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 November 2009
EXFO
Electro-Optical Engineering Inc.
(Translation
of registrant’s name into English)
400
Godin Avenue, Quebec City, Quebec, Canada G1M 2K2
(Address
of principal executive offices)
Indicate
by check mark whether the registrant files or will file annual reports under
cover of Form 20-F or Form 40-F.
|
Form
20-F x
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Form
40-F o
|
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 o
|
No x
|
If “Yes”
is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
In
November 2009, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
issued its annual report containing its annual audited financial statements and
management’s discussion and analysis thereof for its fiscal year ended
August 31, 2009. At the same time, it also issued a cover letter, its
notice of its annual and special shareholders’ meeting, its form of proxy and
its management proxy circular. This report of Form 6-K sets forth said
documents.
The
annual report containing the Corporation’s annual audited financial statements
and management’s discussion and analysis for its fiscal year ended August 31,
2009, a cover letter, its notice of annual and special shareholders’ meeting,
its form of proxy and its management proxy circular are hereby incorporated as
documents by reference to Form F-3 (Registration Statement under the Securities
Act of 1933) declared effective as of July 30, 2001 and to Form F-3
(Registration Statement under the Securities Act of 1933) declared effective as
of March 11, 2002 and to amend certain material information as set
forth in these two Form F-3 documents.
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.
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EXFO
ELECTRO-OPTICAL ENGINEERING INC.
|
|
|
By: /s/ Germain
Lamonde
Name: Germain
Lamonde
Title: President
and Chief Executive Officer
|
|
Date:
November 25, 2009
2009
Poised
for growth
EXFO
Assessing
Next-Gen
Networks
EXFO is a
leading provider of test and service assurance solutions for network operators
and equipment manufacturers in the global telecommunications industry. The
Telecom Division, which accounts for almost 90% of the company’s revenues,
offers a wide range of innovative solutions to assess optical networks, from the
core to access, as well as next-generation IP infrastructures and related
triple-play services. The Life Sciences and Industrial Division offers solutions
in medical device and opto-electronics assembly, fluorescence microscopy and
other life science sectors. For more information, visit
www.EXFO.com.
TABLE
OF CONTENTS
01 Five
Keys to Understanding EXFO
06 Letter
to Shareholders
10 Financial
Highlights
11 Management’s
Discussion and Analysis
32 Management’s
Reports
33 Report
of Independent Auditors
34 Consolidated
Financial Statements
39 Notes
to Consolidated Financial Statements
60 Board
of Directors
61 Management
and Corporate Officers
62 Corporate
Governance Practices
64 Other
Financial Information
65 Shareholder
Information
66 Glossary
67 Worldwide
Offices
Five Keys to Understanding EXFO
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1
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THE
WORLD NEEDS MORE BANDWIDTH
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At work,
rest or play, people are consuming more and more bandwidth, VoIP, IPTV,
video-on-demand, video conferencing, peer-to-peer file sharing and social
networking applications – these were deemed futuristic not too long ago, but
they have made their way into the very fabric of our daily lives.
In fact,
global IP traffic is almost doubling every two years, as subscribers now expect
wireless and wireline networks to transport any content to any device at any
time.
“To
respond to explosive bandwidth growth, EXFO has developed next-generation test
and service assurance solutions that enable customers to optimize their networks
and maximize revenues.”
Vikas
Arora
Chief
Technology Officer
|
2
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NETWORK
OPERATORS ARE CONVERGING TOWARD AN ALL-IP
ARCHITECTURE
|
Legacy
SONET/SDH standards were established in the mid-1980s to carry point-to-point
voice signals along traditional telephone systems. With the advent of the
Internet in the mid-1990s, these same networks began transporting data without
too many complications.
Fast-forward
to the new millennium as a host of bandwidth-intensive video applications have
forced network operators to overhaul their entire systems to efficiently support
triple-play and even quad-play services.
Today,
voice, data and video have become mere applications on a converged IP
fixed-mobile network, allowing operators to cost-effectively deliver more
bandwidth and services.
“EXFO’s
value proposition to network operators is not only about innovation, quality and
ease of use – it enables them to deploy the most advanced networks with
higher-margin services at a lower cost.”
Étienne
Gagnon
Vice-President
of Telecom Product
Management
and Marketing
|
3
|
EXFO
IS FOLLOWING SUIT WITH ADVANCED IP TESTING AND SERVICE
ASSURANCE…
|
In 1985,
EXFO started off as a pure-play supplier of handheld fiber-optic test
instruments. Over the years we gradually became more software-centric, moving up
the network hierarchy to offer transport and datacom test instruments. These
software-driven solutions characterize traffic carried across wireline and
wireless networks.
Given our
strong focus on IP fixed-mobile convergence, we recently expanded into service
assurance through the acquisition of Brix Networks. As network operators reach a
critical mass in terms of paying customers, it’s far more cost-efficient for
them to deploy IP service assurance systems than send out technicians to cope
with network failures.
By
definition, service assurance is even more software-intensive than transport and
datacom testing, since it monitors quality of service (VoIP, Internet, IPTV) and
quality of experience in real time. Altogether, our software-based test
solutions, collectively known as our protocol business, represented 36% of
Telecom revenues in 2009 compared to 10% in 2006. Not coincidentally, our gross
margin steadily increased over these years to reach 61.3% in 2009.
“EXFO is
just beginning to leverage synergies between testing and service assurance
across the network lifecycle. This will surely fuel our sales growth and
increase our margins as we evolve from a ‘box’ to ‘solution’
supplier.”
Vivian
Hudson
Vice-President
and General Manager
EXFO
Service Assurance
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4
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…
AND FOCUSING ON HIGH-GROWTH MARKET
OPPORTUNITIES
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During
our 24-year history, our growth strategy has always been predicated on targeting
high-potential markets in which we can make a real difference for customers.
Against the backdrop of a global shift towards IP fixed-mobile convergence, we
have steered our efforts to specific market segments like mobile backhaul, FTTx,
40 Gbit/s and 100 Gbit/s network upgrades, and business Ethernet
services. We’ve also prioritized our global sales coverage with a direct
presence in more than 20 selected countries. Our sales force is supplemented by
channel partners who provide pre- and post-sales support in nearly 100
countries. This sales model allows us to combine our global reach with local
partners to better serve our overall markets.
“Given
the strong demand for broadband services in the Americas, our focus on
high-growth market opportunities renders our solutions extremely relevant to
network operators in this region.”
Dana
Yearian
Vice-President
of Telecom Sales
Americas
“We’ve
penetrated about 80% of the top 100 network operator accounts worldwide thanks
to a shrewd assessment of market trends, products designed for real-world
applications, and highly targeted deployment of sales resources.”
Jon
Bradley
Vice-President
of Telecom Sales
International
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5
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EXFO
IS POISED FOR PROFITABLE GROWTH
|
Since
EXFO’s inception, our focus has always been on growing faster than the industry
through market-share gains. We get there by combining market-driven product
innovation with best of- class support to deliver an unmatched customer
experience.
As a
result, EXFO has gained market share every single year since 1985.
During
this period, we have maintained a healthy gross margin, generated strong cash
flow, delivered solid EBITDA levels and protected our balance sheet. Although
our revenues and earnings were affected by the global economic recession in
2009, we remain poised for profitable growth by keeping our eyes on both the top
and bottom lines.
“By
striking the right balance between sales growth and profitability, while
maintaining a strong balance sheet, we’re committed to creating genuine value
for shareholders.”
Pierre
Plamondon, CA
Vice-President
of Finance
and Chief
Financial Officer
Poised
for Profitable Growth
Fiscal
2009 unfolded like two years in one at EXFO. At the midpoint of fiscal 2009, we
had increased sales 10.1% year-over-year (or flat organically, excluding
acquisitions and forward exchange contracts), while most of our peers endured
double-digit declines. We had also generated strong earnings thanks, in part, to
a favorable Canadian/US exchange rate.
The
depressed economic environment, however, caught up with us in the second half of
the fiscal year, especially in May and June, as several opportunities that we
had been tracking were delayed or reduced in size. We also witnessed a
significant decrease in the US dollar against multiple currencies, including the
Canadian dollar, in the third quarter, which prompted us to implement a
restructuring plan that will provide $6 million in annualized pre-tax savings to
help us return to better profitability levels.
We closed
fiscal 2009 with a 5.9% year-over-year decrease in sales to $172.9 million, or
-13.5% on an organic basis. Given the lower sales volume caused by the economic
recession, EBITDA* dropped to $14.5 million, or 8.4% of sales.
Obviously,
these results are disappointing to me, but I believe that we continued to
increase our market share as the telecom test and service assurance pie
contracted more than our sales in the past year. We also made inroads in new
market segments, intensified sales and marketing initiatives in targeted
regions, and launched a series of ground-breaking solutions. I’m confident these
actions will lead to a significant increase in sales and earnings in upcoming
years.
Following
is a summary of our key achievements in fiscal 2009:
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·
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Increased
protocol sales 63.1% year-over-year to $54.9
million;
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·
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Raised
gross margin for a seventh consecutive year to reach
61.3%;
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|
·
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Generated
a record $22.6 million in cash flows from
operations;
|
|
·
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Maintained
a healthy balance sheet with a cash position of $69.7 million and no
debt;
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·
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Returned
$26.3 million to shareholders via our share buyback
programs;
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·
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Positioned
EXFO for key market opportunities by launching 26 new products, including
several game-changers;
and
|
|
·
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Over
the last five years, increased sales by a CAGR of 18.3% and improved gross
margin on average 1.3% per year – from 54.7% to
61.3%.
|
With the
worst of the economic recession seemingly behind us, I’m optimistic that EXFO is
poised to return to profitable growth, as reflected in the theme of our Annual
Report. With operators shifting their fixed and mobile networks to a fully
converged, IP architecture in order to meet growing bandwidth demand in a
flexible and cost-effective manner, EXFO is well positioned to meet the
challenge with its market-leading optical product portfolio and higher-margin,
next-generation IP test and service assurance offerings.
OPTICAL
BUSINESS
Many
operators deferred capital-intensive deployments of fiber in their access
networks, including fiber-to-the-home (FTTH), as well as core network expansion
initiatives in 2009. Consequently, optical sales dropped 17.5% to
$95.5 million despite our continued market-share gains. Third-party
research from Frost & Sullivan reported in 2009 that EXFO had made the
largest market-share gains in the fiber-optic test equipment (FOTE) market for a
fifth consecutive period in calendar 2008, confirming we had vaulted from third
to first place in the global FOTE market with a market share of 18.0% in 2008,
or an estimated 33.3% of the portable test segment. Our internal numbers
indicate that the FOTE market dropped between 20 to 25% in 2009.
Continuing
to build on our leadership position in 2009, we strengthened our optical product
line with a number of innovative test solutions like a patent-pending,
single-ended distributed PMD analyzer and a 100 Gbit/s optical modulation
analyzer. We remain recognized as the partner of choice by network operators
worldwide as they increase transmission rates in core and metro networks to 40
Gbit/s and even 100 Gbit/s, and deploy fiber deeper in their access networks
with proven FTTH or hybrid fiber-to-the-node (FTTN) and fiber-to-the-curb (FTTC)
initiatives. We expect our optical revenues to rebound in 2010 as access to
capital improves among network operators.
PROTOCOL
BUSINESS
Sales of
our protocol business increased 63.1% year-over-year to $54.9 million in 2009 as
we continued gaining market share in next-generation transport and datacom
testing, IMS/VoIP testing (Navtel acquisition) and IP service assurance (Brix
acquisition). These latter two segments made full-year contributions to our
protocol sales in 2009 compared to five and four months, respectively, in 2008.
Our five-year CAGR for protocol sales is a remarkable 51.9%.
We made
headway in 2009 not only with wireline operators, but also with their wireless
counterparts. Among our numerous contract wins, let’s mention two multi-million
dollar contracts with Tier-1 wireless operators: one for mobile backhaul testing
and another for a nation-wide service assurance deployment. Wireless is
increasingly becoming an attractive end-market for EXFO as both fixed and mobile
networks are converging to a common IP-based communications infrastructure
supported by IMS for seamless network interoperability. Wireless operators are
aggressively investing in 3G networks and preparing for 4G/LTE deployments to
cope with the explosion in bandwidth demand generated by smart phones and
notebooks.
To
accommodate soaring mobile data traffic, wireless operators will be massively
deploying optical fiber to their transmission towers in order to ratchet
transmission rates up to 1 Gbit/s. This represents a major opportunity for
EXFO to combine leading optical, protocol and service assurance solutions in a
comprehensive end-to-end offering.
BRIX
ACQUISITION
Our bold
move to acquire Brix Networks in April 2008 is just starting to pay off as we
begin to leverage the technical and commercial synergies with the rest of our
business. Brix brought to EXFO the most advanced and scalable service assurance
solution for voice, data and video applications on fixed and mobile IP networks.
As an integral part of our protocol business, it was negative to earnings
(excluding amortization of intangible assets and stock-based compensation costs)
for the remainder of fiscal 2008 and slightly positive in 2009—ahead of what we
had initially communicated. It should increasingly contribute to earnings as we
ramp up sales volume in a segment that carries our highest margins. IP service
assurance is a high-growth market opportunity for EXFO. Network operators must
increasingly measure quality of experience to assure customer satisfaction and
retention, given the less predictable nature of IP networks with applications
competing for bandwidth as they travel through the “Internet cloud.”
Looking
at the chart on this page, our consolidated gross margin has grown in tandem
with sales of our protocol solutions, which have elevated margins due to their
inherently high software content. As mentioned in previous years, I anticipate
this business will surpass optical revenues in the not-too-distant future
despite expectations that our optical business will resume its growth
trajectory. Consequently, I’m confident that our consolidated gross margin
profile will continue its ascent in upcoming years as we focus on carrying over
the impact to our earnings.
ACCESS
BUSINESS
This
smaller unit is taking longer than planned to deliver on its promise. It was
affected by difficult market conditions in 2009, along with the fact that our
new offering targeting high-speed bandwidth to the home is just starting to win
product approvals with large accounts. Sales in access testing decreased 21.8%
to $5.8 million in 2009, but should return to a growth mode in
2010.
LIFE
SCIENCES AND INDUSTRIAL DIVISION
Sales in
our Life Sciences and Industrial Division dropped 13.2% year-over-year to $19.8
million in 2009 mainly due to reduced demand for consumer goods, such as
cellular phones and cameras, which affected sales of our opto-electronics
assembly product lines. This division remains, however, quite
profitable.
SHARE
BUYBACK PROGRAMS
Through a
substantial issuer bid (SIB) in December 2008, we bought back 7.7 million shares
for $25.5 million. The SIB re-affirmed management’s belief in the long-term
success of the company, reduced pressure on our share price created by some
shareholders’ need for liquidity during the financial crisis, and efficiently
disposed of excess cash on our balance sheet. We also maintained our normal
course issuer bid (NCIB) and altogether returned $26.3 million to shareholders
in fiscal 2009.
FOCUS
ON REVENUE AND
EARNINGS
GROWTH
As we
enter our 25th year of operation, we’re better positioned than ever to benefit
from an economic recovery, key market trends and earnings leverage. In a
nutshell:
|
·
|
We
expect all our telecom segments to resume sales growth in 2010. As access
to capital improves for network operators, our market-leading optical
business should rebound thanks to FTTH rollouts and overall network
expansion. Our protocol business is expected to continue its strong growth
trajectory as operators migrate their wireline and wireless networks to an
all-IP network architecture. Finally, our access segment should benefit
from increased product approvals among a larger base of network operators,
who are delivering higher speeds to homes through their existing fiber and
copper plants.
|
|
·
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We’re
confident that we will continue to raise our gross margin based on
increased sales from our higher-margin protocol business, which will
eventually surpass our optical unit in terms of revenues. In addition,
several strategic initiatives in procurement, product development and
manufacturing operations should continue to sustain this
trend.
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|
·
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As
we ramp up sales volume, we expect to better absorb the costs of our
global R&D, sales and support teams, and reduce their relative weight
in our P&L statement. It should be noted that our R&D software
center in India will begin its third year of operation, resulting in
enhanced productivity and better innovation results for
EXFO.
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·
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We
will focus on increasing the differentiation and added value in our
various product lines in order to deliver end-to-end test and service
assurance solutions that very few players in our field can match. We will
further leverage our technical and sales forces to maximize our return on
investment as network operators increasingly turn up triple-play IP
services and reduce customer churn.
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|
·
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We’ve
made significant moves in recent years, such as establishing our telecom
manufacturing plant in China and R&D software center in India, to
better position ourselves for strong revenue growth and even faster
earnings growth. We’re committed to finding the right balance between
sales and profitability growth, as well as organic versus
acquisition-related development. It’s essential that our earnings,
measured in EBITDA*, progress at a high rate in upcoming years, since as a
significant shareholder of the company I want to create value for all
shareholders.
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CORPORATE
PERFORMANCE METRICS
We have
maintained our best practice of establishing corporate metrics by which
management’s performance can be measured by shareholders. Given the economic
recession in 2009, however, we’ve adjusted them for a new three-year period
extending from fiscal 2010 to 2012. We’re retaining our minimum target of 20%
sales CAGR as we intend to grow sales faster than our end-markets. We’re raising
our gross margin metric to a minimum of 64% based on an increased contribution
from higher-margin protocol solutions. Finally, we plan to at least double
EBITDA* in dollars over the newly defined three-year period.
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Corporate
Performance Objectives for FY 2010-2012
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||
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Increase
sales by a CAGR of 20% or more
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||
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Raise
gross margin to 64%
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||
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Double
EBITDA in dollars
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WRAP-UP
A final
word of thanks goes out to the three pillars of our company: customers,
employees and shareholders. Without your ongoing trust, commitment and belief in
EXFO, we would not be as well positioned today to grow on a profitable basis. I
would also like to extend my gratitude to our Board of Directors, whose wise
counsel and staunch support have proven to be invaluable over the
years.
Sincerely,
/s/
Germain Lamonde
Germain
Lamonde
Chairman,
President and Chief Executive Officer
October
13, 2009
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*
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment, amortization of intangible
assets, impairment of goodwill and extraordinary gain. Please see page 64
for a reconciliation of EBITDA to GAAP net earnings
(loss).
|
(in
thousands of US dollars, except per share data, and as a percentage of
sales)
|
Consolidated
Statements of Earnings Data
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Sales
|
$ | 172,878 | $ | 183,790 | $ | 152,934 | $ | 128,253 | $ | 97,216 | ||||||||||
|
Gross
margin
|
$ | 105,986 | $ | 108,166 | $ | 87,798 | $ | 70,978 | $ | 53,157 | ||||||||||
| 61.3 | % | 58.9 | % | 57.4 | % | 55.3 | % | 54.7 | % | |||||||||||
|
Selling
and administrative
|
$ | 63,808 | $ | 61,153 | $ | 49,580 | $ | 40,298 | $ | 31,782 | ||||||||||
| 36.9 | % | 33.3 | % | 32.4 | % | 31.4 | % | 32.7 | % | |||||||||||
|
Net
research and development
|
$ | 27,698 | $ | 26,867 | $ | 16,668 | $ | 15,404 | $ | 12,190 | ||||||||||
| 16.0 | % | 14.6 | % | 10.9 | % | 12.0 | % | 12.5 | % | |||||||||||
|
Earnings
(loss) from operations
|
$ | (18,078 | ) | $ | 11,983 | $ | 16,782 | $ | 8,062 | $ | (199 | ) | ||||||||
| (10.5 | ) % | 6.5 | % | 11.0 | % | 6.3 | % | (0.2 | ) % | |||||||||||
|
Net
earnings (loss)
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | ||||||||
|
See
note (1) below for selected information included in net earnings
(loss)
|
(9.6 | ) % | 10.0 | % | 27.6 | % | 6.3 | % | (1.7 | ) % | ||||||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.27 | ) | $ | 0.27 | $ | 0.61 | $ | 0.12 | $ | (0.02 | ) | ||||||||
|
EBITDA
*
(unaudited)
|
$ | 14,466 | $ | 20,588 | $ | 22,580 | $ | 15,834 | $ | 7,557 | ||||||||||
| 8.4 | % | 11.2 | % | 14.8 | % | 12.0 | % | 7.8 | % | |||||||||||
|
(1)
Other Selected
Information Included in Net Earnings (Loss)
(Unaudited)
|
||||||||||||||||||||
|
R&D
tax credits recovery
|
$ | (1,902 | ) | $ | – | $ | (3,162 | ) | $ | – | $ | – | ||||||||
|
Amortization
of intangible assets
|
$ | 5,067 | $ | 3,871 | $ | 2,864 | $ | 4,394 | $ | 4,836 | ||||||||||
|
Impairment
of long-lived assets and goodwill
|
$ | 21,713 | $ | – | $ | – | $ | 604 | $ | – | ||||||||||
|
Government
grants
|
$ | – | $ | – | $ | (1,079 | ) | $ | (1,307 | ) | $ | – | ||||||||
|
Restructuring
charges
|
$ | 1,171 | $ | – | $ | – | $ | – | $ | 292 | ||||||||||
|
Stock-based
compensation costs
|
$ | 1,409 | $ | 1,272 | $ | 981 | $ | 1,032 | $ | 963 | ||||||||||
|
Future
income tax recovery
|
$ | (943 | ) | $ | (6,515 | ) | $ | (24,566 | ) | $ | – | $ | – | |||||||
|
Extraordinary
gain
|
$ | – | $ | 3,036 | $ | – | $ | – | $ | – | ||||||||||
|
Net
income tax effect of the above items
|
$ | (2,613 | ) | $ | (915 | ) | $ | – | $ | – | $ | – | ||||||||
|
Consolidated
Balance Sheets Data
|
||||||||||||||||||||
|
Cash
and short-term investments
|
$ | 69,716 | $ | 87,540 | $ | 129,758 | $ | 111,290 | $ | 112,002 | ||||||||||
|
Working
capital
|
$ | 108,080 | $ | 144,604 | $ | 180,440 | $ | 143,985 | $ | 135,288 | ||||||||||
|
Total
assets
|
$ | 240,371 | $ | 293,066 | $ | 279,138 | $ | 219,159 | $ | 190,957 | ||||||||||
|
Long-term
debt (excluding current portion)
|
$ | – | $ | – | $ | – | $ | 354 | $ | 198 | ||||||||||
|
Shareholders’
equity
|
$ | 208,045 | $ | 259,515 | $ | 250,165 | $ | 196,234 | $ | 173,400 | ||||||||||
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion and analysis of the consolidated financial condition and
results of operations of EXFO Electro-Optical Engineering Inc. for the fiscal
years ended August 31, 2007, 2008 and 2009 should be read in conjunction
with our consolidated financial statements and the related notes included
elsewhere in this Annual Report. Our consolidated financial statements have been
prepared in accordance with generally accepted accounting principles in Canada,
or Canadian GAAP. Significant differences in measurement and disclosure from
generally accepted accounting principles in the United States, or U.S. GAAP, are
set out in note 20 to our consolidated financial statements. Our measurement
currency is the Canadian dollar although we report our financial statements in
US dollars.
The
following discussion and analysis of the consolidated financial condition and
results of operations is dated November 6, 2009.
All
dollar amounts are expressed in US dollars, except as otherwise
noted.
INDUSTRY
OVERVIEW
The
fundamental drivers for increased bandwidth and Internet protocol (IP)
fixed-mobile convergence in the global telecommunications industry remain
intact, but they were constrained by an economic recession that forced network
operators and network equipment manufacturers to reduce their capital and
operating expenses in calendar 2009. In fact, several of these players
announced significant reductions in capital expenditures and staffing levels
during the course of the year. The economic outlook seems brighter for the
latter part of calendar 2009, but most industry analysts are forecasting a
moderate improvement rather than an immediate snap back to previous revenue
levels.
Despite
this challenging macro-economic environment, it should be noted that telecom
market dynamics in 2009 are completely different from those during the industry
downturn of 2001. First of all, there is a myriad of bandwidth-intensive
applications generating strong growth in bandwidth demand, both in wireless and
wireline networks. For example, monthly traffic is at the exabyte level (1
exabyte equals 1 quintillion bytes) in 2009, while in 2001 there were few
applications outside of regular e-mail delivery. Secondly, the ongoing demand
for bandwidth has placed a strain on access links, metro rings and
long-haul routes, whereas in 2001 there was an overabundance
of bandwidth capacity in optical backbone networks, which drove bandwidth
prices down significantly. Finally, most network operators have healthy balance
sheets today, while in 2001 many of them were financially overextended with some
declaring outright bankruptcy.
According
to Cisco’s Visual Networking Index, global IP traffic will nearly double every
two years (compound annual growth rate of 46%) from 2007-2012, reaching just
under 44 exabytes per month in 2012. Global bandwidth demand is driven by a wide
range of applications including peer-to-peer file sharing, social networking,
Internet gaming as well as various forms of IP video. For example, YouTube
consumed more bandwidth in 2008 than traffic crossing the entire U.S. network
backbone in 2000.
As
telecommunication networks are being transformed to deliver IP-based voice,
video and data capabilities, legacy SONET/SDH standards, which were first
established in the mid-1980s and implemented until 2005, do not have the payload
flexibility to seamlessly mix and transport these services. Such networks are
not capable of efficiently carrying IP-based services, since they were designed
for public switched telephone network (PSTN), point-to-point voice transmission
only. As a result, new optical transport network (OTN) standards have been
defined to carry IP applications over Ethernet and are at the very
foundation of what the industry is labeling next-generation networks. Network
operators are increasingly turning to such next-generation, IP-based networks
to allow for more flexible and efficient transport of applications and
services, and to offer customers higher-margin triple-play services ― and even quadruple-play
services ― as wireline and wireless technologies become increasingly
interconnected. Finally, as subscribers of these new services reach a critical
mass, network operators are relying on service assurance solutions to
ensure that the quality of service (QoS) and quality of experience
(QoE) are optimal in the post-deployment phase.
As well,
it is now clear that fiber-to-the-home (FTTH) is becoming the access network
architecture of choice for network operators wishing to provide a superior user
experience for a combined video, data and voice offering. This architecture
allows them to meet heightened bandwidth requirements and future-proof their
access networks, as residential bandwidth demands are growing from the 1 to
5 Mbit/s (megabits per second) of the past
to 30 to 100 Mbit/s required for the long term. Some
projects, however, may be delayed due to reduced funding. Hybrid architectures,
combining copper and fiber (fiber-to-the-curb, or FTTC, and
fiber-to-the-node, or FTTN), will also expand in the short term, since they are
less expensive methods to increase bandwidth and can be mass-deployed more
quickly.
FTTH
investment decisions are applicable not only to green-field deployments and
high-rise buildings, but also to larger-scale rollouts as long-term
operating costs are less than FTTC and FTTN. It should be noted that FTTH
deployment costs have largely dropped over the years as increased volume and
improved test tools, like those we offer, are rendering rollouts
increasingly simple and efficient. FTTH is also proving to be a low-cost
alternative for multidwelling units (MDUs) as this network architecture can
deliver large amounts of bandwidth at a minimal cost per apartment. We are
merely at the early stages of fiber deployments in access networks, both in
North America and around the world. It is also worth noting that Western Europe
and even China have become increasingly committed to deploying FTTH networks,
given their high-population density.
As
bandwidth growth in access networks continues to increase, it has begun placing
a strain on metro rings and core networks. It is also driving the need for
higher-speed technologies. For example, 43 Gbit/s (gigabits per
second) SONET/SDH
is now becoming mainstream, while a few network operators are expected to begin
100 Gbit/s Ethernet field trials later in this calendar year. In the long
run, these solutions will offer a more economical way to add capacity on
saturated network sections, especially if trenches need to be dug in order
to deploy new fiber in metro and long-distance
routes.
These
market dynamics affected telecom test and service assurance suppliers in fiscal
2009. However, the tail end of the economic recession in the United States
and Western Europe could potentially continue to delay network investments and
necessarily reduce demand for our test and service
assurance solutions.
COMPANY
OVERVIEW
EXFO is a
leading provider of test and service assurance solutions for network operators
and network equipment manufacturers in the global telecommunications industry.
The Telecom Division, which represents nearly 90% of our business, offers a
wide range of innovative test and service assurance solutions to assess
next-generation and traditional telecom networks. The Life Sciences and
Industrial Division offers solutions in medical-device and opto-electronics
assembly, fluorescence microscopy and other life sciences sectors.
We were
founded in 1985 in Quebec City, Canada. Our original products were focused on
the needs of installers and operators of fiber-optic networks. Customers use
these field-portable testing products for the installation, maintenance,
monitoring and troubleshooting of optical networks. In 1996, we supplemented our
product portfolio with an extensive line of high-end products that are mainly
dedicated to research and development as well as manufacturing activities
of optical component manufacturers and system vendors.
Over the
past several years, we have enhanced our competitive position through
acquisitions of protocol, copper/xDSL and service assurance test
businesses.
In
February 2009, we closed the acquisition of Sweden-based PicoSolve Inc., a
supplier of ultra-high-speed optical sampling oscilloscopes for 40G and
100G R&D, manufacturing and deployment applications.
In April
2008, we acquired all issued and outstanding shares of Brix Networks Inc.
(renamed EXFO Service Assurance Inc.), for a cash consideration of $32.1
million. Brix Networks, a privately held company located in the Boston, MA area,
offers VoIP and IPTV service assurance solutions across the three areas most
affecting the success of a real-time service: signaling quality (signaling path
performance), delivery quality (media transport performance) and content quality
(overall quality of experience). Brix Networks’ service assurance solutions
are mainly designed for network service providers (NSPs) and large
enterprises.
In March
2008, we acquired all issued and outstanding shares of Navtel Communications
Inc., for a cash consideration of $11.3 million. Navtel Communications, a
privately held company in Toronto, Canada, is a leading provider of Internet
protocol multimedia subsystem (IMS) and VoIP test solutions for network
equipment manufacturers (NEMs) and NSP labs. Navtel Communications specializes
in testing next-generation IP networks that are increasingly combining wireline
and wireless technologies. Subsequent to the acquisition, Navtel Communications
was merged into the parent company.
In fiscal
2008, we opened our own telecom manufacturing facilities in Shenzhen, China. We
now have two main manufacturing sites for our Telecom Division and one plant for
our Life Sciences Division. Over time, low-volume, high-complexity telecom
products will be manufactured in Quebec City, whereas high-volume,
low-complexity telecom products will be manufactured in Shenzhen.
In fiscal
2008 and 2009, we accelerated the deployment of a software development center in
Pune, India, to supplement the research and development capabilities of our
labs in Boston, Toronto, Montreal and Quebec City. This enables us to benefit
from the wealth of IP expertise in India, to accelerate product development―especially for our
software-intensive protocol test and service assurance solutions―to take advantage
of a lower cost structure.
In
January 2006, we acquired substantially all the assets of Consultronics Limited
(now merged with the parent company), a leading supplier of test equipment for
copper-based broadband access networks, for a total cash consideration of $19.1
million. Above and beyond copper/xDSL test solutions, Consultronics had a rich
product portfolio for testing next-generation technologies, such as IPTV and
VoIP, which are critical for NSPs in their deployment of triple-play services
(voice, data, video) over optical and copper links in access
networks.
In
November 2001, we acquired Avantas Networks Corporation (renamed EXFO Protocol
Inc. and now merged with the parent company), a supplier of protocol-testing and
optical-network performance management equipment for NSPs. This transaction
enabled us to combine optical and protocol test modules inside a single
field-portable test platform in order to help our customers increase revenues
and reduce operating costs. In October 2002, our wholly-owned subsidiary, EXFO
Gnubi, purchased substantially all the assets of gnubi communications, L.P., a
supplier of multichannel telecom and datacom testing solutions for the
system manufacturer market. EXFO Protocol and EXFO Gnubi were consolidated in
Montreal, Canada, in fiscal 2004.
Previously,
we had completed two acquisitions to bolster growth in the optical component
manufacturing market. We acquired Burleigh Instruments, Inc. (renamed EXFO
Burleigh Products Group Inc.) in December 2000 for its wavelength measurement
instruments and nanopositioning alignment systems. We also added EFOS Inc.
(renamed EXFO Photonic Solutions Inc.) in March 2001 for its precision
light-based, adhesive spot-curing technology. We have since exited the
optical component manufacturing automation business, and the remaining
operations of EXFO Burleigh have mostly been consolidated with those of
EXFO Photonic Solutions in Toronto, Canada.
We
launched 26 new products in fiscal 2009, including three in the fourth quarter,
compared to 27 in fiscal 2008. Key product introductions in fiscal 2009 included
among others a portable test solution for characterizing 100 Gbit/s Ethernet and
40/43 Gbit/s SONET/OTN networks; a patent-pending distributed PMD analyzer
that allows network operators to cost-effectively upgrade their networks to 40G
and 100G by measuring the level of potentially debilitating PMD on each fiber
section; new software releases for the IMS InterWatch platform and Packet Blazer
product lines that support the migration of voice and video applications to the
IPv6 (Internet protocol, version 6) addressing scheme; 1 Gbit/s and 10 Gbit/s
test probes for carrier Ethernet and mobile backhaul service assurance
applications; and the next-generation FTB-500 multilayer platform for high-end
test applications in the field and central office. Following the year-end, we
released the first turnkey optical modulation analyzer for complete
characterization of signals up to 100 Gbaud. Sales from products on the market
two years or less accounted for 38.4% of total sales in fiscal
2009.
Overall
for fiscal 2009, sales decreased 5.9% to $172.9 million from $183.8 million in
2008. This decrease in sales mainly results from the global economic recession
as well as from currency fluctuations on our sales and the impact of such
fluctuations on our forward exchange contracts since the beginning of the fiscal
year. However, global sales for fiscal 2009 included $25.3 million from
Brix Networks and Navtel Communications, compared to $5.4 million in 2008, which
mitigated in part the decrease in sales year-over-year. These two acquisitions
were closed approximately two months and one month into the third quarter of
fiscal 2008, respectively. Excluding the positive impact of our two recent
acquisitions, our organic sales would have decreased 17.3% in fiscal 2009
compared to 2008, reflecting the impact of the global economic recession and the
negative effects of the currency fluctuations on our sales and the impact of
such fluctuations on our forward exchange contracts in fiscal 2009, compared to
2008.
Looking
at the bottom line, we reported a GAAP net loss of $16.6 million, or $0.27 per
share, in fiscal 2009, compared to net earnings of $18.4 million, or $0.27 per
diluted share, in 2008. Net loss for fiscal 2009 included a non-cash
pre-tax impairment of goodwill of $21.7 million. GAAP net loss for
fiscal 2009 also included pre-tax charges of $1.2 million in severance expenses
for the 65 employees who were terminated throughout the company. However, GAAP
net loss included a pre-tax R&D tax credits recovery of $1.9 million and
$372,000 for the recognition of previously unrecognized future income tax
assets. Finally, GAAP net loss for fiscal 2009 included $4.3 million in
after-tax amortization of intangible assets and $1.4 million in stock-based
compensation costs. Net earnings for fiscal 2008 included $5.3 million for the
recognition of previously unrecognized future income tax assets, $2.7 million
for income tax recovery following the review of our tax strategy related to the
changes in substantively enacted income tax rates in Canada, $1.5 million
of income tax expense to account for the changes in substantively enacted income
tax rates on our future income tax assets in Canada, an extraordinary gain
of $3.0 million related to the negative goodwill of the Navtel
Communications acquisition, as well as $3.0 million in after-tax
amortization of intangible assets and $1.3 million in stock-based compensation
costs.
EBITDA
(net earnings (loss) before interest, income taxes, amortization of property,
plant and equipment, amortization of intangible assets, impairment of goodwill
and extraordinary gain) were at $14.5 million, or 8.4% of sales in fiscal
2009, compared to $20.6 million, or 11.2% of sales in 2008 (see
further in this document for a comprehensive reconciliation of EBITDA to
GAAP net earnings (loss)). EBITDA for fiscal 2009 included pre-tax charges of
$1.2 million in severance expenses for the 65 employees who were terminated
throughout the company and stock-based compensation costs of $1.4 million.
However, EBITDA included a pre-tax R&D tax credits recovery of $1.9
million.
On
November 6, 2008, we announced that our Board of Directors had authorized a
renewal of our share repurchase program, by way of a normal course
issuer bid on the open market, of up to 10% of our public float (as defined
by the Toronto Stock Exchange), or 2.7 million subordinate voting shares,
at the prevailing market price. We have used and expect to continue to use cash,
short-term investments or future cash flows from operations to fund the
repurchase of shares. The period of the normal course issuer bid started on
November 10, 2008, and will end on November 9, 2009. All shares
repurchased under the bid are cancelled. In fiscal 2009, we redeemed
488,786 subordinate voting shares for an aggregate net purchase price of
$1.4 million.
On
November 10, 2008, we announced that our Board of Directors had authorized a
substantial issuer bid (the “Offer”) to purchase for cancellation subordinate
voting shares for an aggregate purchase price not to exceed
CA$30 million. On December 18, 2008, pursuant to the Offer, we purchased
for cancellation 7.7 million subordinate voting shares for the aggregate
purchase price of CA$30 million (US$24.9 million), plus related fees of
$576,000. We used cash and short-term investments to fund the purchase of
shares.
On
November 6, 2009, we announced that our Board of Directors had authorized the
second renewal of our share repurchase program, by way of a normal
course issuer bid on the open market, of up to 10% of our public float (as
defined by the Toronto Stock Exchange), or 2.3 million subordinate voting
shares, at the prevailing market price. We expect to use cash, short-term
investments or future cash flows from operations to fund the repurchase of
shares. The period of the normal course issuer bid will start on November 10,
2009, and will end on November 9, 2010, or on an earlier date
if we repurchase the maximum number of shares permitted under the bid.
The program does not require that we repurchase any specific number of
shares, and it may be modified, suspended or terminated at any time and without
prior notice. All shares repurchased under the bid will be
cancelled.
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Recoverability of goodwill is determined at
the reporting unit level, using a two-step approach. First, the carrying value
of the reporting units is compared to their fair value. If the carrying value of
a reporting unit exceeds its fair value, the second step is performed to
determine the amount of the impairment loss. Following the decrease in our stock
price in June 2009, we came to the conclusion that the carrying value of
one of our reporting units exceeded its fair value and we recorded an impairment
charge of $21.7 million in the third quarter of fiscal 2009, to bring
the goodwill of this reporting unit to its fair value. This reporting unit
reports to the Telecom Division.
In June
2009 and as previously mentioned, we laid off 65 employees across the
organization as part of a restructuring plan to cope with currently
difficult market conditions. This action resulted in a one-time pre-tax
restructuring charge of $1.2 million that was recorded in the fourth quarter of
fiscal 2009, but is expected to deliver about $6 million in annual
savings.
During
the third quarter of fiscal 2009, we were named recipient of the Growth Strategy
Leadership Award by Frost & Sullivan for the fifth consecutive time. The
award is presented to the company whose growth strategy generates the largest
market-share gains in the global fiber-optic test equipment (FOTE) market during
the previous research period. According to Frost & Sullivan, a leading
global growth consulting firm, we captured first place overall in the FOTE
market with a market share of 18.0% in 2008, up from a third-place 12.7% in 2006
(Frost & Sullivan did not grant an award in 2008 for market-share gains in
2007). Frost & Sullivan estimated the FOTE market
to be $567.4 million in 2008, including $247.9 million for the
portable installation and maintenance (I&M) test market. Based on Frost
& Sullivan’s market data, we improved our leadership position in the
portable I&M test market from 25.5% in 2006 to 33.3% in 2008.
Sales
We sell
our products to a diversified customer base in approximately 95 countries
through our direct sales force and channel partners like sales representatives
and distributors. Most of our sales are denominated in US dollars
and euros.
In fiscal
2007 and 2009, our top customer accounted for 14.7% and 11.6% of global sales,
respectively. In fiscal 2008, no customer accounted for more than 10% of our
global sales, with our top customer representing 7.4% of our global sales. The
significant sales concentration with this Tier-1 carrier in fiscal 2007 was
largely due to our leadership position in the FTTx test market and the fact
that we benefited from aggressive FTTH rollouts from this customer. This sales
concentration significantly decreased in fiscal 2008. However, in fiscal 2009,
sales to this customer were positively impacted by significant orders for newly
acquired Brix service assurance products. Sales levels with this customer may
fluctuate year-over-year, based on available budgets, the allocation of such
budgets and the timing and scope of projects, especially those related to our
service assurance business.
We
believe that we have a vast array of products, a diversified customer base, and
a good spread across geographical areas, which provides us with reasonable
protection against the concentration of sales and credit risk.
Cost
of Sales
The cost
of sales includes raw materials, salaries and related expenses for direct and
indirect manufacturing personnel (net of government grants), as well as overhead
costs. Excess, obsolete and scrapped materials are also included in the
cost of sales. However, the cost of sales is exclusive of amortization, which is
shown separately in the statements of earnings.
Operating
Expenses
We
classify our operating expenses into three main categories: selling and
administrative expenses, research and development expenses, and amortization
expenses.
Selling
and administrative expenses consist primarily of salaries and related expenses
for personnel, sales commissions, travel expenses, marketing programs,
professional services, information systems, human resources and other corporate
expenses.
Gross
research and development expenses consist primarily of salaries and related
expenses for engineers and other technical personnel, material component costs
as well as fees paid to third-party consultants. We are eligible to receive
research and development tax credits and government grants on research and
development activities carried out in Canada. All related research and
development tax credits and government grants are recorded
as a reduction of gross research and development
expenses.
OUR
STRATEGY, KEY PERFORMANCE INDICATORS AND CAPABILITY TO DELIVER
RESULTS
Three-Year
Strategic Objectives
Our goal
is to become a strong market leader in the global telecom test and service
assurance industry, mostly with network service providers (NSPs). We are
committed to offering the most advanced market-driven solutions that help NSPs
efficiently install, commission and run their converged IP fixed-mobile
networks. Given the myriad of video applications and resultant explosion in
bandwidth demand, we are increasingly covering the service and application
layers on a network infrastructure to enable quadruple-play
services.
To
achieve our long-term vision, we plan to expand our leadership position in the
portable optical segment, while growing our protocol business even faster to
surpass optical sales. This plan is largely based on profitable organic growth
and will be supported by strategic acquisitions of typically small to mid-size
companies with best-of-class technologies in nascent, high-growth markets
complementary to EXFO’s. We also intend to improve our competitive position
through strategic alliances and partnerships.
In our
fiscal 2008 Annual Report, we established three corporate performance objectives
to gauge the success of our overall plan over the next three
years:
|
o
|
Increase
sales significantly faster than the industry growth rate (20%
CAGR*)
|
|
o
|
Grow
EBITDA** in dollars faster than sales (>20%
CAGR)
|
|
o
|
Continue
raising gross margin (62%)
|
|
*
|
Compound
annual growth rate
|
|
**
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment, amortization of intangible
assets, impairment of goodwill and extraordinary
gain.
|
Given the
global economic recession in fiscal 2009, we have adjusted our corporate
performance metrics over a new three-year period extending from fiscal 2010 to
2012. We have maintained our 20% sales CAGR objective, proposed to double EBITDA
in dollars, and raised our gross margin target to 64% for the newly defined
three-year period.
|
Corporate
Performance Objectives for FY 2010-2012
|
||
|
Increase
sales by a CAGR of 20% or more
|
||
|
Raise
gross margin to 64%
|
||
|
Double
EBITDA in dollars
|
These
three-year objectives will guide our actions in upcoming years as we are
committed to maximizing shareholder value.
Results
Achieved in Fiscal 2009
In fiscal
2009, sales and EBITDA decreased 5.9% and 29.7%, respectively, compared to 2008.
Most of these come from the negative effect of the global economic recession we
faced in fiscal 2009 as well as from currency fluctuations since the beginning
of the fiscal year. However, gross margin improved to 61.3% in fiscal 2009 from
58.9% in 2008 despite difficult market conditions and currency fluctuations,
thanks to the contribution of newly acquired Brix Networks and Navtel
Communications. See further in this document for a comprehensive analysis
of our sales and gross margin.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Management’s
discussion and analysis of financial conditions and results of operations is
based on our consolidated financial statements included elsewhere in this Annual
Report. As previously mentioned, they have been prepared in accordance with
Canadian GAAP. The preparation of financial statements in accordance with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosures of contingent assets and
liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting years. On an ongoing
basis, we evaluate these estimates and assumptions, including those related to
the fair value of financial instruments, the allowance for doubtful
accounts receivable, the amount of tax credits recoverable, the provision for
excess and obsolete inventories, the useful lives of capital assets, the
valuation of long-lived assets, the impairment of goodwill, the valuation
allowance of future income tax assets, the amount of certain accrued liabilities
and deferred revenue as well as stock-based compensation costs. We base our
estimates and assumptions on historical experience and on other factors that
we believe to be reasonable under the circumstances, the result of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results
could differ from these estimates.
The
following summarizes our critical accounting policies as well as other policies
that require the most significant judgment and estimates in the preparation of
our consolidated financial statements.
Revenue recognition. For
products in which software is incidental, we recognize revenue when persuasive
evidence of an arrangement exists, the product has been delivered, the price is
fixed or determinable, and collection of the resulting receivable is reasonably
assured. Provisions are made for estimated returns, warranties and
support obligations.
For
products in which software is not incidental, revenues are separated into two
categories: product and post-contract customer support (PCS) revenues, based
upon vendor-specific objective evidence of fair value. Product revenues for
these sales are recognized as described above. PCS revenues are deferred and
recognized ratably over the years of the support arrangement. PCS revenues are
recognized at the time the product is delivered when provided substantially
within one year of delivery, the costs of providing this support are
insignificant (and accrued at the time of delivery) and no (or infrequent)
software upgrades or enhancements are provided.
Maintenance
contracts generally include the right to unspecified upgrades and enhancements
on a when-and-if available basis and ongoing customer support. Revenue from
these contracts is recognized ratably over the terms of the maintenance
contracts on a straight-line basis.
Revenue
for extended warranties is recognized on a straight-line basis over the warranty
period.
For all
sales, we use a binding purchase order as evidence that a sales arrangement
exists.
Delivery
generally occurs when the product is handed over to a transporter for
shipment.
At the
time of the transaction, we assess whether the price associated with our revenue
transaction is fixed or determinable, and whether or not collection is
reasonably assured. We assess whether the price is fixed or determinable
based on the payment terms associated with the transaction. We assess collection
based on a number of factors, including past transaction history and the
creditworthiness of the customer. Generally, collateral or other security is not
requested from customers.
Most
sales arrangements do not generally include acceptance clauses. However, when a
sales arrangement does include an acceptance provision, acceptance occurs upon
the earliest of the receipt of a written customer acceptance or the expiration
of the acceptance period. For these sales arrangements, the sale is recognized
when acceptance occurs.
Allowance for doubtful
accounts. We estimate collectibility of accounts receivable on an ongoing
basis by reviewing balances outstanding over a certain period of time. We
determine our allowance for doubtful accounts receivable based on our historical
accounts receivable collection experience and on the information that we have
about the status of our accounts receivable balances. If the financial
conditions of our customers deteriorate, resulting in an impairment of
their ability to make required payments, additional allowance may be required,
which could adversely affect our future results.
Reserve for excess and obsolete
inventories. We state our inventories at the lower of cost, determined on
an average cost basis, and net realizable value, and we provide reserves for
excess and obsolete inventories. We determine our reserves for excess and
obsolete inventories based on the quantities we have on hand versus expected
needs for these inventories, so as to support future sales of our products. It
is possible that additional inventory reserves may occur if future sales are
less than our forecasts or if there is a significant shift in product mix
compared to our forecasts, which could adversely affect our future
results.
Research and development tax credits
and government grants. We record research and development tax credits and
government grants based on our interpretation of tax laws and grant programs,
especially regarding related eligible projects and expenses, and when there is
reasonable assurance that we have complied and will continue to comply with all
conditions and laws. Also, our judgment and estimates are based on historical
experience. It is possible, however, that the tax authorities or the sponsors of
the grant programs have a different interpretation of laws and application of
conditions related to the programs or that we do not comply with all conditions
related to grants in the future, which could adversely affect our future
results. Furthermore, a significant part of our research and development tax
credits are refundable against income taxes payable, causing their ultimate
realization to be dependent upon the generation of taxable income. If
we obtain information that causes our forecast of future taxable income to
change or if actual taxable income differs from our forecast, we may have to
revise the carrying value of these tax credits, which would affect our results
in the period in which the change was made.
