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 June 2001
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(Translation of registrant's name into English)
465 GODIN AVENUE, VANIER, QUEBEC, CANADA G1M 3G7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form 20-F ___X___ Form 40-F ______
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _______ No ___X___
If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82-______.
On June 27, 2001, EXFO Electro-Optical Engineering Inc., a Canadian
corporation, reported its results of operations for the fiscal quarter ended
May 31, 2001. 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 third fiscal quarter.
EXFO
------------------------------------------------------------------------------
Fiber-optic test, measurement and monitoring equipment
1 800 683-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211
Fax: (418) 683-2170
PRESS RELEASE
EXFO REPORTS STRONG FINANCIAL RESULTS FOR THIRD QUARTER
o POSTS RECORD SALES OF US$45.8 MILLION, EPS* OF $0.11
o ALIGNS COST STRUCTURE TO CURRENT MARKET CONDITIONS
o MAINTAINS GUIDANCE FOR FISCAL 2001 AT LOWER END OF SALES RANGE AND
AT MIDDLE OF EARNINGS RANGE
QUEBEC CITY, CANADA, June 27, 2001--EXFO Electro-Optical Engineering Inc.
(NASDAQ: EXFO, TSE: EXF) announced today record sales for the third quarter
ended May 31, 2001.
Sales increased 136% to US$45.8 million in the third quarter of fiscal 2001
from US$19.4 million for the same period in fiscal 2000, and 26% from US$36.3
million in the second quarter of 2001.
Net earnings* increased 115% to US$6.2 million, or $0.11 per share, for the
third quarter from US$2.9 million, or $0.07 per share, for the same period in
fiscal 2000. Compared to the second quarter of fiscal 2001, net earnings* in
the third quarter dropped 17% from US$7.5 million, or $0.14 per share.
It should be noted that net earnings per share* decreased by $0.01
sequentially if after-tax interest income and foreign exchange losses are
removed. Net earnings* in the second quarter included an after-tax foreign
exchange gain of $0.01 per share and after-tax interest income of $0.02 per
share, resulting in earnings of $0.11 per share. In the third quarter, net
earnings* included after-tax interest income of $0.01 per share, resulting in
earnings of $0.10 per share.
Including amortization of intangible assets and goodwill, EXFO's net loss in
the third quarter is at US$8.6 million, or $0.15 per share, compared to net
earnings of US$2.7 million, or $0.07 per share, for the same period in fiscal
2000 and net earnings of US$24,000, or $0.00 per share, in the second quarter
of 2001. The non-cash charges related to acquisitions include US$4.2 million
in amortization of intangible assets and US$12.0 million in amortization of
goodwill in the third quarter of 2001.
1
EXFO
------------------------------------------------------------------------------
Fiber-optic test, measurement and monitoring equipment
1 800 683-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211
Fax: (418) 683-2170
PRESS RELEASE
The financial results of EFOS, a leader in precision light-based adhesive,
spot-curing, are reflected in EXFO's financial statements during this quarter
since the acquisition closed on March 15, 2001.
"Despite the challenging macro-economic environment, we have posted strong
sales growth and healthy profitability," said Germain Lamonde, Chairman,
President and CEO of EXFO. "We have accomplished this feat due to our
successful focus on innovation, our global and diversified customer base, and
the depth and breadth of our product portfolio.
"We have also adopted a series of proactive measures to align our cost
structure to current market conditions in order to mitigate the impact of the
telecom slowdown on our long-term profitability."
EXFO has implemented a structured plan to reduce costs and increase
efficiencies in order to be better prepared when market conditions improve.
The company will reduce non-customer-related expenses; it will postpone plans
to build a new facility in the Quebec Metro High-Tech Park; it will terminate
non-core operations at Nortech Fibronic Inc., a subsidiary that specialized
in manufacturing fiber-optic temperature sensors; and it will reduce its
workforce by 15%, but continue to recruit specific talent for strategic
initiatives.
These measures are expected to trim approximately US$6.0 million in annual
operating expenses and incur one-time charges of about US$2.0 million that
will be accounted for in the fourth quarter.
BUSINESS HIGHLIGHTS
EXFO introduced more than 10 new products at OFC 2001 in March and, more
recently, it launched the FTB-400 Universal Test System (UTS), a
next-generation field-testing platform.
The FTB-400 UTS, which can hold as many as seven test modules, represents the
industry's first modular platform that can perform the essential physical
layer tests for DWDM long-haul, metro and access networks. In addition, it
enhances user productivity by allowing simultaneous acquisitions in the field.
"Market reaction to this second-generation platform has been very positive,"
Mr. Lamonde added. "We have already begun shipping units in the fourth
quarter."
2
EXFO
------------------------------------------------------------------------------
Fiber-optic test, measurement and monitoring equipment
1 800 683-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211
Fax: (418) 683-2170
PRESS RELEASE
BUSINESS OUTLOOK
Mr. Lamonde maintained his outlook for fiscal 2001. Sales are still expected
to fall between US$150 and US$165 million and EPS* between $0.40 and $0.50.
"We believe that we will achieve the lower end of the sales range and middle
of the earnings range, provided that economic conditions do not change
materially," Mr. Lamonde said.
BUSINESS EXPENSES
Selling and administrative expenses amounted to US$14.3 million, or 31.3% of
sales, for the third quarter compared to US$6.5 million, or 33.7% of sales,
for the same period in fiscal 2000 and US$10.9 million, or 30.1% of sales,
for the second quarter of fiscal 2001.
Gross research and development expenses were US$5.8 million, or 12.6% of
sales, in the third quarter compared to US$2.2 million, or 11.6% of sales,
for the same period in fiscal 2000 and US$4.5 million, or 12.4% of sales, for
the second quarter of 2001.
CONFERENCE CALL AND WEBCAST
EXFO will host a conference call today at 5 p.m. (Eastern time) to review its
third-quarter results. To listen to the conference call and participate in
the question period via telephone, dial 1 (416) 641-6440 or 1 (888) 209-3765.
Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon,
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 July 4, 2001. The
replay number is 1 (416) 626-4100 and the password is 18998674. A Webcast of
the conference call will also be available on EXFO's Web site at
WWW.EXFO.COM, under the Investors section.
*EXCLUDING AMORTIZATION OF INTANGIBLE ASSETS, GOODWILL RELATED TO
ACQUISITIONS AND ONE-TIME RESTRUCTURING CHARGES
3
EXFO
------------------------------------------------------------------------------
Fiber-optic test, measurement and monitoring equipment
1 800 683-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211
Fax: (418) 683-2170
PRESS RELEASE
ABOUT EXFO
EXFO, which derives its name from EXPERTISE IN FIBER OPTICS, is a leading
designer and manufacturer of fiber-optic test, measurement and automation
solutions for the telecommunications industry. EXFO markets its products to
more than 2000 customers in 70 countries around the world.
