UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of January 2002
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(Translation of registrant's name into English)
465 GODIN AVENUE, VANIER, QUEBEC, CANADA G1M 3G7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F ___X___ Form 40-F ______
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _______ No ___X___
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
On January 16, 2002, EXFO Electro-Optical Engineering Inc., a Canadian
corporation, reported its results of operations for the fiscal quarter ended
November 30, 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 first fiscal quarter of the 2002
fiscal year.
[EXFO LOGO]
EXFO REPORTS FIRST-QUARTER RESULTS
QUEBEC CITY, CANADA, January 16, 2002--EXFO Electro-Optical Engineering Inc.
(NASDAQ: EXFO, TSE: EXF) today announced first-quarter results for fiscal 2002.
EXFO reported sales of US$20.1 million for the quarter ended November 30, 2001
compared to US$28.5 million for the same period in fiscal 2001.
Pro forma net loss* for the first quarter of fiscal 2002 was US$1.9 million, or
$0.03 per share, compared to pro forma net earnings of US$7.6 million, or
$0.16 per share, for the first quarter of 2001.
EXFO's net loss for the first quarter of 2002 was US$19.1 million, or $0.33 per
share, compared to net earnings of US$7.5 million, or $0.16 per share, for the
same period last year.
Gross margin, including an inventory write-off of US$3.5 million, amounted to
37.8% of sales for the first quarter of 2002 compared to 63.9% of sales for the
same period in 2001. Excluding this non-recurring charge, gross margin would
have reached 55.1%, in line with management's expectations based on actual sales
for this quarter. Altogether, EXFO incurred restructuring charges of
US$3.9 million in the first quarter of fiscal 2002.
"There's no question, these are unprecedented times in the telecommunications
industry," said Germain Lamonde, Chairman, President and CEO of EXFO. "We've
taken appropriate actions to deal with this current situation, while protecting
our long-term capabilities and intensifying our focus on gaining market share."
BUSINESS HIGHLIGHTS
EXFO continued to introduce best-of-class products during the first quarter of
fiscal 2002, namely the Packet Blazer(TM) Gigabit Ethernet test module and the
FPMD-5600 Femtosecond Polarization Mode Dispersion Analyzer.
The Company also closed its acquisition of Avantas Networks Corporation (renamed
EXFO Protocol Inc.) on November 2, 2001. EXFO Protocol is a supplier of
leading-edge fiber-optic testing and optical network performance management that
supports a wide range of protocols and data transmission rates.
"We have already begun to leverage this acquisition with the introduction of our
Gigabit Ethernet test module for metro and access networks," Mr. Lamonde said.
"Based upon our newly acquired protocol-testing expertise, we also plan to
deliver a fully integrated solution for physical-, optical- and protocol-layer
testing in the near future, and we intend to take advantage of our
long-established relationships in the carrier market with this new product."
1/4
[EXFO LOGO]
OPERATING EXPENSES
Selling and administrative expenses amounted to US$10.3 million, or 51.3% of
sales, for the first quarter of fiscal 2002 compared to US$8.9 million, or 31.3%
of sales, for the same period in 2001. Gross research and development expenses
totalled US$4.2 million, or 20.9% of sales, for the first quarter of fiscal 2002
compared to US$2.8 million, or 10.0% of sales, for the same period last year.
The percentage increases in expenses were mainly due to decreased sales during
the first quarter of 2002.
To align costs with current market conditions, EXFO implemented additional
cost-cutting measures that will provide approximately $6 million in annualized
pre-tax savings. The Company lowered operating expenses, froze employee salaries
and reduced its workforce by 10%.
BUSINESS OUTLOOK
Due to the prolonged downturn in the telecommunications industry, EXFO
forecasted sales between US$14 million and US$18 million and a pro forma net
loss between $0.05 and $0.09 for the second quarter of fiscal 2002.
"The telecommunications industry continues to be challenging, but I believe that
our strong product innovation pipeline and synergies from our strategic
acquisitions will return us to growth in the second half of fiscal 2002,"
Mr. Lamonde said. "We will be launching a number of major leading-edge products
in upcoming weeks that will significantly increase our ability to gain market
share."
CONFERENCE CALL AND WEBCAST
EXFO will host a conference call today at 10:15 a.m. (Eastern time) to review
its first-quarter results. To listen to the conference call and participate in
the question period via telephone, dial 1 (514) 985-4434.
Germain Lamonde, Chairman, President and CEO, and Pierre Plamondon, CA,
Vice-President of Finance and Chief Financial Officer, will participate in the
call. A replay of the conference call can be accessed after 1:30 p.m. (Eastern
time) today until midnight (Eastern time) on January 23, 2002. The replay number
is 1 (416) 626-4100 and the password is 20007553. A Webcast of the conference
call will also be available on EXFO's Web site at www.exfo.com, under the
Investors section.
2/4
[EXFO LOGO]
*Pro forma net earnings (loss) represent net earnings (loss) excluding
amortization of goodwill and the after-tax effect of amortization of intangible
assets and restructuring charges.
THREE MONTHS ENDED NOVEMBER 30,
2000 2001
Net earnings (loss) in accordance with GAAP $ 7,505 $ (19,055)
Pro forma adjustments:
Amortization of goodwill 124 12,450
Amortization of intangible assets 14 3,271
Tax effect of amortization of intangible assets (5) (1,145)
Restructuring charges -- 3,910
Tax effect of the restructuring charges -- (1,368)
========== ==========
Pro forma net earnings (loss) $ 7,638 $ (1,937)
========== ==========
Basic and diluted pro forma net
earnings (loss) per share $ 0.16 $ (0.03)
EXFO PROVIDES PRO FORMA FINANCIAL INFORMATION TO HELP THE READER BETTER
UNDERSTAND ITS OPERATING RESULTS. THIS INFORMATION IS NOT IN ACCORDANCE
WITH, OR AN ALTERNATIVE FOR, GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND
MAY NOT BE COMPARABLE TO SIMILARLY TITLED MEASURES REPORTED BY OTHER
COMPANIES.
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 global telecommunications industry. EXFO markets its products
to more than 2000 customers in 70 countries around the world.
EXFO and its subsidiaries develop products for two main markets. The Portable
and Monitoring Division provides handheld and modular instruments for the
physical-, optical- and protocol-layer testing needs of telecommunications
carriers and network service providers. The Industrial and Scientific Division
offers an extensive line of high-performance instruments, test systems and
automated manufacturing equipment for optical component and system vendors as
well as for research and development labs.
3/4
[EXFO LOGO]
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. 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
various factors that may affect our future performance and other important risk
factors concerning us and our operations.