Impairment of long-lived assets and
goodwill. Long-lived assets are reviewed for impairment when events
or circumstances indicate that cost may not be recoverable. Impairment
exists when the carrying amount of an asset, or a group of assets is greater
than the undiscounted future cash flows expected to be provided by the asset or
the group of assets. The amount of impairment loss, if any, is the excess of the
carrying value over the fair value. We assess fair value of long-lived
assets based on discounted future cash flows.
We assess
impairment of goodwill on an annual basis, or more frequently, if events or
circumstances indicate that it might be impaired. Recoverability of
goodwill is determined at the reporting unit level, using a two-step approach.
First, the carrying value of a reporting unit is compared to its fair value,
which is usually determined based on a combination of discounted
future cash flows and a market approach. If the carrying value of a reporting
unit exceeds its fair value, the second step is performed. In this step, the
amount of impairment loss, if any, represents the excess of the carrying value
of goodwill over its fair value, and the loss is charged to earnings in the
period in which it is incurred. For the purposes of this impairment test, the
fair value of goodwill is estimated in the same way as goodwill
is determined in business combinations; that is, the excess of the fair
value of a reporting unit over the fair value of its net identifiable
assets.
Future income taxes. We
provide for income taxes using the liability method of tax allocation. Under
this method, future income tax assets and liabilities are determined based on
deductible or taxable temporary differences between financial statement values
and tax values of assets and liabilities as well as the carry forward of unused
tax losses and deductions, using substantively enacted income tax rates expected
for the years in which the assets are expected to be realized or the
liabilities to be settled. In assessing the recoverability of our future income
tax assets, we consider whether it is more likely than not that some
or all of the future income tax assets will not be realized. The ultimate
realization of our future income tax assets is dependent upon the generation of
sufficient future taxable income during the periods in which those assets are
expected to be realized.
Stock-based compensation
costs. We account for all forms of employee stock-based compensation
using the fair value-based method. This method requires that we make estimates
about the expected volatility of our shares, the expected life of the
awards and the forfeiture rate.
Adopted
in fiscal 2009
In
December 2006, the Canadian Institute of Chartered Accountants (CICA) issued
three new sections, which provide a complete set of disclosure and
presentation requirements for financial instruments: Section 3862, “Financial
Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard
places increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk previously found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities, regardless of whether they have financial
instruments or are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital and
whether the entity has complied with any capital requirements.
We
adopted these new standards on September 1, 2008 and provided the required
disclosure in our consolidated financial statements.
In June
2007, the CICA issued Section 3031, “Inventories”. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new standard applies to fiscal years beginning
on or after January 1, 2008. We adopted this new standard
on September 1, 2008, and its adoption had no material
measurement effect on our consolidated financial statements. The additional
disclosure is provided in our consolidated financial statements.
In June
2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation”, to include new requirements regarding an entity’s ability to
continue as a going concern. These amendments apply to fiscal years beginning on
or after January 1, 2008. We adopted these amendments on September 1, 2008, and
their adoption had no material effect on our consolidated financial
statements.
In
January 2009, the CICA issued Emerging Issues Committee 173 (EIC-173), “Credit
Risk and the Fair Value of Financial Assets and Financial Liabilities”.
This abstract clarifies that an entity’s own credit risk and the credit risk of
its counterparty should be taken into account in determining the fair value of
financial assets and liabilities. We adopted this standard on January 20, 2009,
and its adoption had no material effect on our consolidated
financial statements.
To
be adopted after fiscal 2009
In
February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”,
which supersedes Section 3062, “Goodwill and Other Intangible Assets”, and
Section 3450, “Research and Development Costs”. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and
of intangible assets by profit-oriented enterprises. Standards concerning
goodwill remain unchanged from the standards included in Section 3062. This new
section applies to fiscal years beginning on or after October 1, 2008. We
will adopt this new standard on September 1, 2009, and have not yet determined
the effects its adoption will have on our consolidated financial
statements.
In
January 2009, the CICA issued Section 1582, “Business Combinations”, which
replaces Section 1581, “Business Combinations”. This new section establishes the
standards for the accounting of business combinations and states that all assets
and liabilities of an acquired business will be recorded at fair value.
Obligations for contingent considerations and contingencies will also be
recorded at fair value at the acquisition date. The standard also states that
acquisition-related costs will be expensed as incurred and that restructuring
charges will be expensed in the periods after the acquisition date. This
standard applies prospectively to business combinations with acquisition dates
on or after January 1, 2011; earlier adoption is permitted.
In
January 2009, the CICA issued Section 1601, “Consolidated Financial Statements”,
which replaces Section 1600, “Consolidated Financial Statements”, and
establishes the standards for preparing consolidated financial statements. This
new section applies to fiscal years beginning on or after January 1, 2011;
earlier adoption is permitted. We have not yet determined the impact that
adopting this standard will have on our consolidated financial
statements.
In
January 2009, the CICA issued Section 1602, “Non-controlling Interests”, which
establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements subsequent to
a business combination. This new section applies to fiscal years beginning on or
after January 1, 2011; earlier adoption is permitted as of the beginning of a
fiscal year.
Should we
decide to adopt one of these three new sections earlier, we must adopt all three
on the same date.
In June
2009, the CICA amended section 3862, "Financial Instruments − Disclosures", to
include enhanced disclosures on liquidity risk of financial instruments and
new disclosures on fair value measurements of financial instruments.
The amendments apply to fiscal years ending after September 30, 2009, with
early adoption permitted. We will adopt these amendments on September 1,
2010, and have not yet determined the effects their adoption will have on
our consolidated financial statements.
In
February 2008, the Canadian Accounting Standards Board announced that the use of
International Financial Reporting Standards (IFRS) established by the
International Accounting Standard Board (IASB) will be required for fiscal years
beginning January 1, 2011, for publicly accountable profit-oriented enterprises.
Accordingly, we will adopt these new standards during our fiscal year beginning
on September 1, 2011. The IASB has also stated that during the transition
period, companies will be required to provide comparative data for the previous
year established under IFRS. IFRS issued by the IASB require the submission of
additional information in the financial statements and, although the conceptual
framework of IFRS is similar to Canadian GAAP, companies must take into account
differences in accounting principles. We are currently evaluating the impact of
adopting these new standards on our consolidated financial statements. In fact,
we have completed the diagnostic phase to assess and scope the significant
differences between existing Canadian GAAP and IFRS and the impact on our
consolidated financial statements. Following the diagnostic phase, we have begun
a detailed analysis of the accounting policies impacted by the adoption of IFRS,
which is expected to be completed throughout fiscal 2010. Some transitional
options permitted under IFRS are currently under analysis. A summary analysis
indicates that in most cases, we would opt for a prospective application
when the choice is available. The changeover to IFRS may result in changes
to our accounting and internal control systems.
RESULTS
OF OPERATIONS
The
following table sets forth certain Canadian GAAP consolidated financial
statements data in thousands of US dollars, except per-share data, and
as a percentage of sales for the years indicated:
|
Consolidated
statements of earnings data:
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
||||||||||||||||||
|
Sales
|
$ | 172,878 | $ | 183,790 | $ | 152,934 | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||
|
Cost
of sales (1)
|
66,892 | 75,624 | 65,136 | 38.7 | 41.1 | 42.6 | ||||||||||||||||||
|
Gross
margin
|
105,986 | 108,166 | 87,798 | 61.3 | 58.9 | 57.4 | ||||||||||||||||||
|
Operating
expenses
|
||||||||||||||||||||||||
|
Selling
and administrative
|
63,808 | 61,153 | 49,580 | 36.9 | 33.3 | 32.4 | ||||||||||||||||||
|
Net
research and development (2)
|
27,698 | 26,867 | 16,668 | 16.0 | 14.6 | 10.9 | ||||||||||||||||||
|
Amortization
of property, plant and equipment
|
4,607 | 4,292 | 2,983 | 2.7 | 2.4 | 1.9 | ||||||||||||||||||
|
Amortization
of intangible assets
|
5,067 | 3,871 | 2,864 | 2.9 | 2.1 | 1.9 | ||||||||||||||||||
|
Restructuring
charges
|
1,171 | − | − | 0.7 | − | − | ||||||||||||||||||
|
Government
grants
|
− | − | (1,079 | ) | − | − | (0.7 | ) | ||||||||||||||||
|
Impairment
of goodwill
|
21,713 | − | − | 12.6 | − | − | ||||||||||||||||||
|
Total
operating expenses
|
124,064 | 96,183 | 71,016 | 71.8 | 52.4 | 46.4 | ||||||||||||||||||
|
Earnings
(loss) from operations
|
(18,078 | ) | 11,983 | 16,782 | (10.5 | ) | 6.5 | 11.0 | ||||||||||||||||
|
Interest
income
|
597 | 4,639 | 4,717 | 0.4 | 2.5 | 3.0 | ||||||||||||||||||
|
Foreign
exchange gain (loss)
|
1,157 | 442 | (49 | ) | 0.7 | 0.3 | − | |||||||||||||||||
|
Earnings
(loss) before income taxes and extraordinary gain
|
(16,324 | ) | 17,064 | 21,450 | (9.4 | ) | 9.3 | 14.0 | ||||||||||||||||
|
Income
taxes
|
||||||||||||||||||||||||
|
Current
|
561 | (7,094 | ) | 3,741 | 0.4 | (3.9 | ) | 2.4 | ||||||||||||||||
|
Future
|
72 | 14,094 | − | 0.0 | 7.7 | − | ||||||||||||||||||
|
Recognition
of previously unrecognized future
income tax assets
|
(372 | ) | (5,324 | ) | (24,566 | ) | (0.2 | ) | (2.9 | ) | (16.0 | ) | ||||||||||||
| 261 | 1,676 | (20,825 | ) | 0.2 | 0.9 | (13.6 | ) | |||||||||||||||||
|
Earnings
(loss) before extraordinary gain
|
(16,585 | ) | 15,388 | 42,275 | (9.6 | ) | 8.4 | 27.6 | ||||||||||||||||
|
Extraordinary
gain
|
− | 3,036 | − | − | 1.6 | − | ||||||||||||||||||
|
Net
earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | (9.6 | )% | 10.0 | % | 27.6 | % | |||||||||||
|
Basic
and diluted earnings (loss) before extraordinary gain per
share
|
$ | (0.27 | ) | $ | 0.22 | $ | 0.61 | |||||||||||||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.27 | ) | $ | 0.27 | $ | 0.61 | |||||||||||||||||
|
Segment
information
|
||||||||||||||||||||||||
|
Sales:
|
||||||||||||||||||||||||
|
Telecom
Division
|
$ | 153,082 | $ | 160,981 | $ | 129,839 | 88.5 | % | 87.6 | % | 84.9 | % | ||||||||||||
|
Life
Sciences and Industrial Division
|
19,796 | 22,809 | 23,095 | 11.5 | 12.4 | 15.1 | ||||||||||||||||||
| $ | 172,878 | $ | 183,790 | $ | 152,934 | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||
|
Earnings
(loss) from operations:
|
||||||||||||||||||||||||
|
Telecom
Division
|
$ | (21,954 | ) | $ | 9,524 | $ | 13,132 | (12.7 | )% | 5.2 | % | 8.6 | % | |||||||||||
|
Life
Sciences and Industrial Division
|
3,876 | 2,459 | 3,650 | 2.2 | 1.3 | 2.4 | ||||||||||||||||||
| $ | (18,078 | ) | $ | 11,983 | $ | 16,782 | (10.5 | )% | 6.5 | % | 11.0 | % | ||||||||||||
|
Research
and development data:
|
||||||||||||||||||||||||
|
Gross
research and development
|
$ | 35,757 | $ | 32,454 | $ | 25,201 | 20.7 | % | 17.7 | % | 16.5 | % | ||||||||||||
|
Net
research and development
(2)
|
$ | 27,698 | $ | 26,867 | $ | 16,668 | 16.0 | % | 14.6 | % | 10.9 | % | ||||||||||||
|
Consolidated
balance sheets data:
|
||||||||||||||||||||||||
|
Total
assets
|
$ | 240,371 | $ | 293,066 | $ | 279,138 | ||||||||||||||||||
|
(1)
|
The
cost of sales is exclusive of amortization, shown
separately.
|
|
(2)
|
Net
research and development expenses for the years ended August 31, 2007 and
2009 include the recognition of previously unrecognized research and
development tax credits of $3,162, or 2.1% of sales, and $1,902, or 1.1%
of sales, respectively.
|
SALES
Fiscal
2009 vs. 2008
In fiscal
2009, our global sales decreased 5.9% to $172.9 million from $183.8 million
in 2008, with an 89%-11% split in favor of our Telecom Division (88%-12% in
2008).
Telecom
Division
In fiscal
2009, sales of our Telecom Division decreased 4.9% to $153.1 million from
$161.0 million in 2008.
The
following table summarizes information about sales of our Telecom Division for
years ended August 31, 2008 and 2009, in thousands of US
dollars:
|
Year
ended
August 31, 2009
|
Year
ended
August 31, 2008
|
Change
in
$
|
Change
in
%
|
|||||||||||||
|
Telecom
Division sales
|
$ | 153,082 | $ | 160,981 | $ | (7,899 | ) | (4.9 | ) % | |||||||
|
(Gains)
losses on forward exchange contracts
|
3,178 | (4,171 | ) | 7,349 | ||||||||||||
|
Telecom
Division sales, excluding gains/losses on forward exchange
contracts
|
156,260 | 156,810 | (550 | ) | (0.4 | ) | ||||||||||
|
Impact
of recent acquisitions (1)
|
(25,327 | ) | (5,423 | ) | (19,904 | ) | ||||||||||
|
Organic
sales
|
$ | 130,933 | $ | 151,387 | $ | (20,454 | ) | (13.5 | ) % | |||||||
|
(1)
|
Includes
Brix Networks and Navtel
Communications.
|
In fiscal
2009, we reported a year-over-year decrease in sales mainly due to the impact of
the worldwide economic recession that affected most of our product lines during
that period. In addition, as a portion of our sales are denominated in
Canadian dollars, euros or British pounds, the increased strength of the US
dollar against these currencies in fiscal 2009, compared to 2008, also had a
negative impact on our sales expressed in US dollars, which contributed to the
decrease in sales compared to the corresponding period last year. This was
amplified by foreign exchange losses on our forward exchange contracts, which
are recorded in reduction of sales. In fact, in fiscal 2009, foreign exchange
losses on our forward exchange contracts amounted to $3.2 million and
accordingly reduced our sales, compared to foreign exchange gains of
$4.2 million in 2008, which increased our sales; this represents
a decrease in sales of $7.3 million year-over-year. Excluding the
impact of gains and losses on forward exchange contracts, our sales would have
been relatively flat year-over-year.
However,
the decrease in sales in fiscal 2009, compared to the same period last year, was
offset in part by the inclusion of the sales of newly acquired Brix
Networks and Navtel Communications products. In fact, sales of Brix Network and
Navtel Communications amounted to $25.3 million in 2009, compared to $5.4
million in 2008. Brix Networks and Navtel Communications were acquired two
months and one month into the third quarter of fiscal 2008, respectively.
Excluding sales of Brix Networks and Navtel Communications and the impact of the
foreign exchange gains or losses on our forward exchange contracts, our telecom
sales would have decreased 13.5% organically year-over-year in 2009, reflecting
the impact of the global economic recession and the decrease of the Canadian
dollar, euro and British pound compared to the US dollar.
In fiscal
2009, we posted record-high sales and bookings of protocol test solutions,
including next-generation IP test solutions and product lines of newly acquired
Brix Networks and Navtel Communications. Protocol test solutions sales, buoyed
by network capacity upgrades on wireline and wireless networks, increased 63.1%
year-over-year (organic growth of 4.8% excluding sales of our new acquisitions
of fiscal year 2008) as they reached $54.9 million in 2009, compared to $33.7
million in 2008. Also, they represented more than 35% of our telecom sales in
2009 (more than 20% in 2008). During fiscal 2009, we shipped a multimillion
order to a Tier-1 wireless operator in North America for our service assurance
test solutions, which increased our protocol sales year-over-year. The acquisitions of Brix
Networks and Navtel Communications and the launches of significant strategic
protocol test solutions in fiscal 2008 and 2009 give us a much more
comprehensive offering in this market segment and a better competitive advantage
over the competition.
However,
sales of our optical test solutions decreased 17.5% to $95.5 million, from
$115.7 million in 2008. Also, in fiscal 2009, we posted a year-over-year
sales decrease of 21.8% ($5.8 million in fiscal 2009, compared
to $7.4 million in 2008) for our copper-access test solutions. Our
optical business was more affected by difficult market conditions, as many
network operators deferred capital-intensive deployment decisions on FTTx
rollouts and capacity expansion, opting to increase speed rather than digging
trenches to add new fiber-optic cables. We believe that we still gained market
share in the optical segment despite our year-on-year revenue decline. The
access segment was also severely impacted by the recession, but we believe in
this case that we have likely lost some market share from a small overall market
presence, as our new products have not yet created a significant impact
in the market. We are optimistic that 2010 will reverse this
trend.
In fiscal
2009, we launched a patent-pending distributed PMD analyzer that allows network
operators to cost-effectively upgrade their networks to 40G and 100G by
measuring the level of potentially debilitating PMD on each fiber section, as
well as the next-generation FTB-500 multilayer platform for high-end test
applications in the field at the central office. In addition, following the
year-end, we released the first turnkey optical modulation analyzer for complete
characterization of signals up to 100 Gbaud. This analyzer incorporates the
technology of newly acquired PicoSolve. These new and significant products
should contribute to our sales in fiscal 2010 and beyond and help us increase
our optical sales in the future.
During
fiscal 2009, our top customer represented 13.1% ($20.0 million) of our telecom
sales, compared to 8.4% ($13.6 million) in 2008.
Life
Sciences and Industrial Division
In fiscal
2009, sales of our Life Sciences and Industrial Division decreased 13.2%
year-over-year at $19.8 million, from $22.8 million in 2008.
A
significant portion of that division’s sales activities are conducted through
original equipment manufacturer (OEM) agreements. Consequently, we are
dependent, to some extent, on the buying pattern of our customers. Moreover,
a significant part of our product offering is related to manufacturing
applications of consumer goods, which have been affected by the current state of
the global economy. Finally, the decrease in the value of the Canadian dollar,
the euro and the British pound versus the US dollar year-over-year had a
negative impact on sales of this division, since a portion of these are
denominated in currencies other than the US dollar and since we report our
results in US dollars.
Fiscal
2008 vs. 2007
In fiscal
2008, our global sales increased 20.2% to $183.8 million, from
$152.9 million in 2007, with an 88%-12% split in favor of our Telecom
Division (85%-15% in 2007).
Telecom
Division
In fiscal
2008, sales of our Telecom Division increased 24.0% to $161.0 million, from
$129.8 million in 2007.
The
following table summarizes information about sales of our Telecom Division for
the years ended August 31, 2007 and 2008, in thousands of US
dollars:
|
Year
ended
August 31, 2008
|
Year
ended
August 31, 2007
|
Change
in
$
|
Change
in
%
|
|||||||||||||
|
Telecom
Division sales
|
$ | 160,981 | $ | 129,839 | $ | 31,142 | 24.0 | % | ||||||||
|
Gains
on forward exchange contracts
|
(4,171 | ) | (1,280 | ) | 2,891 | |||||||||||
|
Telecom
Division sales, excluding gains on forward exchange
contracts
|
156,810 | 128,559 | 28,251 | 22.0 | ||||||||||||
|
Impact
of recent acquisitions
(1)
|
(5,423 | ) | − | (5,423 | ) | - | ||||||||||
|
Organic
sales
|
$ | 151,387 | $ | 128,559 | $ | 22,828 | 17.8 | % | ||||||||
|
(1)
|
Includes
Brix Networks and Navtel
Communications.
|
In fiscal
2008, we posted sales growth thanks to the market acceptance of our
next-generation IP test solutions and continued market-share gains in optical
test solutions, revenue from newly acquired Brix
Networks and Navtel Communications, continued spending in access networks fueled
by the competitive dynamic between telephone and cable companies, as well as the
positive impact of our forward exchange contract gains.
In fiscal
2008, sales of our optical test solutions increased 11.5% to $115.7 million,
from $103.8 million in 2007. In addition, in fiscal 2008, we posted
record-high sales and bookings of protocol test solutions, including
next-generation IP test solutions and product lines of newly acquired Brix
Networks and Navtel Communications. Protocol test solutions represented our
fastest-growing product line with a year-over-year sales increase of 97.4%
(organic growth of 65.6% excluding sales of $5.4 million from our new
acquisitions of fiscal year 2008) as they reached $33.7 million in 2008,
compared to $17.1 million in 2007. Also, they represented more than 20% of our
telecom sales in 2008 (more than 10% in 2007).
However,
in fiscal 2008, we posted a year-over-year sales decrease of 3.9% ($7.4 million
in fiscal 2008, compared to $7.7 million in 2007) for our copper-access test
solutions given that our highly competitive new product offering is only just
starting to establish itself on the market and that large-scale IPTV deployments
have been delayed, which affected our sales in fiscal 2008 to some extent.
During fiscal 2008, we launched new added-value products that integrate
Consultronics (copper-access) core knowledge and intellectual property; namely,
the new AXS-200 SharpTESTER. Also, in 2008 we launched a new test module housed
inside the AXS-200 SharpTESTER platform, which differentiates our access network
offering from those of other vendors. The AXS-200/630 triple-play test set,
which leverages the benefits of Broadcom’s customer premises equipment (CPE)
multimode VDSL2 chipset, enables the installation and troubleshooting of ADSL2+
and VDSL2 access networks with the highest level of interoperability. A
large portion of our sales of copper-access products in fiscal 2007 were made to
a Tier-1 carrier in the United States. In fiscal 2008, sales of copper-access
test solutions made to this customer significantly decreased compared to 2007,
which means that we were able to diversify our customer base
year-over-year
It should
be noted, however, that in fiscal 2007 we benefited from aggressive FTTH
rollouts from our top customer, and that sales to this customer represented
17.3% ($22.5 million) of our telecom sales, compared to 8.4%
($13.6 million) in 2008. Excluding sales to this customer, our telecom
sales would have increased 37.3% in fiscal 2008, compared
to 2007.
In fiscal
2008, foreign exchange gains on our forward exchange contracts, which are
included in our telecom sales, amounted to $4.2 million, compared to $1.3
million in 2007. In fiscal 2008, the average value of the Canadian dollar
increased 11.4% versus the US dollar compared to 2007, which contributed to the
increase in the foreign exchange gains on our forward exchange contracts
year-over-year.
Life
Sciences and Industrial Division
In fiscal
2008, sales of our Life Sciences and Industrial Division decreased 1.2%
year-over-year at $22.8 million, from $23.1 million in 2007.
As
previously mentioned, a significant portion of that division’s sales activities
are conducted through original equipment manufacturer (OEM) agreements.
Consequently, we are dependent, to some extent, on the buying pattern of our
customers. In particular, one of our major OEM customers significantly reduced
its purchases of our products following the launch of its own solution that
competes against our products. Excluding sales to this customer, sales of this
division would have increased 3.5% year-over-year.
Net
bookings
Overall,
for the two divisions, net accepted orders slightly decreased 2.2%
year-over-year to $180.5 million in fiscal 2009 from a record-high
$184.6 million in 2008, for a book-to-bill ratio of 1.04 in fiscal 2009. Despite
the negative impact on our bookings of the global economic recession and
currency fluctuations in fiscal 2009, bookings only decreased 2.2%
year-over-year, thanks to the contribution of Brix Networks and Navtel
Communications, which we acquired two months and one month into the third
quarter of fiscal 2008, respectively.
Geographic
distribution
Fiscal
2009 vs. 2008
In fiscal
2009, sales to the Americas, Europe, Middle-East and Africa (EMEA) and
Asia-Pacific (APAC) accounted for 57%, 27% and 16% of global sales,
respectively, compared to 56%, 28% and 16%, respectively in 2008.
In fiscal
2009, we reported sales decreases (in dollars) in every geographic area. In
fact, sales to the Americas, EMEA and APAC decreased (in dollars) 3.3%, 10.7%
and 6.6%, respectively.
In the
Americas, the decrease in sales in fiscal 2009, compared to 2008, comes
from the United States where we posted a year-over-year decrease in sales
of 8.9%. The current global economic recession has forced NSPs and NEMs to
reduce their capital and operating expenses and several customers have announced
significant reductions in capital expenditures and staffing levels for calendar
year 2009 in anticipation of lower revenue streams; this directly affected
our sales in the Unites States in fiscal 2009, compared to 2008. Also, in fiscal
2009, we recorded significant foreign exchange losses on our forward exchange
contracts, which are included in our sales to the Americas for the most part,
compared to forward exchange gains in 2008. Excluding the impact
of gains and losses on our forward exchange contracts, sales to the United
States would have decreased 3.8% year-over-year. The decrease in sales to
the United States in fiscal 2009 was offset in part by an increase of 31.4% of
sales made in Canada, despite the negative impact of a weaker Canadian
dollar versus the US dollar year-over-year on our Canadian-dollar-denominated
sales. The recession also affected Latin America, where sales decreased 8.7%
year-over-year. Finally, the contribution of Brix Networks and Navtel
Communications in fiscal 2009 also mitigated the effect of the recession and the
currencies on our sales in the United States, as a significant portion of Brix
and Navtel sales are made in the United States and Canada.
The
decrease in sales in the EMEA market, in dollars, in fiscal 2009, compared to
2008, is also due to the impact of the global recession as we are
witnessing caution from many of our customers with their fiscal year budgets
(calendar 2009). While we see this as a delay and a change in spending
patterns, we expect that investments in next-generation access and transport
networks will not be affected in the long term, and we are positioning ourselves
to capitalize on that, with recent additions to our product portfolio and
sales strategy. In fact, due to the recession, many Tier-1 carriers in EMEA have
postponed or significantly reduced the speed of the migration of their
traditional circuit-switched core networks to higher-speed, dense
wavelength-division multiplexing (DWDM) and next-generation packet-based
architectures, which negatively impacted the sales of our products. Also, as a
portion of the orders in this region are denominated in euros or British
pounds, the strength of the US dollar against these currencies in fiscal
2009 had a negative impact on our sales expressed in US dollars for this region,
which contributed to the decrease in sales compared to 2008.
In the
APAC market, sales to China were almost flat year-over-year, despite the
recession and the negative impact of currency fluctuations. In fact, the
recession in China has been less severe than in the rest of the world, and
we were able to mitigate its impact on our sales in that region. However,
the rest of Asia has been affected by the general economic conditions and the
currency fluctuations, and our sales to the rest of Asia have decreased 9.3%
in fiscal 2009 compared to 2008. In the APAC market, despite the recession,
we are committed to carrying out our strategy to increase our market share with
products and solutions developed and targeted for this important market, as well
as to expand our market presence.
Fiscal
2008 vs. 2007
In fiscal
2008, sales to the Americas, EMEA and APAC accounted for 56%, 28% and 16% of
global sales, respectively, compared to 59%, 27% and 14%, respectively in
2007.
In fiscal
2008, we reported sales increases (in dollars) in every geographic area. In
fact, sales to the Americas, EMEA and APAC increased (in dollars) 12.8%, 26.3%
and 40.1%, respectively, which resulted in a larger percentage of sales coming
from international markets.
In the
Americas, the increase in sales in fiscal 2008, compared to the same period
last year, comes from every region; we posted a sales growth of 47.8%, 7.9% and
16.7% in Canada, the United States and Latin America, respectively. In the
United States, despite the decrease in sales to our top customer year-over-year,
we were able to increase our sales. Additionally, Brix Networks and
Navtel Communications contributed to the increase in sales in the United States
and in Canada year-over-year as most of their sales are made in these two
countries. As mentioned above, during fiscal 2007, we benefited from
aggressive FTTH rollouts from our top customer, and sales to this customer
represented 14.7% ($22.5 million) of our global sales in fiscal 2007, compared
to 7.4% ($13.6 million) this year. We believe that we did not lose market
share with this particular customer in fiscal 2008; in fact, we
believe we have expanded market share as we successfully got additional
product-line approvals to partially offset the decline in optical business.
Excluding sales to this customer, sales to the United States would have
increased 28.7% in dollars year-over-year; this shows that, overall, we have
diversified our customer base year-over-year in this region. Finally, sales
to Latin America fluctuate depending on the timing and scope of our customers’
projects.
The
increase in sales in the EMEA market, in dollars, in fiscal 2008, compared to
2007, resulted from our continued strategy from the past several years
to aggressively develop this market, to consistently invest in sales
resources, and to develop stronger support and service operations in this
region. In addition, many Tier-1 carriers in EMEA were migrating their
traditional circuit-switched core networks to higher-speed, dense
wavelength-division multiplexing (DWDM) and next-generation packet-based
architectures, which created a market demand for our protocol test
solutions as well as our DWDM, ROADM and fiber characterization test kits.
Furthermore, we leveraged our FTTx leadership gained in the United States
to provide consultancy with many of the early adopters in this field
in EMEA.
In APAC,
we saw the continued return on investment of some specific optical, protocol as
well as life sciences and industrial products developed and targeted for
this important market. This increasingly competitive range, coupled with our
steadily expanding market presence, is responsible for the higher sales
in this region in fiscal 2008, compared to 2007.
Through
our two divisions, we sell our products to a broad range of customers, including
network service providers, network equipment manufacturers, wireless operators,
cable TV operators, optical system and component manufacturers, as well as
customers in the life sciences and high-precision assembly sectors. In fiscal
2009, our top customer accounted for 11.6% ($20.0 million) of our global
sales, and our top three customers accounted for 17.8% of our global sales.
In fiscal 2008, no customer accounted for more than 10% of our global sales, and
our top three customers accounted for 13.1% of our global sales.
GROSS
MARGIN
Gross
margin amounted to 61.3%, 58.9% and 57.4% of sales in fiscal 2009, 2008 and
2007, respectively.
Fiscal
2009 vs. 2008
Despite
the negative impact on the gross margin of foreign exchange losses on our
forward exchange contracts, which have reduced our sales, we were able to
significantly increase our gross margin by 2.4% year-over-year.
The increase
in our gross margin in fiscal 2009, compared to 2008, can be explained by
the following factors.
First, in
fiscal 2009, our gross margin was positively affected by the significant
increase in sales of our protocol test solutions year-over-year, including
those of newly acquired Brix Networks and Navtel Communications, as these
products have better margins than our other test solutions.
Second,
during fiscal 2009, the value of the Canadian dollar significantly fluctuated
compared to the US dollar, which impacted our gross margin for this period,
compared to the same period last year. In fact, since the beginning of
fiscal 2009, the value of the Canadian dollar significantly decreased compared
to the US dollar; this resulted in a lower cost of goods sold
expressed in US dollars in the statement of earnings, thus increasing our
gross margin year-over-year. However, the increase in the procurement costs of
our raw materials purchased in US dollars, as a result of the recent
and significant decrease in the value of the Canadian dollar compared to
the US dollar, started to materialize in fiscal 2009 and will continue
to do so over time, in line with the inventory turnover rate, as these
raw materials are included in the cost of goods sold of products
manufactured with these parts.
Furthermore,
the operation of our manufacturing facilities in China resulted in a larger
portion of our sales coming from products manufactured in China; those products
have a lower cost than those manufactured in our facilities in Canada, thus
resulting in an improvement in gross margin in fiscal 2009 compared to
2008.
However,
foreign exchange losses on our forward exchange contracts recorded in fiscal
2009 ($3.2 million), which are included in our sales, had a negative impact
of 0.7% on our gross margin during this period, compared to the positive impact
of our foreign exchange gains of $4.2 million, or 1.0% on the gross margin in
2008, thus reducing our gross margin year-over-year.
In
addition, a lower overall sales volume in fiscal 2009 compared to 2008 resulted
in decreased manufacturing activities and in lower absorption of our fixed
manufacturing costs, thus negatively impacting our gross margin
year-over-year.
On an
ongoing basis and when technically possible, we adjust the design of our
products to reuse excess inventory. Over the past few years, we experienced
higher sales than expected on some product lines and consumed such excess
inventory. Consequently, we were able to reuse excess inventories that were
written off in previous years. Excess inventory reuse accounted for $154,000 or
0.1% of sales in fiscal 2009, compared to $1.2 million, or 0.7%
of sales in 2008.
Fiscal
2008 vs. 2007
The
increase in our gross margin in fiscal 2008, compared to 2007, can be explained
by the following factors. First, in fiscal 2008, our gross margin was positively
affected by the significant increase in sales of our protocol test solutions
year-over-year, including those of Brix Networks and Navtel Communications,
as these products have better margins than our other test solutions. In
addition, the significant increase in global sales, year-over-year, resulted in
an increase in manufacturing activities, allowing us to better absorb our fixed
manufacturing costs. Furthermore, we were able to reduce our cost of goods sold
by better leveraging our supplier base and by developing innovative new products
with cost-effective design. Also, our cost of goods was positively affected by
lower costs for raw materials due to the significant increase in the value of
the Canadian dollar, compared to the US dollar in previous quarters, as
most of these costs are incurred in US dollars.
However,
the shift in sales between the Americas in favor of APAC had a negative impact
on our gross margin year-over-year. In fact, sales to APAC tend to have lower
margins than sales to the Americas since we are facing higher pricing pressure
in the APAC region. In addition, we are facing continued aggressive pricing
pressure worldwide. Furthermore, in fiscal 2008, a stronger Canadian dollar,
compared to the US dollar year-over-year, prevented us from further
improving our gross margin as most of our overhead costs and a portion of
our raw material purchases are denominated in Canadian dollars. Finally, the
startup of our own manufacturing activities in China in 2008, resulted in
additional expenses, which reduced our gross margin in fiscal 2008,
compared to 2007.
Excess
inventory reuse accounted for $1.2 million, or 0.7% of sales in fiscal
2008, compared to $1.7 million, or 1.1% of sales in 2007.
Outlook
for fiscal 2010
Considering
the expected sales growth in fiscal 2010, the expected increase in sales of
protocol products, the cost-effective design of our products, our manufacturing
activities in China and our tight control on operating costs, we expect our
gross margin to continue to improve in the future. However, our gross margin may
fluctuate quarter-over-quarter as our sales may fluctuate. Furthermore, our
gross margin can be negatively affected by increased competitive pricing
pressure, customer concentration and/or consolidation, increased obsolescence
costs, shifts in customer and product mix, under-absorption of fixed
manufacturing costs, challenges encountered in the operations of our
manufacturing facilities in China and increases in product offerings by other
suppliers in our industry. Finally, any increase in the strength of the Canadian
dollar, compared to the US dollar, would have a negative impact on our
gross margin in fiscal 2010 and beyond.
SELLING
AND ADMINISTRATIVE
Selling
and administrative expenses were $63.8 million, $61.2 million and $49.6 million
for fiscal 2009, 2008 and 2007, respectively. As a percentage of sales, selling
and administrative expenses amounted to 36.9%, 33.3% and 32.4% for fiscal 2009,
2008 and 2007, respectively.
Fiscal
2009 vs. 2008
Brix
Networks and Navtel Communications, which were acquired two months and one month
into the third quarter of fiscal 2008, respectively, contributed for the whole
year to our selling and administrative expenses in fiscal 2009, which caused
these expenses to increase compared to 2008. In addition, selling expenses for
Brix Networks and Navtel Communications tend to be higher in percentage of
sales than the rest of our business, as their sales cycle is much
longer and complex than our other product lines.
In
addition, during fiscal 2009, despite the challenging market conditions and
currency fluctuations, we maintained our sales and marketing activities for most
of the year to develop our markets and to support the launches
of several products.
However,
in fiscal 2009, the substantial and sudden decrease in the average value of the
Canadian dollar, compared to the US dollar year-over-year, had a
significant positive impact on our selling and administrative expenses,
since a large portion of these expenses is denominated in Canadian dollars
and since these expenses increased year-over-year. Also, the restructuring plan
implemented in the fourth quarter of fiscal 2009 has, to some extent, decreased
our selling and administrative expenses.
Also, in
fiscal 2008, we discontinued certain product lines, which led to the layoff
of some of our sales and marketing personnel, resulting in severance
expenses in 2008.
In fiscal
2009, our selling and administrative expenses increased in percentage
of sales compared to 2008. This increase is explained by the impact of the
acquisitions of Brix Networks and Navtel Communications—whose selling expenses
tend to be higher and whose products deliver better margins than the
rest of our product lines—and by the reduction of our sales levels due to the
worldwide recession, despite the significant decrease in the average value of
the Canadian dollar compared to the US dollar year-over-year.
Fiscal
2008 vs. 2007
In fiscal 2008,
we continued intensifying our sales and marketing activities to
develop our markets and leverage our significant research and development
investments; this resulted in higher sales and marketing expenditures (including
number of additional employees and expenses to support the launch of several new
products and to increase brand-name recognition), compared to
2007.
Also, Brix Networks and
Navtel Communications contributed about four months and five months,
respectively, in fiscal 2008, which caused our selling and administrative
expenses to increase compared to 2007.
The substantial increase in
the average value of the Canadian dollar compared to the US dollar also had a
significant negative impact on our selling and administrative expenses since a
large portion of these expenses are denominated in Canadian dollars and since
these expenses increased year-over-year as our sales grew.
In
addition, the setup in 2008 of manufacturing facilities in China and
a software development center in India contributed to increasing our
administrative expenses year-over-year.
Finally, in fiscal
2008, we discontinued certain product lines, which led to the layoff
of some of our sales and marketing personnel, resulting in severance
expenses during that year.
However,
in fiscal 2007, we had large orders sold directly to international customers,
for which we still had to pay commissions to distributors instead of selling
through our distributors at a discounted price; this did not occur to the same
extent in 2008, resulting in higher selling expenses for 2007, compared to
2008.
In fiscal
2008, and despite an increase in sales, our selling and administrative expenses
increased in percentage of sales compared to 2007. The significant
increase in the average value of the Canadian dollar compared to the
US dollar year-over-year, the setup of our manufacturing facilities in
China and R&D center in India, as well as the impact of the acquisitions of
Brix Networks and Navtel Communications—whose selling expenses tend
to be higher as their products deliver better margins compared to the
rest of our product lines—contributed to the increase in these expenses
as a percentage of sales.
Outlook
for fiscal 2010
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, we expect our selling and administrative expenses to increase in
dollars and range between 33% and 35%. In particular, in fiscal 2010, we
expect our commission expenses to increase as sales volume increases.
Furthermore, considering our goal of becoming the leading player in the telecom
test, measurement, monitoring and service assurance space, we plan to continue
intensifying our sales and marketing efforts, both domestic and international,
which will also cause our expenses to rise. Finally, any increase in the
strength of the Canadian dollar would also cause our selling and administrative
expenses to increase, as a large portion of these expenses are incurred
in Canadian dollars.
RESEARCH
AND DEVELOPMENT
Gross
research and development expenses
Gross
research and development expenses totaled $35.8 million, $32.5 million and $25.2
million for fiscal 2009, 2008 and 2007, respectively. As a percentage of sales,
gross research and development expenses amounted to 20.7%, 17.7% and 16.5%
for fiscal 2009, 2008 and 2007, respectively, while net research and development
expenses accounted for 16.0%, 14.6% and 10.9% of sales for these respective
years. Net research and development expenses for fiscal 2007 and 2009 included
the recognition of non-refundable research and development tax credits in the
amount of $3.2 million, or 2.1% of sales, and $1.9 million, or 1.1% of sales,
respectively.
Fiscal 2009 vs.
2008
Brix
Networks and Navtel Communications, which were acquired two months and one month
into the third quarter of fiscal 2008, respectively, contributed to our
gross research and development expenses during the entire year in fiscal
2009; this caused these expenses to increase both in dollars and in percentage
of sales, compared to 2008. Indeed, Brix Networks and Navtel Communications tend
to incur higher research and development expenses in percentage of
sales, compared to our other product lines ,as their products are more
software-intensive, although they deliver higher margins than most of our
other product lines.
In
addition, we intensified our research and development activities by hiring
additional employees, namely in our software development center in Pune,
India, which resulted in increased gross research and development expenses
in fiscal 2009, compared to 2008.
However,
during fiscal 2009, the significant and rapid decrease in the average value of
the Canadian dollar, compared to the US dollar year-over-year, had a
substantial positive effect on our gross research and development expenses, as a
significant portion of these expenses are denominated in Canadian dollars and
also because these expenses increased year-over-year.
Also, in
fiscal 2008, we closed down our R&D operations in Budapest, Hungary, and
certain R&D projects, which resulted in severance expenses during fiscal
2008.
The
increase in our gross research and development expenses as a percentage of sales
year-over-year is mainly due to a lower sales volume and the impact of the
acquisitions of Brix Networks and Navtel Communications.
Fiscal 2008 vs.
2007
In fiscal 2008, the
significant increase in the average value of the Canadian dollar, compared to
the US dollar year-over-year, had a significant and negative effect on our gross
research and development expenses as a significant portion of these expenses are
denominated in Canadian dollars and also because these expenses increased
year-over-year. In
addition, we intensified our research and development activities, which included
hiring additional employees, resulting in more gross research and development
expenses in both divisions in fiscal 2008, compared to 2007. Furthermore,
Brix Networks and
Navtel Communications contributed for about four months and five months,
respectively, in fiscal 2008, which caused our gross research and
development expenses to increase compared to 2007. It should be noted that
Brix Networks and Navtel Communications tend to incur higher research and
development expenses in percentage of sales, compared to our other
product lines as their products are more software-intensive; however, they
deliver higher margins than most of our other product lines. Also, we
established a research and development center focused on software
development in Pune, India, which resulted in increased expenses
year-over-year. Finally, in fiscal 2008, we closed down our R&D operations
in Budapest, Hungary, and certain R&D projects, which resulted in severance
expenses during that year and caused our fiscal 2008 expenses to increase
year-over-year.
The
increase in our gross research and development expenses as a percentage of sales
year-over-year is mainly due to the negative effect of the increased value
of the Canadian dollar versus the US dollar year-over-year, the impact of the
acquisitions of Brix Networks and Navtel Communications, as well as the
severance expenses incurred in fiscal 2008.
|
Tax
credits
|
Tax
credits from the Canadian federal and provincial governments for research and
development activities were $8.1 million, $5.6 million and $8.5
million for fiscal 2009, 2008 and 2007, respectively. As a percentage
of gross research and development expenses, tax credits reached 22.5%, 17.2% and
33.9% for fiscal 2009, 2008 and 2007, respectively.
Fiscal
2009 vs. 2008
During
fiscal 2009, after reviewing both available positive and negative evidence, and
because we were in a cumulative profit position in one of our
subsidiaries, and also because we expected to generate sufficient taxable income
in future years at the subsidiary level, we concluded that it was more likely
than not that deferred non-refundable research and development tax credits of
this subsidiary would be realizable. Consequently, we recognized previously
unrecognized non-refundable research and development tax credits in the amount
of $1.9 million. Also, increased research and development activities
in Canada in fiscal 2009 compared to 2008, where we are eligible for tax
credits, resulted in increased tax credits year-over-year.
However,
all our research and development tax credits are denominated in Canadian
dollars. The significant decrease in the average value of the Canadian dollar,
compared to the US dollar, in fiscal 2009, compared to 2008, had a negative
impact on these tax credits once expressed in US dollars.
Excluding
the recognition of previously unrecognized research and development tax credits,
tax credits would have represented 17.2% of gross research and development
expenses in fiscal 2009, a level comparable to 2008.
Fiscal
2008 vs. 2007
In fiscal
2007, tax credits included $3.2 million, or 12.5% of gross research and
development expenses, for the recognition of non-refundable research and
development tax credits. Excluding this unusual revenue, tax credits would
have increased $216,000 in fiscal 2008, compared to 2007.
This
increase in the dollar amount of our tax credits in fiscal 2008, compared to
2007, is due to the increased strength of the Canadian dollar, compared to the
US dollar year-over-year, since these credits are solely earned on research
and development expenses incurred in Canada. However, the decrease
in research and development tax credits as a percentage of gross research
and development expenses is mainly due to the fact that since the beginning
of fiscal 2008, the portion of gross research and development incurred in
Canada, where we are entitled to tax credits, was lower than last year following
the establishment of our new software development center in India as well
as the acquisition of Brix Networks, which is located in the United States. Our
research and development activities conducted outside Canada are not entitled to
tax credits.
Outlook
for fiscal 2010
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, we expect our research and development expenses to increase in
dollars, and range between 15% and 17% of sales, given our focus on innovation,
the addition of software features in our products, our desire to gain market
share and our goal to exceed customer needs and expectations. Also, we are
increasingly taking advantage of talent pools around the world through our
software research and development center in Pune, India. Finally, any
increase in the strength of the Canadian dollar in the upcoming quarters
would cause our net research and development expenses to increase, as most of
these are incurred in Canadian dollars.
AMORTIZATION
OF PROPERTY, PLANT AND EQUIPMENT
In fiscal
2009, amortization of property, plant and equipment was $4.6 million, compared
to $4.3 million in 2008 and $3.0 million in 2007.
Fiscal
2009 vs. 2008
The
increased activities of our own manufacturing facility in China, the
upgrade of our IT systems and the impact of the acquisitions of Brix
Networks and Navtel Communications (acquired in the third quarter of fiscal
2008) resulted in an increase in our amortization expenses in fiscal
2009, compared to 2008. However, the significant decrease in the average value
of the Canadian dollar versus the US dollar in fiscal 2009, compared to 2008,
limited the increase in our amortization expenses year-over-year
as a significant portion of these expenses is denominated
in Canadian dollars.
Fiscal
2008 vs. 2007
The
startup of our own manufacturing and research and development facilities in
China and India, the upgrade of our IT systems, and the impact of the
acquisitions of Brix Networks and Navtel Communications, which contributed for
about four months and five months in fiscal 2008, respectively, resulted
in an increase in our amortization expenses in fiscal 2008 compared to
2007. In addition, the
increase in the average value of the Canadian dollar versus the US dollar in
fiscal 2008, compared to 2007, contributed to the increase in our
amortization expenses year-over-year as most of these expenses are denominated
in Canadian dollars.
Outlook
for fiscal 2010
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, as well as our budgeted additions to capital assets, we expect
the amortization of property, plant and equipment to increase in dollars.
Also, any increase in the strength of the Canadian dollar in the upcoming
quarters would cause our amortization of property, plant and equipment to
increase, as most of these expenses are denominated
in Canadian dollars.
AMORTIZATION
OF INTANGIBLE ASSETS
In
conjunction with the business combinations we completed over the past several
years, we recorded intangible assets, primarily consisting of core technology.
These intangible assets resulted in amortization expenses
of $5.1 million, $3.9 million and $2.9 million for fiscal 2009, 2008
and 2007, respectively.
Fiscal
2009 vs. 2008
The
increase in amortization expenses in fiscal 2009, compared to 2008, is mainly
due to the acquisition of Brix Networks core technology in the third quarter of
2008. However, the significant decrease in the average value of the Canadian
dollar versus the US dollar in fiscal 2009, compared to 2008, limited
the increase in our amortization expenses year-over-year
as a significant portion of these expenses are denominated
in Canadian dollars.
Fiscal
2008 vs. 2007
The
increase in amortization expenses in fiscal 2008, compared to 2007, is mainly
due to the acquisition of Brix Networks core technology in the third quarter of
2008 and to the increased strength of the Canadian dollar compared to the US
dollar.
Outlook
for fiscal 2010
For
fiscal 2010, considering the current value of the Canadian dollar compared to
the US dollar, we expect the amortization of intangible assets to increase in
dollars. Also, any increase in the strength of the Canadian dollar in the
upcoming quarters would cause our amortization of intangible assets to increase,
as most of these expenses are denominated in Canadian dollars.
RESTRUCTURING
CHARGES
During
fiscal 2009, we implemented a restructuring plan to align our cost structure to
the current economic and market conditions. Under that plan, we recorded charges
of $1.2 million in severance expenses for the 65 employees who were
terminated throughout the company. These charges are included in the
restructuring charges in the statement of earnings for the year ended August 31,
2009.
GOVERNMENT
GRANTS
Until
December 31, 2006, companies operating in the Quebec City area were
eligible for a refundable credit granted by the Quebec provincial government.
This credit was earned based on the increase of eligible production and
marketing salaries incurred in the Quebec City area at a rate of 40%. From the
total amount we claimed under this program, a sum of CA$1.1 million
(US$1.1 million) was deferred in the balance sheet until we received the
final approval of eligible salaries by the sponsor of the program. In fiscal
2007, the sponsor of the program granted us its final approval, and we recorded
CA$1.1 million (US$1.1 million) in the earnings from operations in the
statement of earnings of fiscal 2007.