EXFO and its subsidiaries develop products mainly for two markets. The
Portable and Monitoring Division provides handheld and modular instruments
primarily to telecommunications carriers. The Industrial and Scientific
Division, Burleigh Instruments and EFOS design an extensive line of
high-performance instruments and automated manufacturing equipment for
optical component and system vendors as well as for research and development
labs.
This news release may contain statements that constitute forward-looking
statements within the meaning of the U.S. Private Securities Litigation
Reform Act of 1995. Forward-looking statements are statements other than
historical information or statements of current condition. These statements
may appear in a number of places in this news release and include statements
concerning our intent, belief, or current expectations regarding future
events. 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
which are beyond the control of EXFO, including retention of qualified
personnel, revenue synergies, demand for testing and measurement instruments
and precision positioning instruments. 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 news release. We undertake no
obligation to revise or update any of them to reflect events or circumstances
after the date of this news release, or to reflect new information or the
occurrence of unanticipated events. Readers are referred to our Annual Report
on Form 20-F and our other filings with the U.S. Securities and Exchange
Commission and the Canadian securities commissions for a discussion of the
other factors that may affect our future performance and other important risk
factors concerning us and our operations.
-30-
4
EXFO
------------------------------------------------------------------------------
Fiber-optic test, measurement and monitoring equipment
1 800 683-3936 info@exfo.com - www.exfo.com
Tel.: (418) 683-0211
Fax: (418) 683-2170
PRESS RELEASE
FOR MORE INFORMATION:
Mike Lamanna Maryse Imbeault
Manager, Investor Relations Director, Communications
(418) 683-0211 (418) 683-0211
MICHAEL.LAMANNA@EXFO.COM MARYSE.IMBEAULT@EXFO.COM
5
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands of US dollars)
AS AT AS AT
AUGUST 31, MAY 31,
2000 2001
------------------- ------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash $ 729 $ 4,355
Short-term investments 162,659 71,267
Accounts receivable
Trade 18,272 29,526
Other 2,790 4,385
Income taxes receivable 284 -
Inventories 18,868 47,499
Prepaid expenses 1,023 1,522
Future income taxes 995 721
------------------- -------------------
205,620 159,275
CAPITAL ASSETS 8,694 24,319
INTANGIBLE ASSETS 68 49,100
FUTURE INCOME TAXES 3,089 1,889
GOODWILL 2,252 232,637
------------------- -------------------
$ 219,723 $ 467,220
------------------- -------------------
------------------- -------------------
LIABILITIES
CURRENT LIABILITIES
Bank advances $ 10 $ 4,220
Accounts payable and accrued liabilities 10,353 19,514
Income taxes payable - 2,887
Mandatorily redeemable preferred shares 543 -
Deferred revenue 395 623
Current portion of long-term debt 152 67
------------------- -------------------
11,453 27,311
DEFERRED REVENUE 151 8
DEFERRED GRANTS 1,109 1,228
LONG-TERM DEBT 16 739
FUTURE INCOME TAXES - 8,416
------------------- -------------------
12,729 37,702
------------------- -------------------
SHAREHOLDERS' EQUITY
SHARE CAPITAL 198,459 430,179
CONTRIBUTED SURPLUS - 1,457
CUMULATIVE TRANSLATION ADJUSTMENT 1,555 (7,997)
RETAINED EARNINGS 6,980 5,879
------------------- -------------------
206,994 429,518
------------------- -------------------
$ 219,723 $ 467,220
------------------- -------------------
------------------- -------------------
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars, except share and per share data)
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2000 2000 2001 2001
------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
SALES $ 19,411 $ 48,522 $ 45,781 $ 110,593
COST OF SALES 7,347 16,956 17,418 40,513
------------------- ------------------- ------------------- -------------------
GROSS MARGIN 12,064 31,566 28,363 70,080
------------------- ------------------- ------------------- -------------------
OPERATING EXPENSES
Selling and administrative 6,549 16,487 14,324 34,159
Net research and development 1,265 4,486 4,460 9,747
Amortization of capital assets 391 981 1,033 2,263
Amortization of intangible assets 12 33 4,211 5,873
------------------- ------------------- ------------------- -------------------
TOTAL OPERATING EXPENSES 8,217 21,987 24,028 52,042
------------------- ------------------- ------------------- -------------------
EARNINGS FROM OPERATIONS 3,847 9,579 4,335 18,038
Interest expense (income), net 170 145 (963) (5,371)
Foreign exchange loss (gain) (505) (389) 152 (3,018)
------------------- ------------------- ------------------- -------------------
EARNINGS BEFORE INCOME TAXES AND
AMORTIZATION OF GOODWILL 4,182 9,823 5,146 26,427
------------------- ------------------- ------------------- -------------------
INCOME TAXES
Current 1,222 3,085 3,252 10,842
Future 83 107 (1,531) (1,870)
------------------- ------------------- ------------------- -------------------
1,305 3,192 1,721 8,972
------------------- ------------------- ------------------- -------------------
EARNINGS BEFORE AMORTIZATION OF GOODWILL 2,877 6,631 3,425 17,455
AMORTIZATION OF GOODWILL 129 171 12,055 18,556
------------------- ------------------- ------------------- -------------------
NET EARNINGS (LOSS) FOR THE PERIOD $ 2,748 $ 6,460 $ (8,630) $ (1,101)
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE
Earnings before amortization of
goodwill $ 0.07 $ 0.17 $ 0.06 $ 0.34
Net earnings (loss) $ 0.07 $ 0.17 $ (0.15) $ (0.02)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S) 38,707 38,514 56,383 51,689
Conversion of preferred shares
Series I 45 4 - -
Exercise of stock options and stock
awards - - 477 334
------------------- ------------------- ------------------- -------------------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S) 38,752 38,518 56,860 52,023
------------------- ------------------- ------------------- -------------------
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS AND CONTRIBUTED SURPLUS
(in thousands of US dollars)
RETAINED EARNINGS
NINE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
2000 2001
------------------ ------------------
(UNAUDITED) (UNAUDITED)
BALANCE - BEGINNING OF PERIOD $ 14,592 $ 6,980
ADD
Net earnings (loss) for the period 6,460 (1,101)
------------------ ------------------
BALANCE - END OF PERIOD $ 21,052 $ 5,879
------------------ ------------------
------------------ ------------------
CONTRIBUTED SURPLUS
NINE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
2000 2001
------------------ ------------------
(UNAUDITED) (UNAUDITED)
BALANCE - BEGINNING OF PERIOD $ - $ -
ADD
Premium on resale of share capital - 1,457
------------------ ------------------
BALANCE - END OF PERIOD $ - $ 1,457
------------------ ------------------
------------------ ------------------
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2000 2000 2001 2001
------------------ ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the period $ 2,748 $ 6,460 $ (8,630) $ (1,101)
