
Total operating expenses 11,292 13,279 70.7 74.8
---------------- ---------------- -------------- --------------
Loss from operations (3,145) (3,562) (19.7) (20.1)
Interest income, net 156 256 0.9 1.4
Foreign exchange gain (loss) (470) 27 (2.9) 0.2
---------------- ---------------- -------------- --------------
Loss before income taxes (3,459) (3,279) (21.7) (18.5)
Income taxes (1,451) (1,121) (9.1) (6.3)
---------------- ---------------- -------------- --------------
Net loss for the period $ (2,008) $ (2,158) (12.6)% (12.2)%
================ ================ ============== ==============
Basic and diluted net loss per share $ (0.03) $ (0.03)
OTHER STATEMENTS OF EARNINGS DATA:
Segment information:
Sales
Telecom Division $ 12,142 $ 14,204
Photonics and Life Sciences Division 3,820 3,544
---------------- ----------------
$ 15,962 $ 17,748
================ ================
Loss from operations: (2)
Telecom Division $ (2,380) $ - (14.9)% -%
Photonics and Life Sciences Division (765) - (4.8) -
---------------- ---------------- -------------- --------------
$ (3,145) $ - (19.7)% -%
================ ================ ============== ==============
Research and development data:
Gross research and development $ 3,573 $ 4,207 22.4% 23.7%
Net research and development $ 2,829 $ 3,311 17.7% 18.7%
(1) Certain comparative figures have been reclassified to conform with the
current year's presentation.
(2) Comparative segment information for the loss from operations is not
available and is impracticable to determine.
4
SALES
For the three months ended November 30, 2003, our global sales
decreased 10.1% to $16.0 million from $17.7 million for the same period last
year, with a 76%-24% split in favor of our Telecom Division.
TELECOM DIVISION
For the three months ended November 30, 2003, sales of our Telecom
Division decreased 14.5% to $12.2 million from $14.2 million for the same period
last year. Our sales for the first quarter of fiscal 2004 were affected by
increased pricing pressure and general reduction of CAPEX and OPEX budgets from
NSPs and system vendors, especially in the United States. Despite the overall
decrease of our Telecom sales year-over-year, sales of protocol-layer solutions
continued to gain traction, with nearly 10% increase year-over-year and
representing almost 10% of global revenue for the first quarter of fiscal 2004.
This is a clear indication that our protocol-layer activities are a key driver
in ensuring our long-term growth.
Despite the decrease in our sales year-over-year, our sales increased
12.5% in the first quarter of fiscal 2004 compared to the fourth quarter of
2003, mainly because of end-of-year budget flush-outs.
PHOTONICS AND LIFE SCIENCES DIVISION
For the three months ended November 30, 2003, sales of our Photonics
and Life Sciences Division increased 7.8% to $3.8 million from $3.5 million for
the same period last year. The slight increase in sales is due to the increased
demand for our high-tech industrial manufacturing solutions, mainly our X-CITETM
120 Fluorescence illumination System.
For the upcoming quarter, we expect the sales split between the two
divisions to remain relatively unchanged.
Overall, for the two divisions, net accepted orders increased 7% to
$16.9 million in the first quarter of fiscal 2004 from $15.8 million for the
same period last year. Larger end-of-year budget flush-outs from some NSPs
year-over-year, resulted in our net accepted orders to increase. Our net
book-to-bill ratio increased to 1.06 in the first quarter of 2004, from 0.89
year-over-year. It is the first time since the fourth quarter of 2002 that our
net book-to-bill ratio is above 1.0, which is a positive sign.
In terms of the geographic distribution of our sales, North American
sales accounted for 56% and 61% of global sales for the three months ended
November 30, 2003 and 2002, respectively. International sales represented 44%
and 39% of global sales for the three months ended November 30, 2003 and 2002,
respectively. The shift in the geographic distribution of our sales is directly
related to the decrease of our sales to the North American market, especially in
the United States, since our international sales remained flat (in dollars)
year-over-year at approximately $7 million. Our sales to the U.-S. market are
slowly increasing since their significant drop in the second quarter of fiscal
2003.