IMPAIRMENT
OF GOODWILL
In the
third quarter of fiscal 2009, we performed our annual impairment test for
goodwill for all reporting units. Recoverability of goodwill is determined at
the reporting unit level, using a two-step approach. First, the carrying value
of the reporting units is compared to their fair value. If the carrying
value of a reporting unit exceeds its fair value, the second step is performed
to determine the amount of the impairment loss. Following the decrease in our
stock price in June 2009, we came to the conclusion that the carrying value
of one of our reporting units exceeded its fair value and we recorded an
impairment charge of $21.7 million in fiscal 2009, to bring the
goodwill of this reporting unit to its fair value. This reporting unit reports
to the Telecom Division. The fair value of the reporting unit was determined
based on a combination of market capitalization and discounted cash flows.
Discounted cash flows were estimated using periods ranging between 5 to 7 years
and a discount rate of 18%.
This
impairment resulted in a future income tax recovery of $2.1
million.
INTEREST
INCOME
Our
interest income mainly resulted from our short-term investments, less interests
and bank charges. Interest income amounted to $597,000, $4.6 million and $4.7
million for fiscal 2009, 2008 and 2007, respectively.
Fiscal
2009 vs. 2008
The
decrease in interest income in fiscal 2009, compared to 2008, is mainly due to
the decrease in our cash and short-term investments following the cash payment
of $41.0 million for the acquisitions of Brix Networks and Navtel Communications
in the third quarter of fiscal 2008, the redemption of share capital
amounting to $34.9 million over the last two years, in accordance with
our share buy-back programs, as well as the significant reduction in
interest rates year-over-year. In addition, the significant decrease in the
average value of the Canadian dollar, compared to the US dollar
year-over-year, contributed to the decrease in our interest income in fiscal
2009, compared to 2008, as it is denominated in Canadian dollars.
Fiscal
2008 vs. 2007
The
slight decrease in interest income in fiscal 2008, compared to 2007, is mainly
due to the decrease of our cash and short-term investments following the cash
payment of $41.0 million for the acquisitions of Brix Networks and Navtel
Communications, the redemption of share capital for $8.1 million in accordance
with our share buy-back program, as well as the general reduction in interest
rates year-over-year. However, the significant increase in the average value of
the Canadian dollar, compared to the US dollar year-over-year, contributed
to the increase in our interest income in fiscal 2008, compared to 2007, as it
is denominated in Canadian dollars. In addition, in fiscal 2008, we received
interest of $241,000 by the Canadian tax authorities following the recovery
during that period of prior years’ income tax receivable.
Outlook
for fiscal 2010
Assuming
no acquisitions paid in cash are made in fiscal 2010 and relative stability in
interest rates, we expect our interest income to decrease in 2010 as our average
cash position is expected to be lower in fiscal 2010, considering the cash used
in fiscal 2009, namely for the consideration paid for the acquisition of capital
assets and the redemption of share capital. This should be slightly mitigated by
cash flows from operating activities in 2010.
FOREIGN
EXCHANGE GAIN (LOSS)
Foreign
exchange gains and losses are mainly the result of the translation of operating
activities denominated in currencies other than the Canadian
dollar.
The
foreign exchange gain amounted to $1.2 million and $442,000 in fiscal 2009 and
2008, respectively, compared to foreign exchange losses of $49,000 for
2007.
Fiscal
2009 vs. 2008
During
fiscal 2009, we witnessed huge volatility in the value of the Canadian dollar
as it fluctuated compared to the US dollar, which overall resulted in
a foreign exchange gain of $1.2 million. In fact, the period-end value of the
Canadian dollar decreased 3.1% to CA$1.0967 = US$1.00 at the end of fiscal 2009,
compared to CA$1.0626 = US$1.00 at the end of 2008.
Fiscal
2008 vs. 2007
In fiscal
2008, we also witnessed volatility in the value of the Canadian dollar as it
fluctuated compared to the US dollar, which overall resulted in a foreign
exchange gain of $442,000. The average exchange rate was CA$1.0071 = US$1.00 in
fiscal 2008, compared to a year-end exchange rate of CA$1.0564 = US$1.00
as at August 31, 2007, and CA$1.0626 = US$1.00 as at
August 31, 2008.
It should be noted that
foreign exchange rate fluctuations also flow through the P&L line items
as a significant portion of our operating items are denominated in
Canadian dollars, and we report our results in US dollars.
Consequently, the significant decrease in the average value of the Canadian
dollar in fiscal 2009, compared to 2008, resulted in a significant and positive
impact on our financial results. This was amplified by the fact that our
operating activities incurred in Canadian dollars increased year-over-year. In
fact, the average value of the Canadian dollar in fiscal 2009 was CA$1.1782 =
US$1.00 compared to CA$1.0071 = US$1.00 in 2008, representing a decrease
of 14.5% in the average value of the Canadian dollar year-over-year. In
fiscal 2008, the average value of the Canadian dollar was CA$1.0071 =
US$1.00 compared to CA$1.1215 = US$1.00 in 2007, representing an increase
of 11.4% in the average value of the Canadian dollar year-over-year. This
had a significant and negative impact on our financial
results.
We manage
our exposure to currency risks with forward exchange contracts. In addition,
some of our Canadian entities’ operating activities are denominated in US
dollars or other currencies, which further hedges these risks. However, any
increase in the value of the Canadian dollar, compared to the US dollar, would
have a negative impact on our operating results.
INCOME
TAXES
We
recorded income tax expenses of $261,000 and $1.7 million in fiscal 2009 and
2008, respectively, compared to an income tax recovery
of $20.8 million in 2007.
Fiscal
2007
During
fiscal 2007, after reviewing both available positive and negative evidence, and
because we were in a cumulative profit position in the parent company
(Canadian federal and provinces levels) and in one of our subsidiaries, located
in the United States, and also because we expected to generate sufficient
taxable income in future years, we concluded that it was more likely than
not that future income tax assets and deferred non-refundable research and
development tax credits of the parent company and a portion of our future income
tax assets in the United States would be realizable. Consequently, we reversed a
portion of our valuation allowance against future income tax assets in the
amount of $24.6 million. From this amount, $16.2 million were related to the
Canadian federal level, $3.2 million were related to the Canadian provincial
levels and $5.2 million were related to the United States level. Future
income tax assets recognized in 2007 were recorded in the income tax provision
in the statement of earnings for that year.
However,
in the United States (federal level), based on available positive and negative
evidence as at August 31, 2007, as well as the level
and the nature of cumulative and expected profits, we maintained
a valuation allowance of $7.6 million on a portion of our future
income tax assets in this tax jurisdiction because it was more likely than
not that these assets would not be recovered. These future income tax assets
consisted of operating losses carried forward.
In other
tax jurisdictions where we have future income tax assets, we were still in a
cumulative loss position as at August 31, 2007, and
available negative evidence outweighed positive evidence. Consequently, for
these tax jurisdictions, we maintained a full valuation allowance against our
future income tax assets. As at August 31, 2007, the valuation
allowance recorded for these tax jurisdictions amounted to $4.9 million and
mainly related to deferred operating losses.
Except
for the reversal of the valuation allowance in fiscal 2007, most of the income
tax expenses recorded in fiscal 2007 represent income taxes payable at the
Canadian federal level, which are reduced by research and development tax
credits that are recorded against gross research and development expenses in the
statements of earnings.
Fiscal
2008
During
fiscal 2008, reductions to the Canadian federal statutory tax rate were
substantively enacted. Therefore, Canadian federal future income tax assets
decreased by $1.5 million and generated a future income tax expense
in the same amount during the year.
In
addition, during fiscal 2008, taking into account these new Canadian federal
substantively enacted tax rates, we reviewed our tax strategy for the
future use of our Canadian federal operating losses, research and development
expenses, certain timing differences and research and development tax credits to
minimize income taxes payable on future years’ taxable income.
Consequently, we amended our prior year’s income tax returns to generate a net
operating loss to be carried back to prior years, which reinstated previously
used research and development tax credits. This resulted in an increase of $2.7
million in both our tax-related assets in the balance sheet and future income
tax recovery in the statement of earnings for the year ended
August 31, 2008.
Finally,
during fiscal 2008, considering the expected positive impact the acquisitions of
Brix Networks and Navtel Communications will have on future years’ taxable
income at the United States federal level, and because actual taxable income in
the United States is greater than initially expected, we concluded that it was
more likely than not that all future income tax assets of our existing
consolidated U.S. group would be recovered. Consequently, we reversed our
valuation allowance against future income tax assets in the amount of $7.6
million. The portions of the valuation allowance that were reversed, and
that were attributable to the effects of the Brix Networks and Navtel
Communications acquisitions—in the amount of $652,000 and
$1.6 million, respectively—were included in the purchase price
allocation of the related acquired businesses. The remainder of the reversal, in
the amount of $5.3 million, has been recorded in income taxes
in the statement of earnings for the year ended
August 31, 2008.
Fiscal
2009
During
fiscal 2009, after reviewing both available positive and negative evidence, and
because we were in a cumulative profit position in one of our
subsidiaries, and also because we expected to generate sufficient taxable income
in future years at the subsidiary level, we concluded that it was more likely
than not that future income tax assets of this subsidiary would be realizable.
Consequently, we reversed the valuation allowance against future income tax
assets in the amount of $372,000. Future income tax assets recognized in
2009 were recorded in the income tax provision in the statement of earnings
for that year.
As at
August 31, 2009, our net future income tax assets amounted to $24.1 million, and
our non-refundable research and development tax credits amounted to $26.4
million. In order to realize these future income tax assets and non-refundable
research and development tax credits, we need to generate approximately $207
million in pretax earnings at the Canadian federal level, approximately $39
million at the Canadian provincial levels, and approximately $36 million at
the United States federal level.
Valuation
allowance
As at
August 31, 2008 and 2009, we were in a cumulative loss position in certain of
our subsidiaries and negative evidence outweighed positive evidence. For these
subsidiaries, we maintained a full valuation allowance against our future income
tax assets. As at August 31, 2009, the valuation allowance for these
subsidiaries amounted to $15.5 million and mainly related to operating
losses. Of the valuation allowance of $15.5 million, $10.3 million
related to Brix Networks. In the event that we reverse a portion of or
all the valuation allowance related to Brix Networks, the amount of such
reversal would reduce the amount of goodwill recognized for this
acquisition.
Please
refer to note 17 of our consolidated financial statements included elsewhere in
this document for more details on income taxes and a full reconciliation of the
income tax provision.
EXTRAORDINARY
GAIN
In
conjunction with the acquisition of Navtel Communications, we recorded negative
goodwill in the amount of $3.0 million. This negative goodwill has
been recorded as an extraordinary gain in the statement of earnings for fiscal
2008.
LIQUIDITY
AND CAPITAL RESOURCES
Cash
requirements and capital resources
As at
August 31, 2009, cash and short-term investments totaled $69.7 million, while
our working capital was at $108.1 million. Our cash and short-term
investments decreased $17.8 million in fiscal 2009, compared to 2008, mainly due
to the cash payments of $6.9 million, $2.4 million and $26.9 million for the
purchases of capital assets, the contingent cash consideration for the
acquisition of Brix Networks and the redemption of share capital, respectively.
We also recorded an unrealized foreign exchange loss on our cash and
short-term investments of $4.2 million. This unrealized foreign
exchange loss resulted from the translation, in US dollars, of our
Canadian-dollar-denominated cash and short-term investments and was included in
the accumulated other comprehensive income in the balance sheet. On the other
hand, operating activities generated cash flows of $22.6 million.
Our
short-term investments consist of commercial paper issued by 11 (10 as at
August 31, 2008) high-credit quality corporations and trusts; therefore, we
consider the risk of non-performance of these financial instruments
to be limited. None of these debt instruments are expected to be
affected by a significant liquidity risk; and none of them represent
asset-backed commercial paper. For the purposes of
managing our cash position, we have established a cash management policy,
which we follow and monitor on a regular basis. These short-term investments
will be used for working capital and other general corporate purposes,
including other potential acquisitions.
We
believe that our cash balances and short-term investments will be sufficient to
meet our liquidity and capital requirements for the foreseeable future,
including the effect of our normal course issuer bid. In addition to these
assets, we have unused available lines of credit totaling $14.2 million for
working capital and other general corporate purposes, as well as unused lines of
credit of $16.5 million for foreign currency exposure related
to forward exchange contracts. However, possible operating losses and/or
possible investments in or acquisitions of complementary businesses,
products or technologies may require additional financing. There can be no
assurance that additional debt or equity financing will be available when
required or, if available, that it can be secured on satisfactory
terms.
As at
August 31, 2009, our commitments under operating leases amounted to $3.3 million
in 2010, $1.6 million in 2011, $741,000 in 2012, $250,000 in 2013 and
$356,000 in 2014 and after, for total commitments
of $6.2 million.
Sources
and uses of cash
We
finance our operations and meet our capital expenditure requirements mainly
through cash flows from operating activities, the use of our cash and short-term
investments as well as the issuance of subordinate voting shares.
Operating
activities
Cash
flows provided by operating activities were $22.6 million in fiscal 2009,
compared to $12.7 million in 2008 and $14.4 million in 2007.
Fiscal
2009 vs. 2008
Cash
flows provided by operating activities in fiscal 2009 were attributable to the
net earnings after items not affecting cash of $16.5 million, and to the
positive net change in non-cash operating items of $6.1 million.
The positive net change in non-cash operating items was mainly due to the
positive effect on cash of the decrease of $9.7 million of our accounts
receivable, the positive effect on cash of the decrease of $2.6 million of our
inventories, offset in part by the negative effect on cash of the increase of
$3.4 million of our income taxes and tax credit recoverable, as well as the
negative effect on cash of the decrease of $2.4 million of our accounts payable
and accrued liabilities. The decrease of our accounts receivable is directly
attributable to the decrease in sales year-over-year and the timing of sales
during the year. The decrease in our inventories is mainly due to lower activity
levels year-over-year and a shift in product mix in favor of software-intensive
products requiring less material and parts than our traditional ones.
The increase in our income taxes and tax credits is mainly due to the
increase in our tax credits recoverable that were earned during the year but not
yet recovered, as well as the fact that we recognized at the end of the
year previously unrecognized R&D tax credits. The decrease in our
accounts payable and accrued liabilities is due to the timing of certain
purchases and payments.
Fiscal
2008 vs. 2007
Cash
flows provided by operating activities in fiscal 2008 were attributable to the
net earnings after items not affecting cash of $33.6 million, offset in part by
the negative net change in non-cash operating items of $20.9 million.
The negative net change in non-cash operating items was mainly due to the
negative effect on cash of the increase of $4.3 million of our accounts
receivable, the negative effect on cash of the increase of $12.8 million of our
income tax and tax credits recoverable, the negative effect on cash of the
increase of $2.2 million of our inventories, as well as the negative effect on
cash of the decrease of $1.4 million of our accounts payable and accrued
liabilities. The increase of our accounts receivable is directly attributable to
the increase in sales year-over-year. The increase in our income taxes and
tax credits is mainly due to the increase in our tax credits recoverable that
were earned during the year but not yet recovered, as well as the effect of the
change in our tax strategy, explained elsewhere in this document. This increase
was mostly offset by the positive effect on cash of the decrease of our future
income tax assets (in items not affecting cash), which also resulted from the
change in the tax strategy. The increase in our inventories resulted from
expected increased sales activities for the next quarters. The decrease
in our accounts payable and accrued liabilities is due to the timing of
certain purchases and payments.
Investing
activities
Cash
flows provided by investing activities amounted to $8.8 million in fiscal 2009,
compared to cash flows used of $4.2 million in 2008 and $16.1 million in
2007.
Fiscal
2009 vs. 2008
In fiscal
2009, we disposed (net of acquisitions) of $18.1 million worth of
short-term investments but paid $6.9 million for the purchase
of capital assets and $2.4 million for a contingent consideration on a
business combination.
Fiscal
2008 vs. 2007
In fiscal
2008, we disposed (net of acquisitions) of $43.3 million worth of
short-term investments to pay for the cash consideration of $41.0 million
for the two business combinations closed during the year. Also, we paid $6.5
million for the purchase of capital assets.
Financing
activities
Cash
flows used by financing activities amounted to $26.8 million in fiscal 2009,
compared to $8.0 million in 2008 and cash flows provided of $330,000 in
2007.
Fiscal
2009 vs. 2008
In fiscal
2009, we redeemed share capital for a cash consideration of $26.9 million.
However, during that year, exercise of stock options generated
$56,000.
Fiscal
2008 vs. 2007
In fiscal
2008, we redeemed share capital for a cash consideration of $8.1 million.
However, during that year, exercise of stock options generated
$61,000.
FORWARD
EXCHANGE CONTRACTS
We
utilize forward exchange contracts to manage our foreign currency exposure. Our
policy is not to utilize those derivative financial instruments for trading or
speculative purposes.
Our
forward exchange contracts, which are used to hedge anticipated
US-dollar-denominated sales, qualify for hedge accounting; therefore, foreign
exchange translation gains and losses on these contracts are recognized
as an adjustment of the revenues when the corresponding sales are
recorded.
As at
August 31, 2009, we held forward exchange contracts to sell US dollars at
various forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted
average contractual
forward
rates
|
||
|
September
2009 to August 2010
|
$27,600,000
|
1.1019
|
||
|
September
2010 to August 2011
|
$14,600,000
|
1.1221
|
||
|
September
2011
|
$1,000,000
|
1.1278
|
As at
August 31, 2009, the fair value of our forward exchange contracts, which
represents the amount we would receive or pay to settle the contracts based
on the forward exchange rate at year end, represented net gains of $530,000
($62,000 as at August 31, 2008).
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 EXFO, four of the
underwriters of our Initial Public Offering and some of our 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 EXFO’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 EXFO’s Initial Public
Offering; and (ii) the underwriters allegedly entering into agreements with
customers whereby shares issued in connection with EXFO’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 predetermined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the defendants in all of the 310 cases included in
this class action and also filed an amended complaint containing allegations
specific to four of EXFO’s underwriters, EXFO and two of our executive officers.
In addition to the allegations mentioned above, the amended complaint alleges
that the underwriters (i) used their analysts to manipulate the stock
market; and (ii) implemented schemes that allowed issuer insiders to sell
their shares rapidly after an initial public offering and benefit from high
market prices. As concerns EXFO and our two executive officers in particular,
the amended complaint alleges that (i) EXFO’s registration statement was
materially false and misleading because it failed to disclose the additional
commissions and compensation to be received by underwriters; (ii) the two
named executive officers learned of or recklessly disregarded the alleged
misconduct of the underwriters; (iii) the two named executive officers had
motive and opportunity to engage in alleged wrongful conduct due to personal
holdings of EXFO’s stock and the fact that an alleged artificially inflated
stock price could be used as currency for acquisitions; and (iv) the two named
executive officers, by virtue of their positions with EXFO, controlled it and
the contents of the registration statement and had the ability to prevent its
issuance or cause it to be corrected. The plaintiffs in this suit seek an
unspecified amount for damages suffered.
In July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the
claims against EXFO was dismissed. On October 8, 2002, the claims against
its officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion on
February 15, 2005, subject to certain modifications. On August 31,
2005, the court issued a preliminary order further approving the modifications
to the settlement and certifying the settlement classes. The court also
appointed the notice administrator for the settlement and ordered that notice of
the settlement be distributed to all settlement class members by
January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. EXFO's case is not one of these
focus cases. On October 13, 2004, the district court certified the
focus cases as class actions. The underwriter defendants appealed that
ruling, and on December 5, 2006, the Court of Appeals for the Second
Circuit reversed the district court’s class
certification decision.
On April
6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the
plaintiffs’ petition for rehearing en banc. In light of the
Second Circuit’s opinion, liaison counsel for all issuer defendants, including
EXFO, informed the court that this settlement cannot be approved, because the
defined settlement class, like the litigation class, cannot be certified.
On June 25, 2007, the district court entered an order terminating
the settlement agreement. On August 14, 2007, the plaintiffs filed their second
consolidated amended class action complaints against the focus cases and, on
September 27, 2007, again moved for class certification.
On November 12, 2007, certain defendants in the focus cases moved
to dismiss the second consolidated amended class action complaints. On March 26,
2008, the district court denied the motions to dismiss, except as to Section 11
claims raised by those plaintiffs who sold their securities for a price in
excess of the initial offering price and those who purchased outside of the
previously certified class period. Briefing on the class certification motion
was completed in May 2008. That motion was withdrawn without prejudice on
October 10, 2008.
On
April 2, 2009, a stipulation and agreement of settlement between the
plaintiffs, issuer defendants and underwriter defendants was submitted to the
Court for preliminary approval. The Court granted the plaintiffs’ motion for
preliminary approval and preliminarily certified the settlement classes
on June 10, 2009. The settlement fairness hearing was held on
September 10, 2009. On October 6, 2009, the Court entered an opinion granting
final approval to the settlement and directing that the Clerk of the Court close
these actions. Notices of appeal of the opinion granting final approval have
been filed. Given that the settlement remains subject to appeal as of the date
of issuance of these financial statements, the ultimate outcome of the
contingency is uncertain. However, based on the settlement approved on October
6, 2009, and the related insurance against such claims, we have determined the
impact to our financial position and results of operations
as at and for the year ended August 31, 2009 to be
immaterial.
SHARE
CAPITAL AND STOCK-BASED COMPENSATION PLANS
Share
capital
As at
November 6, 2009, EXFO had 36,643,000 multiple voting shares outstanding,
entitling to 10 votes each and 22,749,965 subordinate voting shares
outstanding. The multiple voting shares and the subordinate voting shares are
unlimited as to number and without par value. On December 18, 2008, we redeemed
7.7 million subordinate voting shares for a total consideration of CA$30 million
(US$24.9 million), plus related fees of $576,000, in accordance with our
substantial issuer bid program. In addition, in fiscal 2009, we redeemed
488,786 subordinated voting shares for a total net consideration of
$1.4 million based on our normal course issuer bid share buy-back
program.
Long-Term
Incentive Plan and Deferred Share Unit Plan
The
aggregate number of subordinate voting shares covered by stock options,
restricted share units (RSUs) and deferred share units (DSUs) granted under the
Long-Term Incentive Plan and the Deferred Share Unit Plan was 3,121,132 as at
August 31, 2009. The maximum number of subordinate voting shares issuable under
these two plans cannot exceed 6,306,153 shares. The following tables summarize
information about stock options, RSUs and DSUs granted to the members of the
Board of Directors and to Management and Corporate Officers of the company and
its subsidiaries as at August 31, 2009:
|
Stock Options
|
Number
|
%
of issued and outstanding
|
Weighted
average exercise price
|
|||||||||
|
Chairman
of the Board, President and CEO (one individual)
|
179,642 | 11 | % | $ | 9.05 | |||||||
|
Board
of Directors (four individuals)
|
148,807 | 9 | 6.19 | |||||||||
|
Management
and Corporate Officers (eight individuals)
|
212,139 | 12 | 14.49 | |||||||||
| 540,588 | 32 | % | $ | 10.40 | ||||||||
|
Restricted Share Units
(RSUs)
|
Number
|
% of issued
and outstanding
|
||||||
|
Chairman
of the Board, President and CEO (one individual)
|
140,459 | 10 | % | |||||
|
Management
and Corporate Officers (eleven individuals)
|
479,887 | 36 | ||||||
| 620,346 | 46 | % | ||||||
|
Deferred Share Units
(DSUs)
|
Number
|
% of issued
and outstanding
|
||||||
|
Board
of Directors (five individuals)
|
114,924 | 100 | % | |||||
OFF-BALANCE
SHEET ARRANGEMENTS
As at
August 31, 2009, our off-balance sheet arrangements consisted of letters of
guarantee. As at August 31, 2009, our letters of guarantee
amounted to $5.5 million; these letters of guarantee expire at various
dates through fiscal 2016. From this amount, we had $1.1 million worth of
letters of guarantee for our own selling and purchasing requirements, which were
for the most part reserved from one of our lines of credit. The remainder, in
the amount of $4.4 million, was used to secure our line of credit in CNY
(Chinese currency). This line of credit was unused as at August 31,
2009.
VARIABLE
INTEREST ENTITY
As of
August 31, 2009, we did not have interests in any variable interest
entities.
RISKS
AND UNCERTAINTIES
Over the
past several years, we have managed our business in a difficult environment;
focused on research and development programs for new and innovative products
aimed at expected growth pockets in our sector; continued the development of our
domestic and international markets; and made strategic acquisitions. However, we
operate in a highly competitive sector 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.
We are
exposed to currency risks due to the export of our Canadian-manufactured
products, the large majority of which are denominated in US dollars and due
to the fact that a significant portion of our operational costs are incurred in
Canadian dollars. These risks are partially hedged by operating expenses
denominated in US dollars and forward exchange contracts. Any increase
in the value of the Canadian dollar in the coming months would negatively
affect our results of operations.
In
addition, our business is subject to the effects of general economic conditions
in North America and throughout the world and, more particularly, market
conditions in the telecommunications industry. In the past, our operating
results were adversely affected by reduced telecom capital spending in North
America, Europe and Asia and by general unfavorable economic conditions. In
particular, sales to network service providers in North America were
significantly and adversely affected by a downturn in 2001 in the
telecommunications industry. With the current recession in key
geographic regions or markets, we have experienced and may continue to
experience a material adverse impact on our business, operating results and
financial conditions.
Also,
risks and uncertainties related to the telecommunications test, measurement,
monitoring and service assurance industry involve the rapid development of new
products that may have short life cycles and require extensive research and
development; the difficulty of adequately predicting market size and trends; the
difficulty of retaining highly skilled employees; and the ability to quickly
adapt our cost structure to changing market conditions in order to achieve
profitability.
Furthermore,
given our strategic goals for growth and competitive positioning in our
industry, we are continuously expanding into international markets, which
requires certain actions, such as the opening of our manufacturing facilities in
China and software development center in India. This exposes us to certain risks
and uncertainties, namely changes in local laws and regulations, multiple
technological standards, protective legislation, pricing pressure, cultural
differences and the management of operations in China and
India.
Also,
while strategic acquisitions, like those we have made in the past, those closed
in fiscal 2008 and possibly others in the future, are essential to our long-term
growth, they also expose us to certain risks and uncertainties related to the
rapid and effective integration of these businesses as well as their products,
technologies and personnel. Finally, integration requires the dedication of
management resources, which may detract their attention from our day-to-day
business and operations.
The
current economic environment of our industry could also result in some of our
customers experiencing difficulties, which, consequently, could have a negative
effect on our results, especially in terms of future sales and recoverability
of accounts receivable. However, the sectorial and geographic diversity of
our customer base provides us with a reasonable level of protection in this
area. Finally, other financial instruments, which potentially subject
us to credit risks, consist mainly of cash, short-term investments and
forward exchange contracts. Our short-term investments consist of debt
instruments issued by high-credit quality corporations and trusts. Our cash and
forward exchange contracts are held with or issued by high-credit quality
financial institutions; therefore, we consider the risk of non-performance
on these instruments to be limited.
For a
more complete understanding of risk factors that may affect us, please refer to
the risk factors set forth in our disclosure documents published with securities
commissions at www.EXFO.com,
or at www.sedar.com in Canada or www.sec.gov/edgar.shtml
in the U.S.
QUARTERLY
SUMMARY FINANCIAL INFORMATION (UNAUDITED)
(tabular
amounts in thousands of US dollars, except per share data)
|
1st
quarter
|
2nd
quarter
|
3rd
quarter
|
4th
quarter
|
Year
ended August 31
|
||||||||||||||||
|
2009
|
||||||||||||||||||||
|
Sales
|
$ | 46,363 | $ | 46,372 | $ | 43,636 | $ | 36,507 | $ | 172,878 | ||||||||||
|
Cost
of sales
|
$ | 17,480 | $ | 18,353 | $ | 16,441 | $ | 14,618 | $ | 66,892 | ||||||||||
|
Gross
margin
|
$ | 28,883 | $ | 28,019 | $ | 27,195 | $ | 21,889 | $ | 105,986 | ||||||||||
|
Earnings
(loss) from operations
|
$ | 2,093 | $ | 2,599 | $ | (21,552 | ) | $ | (1,218 | ) | $ | (18,078 | ) | |||||||
|
Net
earnings (loss)
|
$ | 5,287 | $ | 2,655 | $ | (23,346 | ) | $ | (1,181 | ) | $ | (16,585 | ) | |||||||
|
Basic
and diluted net earnings (loss) per share (1)
|
$ | 0.08 | $ | 0.04 | $ | (0.39 | ) | $ | (0.02 | ) | $ | (0.27 | ) | |||||||
|
1st
quarter
|
2nd
quarter
|
3rd
quarter
|
4th
quarter
|
Year
ended August 31
|
||||||||||||||||
|
2008
|
||||||||||||||||||||
|
Sales
|
$ | 40,985 | $ | 43,281 | $ | 48,581 | $ | 50,943 | $ | 183,790 | ||||||||||
|
Cost
of sales
|
$ | 18,144 | $ | 18,060 | $ | 19,004 | $ | 20,416 | $ | 75,624 | ||||||||||
|
Gross
margin
|
$ | 22,841 | $ | 25,221 | $ | 29,577 | $ | 30,527 | $ | 108,166 | ||||||||||
|
Earnings
from operations
|
$ | 302 | $ | 3,635 | $ | 4,458 | $ | 3,588 | $ | 11,983 | ||||||||||
|
Earnings
(loss) before extraordinary gain
|
$ | (93 | ) | $ | 4,024 | $ | 8,143 | $ | 3,314 | $ | 15,388 | |||||||||
|
Net
earnings (loss)
|
$ | (93 | ) | $ | 4,024 | $ | 11,179 | $ | 3,314 | $ | 18,424 | |||||||||
|
Basic
and diluted earnings (loss) before extraordinary gain (1)
|
$ | (0.00 | ) | $ | 0.06 | $ | 0.12 | $ | 0.05 | $ | 0.22 | |||||||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.00 | ) | $ | 0.06 | $ | 0.16 | $ | 0.05 | $ | 0.27 | |||||||||
|
1st
quarter
|
2nd
quarter
|
3rd
quarter
|
4th
quarter
|
Year
ended August 31
|
||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Sales
|
$ | 35,547 | $ | 35,207 | $ | 39,205 | $ | 42,975 | $ | 152,934 | ||||||||||
|
Cost
of sales
|
$ | 15,229 | $ | 14,970 | $ | 16,828 | $ | 18,109 | $ | 65,136 | ||||||||||
|
Gross
margin
|
$ | 20,318 | $ | 20,237 | $ | 22,377 | $ | 24,866 | $ | 87,798 | ||||||||||
|
Earnings
from operations
|
$ | 2,759 | $ | 2,081 | $ | 2,840 | $ | 9,102 | $ | 16,782 | ||||||||||
|
Net
earnings
|
$ | 3,533 | $ | 2,684 | $ | 2,574 | $ | 33,484 | $ | 42,275 | ||||||||||
|
Basic
net earnings per share (1)
|
$ | 0.05 | $ | 0.04 | $ | 0.04 | $ | 0.49 | $ | 0.61 | ||||||||||
|
Diluted
net earnings per share
|
$ | 0.05 | $ | 0.04 | $ | 0.04 | $ | 0.48 | $ | 0.61 | ||||||||||
|
(1)
|
Per
share data is calculated independently for each of the quarters presented.
Therefore, the sum of this quarterly information does not equal the
corresponding annual information.
|
Fourth-quarter
results
In the
fourth quarter of fiscal 2009, sales were $36.5 million, compared to $50.9
million in 2008.
In the
fourth quarter of fiscal 2009, we reported a year-over-year decrease in sales
mainly due to the impact of the worldwide economic recession that affected most
of our product lines during that period. In fact, we witnessed
a significant drop in our bookings in the last part of the third quarter of
fiscal 2009 and the beginning of the fourth quarter, reflecting the significant
reduction of spending in our end-markets. In addition, as a portion of our
sales are denominated in Canadian dollars, euros or British pounds, the
increased strength of the US dollar against these currencies in the fourth
quarter of fiscal 2009, also had a negative impact on our sales expressed in US
dollars, which contributed to the decrease in sales compared to the
corresponding period last year. This was amplified by foreign exchange
losses on our forward exchange contracts, which are recorded in sales. In fact,
in the fourth quarter of fiscal 2009, foreign exchange losses on our forward
exchange contracts amounted to $218,000 and accordingly reduced our sales,
compared to foreign exchange gains of $663,000 during the same period last year,
which increased our sales. We have to remember that in the fourth quarter of
fiscal 2008, we posted record-high quarterly sales of $50.9
million.
In the
fourth quarter of fiscal 2009, gross margin reached 60.0% of global sales, flat
compared to 59.9% for the same period last year. In the fourth quarter of fiscal
2009, despite the significant decrease in sales, gross margin was flat
year-over-year. In the fourth quarter of fiscal 2009, a shift in product mix
resulted in a larger portion of our sales coming from our protocol test
solutions, including those of newly acquired Brix Networks, compared to our
optical and copper-access test solutions and those of our Life Sciences and
Industrial Division; these products have better margins than our other test
solutions, which contributed to increasing our gross margin year-over-year. In
addition, in fiscal 2009, the value of the Canadian dollar significantly
fluctuated compared to the US dollar, which positively impacted our gross margin
for these periods, compared to 2008. In fact, since the beginning of fiscal
2009, the value of the Canadian dollar significantly decreased compared to the
US dollar; this resulted in a lower cost of goods sold expressed in US
dollars in the statement of earnings, thus increasing our gross margin
year-over-year in the fourth quarter of fiscal 2009. However, the increase in
the procurement costs of our raw materials purchased in US dollars, as a result
of the recent and significant decrease in the value of the Canadian dollar
compared to the US dollar, materialized in the fourth quarter of
fiscal 2009 compared to the same period last year.
Furthermore,
the operation of our manufacturing facilities in China resulted in a larger
portion of our sales coming from products manufactured in China in the fourth
quarter of fiscal 2009 compared to the same period last year; these products
have a lower cost than those manufactured in our facilities in Canada, thus
resulting in an improvement in gross margin in the fourth quarter of
fiscal 2009 compared to the same period last year.
However,
foreign exchange losses on our forward exchange contracts recorded in the fourth
quarter of fiscal 2009 ($218,000), which are included in our sales, had
a negative impact on our gross margin during that period, compared to the
positive impact of our foreign exchange gains of $663,000 during the same period
last year, thus reducing our gross margin year-over-year.
In
addition, a lower overall sales volume in the fourth quarter of fiscal 2009
compared to the same period last year resulted in decreased manufacturing
activities and in lower absorption of our fixed manufacturing costs, thus
negatively impacting our gross margin year-over-year.
In the
fourth quarter of fiscal 2009, loss from operations amounted to $1.2 million,
compared to earnings from operations of $3.6 million for the same period
last year. Loss from operations in the fourth quarter of fiscal 2009 were
negatively impacted by the significant decrease in sales and gross margin (in
dollars) year-over-year. In addition, in the fourth quarter of fiscal 2009,
we recorded restructuring charges of $1.2 million in severance expenses for the
employees who where terminated throughout the organization during the quarter.
However, in the fourth quarter of fiscal 2009, selling expenses were lower
compared to the same period last year due to the reduction of sales
year-over-year. In addition, a weaker Canadian dollar, compared to the
US dollar year-over-year, had a positive impact on earnings from
operations as a portion of our cost of goods and our operating expenses
are denominated in Canadian dollars. Furthermore, in the fourth quarter of
fiscal 2009, we recorded $1.9 million for the recognition of prior years’
non-refundable research and development tax credits, which has reduced our net
research and development expenses. Excluding this recognition of prior years’
non-refundable research and development tax credits, net research and
development expenses would have been flat year-over-year despite the positive
impact of a weaker Canadian dollar. Earnings from operations in the fourth
quarter of fiscal 2008 included the dilutive effect of newly acquired Brix
Networks. Furthermore, a stronger Canadian dollar, compared to the
US dollar year-over-year, had a negative impact on earnings from
operations as a portion of our cost of goods and our operating expenses
are denominated in Canadian dollars. Finally, the setup of our own
manufacturing activities in China and of a research center in India,
resulted in additional expenses, which reduced our earnings from operations
in the fourth quarter of fiscal 2008, compared to the same period in 2007.
However, increased sales volume and gross margin mitigated these negative
effects.
Net loss
amounted to $1.2 million, or $0.02 per share, in the fourth quarter of fiscal
2009, compared to net earnings of $3.3 million, or $0.05 per diluted share,
for the same period last year. In addition to the explanations above,
in the fourth quarter of fiscal 2009, we recorded $372,000 worth of future
income tax assets for which a valuation allowance was previously
established. However, net earnings in the fourth quarter of fiscal 2008 included
pre-tax interest income of $576,000 compared to an interest expense of $86,000
during the same period of fiscal 2009 due to lower interest rates and a
lower cash position year-over-year. In addition, net earnings of the fourth
quarter of fiscal 2008 included a pre-tax foreign exchange gain of $1.3
million on the translation of balance sheet elements, compared to only $186,000
in 2009.
MANAGEMENT’S REPORTS
RESPONSIBILITY
FOR FINANCIAL INFORMATION
EXFO
management is responsible for the preparation, integrity and objectivity of the
consolidated financial statements and other financial information presented in
this Annual Report. These consolidated financial statements have been prepared
in accordance with Canadian generally accepted accounting principles and include
some amounts that are based on estimates and judgments. Management has
determined such amounts on a reasonable basis in order to ensure that the
financial statements are presented fairly in all material respects.
EXFO’s
policy is to maintain systems of internal accounting, and administrative and
disclosure controls—reinforced by standards of conduct and ethics set out in
written policies—to provide reasonable assurance that the financial information
is relevant, accurate and reliable, and that assets are appropriately accounted
for and adequately safeguarded. The Board of Directors is responsible for
ensuring that management fulfills its responsibilities for financial reporting
and is ultimately responsible for reviewing and approving the financial
statements.
The Board
carries out this responsibility principally through its Audit Committee. The
Audit Committee is appointed by the Board and is composed of independent outside
directors. The Committee meets periodically with management and external
auditors to review accounting, auditing and internal control matters. These
consolidated financial statements have been reviewed and approved by the Board
of Directors on the recommendation of the Audit Committee.
The
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, the independent auditors, in accordance with the Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States) on behalf of the shareholders. The external
auditors have full and free access to the Audit Committee.
INTERNAL
CONTROL OVER FINANCIAL REPORTING
EXFO
management is responsible for establishing and maintaining adequate internal
control over financial reporting. EXFO’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with accounting principles generally
accepted in Canada.
EXFO’s
internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
EXFO; (ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in Canada, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of EXFO; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of EXFO’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management
conducted an evaluation of the effectiveness of EXFO’s internal control over
financial reporting based on the criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this evaluation, management concluded that
EXFO’s internal control over financial reporting was effective as at August 31,
2009.
The
company’s internal control over financial reporting as at August 31, 2009 has
been audited by PricewaterhouseCoopers LLP, the independent auditors, based on
the criteria established in Internal Control — Integrated Framework issued
by the COSO.
|
/s/ Germain Lamonde
|
/s/ Pierre Plamondon
|
|
|
GERMAIN
LAMONDE
|
PIERRE
PLAMONDON, CA
|
|
|
Chairman,
President and
|
Vice-President,
Finance and
|
|
|
Chief
Executive Officer
|
Chief
Financial Officer
|
REPORT OF INDEPENDENT AUDITORS
TO
THE SHAREHOLDERS OF EXFO ELECTRO-OPTICAL ENGINEERING INC.
We have
completed integrated audits of the consolidated financial statements and
internal control over financial reporting of EXFO Electro-Optical Engineering
Inc. as at August 31, 2009, 2008 and 2007. Our opinions, based on our audits,
are presented below.
CONSOLIDATED
FINANCIAL STATEMENTS
We have
audited the accompanying consolidated balance sheets of EXFO Electro-Optical
Engineering Inc. as at August 31, 2009 and 2008, and the related
consolidated statements of earnings, comprehensive income (loss) and accumulated
other comprehensive income, retained earnings and contributed surplus and cash
flows for each of the years in the three-year period ended August 31, 2009.
These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We
conducted our audits of the Company’s financial statements in accordance with
Canadian generally accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform an audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. A financial statement audit also
includes assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as at August 31,
2009 and 2008 and the results of its operations and its cash flows for each of
the years in the three-year period ended August 31, 2009 in accordance with
Canadian generally accepted accounting principles.
INTERNAL
CONTROL OVER FINANCIAL REPORTING
We have
also audited EXFO Electro-Optical Engineering Inc.’s internal control over
financial reporting as at August 31, 2009, based on criteria established in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on the effectiveness of
the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk, and performing such other procedures as we
consider necessary in the circumstances. We believe that our audit provides
a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as at August 31, 2009 based on
criteria established in Internal Control — Integrated Framework issued by the
COSO.
/s/
PricewaterhouseCoopers LLP
CHARTERED
ACCOUNTANTS
Quebec
City, Quebec, Canada
October
13, 2009,
except
note 21, which is as of November 6, 2009
EXFO Electro-Optical Engineering Inc.
Consolidated
Balance Sheets
(in thousands of US dollars)
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Assets
|
||||||||
|
Current
assets
|
||||||||
|
Cash
|
$ | 10,611 | $ | 5,914 | ||||
|
Short-term
investments (note 6)
|
59,105 | 81,626 | ||||||
|
Accounts
receivable (note 6)
|
||||||||
|
Trade
|
22,946 | 31,473 | ||||||
|
Other
|
2,752 | 4,753 | ||||||
|
Income
taxes and tax credits recoverable
|
2,353 | 4,836 | ||||||
|
Inventories
(note 7)
|
30,863 | 34,880 | ||||||
|
Prepaid
expenses
|
2,043 | 1,774 | ||||||
|
Future
income taxes (note 17)
|
5,538 | 9,140 | ||||||
| 136,211 | 174,396 | |||||||
|
Tax
credits recoverable
|
26,762 | 20,657 | ||||||
|
Forward exchange contracts
(note 6)
|
428 | − | ||||||
|
Property, plant and equipment
(note 8)
|
19,100 | 19,875 | ||||||
|
Intangible assets (note
9)
|
16,859 | 19,945 | ||||||
|
Goodwill (notes 3, 4 and
9)
|
22,478 | 42,653 | ||||||
|
Future income taxes
(note 17)
|
18,533 | 15,540 | ||||||
| $ | 240,371 | $ | 293,066 | |||||
|
Liabilities
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities (note 11)
|
$ | 21,650 | $ | 24,713 | ||||
|
Deferred
revenue
|
6,481 | 5,079 | ||||||
| 28,131 | 29,792 | |||||||
|
Deferred
revenue
|
4,195 | 3,759 | ||||||
| 32,326 | 33,551 | |||||||
|
Commitments (note
12)
|
||||||||
|
Contingencies (note
13)
|
||||||||
|
Shareholders’
equity
|
||||||||
|
Share
capital (note 14)
|
104,846 | 142,786 | ||||||
|
Contributed
surplus
|
17,758 | 5,226 | ||||||
|
Retained
earnings (note 14)
|
43,909 | 60,494 | ||||||
|
Accumulated
other comprehensive income
|
41,532 | 51,009 | ||||||
| 208,045 | 259,515 | |||||||
| $ | 240,371 | $ | 293,066 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
On behalf of the Board
|
/s/
Germain Lamonde
GERMAIN
LAMONDE
Chairman,
President and CEO
|
/s/
André Tremblay
ANDRÉ
TREMBLAY
Chairman,
Audit Committee
|
EXFO
Electro-Optical Engineering Inc.
Consolidated
Statements of Earnings
(in thousands of US dollars, except share and
per share data)
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Sales (note
19)
|
$ | 172,878 | $ | 183,790 | $ | 152,934 | ||||||
|
Cost of sales (1,
2) (note 7)
|
66,892 | 75,624 | 65,136 | |||||||||
|
Gross
margin
|
105,986 | 108,166 | 87,798 | |||||||||
|
Operating
expenses
|
||||||||||||
|
Selling
and administrative (1)
|
63,808 | 61,153 | 49,580 | |||||||||
|
Net
research and development (1)
(notes 16 and 17)
|
27,698 | 26,867 | 16,668 | |||||||||
|
Amortization
of property, plant and equipment
|
4,607 | 4,292 | 2,983 | |||||||||
|
Amortization
of intangible assets
|
5,067 | 3,871 | 2,864 | |||||||||
|
Restructuring
charges (note 4)
|
1,171 | – | – | |||||||||
|
Government
grants (note 16)
|
– | – | (1,079 | ) | ||||||||
|
Impairment
of goodwill (note 4)
|
21,713 | – | – | |||||||||
|
Total
operating expenses
|
124,064 | 96,183 | 71,016 | |||||||||
|
Earnings
(loss) from operations
|
(18,078 | ) | 11,983 | 16,782 | ||||||||
|
Interest
income
|
597 | 4,639 | 4,717 | |||||||||
|
Foreign
exchange gain (loss)
|
1,157 | 442 | (49 | ) | ||||||||
|
Earnings (loss) before income
taxes and extraordinary gain (note 17)
|
(16,324 | ) | 17,064 | 21,450 | ||||||||
|
Income taxes (note
17)
|
||||||||||||
|
Current
|
561 | (7,094 | ) | 3,741 | ||||||||
|
Future
|
72 | 14,094 | – | |||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(372 | ) | (5,324 | ) | (24,566 | ) | ||||||
| 261 | 1,676 | (20,825 | ) | |||||||||
|
Earnings
(loss) before extraordinary gain
|
(16,585 | ) | 15,388 | 42,275 | ||||||||
|
Extraordinary gain (note
3)
|
– | 3,036 | – | |||||||||
|
Net
earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||
|
Basic
and diluted earnings (loss) before extraordinary gain per
share
|
$ | (0.27 | ) | $ | 0.22 | $ | 0.61 | |||||
|
Basic
and diluted net earnings (loss) per share
|
$ | (0.27 | ) | $ | 0.27 | $ | 0.61 | |||||
|
Basic
weighted average number of shares outstanding (000’s)
|
61,845 | 68,767 | 68,875 | |||||||||
|
Diluted weighted average number
of shares outstanding (000’s) (note 18)
|
61,845 | 69,318 | 69,555 | |||||||||
|
(1) Stock-based compensation costs
included in:
|
||||||||||||
|
Cost of sales
|
$ | 137 | $ | 148 | $ | 118 | ||||||
|
Selling and administrative
|
858 | 830 | 633 | |||||||||
|
Net research and development
|
414 | 294 | 230 | |||||||||
| $ | 1,409 | $ | 1,272 | $ | 981 | |||||||
|
(2)
The cost of sales is exclusive of amortization, shown
separately.
|
||||||||||||
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO
Electro-Optical Engineering Inc.
Consolidated
Statements of Comprehensive Income (Loss)
and Accumulated Other
Comprehensive Income
(in thousands of US
dollars)
|
Comprehensive
income (loss)
|
||||||||||||
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Net
earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||
|
Foreign
currency translation adjustment
|
(10,671 | ) | (2,289 | ) | 9,881 | |||||||
|
Changes
in unrealized losses on short-term investments
|
22 | 31 | – | |||||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
(1,467 | ) | 962 | – | ||||||||
|
Reclassification
of realized gains (losses) on forward exchange contracts in net earnings
(loss)
|
3,167 | (3,915 | ) | – | ||||||||
|
Future
income tax effect of the above items
|
(528 | ) | 909 | – | ||||||||
|
Comprehensive
income (loss)
|
$ | (26,062 | ) | $ | 14,122 | $ | 52,156 | |||||
|
Accumulated
other comprehensive income
|
||||||||
|
Years
ended August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Foreign
currency translation adjustment
|
||||||||
|
Cumulative
effect of prior years
|
$ | 51,129 | $ | 53,418 | ||||
|
Current
year
|
(10,671 | ) | (2,289 | ) | ||||
| 40,458 | 51,129 | |||||||
|
Unrealized
gains (losses) on forward exchange contracts
|
||||||||
|
Cumulative
effect of prior years
|
(96 | ) | 1,948 | |||||
|
Current
year, net of realized gains (losses) and future income
taxes
|
1,172 | (2,044 | ) | |||||
| 1,076 | (96 | ) | ||||||
|
Unrealized
losses on short-term investments
|
||||||||
|
Cumulative
effect of prior years
|
(24 | ) | (55 | ) | ||||
|
Current
year, net of future income taxes
|
22 | 31 | ||||||
| (2 | ) | (24 | ) | |||||
|
Accumulated
other comprehensive income
|
$ | 41,532 | $ | 51,009 | ||||
Total
retained earnings and accumulated other comprehensive income amounted to
$111,503 and $85,441 as at August 31, 2008 and 2009, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO
Electro-Optical Engineering Inc.