-30-
FOR MORE INFORMATION:
Mike Lamanna Maryse Imbeault
Director, Investor Relations Director, Communications
(418) 683-0211 (418) 683-0211
michael.lamanna@exfo.com maryse.imbeault@exfo.com
------------------------ ------------------------
4/4
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED BALANCE SHEET
(in thousands of US dollars)
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2001 2001
------------------ -------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,729 $ 20,876
Short-term investments 66,861 37,334
Accounts receivable
Trade, less allowance for doubtful accounts of $854
($893 as at August 31, 2001) 24,531 15,757
Other 3,660 3,864
Income taxes receivable -- 7,778
Inventories (note 3) 44,345 44,820
Prepaid expenses 1,265 1,553
Future income taxes 1,423 1,382
--------- ---------
149,814 133,364
PROPERTY, PLANT AND EQUIPMENT 27,140 29,738
INTANGIBLES ASSETS AND GOODWILL 264,242 308,932
FUTURE INCOME TAXES 1,381 2,475
--------- ---------
$ 442,577 $ 474,509
--------- ---------
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 4) $ 16,180 $ 16,283
Income taxes payable 2,623 --
Deferred revenue 616 491
Current portion of long-term debt 106 91
--------- ---------
$ 19,525 $ 16,865
DEFERRED GRANTS 1,002 766
LONG-TERM DEBT 664 642
FUTURE INCOME TAXES 6,581 5,940
--------- ---------
27,772 24,213
--------- ---------
CONTINGENCY (note 7)
SHAREHOLDERS' EQUITY
SHARE CAPITAL 429,995 489,611
CONTRIBUTED SURPLUS 1,457 1,483
CUMULATIVE TRANSLATION ADJUSTMENT (8,333) (13,429)
DEFICIT (8,314) (27,369)
--------- ---------
414,805 450,296
--------- ---------
$ 442,577 $ 474,509
--------- ---------
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars, except share and per share data)
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2000 2001
------------------ -------------------
SALES $ 28,519 $ 20,138
COST OF SALES (including restructuring charges of $3,500, note 6) 10,308 12,532
--------- ---------
GROSS MARGIN 18,211 7,606
--------- ---------
OPERATING EXPENSES
Selling and administrative 8,920 10,325
Net research and development (note 5) 1,972 3,145
Amortization of property, plant and equipment 514 1,348
Amortization of intangible assets 14 3,271
Restructuring charges (note 6) - 410
--------- ---------
TOTAL OPERATING EXPENSES 11,420 18,499
--------- ---------
EARNINGS (LOSS) FROM OPERATIONS 6,791 (10,893)
Interest income, net 2,631 699
Foreign exchange gain 2,359 33
--------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES AND AMORTIZATION OF GOODWILL 11,781 (10,161)
--------- ---------
INCOME TAXES
Current 3,520 (2,574)
Future 632 (982)
--------- ---------
4,152 (3,556)
--------- ---------
EARNINGS (LOSS) BEFORE AMORTIZATION OF GOODWILL 7,629 (6,605)
AMORTIZATION OF GOODWILL 124 12,450
--------- ---------
NET EARNINGS (LOSS) FOR THE PERIOD $ 7,505 $ (19,055)
--------- ---------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Earnings (loss) before amortization of goodwill $ 0.16 $ (0.11)
Net earnings (loss) $ 0.16 $ (0.33)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's) 46,757 58,341
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's) (note 8) 46,846 58,341
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
AND CONTRIBUTED SURPLUS
(in thousands of US dollars)
RETAINED EARNINGS (DEFICIT)
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------------
2000 2001
---------- ----------
BALANCE - BEGINNING OF PERIOD $ 6,980 $ (8,314)
ADD
Net earnings (loss) for the period 7,505 (19,055)
--------- ---------
BALANCE - END OF PERIOD $ 14,485 $ (27,369)
========= =========
CONTRIBUTED SURPLUS
THREE MONTHS ENDED
NOVEMBER 30,
---------------------------------
2000 2001
---------- ----------
BALANCE - BEGINNING OF PERIOD $ - $ 1,457
ADD
Premium on resale of share capital 997 26
-------- ---------
BALANCE - END OF PERIOD $ 997 $ 1,483
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
Three Months Ended
November 30,
-----------------------------------------
2000 2001
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the period $ 7,505 $ (19,055)
Add (deduct) items not affecting cash and cash equivalents
Amortization of discount on short-term investments (2,607) (487)
Amortization of property, plant and equipment 514 1,348
Amortization of intangible assets 14 3,271
Foreign exchange gains on disposal of short-term investments (2,310) (79)
Future income taxes 632 (982)
Amortization of goodwill 124 12,450
Change in non-cash operating working capital items
Accounts receivable (6,258) 8,921
Income taxes 1,812 (8,111)
Inventories (6,993) 2,509
Prepaid expenses 22 51
Accounts payable and accrued liabilities 6,400 (2,222)
Deferred revenue 32 (115)
Deferred grants 10 (219)
---------- -----------
(1,103) (2,720)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances 158 --
Repayment of mandatorily redeemable preferred shares (354) --
Repayment of long-term debt (130) (37)
Redemption of share capital (19) (2)
Resale of share capital 1,016 28
Share issue expenses (23) (14)
---------- -----------
648 (25)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (16,465) (278,158)
Proceeds from disposal of short-term investments 18,332 307,115
Additions to property, plant and equipment and intangible assets (2,181) (3,138)
Business combination, net of cash and cash equivalents acquired (note 2) - (9,756)
---------- -----------
(314) 16,063
CHANGE IN CASH AND CASH EQUIVALENTS (769) 13,318
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 324 (171)
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 729 7,729
---------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 284 $ 20,876
---------- -----------
SUPPLEMENTARY INFORMATION
Interest paid $ (32) $ (53)
Interest received $ 666 $ 1,093
Income taxes paid $ (945) $ (4,473)
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, 2001 and for the periods ended
November 30, 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 BUSINESS COMBINATION
On November 2, 2001, the company acquired a 100% interest in Avantas
Networks Corporation (renamed EXFO Protocol Inc.), a Canadian company
specializing in fiber-optic protocol testing, in exchange for a total
consideration valued at $94,952,000 or $69,381,000 net of $25,571,000 of
cash and cash equivalents acquired. The total consideration includes
acquisition-related costs of $1,272,000.
The consideration paid consisted of $9,756,000 in cash, net of cash and
cash equivalents acquired of $25,571,000 and the issuance of 4,374,573
subordinate voting shares valued at $59,625,000. The fair value of the
subordinate voting shares issued was determined based on the market price
of the shares beginning three days before and ending three days after the
terms of the acquisition were agreed and announced, being August 20, 2001.
This acquisition has been accounted for using the purchase method and
consequently, the results of operations of EXFO Protocol Inc. have been
included in the consolidated statement of earnings of the company since
November 2, 2001, being the date of acquisition.