We sell our products to a broad range of customers across our two
divisions, including NSPs, optical component and system manufacturers, as well
as high-tech industrial manufacturers and research and development laboratories.
For the three months ended November 30, 2003, no customer accounted for more
than 8.4% of our sales. For the same period last year, we had only one 10%
customer, with 12.9% of our sales.
5
Considering the sales level and the net book-to-bill ratio for the
first quarter of fiscal 2004 as well as the expected market-share gain in
protocol testing, we still believe in a 10% sales growth year-over-year, in a
stable or slightly declining telecommunications market.
GROSS MARGIN
Gross margin amounted to 51.0% of sales for the three months ended
November 30, 2003, compared to 54.7% for the same period last year.
Existing market conditions and sustained pricing pressure inevitably
led to margin erosion in the first quarter of fiscal 2004. In addition, shift in
product mix in favor of field-testing products (vs. benchtop products) caused
our gross margin to decrease. Field-testing units tend to have lower margin than
benchtop instruments. Furthermore, we use distributors for most of our
international sales, which cause our gross margin to be lower since our
international sales represented a larger portion of our sales year-over-year.
Finally, the increased strength of the Canadian dollar, compared to the US
dollar during the first quarter of fiscal 2004, negatively affected our gross
margin to some extent as some cost of sales elements are denominated in Canadian
dollars. Our recent cost-cutting measures and our increased efficiency prevented
a further reduction of our gross margin.
The 51% gross margin reached in the first quarter of fiscal 2004 leads
us to believe that our 50% gross margin objective for fiscal 2004 is attainable.
However, our gross margin may fluctuate quarter-over-quarter as our sales may
fluctuate. Furthermore, our gross margin can be negatively affected by increased
competitive pricing pressure, increased obsolescence costs, shifts in product
mix, under-absorption of fixed manufacturing costs and increases in product
offerings by other suppliers in our industry.
It should be noted that a new presentation was adopted, which certain
expenses were reclassified from selling and administrative expenses to cost of
sales. Consequently, comparative figures have also been reclassified, resulting
in a cost of sales increase of 2.0% for the first quarter of 2003, with a
comparable decrease in selling and administrative expenses for the same period.
SELLING AND ADMINISTRATIVE
For the three months ended November 30, 2003, selling and
administrative expenses were $5.9 million, or 36.7% of sales, compared to $7.3
million, or 40.9% of sales for the same period last year. As a result of our
restructuring plans and tight cost-control measures, we were able to reduce our
selling and administrative expenses by nearly 20% year-over-year. The decrease
in global sales, in the first quarter of fiscal 2004, also resulted in lower
commission expenses.
However, the increased strength of the Canadian dollar, compared to the
US dollar, in the first quarter of fiscal 2004, prevented us from further
reducing our selling and administrative expenses as some of our selling and
administrative expenses are incurred in Canadian dollars.
Considering the challenging market conditions, we will continue to
maintain our selling and administrative expenses at an acceptable level without
impeding our efforts to strategically position our company, improve our sales,
and provide quality service to customers. However, any further increase in the
strength of the Canadian dollar will negatively affect our selling and
administrative expenses in the upcoming quarter.
6
RESEARCH AND DEVELOPMENT
For the three months ended November 30, 2003, gross research and
development expenses totaled $3.6 million, or 22.4% of sales, compared to $4.2
million, or 23.7% of sales for the same period last year. The decrease in gross
research and development dollars and as percentage of sales year-over-year is
mostly attributable to our recent restructuring efforts and the fact that we
refocused our research and development activities in our Photonics and Life
Sciences Division based on our strategy to leverage existing telecom
technologies.
However, it should be noted that the overall decrease in dollars was
offset in part by the increased value of the Canadian dollar compared to the US
dollar, year-over-year, since a large portion of our research and development
expenses are denominated in Canadian dollars.
Although we reduced our gross research and development expenses
year-over-year, we still invested significantly in research and development
activities in the first quarter of fiscal 2004, mainly in our Telecom Division,
as we firmly believe that innovation and new product introductions are the key
to gaining market share in this current economic environment and ensuring the
long-term growth and profitability of the company. In the first quarter of
fiscal 2004, 39% of sales originated from products that have been on the market
for two years or less. For the first quarter of 2003, this figure reached 45% of
sales.