Consolidated
Statements of Retained Earnings and Contributed Surplus
(in thousands of US dollars)
|
Retained
earnings
|
||||||||||||
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
– Beginning of year
|
$ | 60,494 | $ | 42,275 | $ | – | ||||||
|
Add
(deduct)
|
||||||||||||
|
Cumulative
effect of prior years
|
– | 55 | – | |||||||||
|
Net
earnings (loss) for the year
|
(16,585 | ) | 18,424 | 42,275 | ||||||||
|
Premium
on redemption of share capital (note 14)
|
– | (260 | ) | – | ||||||||
|
Balance
– End of year
|
$ | 43,909 | $ | 60,494 | $ | 42,275 | ||||||
|
Contributed
surplus
|
||||||||||||
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Balance
– Beginning of year
|
$ | 5,226 | $ | 4,453 | $ | 3,776 | ||||||
|
Add
(deduct)
|
||||||||||||
|
Stock-based
compensation costs
|
1,407 | 1,287 | 973 | |||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards (note 14)
|
(540 | ) | (514 | ) | (296 | ) | ||||||
|
Discount
on redemption of share capital (note 14)
|
11,665 | – | – | |||||||||
|
Balance
– End of year
|
$ | 17,758 | $ | 5,226 | $ | 4,453 | ||||||
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO
Electro-Optical Engineering Inc.
Consolidated
Statements of Cash Flows
(in thousands of US dollars)
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cash
flows from operating activities
|
||||||||||||
|
Net
earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||
|
Add
(deduct) items not affecting cash
|
||||||||||||
|
Change
in discount on short-term investments
|
597 | 1,035 | (404 | ) | ||||||||
|
Stock-based
compensation costs
|
1,409 | 1,272 | 981 | |||||||||
|
Amortization
|
9,674 | 8,163 | 5,847 | |||||||||
|
Deferred
revenue
|
1,706 | 47 | 1,299 | |||||||||
|
Government
grants
|
– | – | (752 | ) | ||||||||
|
Loss
(gain) on disposal of capital assets
|
237 | – | (117 | ) | ||||||||
|
Impairment
of goodwill (note 4)
|
21,713 | – | – | |||||||||
|
Future
income taxes
|
(300 | ) | 8,770 | (24,566 | ) | |||||||
|
Extraordinary
gain (note 3)
|
– | (3,036 | ) | – | ||||||||
|
Change
in unrealized foreign exchange gain
|
(1,955 | ) | (1,093 | ) | (65 | ) | ||||||
| 16,496 | 33,582 | 24,498 | ||||||||||
|
Change
in non-cash operating items
|
||||||||||||
|
Accounts
receivable
|
9,654 | (4,338 | ) | (5,468 | ) | |||||||
|
Income
taxes and tax credits
|
(3,391 | ) | (12,833 | ) | (3,403 | ) | ||||||
|
Inventories
|
2,624 | (2,166 | ) | (5,456 | ) | |||||||
|
Prepaid
expenses
|
(350 | ) | (127 | ) | 85 | |||||||
|
Accounts
payable and accrued liabilities
|
(2,409 | ) | (1,416 | ) | 4,105 | |||||||
| 22,624 | 12,702 | 14,361 | ||||||||||
|
Cash
flows from investing activities
|
||||||||||||
|
Additions
to short-term investments
|
(438,460 | ) | (717,020 | ) | (807,056 | ) | ||||||
|
Proceeds
from disposal and maturity of short-term investments
|
456,612 | 760,310 | 793,435 | |||||||||
|
Additions
to capital assets
|
(6,945 | ) | (6,508 | ) | (5,547 | ) | ||||||
|
Net
proceeds from disposal of capital assets
|
– | – | 3,092 | |||||||||
|
Business
combinations, net of cash acquired (note 3)
|
(2,414 | ) | (41,016 | ) | – | |||||||
| 8,793 | (4,234 | ) | (16,076 | ) | ||||||||
|
Cash
flows from financing activities
|
||||||||||||
|
Repayment
of long-term debt
|
– | – | (472 | ) | ||||||||
|
Redemption
of share capital (note 14)
|
(26,871 | ) | (8,068 | ) | – | |||||||
|
Exercise
of stock options
|
56 | 61 | 802 | |||||||||
| (26,815 | ) | (8,007 | ) | 330 | ||||||||
|
Effect
of foreign exchange rate changes on cash
|
95 | (88 | ) | 73 | ||||||||
|
Change
in cash
|
4,697 | 373 | (1,312 | ) | ||||||||
|
Cash
– Beginning of year
|
5,914 | 5,541 | 6,853 | |||||||||
|
Cash
– End of year
|
$ | 10,611 | $ | 5,914 | $ | 5,541 | ||||||
|
Supplementary
information
|
||||||||||||
|
Interest
paid
|
$ | 23 | $ | 55 | $ | 57 | ||||||
|
Income
taxes paid
|
$ | 86 | $ | 759 | $ | 3,527 | ||||||
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
1 Nature
of Activities
EXFO
Electro-Optical Engineering Inc. (“EXFO”) designs, manufactures and markets a
line of test and service assurance solutions for network service providers and
equipment manufacturers in the global telecommunications industry.
The Telecom Division, which represents the company’s main business
activity, offers a wide range of innovative solutions to assess optical
networks, from the core to access, as well as next-generation IP infrastructures
and related triple-play services. The Life Sciences and Industrial Division
offers solutions for medical-device and opto-electronics assembly, fluorescence
microscopy and other life sciences sectors. EXFO’s products are sold in
approximately 95 countries around the world.
2 Summary
of Significant Accounting Policies
Basis
of presentation
These
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (“GAAP”) in Canada, and significant
differences in measurement and disclosure from U.S. GAAP are set out in note 20.
These consolidated financial statements include the accounts of the company and
its domestic and international subsidiaries. All significant intercompany
accounts and transactions have been eliminated.
Accounting
estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial
statements, as well as the reported amounts of revenues and expenses during the
reporting years. Significant estimates include the fair value of financial
instruments, the allowance for doubtful accounts receivable, the amount of tax
credits recoverable, the provision for excess and obsolete inventories, the
useful lives of capital assets, the valuation of long-lived assets, the
impairment of goodwill, the valuation allowance for future income taxes, the
amount of certain accrued liabilities and deferred revenue as well as
stock-based compensation costs. Actual results could differ from those
estimates.
Reporting
currency
The
measurement currency of the company is the Canadian dollar. The company has
adopted the US dollar as its reporting currency. The financial statements
are translated into the reporting currency using the current rate method. Under
this method, the financial statements are translated into the reporting currency
as follows: assets and liabilities are translated at the exchange rate in
effect on the date of the balance sheet, while revenues and expenses are
translated at the monthly average exchange rate. The cumulative foreign currency
translation adjustment arising from such translation is included
in accumulated other comprehensive income in
shareholders’ equity.
In the
event that management decides to declare dividends, such dividends would be
declared in Canadian dollars.
Foreign
currency translation
Foreign
currency transactions
Transactions
denominated in currencies other than the measurement currency are translated
into the relevant measurement currency as follows: monetary assets and
liabilities are translated at the exchange rate in effect on the date of the
balance sheet, and revenues and expenses are translated at the exchange rate in
effect on the date of the transaction. Non-monetary assets and liabilities are
translated at historical rates. Foreign exchange gains and losses arising from
such translation are reflected in the statements of earnings.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Integrated
foreign operations
The
financial statements of integrated foreign operations are remeasured into the
relevant measurement currency using the temporal method. Under this method,
monetary assets and liabilities are remeasured at the exchange rate in effect on
the date of the balance sheet. Non-monetary assets and liabilities are
remeasured at historical rates, unless such assets and liabilities are carried
at market value, in which case, they are remeasured at the exchange rate in
effect on the date of the balance sheet. Revenues and expenses are remeasured at
the monthly average exchange rate. Foreign exchange gains and losses arising
from such remeasurement are reflected in the statements of
earnings.
Forward
exchange contracts
Forward
exchange contracts are utilized by the company to manage its foreign currency
exposure. Forward exchange contracts, which qualify for hedge accounting as per
the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3865,
“Hedges”, are entered into by the company to hedge anticipated
US-dollar-denominated sales and the related accounts receivable. The company’s
policy is not to utilize those derivative financial instruments for trading or
speculative purposes.
In
accordance with the requirements of the CICA Handbook Section 3855, “Financial
Instruments – Recognition and Measurement”, adopted by the company on September
1, 2007, the company’s forward exchange contracts are recorded at fair
value in the balance sheet, and changes in their fair value are reported
in comprehensive income. Any ineffective portion is recognized immediately
in the statements of earnings. Upon the recognition of related hedged sales,
accumulated changes in fair value are reclassified in sales in the statements of
earnings.
Prior to
the adoption of Section 3855 on September 1, 2007, the company’s forward
exchange contracts qualified for hedge accounting; therefore, foreign exchange
translation gains and losses on these contracts were recognized as an adjustment
of the revenues when the corresponding hedged sales were
recorded.
Short-term
investments
All
investments with original terms to maturity of three months or less and that are
not required for the purposes of meeting short-term cash requirements are
classified as short-term investments.
In
accordance with the requirements of the CICA Handbook Section 3855, “Financial
Instruments – Recognition and Measurement”, adopted by the company on September
1, 2007, short-term investments are classified as available-for-sale securities;
therefore, they are carried at fair value in the balance sheet, and any changes
in their fair value are reflected in comprehensive income. Upon the
disposal of these assets, accumulated changes in their fair value are
reclassified in the statements of earnings.
Interest
income on short-term investments is recorded in interest income in the
statements of earnings and in cash flows from operating activities in the
statements of cash flows.
Inventories
Inventories
are valued on an average cost basis, at the lower of cost and net realizable
value.
Property,
plant and equipment and amortization
Property,
plant and equipment are recorded at cost, less related government grants and
research and development tax credits. Amortization is provided on a
straight-line basis over the estimated useful lives as follows:
|
Term
|
||
|
Land
improvements
|
5
years
|
|
|
Buildings
|
25
years
|
|
|
Equipment
|
2
to 10 years
|
|
|
Leasehold
improvements
|
The
lesser of useful life and remaining lease
term
|
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Intangible
assets, goodwill and amortization
Intangible
assets primarily include the cost of core technology and software, net of
accumulated amortization. Core technology represents existing technology that
was acquired in business combinations and that has reached technological
feasibility. Amortization is provided on a straight-line basis over the
estimated useful lives of five years for core technology and four and 10 years
for software.
Goodwill
represents the excess of the purchase price of acquired businesses over the fair
value of net identifiable assets acquired. Goodwill is not amortized but must be
tested for impairment on an annual basis or more frequently if events
or circumstances indicate that it might be impaired. Recoverability of
goodwill is determined at the reporting unit level, using a two-step approach.
First, the carrying value of a reporting unit is compared to its fair value,
which is usually determined based on a combination of discounted future cash
flows and a market approach. If the carrying value of a reporting unit
exceeds its fair value, the second step is performed. In this step, the amount
of impairment loss, if any, represents the excess of the carrying value of
goodwill over its fair value, and the loss is charged to earnings in the period
in which it is incurred. For the purposes of this impairment test, the fair
value of goodwill is estimated in the same way as goodwill is determined in
business combinations; that is, the excess of the fair value of a reporting unit
over the fair value of its net identifiable assets.
The
company performs its annual impairment test in the third quarter of each fiscal
year for all its existing reporting units (note 4).
|
|
Impairment
of long-lived assets
|
Long-lived
assets are reviewed for impairment when events or circumstances indicate that
cost may not be recoverable. Impairment exists when the carrying amount/value of
an asset or group of assets is greater than the undiscounted future cash flows
expected to be provided by the asset or group of assets. The amount of
impairment loss, if any, is the excess of the carrying value over the fair
value. The company assesses fair value of long-lived assets based on discounted
future cash flows.
Warranty
The
company offers its customers warranties of one to three years, depending on the
specific products and terms of the purchase agreement. The company’s typical
warranties require it to repair or replace defective products during the
warranty period at no cost to the customer. Costs related to original warranties
are accrued at the time of shipment, based upon estimates of expected rework and
warranty costs to be incurred. Costs associated with separately priced extended
warranties are expensed as incurred.
Revenue
recognition
For
products in which software is incidental, the company recognizes revenue when
persuasive evidence of an arrangement exists, the product has been delivered,
the price is fixed or determinable, and collection of the resulting receivable
is reasonably assured. Provisions are made for estimated returns,
warranties and support obligations.
For
products in which software is not incidental, revenues are separated into two
categories: product and post-contract customer support (PCS) revenues, based
upon vendor-specific objective evidence of fair value. Product revenues for
these sales are recognized as described above. PCS revenues are deferred and
recognized ratably over the years of the support arrangement. PCS revenues are
recognized at the time the product is delivered when provided substantially
within one year of delivery, the costs of providing this support are
insignificant (and accrued at the time of delivery), and no (or infrequent)
software upgrades or enhancements are provided.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Maintenance
contracts generally include the right to unspecified upgrades and enhancements
on a when-and-if available basis and ongoing customer support. Revenue from
these contracts is recognized ratably over the terms of the maintenance
contracts on a straight-line basis.
Revenue
for extended warranties is recognized on a straight-line basis over the warranty
period.
For all
sales, the company uses a binding purchase order as evidence that a sales
arrangement exists.
Delivery
generally occurs when the product is handed over to a transporter for
shipment.
At the
time of the transaction, the company assesses whether the price associated with
its revenue transaction is fixed or determinable and whether or not
collection is reasonably assured. The company assesses whether the price is
fixed or determinable based on the payment terms associated with the
transaction. The company assesses collection based on a number of
factors, including past transaction history and the creditworthiness of the
customer. Generally, collateral or other security is not requested from
customers.
Most
sales arrangements do not generally include acceptance clauses. However, when a
sales arrangement does include an acceptance provision, acceptance occurs
upon the earliest of receipt of a written customer acceptance or expiration of
the acceptance period. For these sales arrangements, the sale is recognized when
acceptance occurs.
Advertising
costs
Advertising
costs are expensed as incurred.
Government
grants
Grants
related to operating expenses are included in earnings when the related expenses
are incurred. Grants related to capital expenditures are deducted from the
related assets. Grants are included in earnings or deducted from the related
assets, provided there is reasonable assurance that the company has complied and
will comply with all the conditions related to the grant.
Research
and development expenses
All
expenses related to research, as well as development activities that do not meet
generally accepted criteria for deferral are expensed as incurred, net of
related tax credits and government grants. Development expenses that meet
generally accepted criteria for deferral, in accordance with the CICA Handbook
Section 3450, “Research and Development”, are capitalized, net of related tax
credits and government grants, and are amortized against earnings over the
estimated benefit period. Research and development expenses are mainly comprised
of salaries and related expenses, material costs as well as fees paid to
third-party consultants.
As at
August 31, 2009, the company had not deferred any development
costs.
Income
taxes
The
company provides for income taxes using the liability method of tax allocation.
Under this method, future income tax assets and liabilities are determined based
on deductible or taxable temporary differences between financial statement
values and tax values of assets and liabilities as well as the carry forward of
unused tax losses and deductions, using substantively enacted income tax rates
expected to be in effect for the years in which the assets are expected
to be realized or the liabilities to be settled.
The
company establishes a valuation allowance against future income tax assets if,
based on available information, it is more likely than not that some
or all of the future income tax assets will not be realized.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Earnings
per share
Basic
earnings per share are determined using the weighted average number of common
shares outstanding during the year.
Diluted
earnings per share are determined using the weighted average number of common
shares outstanding during the year, plus the effect of dilutive potential common
shares outstanding during the year. This method requires that diluted earnings
per share be calculated (using the treasury stock method) as if all dilutive
potential common shares had been exercised at the latest at the beginning of the
year or on the date of issuance, as the case may be, and that the funds obtained
thereby (plus an amount equivalent to the unamortized portion of related
stock-based compensation costs) be used to purchase common shares of the
company at the average market price of the common shares during the
year.
Stock-based
compensation costs
The
company accounts for stock-based compensation on stock options, restricted share
units and deferred share units, using the fair value-based method. The company
accounts for stock-based compensation on stock appreciation rights, using the
intrinsic value method. Stock-based compensation costs are amortized to expense
over the vesting periods.
New
accounting standards and pronouncements
Adopted
in fiscal 2009
In
December 2006, the Canadian Institute of Chartered Accountants (CICA) issued
three new sections, which provide a complete set of disclosure and
presentation requirements for financial instruments: Section 3862, “Financial
Instruments − Disclosures”; Section 3863, “Financial
Instruments − Presentation”; and Section 1535, “Capital
Disclosures”.
Section
3862 replaces the disclosure portion of Section 3861, “Financial
Instruments − Disclosure and Presentation”. The new standard
places increased emphasis on disclosures regarding risks associated with both
recognized and unrecognized financial instruments and how these risks are
managed. It is also intended to remove any duplicate disclosures and simplify
the disclosures about concentrations of risk, credit risk, liquidity risk and
price risk previously found in Section 3861.
Section
3863 carries forward the presentation requirements from Section 3861,
unchanged.
Section
1535 applies to all entities, regardless of whether they have financial
instruments or are subject to external capital requirements. The new section
requires disclosure of information about an entity’s objectives, policies and
processes for managing capital, as well as quantitative data about capital and
whether the entity has complied with any capital requirements.
The
company adopted these new standards on September 1, 2008 (notes 5 and
6).
In June
2007, the CICA issued Section 3031, “Inventories”. This standard requires the
measurement of inventories at the lower of cost and net realizable value and
includes guidance on the determination of cost, including allocation of
overheads and other costs to inventory. The standard also requires the
consistent use of either first-in, first-out (FIFO) or weighted average cost
formula to measure the cost of inventories and requires the reversal of previous
write-downs to net realizable value when there is a subsequent increase in the
value of inventories. The new standard applies to fiscal years beginning
on or after January 1, 2008. The company adopted this new standard on
September 1, 2008, and its adoption had no material measurement effect on
the consolidated financial statements. The additional disclosure is shown in
note 7.
In June
2007, the CICA amended Section 1400, “General Standards of Financial Statement
Presentation”, to include new requirements regarding an entity’s ability to
continue as a going concern. These amendments apply to fiscal years beginning on
or after January 1, 2008. The company adopted these amendments on September 1,
2008, and their adoption had no material effect on the consolidated financial
statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
In
January 2009, the CICA issued Emerging Issues Committee 173 (EIC-173), “Credit
Risk and the Fair Value of Financial Assets and Financial Liabilities”. This
abstract clarifies that an entity’s own credit risk and the credit risk of its
counterparty should be taken into account in determining the fair value of
financial assets and liabilities. The company adopted this standard on January
20, 2009, and its adoption had no material effect on the consolidated financial
statements.
To
be adopted after fiscal 2009
In
February 2008, the CICA issued Section 3064, “Goodwill and Intangible Assets”,
which supersedes Section 3062, “Goodwill and Other Intangible Assets” and
Section 3450, “Research and Development Costs”. Various changes have been made
to other sections of the CICA Handbook for consistency purposes. Section 3064
establishes standards for the recognition, measurement, presentation and
disclosure of goodwill subsequent to its initial recognition and of intangible
assets by profit-oriented enterprises. Standards concerning goodwill remain
unchanged from the standards included in Section 3062. This new section
applies to fiscal years beginning on or after October 1, 2008. The company will
adopt this new standard on September 1, 2009, and has not yet determined the
effects its adoption will have on the consolidated financial
statements.
In
January 2009, the CICA issued Section 1582, “Business Combinations”, which
replaces Section 1581, “Business Combinations”. This new section establishes the
standards for the accounting of business combinations and states that all assets
and liabilities of an acquired business will be recorded at fair value.
Obligations for contingent consideration and contingencies will also be recorded
at fair value at the acquisition date. The standard also states that
acquisition-related costs will be expensed as incurred and that restructuring
charges will be expensed in the periods after the acquisition date. This
standard applies prospectively to business combinations with acquisition dates
on or after January 1, 2011; earlier adoption is permitted.
In
January 2009, the CICA issued Section 1601, “Consolidated Financial Statements”,
which replaces Section 1600, “Consolidated Financial Statements”, and
establishes the standards for preparing consolidated financial statements. This
new section applies to fiscal years beginning on or after January 1, 2011;
earlier adoption is permitted. The company has not yet determined the impact
that adopting this standard will have on the consolidated financial
statements.
In
January 2009, the CICA issued Section 1602, “Non-controlling Interests”, which
establishes standards for the accounting of non-controlling interests of a
subsidiary in the preparation of consolidated financial statements subsequent to
a business combination. This new section applies to fiscal years beginning on or
after January 1, 2011; earlier adoption is permitted as of the beginning of
a fiscal year.
Should
the company decide to adopt one of these three new sections ealier, it must
adopt all three on the same date.
In June
2009, the CICA amended section 3862, "Financial Instruments − Disclosures", to
include enhanced disclosures on liquidity risk of financial instruments and
new disclosures on fair value measurements of financial instruments.
The amendments apply to fiscal years ending after September 30, 2009, with
early adoption permitted. The company will adopt these amendments on September
1, 2010, and has not yet determined the effects its adoption will have on
the consolidated financial statements.
3 Business
Combinations
Navtel
Communications Inc.
On March
26, 2008, the company acquired all issued and outstanding shares of Navtel
Communications Inc. Based in Toronto, Canada, Navtel Communications Inc.
was a privately held company specializing in tests for next-generation Internet
protocol networks. On March 26, 2008, Navtel Communications Inc. was liquidated
into the parent company.
This
acquisition was settled for a total cash consideration of $11,477,000, or
$11,332,000 net of $145,000 of cash acquired. The total consideration included
acquisition-related costs of $172,000.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
This
acquisition was accounted for using the purchase method and, consequently, the
results of operations of the acquired business have been included in the
consolidated financial statements of the company since March 26, 2008, being the
date of acquisition.
The
purchase price, including acquisition-related costs, was allocated based on the
estimated fair value of acquired net assets at the date of acquisition as
follows:
|
Assets
acquired, net of cash acquired
|
||||
|
Accounts
receivable
|
$ | 776 | ||
|
Inventories
|
447 | |||
|
Other
current assets
|
320 | |||
|
Tax
credits
|
7,074 | |||
|
Core
technology
|
2,919 | |||
|
Future
income tax assets
|
8,586 | |||
|
Current
liabilities assumed
|
||||
|
Accounts
payable and accrued liabilities
|
(431 | ) | ||
|
Deferred
revenue
|
(523 | ) | ||
|
Future
income tax liabilities
|
(2,737 | ) | ||
|
Net
identifiable assets acquired
|
16,431 | |||
|
Purchase
price, net of cash acquired
|
11,332 | |||
|
Excess
of the fair value of net identifiable assets acquired over the purchase
price
|
$ | (5,099 | ) | |
The
excess of the fair value of the net identifiable assets acquired over the
purchase price in the amount of $5,099,000 has been eliminated in part by fully
reducing the value assigned to acquired core technology and related future
income tax liabilities. The remaining excess in the amount of $3,036,000 has
been presented as an extraordinary gain in the statement of earnings for the
year ended August 31, 2008. The basic and diluted extraordinary gain per share
amounted to $0.05 for the year ended August 31, 2008.
This
business reports to the Telecom Division.
Brix
Networks Inc. (renamed EXFO Service Assurance Inc.)
On April
22, 2008, the company acquired all issued and outstanding shares of Brix
Networks Inc. (renamed EXFO Service Assurance Inc.). Based in the Boston, MA
area, Brix Networks Inc. was a privately held company offering VoIP and IPTV
test solutions across the three areas that most affect the success of a
real-time service: signaling quality (signaling path performance), delivery
quality (media transport performance) and content quality (overall quality of
experience).
This
acquisition was settled for a cash consideration of $29,696,000, or $29,684,000
net of $12,000 of cash acquired, plus a contingent cash consideration of
$2,414,000; this contingent cash consideration was paid in fiscal 2009 based
upon the achievement of a certain bookings volume during the 12 months following
the acquisition. The amount paid for the contingent cash consideration increased
goodwill.
The
purchase price allocation took into account severance expenses of $497,000 (note
4) for the termination of employees of the acquired business.
This
acquisition was accounted for using the purchase method and, consequently, the
results of operations of the acquired business have been included in the
consolidated financial statements of the company since April 22, 2008, being the
date of acquisition.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
purchase price, including acquisition-related costs, was allocated based on the
estimated fair value of acquired net assets at the date of acquisition as
follows:
|
Assets
acquired, net of cash acquired
|
||||
|
Accounts
receivable
|
$ | 1,106 | ||
|
Inventories
|
1,229 | |||
|
Other
current assets
|
488 | |||
|
Capital
assets
|
1,097 | |||
|
Core
technology
|
13,765 | |||
|
Future
income tax assets
|
1,641 | |||
|
Current
liabilities assumed
|
||||
|
Accounts
payable and accrued liabilities
|
(2,565 | ) | ||
|
Deferred
revenue
|
(2,445 | ) | ||
|
Net
identifiable assets acquired
|
14,316 | |||
|
Goodwill
|
15,368 | |||
|
Purchase
price, net of cash acquired
|
$ | 29,684 | ||
Intangible
assets are amortized on a straight-line basis over their estimated useful life
of five years.
Future
income tax assets at the acquisition date amounted to $13,701,000 and were
mainly comprised of net operating losses and research and development expenses
carried forward. A valuation allowance of $8,195,000 was recorded against these
assets at the acquisition date. In the event that the company would reverse a
portion or all of the valuation allowance, the amount of such reversal would
reduce the amount of goodwill recognized at the date of
acquisition.
This
business, including acquired goodwill, reports to the Telecom Division. Acquired
goodwill is not deductible for tax purposes.
4 Special
Charges
Impairment
of goodwill
Fiscal
2009
In the
third quarter of fiscal 2009, the company performed its annual impairment test
for goodwill for all reporting units. Recoverability of goodwill is determined
at the reporting unit level, using a two-step approach. First, the carrying
value of the reporting units is compared to their fair value. If the
carrying value of a reporting unit exceeds its fair value, the second step is
performed to determine the amount of the impairment loss. Following the decrease
in the company’s stock price in June 2009, the company came to the
conclusion that the carrying value of one of its reporting units exceeded its
fair value, and it recorded an impairment charge of $21,713,000 in fiscal
2009, to bring the goodwill of this reporting unit to its fair value.
This reporting unit reports to the Telecom Division.
This
impairment resulted in a future income tax recovery of $2,070,000.
Restructuring
charges
Fiscal
2009
During
fiscal 2009, the company implemented a restructuring plan to align its cost
structure to the current economic and market conditions. Under that plan, the
company recorded charges of $1,171,000 in severance expenses for the
65 employees who were terminated throughout the company. These charges are
included in the restructuring charges in the statement of earnings for the year
ended August 31, 2009. As at August 31, 2009, the accrued liabilities related to
the severance expenses amounted to $24,000.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
following tables summarize changes in restructuring charges payable since August
31, 2006:
Year
ended August 31, 2009
|
Balance as at
August 31, 2008
|
Additions
|
Payments
|
Balance as at
August 31, 2009
|
|||||||||||||
|
Fiscal
2009 plan
|
||||||||||||||||
|
Severance
expenses
|
$ | − | $ | 1,171 | $ | (1,147 | ) | $ | 24 | |||||||
|
Fiscal
2008 plan
|
||||||||||||||||
|
Severance
expenses (note 3)
|
292 | − | (292 | ) | − | |||||||||||
|
Total
for all plans (note 11)
|
$ | 292 | $ | 1,171 | $ | (1,439 | ) | $ | 24 | |||||||
Year
ended August 31, 2008
|
Balance as at
August 31, 2007
|
Additions
|
Payments
|
Balance as at
August 31, 2008
|
|||||||||||||
|
Fiscal
2008 plan (notes 3 and 11)
|
||||||||||||||||
|
Severance
expenses
|
$ | − | $ | 497 | $ | (205 | ) | $ | 292 | |||||||
Year
ended August 31, 2007
|
Balance as at
August 31, 2006
|
Additions
|
Payments
|
Balance as at
August 31, 2007
|
|||||||||||||
|
Fiscal
2006 plan
|
||||||||||||||||
|
Severance
expenses
|
$ | 631 | $ | − | $ | (631 | ) | $ | − | |||||||
|
Fiscal
2003 plan
|
||||||||||||||||
|
Exited
leased facilities
|
60 | − | (60 | ) | − | |||||||||||
|
Total
for all plans
|
$ | 691 | $ | − | $ | (691 | ) | $ | − | |||||||
5 Capital
Disclosures
The
company is not subject to any external restrictions on its capital.
The
company’s objectives when managing capital are:
|
·
|
To
maintain a flexible capital structure, which optimizes the cost of capital
at acceptable risk;
|
|
·
|
To
sustain future development of the company, including research and
development activities, market development, and potential acquisitions of
complementary businesses or products;
and
|
|
·
|
To
provide the company’s shareholders with an appropriate return on their
investment.
|
The
company defines its capital as shareholders’ equity, excluding accumulated other
comprehensive income. Accumulated other comprehensive income’s main components
are the cumulative foreign currency translation adjustment, which is the result
of the translation of the company’s consolidated financial statements into
US dollars (the reporting currency) as well as after-tax unrealized gains
(loss) on forward exchange contracts.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
capital of the company amounted to $208,506,000 and $166,513,000 as at August
31, 2008 and 2009, respectively.
Of the
capital, as at August 31, 2009, an amount of $69,716,000 represented cash and
short-term investments ($87,540,000 as at August 31, 2008), a portion
of which can be considered in excess of the company’s current and expected needs
(except for potential acquisitions of businesses). The company has
consequently been repurchasing shares from the open market via a normal course
issuer bid through the facilities of the Toronto Stock Exchange and NASDAQ.
Furthermore, on December 18, 2008, pursuant to a substantial issuer bid
(note 14), the company purchased for cancellation 7,692,307 subordinate
voting shares for an aggregate purchase price of CA$30,000,000 (US$24,879,000),
plus related fees of $576,000.
6 Financial
Instruments
Market
risk
Currency
risk
The
principal measurement currency of the company is the Canadian dollar. The
company is exposed to currency risks as a result of its export sales
of products manufactured in Canada and China, the majority of which are
denominated in US dollars and euros. These risks are partially hedged
by forward exchange contracts (US dollars) and certain operating expenses (US
dollars and euros).
As at
August 31, 2009, the company held contracts to sell US dollars for Canadian
dollars at various forward rates, which are summarized as follows:
|
Expiry
dates
|
Contractual
amounts
|
Weighted
average contractual
forward
rates
|
|||
|
September
2009 to August 2010
|
$ 27,600
|
1.1019
|
|||
|
September
2010 to August 2011
|
14,600
|
1.1221
|
|||
|
September
2011
|
1,000
|
1.1278
|
|||
|
Total
|
$ 43,200
|
1.1093
|
|||
These
contracts are designated and accounted for as cash flow hedges.
The fair
value of forward exchange contracts, which represents the amount that the
company would receive or pay to settle the contracts based on the forward
exchange rate at period end, amounted to net gains of $62,000 as at August 31,
2008 and net gains of $530,000
as at August 31, 2009.
As at
August 31, 2009, forward exchange contracts, in the amount of
$874,000, are presented as current assets in other receivable in the balance
sheet, forward exchange contracts, in the amount of $428,000, are presented
as long-term assets in forward exchange contracts in the balance sheet, and
forward exchange contracts, in the amount of $704,000, are presented
as current liabilities in the accounts payable and accrued liabilities in the
balance sheet (note 11). As at August 31, 2008, forward
exchange contracts, in the amount of $614,000, are presented as current assets
in other receivable in the balance sheet and forward exchange contracts, in the
amount of $714,000, are presented as current liabilities in the
accounts payable and accrued liabilities in the balance sheet (note
11).
Based on
the portfolio of forward exchange contracts as at August 31, 2009, the company
estimates that the portion of the unrealized gains on these contracts as of that
date, which will be realized and reclassified from accumulated other
comprehensive income to net earnings over the next 12 months, amounts to
$170,000.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
following table summarizes significant financial assets and liabilities that are
subject to currency risk as at August 31, 2009:
|
Carrying/nominal
amount
(in
thousands
of
US dollars)
|
Carrying/nominal
amount
(in
thousands
of
euros)
|
|||||||
|
Financial
assets
|
||||||||
|
Cash
|
$ | 6,040 | € | 779 | ||||
|
Accounts
receivable
|
17,402 | 2,642 | ||||||
| 23,442 | 3,421 | |||||||
|
Financial
liabilities
|
||||||||
|
Accounts
payable and accrued liabilities
|
5,718 | 332 | ||||||
|
Forward
exchange contracts
|
5,600 | − | ||||||
| 11,318 | 332 | |||||||
|
Net
exposure
|
$ | 12,124 | € | 3,089 | ||||
The
period-end value of the Canadian dollar compared to the US dollar was CA$1.0967
= US$1.00 as at August 31, 2009.
The
period-end value of the Canadian dollar compared to the euro was CA$1.5741 =
€1.00 as at August 31, 2009.
The
following sensitivity analysis summarizes the effect that a change in the value
of the Canadian dollar (compared to US dollar and euro) on financial
assets and liabilities denominated in US dollars and euros, would have on net
earnings, net earnings per diluted share and comprehensive income, based on the
foreign exchange rates as at August 31, 2009:
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would decrease (increase) net earnings by
$1,205,000 or $0.02 per diluted
share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the euro would decrease (increase) net earnings by $445,000,
or $0.01 per diluted share.
|
|
·
|
An
increase (decrease) of 10% in the period-end value of the Canadian dollar
compared to the US dollar would increase (decrease) comprehensive income
by $2,500,000.
|
The
impact of the change in the value of the Canadian dollar compared to the US
dollar and the euro on these financial assets and liabilities is recorded in the
foreign exchange gain or loss line item in the consolidated statements of
earnings, except for outstanding forward contracts, which impact is recorded in
comprehensive income. The change in the value of the Canadian dollar
compared to the US dollar and the euro also impacts the company’s balances of
income tax and tax credits recoverable or payable and future income tax
assets and liabilities related to integrated foreign subsidiaries; this may
result in additional and significant foreign exchange gain or loss. However,
these assets and liabilities are not considered financial instruments and are
excluded from the sensitivity analysis above. The foreign exchange rate
fluctuations also flow through the statements of earnings line items, as a
significant portion of the company’s operating expenses is denominated
in Canadian dollars, and the company reports its results in US dollars;
that effect is not reflected in the sensitivity
analysis above.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Interest
rate risk
The
company is exposed to interest rate risks through its short-term investments.
Short-term investments consist of the following:
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Commercial
paper denominated in Canadian dollars, bearing interest at annual rates of
0.2% to 0.6% in 2009 and 2.80% to 3.32% in 2008, maturing between
September 2009 and December 2009 in fiscal 2009, and September 2008 and
February 2009 in fiscal 2008
|
$ | 45,109 | $ | 81,626 | ||||
|
Bankers
acceptance denominated in Canadian dollars, bearing interest at an annual
rate of 0.2%, maturing between September and October 2009
|
13,996 | − | ||||||
| $ | 59,105 | $ | 81,626 | |||||
The fair
value of short-term investments based on market value amounted to $81,626,000
and $59,105,000 as at August 31, 2008 and 2009,
respectively.
An
increase (decrease) of 0.5% in the interest rate of the company’s short-term
investments would increase (decrease) net earnings by $204,000, or $0.00 per
diluted share.
Due to
their short-term maturity of usually three months or less, the company’s
short-term investments are not subject to significant fair value interest
rate risk. Accordingly, change in fair value has been nominal to the degree that
amortized cost has historically approximated the fair value. Any change in fair
value of the company’s short-term investments, all of which are
classified as available for sale, is recorded in other comprehensive
income.
Cash,
accounts receivable and accounts payable and accrued liabilities are
non-interest-bearing financial assets and liabilities. Accounts receivable
and accounts payable are financial instruments whose carrying value approximates
their fair value due to their short-term maturity.
Credit
risk
Financial
instruments that potentially subject the company to credit risk consist
primarily of cash, short-term investments, accounts receivable and forward
exchange contracts (with a positive fair value). As at
August 31, 2009, the company’s short-term investments consist of debt
instruments issued by 11 (10 as at August 31, 2008) high-credit quality
corporations and trusts. None of these debt instruments are expected
to be affected by a significant liquidity risk, and none of them
represent asset-backed commercial paper. The company’s cash and forward exchange
contracts are held with or issued by high-credit quality financial
institutions; therefore, the company considers the risk of non-performance on
these instruments to be limited.
Generally,
the company does not require collateral or other security from customers for
trade accounts receivable; however, credit is extended to customers following an
evaluation of creditworthiness. In addition, the company performs ongoing credit
reviews of all its customers and establishes an allowance for doubtful accounts
receivable when accounts are determined to be uncollectible. Allowance for
doubtful accounts amounted to $305,000 and $1,220,000
as at August 31, 2008 and 2009, respectively. Bad debt
expense (recovery) amounted to $(52,000), $148,000 and $967,000 for the years
ended August 31, 2007, 2008 and 2009, respectively.
For the
years ended August 31, 2007 and 2009, one customer represented more than
10% of global sales with 14.7% ($22,480,000) and 11.6% ($20,049,000),
respectively. This customer purchased from the Telecom Division. In fiscal 2008,
no customer represented more than 10% of sales.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
following table summarizes the age of trade accounts receivable as at
August 31 2009:
|
Current
|
$ | 16,489 | ||
|
Past
due, 0 to 30 days
|
3,551 | |||
|
Past
due, 31 to 60 days
|
1,464 | |||
|
Past
due, more than 60 days
|
2,662 | |||
|
Total
accounts receivable
|
24,166 | |||
|
Allowance
for doubtful accounts
|
(1,220 | ) | ||
| $ | 22,946 | |||
Changes
in the allowance for doubtful accounts are as follows:
|
Years
ended August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
– Beginning of year
|
$ | 305 | $ | 206 | ||||
|
Addition
charged to earnings
|
979 | 204 | ||||||
|
Write-off
of uncollectible accounts
|
(45 | ) | (53 | ) | ||||
|
Recovery
of uncollectible accounts
|
(19 | ) | (52 | ) | ||||
|
Balance
– End of year
|
$ | 1,220 | $ | 305 | ||||
Liquidity
risk
Liquidity
risk is defined as the potential that the company cannot meet its obligations as
they become due.
The
following table summarizes the contractual maturity of the company’s financial
liabilities as at August 31, 2009:
|
0-12
months
|
13-24
months
|
25-36
months
|
||||||||||
|
Accounts
payable and accrued liabilities
|
$ | 20,946 | $ | − | $ | − | ||||||
|
Forward
exchange contracts
|
||||||||||||
|
Outflow
|
27,600 | 14,600 | 1,000 | |||||||||
|
Inflow
|
(27,730 | ) | (14,938 | ) | (1,028 | ) | ||||||
|
Total
|
$ | 20,816 | $ | (338 | ) | $ | (28 | ) | ||||
In
addition, the company has a share repurchase program that may require additional
cash outflows during fiscal 2010 and 2011 (note 14). Also, the company has an
outstanding contingent consideration payable upon the acquisition of assets,
which is not yet recorded in the financial statements and may require additional
cash outflows in upcoming years (note 13).
As at
August 31, 2009, the company had $69,716,000 in cash and short-term
investments and $25,698,000 in accounts receivable. In addition to these
financial assets, the company has unused available lines of credit totaling
$14,169,000 for working capital and other general corporate purposes, including
potential acquisitions and its share repurchase program as well as unused
lines of credit of $16,465,000 for foreign currency exposure related to its
forward exchange contracts (note 10).
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
7 Inventories
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 14,497 | $ | 17,651 | ||||
|
Work
in progress
|
1,955 | 1,961 | ||||||
|
Finished
goods
|
14,411 | 15,268 | ||||||
| $ | 30,863 | $ | 34,880 | |||||
The cost
of sales comprised almost exclusively the amount of inventory recognized as an
expense during the reporting periods, except for the related amortization, which
is shown separately in operating expenses.
Inventory
write-down amounted to $3,586,000, $2,651,000 and $3,332,000 for the years ended
August 31, 2007, 2008 and 2009, respectively.
On an
ongoing basis and when technically possible, the company adjusts the design of
its products to reuse excess inventory; over the past few years, the company
experienced higher sales than expected on some product lines and consumed such
excess inventory. Consequently, it was able to reuse excess inventories that
were written off in previous years. Excess inventory reuse accounted for
$1,700,000, $1,200,000 and $154,000 for the years ended August 31, 2007, 2008
and 2009, respectively.
8 Property,
Plant and Equipment
|
As
at August 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Cost
|
Accumulated
amortization
|
Cost
|
Accumulated
amortization
|
|||||||||||||
|
Land
and land improvements
|
$ | 2,224 | $ | 1,157 | $ | 2,295 | $ | 1,184 | ||||||||
|
Buildings
|
12,374 | 4,354 | 12,319 | 3,985 | ||||||||||||
|
Equipment
|
37,824 | 28,852 | 36,423 | 27,083 | ||||||||||||
|
Leasehold
improvements
|
4,751 | 3,710 | 3,698 | 2,608 | ||||||||||||
| 57,173 | $ | 38,073 | 54,735 | $ | 34,860 | |||||||||||
|
Less:
|
||||||||||||||||
|
Accumulated
amortization
|
38,073 | 34,860 | ||||||||||||||
| $ | 19,100 | $ | 19,875 | |||||||||||||
As at
August 31, 2007, 2008 and 2009, unpaid purchases of property, plant and
equipment amounted to $464,000, $414,000 and $348,000,
respectively.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
9 Intangible
Assets and Goodwill
Intangible
assets
|
As
at August 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Cost
|
Accumulated
amortization
|
Cost
|
Accumulated
amortization
|
|||||||||||||
|
Core
technology
|
$ | 63,490 | $ | 49,316 | $ | 62,933 | $ | 45,981 | ||||||||
|
Software
|
9,193 | 6,508 | 8,631 | 5,638 | ||||||||||||
| 72,683 | $ | 55,824 | 71,564 | $ | 51,619 | |||||||||||
|
Less:
|
||||||||||||||||
|
Accumulated
amortization
|
55,824 | 51,619 | ||||||||||||||
| $ | 16,859 | $ | 19,945 | |||||||||||||
Estimated
amortization expense for intangible assets in each of the next five fiscal years
amounts to $5,564,000 in 2010, $4,355,000 in 2011, $3,442,000 in 2012,
$2,392,000 in 2013 and $416,000 in 2014.
Additions
to intangible assets for the years ended August 31, 2007, 2008 and 2009 amounted
to $1,156,000, $14,828,000 and $2,600,000, respectively.
Goodwill
Changes
in the carrying value of goodwill are as follows:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
Telecom
Division
|
Life
Sciences and Industrial Division
|
Total
|
|||||||||||||||||||
|
Balance
– Beginning of year
|
$ | 37,866 | $ | 4,787 | $ | 42,653 | $ | 23,622 | $ | 4,815 | $ | 28,437 | ||||||||||||
|
Addition
from business combinations (note 3)
|
2,414 | − | 2,414 | 15,368 | − | 15,368 | ||||||||||||||||||
|
Impairment
(note 4)
|
(21,713 | ) | − | (21,713 | ) | − | − | − | ||||||||||||||||
|
Foreign
currency translation adjustment
|
(727 | ) | (149 | ) | (876 | ) | (1,124 | ) | (28 | ) | (1,152 | ) | ||||||||||||
|
Balance
– End of year (note 19)
|
$ | 17,840 | $ | 4,638 | $ | 22,478 | $ | 37,866 | $ | 4,787 | $ | 42,653 | ||||||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
10 Credit
Facilities
The
company has lines of credit that provide for advances of up to CA$15,000,000
(US$13,677,000) and up to $2,000,000. These lines of credit bear
interest at the Canadian prime rate. As at August 31, 2009, an amount
of CA$6,040,356 (US$5,508,000) was drawned from theses lines of credit for
letters of guarantee (note 13). These lines of credit are subject to a
negative pledge whereby the company has agreed with the bank not to pledge its
assets to any other party.
The
company also has another line of credit, which provides for advances of up to
US$4,000,000. This line of credit bears interest at the Chinese prime rate for
advances made in CNY and at LIBOR plus 3.5% for advances made in US dollars.
As at August 31, 2009, this line of credit was
unused.
Finally,
the company has lines of credit of $19,935,000 for the foreign currency risk
exposure related to its forward exchange contracts (note 6). As at August 31,
2009, an amount of $3,470,000 was reserved from these lines of
credit.
These
lines of credit are renewable annually and unsecured.
11 Accounts
Payable and Accrued Liabilities
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Trade
|
$ | 9,063 | $ | 10,303 | ||||
|
Salaries
and social benefits
|
8,863 | 8,888 | ||||||
|
Warranty
|
699 | 974 | ||||||
|
Commissions
|
647 | 761 | ||||||
|
Restructuring
charges (note 4)
|
24 | 292 | ||||||
|
Forward
exchange contracts (note 6)
|
704 | 714 | ||||||
|
Other
|
1,650 | 2,781 | ||||||
| $ | 21,650 | $ | 24,713 | |||||
Changes
in the warranty provision are as follows:
|
Years
ended August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Balance
– Beginning of year
|
$ | 974 | $ | 800 | ||||
|
Provision
|
590 | 655 | ||||||
|
Addition
from business combinations
|
− | 175 | ||||||
|
Settlements
|
(865 | ) | (656 | ) | ||||
|
Balance
– End of year
|
$ | 699 | $ | 974 | ||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
12 Commitments
The
company entered into operating leases for certain of its premises and equipment,
which expire at various dates through August 2015. As at August 31, 2009,
minimum rental expenses of these operating leases in each of the next five years
will amount to $3,262,000 in 2010, $1,567,000 in 2011, $741,000 in 2012,
$250,000 in 2013 and $189,000 in 2014. Total commitments for these operating
leases amount to $6,176,000.
For the
years ended August 31, 2007, 2008 and 2009, rental expenses amounted to
$1,847,000, $2,427,000 and $2,736,000, respectively.
13 Contingencies
a) Class
action
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 predetermined prices.
On April
19, 2002, the plaintiffs filed an amended complaint containing master
allegations against all of the defendants in all of the 310 cases included
in this class action and also filed an amended complaint containing allegations
specific to four of the company’s underwriters, the company and two of its
executive officers. In addition to the allegations mentioned above, the amended
complaint alleges that the underwriters (i) used their analysts to manipulate
the stock market; and (ii) implemented schemes that allowed issuer insiders
to sell their shares rapidly after an initial public offering and benefit from
high market prices. As concerns the company and its two executive officers in
particular, the amended complaint alleges that (i) the company’s registration
statement was materially false and misleading because it failed to disclose
the additional commissions and compensation to be received by underwriters; (ii)
the two named executive officers learned of or recklessly disregarded the
alleged misconduct of the underwriters; (iii) the two named executive officers
had motive and opportunity to engage in alleged wrongful conduct due to personal
holdings of the company’s stock and the fact that an alleged artificially
inflated stock price could be used as currency for acquisitions; and (iv) the
two named executive officers, by virtue of their positions with the company,
controlled the company and the contents of the registration statement and had
the ability to prevent its issuance or cause it to be corrected. The plaintiffs
in this suit seek an unspecified amount for damages suffered.
In July
2002, the issuers filed a motion to dismiss the plaintiffs’ amended complaint
and a decision was rendered on February 19, 2003. Only one of the claims
against the company was dismissed. On October 8, 2002, the claims against
its officers were dismissed pursuant to the terms of Reservation of Rights and
Tolling Agreements entered into with the plaintiffs.