The purchase price, including acquisition-related costs, has been allocated
based on the estimated fair value of net assets at the date of acquisition
as follows:
(UNAUDITED)
Assets acquired
Current assets $ 7,010
Property, plant and equipment 1,966
In-process research and development 1,400
Core technology 5,050
Future income tax assets 781
Liabilities assumed (3,478)
----------
Net identifiable assets acquired 12,729
Goodwill 56,652
----------
Purchase price 69,381
Less: Subordinate voting shares issued 59,625
----------
Cash paid, net of cash and cash equivalents acquired $ 9,756
----------
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 fair value allocated to intangible assets acquired was based upon an
independent valuation performed in conjunction with this acquisition.
The existing technology that has reached technological feasibility was
classified as core technology.
Acquired in-process research and development represents the existing
technology that has not reached technological feasibility and has no future
alternative use.
In-process research and development and core technology are amortized on a
straight-line basis over their estimated useful lives of ten months and
five years, respectively. Goodwill is not amortized but is reviewed for
impairment when events or circumstances indicate that cost may not be
recoverable.
3 INVENTORIES
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2001 2001
--------------- ---------------
(UNAUDITED)
Raw materials $ 29,891 $ 30,717
Work in progress 3,507 3,649
Finished goods 10,947 10,454
---------- ----------
$ 44,345 $ 44,820
---------- ----------
4 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2001 2001
--------------- --------------
(UNAUDITED)
Trade $ 7,732 $ 7,045
Salaries and social benefits 3,917 3,572
Outstanding cheques in excess of bank balances -- 1,388
Commissions 1,307 675
Restructuring charges 1,230 1,221
Warranty 901 968
Other 1,093 1,414
---------- ----------
$ 16,180 $ 16,283
---------- ----------
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 NET RESEARCH AND DEVELOPMENT EXPENSES
Three Months Ended
November 30,
---------------------------------------
2000 2001
----------------- ------------------
(unaudited) (unaudited)
Gross research and development expenses $ 2,848 $ 4,210
Research and development tax credits (700) (942)
Government grants (176) (123)
----------- -----------
$ 1,972 $ 3,145
----------- -----------
6 RESTRUCTURING CHARGES
In November 2001, the company incurred restructuring charges in order to
align its cost structure to current market conditions. The company recorded
$410,000 in severance expenses for the 101 employees who were terminated,
which are included in the restructuring charges in the statement of
earnings. The company also recorded $3,500,000 in inventory write-off which
is included in the cost of sales in the statement of earnings. As at
November 30, 2001, the accrued liabilities related to these restructuring
charges amount to $392,000 and consist of severance expenses.
7 CONTINGENCY
On November 27, 2001, a class action suit was filed in the United States
District Court for the Southern District of New York against the company,
four of the underwriters of its Initial Public Offering and some of its
executive officers pursuant to the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder and sections 11, 12 and 16 of the Securities
Act of 1933. This class action alleges that the company's registration
statement and prospectus filed with the Securities and Exchange Commission
on June 29, 2000 contained material misrepresentations and/or omissions
resulting from (i) the underwriters allegedly soliciting and receiving
additional, excessive and undisclosed commissions from certain investors in
exchange for which they allocated material portions of the shares issued in
connection with the company's Initial Public Offering; and (ii) the
underwriters allegedly entering into agreements with customers whereby
shares issued in connection with the company's Initial Public Offering
would be allocated to those customers in exchange for which customers
agreed to purchase additional amounts of shares in the after market at
pre-determined prices. The plaintiffs in this suit seek an unspecified
amount for damages suffered.
The company believes that its executive officers have fully complied with
all applicable securities laws and that the claims against it and its
officers are without merit. The company has referred this matter to its
insurers and plans to vigorously defend its position in this litigation.
However, at this time, it is not possible to predict the outcome of this
case, nor determine the amount of possible losses. Accordingly, no
provision for this case has been made in the interim consolidated financial
statements as of November 30, 2001.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
8 EARNINGS (LOSS) PER SHARE
The following table summarizes the reconciliation of the basic weighted
average number of shares outstanding and the diluted weighted average
number of shares outstanding used in the diluted earnings (loss) per share
calculation:
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2000 2001
------------------ -------------------
(UNAUDITED) (UNAUDITED)
Basic weighted average number of shares outstanding (000's) 46,757 58,341
Exercise of stock options 89 -
------- -------
Diluted weighted average number of shares outstanding (000's) 46,846 58,341
------- -------
9 DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
These interim consolidated financial statements are prepared in accordance
with Canadian GAAP which differ in certain respects from U.S. GAAP. Note 19
to the company's most recent annual consolidated financial statements
describes the significant differences between Canadian and U.S. GAAP that
affect the company. This note describes significant additional changes
occurring since the most recent annual financial statements and provides a
quantitative analysis of the significant differences. All disclosures
required in annual financial statements under U.S. GAAP have not been
provided in these interim consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
RECONCILIATION OF NET EARNINGS (LOSS) TO CONFORM WITH U.S. GAAP
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2000 2001
------------------ -------------------
(UNAUDITED) (UNAUDITED)
Net earnings (loss) for the period in accordance with Canadian GAAP $ 7,505 $ (19,055)
Non-cash stock-based compensation costs related to stock option plan (121) (207)
Non-cash stock-based compensation costs related to stock purchase plan 467 (127)
Non-cash stock-based compensation costs related to restricted stock award
plan - (912)
Unrealized losses on forward exchange contracts (899) (266)
Future income taxes on forward exchange contracts 405 88
Unrealized foreign exchange gains on available-for-sale securities (4,300) -
Future income taxes on available-for-sale securities 1,935 -
Acquired in-process research and development - (1,260)
Future income taxes on acquired in-process research and development - (46)
Amortization of goodwill - (3,242)
---------- ----------
Net earnings (loss) available to common shareholders for the period in
accordance with U.S. GAAP 4,992 (25,027)
Other comprehensive income (loss)
Foreign currency translation adjustments (8,542) (5,096)
Unrealized holding gains on available-for-sale securities, net of
related future income taxes (37) -
Unrealized foreign exchange gains on available-for-sale securities,
net of related future income taxes 2,365 -
---------- ----------
Comprehensive loss $ (1,222) $ (30,123)
---------- ----------
Basic and diluted net earnings (loss) per share in accordance with U.S. GAAP $ 0.11 $ (0.43)
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, NOVEMBER 30,
2001 2001
------------------ -------------------
(UNAUDITED)
Share capital in accordance with Canadian GAAP $ 429,995 $ 489,611
Stock-based compensation costs related to stock purchase plan
Current period (150) -
Cumulative effect or prior periods 2,692 2,542
Shares issued upon business combinations 65,584 65,584
---------- ----------
Share capital in accordance with U.S. GAAP $ 498,121 $ 557,737
========== ==========
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2001 2001
------------------ ------------------
(UNAUDITED)
Deferred stock-based compensation costs in accordance with Canadian
GAAP $ - $ -
Stock-based compensation costs related to stock-based compensation
plans
Current period (8,145) -