Add (deduct) items not affecting cash
Amortization of discount on short-term
investments - - (251) (251)
Amortization of capital assets 391 981 1,033 2,263
Amortization of intangible assets 12 33 4,211 5,873
Foreign exchange gains on disposal of
short-term investments - - (34) (3,222)
Future income taxes 83 107 (1,531) (1,870)
Amortization of goodwill 129 171 12,055 18,556
Change in non-cash operating working capital
items
Accounts receivable (2,811) (7,836) 2,028 (5,269)
Income taxes receivable 522 (16) 806 1,082
Inventories (4,032) (7,275) (7,132) (23,432)
Prepaid expenses (80) (33) 280 (325)
Accounts payable and accrued
liabilities 2,555 4,462 (3,223) 1,148
Income taxes payable - - (1,150) 2,957
Deferred revenue 68 143 (62) 114
Deferred grants 35 290 231 170
------------------ ------------------- ------------------- -------------------
(380) (2,513) (1,369) (3,307)
------------------ ------------------- ------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances 1,996 6,548 1,373 2,177
Repayment of mandatorily redeemable
preferred shares - - - (354)
Repayment of long-term debt (48) (64) (7) (3,311)
Issuance of share capital 356 373 - -
Resale of share capital - - 110 1,490
Redemption of share capital - - (3) (33)
Share issue expenses (811) (811) - (41)
Dividends paid (1) (52) - -
------------------ ------------------- ------------------- -------------------
1,492 5,994 1,473 (72)
------------------ ------------------- ------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments - - (251,191) (461,981)
Proceeds from disposal of short-term
investments - 1,400 286,201 550,220
Additions to capital and intangible assets (1,096) (2,683) (7,469) (13,207)
Business combinations (3) (2,111) (25,150) (67,499)
------------------ ------------------- ------------------- -------------------
(1,099) (3,394) 2,391 7,533
------------------ ------------------- ------------------- -------------------
CHANGE IN CASH 13 87 2,495 4,154
EFFECT OF FOREIGN EXCHANGE RATE CHANGES
ON CASH (477) (435) (74) (528)
CASH - BEGINNING OF PERIOD 539 423 1,934 729
------------------ ------------------- ------------------- -------------------
CASH - END OF PERIOD $ 75 $ 75 $ 4,355 $ 4,355
------------------ ------------------- ------------------- -------------------
------------------ ------------------- ------------------- -------------------
SUPPLEMENTARY INFORMATION
Interest paid $ 298 $ 342 $ 119 $ 276
Interest received $ - $ - $ 1,435 $ 6,158
Income taxes paid (recovered) $ (221) $ 2,877 $ 3,820 $ 5,930
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 May 31, 2001 and for the periods ended
May 31, 2000 and 2001 is unaudited; however, 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 NEW ACCOUNTING STANDARDS
On September 1, 2000, the company retroactively adopted the new
standard of the Canadian Institute of Chartered Accountants (CICA)
regarding accounting for employee future benefits (CICA 3461, Employee
future benefits). The adoption of this new standard did not result in
any changes to prior year earnings, shareholders' equity or cash flows.
During the period, the company retroactively adopted the recently
revised recommendations of the CICA regarding earnings per share (CICA
3500, Earnings per share). The principles for calculating basic
earnings per share are consistent with previous practice, however,
diluted earnings per share are now calculated using the treasury stock
method which differs from the imputed interest method previously used.
The adoption of these revised recommendations did not result in any
material change to previously reported basic and diluted earnings per
share.
In 2000, a new accounting standard for the preparation of interim
financial statements (CICA 1751, Interim Financial Statements) was
issued which sets out minimum presentation and disclosure requirements
as well as guidance on recognition and measurement of items for interim
periods. The recognition and measurement guidance requires that items
be recognized and measured on the same basis as used for annual
financial statements. The new standard is effective for fiscal years
beginning on or after January 1, 2001. The company believes that these
interim consolidated financial statements comply in all material
respects with the recommendations in the new standard.
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 BUSINESS COMBINATIONS
BURLEIGH INSTRUMENTS, INC.
On December 20, 2000, the company acquired a 100% interest in Burleigh
Instruments, Inc. ("Burleigh"), a U.S. company which manufactures
precision scientific instruments used in basic and applied research,
engineering and production test applications in a variety of fields, in
exchange for a total consideration valued at US$189,270,000 including
acquisition-related costs of US$2,461,000.
The consideration paid consisted of US$42,461,000 in cash and the
issuance of 6,488,816 subordinate voting shares for an amount of
US$146,809,000. The foreign subsidiary is considered as a
self-sustaining foreign operation. As a result, the subsidiary's
accounts are remeasured into the functional currency using the current
rate method.
EFOS INC.
On March 15, 2001, the company acquired a 100% interest in EFOS Inc.
("EFOS"), a Canadian company specializing in precision light-based
adhesive spot curing technologies as well as curing process control for
the global optical component manufacturing market. This acquisition was
settled for a total consideration valued at US$110,146,000 including
acquisition-related costs of US$194,000. The consideration paid
consisted of US$25,194,000 in cash and the issuance of 3,700,000
subordinate voting shares for an amount of US$84,952,000.
These acquisitions have been accounted for using the purchase method
and consequently, the net earnings of Burleigh and EFOS have been
included in the consolidated statements of earnings of the company from
the date of acquisition of these subsidiaries, being December 20, 2000
for Burleigh and March 15, 2001 for EFOS.
The purchase price, including acquisition-related costs, has been
allocated based on the estimated fair value of net assets at the
acquisition dates as follows:
BURLEIGH EFOS
------------------- -------------------
(UNAUDITED) (UNAUDITED)
Assets acquired
Current assets $ 7,092 $ 9,195
Capital assets 4,457 1,054
In process research and development 1,800 972
Core technology 24,000 25,324
Work force 1,250 907
Trademark - 421
Liabilities assumed (9,068) (7,169)
Future income taxes (8,927) (983)
------------------- -------------------
Net identifiable assets acquired (forward) $ 20,604 $ 29,721
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)
BURLEIGH EFOS
------------------- -------------------
(UNAUDITED) (UNAUDITED)
(brought forward) $ 20,604 $ 29,721
Goodwill 168,666 80,425
------------------- -------------------
Purchase price 189,270 110,146
Less: Subordinate voting shares issued 146,809 84,952
------------------- -------------------
Cash paid $ 42,461 $ 25,194
------------------- -------------------
------------------- -------------------
The fair value allocated to intangible assets acquired from Burleigh
and EFOS was based upon independent valuations performed in conjunction
with these acquisitions.