In June
2004, an agreement of partial settlement was submitted to the court for
preliminary approval. The proposed partial settlement was between the
plaintiffs, the issuer defendants in the consolidated actions, the issuer
officers and directors named as defendants, and the issuers’ insurance
companies. The court granted the preliminary approval motion
on February 15, 2005, subject to certain modifications. On
August 31, 2005, the court issued a preliminary order further approving the
modifications to the settlement and certifying the settlement classes. The court
also appointed the notice administrator for the settlement and ordered that
notice of the settlement be distributed to all settlement class members by
January 15, 2006. The settlement fairness hearing occurred on
April 24, 2006, and the court reserved decision at that time.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
While the
partial settlement was pending approval, the plaintiffs continued to litigate
against the underwriter defendants. The district court directed that the
litigation proceed within a number of “focus cases” rather than in all of the
310 cases that have been consolidated. The company's case is not one
of these focus cases. On October 13, 2004, the district court
certified the focus cases as class actions. The underwriter defendants
appealed that ruling, and on December 5, 2006, the Court of Appeals for the
Second Circuit reversed the district court’s class certification
decision.
On April
6, 2007, the Second Circuit denied the plaintiffs’ petition for rehearing of
that decision and, on May 18, 2007, the Second Circuit denied the plaintiffs’
petition for rehearing en
banc. In light of the Second Circuit’s opinion, liaison counsel for all
issuer defendants, including the company, informed the court that this
settlement cannot be approved, because the defined settlement class, like the
litigation class, cannot be certified. On June 25, 2007, the district court
entered an order terminating the settlement agreement. On August 14, 2007, the
plaintiffs filed their second consolidated amended class action complaints
against the focus cases and, on September 27, 2007, again moved for class
certification. On November 12, 2007, certain defendants in the
focus cases moved to dismiss the second consolidated amended class action
complaints. On March 26, 2008, the district court denied the motions to dismiss,
except as to Section 11 claims raised by those plaintiffs who sold their
securities for a price in excess of the initial offering price and those who
purchased outside of the previously certified class period. Briefing on the
class certification motion was completed in May 2008. That motion was withdrawn
without prejudice on October 10, 2008.
On
April 2, 2009, a stipulation and agreement of settlement between the
plaintiffs, issuer defendants and underwriter defendants was submitted to the
Court for preliminary approval. The Court granted the plaintiffs’ motion for
preliminary approval and preliminarily certified the settlement classes
on June 10, 2009. The settlement fairness hearing was held
on September 10, 2009. On October 6, 2009, the Court entered an opinion
granting final approval to the settlement and directing that the Clerk of
the Court close these actions. Notices of appeal of the opinion granting final
approval have been filed. Given that the settlement remains subject to appeal as
of the date of issuance of these financial statements, the ultimate outcome
of the contingency is uncertain. However, based on the
settlement approved on October 6, 2009, and the related insurance against such
claims, management has determined the impact to its financial position and
results of operations as at and for the year ended August 31, 2009 to
be immaterial.
|
|
b)
|
Letters
of guarantee
|
As at
August 31, 2009, in the normal course of its operations, the company had
outstanding letters of guarantee in the amount of $5,508,000, which expire at
various dates through fiscal 2016. From this amount, the company had $1,108,000
worth of letters of guarantee for its own selling and purchase requirements,
which were for the most part reserved from one of the lines of credit (note 10).
The remainder in the amount of $4,400,000 was used by the company to secure its
line of credit in CNY. This line of credit was unused
as at August 31, 2009 (note 10).
|
|
c)
|
Contingent
cash consideration
|
Following
the purchase of assets in fiscal 2009, the company has a contingent cash
consideration of up to $1,000,000, payable based upon the achievement of a
certain booking volume in the next 24 months following the
purchase.
14 Share
Capital
|
Authorized –
unlimited as to number, without par value
|
|
|
Subordinate
voting and participating, bearing a non-cumulative dividend to be
determined by the Board of Directors, ranking pari passu with
multiple voting shares
|
|
|
Multiple
voting and participating, entitling to 10 votes each, bearing a
non-cumulative dividend to be determined by the Board of Directors,
convertible at the holder’s option into subordinate voting shares on a
one-for-one basis, ranking pari passu with
subordinate voting shares
|
|
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
following table summarizes the share capital activity since August 31,
2006:
|
Multiple
voting shares
|
Subordinate
voting shares
|
|||||||||||||||||||
|
Number
|
Amount
|
Number
|
Amount
|
Total amount
|
||||||||||||||||
|
Balance
as at August 31, 2006
|
37,143,000 | $ | 1 | 31,609,969 | $ | 148,920 | $ | 148,921 | ||||||||||||
|
Exercise
of stock options (note 15)
|
– | – | 250,528 | 802 | 802 | |||||||||||||||
|
Redemption
of restricted share units (note 15)
|
– | – | 1,064 | – | – | |||||||||||||||
|
Conversion
of multiple voting shares into subordinate voting shares
|
(500,000 | ) | – | 500,000 | – | – | ||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 296 | 296 | |||||||||||||||
|
Balance
as at August 31, 2007
|
36,643,000 | 1 | 32,361,561 | 150,018 | 150,019 | |||||||||||||||
|
Exercise
of stock options (note 15)
|
– | – | 18,500 | 61 | 61 | |||||||||||||||
|
Redemption
of restricted share units (note 15)
|
– | – | 65,870 | – | – | |||||||||||||||
|
Redemption
of deferred share units (note 15)
|
– | – | 20,695 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 514 | 514 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (1,682,921 | ) | (7,808 | ) | (7,808 | ) | ||||||||||||
|
Balance
as at August 31, 2008
|
36,643,000 | 1 | 30,783,705 | 142,785 | 142,786 | |||||||||||||||
|
Exercise
of stock options (note 15)
|
– | – | 27,500 | 56 | 56 | |||||||||||||||
|
Redemption
of restricted share units (note 15)
|
– | – | 106,190 | – | – | |||||||||||||||
|
Reclassification
of stock-based compensation costs to share capital upon exercise of stock
awards
|
– | – | – | 540 | 540 | |||||||||||||||
|
Redemption
of share capital
|
– | – | (8,181,093 | ) | (38,536 | ) | (38,536 | ) | ||||||||||||
|
Balance
as at August 31, 2009
|
36,643,000 | $ | 1 | 22,736,302 | $ | 104,845 | $ | 104,846 | ||||||||||||
|
|
a)
|
On
November 6, 2008, the company announced that its Board of Directors had
authorized a renewal of its share repurchase program, by way of a normal
course issuer bid on the open market, of up to 10% of its public float
(as defined by the Toronto Stock Exchange), or 2,738,518 subordinate
voting shares, at the prevailing market price. The company expects
to use cash, short-term investments or future cash flows from
operations to fund the repurchase of shares. The period of the normal
course issuer bid commenced on November 10, 2008, and will end
on November 9, 2009. All shares repurchased under the bid
are cancelled. In fiscal 2009, the company redeemed
488,786 subordinate voting shares for an aggregate net purchase
price of $1,416,000.
|
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
|
|
b)
|
On
November 10, 2008, the company announced that its Board of Directors had
authorized a substantial issuer bid (the “Offer”) to purchase for
cancellation subordinate voting shares for an aggregate purchase price not
to exceed CA$30,000,000. On December 18, 2008, pursuant to the Offer,
the company purchased for cancellation 7,692,307 subordinate voting
shares for the aggregate purchase price of CA$30,000,000 (US$24,879,000),
plus related fees of $576,000. The company used cash and short-term
investments to fund the purchase of
shares.
|
|
|
c)
|
On
November 6, 2009, the company announced that its Board of Directors had
authorized the second renewal of its share repurchase program, by way
of a normal course issuer bid on the open market, of up to 10%
of its public float (as defined by the Toronto Stock Exchange),
or 2,256,431 million subordinate voting shares, at the prevailing market
price. The company expects to use cash, short-term investments or future
cash flows from operations to fund the repurchase of shares. The period of
the normal course issuer bid will start on November 10, 2009, and will end
on November 9, 2010, or on an earlier date if the
company repurchases the maximum number of shares permitted under the bid.
The program does not require that the company repurchases any
specific number of shares, and it may be modified, suspended or
terminated at any time and without prior notice. All shares repurchased
under the bid will
be cancelled.
|
15 Stock-Based
Compensation Plans
The
maximum number of additional subordinate voting shares issuable under the
Long-Term Incentive Plan and the Deferred Share Unit Plan cannot exceed
6,306,153 shares. The maximum number of subordinate voting shares that may
be granted to any individual on an annual basis cannot exceed 5% of the
number of outstanding subordinate voting shares. The company settles stock
options and redeems restricted share units and deferred share units through the
issuance of common shares from treasury.
Long-Term
Incentive Plan
In May
2000, the company established a Stock Option Plan for directors, executive
officers and employees and those of the company’s subsidiaries, as determined by
the Board of Directors. In January 2005, the company made certain amendments to
the existing Stock Option Plan, including the renaming of the plan to Long-Term
Incentive Plan, which includes stock options and restricted share units. This
plan was approved by the shareholders of the company.
Stock
Options
The
exercise price of stock options granted under the Long-Term Incentive Plan is
the market price of the common shares on the date of grant. Stock options
granted under the plan generally expire 10 years from the date of grant and vest
over a four-year period, being the required period of service from
employees, generally with 25% vesting on an annual basis commencing on the first
anniversary of the date of grant. The Board of Directors may accelerate the
vesting of any or all outstanding stock options upon the occurrence of a change
of control.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
following table summarizes stock option activity since August 31,
2006:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
|||||||||||||||||||
|
(CA$)
|
(CA$)
|
(CA$)
|
||||||||||||||||||||||
|
Outstanding – Beginning of year
|
1,821,481 | $ | 21 | 1,929,388 | $ | 21 | 2,439,375 | $ | 20 | |||||||||||||||
|
Exercised
|
(27,500 | ) | 3 | (18,500 | ) | 3 | (250,528 | ) | 4 | |||||||||||||||
|
Forfeited
|
(1,000 | ) | 6 | (8,750 | ) | 6 | (37,869 | ) | 5 | |||||||||||||||
|
Expired
|
(126,392 | ) | 26 | (80,657 | ) | 29 | (221,590 | ) | 37 | |||||||||||||||
|
Outstanding
– End of year
|
1,666,589 | $ | 21 | 1,821,481 | $ | 21 | 1,929,388 | $ | 21 | |||||||||||||||
|
Exercisable
– End of year
|
1,660,090 | $ | 21 | 1,762,969 | $ | 21 | 1,746,699 | $ | 22 | |||||||||||||||
The
intrinsic value of stock options exercised during fiscal 2007, 2008 and 2009 was
$743,000, $43,000 and $23,000, respectively.
Expected
forfeitures are immaterial to the company and are not reflected in the table
above.
The
following table summarizes information about stock options as at August 31,
2009:
|
Stock
options outstanding
|
Stock
options exercisable
|
|||||||||||||||||||||||||||
|
Exercise price
|
Number
|
Weighted
average
exercise
price
|
Intrinsic
value
|
Weighted
average
remaining
contractual
life
|
Number
|
Weighted
average
exercise
price
|
Intrinsic
value
|
Weighted
average
remaining
contractual
life
|
||||||||||||||||||||
|
(CA$)
|
(CA$)
|
(CA$)
|
(CA$)
|
(CA$)
|
||||||||||||||||||||||||
| $2.50 | 232,625 | $ | 2.50 | $ | 184 |
3.1
years
|
232,625 | $ | 2.50 | $ | 184 |
3.1
years
|
||||||||||||||||
| $3.96 to $5.60 | 383,404 | 5.11 | – |
4.7
years
|
376,905 | 5.11 | – |
4.7
years
|
||||||||||||||||||||
| $6.22 to $9.02 | 142,516 | 6.54 | – |
4.4
years
|
142,516 | 6.54 | – |
4.4
years
|
||||||||||||||||||||
| $14.27 to $20.00 | 354,928 | 15.57 | – |
2.1
years
|
354,928 | 15.57 | – |
2.1
years
|
||||||||||||||||||||
| $29.70 to $43.00 | 401,263 | 36.54 | – |
1.2
year
|
401,263 | 36.54 | – |
1.2
year
|
||||||||||||||||||||
| $51.25 to $68.17 | 119,523 | 66.26 | – |
1.0
year
|
119,523 | 66.26 | – |
1.0
year
|
||||||||||||||||||||
| $83.66 | 32,330 | 83.66 | – |
1.0
year
|
32,330 | 83.66 | – |
1.0
year
|
||||||||||||||||||||
| 1,666,589 | $ | 20.57 | $ | 184 |
2.7
years
|
1,660,090 | $ | 20.63 | $ | 184 |
2.7
years
|
|||||||||||||||||
Restricted
Share Units (RSUs)
RSUs are
“phantom” shares that rise and fall in value based on the market price of the
company’s subordinate voting shares and are redeemable for actual subordinate
voting shares or cash at the discretion of the Board of Directors as determined
on the date of grant. Vesting dates are also established by the Board of
Directors on the date of grant. The vesting dates are subject to a minimum term
of three years and a maximum term of 10 years from the award date, being the
required period of service from employees. Fair value of RSUs equals
the market price of the common shares on the date of grant. This plan was
approved by the shareholders of the company.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
following table summarizes RSU activity since August 31, 2006:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Outstanding
– Beginning of year
|
847,791 | 488,015 | 327,877 | |||||||||
|
Granted
|
685,972 | 469,847 | 219,002 | |||||||||
|
Redeemed
|
(106,190 | ) | (65,870 | ) | (1,064 | ) | ||||||
|
Forfeited
|
(87,954 | ) | (44,201 | ) | (57,800 | ) | ||||||
|
Outstanding
– End of year
|
1,339,619 | 847,791 | 488,015 | |||||||||
None of
the RSUs outstanding, as at August 31, 2007, 2008 and 2009, were redeemable. The
weighted average grant-date fair value of RSUs granted during fiscal 2007, 2008
and 2009 amounted to $6.48, $5.46 and $2.69, respectively.
As at
August 31, 2009, the intrinsic value of RSUs outstanding was
$4,019,000.
Expected
forfeitures are immaterial to the company and are not reflected in the table
above.
As at
August 31, 2009, unrecognized stock-based compensation costs of unvested RSUs
amounted to $2,995,000. The weighted average period over which they are
expected to be recognized is 3.2 years.
Deferred
Share Unit Plan
In
January 2005, the company established a Deferred Share Unit (DSU) Plan for the
members of the Board of Directors as part of their annual retainer fees.
Each DSU entitles the Board members to receive one subordinate voting share.
DSUs are acquired on the date of grant and will be redeemed in subordinate
voting shares when the Board member ceases to be Director of the
company. This plan was approved by the shareholders of the company.
The
following table summarizes DSU activity since August 31, 2006:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Outstanding
– Beginning of year
|
79,185 | 64,718 | 43,290 | |||||||||
|
Granted
|
35,739 | 35,162 | 21,428 | |||||||||
|
Redeemed
|
− | (20,695 | ) | – | ||||||||
|
Outstanding
– End of year
|
114,924 | 79,185 | 64,718 | |||||||||
None of
the DSUs outstanding as at August 31, 2007, 2008 and 2009 were redeemable. The
weighted average grant-date fair value of DSUs granted during fiscal 2007, 2008
and 2009 amounted to $6.29, $5.14 and $3.19.
As at
August 31, 2009, the intrinsic value of DSUs outstanding was
$345,000.
Stock
Appreciation Rights Plan
In August
2001, the company established the Stock Appreciation Rights Plan for certain
employees. Under that plan, eligible employees are entitled to receive a cash
amount equivalent to the difference between the market price of the common
shares on the date of exercise and the exercise price determined on the date of
grant. Stock appreciation rights granted under the plan generally expire 10
years from the date of grant and vest over a four-year period, being the
required period of service from employees, with 25% vesting on an annual basis
commencing on the first anniversary of the date of grant. This plan was
approved by the shareholders of the company.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
following table summarizes stock appreciation rights activity since August 31,
2006:
|
Years
ended August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
Number
|
Weighted
average
exercise
price
|
|||||||||||||||||||
|
Outstanding – Beginning of year
|
30,700 | $ | 10 | 27,700 | $ | 11 | 24,500 | $ | 11 | |||||||||||||||
|
Granted
|
9,674 | 2 | 3,000 | 6 | 5,200 | 6 | ||||||||||||||||||
|
Forfeited
|
− | − | – | – | (2,000 | ) | 2 | |||||||||||||||||
|
Outstanding
– End of year
|
40,374 | $ | 8 | 30,700 | $ | 10 | 27,700 | $ | 11 | |||||||||||||||
|
Exercisable
– End of year
|
24,475 | $ | 11 | 19,550 | $ | 12 | 13,875 | $ | 15 | |||||||||||||||
The
following table summarizes information about stock appreciation rights as at
August 31, 2009:
|
Stock
appreciation
rights
outstanding
|
Stock
appreciation
rights
exercisable
|
||||||||||
|
Exercise price
|
Number
|
Weighted
average
remaining contractual
life
|
Number
|
||||||||
| $2.36 | 9,674 |
9.2
years
|
− | ||||||||
| $4.51 to $6.50 | 25,700 |
6.2
years
|
19,475 | ||||||||
| $22.25 | 2,500 |
1.4
year
|
2,500 | ||||||||
| $45.94 | 2,500 |
1.0
year
|
2,500 | ||||||||
| 40,374 |
6.3
years
|
24,475 | |||||||||
16 Other
Disclosures
Net
research and development expenses
Net
research and development expenses comprise the following:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Gross
research and development expenses
|
$ | 35,757 | $ | 32,454 | $ | 25,201 | ||||||
|
Research
and development tax credits and grants
|
(6,157 | ) | (5,587 | ) | (5,371 | ) | ||||||
|
Recognition
of previously unrecognized research and development tax credits (note
17)
|
(1,902 | ) | – | (3,162 | ) | |||||||
| $ | 27,698 | $ | 26,867 | $ | 16,668 | |||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Government
grants
Until
December 31, 2006, companies operating in the Quebec City area were eligible for
a refundable credit granted by the Quebec provincial government. This credit was
earned based on the increase of eligible production and marketing salaries
incurred in the Quebec City area at a rate of 40%. From the total amount claimed
by the company under this program, a sum of CA$1,142,000 (US$1,079,000) was
deferred in the balance sheet until the company received the final approval
of eligible salaries by the sponsor of the program. In fiscal 2007, the
sponsor of the program granted the company its final approval, and the company
recorded CA$1,142,000 (US$1,079,000) in the earnings from operations in the
statement of earnings of fiscal 2007.
Defined
contribution plans
The
company maintains separate defined contribution plans for certain eligible
employees. These plans, which are accounted for on an accrual basis, are
summarized as follows:
|
·
|
Deferred
profit-sharing plan
|
The
company maintains a plan for certain eligible employees residing in Canada,
under which the company may elect to contribute an amount equal to 2% of an
employee’s gross salary, provided that the employee has contributed at least 2%
of his gross salary to a tax-deferred registered retirement savings plan. Cash
contributions to this plan and expenses for the years ended August 31, 2007,
2008 and 2009, amounted to $419,000, $531,000 and $504,000,
respectively.
|
·
|
401K
plan
|
The
company maintains a 401K plan for eligible employees residing in the U.S. Under
this plan, the company must contribute an amount equal to 3% of an employee’s
current compensation. During the years ended August 31, 2007, 2008 and 2009, the
company recorded cash contributions and expenses totaling $166,000, $216,000 and
$356,000, respectively.
17 Income
Taxes
Fiscal
2007
During
fiscal 2007, after reviewing both available positive and negative evidence, and
because the company was in a cumulative profit position in the parent
company (Canadian federal and provinces level) and in one of its subsidiaries,
located in the United States, and also because the company expected to generate
sufficient taxable income in future years, management concluded that it was more
likely than not that future income tax assets and deferred non-refundable
research and development tax credits of the parent company and a portion of the
company’s future income tax assets in the United States would be realizable.
Consequently, it reversed a portion of its valuation allowance against future
income tax assets in the amount of $24,566,000 and recognized previously
unrecognized non-refundable research and development tax credits in the amount
of $3,162,000 (note 16). Future income tax assets recognized in 2007 were
recorded in the income tax provision, while research and development tax credits
were recorded against gross research and development expenses in the
statement of earnings for that year.
However,
in the United States (federal level), based on available positive and negative
evidence as at August 31, 2007, as well as the level and the nature of
cumulative and expected profits, the company maintained a valuation allowance
of $7,568,000 on a portion of its future income tax assets in
this tax jurisdiction because it was more likely than not that these assets
would not be recovered. These future income tax assets consisted of operating
losses carried forward.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
In other
tax jurisdictions where the company has future income tax assets, the company
was still in a cumulative loss position as at August 31, 2007, and available
negative evidence outweighed positive evidence. Consequently, for these tax
jurisdictions, the company maintained a full valuation allowance against its
future income tax assets. As at August 31, 2007, the
valuation allowance recorded by the company for these tax jurisdictions amounted
to $4,924,000 and mainly related to deferred operating losses.
Fiscal
2008
During
fiscal 2008, reductions to the Canadian federal statutory tax rate were
substantively enacted. Therefore, Canadian federal future income tax assets
decreased by $1,524,000, and generated a future income tax expense in the
same amount during the year.
In
addition, during fiscal 2008, taking into consideration these new Canadian
federal substantively enacted tax rates, the company reviewed its tax strategy
for the future use of its Canadian federal operating losses, research and
development expenses, certain timing differences and research and development
tax credits to minimize income taxes payable on future years’ taxable income.
Consequently, it amended its prior year’s income tax returns to generate a net
operating loss to be carried back to prior years, which reinstated
previously used research and development tax credits. This resulted
in an increase of its tax-related assets of $2,715,000 and an income
tax recovery of the same amount in the statement of earnings for the year
ended August 31, 2008.
Finally,
during fiscal 2008, considering the expected positive impact of the acquisitions
of Navtel Communications Inc. and Brix Networks Inc. on future years’ taxable
income at the United States (federal) level, and because actual taxable income
in the United States was greater than initially expected, management concluded
that it was more likely than not that all future income tax assets of its
existing consolidated U.S. group would be recovered. Consequently, it reversed
its valuation allowance against future income tax assets in the amount of
$7,617,000. The portion of the valuation allowance that was reversed, and that
was attributable to the effects of the Navtel Communications Inc. and Brix
Networks Inc. acquisitions, in the amount of $652,000 and $1,641,000,
respectively, was included in the purchase price allocation of the related
acquired businesses. The remainder of the reversal, in the amount of $5,324,000,
has been recorded in income taxes in the statement of earnings for the year
ended August 31, 2008.
Fiscal
2009
During
fiscal 2009, after reviewing both available positive and negative evidence, and
because the company was in a cumulative profit position in one of its
subsidiaries, and also because the company expected to generate sufficient
taxable income in future years at the subsidiary level, management concluded
that it was more likely than not that future income tax assets and deferred
non-refundable research and development tax credits of this subsidiary would be
realizable. Consequently, it reversed the valuation allowance against future
income tax assets in the amount of $372,000 and recognized previously
unrecognized non-refundable research and development tax credits in the amount
of $1,902,000 (note 16). Future income tax assets recognized in 2009 were
recorded in the income tax provision, while research and development tax credits
were recorded against gross research and development expenses in the
statement of earnings for that year.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
reconciliation of the income tax provision calculated using the combined
Canadian federal and provincial statutory income tax rate with the income tax
provision in the financial statements is as follows:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Income
tax provision at combined Canadian federal and provincial statutory tax
rate (31% in 2009 and 2008 and 32% in 2007)
|
$ | (5,060 | ) | $ | 5,290 | $ | 6,864 | |||||
|
Increase
(decrease) due to:
|
||||||||||||
|
Foreign
income taxed at different rates
|
63 | 147 | (12 | ) | ||||||||
|
Non-taxable
income
|
(211 | ) | (448 | ) | (109 | ) | ||||||
|
Non-deductible
expenses
|
5,200 | 998 | 692 | |||||||||
|
Change
in tax rates
|
– | 1,522 | 105 | |||||||||
|
Change
in tax strategy
|
– | (2,715 | ) | – | ||||||||
|
Foreign
exchange effect of translation of foreign integrated
subsidiaries
|
95 | 32 | 45 | |||||||||
|
Other
|
638 | 378 | 236 | |||||||||
|
Recognition
of previously unrecognized future income tax assets
|
(372 | ) | (5,324 | ) | (24,566 | ) | ||||||
|
Utilization
of previously unrecognized future income tax
assets
|
(937 | ) | (1,872 | ) | (4,715 | ) | ||||||
|
Unrecognized future
income tax assets on temporary deductible differences and unused tax
losses and deductions
|
845 | 3,668 | 635 | |||||||||
| $ | 261 | $ | 1,676 | $ | (20,825 | ) | ||||||
|
The
income tax provision consists of the following:
|
||||||||||||
|
Current
|
||||||||||||
|
Canada
|
$ | 62 | $ | (7,474 | ) | $ | 3,568 | |||||
|
Other
|
499 | 380 | 173 | |||||||||
| 561 | (7,094 | ) | 3,741 | |||||||||
|
Future
|
||||||||||||
|
Canada
|
2,307 | 12,111 | 3,726 | |||||||||
|
United
States
|
(2,511 | ) | 376 | 428 | ||||||||
|
Other
|
368 | (189 | ) | (74 | ) | |||||||
| 164 | 12,298 | 4,080 | ||||||||||
|
Valuation
allowance
|
||||||||||||
|
Canada
|
(1,005 | ) | 812 | (23,092 | ) | |||||||
|
United
States
|
604 | (4,545 | ) | (5,628 | ) | |||||||
|
Other
|
(63 | ) | 205 | 74 | ||||||||
| (464 | ) | (3,528 | ) | (28,646 | ) | |||||||
| (300 | ) | 8,770 | (24,566 | ) | ||||||||
| $ | 261 | $ | 1,676 | $ | (20,825 | ) | ||||||
|
Details
of the company’s income taxes:
|
||||||||||||
|
Earnings
(loss) before income taxes and extraordinary gain
|
||||||||||||
|
Canada
|
$ | (11,344 | ) | $ | 18,347 | $ | 19,634 | |||||
|
United
States
|
(5,026 | ) | (748 | ) | 1,059 | |||||||
|
Other
|
46 | (535 | ) | 757 | ||||||||
| $ | (16,324 | ) | $ | 17,064 | $ | 21,450 | ||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Significant
components of the company’s future income tax assets and liabilities are as
follows:
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Future
income tax assets
|
||||||||
|
Long-lived
assets
|
$ | 5,195 | $ | 3,696 | ||||
|
Provisions
and accruals
|
3,946 | 3,475 | ||||||
|
Deferred
revenue
|
1,659 | 1,466 | ||||||
|
Research
and development expenses
|
12,340 | 12,424 | ||||||
|
Losses
carried forward
|
28,165 | 29,890 | ||||||
| 51,305 | 50,951 | |||||||
|
Valuation
allowance
|
(15,458 | ) | (15,529 | ) | ||||
| 35,847 | 35,422 | |||||||
|
Future
income tax liabilities
|
||||||||
|
Research
and development tax credits
|
(7,118 | ) | (5,607 | ) | ||||
|
Long-lived
assets
|
(4,658 | ) | (5,135 | ) | ||||
| (11,776 | ) | (10,742 | ) | |||||
|
Future
income tax assets, net
|
$ | 24,071 | $ | 24,680 | ||||
As at
August 31, 2009, the company had available operating and capital losses in
several tax jurisdictions, against which a valuation allowance of
$13,161,000 was recorded. The valuation allowance includes $8,263,000 for which
subsequently recognized benefits will be allocated to reduce goodwill (note
3).
The
following table summarizes the year of expiry of these losses by tax
jurisdiction:
|
Canada
|
United
States
|
|||||||||||
|
Year
of expiry
|
Federal
|
Provincial
|
and
other
|
|||||||||
|
2013
|
$ | – | $ | – | $ | 604 | ||||||
|
2014
|
– | – | 451 | |||||||||
|
2015
|
1,084 | 1,084 | 291 | |||||||||
|
2019
|
– | – | 68 | |||||||||
|
2020
|
– | – | 3,471 | |||||||||
|
2021
|
– | – | 10,202 | |||||||||
|
2022
|
– | – | 9,191 | |||||||||
|
2023
|
– | – | 6,356 | |||||||||
|
2024
|
– | – | 6,706 | |||||||||
|
2025
|
– | – | 6,525 | |||||||||
|
2026
|
980 | 980 | 3,302 | |||||||||
|
2027
|
1,244 | 1,244 | 1,376 | |||||||||
|
2028
|
– | – | 2,447 | |||||||||
|
Indefinite
|
17,361 | 17,680 | 17,461 | |||||||||
| $ | 20,669 | $ | 20,988 | $ | 68,451 | |||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
As at
August 31, 2009, in addition to operating and capital losses, the company had
available research and development expenses in Canada amounting to $41,919,000
at the federal level and $31,344,000 at the provincial level; in the United
States, research and development expenses amounted to $4,680,000. A valuation
allowance of $1,872,000 was recorded against these assets for which subsequently
recognized benefits will be allocated to reduce goodwill (note 3). In
Canada, these expenses can be carried forward indefinitely against future years’
taxable income in their respective tax jurisdiction, and in the United States,
these expenses can be carried forward against taxable income of fiscal years
2013 to 2016.
Finally,
as at August 31, 2009, the company had non-refundable research and development
tax credits at the Canadian federal level in the amount of $26,432,000 that can
be carried forward against future years’ income taxes payable over the next
20 years.
18 Earnings
per Share
The
following table summarizes the reconciliation of the basic weighted average
number of shares outstanding and the diluted weighted average number of shares
outstanding:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Basic
weighted average number of shares
outstanding
(000’s)
|
61,845 | 68,767 | 68,875 | |||||||||
|
Plus
dilutive effect of:
|
||||||||||||
|
Stock
options (000’s)
|
131 | 291 | 448 | |||||||||
|
Restricted
share units (000’s)
|
311 | 181 | 179 | |||||||||
|
Deferred
share units (000’s)
|
94 | 79 | 53 | |||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
62,381 | 69,318 | 69,555 | |||||||||
|
Stock
awards excluded from the calculation of the diluted weighted average
number of shares outstanding because their exercise price was greater than
the average market price of the common shares (000’s)
|
1,602 | 1,404 | 1,207 | |||||||||
For the
year ended August 31, 2009, the diluted amount per share was the same amount as
the basic amount per share since the dilutive effect of stock options,
restricted share units and deferred share units was not included in the
calculation; otherwise, the effect would have been anti-dilutive. Accordingly,
the diluted amount per share for this period was calculated using the basic
weighted average number of shares outstanding.
19 Segment
Information
The
company is organized under two reportable segments. The Telecom Division,
which represents the company’s main business activity, offers a wide range of
innovative solutions to assess optical networks, from the core to access, as
well as next-generation IP infrastructures and related triple-play
services. The Life Sciences and Industrial Division offers solutions for
medical-device and opto-electronics assembly, fluorescence microscopy and other
life sciences sectors.
The
reporting structure reflects how the company manages its business and how it
classifies its operations for planning and measuring performance.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
The
following tables present information by segment:
|
Year
ended August 31, 2009
|
||||||||||||
|
Telecom
Division
|
Life Sciences and
Industrial Division
|
Total
|
||||||||||
|
Sales
|
$ | 153,082 | $ | 19,796 | $ | 172,878 | ||||||
|
Earnings
(loss) from operations
|
$ | (21,954 | ) | $ | 3,876 | $ | (18,078 | ) | ||||
|
Unallocated
items:
|
||||||||||||
|
Interest
income
|
597 | |||||||||||
|
Foreign
exchange gain
|
1,157 | |||||||||||
|
Loss
before income taxes
|
(16,324 | ) | ||||||||||
|
Income
taxes
|
261 | |||||||||||
|
Net
loss for the year
|
$ | (16,585 | ) | |||||||||
|
Recognition
of previously unrecognized research and development tax credits (note
17)
|
$ | − | $ | (1,902 | ) | $ | (1,902 | ) | ||||
|
Restructuring
charges (note 4)
|
$ | 963 | $ | 208 | $ | 1,171 | ||||||
|
Amortization
of capital assets
|
$ | 9,486 | $ | 188 | $ | 9,674 | ||||||
|
Stock-based
compensation costs
|
$ | 1,300 | $ | 109 | $ | 1,409 | ||||||
|
Impairment
of goodwill (note 4)
|
$ | 21,713 | $ | − | $ | 21,713 | ||||||
|
Capital
expenditures
|
$ | 6,782 | $ | 163 | $ | 6,945 | ||||||
|
Year
ended August 31, 2008
|
||||||||||||
|
Telecom
Division
|
Life Sciences and
Industrial Division
|
Total
|
||||||||||
|
Sales
|
$ | 160,981 | $ | 22,809 | $ | 183,790 | ||||||
|
Earnings
from operations
|
$ | 9,524 | $ | 2,459 | $ | 11,983 | ||||||
|
Unallocated
items:
|
||||||||||||
|
Interest
income
|
4,639 | |||||||||||
|
Foreign
exchange gain
|
442 | |||||||||||
|
Earnings
before income taxes and extraordinary gain
|
17,064 | |||||||||||
|
Income
taxes
|
1,676 | |||||||||||
|
Earnings
before extraordinary gain
|
15,388 | |||||||||||
|
Extraordinary
gain
|
3,036 | |||||||||||
|
Net
earnings for the year
|
$ | 18,424 | ||||||||||
|
Amortization
of capital assets
|
$ | 7,999 | $ | 164 | $ | 8,163 | ||||||
|
Stock-based
compensation costs
|
$ | 1,171 | $ | 101 | $ | 1,272 | ||||||
|
Capital
expenditures
|
$ | 6,327 | $ | 181 | $ | 6,508 | ||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
|
Year
ended August 31, 2007
|
||||||||||||
|
Telecom
Division
|
Life Sciences and
Industrial Division
|
Total
|
||||||||||
|
Sales
|
$ | 129,839 | $ | 23,095 | $ | 152,934 | ||||||
|
Earnings
from operations
|
$ | 13,132 | $ | 3,650 | $ | 16,782 | ||||||
|
Unallocated
items:
|
||||||||||||
|
Interest
income
|
4,717 | |||||||||||
|
Foreign
exchange loss
|
(49 | ) | ||||||||||
|
Earnings
before income taxes
|
21,450 | |||||||||||
|
Income
taxes
|
(20,825 | ) | ||||||||||
|
Net
earnings for the year
|
$ | 42,275 | ||||||||||
|
Recognition
of previously unrecognized research and development tax credits (note
17)
|
$ | (3,162 | ) | $ | − | $ | (3,162 | ) | ||||
|
Government
grants (note 16)
|
$ | (1,079 | ) | $ | − | $ | (1,079 | ) | ||||
|
Amortization
of capital assets
|
$ | 5,557 | $ | 290 | $ | 5,847 | ||||||
|
Stock-based
compensation costs
|
$ | 886 | $ | 95 | $ | 981 | ||||||
|
Capital
expenditures
|
$ | 5,424 | $ | 123 | $ | 5,547 | ||||||
Total
assets by reportable segment are detailed as follows:
|
As
at August 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Telecom
Division
|
$ | 135,015 | $ | 170,429 | ||||
|
Life
Sciences and Industrial Division
|
10,267 | 9,803 | ||||||
|
Unallocated
assets
|
95,089 | 112,834 | ||||||
| $ | 240,371 | $ | 293,066 | |||||
Unallocated
assets are comprised of cash, short-term investments, other receivable on
forward exchange contracts as well as future income taxes.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Sales to
external customers by geographic region are detailed as follows:
|
Years
ended August 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
United
States
|
$ | 72,379 | $ | 79,471 | $ | 73,679 | ||||||
|
Canada
|
18,681 | 14,219 | 9,619 | |||||||||
|
Latin
America
|
8,086 | 8,858 | 7,592 | |||||||||
|
Americas
|
99,146 | 102,548 | 90,890 | |||||||||
|
China
|
13,455 | 13,960 | 9,329 | |||||||||
|
Other
|
13,745 | 15,148 | 11,445 | |||||||||
|
Asia-Pacific
|
27,200 | 29,108 | 20,774 | |||||||||
|
Europe,
Middle-East and Africa
|
46,532 | 52,134 | 41,270 | |||||||||
| $ | 172,878 | $ | 183,790 | $ | 152,934 | |||||||
Sales
were allocated to geographic regions based on the country of residence of the
related customers.
Long-lived
assets by geographic region are detailed as follows:
|
As
at August 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||||||||
|
Property,
plant
and equipment
|
Intangible
assets
|
Goodwill
|
Property,
plant
and equipment
|
Intangible
assets
|
Goodwill
|
|||||||||||||||||||
|
Canada
|
$ | 15,013 | $ | 7,086 | $ | 4,638 | $ | 15,916 | $ | 7,479 | $ | 23,007 | ||||||||||||
|
United
States
|
1,015 | 9,687 | 17,840 | 918 | 12,397 | 19,646 | ||||||||||||||||||
|
China
|
2,033 | 32 | − | 1,965 | 16 | − | ||||||||||||||||||
|
Other
|
1,039 | 54 | − | 1,076 | 53 | − | ||||||||||||||||||
| $ | 19,100 | $ | 16,859 | $ | 22,478 | $ | 19,875 | $ | 19,945 | $ | 42,653 | |||||||||||||
20 United
States Generally Accepted Accounting Principles
As a
registrant with the Securities and Exchange Commission in the United States
(SEC), the company is required to reconcile its financial statements for
significant differences in measurement and disclosure between generally accepted
accounting principles as applied in Canada (Canadian GAAP) and those applied in
the United States (U.S. GAAP). Furthermore, additional significant disclosures
required under U.S. GAAP and Regulation S-X of the SEC are also provided in the
accompanying financial statements and notes. The following summarizes the
significant quantitative differences between Canadian and U.S. GAAP, as
well as other significant disclosures required under U.S. GAAP and
Regulation S-X of the SEC not already provided in the accompanying financial
statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to 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 to U.S. GAAP
The
following summary sets out the significant differences between the company’s
reported net earnings (loss) and net earnings (loss) per share under Canadian
GAAP as compared to U.S. GAAP. Refer to corresponding explanatory notes
in the Reconciliation Items section.
|
Years
ended August 31,
|
||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||
|
Net
earnings (loss) for the year in accordance with Canadian
GAAP
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | |||||||||
|
Impairment
of goodwill
|
a | ) | 8,406 | − | − | |||||||||||
|
Unrealized
losses on available-for-sale securities
|
b | ) | − | − | 55 | |||||||||||
|
Stock-based
compensation costs related to stock appreciation rights
|
c | ) | – | – | (73 | ) | ||||||||||
|
Net
earnings (loss) for the year in accordance with U.S. GAAP
|
$ | (8,179 | ) | $ | 18,424 | $ | 42,257 | |||||||||
|
Out
of which:
|
||||||||||||||||
|
Earnings
(loss) before extraordinary gain
|
$ | (8,179 | ) | $ | 15,388 | $ | 42,257 | |||||||||
|
Extraordinary
gain
|
$ | – | $ | 3,036 | $ | – | ||||||||||
|
Basic
and diluted earnings (loss) before extraordinary gain per share in
accordance with U.S. GAAP
|
$ | (0.13 | ) | $ | 0.22 | $ | 0.61 | |||||||||
|
Basic
and diluted net earnings (loss) per share in accordance with
U.S. GAAP
|
$ | (0.13 | ) | $ | 0.27 | $ | 0.61 | |||||||||
|
Basic
weighted average number of shares outstanding (000’s)
|
61,845 | 68,767 | 68,875 | |||||||||||||
|
Diluted
weighted average number of shares outstanding (000’s)
|
61,845 | 69,318 | 69,555 | |||||||||||||
Reconciliation
of shareholders’ equity to conform to U.S. GAAP
The
following summary sets out the significant differences between the company’s
reported shareholders’ equity under Canadian GAAP as compared to U.S. GAAP.
Refer to the corresponding explanatory note in the Reconciliation
Items section.
|
As
at August 31,
|
||||||||||||
|
2009
|
2008
|
|||||||||||
|
Shareholders’
equity in accordance with Canadian GAAP
|
$ | 208,045 | $ | 259,515 | ||||||||
|
Goodwill
|
a | ) | (3,879 | ) | (12,640 | ) | ||||||
|
Stock
appreciation rights
|
c | ) | (73 | ) | (73 | ) | ||||||
|
Shareholders’
equity in accordance with U.S. GAAP
|
$ | 204,093 | $ | 246,802 | ||||||||
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
Statements
of cash flows
For the
years ended August 31, 2007, 2008 and 2009, there were no significant
differences between the statements of cash flows under Canadian GAAP as compared
to U.S. GAAP, except for the subtotal before change in non-cash operating items,
whose presentation is not permitted under U.S. GAAP.
Reconciliation
items
|
a)
|
Goodwill
|
Under
U.S. GAAP, until the adoption of SFAS 142, “Goodwill and Other Intangible
Assets”, when assets being tested for recoverability were acquired in business
combinations accounted for by the purchase method, the goodwill that arose in
that transaction had to be included as part of the asset grouping in determining
recoverability. The intangible assets tested for recoverability prior to the
adoption of SFAS 142 were acquired in business combinations that were accounted
for using the purchase method and, consequently, the company allocated goodwill
to those assets on a pro rata basis, using the relative fair values of the
long-lived assets and identifiable intangible assets acquired as determined
at the date of acquisition. The carrying value of goodwill identified with the
impaired intangible assets was written down before any reduction was made to the
intangible assets.
Under
Canadian GAAP, no allocation of goodwill was required and each asset was tested
for recoverability separately based on its pre-tax undiscounted future cash
flows over its expected period of use.
As a
result of this difference, goodwill under U.S. GAAP was lower compared to
Canadian GAAP. Consequently, the amount of goodwill impairment recorded in
fiscal 2009 was lower under U.S. GAAP as compared to the amount recorded under
Canadian GAAP.
|
b)
|
Short-term
investments
|
Upon the
adoption by the company of the CICA Handbook Section 3855 on September 1, 2007,
existing GAAP differences between Canadian GAAP and U.S. GAAP with respect to
accounting for short-term investments were eliminated. Under Canadian GAAP,
prior to the adoption of Section 3855 on September 1, 2007, short-term
investments were carried at the lower of cost and market value and any
unrealized loss was reflected in the statements of earnings. Under U.S. GAAP,
short-term investments are classified as “available-for-sale securities” and
carried at their fair value and any changes in their fair value are
reflected in comprehensive income consistent with the accounting treatment
required by Section 3855.
|
c)
|
Stock-based
compensation costs related to stock appreciation
rights
|
Under
U.S. GAAP, stock-based compensation costs related to stock appreciation rights
must be measured using the fair value-based method at the end of each period.
The company uses the Black-Scholes options valuation model to measure the
fair value of its stock appreciation rights, based on the same assumptions than
those used for stock options. Changes in the fair value of these awards must be
charged to earnings. Under Canadian GAAP, stock appreciation rights are measured
using the intrinsic value method, based on the market price of the common shares
at the end of each period, and changes in the intrinsic value of these
awards are charged to earnings.
|
d)
|
Research
and development tax credits
|
Under
Canadian GAAP, all research and development tax credits are recorded as a
reduction of gross research and development expenses in the statements or
earnings. Under U.S. GAAP, tax credits that are refundable against income taxes
otherwise payable are recorded in the income taxes. These tax credits amounted
to $6,639,000, $3,692,000 and $5,565,000 for fiscal 2007, 2008 and 2009,
respectively. This difference has no impact on the net earnings (loss) and the
net earnings (loss) per share figures for the reporting years.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
|
e)
|
Elimination
of deficit by reduction of share
capital
|
As at
August 31, 2006, under Canadian GAAP, the company proceeded to eliminate its
deficit against its share capital. However, under U.S. GAAP, such elimination is
not permitted, which creates a permanent difference of $373,711,000 in the
deficit and the share capital between the Canadian GAAP and U.S. GAAP figures.
This difference has no impact on the total amount of the shareholders’
equity.
|
f)
|
New
accounting standards and
pronouncements
|
Adopted
in fiscal 2009
In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements”, which
establishes a framework for measuring fair value in GAAP and is applicable to
other accounting pronouncements, in which fair value is considered to be
the relevant measurement attribute. SFAS 157 also expands disclosures about fair
value measurement. In February 2008, the FASB amended SFAS 157 to exclude
leasing transactions and to delay the effective date by one year for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis. This
statement is effective for fiscal years beginning after
November 15, 2007. The company adopted this statement
on September 1, 2008, and its adoption had no significant impact
on the consolidated financial statements.
In
February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115”, which allows entities to measure many financial instruments and certain
other items at fair value. Most of the provisions of this statement apply only
to entities that elect the fair value option. However, the amendment to SFAS
115, “Accounting for Certain Investments in Debt and Equity Securities”, applies
to all entities with available-for-sale and trading securities. This statement
is effective for fiscal years beginning after November 15, 2007. The company
adopted this statement on September 1, 2008, and it did not elect
to use the fair value option as of the date of adoption.
In May
2008, the FASB issued SFAS 162, “The Hierarchy of Generally Accepted Accounting
Principles”, which is intended to improve financial reporting by
identifying a consistent framework for selecting accounting principles
to be used in preparing financial statements that are presented in
conformity with U.S. GAAP for non-governmental entities. The guidance in SFAS
162 replaces that which is prescribed by the American Institute of Certified
Public Accountants’ (“AICPA”) Statement on Auditing Standards (“SAS”) No. 69,
“The Meaning of Present
Fairly in Conformity with Generally Accepted Accounting Principles, for Nongovernmental
Entities”. SFAS 162 became effective in January 2009, and the adoption
of this standard had no significant impact on the consolidated
financial statements.
In May
2009, the FASB issued SFAS 165, “Subsequent Events”. This statement introduces
the concept of financial statements being available to be issued. It requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date, i.e., whether that date represents the date
when the financial statements were issued or were available to be issued. This
statement is effective for financial statements issued for fiscal years and
interim periods ending after June 15, 2009. The adoption of this standard had no
significant impact on the consolidated financial statements.
To
be adopted after fiscal 2009
In
December 2007, the FASB issued SFAS 141(R), “Business Combinations”,
and SFAS 160, “Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51”. These new standards will
significantly change the accounting and reporting for business combination
transactions and noncontrolling (minority) interests in consolidated
financial statements. SFAS 141(R) and SFAS 160 are required to be adopted
simultaneously and are effective for the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is prohibited. The company
will adopt these statements on September 1, 2009, and is currently evaluating
the impact that the adoption of SFAS 141(R) and SFAS 160 will have on
its consolidated financial statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
In
February 2008, the FASB issued FASB Staff Position (FSP) FAS 157-2, “Effective
Date of FASB Statement No. 157” (FSP FAS 157-2). FSP FAS 157-2 defers the
implementation of SFAS No. 157 for certain non-financial assets and
non-financial liabilities. The aspects that have been deferred by FSP FAS 157-2
will be effective for the company beginning in the first quarter of fiscal year
2010. The company is currently evaluating the impact that FSP FAS 157-2
will have on its consolidated financial statements.
In March
2008, the FASB issued SFAS 161, “Disclosures about Derivative Instruments and
Hedging Activities – an amendment of FASB Statement No. 133”, which will
require entities to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flow. SFAS 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. The company will
adopt this statement on September 1, 2009, and is currently evaluating the
impact its adoption will have on the note disclosures related to derivative
instruments and hedging activities.
In April
2008, the FASB issued the FASB staff position (FSP) FAS 142-3, “Determination of
the Useful Life of Intangible Assets”. This FSP amends the factors that
should be considered in developing renewal or extension assumptions used
to determine the useful life of a recognized intangible asset under SFAS
142, “Goodwill and Other Intangible Assets”. The intent of this FSP is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141 (revised 2007), “Business Combinations”, and
other U.S. generally accepted accounting principles (GAAP). This FSP shall be
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years.
Early adoption is prohibited. The guidance for determining the useful life of a
recognized intangible asset in paragraphs 7–11 of this FSP shall be applied
prospectively to intangible assets acquired after the effective date.
The disclosure requirements in paragraphs 13–15 shall be applied
prospectively to all intangible assets recognized as of, and
subsequent to, the effective date. The company will adopt this FSP
on September 1, 2009, and is currently evaluating the impact its adoption
will have on the consolidated financial statements.
In April
2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (APB)
APB 28-1 (“FSP FAS 107-1 and APB 28-1”), “Interim Disclosures about Fair
Value of Financial Instruments”. FSP FAS 107-1 and APB 28-1 amends SFAS
107, “Disclosures about Fair Value of Financial Instruments”, to require
disclosures about fair value of financial instruments for annual and
interim reporting periods of publicly traded companies and amends APB 28,
“Interim Financial Reporting” to require those disclosures in summarized
financial information at interim reporting periods. FSP FAS 107-1 and APB 28-1
are effective for reporting periods ending after June 15, 2009. The company
will adopt these statements on September 1, 2009 and is currently evaluating the
impact their adoption will have on the consolidated
financial statements.