Cumulative effect of prior periods (19,429) (7,968)
Amortization for the period 4,912 1,246
Reduction of stock-based compensation costs 14,694 -
--------- ---------
Deferred stock-based compensation costs in accordance with U.S. GAAP $ (7,968) $ (6,722)
========= =========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
OTHER CAPITAL
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2001 2001
------------------ -------------------
(UNAUDITED)
Other capital in accordance with Canadian GAAP $ - $ -
Stock-based compensation costs related to stock-based compensation
plans
Current period 8,145 -
Cumulative effect of prior periods 18,749 12,350
Reduction of stock-based compensation costs (14,544) -
---------- ---------
Other capital in accordance with U.S. GAAP $ 12,350 $ 12,350
========== =========
DEFICIT
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2001 2001
------------------ -------------------
(UNAUDITED)
Deficit in accordance with Canadian GAAP $ (8,314) $ (27,369)
Stock-based compensation costs related to stock-based compensation
plans
Current period (4,912) (1,246)
Cumulative effect of prior periods (2,012) (6,924)
Unrealized gains (losses) on forward exchange contracts, net of
related future income taxes
Current period 117 (178)
Cumulative effect of prior periods - 117
Acquired in-process research and development
Current period - (1,260)
Future income taxes on acquired in-process research and development
Current period (936) (46)
Cumulative effect of prior periods - (936)
Amortization of goodwill
Current period (8,453) (3,242)
Cumulative effect of prior periods - (8,453)
Change in reporting currency
Cumulative effect of prior periods 1,016 1,016
--------- ---------
Deficit in accordance with U.S. GAAP $ (23,494) $ (48,521)
========= =========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
ACCUMULATED OTHER COMPREHENSIVE LOSS
AS AT AS AT
AUGUST 31, NOVEMBER 30,
2001 2001
------------------ -------------------
(UNAUDITED)
Foreign currency translation adjustments
Balance - Beginning of period $ 539 $ (9,349)
Change during the period (9,888) (5,096)
----------- -----------
Balance - End of period (9,349) (14,445)
----------- -----------
Unrealized holding gains on available-for-sale securities, net of future
income taxes
Balance - Beginning of period 37 -
Reclassification adjustment for amounts included in net loss, net of
related future income taxes (37) -
----------- -----------
Balance - End of period - -
---------- ----------
Accumulated other comprehensive loss $ (9,349) $ (14,445)
========== ==========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
BALANCE SHEETS
AS AT AUGUST 31, 2001 AS AT NOVEMBER 30, 2001
------------------------------------- ---------------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
(UNAUDITED) (UNAUDITED)
Goodwill
Cost $ 250,497 $ 315,547 $ 304,522 $ 369,116
Accumulated amortization (31,325) (39,762) (43,666) (55,350)
--------- --------- --------- ----------
$ 219,172 $ 275,785 $ 260,856 $ 313,766
--------- --------- --------- ----------
Shareholders' equity
Share capital $ 429,995 $ 498,121 $ 489,611 $ 557,737
Contributed surplus 1,457 1,457 1,483 1,483
Cumulative translation
adjustment (8,333) - (13,429) -
Deferred stock-based
compensation costs - (7,968) - (6,722)
Other capital - 12,350 - 12,350
Deficit (8,314) (23,494) (27,369) (48,521)
Accumulated other
comprehensive loss - (9,349) - (14,445)
--------- --------- --------- ---------
$ 414,805 $ 471,117 $ 450,296 $ 501,882
--------- --------- --------- ---------
STATEMENTS OF CASH FLOWS
For the periods ended November 30, 2000 and 2001, there are no significant
differences between the statements of cash flows under Canadian GAAP as
compared to U.S. GAAP.
UNAUDITED PRO FORMA INFORMATION ON BUSINESS COMBINATION
Under U.S. GAAP, pro forma information must be provided as though the
business combination had occurred at the beginning of the reported periods.
The following unaudited pro forma information reflects the results of
operations as if the acquisition of EXFO Protocol Inc. had been completed
on September 1, 2000 and 2001.
Such information is not necessarily indicative of the actual results which
would have been achieved, nor is it necessarily indicative of future
consolidated results of the company.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
THREE MONTHS ENDED
NOVEMBER 30,
-----------------------------------------
2000 2001
------------------ -------------------
Sales $ 28,519 $ 20,245
Net earnings (loss) $ 224 $ (25,737)
Basis and diluted net earnings (loss) per share $ - $ (0.42)
NEW ACCOUNTING STANDARDS
In November 2001, The Canadian Institute of Chartered Accountants (CICA)
revised section 1650, "Foreign Currency Translation", which is effective
for fiscal years beginning on or after January 1, 2002. The revised
standard no longer permits the deferral and amortization of unrealized
exchange gains and losses that arise on the translation of long-term
foreign currency denominated monetary assets and liabilities. Under the new
rules, such gains and losses must be reported in earnings as they arise.
Adopting this revised standard is not expected to have a significant impact
on the company's financial statements.
In November 2001, the CICA issued Accounting Guideline No. 13, "Hedging
Relationships", which shall be applied to hedging relationships in effect
in fiscal years beginning on or after July 1, 2002. This new accounting
guideline establishes basic criteria that must be met before hedge
accounting can be used. It also describes the types of exposures that can
be hedged and the types of instruments that qualify as hedges, sets
detailed designation and documentation requirements and requires formal
effectiveness testing. The company has not yet assessed the impact of the
adoption of this new guideline.
In November 2001, the CICA issued section 3870, "Stock-Based Compensation
and Other Stock-Based Payments", which is effective for fiscal years
beginning on or after January 1, 2002. The new section applies to awards
granted on or after the date of adoption, and requires that stock-based
payment to non-employees and direct awards to employees and non-employees
be accounted for using a fair value-based method. Adopting this new
standard is not expected to have a significant impact on the company's
financial statements.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS
141 "Business Combinations" and SFAS 142 "Goodwill and other intangible
assets" and in August 2001 the CICA issued section 1581 "Business
Combination" and section 3062 "Goodwill and other intangible assets". SFAS 141
and section 1581 require business combinations initiated after June 30,
2001 or business combinations accounted for by the purchase method with a
date of acquisition after June 30, 2001 to be accounted for using the
purchase method of accounting. SFAS 141 and section 1581 also broaden
criteria for recording intangible assets separately from goodwill. Upon the
adoption of SFAS 142 and section 3062, recorded goodwill and intangible
assets will be evaluated against those new criteria and may result in
certain intangible assets being reclassified into goodwill or,
alternatively, amounts initially recorded as goodwill being separately
identified and recognized apart from goodwill as intangible assets. SFAS 142
and section 3062 require the use of a non-amortization approach to
account for purchased goodwill and indefinite-lived intangibles. Under the
non-amortization approach, goodwill and indefinite-lived intangibles will
not be amortized, but instead they will be reviewed for impairment and
written down and charged to earnings only in the periods in which the
recorded value of goodwill and indefinite-lived intangibles exceed the fair
value. SFAS 142 and section 3062 will be adopted on September 1, 2002.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data
and as otherwise noted)
The impact of adopting SFAS 142 and section 3062 will allow the company to
use the non-amortization approach for goodwill recorded prior to July 1,
2001 and will reduce annual goodwill amortization by approximately
$63,000,000 under SFAS 142 and $50,000,000 under section 3062. Moreover,
the company will implement a new goodwill impairment methodology and any
potential initial impairment losses on goodwill determined by this
methodology will be charged to earnings under SFAS 142 and to deficit under
section 3062. Any subsequent impairment losses on goodwill will be charged
to earnings in the period in which it is incurred.