The existing technology that has reached technological feasibility was
classified as core technology.
Acquired in process research and development represents the existing
technology that has not reached technological feasibility and has no
future alternative use.
The fair value of subordinate voting shares issued as part of these
business combinations was determined based on the market price of the
shares over a reasonable period of time before and after the dates of
acquisition of the subsidiaries.
Acquired goodwill is amortized on a straight-line basis over a
five-year period from the acquisition date.
4 INVENTORIES
AS AT AS AT
AUGUST 31, MAY 31,
2000 2001
------------------- --------------------
(UNAUDITED)
Raw materials $ 12,057 $ 31,969
Work in progress 2,910 5,721
Finished goods 3,901 9,809
------------------- --------------------
$ 18,868 $ 47,499
------------------- --------------------
------------------- --------------------
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)
5 INTANGIBLE ASSETS AND GOODWILL
The net book value of intangible assets and goodwill is as follows:
AS AT
AUGUST 31,
AS AT MAY 31, 2001 2000
-------------------------------------------------- ----------------
AMORTIZATION ACCUMULATED
PERIOD COST AMORTIZATION NET NET
---------------------- ---------------- ---------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
In process research
and development Five and eight months $ 2,770 $ 1,584 $ 1,186 $ -
Core technology Five years 49,516 3,459 46,057 -
Workforce One year 2,156 739 1,417 -
Other assets Two and four years 668 228 440 68
---------------- ---------------- ---------------- ----------------
$ 55,110 $ 6,010 $ 49,100 $ 68
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Goodwill Five years $ 251,402 $ 18,765 $ 232,637 $ 2,252
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
Intangible assets and goodwill are amortized on a straight-line basis over
their estimated useful lives.
6 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AS AT
AUGUST 31, MAY 31,
2000 2001
------------------ --------------------
(UNAUDITED)
Trade $ 6,473 $ 11,028
Salaries and social benefits 1,698 4,848
Outstanding cheques in excess of bank balances 374 124
Commissions 966 1,085
Other 842 2,429
------------------ --------------------
$ 10,353 $ 19,514
------------------ --------------------
------------------ --------------------
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)
7 RESTRICTED STOCK AWARD PLAN
On December 20, 2000, the company established a restricted stock award
plan for employees of Burleigh. A total of 360,000 stock awards entitle
employees to receive an equal aggregate of subordinate voting shares at a
purchase price of nil. Stock awards granted under the plan vest over a
four-year period, with 25% vesting on an annual basis commencing on the
first anniversary of the date of grant. The plan will expire on December
20, 2004. No compensation cost has been recognized for this stock-based
compensation plan and no adjustment to the share capital will be required
upon issuance of shares following the exercise of those stock awards since
the purchase price is nil.
8 NET RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2000 2000 2001 2001
------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Gross research and development
expenses $ 2,244 $ 6,940 $ 5,783 $ 13,139
Research and development tax credits (820) (2,036) (959) (2,526)
Government grants (159) (418) (364) (866)
------------------- ------------------- ------------------- -------------------
$ 1,265 $ 4,486 $ 4,460 $ 9,747
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
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)
9 ADJUSTED NET EARNINGS
Adjusted net earnings exclude the after-tax effect of the amortization of
intangible assets and the amortization of goodwill.
The following table summarizes the adjusted net earnings, the basic and
diluted adjusted net earnings per share and the basic and diluted weighted
average number of shares outstanding:
THREE MONTHS ENDED NINE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2000 2000 2001 2001
------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Adjusted net earnings $ 2,885 $ 6,653 $ 6,204 $ 21,331
Basic and diluted adjusted net
earnings per share $ 0.07 $ 0.17 $ 0.11 $ 0.41
Basic weighted average number
of shares outstanding
(000's) 38,707 38,514 56,383 51,689
Diluted weighted average
number of shares
outstanding (000's) 38,752 38,518 56,860 52,023
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 material differences between Canadian and U.S. GAAP. This
note describes additional changes occurring since the most recent annual
financial statements and provides a quantitative analysis of the material
differences. All disclosures required in annual financial statements under
U.S. GAAP have not been provided in these interim consolidated financial
statements.
ACCOUNTING FOR STOCK-BASED COMPENSATION PLAN
Under U.S. GAAP, compensation costs related to the restricted stock award
plan are measured as the difference between the fair value of the
underlying stock and the purchase price which is nil. Compensation costs
are amortized to expense over the estimated vesting period of four years,
being the acquisition period. As at May 31, 2001, the balance of deferred
stock-based compensation costs related to this plan amounted to
US$6,500,000.
Under Canadian GAAP, no compensation cost has been recognized for this
stock-based compensation plan.
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)
BUSINESS COMBINATIONS
Under U.S. GAAP, the value of shares issued upon a business combination
should be determined based on the market price of the shares over a
reasonable period of time before and after the companies have reached an
agreement on the purchase price, the significant terms of the agreement
are known and the proposed transaction is announced.
Consequently, the measurement dates of the acquisitions of Burleigh and
EFOS occurred on December 14, 2000 and March 6, 2001, respectively, the
dates on which all significant terms of the agreements were known. The
average market price of the shares a few days before and after those dates
was US$31.09 and US$25.84, respectively. Considering the number of shares
issued upon those acquisitions, the total consideration for U.S. GAAP
purposes amounts to US$244,198,000 (US$189,270,000 under Canadian GAAP)
for Burleigh and US$120,802,000 (US$110,146,000 under Canadian GAAP) for
EFOS, thus increasing share capital and goodwill under U.S. GAAP.
Furthermore, under U.S. GAAP, the forward exchange contracts used by EFOS
have not qualified for hedging accounting treatment during the period
ended March 14, 2001 and accordingly changes in the fair value of the
derivatives have been charged to earnings for that period. Under Canadian
GAAP, those forward exchange contracts have been designated as hedges of
anticipated sales and the unrealized gain is not reflected in the
financial statements until the sale occurs.
Moreover, under U.S. GAAP, in process research and development acquired in
a business combination is written off at the time of acquisition and no
future income taxes are recognized on this asset in the purchase price
allocation process.
Under Canadian GAAP, in process research and development acquired in a
business combination is capitalized and amortized over its estimated
useful life. Future income taxes are recognized on the acquisition date on
that asset in the purchase price allocation process.
Finally, under U.S. GAAP, pro forma information must be disclosed as
though the business combinations have occurred at the beginning of the
reported periods.