In
September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 09-3,
“Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That
Include Software Elements” (“EITF 09-3”). EITF 09-3 amends Statement of Position
(“SOP”) 97-2, “Software Revenue Recognition”, to exclude tangible products
containing software components and non-software components that function
together to deliver the product’s essential functionality. EITF 09-3 applies to
revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010, with early application permitted with
EITF 08-1. The company expects to adopt this standard in the first quarter
of fiscal 2011. The company is currently evaluating the impact EITF 09-3 will
have on the consolidated financial statements.
EXFO
Electro-Optical Engineering Inc.
Notes
to Consolidated Financial Statements
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
In
September 2009, the FASB issued Emerging Issues Task Force (“EITF”) 08-1,
“Revenue Arrangements with Multiple Deliverables” (“EITF 08-1”). EITF 08-1
amends EITF 00-21, “Revenue Arrangements with Multiple Deliverables”, to require an
entity to use an estimated selling price when vendor-specific objective evidence
or acceptable third-party evidence does not exist for any products or
services included in a multiple element arrangement. The arrangement
consideration should be allocated among the products and services based upon
their relative selling prices, thus eliminating the use of the residual method
of allocation. EITF 08-01 also requires expanded qualitative and quantitative
disclosures regarding significant judgments made and changes in applying the
guidance. EITF 08-1 applies to fiscal years beginning after June 15, 2010, with
early application permitted. The company expects to adopt the standard in the
first quarter of fiscal 2011. The company is currently evaluating the impact
EITF 08-1 will have on the financial statements.
In
June 2009, the FASB issued SFAS 168, “The FASB Accounting Standards
CodificationTM and
the Hierarchy of Generally Accepted Accounting Principles—a replacement of
FASB Statement No. 162” (“SFAS 168”). SFAS 168 modifies the U.S. GAAP hierarchy
created by FASB Statement No. 162, “The Hierarchy of Generally Accepted
Accounting Principles”, (“SFAS 162”) by establishing only two levels of GAAP:
authoritative and non-authoritative. FASB Accounting Standards Codification will
become the single source of authoritative U.S. accounting and reporting
standards, along with rules and interpretative releases of the SEC which are
considered sources of authoritative GAAP for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification would become non-authoritative. SFAS 168 will not result in any
accounting changes. This Statement applies to interim and annual reporting
periods ending after September 15, 2009. The company will adopt this
standard in the first quarter of fiscal 2010 and its adoption will have no
material impact on the interim and annual consolidated
financial statements.
21 Subsequent
Events
Subsequent
events have been evaluated until October 13, 2009, which is the date the
consolidated financial statements of the company were available to be
issued, except for notes 13 a) and 14 c), which are dated November 6,
2009.
BOARD OF DIRECTORS
|
GERMAIN
LAMONDE
Chairman
of the Board, President and CEO,
EXFO
Electro-Optical Engineering Inc.
Germain
Lamonde, a company founder, has been President and Chief Executive Officer
of EXFO since its inception in 1985. Mr. Lamonde, who is responsible
for the overall management and strategic direction of EXFO and its
subsidiaries and divisions, has grown the company from the ground up into
a global leader in the telecommunications test and measurement industry.
As a majority shareholder of EXFO, Mr. Lamonde also acts as Chairman
of the Board, ensuring excellence in corporate governance practices and
alignment with shareholder interests. Mr. Lamonde has also served on the
boards of several organizations such as the Canadian Institute for
Photonic Innovations, the PÔLE QCA Economic Development Corporation and
the National Optics Institute of Canada, to name a few. Germain
Lamonde holds a bachelor’s degree in physics engineering from the
University of Montreal’s School of Engineering (École Polytechnique), a
master’s degree in optics from Université Laval in Quebec City, and is
also a graduate of the Ivey Executive Program offered by the
University of Western Ontario in London, Ontario.
|
GUY MARIER 1, 2,
3
Corporate
Director
Formerly
President of Bell Québec between 1999 and 2003, Guy Marier completed his
successful 33-year career at Bell as Executive Vice-President of the
Project Management Office of Bell, before retiring at the end of 2003. Mr.
Marier began at Bell Canada in 1970 and quickly became an executive. From
1988 to 1990, he headed up Bell Canada International’s investments and
projects in Saudi Arabia and, for the three following years, served as
President of Télébec, a subsidiary of Bell Canada. He then returned to the
parent company to hold various senior management positions. Mr. Marier was
appointed to EXFO’s Board of Directors in January 2004. Guy Marier holds a
Bachelor of Arts from the University of Montreal and a Bachelor of
Business Administration from Université du Québec à Montréal.
|
|
|
PIERRE-PAUL ALLARD 1,
2
Area
Vice-President, Sales,
Cisco
Systems, Inc.
Pierre-Paul
Allard is presently Area Vice-President of Sales for Cisco Systems, Inc.,
where he has held several management positions over the years. Currently,
he is responsible for sales and field operations of Cisco’s Global
Enterprise Client segment, focusing on new market opportunities,
accelerated revenue growth and increased customer satisfaction. Prior to
joining Cisco, Mr. Allard worked for IBM Canada for 12 years. He was
appointed a member of EXFO’s Board of Directors in September 2008 and has
been a board member of many other technology companies in Canada and in
the U.S. Today, he is also an active philanthropist for the Institut de
cardiologie de Québec. In 2002, Mr. Allard co-chaired the Canadian
e-Business Initiative, a private-public partnership aiming to measure
the role e-business plays in increasing productivity levels, job creation
and competitive position. In 1998, he was the laureate of the
Arista-Sunlife Award, for Top Young Entrepreneur in Large Enterprise, by
the Montreal Chamber of Commerce. In 2003, he received the Queen’s Golden
Jubilee Medal, which highlights significant contributions to Canada. In
the same year, he was also awarded the prestigious Trudeau Medal from the
University of Ottawa, School of Management. Pierre-Paul Allard holds a
bachelor’s and master’s degree in Business Administration from the
University of Ottawa, School of Management, in Canada.
|
DR. DAVID A. THOMPSON
1,
2
Retired
Vice-President and Director of Technology, Corning Cable
Systems
David
A. Thompson most recently served as Vice-President and Director of
Hardware and Equipment Technology at Corning Cable Systems, where he held
this position until retiring from Corning in 2008. Prior to this, he held
several technical management roles at Corning Inc. starting in 1976. He
has been a member of the Board of Directors of EXFO since July 2000 and
also continues to serve on the engineering advisory group at the
University of North Carolina in Charlotte. Dr. Thompson joined Corning
Inc. in 1976 in glass chemistry research, developing new specialty glasses
for television, optical lenses, solar mirrors and optical fibers. He
served in several global business management and strategic planning roles
for Corning in both R&D and the Telecommunications Division between
1988 and 1999. He was technical director for the creation of optical
amplifier and optical components for Corning and in creation of the
Samsung-Corning Micro-Optics joint venture. He later was named
Vice-President for the Strategic Planning and Innovation Effectiveness on
return to the Corning RD&E Division. David A. Thompson holds a
Bachelor of Science in chemistry from Ohio State University, a masters and
doctorate in inorganic chemistry from the University of Michigan, and he
attended the MIT Sloan School for technology leaders. He also holds over
20 patents and has over two dozen technical publications in the areas of
inorganic chemistry, glass technology and telecommunications. Dr. Thompson
is a member of several professional and honor societies and has chaired
numerous technical society groups during his career.
|
|
|
PIERRE MARCOUILLER 1,
2
Chairman
of the Board and CEO,
Camoplast
Inc.
Pierre
Marcouiller is Chairman of the Board and CEO of Camoplast Inc., an
industrial manufacturer specializing in rubber tracks, undercarriage
systems, and composite and plastic components aimed at the recreational,
agricultural, automotive and industrial markets. Prior to joining
Camoplast, Mr. Marcouiller was President and General Manager of Venmar
Ventilation Inc. (1988-1996), where he was the controlling shareholder
from 1991 to 1996. He is also a Director of Canam Group Inc., an
industrial company specialized in the design and fabrication of
construction products and solutions in the commercial, industrial,
institutional, residential, and bridge and highway infrastructure markets.
Mr. Marcouiller also holds directorships in other privately held
companies. Pierre Marcouiller holds a bachelor’s degree in business
administration from Université du Québec à Trois-Rivières and an MBA from
Université de Sherbrooke.
|
ANDRÉ TREMBLAY 1,
2
President
and CEO,
Terrestar
Solutions Inc.
André
Tremblay is President and CEO of Terrestar Solutions Inc., a leading-edge
provider of satellite telecommunication services. He is also a founder and
managing partner of Trio Capital Inc., a private equity fund
management company. He has more than 20 years’ experience in the
telecommunications industry, having been actively involved in the
conception, financing and management of several companies. As a special
advisor to the President of Telesystem Ltd., and as President of
Telesystem Enterprises Ltd. from 1992 to 1998, Mr. Tremblay managed a
portfolio of telecommunication companies under control. For almost 10
years, he served as President and Chief Executive Officer of Microcell
Telecommunications, a wireless network and service provider, which he led
from its inception on through the different phases of its evolution.
During that time, he has also provided early-stage financing, along with
strategic advice and direction, for startup technology firms. In 2005, he
was appointed by Canada’s Industry Minister as member of the
Telecommunications Policy Review Panel to make recommendations on how to
modernize Canada’s telecommunication policies and regulatory framework.
André Tremblay holds bachelor’s degrees in management and in accounting
from Université Laval, a master’s degree in taxation from Université de
Sherbrooke, and is also a graduate of Harvard Business School’s Advanced
Management Program.
|
| 1) Audit Committee | 2) Human Resources Committee | 3) Independent Lead Director |
MANAGEMENT AND CORPORATE OFFICERS
|
Germain
Lamonde
Chairman,
President and
Chief
Executive Officer
|
Étienne
Gagnon
Vice-President,
Telecom
Product
Management and Marketing
|
|
|
Jon
Bradley
Vice-President,
Telecom Sales,
International
|
Luc
Gagnon
Vice-President,
Telecom Manufacturing
Operations
and Customer Service
|
|
|
Stephen
Bull
Vice-President,
Research and Development,
Telecom
Division
|
Vivian
Hudson
Vice-President
and General Manager,
EXFO
Service Assurance
|
|
|
Normand
Durocher
Vice-President,
Human
Resources
|
Pierre
Plamondon, CA
Vice-President,
Finance and
Chief
Financial Officer
|
|
|
Allan
Firhoj
Vice-President
and General Manager,
Life
Sciences and Industrial Division
|
Dana
Yearian
Vice-President,
Telecom Sales,
Americas
|
|
|
Benoît
Ringuette
General
Counsel and
Corporate
Secretary
|
CORPORATE GOVERNANCE PRACTICES
Corporate
governance practices have always been a priority at EXFO. The following policies
and charters have been in force for several years now and are being reviewed on
a regular basis and updated as the case may be: Ethics and Business Conduct
Policy; Code of Ethics for Our Principal Executive Officer and Senior Financial
Officers; Board of Directors Corporate Governance Guidelines; Statement on
Reporting Ethical Violations (“whistle-blowing”); Audit Committee Charter; Human
Resources Committee Charter; Disclosure Guidelines; Securities Trading Policy;
and Policy Regarding Hiring Employees and Former Employees of Independent
Auditor. Also, in the last financial year, following recent modifications to
securities regulations, EXFO has adopted Guidelines Regarding the Filing and
Disclosure of Material Contracts. All these policies and charters are readily
available from EXFO’s website at www.EXFO.com, with the exception of the
Disclosure Guidelines, the Securities Trading Policy and the Guidelines
Regarding the Filing and Disclosure of Material Contracts.
In
addition to the above-mentioned policies, the Board of Directors and management
continue to keep abreast of applicable Canadian and U.S. regulatory
requirements.
The Audit
Committee was also very active throughout the year, ensuring compliance with the
regulations of the U.S. Securities and Exchange Commission and the Canadian
Securities authorities with respect to i) disclosure controls and procedures;
ii) internal control over financial reporting that apply to Canadian
companies with shares registered in the U.S.
As
achieving best practices in corporate governance is an ongoing process in an
ever-changing context, this past year, the Board of Directors also reviewed
procedures to monitor the effectiveness of the Board. The Board
of Directors believes that EXFO’s corporate governance practices do comply
with current regulatory requirements. As new guidelines come into effect, we
will continue to comply with these requirements. Further details about EXFO’s
corporate governance practices, policies and guidelines are published in the
Management Proxy Circular and on EXFO’s website.
Pursuant
to the General By-Laws of the Corporation, the present Board members were
elected at our last Annual Meeting of Shareholders, held on January 14,
2009.
RESPONSIBILITIES
OF THE BOARD
The Board
is responsible for the stewardship of our business and affairs by reviewing,
discussing and approving our strategic direction and organizational structure,
as well as for the review and approval of management’s strategic plan on an
annual basis. The Board also identifies the principal risks of our business and
reviews EXFO’s risk management systems on an annual and ongoing
basis.
In
addition to matters requiring Board approval under applicable laws, the Board
grants final approval with respect to each of the following: (i) the strategic
direction of EXFO; (ii) material contracts, acquisitions or dispositions
of our assets; and (iii) the annual operational plan, as well as capital
and operating budgets.
The Board
of Directors assumes direct responsibility for corporate governance practices
and for monitoring the powers, the mandates and the performance of its
committees.
The Board
is also responsible for the establishment and functioning of all Board
committees, the appointment of members to serve on such committees, their
compensation and their good standing. At regularly scheduled meetings of the
Board, the Directors receive, consider and discuss committee
reports.
During
the fiscal year ended August 31, 2009, the Board met a total of ten (10) times.
Attendance was satisfactory, as all members attended all meetings except for Mr.
Allard, who was absent for one (1) meeting, Dr. Thompson, who was absent for one
(1) meeting and Mr. Tremblay, who was absent for two (2) meetings.
Since
January 2007, Mr. Guy Marier is the Independent Lead Director. As such, he is
responsible for ensuring that the Board properly performs its duties,
independent of management. The Independent Lead Director is required
to hold as many Board of Directors meetings as necessary without management
members present; additional meetings of independent Board members may also be
held at any member’s request. During the fiscal year ended August 31, 2009, the
independent Board members met a total of three (3) times; attendance was
satisfactory, as all members attended all meetings except for Mr. Pierre-Paul
Allard, who was absent for one (1) meeting.
As per
its Human Resources Committee Charter (which integrates the Compensation
Committee Charter and the Nominating and Governance Committee Charter), the
Corporation also has a formal procedure in place for recruiting new
Directors.
COMPOSITION
OF THE BOARD
Our
articles of incorporation provide for a Board of Directors with a minimum of
three (3) and a maximum of twelve (12) Directors. EXFO’s Board presently
consists of six (6) Directors, five (5) of whom are independent
of management and free from any interest and any business or other
relationship which could, or could reasonably be perceived to, materially
interfere with a Director’s ability to act with a view to the best interests of
EXFO, other than interests arising from non-significant shareholding. EXFO’s
Directors are elected at the Annual General Meeting of Shareholders for one-year
terms and serve until their successors are elected or appointed, unless they
resign or are removed earlier.
The
Chairman of the Board and Chief Executive Officer, Mr. Germain Lamonde, is a
majority shareholder of EXFO as he has the ability to exercise a majority of the
votes for the election of the Board of Directors. Since the other five (5)
Board members do not have interests in EXFO or relationships with either EXFO or
Mr. Lamonde, except for non-significant shareholding in the company, EXFO
believes that the interests of its investors, other than Mr. Lamonde’s, are
fairly represented.
COMMITTEES
OF THE BOARD
Board
committees play a significant role in the performance of Board duties and
obligations; committee chairs submit items for Board agendas and report on
committee activities. The members of these committees are appointed annually,
and the Board may appoint additional ad hoc committees periodically, as
needed.
EXFO has
a practice of permitting the Board, any committee thereof, and any individual
Director to hire independent, external advisors at its expense. The Audit
Committee and the Human Resources Committee are entirely comprised of
independent Directors.
The
following is a general description of the composition and general duties of each
Board committee, as determined in its mandate as at fiscal year ended
August 31, 2009.
AUDIT
COMMITTEE
The
Corporation’s Audit Committee Charter ensures full compliance with all
applicable regulations. As such, the Audit Committee reviews interim in-house
financial statements and annual audited financial statements and related
disclosure documents, including “Management’s Discussion and Analysis of
Financial Condition and Results of Operations”, with management and
external auditors and approves them prior to public release. The Audit Committee
is also responsible for reviewing EXFO’s internal control systems with regard to
finance, accounting, legal compliance and ethical behavior. The Committee meets
regularly with external auditors, with and without management, to consider the
scope and results of their audits, including analysis of the adequacy of the
internal controls and the effect of the procedures relating to the outside
auditors’ independence. The Committee also recommends to the shareholders the
selection of external auditors for their appointment by the shareholders. The
Audit Committee is comprised of the following independent Directors: Mr.
Pierre-Paul Allard, who joined in January 2009, Mr. Pierre Marcouiller, Mr.
Guy Marier, Mr. André Tremblay and Dr. David A. Thompson. The Chair of the Audit
Committee is Mr. Tremblay. During the fiscal year ended August 31, 2009, the
Audit Committee met a total of four (4) times; attendance was exemplary, as all
members attended all meetings.
HUMAN
RESOURCES COMMITTEE
The
Corporation’s Human Resources Committee Charter, which integrates the
Compensation Committee Charter and the Nominating and Governance Committee
Charter, ensures full compliance with all applicable regulations. As such,
the Human Resources Committee reviews, together with management, the
Corporation’s “Compensation Discussion and Analysis” included in the Management
Proxy Circular of the Corporation, and then approves it prior to public
disclosure.
In
accordance with these charters, the Human Resources Committee is responsible for
assessing the performance and establishing the annual compensation of all EXFO
senior officers, including the Chief Executive Officer.
This
Committee also reviews and submits to the Board the salary structure and the
short-term and long-term incentive compensation programs for all EXFO
employees.
The
Committee is responsible for the review and approval of the employees who will
receive restricted share units (RSUs) and stock options to purchase EXFO shares
in accordance with policies established by the Board and the terms of the
Long-Term Incentive Plan. In addition, the Committee reports annually to the
Board regarding the organizational structure and succession plan for senior
management. The remuneration to be paid by EXFO to the Directors, either in cash
or in the form of deferred share units (DSUs) pursuant to the Deferred Share
Unit Plan, is recommended to the Board by the Human Resources Committee.
The Human Resources Committee is comprised of the following independent
Directors: Mr. Pierre-Paul Allard, who joined in January 2009, Mr. Pierre
Marcouiller, Mr. Guy Marier, Dr. David A. Thompson and Mr. André Tremblay. The
Chair of the Human Resources Committee is Mr. Guy Marier. During the fiscal year
ended August 31, 2009, the Human Resources Committee met a total of four
(4) times; attendance was satisfactory, as all members attended all meetings,
except for Mr. Tremblay, who was absent for one (1) meeting.
|
Name
|
Board
of Directors
|
Audit
Committee
|
HR
Committee
|
|
Germain
Lamonde
|
Chair
|
||
|
Pierre
Marcouiller
|
●
|
●
|
●
|
|
Guy
Marier
|
Lead
Director
|
●
|
Chair
|
|
David
A. Thompson
|
●
|
●
|
●
|
|
André
Tremblay
|
●
|
Chair
|
●
|
|
Pierre-Paul
Allard
|
●
|
●
|
●
|
DISCLOSURE
COMMITTEE
The
Disclosure Committee is responsible for overseeing EXFO’s disclosure practices,
as per the Corporation’s Disclosure Guidelines, which ensure full compliance
with all applicable regulations. The Disclosure Committee consists of the Chief
Executive Officer, the Chief Financial Officer, the Investor Relations Manager,
the Manager of Financial Reporting and Accounting, as well as the General
Counsel and Corporate Secretary.
During
the year ended August 31, 2009, the Disclosure Committee ensured that the
corporate governance policies adopted by the Board of Directors were made
publicly available. This was done by posting the following documents on EXFO’s
website: Audit Committee Charter; Board of Directors Corporate Governance
Guidelines; Code of Ethics for Our Principal Executive Officer and Senior
Financial Officers; Ethics and Business Conduct Policy; Human Resources
Committee Charter; Statement on Reporting Ethical Violations; and Policy
Regarding Hiring Employees and Former Employees of Independent Auditor. The
Disclosure Committee also ensured that a contact to the Independent Lead
Director and the General Counsel was made available via EXFO’s
website.
SHAREHOLDER/INVESTOR
COMMUNICATIONS AND FEEDBACK
The Chief
Financial Officer assumes responsibility for investor relations. He is
responsible for facilitating communications between senior management and EXFO’s
shareholders and financial analysts. Information to shareholders is
disseminated through annual and quarterly reports, press releases, the
Management Proxy Circular, the Annual General Shareholders’ Meeting and investor
presentations. EXFO receives and responds to all shareholders’ inquiries in an
appropriate and timely manner. In communications to senior management, the Chief
Financial Officer also provides feedback from shareholders.
SECURITIES
TRADING POLICY
The
Securities Trading Policy is one of the necessary measures to prevent trading by
persons in possession of material information. The Corporation’s Securities
Trading Policy also ensures full compliance with
applicable regulations.
OTHER FINANCIAL INFORMATION
The
company provides a non-GAAP financial measure (EBITDA*) as supplemental
information regarding the company’s operational performance. The company uses
EBITDA for the purposes of evaluating its historical and prospective financial
performance, as well as its performance relative to its competitors. This
measure also helps management to plan and forecast future periods and to assist
to make operational and strategic decisions. The company believes that providing
this information to its investors, in addition to the GAAP measures, allows them
to see the company’s results through the eyes of management, and to better
understand the company’s historical and future financial
performance.
The
presentation of this additional information is not prepared in accordance with
GAAP. Therefore, the information may not necessarily be comparable to that of
other companies and should be considered as a supplement to, not
a substitute for, the corresponding measures calculated in accordance with
GAAP.
RECONCILIATION
OF EBITDA TO GAAP NET EARNINGS (LOSS)
(in
thousands of US dollars, except as a percentage of sales)
|
Years
ended August 31,
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
GAAP
net earnings (loss) for the year
|
$ | (16,585 | ) | $ | 18,424 | $ | 42,275 | $ | 8,135 | $ | (1,634 | ) | ||||||||
|
Add
(deduct):
|
||||||||||||||||||||
|
Amortization
of property, plant and equipment
|
4,607 | 4,292 | 2,983 | 3,523 | 4,256 | |||||||||||||||
|
Amortization
of intangible assets
|
5,067 | 3,871 | 2,864 | 4,394 | 4,836 | |||||||||||||||
|
Impairment
of goodwill
|
21,713 | – | – | – | – | |||||||||||||||
|
Interest
income
|
(597 | ) | (4,639 | ) | (4,717 | ) | (3,253 | ) | (2,524 | ) | ||||||||||
|
Income
taxes
|
261 | 1,676 | 20,825 | 2,585 | 2,623 | |||||||||||||||
|
Extraordinary
gain
|
– | (3,036 | ) | – | – | – | ||||||||||||||
|
EBITDA
for the year **
|
$ | 14,466 | $ | 20,588 | $ | 22,580 | $ | 15,384 | $ | 7,557 | ||||||||||
|
EBITDA
in percentage of sales **
|
8.4 | % | 11.2 | % | 14.8 | % | 12.0 | % | 7.8 | % | ||||||||||
|
*
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment, amortization of intangible
assets, impairment of goodwill and extraordinary
gain.
|
|
**
|
EBITDA
includes $1,902, or 1.1% of sales, for the recognition of previously
unrecognized R&D tax credits in fiscal 2009, $4,241, or 2.8% of sales,
for the recognition of previously unrecognized R&D tax credits and a
government grant recovery in 2007, and $1,307, or 1.0% of sales, for a
government grant recovery in 2006.
|
SHAREHOLDER INFORMATION
The
subordinate voting shares of EXFO are listed on the Toronto Stock Exchange under
the stock symbol “EXF” and on the NASDAQ Global Market under the stock symbol
“EXFO”.
ANNUAL
AND SPECIAL MEETING
The
Annual and Special Meeting of Shareholders of EXFO Electro-Optical Engineering
Inc. will be held on January 13, 2010, 10 a.m., at the Marriott
Toronto Downtown Eaton Centre Hotel, Carlton Room (Second Floor), 525 Bay
Street, Toronto, Ontario.
TRANSFER
AGENTS AND REGISTRARS
|
CANADA
CIBC
Mellon Trust Company
320
Bay Street
Banking
Hall
Toronto
(Ontario) M5H 4A6 CANADA
Tel.:
1 416 643-5000
Tel.
(toll-free): 1 800 387-0825
|
UNITED
STATES
Mellon
Investor Services, LLC
P.O.
Box 358016
Pittsburgh,
PA 15252-8016 USA
Tel.
(toll-free): 1 800 522-6645
Tel.
(for hearing-impaired): 1 800 231-5469
|
INDEPENDENT
AUDITORS
PricewaterhouseCoopers
LLP
Place de
la Cité, Tour Cominar
2640
Laurier Blvd., Suite 1700
Quebec
City (Quebec) G1V 5C2 CANADA
Tel.: 1
418 522-7001
CONTACT
INFORMATION
INVESTOR
RELATIONS
Vance
Oliver
Manager,
Investor Relations
Tel.: 1
418 683-0913, ext. 3733
E-mail:
vance.oliver@EXFO.com
The
Annual Report is available in English and in French, both in print and on EXFO’s
website at www.EXFO.com, at www.sedar.com in Canada and at
www.sec.gov/edgar.shtml in the United States.
3G: The current generation of
mobile telecommunication networks is collectively known as 3G (for third
generation).
4G/LTE: Long-term evolution
(LTE) is the last step toward the development of the fourth-generation (4G)
standard designed to increase the capacity and speed of mobile telephone
networks. LTE supports scalable carrier bandwidths as well as both
frequency-division duplexing and time-division duplexing.
Access Network: Last link in a
network between the customer premises and the first point of connection to the
network infrastructure—a point of presence (PoP) on the edge of a metropolitan
network or a central office (CO). Access networks have, up to now, consisted
primarily of passive, twisted-pair copper wires, but there is a strong trend
toward optical-fiber connections either directly or very close to the customer
(fiber-to-the-curb).
Asymmetric Digital Subscriber Line
(ADSL): Transmission technology that consists of modems attached
to twisted-pair copper wiring that transmit from 1.5 Mbit/s to 8 Mbit/s
downstream (to the subscriber) and up to 1.5 Mbit/s upstream,
depending on line distance.
Bandwidth: Represents the
amount of data that can be transmitted through a communications channel in a
fixed amount of time. For digital devices, bandwidth is usually expressed in
bits (or bytes) per second. For analog devices, it is expressed in cycles per
second or in hertz (Hz).
Business Ethernet Services:
Services delivered over high-speed Ethernet connectivity to
enterprises.
Circuit-Switched Network: A
type of network in which a continuous link is established between a source and
a receiver. Circuit-switching is used for voice and video to ensure that
individual parts of a signal are received in the correct order by the
destination site.
Digital Subscriber Line (DSL):
The generic term that refers to the entire family of DSL technologies.
DSL refers to digital modems placed at either end of a local loop. DSL bypasses
the circuit-switched lines that make up that network and yields much faster data
transmission rates than analog modem technologies.
Ethernet: Protocol for data
networking. Ethernet networks typically operate at 10, 100 or 1000
Mbit/s.
Fiber-to-the-Curb (FTTC):
Network in which fiber is installed typically within 1000 feet of the
premises, leaving the curb-to-building section made out of twisted-pair copper
cable.
Fiber-to-the-Home (FTTH):
Network in which the deployment of fiber runs all the way from the
central-office telephone switch to the subscriber’s premises or
home.
Fiber-to-the-Node (FTTN):
Network in which fiber is used for part, of the link from the fiber
distribution hub to the end-user. An optical-to-electrical conversion takes
place at an active device called a node, which typically serves a neighborhood
or geographically similar area. Most current cable TV and telephony networks
have FTTN architectures.
Fiber-to-the-x (FTTx): The x
is a variable indicating the point at which the fiber in a network stops and
copper cabling takes over. The further the fiber goes, the wider the bandwidth,
the quicker the speed, and the more applications and services can be
offered.
Internet Cloud: It typically
involves the provision of dynamically scalable and often virtualized resources
as a service over the Internet.
Internet Protocol (IP): Method
by which data is sent from one computer to another on the Internet. Each
computer on the Internet has at least one IP address that uniquely identifies it
from all other computers on the Internet. Because of these standardized IP
addresses, the gateway receiving the data can keep track of, recognize and route
messages appropriately.
Internet Protocol Television (IPTV):
Delivers scheduled TV programs and video-on-demand (VOD) via the
IP protocol and digital streaming techniques used to watch video on the
Internet. To receive and decode the images in real time, the user requires
either an IPTV set-top box or a computer and software-based media
player.
IP Multimedia Subsystem (IMS):
An architectural framework for delivering multimedia services to both
wireless and fixed line subscribers utilizing the Internet protocol (IP). The
IMS architecture is access-independent and utilizes a horizontal control layer
that isolates the access network from the service layer.
Mobile Backhaul Network: A
mobile backhaul network refers to the wireless communications system used to get
data from the base station to the controller of the base station in a major
wireless network.
Packet: Bits grouped serially
in a defined format, containing a command or data message sent over a
network.
Polarization Mode Dispersion (PMD):
Dispersion of light causing a delay between the two principle states
of polarization propagating along a fiber or through a device due to the
birefringence properties of the material.
Protocol: A formal set of
rules governing the format, timing, sequencing and error control of data
exchange across a network. Many protocols may be required and used on a
single network.
Quadruple-Play Services:
Combine triple-play services (broadband Internet access, television and
telephone) with wireless service provisions.
Synchronous Digital Hierarchy (SDH):
A standardized multiplexing protocol that transfer multiple digital bit
streams over optical fiber; used around the world (except in North
America).
Synchronous Optical Network (SONET):
A standardized multiplexing protocol that transfer multiple digital bit
streams over optical fiber; used in the U.S. and Canada.
Triple-Play Services: Also
known as bundled services. The ability of a telecommunications carrier to supply
voice, data and video applications at once. A typical example of a triple-play
proposal would include one or multiple phone lines, a high-speed Internet
connection and television/video services.
Very-High-Data-Rate Digital
Subscriber Line (VDSL): A developing technology that promises much higher
data rates over relatively short distances (up to 52 Mbit/s over lines up to
1000 ft or 300 m in length).
Voice-over-Internet-Protocol (VoIP):
Refers to communications services — voice, facsimile and/or
voice-messaging applications—that are transported via the Internet, rather than
the public switched telephone network. In an Internet-based telephone call,
the voice signals are converted to digital format and compressed/translated into
IP packets for transmission over the Internet.
WORLDWIDE OFFICES
|
EXFO
CORPORATE HEADQUARTERS
AND
OPTICAL BUSINESS
400
Godin Avenue
Quebec
City (Quebec) G1M 2K2 CANADA
Tel.:
1 418 683-0211
Toll-free:
1 800 663-3936 (USA and Canada)
Fax:
1 418 683-2170
ACCESS
BUSINESS
160
Drumlin Circle
Concord
(Ontario) L4K 3E5 CANADA
Tel.:
1 905 738-3741
Fax:
1 905 738-3712
PROTOCOL
BUSINESS
Navtel
Product Group
160
Drumlin Circle
Concord
(Ontario) L4K 3E5 CANADA
Tel.:
1 905 738-3741
Fax:
1 905 738-3712
Transport
and Datacom
2650
Marie-Curie Avenue West
St-Laurent
(Quebec) H4S 2C3 CANADA
Tel.:
1 514 856-2222
Toll-free:
1 888 972-7666 (USA and Canada)
Fax:
1 514 856-2232
EXFO
Service Assurance
285
Mill Road
Chelmsford,
MA 01824 USA
Tel.:
1 978 367-5600
Toll-free:
1 888 274 9638 (USA and Canada)
Fax:
1 978 367-5700
EXFO
SWEDEN
Arvid
Hedvalls Backe 4
SE-411
33 Gothenburg SWEDEN
Tel.:
+46 31 164949
LIFE
SCIENCES AND INDUSTRIAL DIVISION
2260
Argentia Road
Mississauga
(Ontario) L5N 6H7 CANADA
Tel.:
1 905 821-2600
Fax:
1 905 821-2055
|
EXFO
AMERICA
3701
Plano Parkway, Suite 160
Plano,
TX 75075 USA
Tel.:
1 972 907-1505
Toll-free:
1 800 663-3936 (USA and Canada)
Fax:
1 972 836-0164
EXFO
EUROPE
Omega
Enterprise Park, Electron Way
Chandlers
Ford, Eastleigh,
Hampshire
S053 4SE UK
Tel.:
+44 2380 246810
Fax:
+44 2380 246801
EXFO
INDIA
701
Cerebrum IT Park, Wadgaon Sheri
Pune
411006 INDIA
Tel.:
+91 20 4018 6613
EXFO
ASIA-PACIFIC
151
Chin Swee Road, #03-29
Manhattan
House 169876 SINGAPORE
Tel.:
+65 6333 8241
Fax:
+65 6333 8242
EXFO
CHINA
EXFO
Telecom Equipment (Shenzhen) Ltd.
3rd
Floor, Building 10
Yu
Sheng Industrial Park (Gu Shu Crossing), No. 467
National
Highway 107, Xixiang, Bao An District
Shenzhen
518126 CHINA
Tel.:
+86 (755) 2955 3100
Fax:
+86 (755) 2955 3101
Sales
Office - Shenzhen
No.
88 Fuhua First Road
Central
Tower, Room 801
Futian
District
Shenzhen
518048, P. R. CHINA
Tel.:
+86 (755) 8203 2300
Fax:
+86 (755) 8203 2306
Sales Office -
Beijing
Beijing
New Century Hotel Office Tower
Room
1754-1755
No.
6 Southern Capital Gym Road
Beijing
100044 P. R. CHINA
Tel.:
+86 (10) 6849 2738
Fax:
+86 (10) 6849 2662
|
FORWARD-LOOKING
STATEMENTS
This
Annual Report contains forward-looking statements within the meaning of the U.S.
Private Securities Litigation Reform Act of 1995, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Forward-looking statements are statements other than historical information or
statements of current condition. Words such as may, will, expect, believe,
anticipate, intend, could, estimate, continue, or the negative
or comparable terminology are intended to identify forward-looking
statements. In addition, any statements that refer to expectations, projections
or other characterizations of future events and circumstances are considered
forward-looking statements. They are not guarantees of future performance and
involve risks and uncertainties. Actual results may differ materially from those
in forward-looking statements due to various factors including the effect of the
worldwide recession and the timing of the expected recovery on the telecom
market for our customers and suppliers; fluctuating exchange rates and our
ability to execute in these uncertain conditions; consolidation in the
global telecommunications test, measurement and service assurance industry;
capital spending levels in the telecommunications, life sciences and
high-precision assembly sectors; concentration of sales; the effects of the
additional actions we have taken in response to such economic uncertainty
(including our ability to quickly adapt cost structures with anticipated levels
of business, ability to manage inventory levels with market demand); market
acceptance of our new products and other upcoming products; limited visibility
with regards to customer orders and the timing of such orders; our ability to
successfully integrate our acquired and to-be-acquired businesses; our ability
to successfully expand international operations; the retention of key technical
and management personnel; and future economic, competitive, financial and market
condition. Assumptions relating to the foregoing involve judgments and risks,
all of which are difficult or impossible to predict and many of which are beyond
our control. Other risk factors that may affect our future performance and
operations are detailed in our Annual Report, on Form 20-F, and our other
filings with the U.S. Securities and Exchange Commission and the Canadian
securities commissions. We believe that the expectations reflected in the
forward-looking statements are reasonable based on information currently
available to us, but we cannot assure you that the expectations will prove to
have been correct. Accordingly, you should not place undue reliance on these
forward-looking statements. These statements speak only as of the date of this
document. Unless required by law or applicable regulations, we undertake no
obligation to revise or update any of them to reflect events or
circumstances that occur after the date of this document.
TRADEMARKS
AND LOGOS
EXFO and
the EXFO logo are registered trademarks of EXFO Electro-Optical Engineering Inc.
in Canada, the United States and/or other countries. Other EXFO product names or
logos referenced in this document are either trademarks or registered trademarks
of EXFO Electro-Optical Engineering Inc. or of its affiliated companies.
All other product
names and trademarks mentioned herein are trademarks of their respective owners.
However, neither the presence nor absence of the identification symbols ® or ™
affects the legal status of any trademark.
All dollar
amounts in this Annual Report are expressed in US dollars, except as otherwise
noted.
| WWW.EXFO.COM | EXFO |
| Assessing Next-Gen Networks |
© 2009
EXFO Electro-0ptical Engineering Inc. All rights reserved. Printed in
Canada.
Quebec City, Canada, November 2, 2009
RE:
Annual and Special Meeting of Shareholders
Dear
Shareholder,
Fiscal
2009 unfolded like two years in one at EXFO. At the midpoint of fiscal 2009, we
had increased sales 10.1% year-over-year (or flat organically, excluding
acquisitions and forward exchange contracts), while most of our peers endured
double-digit declines. We had also generated strong earnings thanks,
in part, to a favorable Canadian/US exchange rate.
The
depressed economic environment, however, caught up with us in the second half of
the fiscal year, especially in May and June, as several opportunities that we
had been tracking were delayed or reduced in size. We also witnessed a
significant decrease in the US dollar against multiple currencies, including the
Canadian dollar, in the third quarter, which prompted us to implement a
restructuring plan that will provide $6 million in annualized pre-tax savings to
help us return to better profitability levels.
We closed
fiscal 2009 with a 5.9% year-over-year decrease in sales to $172.9 million, or
-13.5% on an organic basis. Given the lower sales volume caused by the
economic recession, EBITDA* dropped to $14.5 million, or 8.4% of
sales.
Obviously,
these results are disappointing to me, but I believe that we continued to
increase our market share as the telecom test and service assurance pie
contracted more than our sales in the past year. We also made inroads in
new market segments, intensified sales and marketing initiatives in targeted
regions, and launched a series of ground-breaking solutions. I’m confident these
actions will lead to a significant increase in sales and earnings in
upcoming years.
Following
is a summary of our key achievements in fiscal 2009:
|
·
|
Increased
protocol sales 63.1% year-over-year to $54.9
million;
|
|
·
|
Raised
gross margin for a seventh consecutive year to reach
61.3%;
|
|
·
|
Generated
a record $22.6 million in cash flows from
operations;
|
|
·
|
Maintained
a healthy balance sheet with a cash position of $69.7 million and no
debt;
|
|
·
|
Returned
$26.3 million to shareholders via our share buyback
program;
|
|
·
|
Positioned
EXFO for our key market opportunities by launching 26 new products,
including several
game-changers; and
|
|
·
|
Over
the last five years, increased sales by a CAGR of 18.3% and improved gross
margin on average 1.3% per year—from 54.7% to
61.3%.
|
With the
worst of the economic recession seemingly behind us, I’m optimistic that EXFO is
poised to return to profitable growth. Given that operators are
shifting their fixed and mobile networks to a fully converged, IP architecture
in order to meet growing bandwidth demand in a flexible and cost-effective
manner, EXFO is well positioned to meet the challenge with its
market-leading optical product portfolio and higher-margin, next-generation IP
test and service assurance offerings.
Against
this backdrop, we have maintained our best practice of establishing corporate
metrics by which management’s performance can be measured by shareholders. Due
to the economic recession in 2009, however, we’ve adjusted them for a new
three-year period extending from fiscal 2010 to 2012. We’re retaining our
minimum target of 20% sales CAGR as we intend to grow sales faster than our
end-markets. We’re raising our gross margin metric to a minimum of 64% based on
an increased contribution from higher-margin protocol solutions. Finally, we
plan to at least double EBITDA* in dollars over the newly defined three-year
period.
I will
discuss these objectives in greater detail at our upcoming Annual and Special
Meeting of Shareholders. Please consider this letter as a formal invitation
to attend our Meeting, which will be held
on January 13, 2010, 10 a.m., at the Marriott Toronto Downtown
Eaton Centre Hotel, Carlton Room (Second Floor), 525 Bay Street, Toronto,
Ontario.
Details
of the business to be conducted at the Meeting are provided in the attached
Management Proxy Circular and Notice of Annual and Special Meeting of
Shareholders.
It is
important that your shares be represented at the Meeting. WHETHER OR NOT YOU
PLAN TO ATTEND THE MEETING, PLEASE COMPLETE, SIGN, DATE AND PROMPTLY RETURN
THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE.
If you
send in your proxy card and then decide to attend the Meeting to vote your
shares in person, you may still do so. Your proxy is revocable in accordance
with the procedures set forth in the Management Proxy Circular.
For
investors holding EXFO shares through a broker and wanting a printed copy of our
Annual Report, please make the request to your broker. Otherwise, contact our
Investor Relations Department at ir@EXFO.com.
On behalf
of the Board of Directors, I would like to express our appreciation for your
continued interest in EXFO. We look forward to seeing you at the
Meeting.
Sincerely,
/s/ Germain Lamonde
Germain
Lamonde
Chairman,
President and
Chief
Executive Officer
EXFO
Electro-Optical Engineering Inc.
|
*
|
EBITDA
is defined as net earnings (loss) before interest, income taxes,
amortization of property, plant and equipment, amortization of intangible
assets, impairment of goodwill and extraordinary gain. Please see EXFO’s
website, www.EXFO.com/investors, for a
reconciliation of EBITDA to GAAP net earnings
(loss).
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
_________________________
NOTICE
OF ANNUAL AND SPECIAL MEETING
OF
SHAREHOLDERS
NOTICE IS HEREBY GIVEN that
the Annual and Special Meeting (the "Meeting") of shareholders of EXFO
Electro-Optical Engineering Inc. (the "Corporation") will be held at 10:00 a.m.
(Eastern Standard Time), on Wednesday, January 13, 2010, at the Marriott Toronto
Downtown Eaton Centre Hotel, Carlton Room (Second Floor), 525 Bay Street,
Toronto, Ontario, Canada for the following purposes:
|
1.
|
to
receive the consolidated financial statements of the Corporation for the
financial year ended August 31, 2009, and the Auditor’s report
thereon;
|
|
2.
|
to
elect Directors of the Corporation;
|
|
3.
|
to
appoint PricewaterhouseCoopers LLP as auditors and to authorize the Audit
Committee to fix their
remuneration;
|
|
4.
|
to
consider and, if deemed advisable, to adopt with or without variation, a
special resolution, whose text is reproduced in full in the
accompanying Information Circular, authorizing an amendment to the
articles of the Corporation to change the name of the Corporation to “EXFO
Inc.”;
|
|
5.
|
to
transact such further or other business as may properly come before the
Meeting or any adjournment or adjournments
thereof.
|
Enclosed
is a copy of the 2009 Annual Report of the Corporation including the
consolidated financial statements and the Auditor’s Report thereon, together
with the Management Proxy Circular and a form of Proxy.
DATED at
Quebec, Province of Quebec, this 2nd day
of November, 2009.
BY
ORDER OF THE BOARD OF DIRECTORS
/s/ Benoit Ringuette
Benoit
Ringuette
Secretary
Shareholders
unable to attend the Meeting are requested to complete the enclosed proxy form
and return it in the envelope provided. To be valid, proxies must reach the
office of CIBC Mellon Trust Company, no later than the last day prior to the
date of the Meeting or any reconvening of the Meeting in case of adjournment.
Shareholders may also have the proxy form delivered to the Chairman of the
Meeting prior to the time of voting on the day of the Meeting or any adjournment
thereof.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
MANAGEMENT
PROXY CIRCULAR OF THE CORPORATION
FOR THE
ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
THIS
PROXY IS SOLICITED BY THE MANAGEMENT OF THE CORPORATION
The
undersigned shareholder of EXFO ELECTRO-OPTICAL ENGINEERING INC. hereby appoints
(CHECK EITHER (A) or (B)):
|
o (A)
|
Mr.
Germain Lamonde of St-Augustin-de-Desmaures, Quebec, or failing him, Mr.
Pierre Plamondon of Quebec, Quebec;
|
| o (B) | of | ; | |
| (Name) | (Address) |
as the
representative of the undersigned to attend, act and vote on behalf of the
undersigned at the Annual and
Special Meeting of the shareholders (the "Meeting") of the Corporation to be
held at the Marriott Toronto Downtown Eaton Centre Hotel, Carlton Room (Second
Floor), 525 Bay Street, Toronto, Ontario, Canada, on January 13, 2010,
at 10:00 o’clock a.m. (Eastern Standard Time) and at any adjournments of
such meeting.
The
undersigned wishes that all shares represented by this proxy be voted in
accordance with the instructions hereinbelow. All shares represented by this
proxy will be voted for or be the subject of abstentions, as specified
by the shareholder. However, in the absence of instructions, the shares
represented by proxy will be voted in favor of each of the proposals set
forth herein.
|
|
(MARK
WITH AN X)
|
|
To
elect Pierre-Paul Allard, Germain Lamonde, Pierre Marcouiller, Guy Marier,
David A. Thompson and André Tremblay, whose cities of residence are
indicated in the Management Proxy Circular, as Directors of the
Corporation.
|
FOR
ABSTENTION
|
o
o
|
|
To
appoint PricewaterhouseCoopers LLP as auditors and to authorize the Audit
Committee to fix their remuneration.
|
FOR
ABSTENTION
|
o
o
|
|
To
adopt a special resolution, authorizing an amendment to the articles of
the Corporation to change the name of the Corporation to “EXFO
Inc.”;
|
FOR
AGAINST
|
o
o
|
A
DISCRETIONARY POWER IS HEREBY CONFERRED as to any amendment or change made to
the matters mentioned in the Notice of Meeting or as to such other matters as
may legally come before the Meeting. The Management of the Corporation is not
aware of any amendments, changes or other matters that may come before the
Meeting.
|
*
A shareholder is entitled to appoint, to attend and act for and on behalf
of such shareholder at the Meeting, a person other than the person
mentioned in (A) herein above and may do so by checking (B) hereinabove
and adding the name of such other person in the space reserved for such
purpose.
|
DATED
this day
of
__________________________________________
SIGNATURE
OF SHAREHOLDER
[ ]
name of shareholder
[ ]
|
This
proxy must be signed by the shareholder or his proxyholder authorized in writing
or, if the shareholder is a corporation, under its corporate seal, by
a duly authorized officer or proxyholder of the corporation. Please remember to
date and sign this proxy. If this proxy is not dated, it will be deemed to bear
the date of its mailing by Management.
YOU
ARE REFERRED TO THE MANAGEMENT PROXY CIRCULAR APPENDED.
Français
au verso
NOTICE OF ANNUAL AND
SPECIAL
MEETING OF SHAREHOLDERS
And
MANAGEMENT
PROXY CIRCULAR
November
2, 2009
EXFO
Electro-Optical Engineering Inc.
MANAGEMENT
PROXY CIRCULAR
SOLICITATION
OF PROXIES
This
Management Proxy Circular is provided in connection with the solicitation by the
Management of EXFO Electro-Optical Engineering Inc. (the "Corporation" or
"EXFO") of proxies to be used at the Annual and Special Meeting of shareholders
(the "Meeting") of the Corporation to be held at the time and place and for the
purposes stated in the accompanying Notice of Meeting and at any adjournment
thereof. Unless otherwise indicated, the information contained herein is given
as of November 2, 2009.
It is
expected that the solicitation will be made primarily by mail but proxies may
also be solicited personally by officers, employees or agents of the
Corporation. The Corporation may also reimburse brokers and other persons
holding shares in their names or in the names of nominees, for their costs
incurred in sending proxy material to principals and obtaining their
proxies. The cost of solicitation will be borne by the Corporation and is
expected to be nominal.
APPOINTMENT
AND REVOCATION OF PROXIES AND ATTENDANCE OF BENEFICIAL SHAREHOLDERS
The
persons named in the enclosed Form of Proxy (the "Form of Proxy") are officers
of the Corporation. A shareholder desiring to
appoint some other person (who need not be a shareholder) to represent him or
her at the Meeting may do so by inserting such person’s name in the blank space
provided in the Form of Proxy and checking item (B).