Under the transitional provisions of SFAS 142 and section 3062, the company
did not amortize the goodwill resulting from the acquisition of EXFO
Protocol Inc., which closed on November 2, 2001.
In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligation", which is effective for fiscal years beginning on or after June 15,
2002. This standard requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The company
has not yet assessed the impact of the adoption of this new standard.
In October 2001, the FASB issued SFAS 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", which supersedes SFAS 121 and the
provisions of APB 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions" with regard to
reporting the effects of a disposal of a segment of a business. SFAS 144
retains many of the provisions of SFAS 121, but significantly changes the
criteria that would have to be met to classify an asset as held for
disposal such that long-lived assets to be disposed of other that by sale
are considered held and used until disposed of. In addition, SFAS 144
retains the basic provisions of APB 30 for presentation of discontinued
operations in the statement of earnings but broadens that presentation to a
component of an entity. This new standard is effective for fiscal years
beginning on December 15, 2001. Adopting this new standard is not expected
to have a significant impact on the company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS DISCUSSION AND ANALYSIS MAY CONTAIN 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 ANALYSIS 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, MEASUREMENT AND MONITORING
INSTRUMENTS AND PRECISION POSITIONING INSTRUMENTS AS WELL AS GENERAL ECONOMIC
CONDITIONS. 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 AND ANALYSIS. WE UNDERTAKE NO OBLIGATION TO REVISE OR
UPDATE ANY OF THEM TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS
DISCUSSION AND ANALYSIS 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.
ALL DOLLAR AMOUNTS ARE EXPRESSED IN US DOLLARS, EXCEPT AS OTHERWISE NOTED.
OVERVIEW
Although the long-term outlook for the telecommunications industry remains
robust, the first quarter of fiscal 2002 was marked by deteriorating market
conditions and the tragic events of September 11, 2001. The full impact of these
unprecedented events on the telecommunications industry proved to be more severe
than originally anticipated. As a result, carriers sharply reduced their capital
spending budgets, which resulted in fewer deployments of optical networks. On
the optical component and system manufacturing side, many companies had excess
inventory of finished products and therefore reduced the manufacturing of
products and their needs for fiber-optic test, measurement, monitoring and
automation equipment. This lead some companies to liquidate their fiber-optic
test and measurement equipment at auctions. Not only did this create pricing
pressure in the market, but it prompted some customers to postpone their buying
decisions.
In response to these market factors, EXFO implemented additional cost-cutting
measures that will provide approximately $6 million in annualized pre-tax
savings. We lowered operating expenses, froze employee salaries and reduced our
workforce by 10%. These measures incurred charges of about $4 million, including
an inventory write-off of $3.5 million, that were accounted for in the first
quarter of fiscal 2002.
On December 1, 2001, our new Enterprise Resource Planning (ERP) system has been
implemented at our major facility in Quebec City, QC. This ERP system will
enable us to improve the efficiency of our operations and should provide our
customers with better and more prompt service down the line. The migration to
this new ERP system is moving according to our plan.
On November 2, 2001, we completed our acquisition of Avantas Networks
Corporation (renamed EXFO Protocol Inc) for a total consideration valued at
$94,952,000 or $69,381,000 net of $25,571,000 of cash and cash equivalents
acquired. This acquisition has been accounted for using the purchase method and
has resulted in goodwill of $56,652,000 which, under the new accounting rules,
is not amortized. EXFO Protocol Inc., a Montreal-based, pre-revenue company, is
a supplier of leading-edge fiber-optic testing and optical network performance
management equipment that supports a wide range of protocols and data
transmission rates. This acquisition will enable us to enter the critical
protocol-layer testing market and, more importantly, almost double our
addressable market size to an estimated $3.3 billion, according to reports from
Frost and Sullivan.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations for the periods ended November 30, 2000 and 2001 should be read in
conjunction with our interim consolidated financial statements and the related
notes thereto. All figures are expressed in thousands of US dollars unless
otherwise noted. Our interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in Canada,
or Canadian GAAP, which conform in all material respects with generally accepted
accounting principles in the United States, or U.S. GAAP, except as described in
note 9 to our interim consolidated financial statements.
THREE MONTHS ENDED THREE MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
2000 2001 2000 2001
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
Sales $ 28,519 $ 20,138 100.0% 100.0%
Cost of sales * 10,308 12,532 36.1 62.2
---------- ---------- -------- --------
Gross margin 18,211 7,606 63.9 37.8
Operating expenses
Selling and administrative 8,920 10,325 31.3 51.3
Net research and development 1,972 3,145 6.9 15.6
Amortization of property, plant and
equipment 514 1,348 1.8 6.7
Amortization of intangible assets 14 3,271 0.1 16.3
Restructuring charges - 410 - 2.0
---------- ---------- -------- --------
Total operating expenses 11,420 18,499 40.1 91.9
Earnings (loss) from operations 6,791 (10,893) 23.8 (54.1)
Interest income, net 2,631 699 9.2 3.5
Foreign exchange gain 2,359 33 8.3 0.1
---------- ---------- -------- --------
Earnings (loss) before income taxes and
amortization of goodwill 11,781 (10,161) 41.3 (50.5)
Income tax expense (recovery) 4,152 (3,556) 14.6 (17.7)
---------- ---------- -------- --------
Earnings (loss) before amortization of
goodwill 7,629 (6,605) 26.7 (32.8)
Amortization of goodwill 124 12,450 0.4 61.8
---------- ---------- -------- --------
Net earnings (loss) for the period $ 7,505 $ (19,055) 26.3% (94.6)%
---------- ---------- -------- --------
Basic and diluted net earnings (loss) per share $ 0.16 $ (0.33)
Research and development data:
Gross research and development $ 2,848 $ 4,210 10.0% 20.9%
Net research and development $ 1,972 $ 3,145 6.9% 15.6%
Other data (unaudited):
Pro forma net earnings (loss) ** $ 7,638 $ (1,937) 26.8% (9.6)%
Basic and diluted pro forma net earnings $ 0.16 (0.03)
(loss) per share **
* Including restructuring charges of $3.5 million in 2001.