EXCHANGE GAINS AND LOSSES ON SHORT-TERM INVESTMENTS
Under Canadian GAAP, unrealized exchange gains and losses on short-term
investments are included in net earnings, whereas under U.S. GAAP,
unrealized exchange gains and losses on short-term investments classified
as available-for-sale securities are included in accumulated other
comprehensive income until the investments are realized.
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)
FORWARD EXCHANGE CONTRACTS
On September 1, 2000, the company adopted Statement of Financial
Accounting Standard No. 133, Accounting for Derivative Instruments and
Hedging Activities and its amendments (SFAS 138), which requires all
derivatives to be carried on the balance sheet at fair value. The forward
exchange contracts used by the company have not qualified for hedging
accounting treatment during the periods ended May 31, 2001, accordingly
changes in the fair value of the derivatives have been charged to earnings
during the periods. Under Canadian GAAP, certain forward exchange
contracts have been designated as hedges of anticipated sales and the
related accounts receivable and unrealized gains and losses are not
reflected in the financial statements until the sale occurs. For all other
forward exchange contracts, the unrealized gains and losses are charged to
earnings under Canadian GAAP with an offsetting asset or liability for the
unrealized amount. Under Canadian GAAP, the unrealized gains and losses
are computed using the period-end spot rate as opposed to the period-end
forward rate.
SHARE CAPITAL
Under Canadian GAAP, restricted shares reacquired from employees under the
stock purchase plan are treated as arm's length repurchases of shares
whereas under U.S. GAAP, the reacquisition of shares would be accounted
for as a forfeiture by the employee, resulting in any difference between
the amount originally credited to share capital and the remaining deferred
compensation cost being credited to compensation expense in the current
period. The subsequent resale of the shares would be treated as an
issuance of shares for the proceeds received.
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 NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2000 2000 2001 2001
------------------ ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net earnings (loss) for the period in
accordance with Canadian GAAP $ 2,748 $ 6,460 $ (8,630) $ (1,101)
Non-cash stock-based compensation
costs related to stock option plan - - (434) (608)
Non-cash stock-based compensation
costs related to stock purchase
plan (144) (437) (116) (350)
Non-cash stock-based compensation
costs related to restricted stock
award plan - - (1,306) (1,645)
Unrealized gains (losses) on forward
exchange contracts 87 (71) 9 112
Future income taxes on forward
exchange contracts (33) 27 (16) (50)
Acquired in process research and
development - - 128 (1,181)
Future income taxes on acquired in
process research and development - - (694) (532)
Amortization of goodwill - - (3,127) (5,161)
------------------ ------------------- ------------------- -------------------
Net earnings (loss) available to
common shareholders for the
period in accordance with U.S.
GAAP 2,658 5,979 (14,186) (10,516)
Other comprehensive loss
Foreign currency translation
adjustments (838) (242) (1,674) (9,552)
Reclassification of holding gains
on available-for-sale
securities included in net
earnings (loss), net of
related future income taxes - (36) (419) (37)
------------------ ------------------- ------------------- -------------------
Comprehensive income (loss) $ 1,820 $ 5,701 $ (16,279) $ (20,105)
------------------ ------------------- ------------------- -------------------
------------------ ------------------- ------------------- -------------------
Basic and diluted net earnings (loss)
per share in accordance with U.S.
GAAP $ 0.07 $ 0.16 $ (0.25) $ (0.20)
------------------ ------------------- ------------------- -------------------
------------------ ------------------- ------------------- -------------------
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, MAY 31,
2000 2001
------------------ -------------------
(UNAUDITED)
Share capital in accordance with Canadian GAAP $ 198,459 $ 430,179
Stock-based compensation costs related to stock purchase plan
Current period 2,692 (150)
Cumulative effect of prior periods - 2,692
Shares issued upon business combinations - 65,584
------------------ -------------------
Share capital in accordance with U.S. GAAP $ 201,151 $ 498,305
------------------ -------------------
------------------ -------------------
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AS AT
AUGUST 31, MAY 31,
2000 2001
------------------ -------------------
(UNAUDITED)
Deferred stock-based compensation costs in accordance with Canadian GAAP $ - $ -
Stock-based compensation costs related to stock purchase plan
Current period (2,692) -
Cumulative effect of prior periods - (2,144)
Amortization for the period 548 500
------------------ -------------------
Deferred stock-based compensation costs in accordance with U.S. GAAP $ (2,144) $ (1,644)
------------------ -------------------
------------------ -------------------
OTHER CAPITAL
AS AT AS AT
AUGUST 31, MAY 31,
2000 2001
------------------ -------------------
(UNAUDITED)
Other capital in accordance with Canadian GAAP $ - $ -
Stock-based compensation costs related to stock option plan and
restricted stock award plan
Current period 1,464 2,253
Cumulative effect of prior periods - 1,464
------------------ -------------------
Other capital in accordance with U.S. GAAP $ 1,464 $ 3,717
------------------ -------------------
------------------ -------------------
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)
RETAINED EARNINGS (DEFICIT)
AS AT AS AT
AUGUST 31, MAY 31,
2000 2001
------------------ -------------------
(UNAUDITED)
Retained earnings in accordance with Canadian GAAP $ 6,980 $ 5,879
Stock-based compensation costs
Current period (2,002) (2,603)
Cumulative effect of prior periods (10) (2,012)
Unrealized gains on forward exchange contracts, net of related future
income taxes of $50,000
Current period - 62
Acquired in process research and development including future income
taxes of $532
Current period - (1,713)
Amortization of goodwill
Current period - (5,161)
Change in reporting currency
Cumulative effect of prior periods 1,016 1,016
------------------ -------------------
Retained earnings (deficit) in accordance with U.S. GAAP $ 5,984 $ (4,532)
------------------ -------------------
------------------ -------------------
ACCUMULATED OTHER COMPREHENSIVE LOSS
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2000 2000 2001 2001
------------------ ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Foreign currency translation
adjustments
Balance - Beginning of period $ (420) $ (1,016) $ (7,339) $ 539
Change during the period (838) (242) (1,674) (9,552)
------------------ ------------------- ------------------- -------------------
Balance - End of period (1,258) (1,258) (9,013) (9,013)
------------------ ------------------- ------------------- -------------------
Unrealized holding gains on
available-for-sale securities,
net of future income taxes
Balance - Beginning of period - 36 419 37
Unrealized gains arising during
the period, net of future
income taxes - - - 419
Reclassification adjustment for
amounts included in net
earnings, net of related
future income taxes - (36) (419) (456)
------------------ ------------------- ------------------- -------------------
Balance - End of period - - - -
------------------ ------------------- ------------------- -------------------
Accumulated other comprehensive loss $ (1,258) $ (1,258) $ (9,013) $ (9,013)
------------------ ------------------- ------------------- -------------------
------------------ ------------------- ------------------- -------------------
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
The following table summarizes the material differences in balance sheet
items between Canadian GAAP and U.S. GAAP:
AS AT AUGUST 31, 2000 AS AT MAY 31, 2001
---------------------------------------- ----------------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
------------------- ------------------- ------------------- -------------------
(UNAUDITED) (UNAUDITED)
Intangible assets $ 68 $ 68 $ 49,100 $ 47,919
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
Goodwill $ 2,252 $ 2,252 $ 232,637 $ 291,772
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
Shareholders' equity
Share capital $ 198,459 $ 201,151 $ 430,179 $ 498,305
Contributed surplus - - 1,457 1,457
Cumulative translation
adjustment 1,555 - (7,997) -
Deferred stock-based
compensation costs - - - (1,644)
Other capital - 1,464 - 3,717
Retained earnings (deficit) 6,980 5,984 5,879 (4,532)
Accumulated other
comprehensive income
(loss) - 576 - (9,013)
------------------- ------------------- ------------------- -------------------
$ 206,994 $ 209,175 $ 429,518 $ 488,290
------------------- ------------------- ------------------- -------------------
------------------- ------------------- ------------------- -------------------
STATEMENTS OF CASH FLOWS
For the three months and the nine months ended May 31, 2000 and 2001,
there are no material differences between the statements of cash flows
under Canadian GAAP as compared to U.S. GAAP.