To be
valid, proxies must be received at the Montreal, Canada office of CIBC Mellon
Trust Company, 2001 University Street, Suite 1600, Montreal, Quebec,
Canada, H3A 2A6, the transfer agent of the Corporation, no later than the
close of business on the last business day preceding the day of the Meeting or
any adjournment thereof, or proxies may be delivered to the Chairman of the
Meeting on the day of the Meeting or any adjournment thereof. A beneficial
shareholder who completes a Form of Proxy and who wishes to attend and vote at
the Meeting personally must appoint himself or herself proxy holder in the
foregoing manner.
A proxy
given pursuant to this solicitation may be revoked by instrument in writing
executed by the shareholder or by his or her attorney authorized in writing
if such instrument is deposited either at the registered office of the
Corporation to the attention of the Corporate Secretary no later than the close
of business on the last business day preceding the day of the Meeting or any
adjournment thereof or with the Chairman of the Meeting on the day of the
Meeting or any adjournment thereof.
VOTING
OF PROXIES
The
shares represented by proxies appointing the persons, or any one of them,
designated by Management thereon to represent the shareholder at the
Meeting will be voted in accordance with the instructions given by the
shareholder. Unless otherwise
indicated, the voting rights attaching to the shares represented by a Form
of Proxy will be voted “FOR” in respect of all the proposals described
herein.
The Form
of Proxy confers discretionary authority upon the persons named therein with
respect to amendments or variations to matters identified in the
accompanying Notice of Meeting. As at the date hereof, Management is not aware
that any other matter is to be presented at the Meeting. If, however, other
matters properly come before the Meeting, the persons designated in the Form of
Proxy will vote thereon in accordance with their judgment pursuant to the
discretionary authority conferred by such proxy with respect to such
matters.
VOTING
SHARES AND PRINCIPAL HOLDERS THEREOF
As at
November 2, 2009, 22,749,965 Subordinate Voting Shares and 36,643,000 Multiple
Voting Shares were outstanding, being the only classes of shares entitled to be
voted at the Meeting. Each holder of Subordinate Voting Shares is entitled
to one vote and the holder of Multiple Voting Shares is entitled to 10 votes for
each share registered in his or her name at the close of business on November
17, 2009, being the date fixed by the Board of Directors for the purpose of
determining registered shareholders entitled to receive the accompanying Notice
of Meeting and to vote (the “Record Date”). A list of
shareholders entitled to vote as of the Record Date, showing the number of
shares held by each shareholder, shall be prepared within 10 days of the Record
Date. This list of shareholders will be available for inspection
during normal business hours at the Montreal, Canada office of CIBC Mellon
Trust Company, the transfer agent of the Corporation, 2001 University Street,
Suite 1600, Montreal, Quebec, Canada, H3A 2A6, and at the
Meeting.
Unless
otherwise indicated, the resolutions submitted to a vote at the Meeting must be
passed by a majority of the votes cast by the holders of Subordinate Voting
Shares and Multiple Voting Shares, as a single class, present at the Meeting in
person or by proxy and voting in respect of all resolutions to be voted on by
the shareholders of the Corporation.
To the
knowledge of executive officers and directors of the Corporation, as of November
2, 2009, the only persons who are beneficial owners or who exercise control or
direction, directly or indirectly, over shares carrying more than 10% of the
voting rights attaching to any class of shares of the Corporation
are:
|
Name
of Shareholder
|
Number
of Subordinate Voting Shares
|
Percentage
of Voting Rights Attached to All Subordinate Voting Shares
|
Number of Multiple Voting
Shares (1)
|
Percentage
of Voting Rights Attached to All Multiple Voting Shares
|
Percentage
of Voting Rights Attached to All Subordinate and Multiple Voting
Shares
|
|
Germain
Lamonde
|
16,139
|
0.07%
|
36,643,000 (2)
|
100%
|
94.16%
|
|
(1)
|
The
holder of Multiple Voting Shares is entitled to 10 votes for each
share.
|
|
(2)
|
Mr.
Lamonde exercises control over this number of Multiple Voting Shares
through G. Lamonde Investissements Financiers inc., a company
controlled by Mr. Lamonde and through Fiducie Germain Lamonde, a
family trust for the benefit of Mr. Lamonde’s
family.
|
ELECTRONIC
DELIVERY
The
Corporation has a voluntary program for e-mail notification to our shareholders
that documents which must be delivered pursuant to securities legislation
are available on EXFO’s website. Every year, EXFO delivers
documentation to shareholders, such as this Management Proxy Circular and its
Annual Report containing the annual consolidated financial statements together
with the auditors' report thereon that must be delivered to shareholders of
a public company by law. EXFO has made this process more convenient for its
shareholders, as shareholders who so wish, may be notified by e-mail when
the Corporation’s documentation is posted in the "Investors" section on its
website (www.EXFO.com). Accordingly such documentation will not be sent in paper
form by mail. The Corporation believes that electronic delivery will
benefit the environment and reduce its costs. Shareholders who do not consent to
receive documentation by e-mail will continue to receive such documentation by
mail. Shareholders may also notify the Corporation in writing of their intention
not to receive the Annual Report containing the annual consolidated financial
statements together with the auditors' report thereon, neither by e-mail
nor by mail.
Registered
shareholders can consent to electronic delivery by completing and returning the
consent form accompanying this Circular to CIBC Mellon Trust Company.
Unregistered shareholders (i.e. shares are held through a securities
broker, bank, trust company or other nominee) can consent to electronic delivery
by completing and returning the appropriate form received from the applicable
intermediary.
BUSINESS
TO BE TRANSACTED AT THE MEETING
Presentation
of the Financial Statements
The
consolidated financial statements of the Corporation for the financial year
ended August 31, 2009 and the Auditors’ report thereon contained in
EXFO’s Annual Report accompanying this Circular will be submitted
to shareholders at the Meeting but no vote with respect thereto is required
or proposed to be taken.
Election
of the Directors
According
to the articles of the Corporation, the Board of Directors shall consist of a
minimum of three (3) and a maximum of twelve (12) directors. The number of
directors is currently fixed to six (6) pursuant to a resolution of the
Board of Directors. At the Meeting, Management proposes the six (6) persons
named hereafter on page 4 as nominees for election as directors to
hold office until the next annual meeting or until the office is otherwise
vacated in accordance with the Corporation’s by-laws.
Management
does not anticipate that any of the nominees will be unable, or for any reason
whatsoever, be reluctant to fulfill their duties as directors. Should this occur
for any reason whatsoever before the election, the persons named in the Form of
Proxy reserve the right to vote for another nominee of their choice unless the
shareholder specified on the Form of Proxy to abstain from voting for the
election of the directors. The election of the directors must be approved
by a majority of the votes cast on the matter at the Meeting.
Appointment
and Remuneration of Auditors
A firm of
auditors is to be appointed by vote of the shareholders at the Meeting to serve
as auditors of the Corporation until the close of the next annual
meeting. The Audit Committee is to be authorized to fix the
remuneration of the auditors so appointed. The Board of Directors and
Management, upon the advice of the Audit Committee, recommend that
PricewaterhouseCoopers LLP be re-appointed as Auditors of the
Corporation. The re-appointment of PricewaterhouseCoopers LLP
must be approved by a majority of the votes cast on the matter at the
Meeting.
Resolution
for the Approval of the Corporation’s Name Change
When the
Corporation was founded in 1985, its original products were focused on the needs
of installers and operators of fiber-optic networks. Over the past several years
the Corporation has extended its business activities to include transport
and datacom, copper/xDSL, service assurance as well as life sciences and
industrial business. As a result, management of the Corporation
believes that the words “Electro-Optical Engineering” should be deleted from the
name of the Corporation, and therefore, proposes to change the name of the
Corporation from “EXFO Electro-Optical Engineering Inc.” to “EXFO Inc.” The word
“EXFO” by itself is a registered trademark in Canada, the United States of
America, the European Union and various other countries, and the Corporation is
recognized worldwide as being “EXFO”. In the opinion of management of the
Corporation: (a) the proposed new name, simplified from the original name,
is better adapted to the present broader range of the business activities of the
Corporation; (b) the proposed new name would be more suitable for any additional
future business orientations the Corporation may wish to encounter, if any; and
(c) the deletion of the words “Electro-Optical Engineering” from the name of the
Corporation is desirable in light of the fact that the Corporation is no longer
only focused on the needs of installers and operators of fiber-optic
networks.
Accordingly,
the following special resolution (the “Name Change Resolution”) authorizing an
amendment to the articles of the Corporation to change the name of the
Corporation to “EXFO Inc.” will be considered at the Meeting:
“BE IT
RESOLVED, as a special resolution pursuant to s. 173(1) (a) of the Canada Business Corporations
Act, R.S.C. 1985, c. C-44 (the “Act”), that:
|
(i)
|
the
articles of the Corporation be amended to change the name of the
Corporation to “EXFO Inc.”;
|
|
(i)
|
any
officer of the Corporation be and hereby is authorized and empowered,
acting for, in the name of and on behalf of the Corporation, to execute or
cause to be executed, under the seal of the Corporation or otherwise, and
to deliver or cause to be delivered any and all documents and instruments,
and to do or cause to be done all such other acts and things, as, in the
opinion of the Board of Directors or such designate, may be necessary or
desirable in order to fulfill the intent of the foregoing provisions
of this resolution including, without limitation, registering such
articles of amendment in accordance with the Act to change the name of the
Corporation as described
above;
|
|
(ii)
|
notwithstanding
that this resolution has been duly passed by the shareholders of the
Corporation, the Board be and is hereby authorized and empowered to revoke
this resolution, in whole or in part, at any time prior to such
articles of amendment being registered pursuant to the Act without further
approval of the shareholders of the
Corporation.”
|
The
Board of Directors recommends that the shareholders vote “For” the adoption of
the Name Change Resolution. To be effective, the Name Change resolution must be
approved by not less than two-thirds of the votes cast on the matter at the
Meeting.
NOMINEES
FOR ELECTION AS DIRECTORS AND THEIR BENEFICIAL OWNERSHIP OF VOTING
SECURITIES
The
following table and notes set out the name of each of the individuals proposed
to be nominated at the Meeting for election as a director of the Corporation,
all other positions and offices with the Corporation now held by each such
individual, if any, the principal occupation or employment of each such
individual, their respective period of service as a director and the approximate
number of shares of the Corporation beneficially owned by each such individual
or over which each of them exercised control or direction.
|
Name
and Position
or Office with
the
Corporation
|
Principal
Occupation or Employment
|
Residence
|
Director
Since
|
Number
of Subordinate Voting Shares
|
Number
of Multiple Voting Shares
|
|
|
Germain
Lamonde
Chairman
of the Board, President and Chief Executive Officer
|
Chairman
of the Board, President and Chief Executive Officer, EXFO Electro-Optical
Engineering Inc.
|
St-Augustin-de-Desmaures,
Quebec,
Canada
|
September
1985
|
16,139
|
36,643,000
(1)
|
|
|
Pierre-Paul
Allard (2)
Independent
Director
|
Area
Vice-President, Sales
Cisco
Systems Inc. (3)
|
Pleasanton,
California,
USA
|
September
2008
|
8,000
|
-
|
|
|
Pierre
Marcouiller (4)
(5)
Independent
Director
|
Chairman
of the Board and Chief Executive Officer,
Camoplast
Inc. (6)
|
Magog,
Quebec,
Canada
|
May
2000
|
5,000
|
-
|
|
|
Guy
Marier (4)
(7)
Independent
Lead Director
|
Executive
Consultant
|
Lakefield
Gore, Quebec,
Canada
|
January
2004
|
1,000
|
-
|
|
|
David
A. Thompson, Ph.D.(4)
(5)
Independent
Director
|
Executive
Consultant (8)
|
Newton,
North
Carolina,
USA
|
June
2000
|
2,100
|
-
|
|
|
André
Tremblay (5)
(9)
Independent
Director
|
President
and Chief Executive Officer,
Terrestar
Solutions Inc. (10)
|
Outremont,
Quebec,
Canada
|
May
2000
|
6,650 (11)
|
-
|
|
|
(1)
|
Mr.
Lamonde exercises control over this number of Multiple Voting Shares
through G. Lamonde Investissements Financiers inc., a company
controlled by Mr. Lamonde and through Fiducie Germain
Lamonde, a family trust for the benefit of Mr. Lamonde’s
family.
|
|
(2)
|
Member
of the Audit Committee and the Human Resources Committee since January
2009.
|
|
(3)
|
Cisco
Systems Inc. is a leading network equipment manufacturer in the global
telecommunications industry.
|
|
(4)
|
Member
of the Audit Committee.
|
|
(5)
|
Member
of the Human Resources Committee.
|
|
(6)
|
Camoplast
Inc. designs, develops and manufactures specialized components,
sub-systems and assemblies for the world leading original equipment
manufacturers (OEMs) of both on- and off-road vehicles in a variety of
markets including automotive, agricultural, construction and industrial,
defence and powersports.
|
|
(7)
|
Chairman
of the Human Resources Committee.
|
|
(8)
|
Mr.
David A. Thompson has recently retired from his position as Vice-President
and Director of Technology, Corning Cable Systems. Corning Incorporated is
a diversified technology company that concentrates its efforts on
high-impact growth opportunities. Corning combines its expertise in
specialty glass, ceramic materials, polymers, and the manipulation of the
properties of light, with strong process and manufacturing capabilities to
develop, engineer and commercialize significant innovative products for
the telecommunications, flat panel display, environmental, semiconductor,
and life science industries.
|
|
(9)
|
Chairman
of the Audit Committee.
|
|
(10)
|
Terrestar
Solutions Inc. is a leading edge provider of satellite telecommunication
services in Canada.
|
|
(11)
|
Mr.
Tremblay exercises control over this number of Subordinate Voting Shares
through 9104-5559 Quebec inc., a company controlled by Mr.
Tremblay.
|
The
information as to Subordinate Voting Shares and Multiple Voting Shares
beneficially owned or over which the above-named individuals exercise control or
direction is not within the direct knowledge of the Corporation and has been
furnished by the respective individuals.
With the
exception of Mr. André Tremblay, none of the individuals who are proposed to be
nominated at the Meeting for election as a director of the
Corporation:
|
(a)
|
is,
as at the date hereof, or has been, within 10 years before the date
hereof, a director, chief executive officer or chief financial officer of
any company that (i) was subject to an order that was issued while
such individual was acting in the capacity as director, chief executive
officer or chief financial officer, or (ii) was subject to an order
that was issued after such individual ceased
to be a director, chief executive officer or chief
financial officer and which resulted from an event that occurred while
that person was acting in the capacity as director, chief executive
officer or chief financial
officer;
|
|
(b)
|
is,
as at the date hereof, or has been within 10 years before the date hereof,
a director or executive officer of any company that, while such individual
was acting in that capacity, or within a year of that individual
ceasing to act in that capacity, became bankrupt, made a proposal under
any legislation relating to bankruptcy or insolvency or was subject to or
instituted any proceedings, arrangement or compromise with creditors or
had a receiver, receiver manager or trustee appointed to hold its
assets;
|
|
(c)
|
has,
within the 10 years before the date hereof, become bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency, or
become subject to or instituted any proceedings, arrangement or compromise
with creditors, or had a receiver, receiver manager or trustee
appointed to hold his assets; or
|
|
(d)
|
has
been subject to (i) any penalties or sanctions imposed by a court
relating to securities legislation or by a securities regulatory authority
or has entered into a settlement agreement with a securities
regulatory authority, or (ii) any other penalties or sanctions
imposed by a court or regulatory body that would likely be considered
important to a reasonable security holder in deciding whether to vote
for such individual.
|
Mr.
Tremblay was a director and the President and Chief Executive Officer of
Microcell Telecommunications Inc. (“Microcell”) in 2003, when Microcell
successfully completed its recapitalization process according to a Plan
of Reorganization and Compromise and Arrangement approved by the Superior
Court of the Province of Quebec.
COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
Compensation
Discussion & Analysis
This
Compensation Discussion & Analysis mainly focuses on: (i) significant
elements of the Corporation’s executive compensation program; (ii) principles on
which the Corporation makes compensation decisions and determines the amount of
each element of executive and director compensation; and (iii) an analysis of
the material compensation decisions made by the Human Resources Committee for
the financial year ended August 31, 2009.
The
following is a discussion of the compensation arrangements with the
Corporation’s Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”)
and each of the three most highly compensated executive officers whose total
compensation was, individually, more than $150,000 (the “NEOs”). The
Corporation’s NEOs for the financial year ended August 31, 2009 were,
Mr. Germain Lamonde (CEO), Mr. Pierre Plamondon (CFO), Mr. Jon Bradley,
Vice-President, Telecom Sales, International, Mr. Dana Yearian,
Vice-President, Telecom Sales, Americas and Mr. Stephen Bull,
Vice-President, Research and Development, Telecom Division.
Members
of the Human Resources Committee
During
the fiscal year ended August 31, 2009, the Human Resources Committee was
composed of Mr. Guy Marier, as Chairman, Mr. Pierre-Paul Allard
(starting January 14, 2009), Mr. Pierre Marcouiller, Mr. David A. Thompson
and Mr. André Tremblay, none of whom were officers or employees, or former
officers or employees of the Corporation or its subsidiaries. All of the
members of the Human Resources Committee are considered “independent”, as
defined in applicable securities legislation.
Mandate
of the Human Resources Committee
The Human
Resources Committee of the Board of Directors is responsible for establishing
the annual compensation and overseeing the assessment of the performance of all
the Corporation’s executive officers, including the President and Chief
Executive Officer. This Committee also reviews and submits to the Board the
salary structure and the short-term and long-term incentive compensation
programs for all employees of the Corporation. The Committee also evaluates and
makes recommendations to the Board regarding the compensation of directors,
including the number of Deferred Share Units credited to the non-employee
directors pursuant to the Deferred Share Unit Plan. The Committee’s
goal is to develop and monitor executive compensation programs that are
consistent with strategic business objectives and shareholders' interests.
Though the Committee is responsible for the review and approval of the
employees that will receive Restricted Share Units or options to purchase shares
of the Corporation, in accordance with policies established by the Board
and the terms of the Long-Term Incentive Plan, these functions may be shared
between the Board of Directors and the Human Resources Committee. During the
period from September 1, 2008 to August 31, 2009 these functions have
exclusively been performed by the Human Resources Committee.
The Human
Resources Committee has reviewed and discussed with management the compensation
disclosure in this document, and has recommended to the Board of Directors that
the disclosure be included in this Circular.
Since
September 1, 2008 and prior to November 2, 2009, the Human Resources Committee
held 5 meetings and at three of those meetings executive compensation was
discussed. On October 15, 2008 and October 13, 2009, the Human
Resources Committee met to discuss and approve the compensation plans of
executive officers for the financial years beginning on September 1, 2008 and
2009. On June 30, 2009 the Human Resources Committee met to discuss the
Executive Compensation Survey prepared by Mercer (Canada) Ltd. ("Mercer") that
provided certain recommendations with respect to the target compensation (base
salary, short-term compensation and long-term compensation) that should be aimed
by the Corporation for its executive officers. The Human Resources
Committee meetings were attended by all the members of the Committee, except Mr.
Tremblay who was absent at two meetings.
Compensation
Plan Control - Compensation Consultant and Internal Review
As a
general practice, the Corporation’s relative position in terms of compensation
levels is determined annually through studies performed by independent
consulting firms using a selected reference market of comparable companies. The
benchmarking activities are further detailed below under the heading –
“Benchmarking”.
In 2004,
the Corporation engaged Mercer to conduct a full market benchmarking and review
of the Corporation’s executive compensation plans. The analysis of Mercer was
based on three elements: (i) base salary; (ii) variable compensation; and
(iii) long-term incentive compensation and indicated that the base salary
and variable compensation of the executive officers were competitive with the
reference group identified by Mercer but indicated that the long-term
incentive compensation element was weak compared to the reference group. In
order to overcome such weakness Mercer recommended the introduction of a
Long-Term Incentive Plan. Following such recommendations, the Corporation
decided to align the overall compensation of the executive officers with the
median compensation offered in a comparative market and also introduced an
amendment to the Stock Option Plan creating the Long-Term Incentive Plan
pursuant to which, the Corporation may grant Restricted Share Units to executive
officers. Such Plan was approved by the shareholders of the Corporation
on January 12, 2005.
In 2006,
Mercer provided data regarding market competitive annual base salary increases,
which were applied to the executive compensation structure developed in 2004. In
addition, Mercer provided information about the following topics in
2006: (i) job classification structure & salary scales (Define Job
positions vs. comparable market including salary scale); and
(ii) development of compensation management policies & practices (to
manage employee progression through the salary scale).
In 2007,
the Corporation engaged two human resources consultants, Mercer and AON
Corporation to adivse whether the compensation positioning of the
Corporation was still aligned with the comparative market. Both consultants
confirmed that the Corporation’s position was still aligned with the comparative
market and both also recommended that the Corporation’s compensation scheme
should gradually evolve from the fiftieth percentile to the sixtieth percentile.
The recommendations of both consultants were followed and the Corporation
decided to gradually align the compensation positioning from the fiftieth
percentile to the sixtieth percentile (hereinafter in this Circular referred to
as the “Target Compensation Positioning”) over the next three
years.
In 2008,
the Corporation engaged Hewitt Associates LLC to conduct a world-wide market
analysis for selected international positions. The survey included annual
base salary, bonuses and commission plans.
In 2009,
the Corporation appointed Mercer to review the compensation positioning of the
Corporation. Mercer confirmed that the majority of the Corporation’s
compensation scheme (base salary, short-term compensation and long-term
compensation) was still aligned with the comparative market but some adjustments
were proposed to be made for certain executive officers. Considering
the overall economic situation, the adjustments proposed by Mercer will be
postponed.
In
addition, internal pay equity studies are a key factor to complete the
compensation review process and indicate where necessary adjustments may be
required. During the financial year ended August 31, 2009, this practice
continued and certain compensation adjustments were made.
Benchmarking
The
target compensation levels of the Corporation are determined in relation to the
compensation levels of the peer companies of the Corporation and in
consideration of the results of the Corporation. The reference companies were
determined using the market data for Canada, United States and the United
Kingdom from the following sources: 2008 Canadian Mercer benchmark Database, US
Mercer benchmark database and 2008 Mercer United Kingdom benchmark database.
Although the Corporation was not provided with the list of the companies
identified in the peer group, the peer group was determined in accordance with
the following elements: (i) companies operating in Canada where the
attraction and retention of skilled candidates is crucial in order to
fulfill the Corporation's strategy; (ii) companies that are in the
high-technology, telecommunications and durable-manufacturing of goods
industries and (iii) that have a median annual revenue of 200-300 million
US dollars. The report provided by Mercer compared the Corporation’s
compensation levels with the compensation levels of the peer group for each of
the following core compensation elements: base salary, sum of base salary and
annual short-term incentives and the sum of base salary, annual short-term
incentives and long-term incentives.
Key
Elements and Policies for Compensation of Executive Officers
The
Corporation’s executive compensation plans are designed to attract, retain and
motivate key executives who directly impact the Corporation’s long-term success
and the creation of shareholder value. In determining executive compensation,
the Committee considers the following four principles:
|
·
|
Performance-based:
Executive compensation levels reflect both the results of the Corporation
and individual results based on specific quantitative and qualitative
objectives established at the start of each financial year in keeping with
the Corporation’s long-term strategic
objectives.
|
|
·
|
Aligned with shareholder
interests: An important portion of incentive compensation for
executives is composed of equity awards to ensure that executives are
aligned with the principles of sustained long-term shareholder value
growth.
|
|
·
|
Market competitive:
Compensation of executives is designed to be externally competitive when
compared against executives of comparable peer companies, and in
consideration of the Corporation’s
results.
|
|
·
|
Individually equitable:
Compensation levels are also designed to reflect individual factors such
as scope of responsibility, experience, and performance against individual
measures.
|
Compensation
Elements
The
significant elements of the Corporation’s 2009 executive compensation program
were (i) Base Salary, (ii) the Short-Term Incentive Plan, and (iii)
the stock-based incentive compensation delivered through the Long-Term Incentive
Plan. In addition to the foregoing and as the case may be, the Corporation
also offered benefit plans and if applicable, contributed to a Deferred
Profit-Sharing Plan or a 401K Plan, as the case may be. To determine
appropriate compensation levels for each pay component, the Human Resources
Committee considered all key elements of the executive compensation
program. The Committee did not assign specific weightings to any key element of
the Corporation’s 2009 executive compensation program.
Base
Salaries
In
establishing the base salaries of senior officers, including the President and
Chief Executive Officer, the Corporation takes into consideration
responsibilities, job descriptions and salaries paid by other similar Canadian
organizations for positions similar in magnitude, scope and complexity. The
Committee’s objective is to align executive compensation levels with the Target
Compensation Positioning offered within a reference group of comparable
companies that are similar in size to the Corporation, with a particular focus
on those within the High-Technology/Telecommunications and Manufacturing-Durable
Goods industries. The Committee reviews the base salary of each executive
officer on an annual basis at the beginning of each financial year and
recommends that the Board approve appropriate adjustments, if required,
within the salary range in order to maintain a competitive position within the
market place.
Short-Term
Incentive Compensation
The
short-term incentive plan (“STIP”) provides executive officers with the
opportunity to earn annual bonuses based on the Corporation’s financial
performance and the achievement of strategic corporate and product line
objectives established on a yearly basis as well as the achievement of personal
objectives. The STIP’s objectives are aimed to reward seven elements: three
elements are shareholder oriented (sales, gross margins and EBITDA), two are
customer oriented (on time delivery and quality), one is based on the growth
metrics of the Corporation compared to the growth rate of the competition and
one is based on personal objectives.
Target
payout levels for NEOs eligible for incentive bonuses in the year ended
August 31, 2009 were established to be in line with the objective
of the Committee to align compensation with the Target Compensation Positioning
offered in the reference group. The minimum, target and maximum payouts to
executive officers under the STIP (expressed as a percentage of their base
salary) for the financial year ended August 31, 2009 were
as follows:
Our
President and Chief Executive Officer, Mr. Germain Lamonde, had a short-term
incentive target of 55% of his annual base salary. That bonus was based on the
achievement of financial, strategic and personal objectives as shown in the
following table.
Our Chief
Financial Officer, Mr. Pierre Plamondon, had a short-term incentive target of
35% of his annual base salary. That bonus was based on the achievement of
financial, strategic and personal objectives as shown in the following
table.
Our
Vice-President, Research and Development, Telecom Division, Mr. Stephen Bull,
had a short-term incentive target of 32,5% of his annual base salary. That
bonus was based on the achievement of financial, strategic and personal
objectives as shown in the following table.
|
Measure
(1)
|
Weighting
for Mr. Lamonde, Mr. Plamondon and Mr. Bull
|
|
|
Sales
(2)
|
35%
|
|
|
EBITDA
(2)
|
20%
|
|
|
Gross
margin (2)
|
20%
|
|
|
Customer
satisfaction (quality and on time delivery) (3)
|
25%
|
|
|
Growth
metrics (4)
|
10%
|
|
|
Personal
objectives (multiplier) (5)
(6)
|
0%
- 125%
|
|
|
(1)
|
Sales,
EBITDA, Gross margin and Customer satisfaction measures are established to
provide a metric from 0% to 150% (and up to an additional
10% for the Growth measures) and such a metric is multiplied by the
personal objectives measure. This result is then multiplied by the
short-term incentive target % of the individual annual base
salary.
|
|
(2)
|
Upon
attainment of 40% of the target objective, the NEO begins to be
compensated for this element and can be compensated up to the
attainment of 150% of the target
objective.
|
|
(3)
|
The
compensation for this element is pro-rated up to the attainment of 150% of
the target objective.
|
|
(4)
|
If
the Corporation’s growth rate is higher by 10% than the growth rate of
target competitive companies, then the Corporation’s growth rate exceeding
10% (up to a maximum of 10%) will be added to the metric
determined above in note 1.
|
|
(5)
|
The
compensation for this element is pro-rated up to the attainment of 125% of
the target objective.
|
|
(6)
|
The
personal objectives of each NEO are based on the position and role he
has with the Corporation. Such personal objectives are based mostly
on the attainment of departmental objectives and the others objectives are
based on the attainment of personal management objectives all of which
attainments are determined by an evaluation of the individual’s supervisor
or the Human Resources Committee, as the case may be.
|
Our
Vice-President, Telecom Sales, International, Mr. Jon Bradley, and
Vice-President, Telecom Sales, Americas, Mr. Dana Yearian, do not participate in
the short-term incentive plan that is available to the company’s other senior
executives. Instead, Mr. Bradley and Mr. Yearian participate in the company’s
sales incentive plan (“SIP”). Under the SIP, Mr. Bradley and Mr. Yearian
have target incentives of 40% of their target compensation. The target
compensation being the sum of base salary (60%) and target SIP (40%). The SIP is
based 45% on the achievement of revenue targets (billings), 45% on margin
targets and 10% on personal objectives. The compensation rate for the attainment
of revenue targets (billings) is equal to the total billings potential amount of
commission on the total billings quotas defined at the beginning of the
financial year. This rate is lower for the attainment of 62.5% or less
of the objective and the regular rate for the attainment from greater than
62.5% to 100% of the objective. An accelerator is applied after 100%
attainment of the objective. The commission rate for the attainment of the
margin targets is equal to the total margins potential on the total margins
quotas defined at the beginning of the financial year. This rate is used for all
margins up to 100% attainment of the objective and an accelerator is applied
after 100% attainment of the objective. The compensation for personal objectives
is a maximum amount based on the quarterly achievement of the sales target
for their specific territory. It is pro-rated between 70% and 100% achievement
and no compensation will be attributed to this element if less than 70% of
the objective is attained. Additional bonuses are also available, one being
based on revenues of recent acquisitions and the other on reduction of cost per
order dollar. Accordingly, a total sales achievement figure target of recent
acquisitions and a commission rate are determined at the beginning of the
financial year. The commission rate is applied when total sales achievement
figure of recent acquisitions exceeds 50% of the target. A reduction of cost per
order dollar figure target is determined at the beginning of the financial year.
The compensation for the attainment of the reduction of cost per order
dollar figure target is a maximum amount based on the achievement of such target
and is pro-rated up to 100% achievement.
Long-Term
Incentive Compensation
|
·
|
Long-Term
Incentive Plan
|
The
principal component of the long-term incentive compensation offered by the
Corporation is made up of the Long-Term Incentive Plan for directors, officers,
employees and consultants of the Corporation and its
subsidiaries.
Introduced
in May 2000, amended in October 2004 and effective in January 2005, the
Long-Term Incentive Plan (“LITP”), is designed to provide directors,
officers, employees and consultants with an incentive to create value and
accordingly ensures that their interests are aligned with those of the
Corporation’s shareholders and to further attract, motivate and retain all of
its employees, including the NEOs. The LTIP is subject to Human Resources
Committee review to ensure maintenance of its market competitiveness. The Board
has full and complete authority to interpret the Plan and to establish the rules
and regulations applying to it and to make all other determinations it deems
necessary or useful for the administration of the Plan, provided that such
interpretations, rules, regulations and determinations are consistent with the
rules of all stock exchanges on which the securities of the Corporation are
then traded and with all relevant securities legislation.
The
Long-Term Incentive Plan provides for the issuance of options to purchase
Subordinate Voting Shares and the issuance of Restricted Share Units (“RSUs”)
redeemable for actual Subordinate Voting Shares or the equivalent in cash
to directors, officers, employees and consultants. The Board of Directors upon
recommendation of the Human Resources Committee designates the recipients of
options or RSUs and determines the number of Subordinate Voting Shares
covered by each option or RSU, the dates of vesting, the expiry date and any
other conditions relating to these options or RSUs, in each case in accordance
with the applicable legislation of the securities regulatory authorities. During
the financial year ended August 31, 2009, target awards for eligible
officers under the LTIP were established to be in line with the objective of the
Committee to align compensation with the Target Compensation Positioning offered
in the reference group. Each executive officer is entitled to receive annually
from 25% to 30% of his base salary in RSUs except for the Corporation’s CEO
that is entitled to receive annually up to 55% of his base salary in RSUs,
subject to other grants of RSUs that may be granted from time to time
as an additional incentive to all executive officers. As disclosed
under the section “Summary Compensation Table” hereof, the NEOs were granted
RSUs during the last financial year. The Corporation did not take into account
the amount and terms of outstanding options or RSUs neither the
restrictions on resale of such units, when determining the grants mentioned
above.
The
exercise price of the options is determined by the Board of Directors at the
time of granting the options, subject to compliance with the rules of all stock
exchanges on which the Subordinate Voting Shares are listed and with all
relevant securities legislation. In any event, the exercise price may
not be lower than the highest of the closing prices of the Subordinate Voting
Shares on the Toronto Stock Exchange and the NASDAQ National Market on the last
trading day preceding the grant date, using the noon buying rate of the Federal
Reserve Bank of New York (for grants of options prior to January 1, 2009) or the
Bank of Canada (for grants of options on or after January 1, 2009) on the grant
date to convert the NASDAQ National Market closing price to Canadian dollars.
Any option issued is non-transferable. At August 31, 2009, there were
a total of 1,666,589 options granted to all LTIP participants and
outstanding pursuant to the Long-Term Incentive Plan having a weighted
average exercise price of US$13.78 (CA$20.57) per option.
The fair
value at the time of grant of a RSU is equal to the market value of Subordinate
Voting Shares at the time RSUs are granted. The grant date market value is equal
to the highest of the closing prices of the Subordinate Voting Shares on the
Toronto Stock Exchange and the NASDAQ National Market on the last trading day
preceding the grant date, using the noon buying rate of the Federal Reserve Bank
of New York (for grants of RSUs prior to January 1, 2009) or the Bank of
Canada (for grants of RSUs on or after January 1, 2009) on the grant date to
convert the NASDAQ National Market closing price to Canadian dollars. At the end
of financial year ended August 31, 2009, there were a total of
1,339,619 RSUs granted and outstanding pursuant to the Long-Term Incentive Plan
having a weighted average fair value at the time of grant
of US$4.21 (CA$4.74) per RSU.
The
maximum number of Subordinate Voting Shares that are issuable under the Plan
shall not exceed 6,306,153 Subordinate Voting Shares, which represents
10.6% of the Corporation’s issued and outstanding voting shares as of November
2, 2009. The maximum number of Subordinate Voting Shares that may be
granted to any one individual shall not exceed 5% of the number of outstanding
Subordinate Voting Shares, which represents 1,137,498 issued and outstanding
Subordinate Voting Shares as of November 2, 2009.
Some
options granted to directors and employees vest on the first anniversary date of
their grant. Some options granted in the financial years ended August 31, 2004
and 2005 vest at a rate of 12.5% six (6) months after the date of grant,
12.5% twelve (12) months after the date of grant and 25% annually
thereafter commencing on the second anniversary date of the grant in October
2005. Otherwise all options vest at a rate of 25% annually commencing on the
first anniversary date of the grant. All options may be exercised in whole or in
part once vested. All of the options that are granted under the Plan must be
exercised within a maximum period of ten (10) years following the date
of their grant or they will be forfeited.
All RSUs
first vesting cannot be earlier than the third anniversary date of their grant.
Some RSUs granted in the financial year ended August 31, 2009, vest at a rate of
1/2 annually commencing on the third anniversary date of the grants in
October 2008, January 2009, April 2009 and July 2009. Some RSUs granted in the
financial year ended August 31, 2009, vest at a rate of 1/3 annually commencing
on the third anniversary date of the grant in January 2009. Some RSUs
granted in the financial year ended August 31, 2008, vest at a rate of 1/2
annually commencing on the third anniversary date of the grants in October 2007,
January 2008, April 2008 and July 2008. Some RSUs granted in the financial year
ended August 31, 2007, vest at a rate of 1/2 annually commencing on the third
anniversary date of the grants in September 2006, January 2007 and
July 2007 and others at a rate of 1/3 annually on the third, fourth
and fifth anniversary dates of the grants in September 2006, October 2006 and
January 2007. Some RSUs granted in the financial year ended August 31, 2006 vest
at a rate of 1/2 annually commencing on the third anniversary date of the grant
in February 2006 and in June 2006 and others at a rate of 1/3 annually
commencing on the third anniversary date of the grant in August 2006. Some RSUs
granted in the financial year ended August 31, 2005 vest at a rate of 1/3
annually commencing on the third anniversary date of the grant in February 2005
and others at a rate of 55%, 35% and 10%, on the third, fourth and
fifth anniversary dates of the grant in January 2005.
Some RSUs
granted during the last five financial years vest on the fifth anniversary date
of each grant respectively in October 2008, October 2007,
October 2006, December 2005 and in January 2005. However, these RSUs are
subject to early vesting on the third and fourth anniversary dates of the grant
on the attainment of performance objectives, namely related to long-term growth
of revenue and profitability, as determined by the Board of Directors of the
Corporation. Accordingly, subject to the attainment of performance objectives,
the first early vesting is up to 1/3 of the units on the
third anniversary date of the grant and the second early vesting is up to
50% of the remaining units on the fourth anniversary date of the
grant.
If any
vesting dates fall into any black-out period or any other restrictive period
during which the RSU holder is not entitled to trade the Corporation’s
Subordinate Voting Shares, the RSUs shall: a) vest on the fifth trading day the
RSU holder is entitled to trade after such black-out period or restrictive
period or b) if the RSU holder decides, prior to such vesting date,
to pay his/her income tax without using any of the Subordinate Voting Shares’
proceeds, then and only then, the vesting date shall remain the one determined
on the granting date for such RSUs.
Any
option granted pursuant to the Long-Term Incentive Plan will lapse (i)
immediately upon the termination of the relationship with the Corporation or one
of its subsidiaries for a good and sufficient cause for employees or officers or
at the date on which an employee or an officer resigns or leaves his employment
with the Corporation or one of its subsidiaries (or within 30 days if
the holder’s employment is terminated for reasons not related to cause); and
(ii) 30 days after a director ceases to be a member of the Board of
Directors of the Corporation or one of its subsidiaries. In the event of
retirement or disability, any option held by an employee lapses 30 days
after the date of any such disability or retirement. In the
event of death, any option held by the optionee lapses 6 months after the date
of death.
Any RSU
granted pursuant to the Long-Term Incentive Plan will lapse (i) immediately,
where vesting of a unit is subject to the attainment of performance
objectives, if such performance objectives have not been attained
(or postponed at a further vesting date as determined by the Board of
Directors); and (ii) immediately, whether or not subject to attainment of
performance objectives, upon the termination of the relationship with the
Corporation or one of its subsidiaries for a good and sufficient cause for
employees or officers or at the date on which an employee or an officer
resigns or leaves his employment with the Corporation or one of its
subsidiaries.
Any RSU
granted pursuant to the Long-Term Incentive Plan will vest immediately, to a
certain proportion as determined by the Plan, upon the termination of the
relationship of an employee or officer with the Corporation or one of its
subsidiaries (i) for reasons not related to cause; (ii) because of
death or permanent disability and (iii) retirement.
|
·
|
Restricted
Share Unit Grants in Last Financial
Year
|
The
aggregate number of Restricted Share Units (RSUs) granted during the financial
year ended August 31, 2009 was 685,972 having a weighted average fair
value at the time of grant of US$2.69 (CA$3.38) per RSU. The fair value at the
time of grant of a RSU is equal to the market value of Subordinate Voting Shares
at the time RSUs are granted. At August 31, 2009, there were a total
of 1,339,619 RSUs granted and outstanding pursuant to the Long-Term
Incentive Plan having a weighted average fair value at the time of grant
of US$4.21 (CA$4.74) per RSU.
The
RSUs may be redeemed for actual Subordinate Voting Shares or the
equivalent in cash at the discretion of the Board of Directors of the
Corporation on the vesting dates established by the Board of Directors of the
Corporation at the time of grant in its sole discretion.
Therefore,
the value at vesting of a RSU, when converted to Subordinate Voting Shares, is
equivalent to the market value of a Subordinate Voting Share at the time the
conversion takes place and is taxable as an employment income. The table below
shows information regarding RSU grants made under the Long-Term Incentive Plan
during the financial year ended August 31, 2009.
During
the financial year ended August 31, 2009, the following RSUs were
granted:
|
RSUs
#
|
Fair
Value at the Time
of
Grant US$/RSU
|
Vesting (1)
|
|
|
71,003
|
2.36
|
50%
on the third and fourth anniversary dates of the grant
in October 2008
|
|
|
216,685
|
2.36
|
100%
on the fifth anniversary date of the grant in October 2008 subject to
early vesting up to 1/3 on the third anniversary date of the grant and up
to 50% of the remaining units on the fourth anniversary date of the grant
if the performance objectives namely related to long-term growth of
revenue and profitability, as determined by the Board of Directors of the
Corporation are fully attained
|
|
|
135,584
|
2.36
|
100%
on the fifth anniversary date of the grant in October 2008 subject to
early vesting up to 100% on the third anniversary date of the grant if
performance objectives namely related to long-term growth of revenue and
profitability, as determined by the Board of Directors of the Corporation
are fully attained
|
|
|
243,700
|
3.22
|
50%
on the third and fourth anniversary dates of the grant in January
2009
|
|
|
5,000
|
3.22
|
1/3
on the third, fourth and fifth anniversary dates of the grant
in January 2009
|
|
|
11,000
|
3.52
|
50%
on the third and fourth anniversary dates of the grant in April
2009
|
|
|
3,000
|
2.99
|
50%
on the third and fourth anniversary dates of the grant in July
2009
|
|
|
(1)
|
All
RSUs first vesting cannot be earlier than the third anniversary date of
their grant.
|
During
the financial year ended August 31, 2009, the following RSUs were granted to the
following NEOs:
|
Name
|
RSUs
#
|
Percentage
of Net Total
of RSUs
Granted
to
Employees
in
Financial Year (%)
|
Fair
Value at
the
Time of
Grant
US$/RSU
|
Vesting
(1)
|
|
|
Germain
Lamonde
|
65,254
|
9.51%
|
2.36
|
100%
on the fifth anniversary date of the grant in October 2008 subject to
early vesting up to 1/3 on the third anniversary date of the grant and up
to 50% of the remaining units on the fourth anniversary date of the grant
if the performance objectives are fully attained (2)
|
|
|
Pierre
Plamondon
|
40,983
|
5.97%
|
2.36
|
20,664
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting up to 1/3 on the third
anniversary date of the grant and up to 50% of the remaining units on the
fourth anniversary date of the grant if the performance objectives are
fully attained (2)
|
|
|
20,339
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting of 100% on the third
anniversary date of the grant if the objectives are fully attained (3)
|
|||||
|
Jon
Bradley
|
42,242
|
6.16%
|
2.36
|
16,826
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting up to 1/3 on the third
anniversary date of the grant and up to 50% of the remaining units on the
fourth anniversary date of the grant if the performance objectives are
fully attained (2)
|
|
|
25,416
of the RSUs will vest 100% on the fifth anniversary date of the grant in
October 2008 subject to early vesting of 100% on the third anniversary
date of the grant if the objectives are fully attained (3)
|
|||||
|
Dana
Yearian
|
48,496
|
7.07%
|
2.36
|
23,072
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting up to 1/3 on the third
anniversary date of the grant and up to 50% of the remaining units on the
fourth anniversary date of the grant if the performance objectives are
fully attained (2)
|
|
|
25,424
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting of 100% on the third
anniversary date of the grant if the objectives are fully attained (3)
|
|||||
|
Stephen
Bull
|
31,315
|
4.57%
|
2.36
|
17,756
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting up to 1/3 on the third
anniversary date of the grant and up to 50% of the remaining units on the
fourth anniversary date of the grant if the performance objectives are
fully attained (2)
|
|
|
13,559
of the RSUs granted will vest 100% on the fifth anniversary date of the
grant in October 2008 subject to early vesting of 100% on the third
anniversary date of the grant if the objectives are fully attained (3)
|
|||||
|
(1)
|
All
RSUs first vesting cannot be earlier than the third anniversary date of
their grant.
|
|
(2)
|
Those
RSUs granted in the financial year ended August 31, 2009 vest on the fifth
anniversary date of the grant in October 2008 but are subject to
early vesting on the third and fourth anniversary date of the grant on the
attainment of performance objectives, as determined by the Board
of Directors of the Corporation. Accordingly, subject to the
attainment of performance objectives, the first early vesting
is up to 1/3 of the units on the third anniversary date of
the grant and the second early vesting is up to 50% of the remaining units
on the fourth anniversary date of the grant. The early vesting shall be
subject to the attainment of performance objectives. Such performance
objectives are based on the attainment of a sales growth metric combined
with profitability metric. The sales growth metric is determined according
to the Compound Annual Growth Rate (CAGR) of the sales of the Corporation
(SALES CAGR). The profitability metric is determined according to the
Compound Annual Growth Rate (CAGR) of the Corporation’s net earnings
before interest, income taxes, amortization of property, plant and
equipment, amortization of intangible assets, impairment of goodwill and
extraordinary gain (EBITDA) (EBITDA CAGR). Accordingly, the first early
vesting performance objectives will be attained, calculated on a pro-rated
basis, as of: i) 100% for SALES CAGR of 20% or more and 0%
for SALES CAGR of 10% or less for the three fiscal years from the date of
grant and cumulated with ii) 100% for EBITDA CAGR of 20% or more and
0% for EBITDA CAGR of 10% or less for the three fiscal years form the date
of grant. The second early vesting performance objectives will be attained
on the same premises as described above but for the four fiscal years from
the date of grant.
|
|
(3)
|
Those
RSUs granted in the financial year ended August 31, 2009 vest on the fifth
anniversary date of the grant in October 2008 but are subject to
early vesting on the third anniversary date of the grant on the attainment
of performance objectives, related to a target cumulative sales of
Service Assurance (formerly Brix Networks Inc.) and Navtel’s products and
services, as determined by the Board of Directors of the
Corporation. Accordingly, subject to the attainment of performance
objectives, the early vesting is 100% of the units on the third
anniversary date of the grant.
|
The
following table summarizes information about RSUs granted to the members of the
Board of Directors and to Management and Corporate Officers of the
Corporation and its subsidiaries as at August 31, 2009:
|
Number
of RSUs
|
%
of Issued and
Outstanding
RSUs
|
Weighted
Average Fair Value at
the
Time of Grant $US/RSU
|
|
|
President
and CEO (one individual)
|
140,459
|
10.48%
|
4.19
|
|
Board
of Directors (five individuals)
|
–
|
–
|
–
|
|
Management
and Corporate Officers (eleven individuals)
|
479,887
|
35.82%
|
3.74
|
|
·
|
Option
Grants in Last Financial Year
|
There
were no options to purchase the Corporation’s Subordinate Voting Shares granted
during the financial year ended August 31, 2009. At August 31, 2009, there were
a total of 1,666,589 Subordinate Voting Shares covered by options
granted and outstanding pursuant to the Long-Term Incentive Plan having a
weighted average exercise price of US$13.78 (CA$20.57)
per option.
The
following table summarizes information about stock options granted to the
members of the Board of Directors, and to Management and Corporate Officers of
the Corporation and its subsidiaries as at August 31, 2009:
|
Number
of
Options
|
%
of Issued and
Outstanding
Options
|
Weighted
Average Exercise
Price
($US/Security)
|
|
|
President
and CEO (one individual)
|
179,642
|
10.78%
|
9.05
|
|
Board
of Directors (four individuals)
|
148,807
|
8.93%
|
6.19
|
|
Management
and Corporate Officers (eight individuals)
|
212,139
|
12.73%
|
14.49
|
|
·
|
Deferred
Share Unit Plan
|
Introduced
in October 2004 and effective as of January 2005, the Deferred Share Unit Plan
is designed to align more closely the interests of the Corporation’s
non-employee directors with those of its shareholders.