** Net earnings (loss) excluding amortization of goodwill and the after-tax
effect of amortization of intangible assets and restructuring charges. This
information may not be comparable to similarly titled measures reported by
other companies because it is non-GAAP information.
SALES
For the three months ended November 30, 2001, sales decreased 29.4% to
$20.1 million from $28.5 million for the same period last year. The decrease
in sales directly relates to a reduced demand for our products attributable
to the current downturn in the telecommunications industry. Both our Portable
and Monitoring products and our Industrial and Scientific products suffered
from this lack of demand but the downturn was more severe in the Industrial
and Scientific division.
Portable and Monitoring products accounted for 62% of our sales and Industrial
and Scientific products accounted for 38% of our sales in the first quarter of
2002, compared to 63% and 37% respectively for the same period last year. In
fiscal 2001, each division represented almost 50% of our sales.
We expect our Portable and Monitoring products to represent a larger share of
our total sales in up-coming quarters since the continued slowdown in the
telecommunications industry and the impact of the EXFO Protocol Inc. acquisition
in the second half of 2002.
Our book-to-bill ratio for the quarter ended November 30, 2001 is at 0.63. This
is due to the fact that we received in excess of $4 million worth of cancelled
orders during this quarter. Without these cancellations, our book-to-bill ratio
would be at 0.84. The majority of the cancellations came from orders received in
previous quarters.
North American sales accounted for 57.1% and 60.8% of sales for the three months
ended November 30, 2001 and 2000, respectively. International sales represented
42.9% and 39.2% of sales for the three months ended November 30, 2001 and 2000,
respectively. The increase in our international sales is the result of our
sustained efforts to develop the Asian market. Despite the decrease in sales for
every other geographical area, including North America, our sales to the Asian
market increased 11.8% in the first quarter of 2002 compared to the same period
last year, with sales of $3.5 million and $3.1 million for those two periods,
respectively. For the three months ended November 30, 2001, no customer
accounted for more than 7.5 % of sales.
We sell our products to a broad range of customers including telecommunication
carriers, optical component manufacturers as well as research and development
laboratories.
GROSS MARGIN
Gross margin amounted to 37.8% of sales for the three months ended November 30,
2001 compared to 63.9% of sales for the same period last year.
The percentage decline in gross margin is due to a number of reasons. First of
all, we recorded $3.5 million in inventory write-off as part of our
restructuring plan. Excluding this non-recurring charge, gross margin would have
reached 55.1%. Secondly, the continued slowdown in the telecommunications
industry resulted in a reduced demand and pricing pressure for our products in
the first quarter of fiscal 2002 which prevented a better absorption of our
fixed manufacturing costs. Our combined manufacturing capacity in Quebec City,
Qc and Victor, NY, have almost doubled since November 30, 2000 while our sales
decreased significantly in the first quarter of fiscal 2002. Finally, EXFO
Photonic Solutions operates in a market that has relatively lower-margin
products.
Gross margin can be negatively affected by competitive pricing pressure,
increases in component costs and obsolescence costs, shifts in product mix,
reductions in government grants, under-absorption of manufacturing fixed costs
and increases in products offerings by other suppliers in the fiber-optic test,
measurement and automation industry.
SELLING AND ADMINISTRATIVE
For the three months ended November 30, 2001, selling and administrative
expenses were $10.3 million, or 51.3% of sales, compared to $8.9 million, or
31.3% of sales for the same period last year.
The dollar increase is mainly due to the acquisitions of Burleigh Instruments,
EXFO Photonic Solutions and EXFO Protocol and the consolidation of our sales
force in Asia.
The significant decrease in sales in the current quarter caused the percentage
to increase since a large portion of our selling and administrative expenses
tend to be fixed.
Considering persistent market conditions, efforts 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, service our
customers, integrate our acquired companies and satisfy our customers.
RESEARCH AND DEVELOPMENT
For the three months ended November 30, 2001, gross research and development
expenses were $4.2 million, or 20.9% of sales, compared to $2.8 million, or
10.0% of sales for the same period last year. The increase in gross research and
development dollars is mainly related to the acquisitions of Burleigh
Instruments, EXFO Photonic Solutions and EXFO Protocol. With the recent
acquisition of EXFO Protocol, we added 81 employees to our research and
development departments. Our investments in research and development reflect our
continued focus on innovative product development.
The percentage increase reflects our strong and continued focus on innovation
despite the significant decrease in sales. We firmly believe that innovation and
new product introduction will be the key to gain market share in this current
economic environment and ensure the long-term growth and profitability of the
company. In this regard, 55.9% of the sales in this quarter originated from
products that have been on the market for two years or less. This is a strong
improvement compared to 35% of sales reached in the first quarter of
fiscal 2001.
We launched two new products during the first quarter, namely the Packet
BlazerTM Gigabit Ethernet test module and the FPMD-5600 Femtosecond Polarization
Mode Dispersion Analyzer. The Packet BlazerTM test module, which is the first
product launched by EXFO Protocol Inc. since the closing of the acquisition and
is contained inside the portable FTB-400 field-testing platform, offers
telecommunications carriers and networks service providers the assurance that
Gigabit Ethernet capabilities in their next-generation optical transport systems
are working to their full potential. The Femtosecond PMD Analyzer, which is
based on a revolutionary testing method approved by leading international
standards bodies, enables users to measure very small levels of PMD in
narrowband DWDM channels and broadband components in the simplest, fastest and
most repeatable manner.
For the three months ended November 30, 2001, tax credits and grants from
federal, provincial and state governments for research and development
activities were $1.1 million, or 25.3% of gross research and development
expenses, compared to $0.9 million, or 30.8% of gross research and development
expenses for the same period last year.
The dollar increase in tax credits and grants is mainly related to the impact of
EXFO Photonic Solutions and EXFO Protocol acquisitions and the increase level of
activities in research and development. The percentage decrease in tax credits
and grants is related to a reduction in the effective tax credit rate and grants
on research and development carried out in Canada. It should be noted that
research and development carried out by US-based Burleigh Instruments is not
eligible for tax credits.
In terms of net research and development expenses, they amounted to
$3.1 million, or 15.6% of sales for the three months ended November 30, 2001,
compared to $2.0 million, or 6.9% of sales for the same period last year. We
expect to continue investing heavily in research and development in the
up-coming months, reflecting our focus on innovation and our desire to exceed
our customers' needs and expectations.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the acquisitions of Burleigh instruments, EXFO Photonic
Solutions and EXFO Protocol, we recorded $61.1 million in intangible assets,
primarily consisting of core technology. These intangible assets, which are
amortized over periods from five months to five years from the date of
acquisition, resulted in an amortization expense of $3.3 million in the first
quarter of 2002. All the aforementioned acquisitions were completed after
November 30, 2000.