For the three months ended November 30, 2003, tax credits and grants
from the Canadian federal and provincial governments for research and
development activities were $744,000, or 20.8% of gross research and development
expenses, compared to $896,000, or 21.3% of gross research and development
expenses for the same period last year. The decrease in our tax credits and
government grants is directly related to the decrease in our gross research and
development expenses since we were entitled to almost the same grant programs
and tax credits year-over-year.
Even though we are below our fiscal 2004 objective in terms on sales of
new products in the first quarter of fiscal 2004, we still believe that new
products will represent 45% of our sales in fiscal 2004; namely products
launched over the last two years and those that will probably be launched in
2004. We expect to continue investing significantly in research and development
in the upcoming quarters, reflecting our focus on innovation, our desire to gain
market share and our goal to exceed customer needs and expectations.
AMORTIZATION OF INTANGIBLE ASSETS
For the three months ended November 30, 2003, amortization of
intangible assets was $1.2 million, compared to $1.4 million for the same period
last year. The $149,000 decrease in the amortization expense is the result of
the impairment charge recorded in the third quarter of fiscal 2003.
FOREIGN EXCHANGE GAIN (LOSS)
For the three months ended November 30, 2003, the foreign exchange loss
amounted to $470,000, compared to a foreign exchange gain of $27,000 for the
same period last year.
Foreign exchange losses and gains are the result of the translation of
operating activities denominated in currencies other than the Canadian dollar.
During the first quarter of fiscal 2004, the Canadian dollar value increased
significantly, as compared to the US dollar, resulting in a significant foreign
exchange loss during that period.
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We manage our exposure to currency risk with forward exchange contracts
and operating activities, denominated in currencies other than the Canadian
dollar, of our Canadian entities
INCOME TAXES
During the three months ended November 30, 2003, we recorded $1.4
million of income tax recovery due to the non-recurring recovery, during that
period, of income taxes paid in previous periods following the receipt of a tax
assessment. Without this non-recurring gain, our income taxes would have been
nominal as we no longer recognize future income tax assets on our operating
losses because it is more likely than not that these assets will not be
recovered.
We expect our income taxes to be minimal in the next quarter since we
no longer recognize future income tax assets.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations and meet our capital expenditure requirements
mainly through the use of cash and short-term investments.
One of the four main objectives of our strategic plan for fiscal 2004
is to maintain a sound financial position. We believe that such an objective is
in line with a strong cash position. As at November 30, 2003, cash and
short-term investments consisted of $57.6 million. Our working capital was at
$81.2 million. Our cash and short-term investments increased $247,000 in the
first quarter of fiscal 2004, compared to the end of fiscal 2003, due to an
unrealized foreign exchange gain of $3.8 million on cash and short-term
investments, mainly offset by cash flows used by our operating activities of
$3.0 million and the cash payment of $405,000 for the purchases of property,
plant and equipment. The unrealized foreign exchange gain resulted from the
translation in US dollars of our Canadian-dollar-denominated cash and short-term
investments, and was recorded in the cumulative translation adjustment in the
balance sheet. It should be noted that any decline in the Canadian dollar value
compared with the US dollar in future periods will negatively affect the value
of our cash and short-term investments.
We believe that our cash balances and short-term investments, combined
with an available line of credit of $6.4 million, will be sufficient to meet our
liquidity and capital requirements for at least the next 24 months. Our line of
credit bears interest at prime rate. However, possible additional operating
losses and/or possible investment 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 satisfactory
terms.
OPERATING ACTIVITIES
Cash flows used by operating activities were $3.0 million for the three
months ended November 30, 2003, compared to cash flows provided of $2.8 million
for the same period last year. Cash flows used by operating activities in the
first quarter of fiscal 2004 were mainly the result of the increase of some of
our operating items; that is, our accounts receivable increased by $1.9 million
and our income taxes and tax credits recoverable increased by $3.1 million.