PRO FORMA INFORMATION
The following unaudited pro forma information regarding the acquisitions
of Burleigh and EFOS has been prepared by the company's management based
upon the unaudited consolidated financial statements of the company for
the nine months ended May 31, 2000 and 2001 and the unaudited financial
statements of Burleigh and EFOS.
This pro forma information includes adjustments related to the
amortization of intangible assets and goodwill, the income tax effects of
the acquisitions, the stock-based compensation costs related to the
restricted stock award plan and the financing costs related to the cash
payments made in consideration of the acquisitions. Consequently, such
information is not necessarily indicative of the actual results which
would have been achieved, nor is it necessarily indicative of future
consolidated results of the company.
21
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 following unaudited pro forma information for the nine months ended
May 31, 2000 has been prepared as if the acquisitions had occurred on
September 1, 1999. The unaudited pro forma information for the nine months
ended May 31, 2001 has been prepared as if the acquisitions had occurred
on September 1, 2000.
NINE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
2000 2001
------------------ -------------------
(UNAUDITED) (UNAUDITED)
Sales $ 72,199 $ 130,334
Net loss $ (55,807) $ (38,859)
Basic and diluted net loss per share $ (1.14) $ (0.68)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS FOLLOWING DISCUSSION MAY CONTAIN STATEMENTS THAT CONSTITUTE
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS ARE STATEMENTS
OTHER THAN HISTORICAL INFORMATION OR STATEMENTS OF CURRENT CONDITION. THESE
STATEMENTS MAY APPEAR IN A NUMBER OF PLACES IN THIS DISCUSSION AND INCLUDE
STATEMENTS CONCERNING OUR INTENT, BELIEF OR CURRENT EXPECTATIONS REGARDING
FUTURE EVENTS. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF
VARIOUS FACTORS, WHICH ARE BEYOND THE CONTROL OF EXFO, INCLUDING RETENTION OF
QUALIFIED PERSONNEL, REVENUE SYNERGIES, DEMAND FOR TESTING AND MEASUREMENT
INSTRUMENTS AND PRECISION POSITIONING INSTRUMENTS. 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 DISCUSSION. WE UNDERTAKE NO
OBLIGATION TO REVISE OR UPDATE ANY OF THEM TO REFLECT EVENTS OR CIRCUMSTANCES
AFTER THE DATE OF THIS DISCUSSION, OR TO REFLECT NEW INFORMATION OR THE
OCCURRENCE OF UNANTICIPATED EVENTS. READERS ARE REFERRED TO OUR REGISTRATION
STATEMENT ON FORM F-1 AND OUR OTHER FILINGS WITH THE U.S. SECURITIES AND
EXCHANGE COMMISSION AND THE CANADIAN SECURITIES COMMISSIONS FOR A DISCUSSION
OF THE OTHER FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE AND OTHER
IMPORTANT RISK FACTORS CONCERNING US AND OUR OPERATIONS.
The following discussion and analysis should be read in conjunction with our
unaudited comparative interim consolidated financial statements and the
related notes thereto. All figures are expressed in United States dollars
unless otherwise noted. The interim consolidated financial statements have
been prepared in accordance with Canadian GAAP, Generally Accepted Accounting
Principles ("GAAP"), in Canada, which differ in certain respects from U.S.
GAAP, as disclosed in note 10 of our interim consolidated financial
statements.
RECENT EVENTS
On March 15, 2001, we completed our previously announced acquisition of EFOS
Inc. for 3.7 million subordinate voting shares and US$25.2 million in cash.
The total consideration paid was US$110.1 million. EFOS, a privately held
company in Toronto, Ont., is widely recognized as a leader in precision
light-based, adhesive spot-curing technologies as well as curing process
control for the global optical component manufacturing market. EFOS' products
deliver precise doses of the appropriate spectral light onto photosensitive
and heat-cured adhesives to significantly reduce bonding time and increase
repeatability in optical component manufacturing.
On March 16, 2001, we closed an acquisition in which our affiliate, Burleigh
Automation, Inc., purchased substantially all of the assets of Vanguard
Technical Solutions, Inc., a wholly owned subsidiary of DT Industries Inc.
Vanguard specializes in the design and manufacturing of ultra-precision
assembly equipment for sensitive process and critical assembly challenges on
the manufacturing floor.
RESULTS OF OPERATIONS
The following tables display the consolidated statements of earnings in
dollar amounts and as a percentage of sales to facilitate the discussion that
follows.