RESTRUCTURING CHARGES
In November 2001, we implemented additional cost-cutting measures under a
structured plan in order to align our cost structure to current market
conditions and to be better positioned ourselves amidst a challenging
environment. Under that plan, we lowered our operating expenses, froze employee
salaries and reduced our workforce in part by attrition.
Under the structured plan, we recorded restructuring charges of $0.4 million in
severance expenses for the 101 employees who were terminated.
Those measures should enable us to reduce our operating expenses by
approximately $4.5 million for the rest of the year and by approximately
$6 million for a complete year.
INTEREST INCOME, NET
For the three months ended November 30, 2001, net interest income amounted to
$0.7 million compared to $2.6 million for the same period last year. The
decrease is directly related to the use of short-term investments to finance our
recent acquisitions of Burleigh Instruments, EXFO Photonic Solutions and EXFO
Protocol as well as a general decrease in interest rate. Our net interest income
will decrease in the up-coming quarters as we use short-term investments to pay
for cash consideration in our recent acquisitions and because interest rates may
continue to drop.
FOREIGN EXCHANGE GAIN
For the three months ended November 30, 2001, foreign exchange gain amounted to
$33,000 compared to $2.4 million for the same period last year. Last year's
foreign exchange gain was mainly due to the translation of short-term
investments denominated in US dollars. During the three months ended November
30, 2001, we were able to manage our exposure to currency risk with forward
exchange contracts and operating activities of Canadian entities denominated in
currency other than the Canadian dollar.
INCOME TAXES
Our effective income tax recovery rate was 35.0% for the three months ended
November 30, 2001, compared to income tax rate of 35.2% for the same period last
year.
AMORTIZATION OF GOODWILL
In conjunction with the acquisitions of Burleigh instruments and EXFO Photonic
Solutions, we recorded $248.5 million in goodwill, which is amortized over five
years, resulting in an amortization expense of $12.5 million in the first
quarter of 2002. The acquisition of EXFO Protocol has been accounted for using
the new accounting standards contained in new sections 1581 and 3062 of the CICA
and consequently, goodwill resulting from this acquisition is not amortized but
instead reviewed for impairment. Considering that the acquisition of EXFO
Protocol closed on November 2, 2001, no review of impairment of goodwill has
been made on November 30, 2001.
All the aforementioned acquisitions were completed after November 30, 2000.
NET EARNINGS (LOSS)
Net loss amounted to $19.1 million, or $0.33 per share for the three months
ended November 30, 2001, compared to net earnings of $7.5 million, or $0.16 per
share for the same period last year.
PRO FORMA NET EARNINGS (LOSS)
As a measure to assess financial performance, we use pro forma net earnings
(loss) and pro forma net earnings (loss) per share. Pro forma net earnings
(loss) represent net earnings (loss) excluding amortization of goodwill and the
after-tax effect of amortization of intangible assets and restructuring charges.
Pro forma net earnings (loss) is reconciled as follows:
THREE MONTHS ENDED
NOVEMBER 30,
2000 2001
------ ------
(UNAUDITED)
Net earnings (loss) in accordance with GAAP $ 7,505 $ (19,055)
Pro forma adjustments:
Amortization of goodwill 124 12,450
Amortization of intangible assets 14 3,271
Tax effect on amortization of intangible assets (5) (1,145)
Restructuring charges - 3,910
Tax effect on the restructuring charges - (1,368)
---------- ----------
Pro forma net earnings (loss) $ 7,638 $ (1,937)
---------- ----------
Basic and diluted pro forma net earnings (loss) per share $ 0.16 $ (0.03)
Pro forma net loss amounted to $1.9 million, or $0.03 per share for the three
months ended November 30, 2001, compared to pro forma net earnings of
$7.6 million, or $0.16 per share for the same period last year.
We provide pro forma financial information to help the reader to better
understand our operating results. This information is not in accordance with, or
an alternative for, generally accepted accounting principles and may not be
comparable to similarly titled measures reported by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our Initial Public Offering, we financed operations and met our capital
expenditure requirements mainly through cash flows from operations, research and
development tax credits and government grants. On June 29, 2000, we closed our
Initial Public Offering of 8,050,000 subordinate voting shares for net proceeds
of approximately US$209 million, including the over-allotment option exercised
by the underwriters. Since our Initial Public Offering, we have financed our
major investments mainly by the issuance of subordinate voting shares and the
use of our short-term investments.
CASH POSITION AND SHORT-TERM INVESTMENTS
As at November 30, 2001, cash and cash equivalents as well as short-term
investments consisted of $58.2 million. Our working capital was at
$116.5 million. Our cash and cash equivalents and short-term investments
decreased approximately by $16.4 million since August 31, 2001, mainly due to
the cash payment of $9.8 million for the acquisition of EXFO Protocol, the
cash payment of $3.1 million for the purchases of property, plant and
equipment and intangible assets for the quarter and the financing of
operating activities of the quarter for $2.7 million.
OPERATING ACTIVITIES
Cash flows used by operating activities were $2.7 million for the three months
ended November 30, 2001, compared to $1.1 million for the same period last year.
Cash flows used by operating activities were primarily due to net loss after
items not affecting cash and cash equivalents of $3.5 million. This figure was
mainly offset by the net decrease in accounts
receivable and inventories of $11.4 million, over the net decrease in accounts
payable and accrued liabilities and income taxes payable of $10.3 million. The
decrease in our accounts receivable, inventories and accounts payable and
accrued liabilities is respectively due to the reduction in our sales level, our
efforts to maintain inventory at the lowest acceptable level and the reduction
in our purchases due to the actual slowdown in our industry. The decrease in our
income tax payable directly relates to our consolidated tax loss for the first
quarter of 2002 compared to a consolidated taxable income for the year ended
August 31, 2001.
For the three months ended November 30, 2001, the major items not affecting cash
and cash equivalents consisted of net amortization expenses of $16.6 million.
FINANCING ACTIVITIES
Cash flows used by financing activities were $25,000 for the three months ended
November 30, 2001, compared to cash flows provided by financing activities of
$0.6 million for the same period last year.
As at November 30, 2001, we have credit facilities that provide for advances of
up to $6.4 million under lines of credit. These lines of credit bear interest at
prime rate.
INVESTING ACTIVITIES
Cash flows provided by investing activities were $16.1 million for the three
months ended November 30, 2001, compared to cash flows used by investing
activities of $0.3 million for the same period last year. In the first quarter
of 2002, we disposed of $29.0 million of short-term investments to finance the
$3.1 million purchase of property, plant and equipment and intangible assets and
to pay the cash consideration of $9.8 million for the acquisition of EXFO
Protocol. Despite these purchases and acquisition, the disposal of short-term
investments generated net cash flows of $16.1 million in the first quarter of
2002.