These negative effects on cash were offset in part by the decrease of our
inventories of $850,000 and by the net earnings after items not affecting cash
of $834,000. The increase in our accounts receivable is directly related to the
increase in our sales, which were backend-loaded in this quarter. The increase
in our income taxes and tax credits recoverable is due to
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the payment, during the quarter, of income taxes payable for previous periods
and the recognition of tax credits earned during the quarter but not yet
recovered. The cash flow decrease in our inventories is due to our efforts to
maintain them at the lowest acceptable level.
INVESTING ACTIVITIES
Cash flows provided by investing activities were $2.5 million for the
three months ended November 30, 2003, compared to cash flows used of $4.9
million for the same period last year.
In the first quarter of fiscal 2004, we disposed of $2.9 million in
short-term investments to finance our operating activities of $3.0 million.
CONTINGENCY
As discussed in note 7 to our interim consolidated financial
statements, in November 2001, the company was named as a defendant in a U.S.
securities class action related to its initial public offering (IPO) in June
2000. The complaints allege that the prospectus and the registration statement
for the IPO failed to disclose that the underwriters allegedly received
excessive commissions and that the underwriters and some investors collaborated
in order to inflate the price of EXFO's stock in the aftermarket. Even though
the process is continuing in this class action, we have no significant
developments to report in this quarter.
SHARE CAPITAL AND STOCK-BASED COMPENSATION PLANS
SHARE CAPITAL
As at November 30, 2003, EXFO had 37,900,000 multiple voting shares
outstanding, entitling to ten votes each and 25,173,033 subordinate voting
shares outstanding. The multiple voting shares and the subordinate voting shares
are unlimited as to number and without par value.
STOCK OPTION PLAN
The aggregate number of subordinate voting shares covered by options
granted under the stock option plan was 2,841,954 as at November 30, 2003. The
weighted average exercise price of those stock options was $14.95 compared to
the market price of $3.80 per share as at November 30, 2003. The maximum number
of subordinate voting shares issuable under the plan cannot exceed 4,470,961
shares. The following table summarizes information about stock options granted
to the members of the Board of Directors and to Management and Corporate
Officers of the company and its subsidiaries as at November 30, 2003:
WEIGHTED
% OF ISSUED AVERAGE
AND EXERCISE
NUMBER OUTSTANDING PRICE
--------------- --------------- --------------
Chairman of the Board, President and CEO
(one individual) 150,482 5.30% $ 9.91
Board of Directors (four individuals) 181,875 6.40% $ 6.34
Management and Corporate Officers
(ten individuals) 359,525 12.65% $ 13.65
--------------- --------------- --------------
691,882 24.35% $ 10.91
=============== =============== ==============
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RESTRICTED STOCK AWARD PLAN
In addition to the stock option plan, we maintain a restricted stock
award plan for some U.S.-based employees. The aggregate number of subordinate
voting shares covered by restricted stock awards was 143,096 as at November 30,
2003. Each restricted stock award entitles employees to receive one subordinate
voting share at a purchase price of nil.
RISKS AND UNCERTAINTIES
Over the past few years, we have managed our business, focused on
research and development of new and innovative products, prospered in
international markets and closed strategic acquisitions. However, we operate in
a highly competitive field that is in constant evolution and, as a result, we
encounter various risks and uncertainties that must be given appropriate
consideration in our strategic management policies.
The main risks and uncertainties related to the telecommunication test
and measurement industry involve the rapid development of new products that have
short life cycles and require extensive research and development; the difficulty
of predicting market size and trends; the difficulty of retaining highly skilled
employees; and the ability to quickly adapt our cost structure to changing
market conditions in order to achieve profitability.
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 some strategic acquisitions we have completed 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 businesses
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 operating expenses denominated
in US dollars, the purchase of raw materials in US dollars and forward exchange
contracts.
The economic slowdown in our industry could also result in some of our
customers experiencing difficulties and, consequently, this could have a
negative effect on our results especially in terms of future sales and
recoverability of accounts receivable. 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 mainly of cash, short-term investments and forward
exchange contracts. Our short-term investments consist of debt instruments
issued by high-credit quality corporations and trusts. Our cash and forward
exchange contracts are held with or issued by high-credit quality financial
institutions; therefore, we consider the risk of non-performance on these
instruments to be remote.
For a more complete understanding of risk factors that may affect us,
please refer to the risk factors set forth in our disclosures documents
published with securities commissions.
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