(in thousands of US dollars)
(unaudited)
Three months ended Nine months ended
-------------------------------- ------------------------------
May 31, 2000 May 31, 2001 May 31, 2000 May 31, 2001
---------------- -------------- -------------- --------------
Sales $ 19,411 $ 45,781 $ 48,522 $ 110,593
Cost of sales 7,347 17,418 16,956 40,513
---------------- -------------- -------------- --------------
Gross margin 12,064 28,363 31,566 70,080
Operating expenses
Selling and administrative 6,549 14,324 16,487 34,159
Net research and development 1,265 4,460 4,486 9,747
Amortization of capital assets 391 1,033 981 2,263
Amortization of intangible assets 12 4,211 33 5,873
---------------- -------------- -------------- --------------
Total operating expenses 8,217 24,028 21,987 52,042
Earnings from operations 3,847 4,335 9,579 18,038
Interest expense (income), net 170 (963) 145 (5,371)
Foreign exchange loss (gain) (505) 152 (389) (3,018)
---------------- -------------- -------------- --------------
Earnings before income taxes and
amortization of goodwill 4,182 5,146 9,823 26,427
Income taxes 1,305 1,721 3,192 8,972
---------------- -------------- -------------- --------------
Earnings before amortization of goodwill 2,877 3,425 6,631 17,455
Amortization of goodwill 129 12,055 171 18,556
---------------- -------------- -------------- --------------
Net earnings (loss) for the period $ 2,748 $ (8,630) $ 6,460 $ (1,101)
---------------- -------------- -------------- --------------
---------------- -------------- -------------- --------------
Research and development data
Gross research and development $ 2,244 $ 5,783 $ 6,940 $ 13,139
Net research and development $ 1,265 $ 4,460 $ 4,486 $ 9,747
(in percentages)
(unaudited)
Three months ended Nine months ended
-------------------------------- ------------------------------
May 31, 2000 May 31, 2001 May 31, 2000 May 31, 2001
---------------- -------------- -------------- --------------
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 37.8 38.0 34.9 36.6
---------------- -------------- -------------- --------------
Gross margin 62.2 62.0 65.1 63.4
Operating expenses
Selling and administrative 33.7 31.3 34.0 30.9
Net research and development 6.5 9.7 9.2 8.8
Amortization of capital assets 2.1 2.3 2.0 2.1
Amortization of intangible assets 0.1 9.2 0.1 5.3
---------------- -------------- -------------- --------------
Total operating expenses 42.4 52.5 45.3 47.1
Earnings from operations 19.8 9.5 19.8 16.3
Interest expense (income), net 0.9 (2.1) 0.3 (4.9)
Foreign exchange loss (gain) (2.6) 0.3 (0.8) (2.7)
---------------- -------------- -------------- --------------
Earnings before income taxes and
amortization of goodwill 21.5 11.3 20.3 23.9
Income taxes 6.7 3.8 6.6 8.1
---------------- -------------- -------------- --------------
Earnings before amortization of goodwill 14.8 7.5 13.7 15.8
Amortization of goodwill 0.6 26.3 0.4 16.8
---------------- -------------- -------------- --------------
Net earnings (loss) for the period 14.2 % (18.8)% 13.3 % (1.0)%
---------------- -------------- -------------- --------------
---------------- -------------- -------------- --------------
Research and development data
Gross research and development 11.6 % 12.6 % 14.3 % 11.9 %
Net research and development 6.5 % 9.7 % 9.2 % 8.8 %
SALES
For the third quarter ended May 31, 2001, sales increased 136% to $45.8 million
from $19.4 million for the same quarter last year. Sales growth is due to the
increased demand for our Industrial and Scientific products and our Portable and
Monitoring products as well as the impact of the Burleigh Instruments and EFOS
acquisitions in 2001. During this quarter, our three largest customers accounted
for approximately 11.8% of sales with no single customer exceeding 4.6% of
sales.
For the nine months ended May 31, 2001, sales increased 128% to $110.6 million
from $48.5 million for the same period last year. Sales growth is due to the
increased demand for our Industrial and Scientific products and our Portable and
Monitoring products, which include the market penetration of several products
launched in fiscal 2000, as well as the impact of the Burleigh Instruments and
EFOS acquisitions. During these nine months, our three largest customers
accounted for approximately 13.1% of sales with no single customer exceeding
5.7% of sales.
GROSS MARGIN
For the third quarter ended May 31, 2001, gross margin amounted to 62.0% of
sales compared to 62.2% of sales for the same quarter last year. The acquisition
of EFOS, which has a lower gross margin, and the costs related to ramping up
manufacturing capacity prevented us from increasing our gross margin.
For the nine months ended May 31, 2001, gross margin amounted to 63.4% of sales
compared to 65.1% of sales for the same period in fiscal 2000. The decrease in
gross margin reflects a significant ramp-up in production facilities and the
hiring and training of additional manufacturing employees.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses for the third quarter ended May 31, 2001
were $14.3 million, or 31.3% of sales, compared to $6.5 million, or 33.7% of
sales, for the same quarter in fiscal 2000.
For the nine months ended May 31, 2001, selling and administrative expenses were
$34.2 million, or 30.9% of sales, compared to $16.5 million, or 34.0% of sales,
for the same period in fiscal 2000.
The dollar increase for the quarter and nine months ended May 31, 2001 is
directly related to higher commissions resulting from increased sales activity,
increased promotional and product marketing expenses, expenses related to
running a public company, and the impact of the Burleigh Instruments and EFOS
acquisitions. The percentage decrease is mainly due to a better absorption of
these expenses since sales are increasing at a faster rate than selling and
administrative expenses.
RESEARCH AND DEVELOPMENT
Gross research and development expenses were $5.8 million, or 12.6% of sales,
for the third quarter ended May 31, 2001 compared to $2.2 million, or 11.6% of
sales, for the same quarter in fiscal 2000. The increase in research and
development (R&D) dollars reflects our commitment to innovation by hiring
additional R&D personnel as well as the acquisitions of Burleigh Instruments and
EFOS. The increase, as a percentage of sales, is mainly due to the fact R&D
expenses are increasing at a faster rate than sales, taking into account the
acquisitions of Burleigh Instruments and EFOS.
Tax credits and grants from federal, provincial and state governments for R&D
activities were $1.3 million for the third quarter of fiscal 2001 compared to
$1.0 million for the same quarter in 2000. This increase in tax credits and
grants is directly related to the increase of gross research and development
expenses. Tax credits and grants, as a percentage of gross R&D expenses,
decreased for the quarter ended May 31, 2001 mainly because lower tax credit
rates and grants are applicable to our R&D expenses.
Gross research and development expenses were $13.1 million, or 11.9% of sales,
for the nine months ended May 31, 2001 compared to $6.9 million, or 14.3% of
sales, for the same period last year. The dollar increase for the quarter is
primarily due to Burleigh Instruments and EFOS' R&D expenses and to development
efforts centered on our new products in the Industrial and Scientific Division.
Furthermore, we added 198 employees to our R&D departments since May 31, 2000,
which reflects our continued focus on research and development.
Tax credits and grants from federal, provincial and state governments for R&D
activities were $3.4 million for the nine months ended May 31, 2001 compared to
$2.5 million for the same period in fiscal 2000. This increase in tax credits
and grants is directly related to the hiring of additional R&D personnel and the
impact of the Burleigh Instruments and EFOS acquisitions. Tax credits and
grants, as a percentage of gross R&D expenses, decreased for the nine months
ended May 31, 2001 mainly due to lower tax credit rates and grants applicable to
our R&D expenses.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the acquisitions of Burleigh Instruments and EFOS, EXFO
recorded a total of $54.7 million in intangible assets, which is amortized over
periods varying from five months to five years.