OUTLOOK
As described above, we incurred net operating loss in the first quarter of 2002,
and operating activities used $2.7 million in cash flows. There can be no
assurance as to whether and when we will return to profitability or that our
revenues will return to prior level. However, we believe that our cash balances
and short-term investments, together with available credit facilities, will be
sufficient to meet our expected liquidity and capital requirements for the
remaining of the current fiscal year. However, possible additional net operating
losses and/or possible investments in or acquisition of complementary
businesses, products or technologies may require additional financing prior to
such time. There can be no assurance that additional debt or equity financing
will be available when required or, if available, it can be secured on terms
satisfactory to us.
NEW ACCOUNTING STANDARDS
In November 2001, The Canadian Institute of Chartered Accountants (CICA) revised
section 1650, "Foreign Currency Translation", which is effective for fiscal
years beginning on or after January 1, 2002. The revised standard no longer
permits the deferral and amortization of unrealized exchange gains and losses
that arise on the translation of long-term foreign currency denominated monetary
assets and liabilities. Under the new rules, such gains and losses must be
reported in earnings as they arise. Adopting this revised standard is not
expected to have a significant impact on our financial statements.
In November 2001, the CICA issued Accounting Guideline No. 13, "Hedging
Relationships", which shall be applied to hedging relationships in effect in
fiscal years beginning on or after July 1, 2002. This new accounting guideline
establishes basic criteria that must be met before hedge accounting can be used.
It also describes the types of exposures that can be hedged and the types of
instruments that qualify as hedges, sets detailed designation and documentation
requirements and requires formal effectiveness testing. We have not yet assessed
the impact of the adoption of this new guideline.
In December 2001, the CICA issued section 3870, "Stock-Based Compensation and
Other Stock-Based Payments", which is effective for fiscal years beginning on or
after January 1, 2002. The new section applies to awards granted on or after the
date of adoption, and requires that stock-based payment to non-employees and
direct awards to employees and non-employees be accounted for using a fair
value-based method. Adopting this new standard is not expected to have a
significant impact on our financial statements.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and other intangible assets" and
in August 2001, the CICA issued section 1581 "Business Combination" and section
3062 "Goodwill and other intangible assets". SFAS 141 and section 1581 require
business combinations initiated after June 30, 2001 or business combinations
accounted for by the purchase method with a date of acquisition after June 30,
2001 to be accounted for using the purchase method of accounting. These sections
also broaden criteria for recording intangible assets separately from goodwill.
Upon the adoption of SFAS 142 and section 3062, recorded goodwill and intangible
assets will be evaluated against those new criteria and may result in certain
intangible assets being reclassified into goodwill or, alternatively, amounts
initially recorded as goodwill being separately identified and recognized apart
from goodwill as intangible assets. SFAS 142 and section 3062 require the use of
a non-amortization approach to account for purchased goodwill and
indefinite-lived intangibles. Under the non-amortization approach, goodwill and
indefinite-lived intangibles will not be amortized, but instead they will be
reviewed for impairment and written down and charged to earnings only in the
periods in which the recorded value of goodwill and indefinite-lived intangibles
exceeds the fair value. SFAS 142 and section 3062 will be adopted on
September 1, 2002.
The impact of adopting SFAS 142 and section 3062 will allow the company to
use the non-amortization approach for goodwill recorded prior to July 1, 2001
and will reduce annual goodwill amortization by approximately $63,000,000
under SFAS 142 and $50,000,000 under section 3062. Moreover, the company will
implement a new goodwill impairment methodology and any potential initial
impairment losses on goodwill determined by this methodology will be charged
to earnings under SFAS 142 and to deficit under section 3062. Any subsequent
impairment losses on goodwill will be charged to earnings in the period in
which it is incurred.
Under the transitional provisions of SFAS 142 and section 3062, the company did
not amortize the goodwill resulting from the acquisition of EXFO Protocol Inc.,
which closed on November 2, 2001.
In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligation", which is effective for fiscal years beginning on or after June 15,
2002. This standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. We have not yet assessed the
impact of the adoption of this new standard.
In October 2001, the FASB issued SFAS 144, "Accounting for Impairment or
Disposal of Long-Lived Assets", which supersedes SFAS 121 and the provisions
of APB 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions" with regard to reporting the
effects of a disposal of a business segment. SFAS 144 retains many of the
provisions of SFAS 121, but significantly changes the criteria that would
have to be met to classify an asset as held for disposal such that long-lived
assets to be disposed of other than by sale are considered held and used
until disposed of. In addition, SFAS 144 retains the basic provisions of
APB 30 for presentation of discontinued operations in the statement of
earnings but broadens that presentation to a component of an entity. This new
standard is effective for fiscal years beginning on December 15, 2001.
Adopting this new standard is not expected to have a significant impact on
our financial statements.
RISKS AND UNCERTAINTIES
We operate in a highly competitive field that is in constant evolution and, as a
result, we encounter various risks and uncertainties that must be given
appropriate consideration in our strategic management policies.
The main risks and uncertainties related to the fiber-optic test, measurement
and automation industry involve the quick development of new products that have
short lifecycles and require extensive research and development; the difficulty
of attracting and retaining highly skilled employees as well as offering them
effective training programs; and the ability to quickly adapt our cost structure
to changing market conditions in order to ensure our growth.
In addition, given our strategic goals for growth and competitive positioning in
our industry, we are expanding into international markets. This exposes us to
certain risks and uncertainties related to changes in local laws and
regulations, multiple technological standards, protective legislation and
pricing pressure.
Furthermore, while the important strategic acquisitions we have made are
essential to our long-term growth, they also expose us to certain risks and
uncertainties related to the rapid and effective integration of these companies
as well as their products, technologies and personnel.
We are also exposed to currency risks as a result of the export of our products
manufactured in Canada, substantially all of which are denominated in US
dollars. These risks are partially hedged by the operating expenses of certain
international subsidiaries, the purchase of raw materials in US dollars and
forward exchange contracts.
Also, an economic slowdown in our industry could result in some of our customers
experiencing difficulties and, consequently, this could have a negative effect
on our results. However, the sectorial and geographic diversity of our customer
base provides us with a reasonable level of protection in this area. Finally,
other financial instruments which potentially subject us to credit risks consist
principally of cash and cash equivalents, short-term investments and forward
exchange contracts. Our short-term investments consist of debt instruments
issued by high-credit quality financial institutions and corporations. Our cash
and cash equivalents and forward exchange contracts are held with or issued by
high-credit quality financial institutions; therefore, we consider the risk of
non-performance on these instruments to be remote.
In addition, for a fuller understanding of risk factors that may affect us, we
refer you to the risk factors set forth in our disclosure documents published
with securities commissions.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
-------------------------------
Name: Germain Lamonde
Title: President and Chief Executive Officer
Date: January 17, 2002