Considering the acquisitions of Burleigh Instruments and EFOS closed
respectively December 20, 2000 and March 15, 2001, the third quarter ended May
31, 2001 includes amortization of intangible assets of $4.2 million compared to
nil for the same quarter in fiscal 2000, while the nine months ended May 31,
2001 include amortization of intangible assets of $5.9 million compared to nil
for the same period in 2000.
INTEREST EXPENSE (INCOME), NET
Interest income amounted to $1.0 million for the third quarter ended May 31,
2001 compared to an interest expense of $0.2 million for the same quarter in
2000.
Interest income amounted to $5.4 million for the nine months ended May 31, 2001
compared to an interest expense of $0.1 million for the same period in 2000.
These increases result from interest income derived from short-term investments
of the remaining net proceeds of our Initial Public Offering on June 29, 2000.
FOREIGN EXCHANGE GAIN
The foreign exchange gain of $3.0 million for the nine months ended May 31, 2001
is mainly due to the disposal of short-term investments denominated in U.S.
dollars.
INCOME TAXES
Our effective income tax rates were 33.4% and 31.2% for the quarters ended May
31, 2001 and May 31, 2000, respectively.
Our effective income tax rates were 34.0% and 32.5% for the nine months ended
May 31, 2001 and May 31, 2000, respectively.
The higher income tax rates in 2001 compared to 2000 were the result of the
higher effective income tax rate on interest income provided by short-term
investments and higher effective income tax rates for Burleigh Instruments and
EFOS.
AMORTIZATION OF GOODWILL
In conjunction with the acquisitions of Burleigh Instruments and EFOS, EXFO
recorded a total of $249.1 million in goodwill, which is amortized over five
years.
Considering the acquisitions of Burleigh Instruments and EFOS closed
respectively on December 20, 2000 and March 15, 2001, the third quarter ended
May 31, 2001 includes amortization of goodwill of $12.1 million compared to nil
for the same quarter in fiscal 2000, while the nine months ended May 31, 2001
include amortization of goodwill of $18.6 million compared to nil for the same
period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our Initial Public Offering, we had financed operations and met our
capital expenditure requirements mainly through cash flows from our operations,
research and development tax credits and government grants. On June 29, 2000, we
closed our Initial Public Offering of 8,050,000 subordinate voting shares at a
price of US$26.00 per share in the United States and at C$38.55 per share in
Canada. Total proceeds to EXFO, including the over-allotment option exercised by
the underwriters, were approximately US$209 million.
Cash flows used in operating activities were $1.4 million for the third quarter
ended May 31, 2001 compared to $0.4 million for the same quarter last year. Cash
flows used in operating activities for the third quarter ended May 31, 2001 were
mainly due to an increase in inventories of $7.1 million, which is required to
ensure minimal manufacturing and delivery lead times, and a decrease in accounts
payable and liabilities of $3.2 million, which is due to the timing of payments.
A decrease in accounts receivable of $2.0 million, which is related to the
efforts of collecting outstanding bills and to the timing of sales during the
quarter, provided cash flows for operating activities.
Cash flows used in operating activities were $3.3 million for the nine months
ended May 31, 2001 compared to $2.5 million for the same period last year. Cash
flows used in operating activities for the nine months ended May 31, 2001 were
mainly due to an increase in accounts receivable of $5.3 million, which is
related to a higher volume of sales, and an increase in inventories of $23.4
million, which is required to ensure minimal manufacturing and delivery lead
times. Cash flows provided in operating activities were due to the increase in
accounts payable and accrued liabilities totaling $1.1 million and in net income
taxes payable totaling $4.0 million, which are primarily related to EXFO's
growth.
As at May 31, 2001, we had $4.4 million in cash, short-term investments of $71.3
million and working capital of $132.0 million.
Cash flows provided by financing activities for the third quarters ended May 31,
2001 and May 31, 2000 were equivalent at $1.5 million. Cash flows provided by
financing activities in the third quarter ended May 31, 2001 were primarily due
to the use of $1.4 million in bank advances to fund working capital. For the
third quarter ended May 31, 2000, cash flows provided by financing activities
were mainly due to the use of $2.0 million in bank advances and the issuance of
$0.4 million in share capital. Cash flows totaling $0.8 million were used for
share issue expenses.
Cash flows used in financing activities amounted to $0.1 million for the nine
months ended May 31, 2001 compared cash flows provided by financing activities
of $6.0 million for the same period last year. Cash flows used in financing
activities were mainly due to the repayment of long-term debt and mandatorily
redeemable preferred shares for a total amount of $3.7 million. Cash flows
provided by financing activities for the nine months ended May 31, 2001 were
primarily due to net proceeds of $1.5 million from the redemption and the resale
of restricted employee shares and the use of bank advances totaling $2.2
million. For the nine months ended May 31, 2000, cash flows provided by
financing activities were mainly due to the use of bank advances of $6.5 million
and the issuance of $0.4 million in share capital. Cash flows totaling $0.8
million were used for share issue expenses.
Cash flows provided by investing activities for the third quarter ended May 31,
2001 amounted to $2.4 million compared to cash flows used of $1.1 million for
the same quarter last year. During the quarter ended May 31 2001, cash flows
were used for the acquisition of EFOS in the amount of $25.2 million and for the
acquisition of capital and intangible assets in the amount of $7.5 million. Cash
flows were provided by the selling of short-term investments for a net amount of
$35.0 million.
Cash flows provided by investing activities for the nine months ended May 31,
2001 amounted to $7.5 million compared to cash flows used of $3.4 million for
the same period last year. During the nine months ended May 31, 2001, cash flows
were used for the acquisitions of Burleigh Instruments and EFOS in the amount of
$42.3 million and $25.2 million, respectively, as well as for the acquisition of
capital and intangible assets in the amount of $13.2 million. Cash flows were
provided by the selling of short-term investments for a net amount of $88.2
million.
We believe that our existing cash balances and short-term investments, together
with cash flows from operations and available lines of credit, will be
sufficient to meet our liquidity and capital spending requirements through the
end of fiscal 2001. However, possible investments in, or acquisitions of
complementary businesses, products or technologies may require additional
financing prior to such time. There can be no assurance that additional debt or
equity financing will be available when required or, if available, can be
secured on terms satisfactory to us.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
--------------------------------------------
Name: Germain Lamonde
Title: President and Chief Executive Officer
Date: June 28, 2001