Under the
Deferred Share Unit Plan, non-employee directors may elect to receive up to 100
% of their retainer fees in the form of Deferred Share Units (“DSUs”), each of
which has an estimated value determined based on the highest of the closing
prices of the Subordinate Voting Shares on the Toronto Stock Exchange and the
NASDAQ National Market on the last trading day preceding the grant date, using
the noon buying rate of the Federal Reserve Bank of New York (for grants of
DSUs prior to January 1, 2009) or the Bank of Canada (for grants of DSUs on or
after January 1, 2009) on the grant date to convert the NASDAQ National
Market closing price to Canadian dollars, as required. The value at vesting
of a DSU is equivalent to the market value of a Subordinate Voting Share when
a DSU is converted to such Subordinate Voting Share. DSUs attract dividends
in the form of additional DSUs at the same rate as dividends on Subordinate
Voting Share. When a director ceases to be a member of the Board, the DSUs
are either converted and paid in Subordinate Voting Shares purchased on the open
market or issued by the Corporation. Such Subordinate Voting Shares issued by
the Corporation will be issued from the same pool of Subordinate Voting
Shares reserved for issuance pursuant to the Long-Term Incentive Plan, which is
10.6% of the total issued and outstanding voting shares.
|
·
|
Deferred
Share Unit Grants in Last Financial
Year
|
The
aggregate number of Deferred Share Units (“DSUs”) credited to non-employee
directors during the financial year ended August 31, 2009 was 35,739. The
estimated value at the time of grant of a DSU is determined based
on the highest of the closing prices of the Subordinate Voting Shares on
the Toronto Stock Exchange and the NASDAQ National Market on the last trading
day preceding the grant date, using the noon buying rate of the Federal Reserve
Bank of New York (for grants of DSUs prior to January 1, 2009) or the Bank of
Canada (for grants of DSUs on or after January 1, 2009) on the grant date to
convert the NASDAQ National Market closing price to Canadian dollars, as
required. The value at vesting of a DSU is equivalent to the market value
of the Subordinate Voting Shares when a DSU is converted to such
Subordinate Voting Share. As at August 31, 2009, there were
a total of 114,924 DSUs credited to directors pursuant to the Deferred
Share Unit Plan having a weighted average fair value at the time of grant
of US$4.62 (CA$5.18).
During
the financial year ended August 31, 2009, the following DSUs were granted to the
non-employee members of the Board of Directors:
|
DSUs
#
|
Weighted
Average Fair Value at the
Time
of Grant US$/DSU
|
Vesting
|
|
35,739
|
3.19
|
At
the time director cease to be a member of the Board of the
Corporation
|
The
following table summarizes information about DSUs granted to the non-employee
members of the Board of Directors as at November 2, 2009:
|
Number
of DSUs
|
%
of Issued and
Outstanding
DSUs
|
Weighted
Average Fair Value
at
the Time of Grant $US/DSU
|
|
|
Board
of Directors (five individuals)
|
114,924
|
100%
|
4.62
|
|
·
|
Number
of Subordinate Voting Shares reserved for future
issuance
|
During
the financial year ended August 31, 2009, 35,739 DSUs and 685,972 RSUs were
granted to directors, officers and employees. Such awards were issued from the
same pool of Subordinate Voting Shares reserved for issuance pursuant to the
Long-Term Incentive Plan of which the maximum number of Subordinate Voting
Shares issuable shall not exceed 6,306,153 Subordinate Voting Shares, which
represents 10.6% of the Corporation’s issued and outstanding voting shares as of
November 2, 2009. As at November 2, 2009, the number of
Subordinate Voting Shares reserved for future issuance is
2,128,866 representing 3.6% of the Corporation’s issued and outstanding
voting shares as at November 2, 2009.
|
·
|
Stock
Appreciation Rights Plan
|
On August
4, 2001, the Corporation established a Stock Appreciation Rights Plan (“SAR
Plan”) for the benefit of certain employees residing in countries where the
granting of stock-based compensation under the Long-Term Incentive Plan is not
feasible in the opinion of the Corporation. The Board has full and
complete authority to interpret the SAR Plan and to establish the rules and
regulations applying to it and to make all other determinations it deems
necessary or useful for the administration of the SAR Plan.
Under the
SAR Plan, eligible employees are entitled to receive a cash amount equivalent to
the difference between the market price of the Subordinate Voting Shares on the
date of exercise and the exercise price determined on the date of
grant. No Subordinate Voting Shares are issuable under the SAR
Plan.
The Board
of Directors has delegated to Management the task of designating the recipients
of stock appreciation rights, the date of vesting, the expiry date and other
conditions. Under the terms of the SAR Plan, the exercise price of
the stock appreciation rights may not be lower than the highest of the closing
prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the
NASDAQ National Market on the last trading day preceding the grant date, using
the noon buying rate of the Federal Reserve Bank of New York (for grants of SARs
prior to January 1, 2009) or the Bank of Canada (for grants of SARs on or
after January 1, 2009) on the grant date to convert the NASDAQ National Market
closing price to Canadian dollars. Stock appreciation rights are
non-transferable.
The stock
appreciation rights vest over a four-year period, with 25% vesting annually
commencing on the first anniversary date of the date of grant. However, since
October 2007, some stock appreciation rights vest at a rate of 50% annually
commencing on the third anniversary date of the grants in October 2007 and
October 2008. Once vested, stock appreciation rights may be exercised between
the second and the fifteenth business day following each release of the
Corporation’s quarterly financial results. All of the stock
appreciation rights that are granted under the SAR Plan may be exercised within
a maximum period of 10 years following the date of their grant. Any stock
appreciation rights granted under the SAR Plan will lapse immediately upon the
termination of the relationship with the Corporation or one of its subsidiaries
for a good and sufficient cause or at the date on which an employee resigns or
leaves his employment with the Corporation or one of its subsidiaries (or within
30 days if the holder is dismissed without cause). In the event
of retirement or disability, any stock appreciation right held by an employee
lapses 30 days after the date of any such disability or
retirement. In the event of death, any stock appreciation right
lapses 6 months after the date of death.
Benefits
and Perquisites
All
eligible employees of the Corporation, including the NEOs, are eligible to
participate in the Corporation’s benefits program, which includes, life
insurance, extended health and dental coverage, short and long-term disability
coverage, accidental death and dismemberment (AD&D) and emergency travel
assistance. Although the majority of costs of the benefits are paid by the
Corporation, employees (including the NEOs) are also required to contribute to
obtain such benefits.
With the
exception of car allowances that are provided to the Corporation’s CEO,
Vice-President ,Telecom Sales, Americas and Vice-President, Telecom Sales,
International, executive officers, including other NEOs, do not receive any
perquisites. The value of the perquisites for each of the NEOs, is less than
$50,000 or 10% of total annual salary and bonus for the financial year and, as
such is not included in the table provided under the heading “Summary
Compensation Table” and in the table provided under the heading “Termination and
Change of Control Benefits”.
Deferred
Profit-Sharing Plan
The
Corporation maintains a deferred profit-sharing plan (“DPSP”) for certain
eligible Canadian resident employees, including NEOs but excluding the
Corporation’s CEO under which the Corporation may elect to contribute
an amount equal to 2% of an employee’s gross salary, provided that the
employee has contributed at least 2% of his gross salary to a tax-deferred
registered retirement savings plan. Cash contributions to this plan and
expenses for the years ended August 31, 2007, 2008 and 2009, amounted
to US$419,000, US$531,000 and US$504,000, respectively. The amounts
contributed to the DPSP are invested at the employee’s will in the
investment vehicles offered by Standard Life, the Corporation’s fund
administrator. Withdrawals of funds from the DPSP account are not permitted. In
the event of termination of the employment, if the employee has been a
member of the DPSP for more than 2 years, the employee is entitled
to receive the funds accumulated in his DPSP account.
401K
Plan
The
Corporation maintains a 401K plan for eligible United States resident employees
of its subsidiaries. Employees become eligible to participate in the 401K plan
on the date they are hired. Employees may elect to defer their current
compensation up to the lesser of 1% of eligible compensation or the statutorily
prescribed annual limit and have the deferral contributed to the 401K plan. The
401K plan permits, but does not require the Corporation to make additional
matching contributions to the 401K plan on behalf of the eligible participants,
subject to a maximum of 50% of the first 6% of the participant’s current
compensation subject to certain legislated maximum contribution limits.
Accordingly, the Corporation contributes up to 3% of the participant’s current
compensation, subject to certain legislated maximum contribution limits. In
the years ended August 31, 2007, 2008 and 2009, the Corporation made an
aggregate of US$166,000, US$216,000 and US$356,000 respectively, in Safe Harbor
Contributions to the 401K plan. Contributions by participants or by the
Corporation to the 401K plan and income earned on plan contributions are
generally not taxable to the participant until withdrawn and contributions by
the Corporation are generally deductible by the Corporation when made. At the
direction of each participant, the trustees of the 401K plan invest the assets
of the 401K plan in selected investment options. As of
August 31, 2009, the Corporation made an aggregate
of US$2,098,000 in Safe Harbor Contributions to the 401K plan. A
participant may have access to the assets of the plan under the following
limited circumstances: (i) termination of employment; (ii) permitted
withdrawals; and (iii) limited loans.
Conclusion
By way of
application of the Corporation’s executive compensation policy, an important
part of executive compensation is linked to corporate performance and long-term
value creation. The Human Resources Committee continuously reviews executive
compensation programs to ensure that they maintain their competitiveness and
continue to focus on the Corporation’s objectives, values and business
strategies.
Depending
on specific circumstances, the Committee may also recommend employment terms and
conditions that deviate from the policies and the execution by the Corporation
or its subsidiaries of employment contracts on a case-by-case
basis.
Summary
Compensation Table
The table
below shows compensation information during the most recently completed
financial year for the NEOs. This information includes the US dollar value
of base salaries, share-based and option-based awards, non-equity incentive plan
compensations, pension value and all other compensation, if any, whether paid or
deferred.
|
Name
and
Principal
Position
|
Financial
Year
|
Salary
(1)
($)
|
Share-
Based
Awards
(2)
($)
|
Option-
based
awards (3)
($)
|
Non-equity
incentive
plan
compensation ($)
|
Pension
value
($)
|
All
other compensation
(5)
|
Total
Compensation
($)
|
|||||||
|
Annual
incentive
plans
(4)
|
Long-term
incentive
plans
|
||||||||||||||
|
Germain
Lamonde,
President
and
Chief
Executive
Officer
|
2009
|
314,887
371,000
|
(US)
(CA)
|
153,999
192,499
|
(US)
(CA)
|
–
|
135,335
159,452
|
(US)
(CA)
|
(6)
|
–
|
–
|
–
|
604,221
722,951
|
(US)
(CA)
|
|
|
Pierre
Plamondon,
Vice-President,
Finance
and
Chief
Financial
Officer
|
2009
|
186,726
220,000
|
(US)
(CA)
|
96,720
120,900
|
(US)
(CA)
|
–
|
51,033
60,127
|
(US)
(CA)
|
(7)
|
–
|
–
|
5,033
5,930
|
(US)
(CA)
|
339,512
406,957
|
(US)
(CA)
|
|
Jon
Bradley,
Vice-President,
Telecom
Sales,
International
|
2009
|
133,799
157,642
86,100
|
(US)
(CA)
(£)
|
99,691
124,614
61,649
|
(US)
(CA)
(£)
|
–
|
65,578
77,264
42,200
|
(US)
(CA)
(£)
|
(8)
|
–
|
–
|
–
|
299,068
359,520
189,949
|
(US)
(CA)
(£)
|
|
|
Name
and
Principal
Position
|
Financial
Year
|
Salary
(1)
($)
|
Share-
Based
Awards
(2)
($)
|
Option-
based
awards (3)
($)
|
Non-equity
incentive
plan
compensation ($)
|
Pension
value
($)
|
All
other compensation
(5)
|
Total
Compensation
($)
|
|||||||
|
Annual
incentive
plans
(4)
|
Long-term
incentive
plans
|
||||||||||||||
|
Dana
Yearian
Vice-President,
Telecom
Sales,
Americas
|
2009
|
190,000
223,858
|
(US)
(CA)
|
114,451
143,063
|
(US)
(CA)
|
–
|
97,508
114,884
|
(US)
(CA)
|
(9)
|
–
|
–
|
6,536
7,701
|
(US)
(CA)
|
408,495
489,506
|
(US)
(CA)
|
|
Stephen
Bull,
Vice-President,
Research and
Development
|
2009
|
156,343
184,203
|
(US)
(CA)
|
73,903
92,379
|
(US)
(CA)
|
–
|
35,771
42,145
|
(US)
(CA)
|
(10)
|
–
|
–
|
4,065
4,789
|
(US)
(CA)
|
270,082
323,516
|
(US)
(CA)
|
|
(1)
|
Base
salary earned in the financial year, regardless when paid. The
compensation information for Canadian residents has been converted from
Canadian dollars to US dollars based upon an average foreign exchange rate
of CA$1.1782 = US$1.00 for the financial year ended August 31, 2009. The
compensation information for UK resident has been converted from British
Pounds to US dollars based upon an average foreign exchange rate of
£0.6435 = US$1.00 for the financial year ended August 31, 2009 and the
conversion from US dollars to Canadian dollars is made as described
above. The currency conversions cause these reported salaries to fluctuate
from year-to-year because of the fluctuations in exchange
rates.
|
|
(2)
|
Indicates
the dollar amount based on the grant date fair value of the RSUs awarded
under the Long-Term Incentive Plan for the financial year . The grant date
fair value is equal to the highest of the closing prices of the
Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ
National Market on the last trading day preceding the grant date, using
the noon buying rate of the Federal Reserve Bank of New York (for
grants of RSUs prior to January 1, 2009) or the Bank of Canada (for grants
of RSUs on or after January 1, 2009) on the grant date to
convert the NASDAQ National Market closing price to Canadian dollars.
Grants of RSUs to NEOs are detailed under section “Compensation Discussion
& Analysis – Long-Term Incentive
Plan”.
|
|
(3)
|
Indicates
the dollar amount, if any, based on the grant date fair value of the
Subordinate Voting Share options or Share Appreciation Rights awarded
under the Long-Term Incentive Plan for the financial year . The grant date
fair value is equal to the highest of the closing prices of the
Subordinate Voting Shares on the Toronto Stock Exchange and the NASDAQ
National Market on the last trading day preceding the grant date, using
the noon buying rate of the Federal Reserve Bank of New York (for grants
of options or SARs prior to January 1, 2009) or the Bank of Canada
(for grants of options or SARs on or after January 1, 2009) on
the grant date to convert the NASDAQ National Market closing price to
Canadian dollars. Grants of Subordinate Voting Share options or Share
Appreciation Rights to NEOs are detailed under section “Compensation
Discussion & Analysis – Long-Term Incentive
Plan”.
|
|
(4)
|
Indicates
the total bonus earned during the financial year whether paid during the
financial year or payable on a later
date.
|
|
(5)
|
Indicates
the amount contributed by the Corporation during the financial year to the
Deferred Profit-Sharing Plan as detailed under section “Compensation
Discussion & Analysis – Deferred Profit-Sharing Plan” or 401K Plan as
detailed under section “Compensation Discussion & Analysis – 401K
Plan”, as applicable, for the benefit of the NEO. Mr. Lamonde is not
eligible to participate in the Deferred Profit-Sharing Plan and Mr.
Bradley did not participate.
|
|
(6)
|
US$77,918
(CA$91,803) paid during the financial year ended August 31, 2009 and
US$57,417 (CA$67,649) earned in the financial year ended August 31, 2009
but paid in the first quarter of the financial year ending on August 31,
2010.
|
|
(7)
|
US$29,404
(CA$34,643) paid during the financial year ended August 31, 2009 and
US$21,629 (CA$25,484) earned in the financial year ended August 31, 2009
but paid in the first quarter of the financial year ending on August 31,
2010.
|
|
(8)
|
US$58,192
(CA$68,562) paid during the financial year ended August 31, 2009 and
US$7,386 (CA$8,702) earned in the financial year ended August 31, 2009 but
paid in the first quarter of the financial year ending on August 31,
2010.
|
|
(9)
|
US$74,160
(CA$87,375) paid during the financial year ended August 31, 2009 and
US$23,348 (CA$27,509) earned in the financial year ended August 31, 2009
but paid in the first quarter of the financial year ending on August 31,
2010.
|
|
(10)
|
US$22,864
(CA$26,938) paid during the financial year ended August 31, 2009 and
US$12,907 (CA$15,207) earned in the financial year ended August 31, 2009
but paid in the first quarter of the financial year ending on August 31,
2010.
|
Incentive
Plan Awards
The
significant terms of all plan-based awards and non-equity incentive plan awards,
issued or vested, or under which options have been exercised, during the fiscal
year, or outstanding at the end of the financial year are described herein under
the section entitled “Compensation Discussion and Analysis – Long-Term Incentive
Plan” and “Compensation Discussion and Analysis – Short-Term Incentive
Compensation”.
Outstanding
share-based awards and option-based awards
The
following sets out for each NEO all option and RSU awards outstanding as at
August 31, 2009, if any, including those granted before August 31,
2009.
|
Option-based
Awards (Options)
|
Share-based
Awards (RSUs)
|
|||||
|
Name
|
Number of securities
underlying
unexercised options
(#)
(1)
|
Option
exercise
price
(US$)
(2)
|
Option
expiration
date
|
Value
of
unexercised
in-
the-money
options
(US$) (3)
|
Number of shares
or units of shares
that
have not
vested
(#)
|
Market
or payout
value of share-based
awards
that have
not
vested (US$) (4)
|
|
Germain
Lamonde
|
25,402
|
26.00
|
June
29, 2010
|
–
|
140,459
|
421,377
|
|
5,080
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
70,000
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
50,000
|
1.58
|
Sept.
25, 2012
|
71,000
|
|||
|
17,942
|
4.51
|
Feb.
1, 2015
|
–
|
|||
|
11,218
|
4.76
|
Dec.
6, 2015
|
–
|
|||
|
Pierre
Plamondon
|
8,700
|
26.00
|
June
29, 2010
|
–
|
72,922
|
218,766
|
|
10,000
|
45.94
|
Sept.
13, 2010
|
–
|
|||
|
5,000
|
34.07
|
Oct.
11, 2010
|
–
|
|||
|
9,240
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
19,000
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
20,000
|
1.58
|
Sept.
25, 2012
|
28,400
|
|||
|
5,383
|
5.13
|
Oct.
26, 2014
|
–
|
|||
|
3,653
|
4.76
|
Dec.
6, 2015
|
–
|
|||
|
Jon
Bradley
|
5,000
|
45.94
|
Sept.
13, 2010
|
–
|
50,281
|
150,843
|
|
5,000
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
1,000
|
12.22
|
Jan.
3, 2012
|
–
|
|||
|
1,500
|
3.19
|
Jan.
7, 2013
|
–
|
|||
|
10,000
|
3.50
|
Dec.
17, 2013
|
–
|
|||
|
4,000
|
4.51
|
Feb.
1, 2015
|
–
|
|||
|
Dana
Yearian
|
–
|
–
|
–
|
–
|
65,699
|
197,097
|
|
Stephen
Bull
|
900
|
26.00
|
June
29, 2010
|
–
|
61,765
|
185,295
|
|
5,000
|
45.94
|
Sept.
13, 2010
|
–
|
|||
|
2,930
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
15,000
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
1,795
|
5.13
|
Oct.
26, 2014
|
–
|
|||
|
1,803
|
4.76
|
Dec.
6, 2015
|
–
|
|||
|
(1)
|
The
unexercised options have not been and may never be exercised, and
actual gains if any, on exercise will depend on the value of the
Subordinate Voting Shares on the date of exercise. There can be no
assurance that these options will be exercised or any gain
realized.
|
|
(2)
|
Prices
noted are the grant date exercise price for each option under each
award.
|
|
(3)
|
Indicates
an aggregate value of “in-the-money” unexercised options held at the
financial year ended August 31, 2009. “In-the-money” options are
options for which the market value of the underlying securities is higher
than the exercise price. The value of unexercised in-the-money
options at financial year end is the difference between its exercise or
base price and the market value of the underlying Subordinate Voting Share
at August 31, 2009, which was US$3.00 (CA$3.29). The market value of the
Subordinate Voting Shares was calculated by using the highest of the
closing prices of the Subordinate Voting Shares on the Toronto Stock
Exchange and on the NASDAQ National Market on August 31, 2009 using
the noon buying rate of the Bank of Canada to convert the NASDAQ National
Market closing price to Canadian dollars as required. This value has
been converted from Canadian to US dollars based upon the foreign
exchange rate on August 31, 2009
of 1.0967.
|
|
(4)
|
The
value of unvested RSUs at the financial year-end is the market value of
the Subordinate Voting Shares on August 31, 2009, which was
US$3.00 (CA$3.29). The market value of the Subordinate Voting Shares was
calculated by using the highest of the closing prices of the Subordinate
Voting Shares on the Toronto Stock Exchange and on the NASDAQ National
Market on August 31, 2009 using the noon buying rate of the
Bank of Canada to convert the NASDAQ National Market closing price to
Canadian dollars as required. The actual gains on vesting will depend on
the value of the Subordinate Voting Shares on the date of vesting. There
can be no assurance that these values will be
realized.
|
Incentive
plan awards – value vested or earned during the year
The
following table summarizes, for each of the NEOs, the value of option-based
awards, if any vested during the financial year ended August 31, 2009, the value
of share-based awards vested during the financial year ended August 31, 2009, if
any, and the value of non-equity incentive plan compensation earned during the
financial year ended August 31, 2009, if any.
|
Name
|
Option-based
awards – value
vested
during the year (US$) (1)
|
Share-based
awards – value
vested
during the year (US$) (2)
|
Non-equity
incentive plan
compensation
– Value earned
during
the year (US$) (3)
|
|
Germain
Lamonde
|
–
|
32,235
|
135,335
|
|
Pierre
Plamondon
|
–
|
43,189
|
51,033
|
|
Jon
Bradley
|
–
|
7,114
|
65,578
|
|
Dana
Yearian
|
–
|
5,068
|
97,508
|
|
Stephen
Bull
|
–
|
37,875
|
35,771
|
|
(1)
|
Indicates
the aggregate dollar value that would have been realized on the vesting
date if the options under the option-based awards had been exercised on
the vesting date. The value of option-based awards vested during the year
at the vesting date is the difference between its exercise or base price
and the market value of the underlying Subordinate Voting Share on the
date of the vesting. The market value of the Subordinate Voting Shares was
calculated by using the highest of the closing prices of the Subordinate
Voting Shares on the Toronto Stock Exchange and on the NASDAQ National
Market on the date of the vesting using the noon buying rate of the Bank
of Canada to convert the NASDAQ National Market closing price to Canadian
dollars as required.
|
|
(2)
|
The
aggregate dollar value realized is equivalent to the market value of the
securities underlying the RSUs at vesting. This value, as the case may be,
has been converted from Canadian dollars to US dollars based upon the noon
buying rate of the Bank of Canada on the day
of vesting.
|
|
(3)
|
Includes
total non-equity incentive plan compensation earned by each NEO in respect
to the financial year ended on August 31, 2009 (as indicated under
the “Summary Compensation Table”).
|
Pension
plan Benefits
The
Corporation does not have a defined benefit or a defined contribution pension
plan. The significant terms of the Deferred Profit-Sharing Plan and the
401K Plan of the Corporation are described herein under the sections entitled
“Compensation Discussion and Analysis – Deferred Profit-Sharing Plan” and
“Compensation Discussion and Analysis – 401K Plan” and the amounts paid by the
Corporation under such plans are detailed in the column entitled “All other
compensation” in the “Summary Compensation Table”.
Termination
and Change of Control Benefits
The
Corporation has an employment agreement with Mr. Germain Lamonde. The agreement
is for an indeterminate period and the compensation is reviewed annually. In the
event of the termination of Mr. Lamonde’s employment without cause,
Mr. Lamonde will be entitled to severance payments equal to 24 months of
the current rate of remuneration (base salary, STIP compensation and
benefits) and the immediate vesting of all stock options and RSUs.
In addition, in the event that Mr. Lamonde’s employment
is terminated following a merger or an acquisition by a third
party of substantially all of the Corporation’s assets or of the majority
of its share capital, he will be entitled to severance payments equal
to 24 months of remuneration (base salary, STIP compensation and benefits)
and to the immediate vesting of all stock options and RSUs.
If Mr. Lamonde voluntarily resigns he will be entitled to
immediate vesting of all stock options and RSUs.
The
Corporation has an employment agreement with Mr. Pierre Plamondon, the
Corporation’s Vice-President, Finance and Chief Financial Officer. The agreement
is for an indeterminate period and the compensation is reviewed annually. In the
event of termination of Mr. Plamondon’s employment without cause, Mr. Plamondon
will be entitled to severance payments equal to 12 months of the
current base salary. In addition, in the event Mr. Plamondon’s employment
is terminated following a merger or an acquisition by a third party
of substantially all of the Corporation’s assets or of the majority of its
share capital, he will be entitled to severance payments equal to 18 months
of remuneration (base salary, STIP compensation and benefits) and to the
immediate vesting of all stock options and RSUs.
The
Corporation has an employment agreement with Mr. Jon Bradley, the Corporation’s
Vice-President, Telecom Sales, International. The agreement is for an
indeterminate period and the compensation is reviewed annually. In the
event of termination of Mr. Bradley’s employment without cause, Mr. Bradley will
be entitled to severance payments equal to 2 months of the current base
salary per year of service as a Vice-President of the Corporation
(a minimum of 4 months of current base salary but in no case exceeding 12
months of the current base salary). In addition, in the event Mr. Bradley’s
employment is terminated following a merger or an acquisition by a third party
of substantially all of the Corporation’s assets or of the majority of its share
capital, he will be entitled to severance payments equal to 2 months of
remuneration (base salary, SIP compensation and benefits) per year
of service as a Vice-President of the Corporation (a minimum of 6 months of
remuneration but in no case exceeding 18 months of remuneration) and to the
immediate vesting of all stock options and RSUs.
The
Corporation has an employment agreement with Mr. Dana Yearian, the Corporation’s
Vice-President, Telecom Sales, Americas. The agreement is for an indeterminate
period and the compensation is reviewed annually. In the event of termination of
Mr. Yearian’s employment without cause, Mr. Yearian will be entitled to
severance payments equal to 2 months of the current base salary per year of
service but in no case exceeding 12 months. In addition, in the event Mr.
Yearian’s employment is terminated following a merger or an acquisition by a
third party of substantially all of the Corporation’s assets or of the majority
of its share capital, he will be entitled to severance payments equal
to 12 months (for 0-5 years of service) or 18 months of remuneration
(base salary, SIP compensation and benefits) (for more than 5 years of services)
and to the immediate vesting of all stock options and RSUs.
The
Corporation has an employment agreement with Stephen Bull, the Corporation’s
Vice-President, Research and Development, Telecom Division. The agreement is for
an indeterminate period and the compensation is reviewed annually.
In the event of termination of Mr. Bull’s employment without cause, Mr.
Bull will be entitled to severance payments equal to 12 months of
the current base salary. In addition, in the event Mr. Bull’s employment
is terminated following a merger or an acquisition by a third party of
substantially all of the Corporation’s assets or of the majority of its
share capital, he will be entitled to severance payments equal
to 18 months of remuneration (base salary, STIP compensation and
benefits) and to the immediate vesting of all stock options
and RSUs.
The
following table outlines the estimated incremental payments NEOs would be
entitled to receive if a termination payment event occurred on August 31,
2009, which includes all payments, payables and benefits that would
be given by the Corporation to an NEO upon such termination payment
event.
|
Named
Executive Officer
|
Termination
Payment Event
|
|||||
|
Without Cause ($) (1)
|
Change of Control ($)
(2)
(3)
|
Voluntary
($)
|
||||
|
Germain
Lamonde
|
1,519,847
1,644,130
|
(US) (4)
(CA)
|
1,519,847
1,644,130
|
(US)
(CA)
|
492,377
501,610
|
(US) (5)
(CA)
|
|
Pierre
Plamondon
|
294,710
323,077
|
(US)
(CA)
|
633,826
693,040
|
(US)
(CA)
|
–
|
|
|
Jon
Bradley
|
78,293
89,497
|
(US)
(CA)
|
235,213
261,839
|
(US)
(CA)
|
–
|
|
|
Dana
Yearian
|
146,195
168,073
|
(US)
(CA)
|
391,923
444,869
|
(US)
(CA)
|
–
|
|
|
Stephen
Bull
|
231,253
266,354
|
(US)
(CA)
|
494,562
554,795
|
(US)
(CA)
|
–
|
|
|
(1)
|
The
aggregate amount disclosed includes an evaluation of the amount that the
NEO would have been entitled to should a termination of employment
without cause have occurred on August 31, 2009 and includes, as the case
may be for each NEO, the base salary that would have been received and
total value of RSUs and options that would have vested (with the exception
of Mr. Lamonde’s evaluation which is described in note 4 below). The
amount for base salary compensation is calculated according to those
amounts provided under the section entitled “Summary Compensation Table”
included in this Circular. The amount for the total value attached to the
vesting of RSUs and options determined pursuant to the Long-Term Incentive
Plan as described in the section entitled ‘’Long-Term Incentive
Compensation’’ – ‘’Long-Term Incentive Plan’’
for termination without
cause.
|
|
(2)
|
Is
considered a “Change of Control” a merger or an acquisition by a third
party of substantially all of the Corporation’s assets or of the majority
of its share capital.
|
|
(3)
|
The
aggregate amount disclosed includes, as the case may be for each NEO, an
evaluation of the amount that the NEO would have been entitled to should a
termination of employment for Change of Control have occurred on August
31, 2009 and includes, as the case may be, namely, the base salary, STIP
or SIP compensation and total value of RSUs and options that would have
vested. The amount for base salary and STIP or SIP compensation are
calculated according to those amounts provided under the section entitled
“Summary Compensation Table” included in this Circular, the total value
attached to the vesting of RSUs and options is calculated according to
those amounts provided in the columns named “Value of unexercised
in-the-money options” and “Market or payout value of share-based awards
that have not vested” of the table included under the heading
entitled – “Outstanding share-based awards and option-based
awards”.
|
|
(4)
|
The
aggregate amount disclosed includes an evaluation of the amount that Mr.
Lamonde would have been entitled to should a termination
of employment without cause have occurred on August 31, 2009 and
includes: the base salary, STIP compensation, and total value of RSUs
and options that would have vested. The amount for base salary and STIP
compensation are calculated according to those amounts provided under
the section entitled “Summary Compensation Table” included in this
Circular; the total value attached to the vesting of RSUs and options are
calculated according to those amounts provided in the columns named “Value
of unexercised in-the-money options” and “Market or payout value of
share-based awards that have not vested” of the table included under the
heading entitled – “Outstanding share-based awards and option-based
awards”.
|
|
(5)
|
The
aggregate amount disclosed includes an evaluation of the amount that Mr.
Lamonde would have been entitled to should a voluntary termination
of employment have occurred on August 31, 2009 and includes: the
total value of RSUs and options that would have vested. The amount
for the total value attached to the vesting of RSUs and options are
calculated according to those amounts provided in the columns named “Value
of unexercised in-the-money options” and “Market or payout value of
share-based awards that have not vested” of the table included under
the heading entitled – “Outstanding share-based awards and option-based
awards”
|
Compensation
of Directors
Director
Compensation Table
In the
financial year ended August 31, 2009, each director who was not an employee of
the Corporation or any of its subsidiaries received the level of compensation
set forth in the table below as annual compensation payable
in a combination of cash and Deferred Share Units (“DSUs”) as chosen
by the director pursuant to the Deferred Share Unit Plan. The significant terms
of the DSU Plan of the Corporation is described herein under the section
entitled “Long-Term Incentive Compensation – Deferred Share Unit
Plan”.
|
Annual
Retainer for Directors (1)
|
CA$50,000
|
(2)
|
US$42,438
|
(3)
|
|
Annual
Retainer for Lead Director
|
CA$5,000
|
US$4,244
|
(3)
|
|
|
Annual
Retainer for Committee Chairman
|
CA$5,000
|
US$4,244
|
(3)
|
|
|
Annual
Retainer for Committee Members
|
CA$3,000
|
US$2,546
|
(3)
|
|
|
Fees
for all Meetings Attended per day in Person
|
CA$1,000
|
US$849
|
(3)
|
|
|
Fees
for all Meetings Attended per day by Telephone
|
CA$500
|
US$424
|
(3)
|
|
(1)
|
All
the Directors elected to receive 50% of their Annual Retainer in form of
DSUs.
|
|
(2)
|
The
Annual Retainer for Mr. Pierre-Paul Allard and Dr. David A. Thompson is
US$50,000 (CA$58,910).
|
|
(3)
|
The
compensation information has been converted from Canadian dollars to U.S.
dollars based upon an average foreign exchange rate of CA$1.1782 =
US$1.00 for the financial year ended August 31,
2009.
|
In the
financial year ended August 31, 2009, the Directors who are not employees of the
Corporation received the following compensation in the form
indicated:
|
Name
|
Fees
earned
($) (1)
|
Share-based
awards
($) (2)
|
Option-
based
awards
($)
|
Non-equity
incentive
plan
compensation
($)
|
Pension
value
($)
|
All
other
compensation
($)
|
Total
($)
|
|
Pierre-Paul
Allard (3)
|
34,138 (US)
40,222 (CA)
|
25,000 (US)
29,455 (CA)
|
–
|
–
|
–
|
–
|
59,138 (US)
69,677 (CA)
|
|
Pierre
Marcouiller (4)
|
33,101 (US)
39,000 (CA)
|
21,219 (US)
25,000 (CA)
|
–
|
–
|
–
|
–
|
54,320 (US)
64,000 (CA)
|
|
Guy
Marier (5)
|
39,043 US)
46,000 (CA)
|
21,219 (US)
25,000 (CA)
|
–
|
–
|
–
|
–
|
60,262 (US)
71,000 (CA)
|
|
David
A. Thompson (6)
|
36,459 (US)
42,955 (CA)
|
25,000 (US)
29,455 (CA)
|
–
|
–
|
–
|
–
|
61,459 (US)
72,410 (CA)
|
|
André
Tremblay (7)
|
33,526 (US)
39,500 (CA)
|
21,219 (US)
25,000 (CA)
|
–
|
–
|
–
|
–
|
54,745 (US)
64,500 (CA)
|
|
(1)
|
The
compensation information has been converted from Canadian dollars to US
dollars based upon an average foreign exchange rate of CA$1.1782 =
US$1.00 for the financial year ended August 31, 2009 except for Mr.
Pierre-Paul Allard and Mr. David A. Thompson who are paid in US
dollar for the portion of their annual retainer for
Directors.
|
|
(2)
|
The
estimated value at the time of grant of a DSU is determined based on the
highest of the closing prices of the Subordinate Voting Shares on the
Toronto Stock Exchange and the NASDAQ National Market on the last trading
day preceding the grant date, using the noon buying rate of the Federal
Reserve Bank of New York (for grants of DSUs prior to January 1, 2009) or
the Bank of Canada (for grants of DSUs on or after January 1, 2009) on the
grant date to convert the NASDAQ National Market closing price to Canadian
dollars, as required. The value at vesting of a DSU is equivalent to the
market value of a Subordinate Voting Share when a DSU is converted to such
Subordinate Voting Share.
|
|
(3)
|
Mr.
Pierre-Paul Allard is a Director of the Corporation and member of the
Human Resources Committee and the Audit Committee since January 14, 2009.
He received the Annual Retainer for Directors, the Annual Retainer for the
Human Resources Committee and Audit Committee Members (pro rated as of
January 14, 2009) and received the fees for attending 5 days of meetings
in person, 4 days of meetings by
telephone.
|
|
(4)
|
Mr.
Pierre Marcouiller is a Director of the Corporation and a member of the
Human Resources Committee and the Audit Committee. He received the
Annual Retainer for Directors, the Annual Retainer for the Human Resources
Committee and Audit Committee Members and received the fees for attending
6 days of meetings in person, 4 days of meetings by
telephone.
|
|
(5)
|
Mr.
Guy Marier is a Director of the Corporation and a member of the Audit
Committee and the Chairman of the Human Resources Committee and the Lead
Director. He received the Annual Retainer for Directors, the Annual
Retainer for the Human Resources Committee Chairman, the Annual Retainer
for Audit Committee Members, the Annual Retainer for Lead Director and
received the fees for attending 6 days of meetings in person, 4 days
of meetings by telephone.
|
|
(6)
|
Dr.
David A, Thompson is a Director of the Corporation, a member of the Audit
Committee and the Human Resources Committee. He received the Annual
Retainer for Directors, the Annual Retainer for Human Resource Committee
Members, the Annual Retainer for Audit Committee Members and received the
fees for attending 5 days of meetings in person, 4 days of meetings by
telephone.
|
|
(7)
|
Mr.
André Tremblay is a Director of the Corporation, a member of the Human
Resources Committee and Chairman of the Audit Committee. He received the
Annual Retainer for Directors, the Annual Retainer for Human Resources
Committee Members, the Annual Retainer for Audit Committee Chairman and
received the fees for attending 4 days of meetings in person, 4 days of
meetings by telephone.
|
Director
Incentive Plan Awards
The
significant terms of all plan-based awards and non equity incentive plan awards,
issued or vested, or under which options have been exercised, during the year,
or outstanding at the end of the financial year are described herein under
section entitled “Compensation Discussion and Analysis – Long-Term Incentive
Plan”.
Outstanding
share-based awards and option-based awards
The
following sets out for each director of the Corporation all awards outstanding
as at August 31, 2009, if any, including awards granted before August 31,
2009.
|
Option-based
Awards (Options)
|
Share-based
Awards (DSUs)
|
|||||
|
Name
|
Number of securities
underlying
unexercised
options
(#)
(1)
|
Option
exercise
price
(US$)
(2)
|
Option
expiration
date
|
Value
of
unexercised
in-the-money
options
(US$) (3)
|
Number of shares
or units of shares
that
have not
vested
(#)
|
Market
or payout
value of share-based
awards
that have
not
vested (US$) (4)
|
|
Pierre-Paul
Allard
|
–
|
–
|
–
|
–
|
7,866
|
23,598
|
|
Pierre
Marcouiller
|
2,000
|
26.00
|
June
29, 2010
|
–
|
23,778
|
71,334
|
|
400
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
17,966
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
1,037
|
12.69
|
Dec.
1, 2011
|
–
|
|||
|
2,479
|
5.65
|
Mar.
1, 2012
|
–
|
|||
|
12,500
|
1.58
|
Sept.
25, 2012
|
17,750
|
|||
|
12,500
|
3.51
|
Oct.
27, 2013
|
–
|
|||
|
Guy
Marier
|
12,500
|
4.65
|
Mar.
24, 2014
|
–
|
23,778
|
71,334
|
|
David
A. Thompson
|
2,000
|
26.00
|
June
29, 2010
|
–
|
26,963
|
80,889
|
|
400
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
15,334
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
12,500
|
1.58
|
Sept.
25, 2012
|
17,750
|
|||
|
12,500
|
3.51
|
Oct.
27, 2013
|
–
|
|||
|
Option-based
Awards (Options)
|
Share-based
Awards (DSUs)
|
|||||
|
Name
|
Number of securities
underlying
unexercised
options
(#)
(1)
|
Option
exercise
price
(US$)
(2)
|
Option
expiration
date
|
Value
of
unexercised
in-the-money
options
(US$) (3)
|
Number of shares
or units of shares
that
have not
vested
(#)
|
Market
or payout
value of share-based
awards
that have
not
vested (US$) (4)
|
|
André
Tremblay
|
2,000
|
26.00
|
June
29, 2010
|
–
|
32,539
|
97,617
|
|
400
|
22.25
|
Jan.
10, 2011
|
–
|
|||
|
17,291
|
9.13
|
Oct.
10, 2011
|
–
|
|||
|
12,500
|
1.58
|
Sept.
25, 2012
|
17,750
|
|||
|
12,500
|
3.51
|
Oct.
27, 2013
|
–
|
|||
|
(1)
|
The
unexercised options have not been and may never be exercised, and
actual gains if any, on exercise will depend on the value of the
Subordinate Voting Shares on the date of exercise. There can be no
assurance that these options will be exercised or any gain
realized.
|
|
(2)
|
Prices
noted are the grant date exercise price for each option under each
award.
|
|
(3)
|
Indicates
an aggregate value of “in-the-money” unexercised options held at the
financial year ended August 31, 2009. “In-the-money” options are
options for which the market value of the underlying securities is higher
than the exercise price. The value of unexercised in-the-money
options at financial year end is the difference between its exercise or
base price and the market value of the underlying Subordinate Voting Share
at August 31, 2009 which was US$3.00 (CA$3.29). The market value of the
Subordinate Voting Shares was calculated by using the highest of the
closing prices of the Subordinate Voting Shares on the Toronto Stock
Exchange and on the NASDAQ National Market on August 31, 2009 using
the noon buying rate of the Bank of Canada to convert the NASDAQ National
Market closing price to Canadian dollars as
required.
|
|
(4)
|
The
value of unvested DSUs at the financial year-end is the market value of
the Subordinate Voting Shares on August 31, 2009, which was
US$3.00 (CA$3.29). The market value of the Subordinate Voting Shares was
calculated by using the highest of the closing prices of the Subordinate
Voting Shares on the Toronto Stock Exchange and on the NASDAQ National
Market on August 31, 2009 using the noon buying rate of the
Bank of Canada to convert the NASDAQ National Market closing price to
Canadian dollars as required. The actual gains on vesting will depend on
the value of the Subordinate Voting Shares on the date of vesting. There
can be no assurance that these values will be
realized.
|
In the
financial year that ended August 31, 2009, all of the options of directors that
became exercisable were not “in-the-money”, none of the DSUs of directors
vested and the directors did not receive any non-equity incentive compensation
from the Corporation.
Securities
authorized for issuance under equity compensation plans
The
following sets forth the number of Subordinate Voting Shares of the Corporation
issued and outstanding on August 31, 2009 or that may be issued, under the
Corporation’s Long Term Incentive plan (“LTIP”) and Deferred Share Unit plan
(“DSUP”), both of which were approved by the Corporation’s
shareholders.
|
Plan
category
|
Number
of securities to be
issued
upon exercise of
outstanding
options, RSUs
and
DSUs (#)
(a)
|
Weighted-average exercise price
of
outstanding options, RSUs
and
DSUs (US$)
(b)
|
Number
of securities remaining
available
for future issuance
under
equity compensation plans
(excluding
securities reflected in
column
(a)) (#)
(c)
|
|
LTIP
– RSU
|
1,339,619
|
n/a
(1)
|
2,301,648
|
|
LTIP
– Options
|
1,666,589
|
13.78
|
|
|
DSUP
– DSU
|
114,924
|
n/a
(1)
|
|
(1)
|
The
value of RSUs and DSUs will be equal to the market value of the
Subordinate Voting Shares of the Corporation on the date
of vesting.
|
PERFORMANCE
GRAPH
The
following graph compares the cumulative total shareholder return of EXFO’s
Subordinate Voting Shares with the cumulative shareholder return of the
S&P/TSX Composite Index for the last five years ended August 31, 2009.
It assumes that the initial value of the investment in EXFO’s Subordinate
Voting Shares and in the S&P/TSX Composite Index was $100 on August 31,
2004.
The
Corporation’s Stock Performance
(August
31, 2004 to August 31, 2009)
|
2004
|
2005
|
2006
|
2007
|
2008
|
2009
|
|
|
EXFO
Subordinate Voting Share
|
$100
|
$97
|
$101
|
$123
|
$78
|
$57
|
|
S&P/TSX
Stock Index
|
$100
|
$127
|
$144
|
$162
|
$164
|
$129
|
Total
compensation to NEOs of the Corporation is defined as the aggregate of base
salary, short-term compensation, and long-term compensation. Base salary is
established at the beginning of each fiscal year, according
to recommendations made by the Board of Directors’ Human Resources
Committee. Short-term compensation, which varies from one year to the next, is
contingent upon the achievement of pre-established objectives measured against
corporate and individual targets for a given fiscal year. For more information
about short-term compensation, refer to the heading entitled “Short Term
Incentive Compensation”. Long-term compensation, which is handed out in the form
of Restricted Share Units (“RSUs”), vests over a three- to five-year period,
depending on the achievement of pre-established corporate goals. For more
information about long-term compensation, refer to the heading entitled
“Long Term Incentive Plan”.
Consequently,
base salary and short-term compensation do not necessarily track the market
value of our share price. Long-term compensation, however, is directly aligned
with share-price performance, since the market value of RSUs is equal to
the market value of our shares on any vesting day. Accordingly, the market value
of our share price significantly reduced the planned value of NEOs’ total
compensation, thereby partially aligning their experience with that of
shareholders.
DIRECTORS
AND OFFICERS’ LIABILITY INSURANCE
The
Corporation maintains insurance protection against liability incurred by its
officers and directors as well as those of its subsidiaries in the
performance of their duties. The entire premium, amounting to US$169,250 from
September 30, 2009 to September 30, 2010, is paid by the
Corporation. The aggregate limit of liability in respect of any and all
claims is US$10 million per year, subject to a deductible of US$250,000. A
separate excess director and officer liability policy (Chubb Executive Elite)
with aggregate limit of US$5 million provides broad form side A coverage,
featuring difference-in-conditions (DIC) drop-down coverage that fills in
potential coverage gaps that may exist under restrictive or unresponsive
underlying insurance. This specific policy provides coverage for personal
directors and officers liability if the organization fails or refuses to
indemnify, or is financially unable to do so, or is prevented by law
from indemnifying and will also respond if the primary D&O policy
limit is consumed.
REPORT
ON CORPORATE GOVERNANCE PRACTICES
Corporate
Governance Developments in Canada
In
January 2004, the Canadian Securities Administrators (the “CSA”) adopted
Multilateral Instrument 52-110 — Audit Committees, which was amended as of June
30, 2005 (“MI 52-110”). MI 52-110 sets forth certain requirements
regarding audit committee composition and responsibilities, as well as reporting
obligations with respect to audit-related matters. The disclosure of the MI
52-110 requirements is included in our 2009 Annual Information Form in Form 20-F
under Exhibit 11.6 (Audit Committee Charter), Items 6.A (Directors and Senior
Management) and 16.C (Audit Committee Pre-Approval Policies and Procedures and
Principal Accountant Fees and Services) available as described below. For the
composition of the Audit committee, refer to the table provided under heading
“Nominees for Election as Directors and their Beneficial Ownership of Voting
Securities”.
Effective
June 30, 2005, the CSA also adopted National Instrument 58-101 —
Disclosure of Corporate Governance Practices (“NI 58-101”) and National
Policy 58-201 — Effective Corporate Governance (“NP 58-201” and,
together with MI 52-110, the “CSA Corporate Governance Standards”).
NP 58-201 provides guidance to Canadian issuers with respect to corporate
governance practices, while NI 58-101 requires issuers to make certain
disclosures regarding their governance practices. The CSA Corporate Governance
Standards, particularly NI 58-101 and NP 58-201, have replaced the
former guidelines of the Toronto Stock Exchange that had, prior to the coming
into force of the CSA Corporate Governance Standards, served as the primary
source of codified recommendations in respect of corporate governance
practices in Canada.
EXFO’s
Corporate Governance Practices
In
accordance with NI 58-101, we are required to disclose information with
respect to our system of corporate governance. Over the past few years, we have
undertaken a comprehensive review of our corporate governance practices in order
to best comply with and, whenever practicable, exceed the CSA
Standards.
We
adopted in March 2005 and are updating on a regular basis a number of charters
and policies, including an Audit Committee Charter; a Board of Directors
Corporate Governance Guidelines, a Code of Ethics for our Principal Executive
Officer and Senior Financial Officers, a Disclosure Guidelines, an Ethics and
Business Conduct Policy, a Human Resources Committee Charter, a Securities
Trading Policy and a Statement on Reporting Ethical Violations (Whistle Blower).
We also adopted in October 2006 a policy regarding Hiring Employees and Former
Employees of Independent Auditor. We are also implementing best practices such
as, Best Practice regarding the Granting base of Stock Incentive Compensation
and the establishment of Guidelines regarding the filing and disclosure of
material contracts. We refer to our Board and Committee Charters as our
“Corporate Governance Rules”.
We are of
the view that adopting and implementing good corporate governance practices is a
cornerstone of our corporate and management practices and policies and that our
existing corporate governance practices already meet or surpass the prevailing
corporate governance standards. We further believe that the measures we have
adopted with respect to corporate governance comply substantially with the CSA
Standards.
We
encourage our shareholders to consult our Corporate Governance Rules and Ethics
and Business Conduct Policy available on our website at www.EXFO.com and also available in print to any
shareholder who requests copies by contacting our Corporate
Secretary.
Our 2009
Annual Information Form in Form 20-F (also filed with the SEC), which will be
available on or before November 27, 2009 and which may be obtained free of
charge upon request to the Corporate Secretary or at www.sedar.com, will also contain certain
information with respect to our corporate governance practices.
We are
dedicated to updating our corporate governance practices on an ongoing basis in
order to respond to the evolution of best practices. We and our Board of
Directors are of the view that our corporate governance practices, as summarized
in the Schedule A attached to this Management Proxy Circular, are in substantial
compliance with the CSA Corporate Governance Standards. Copies of our Corporate
Governance Rules and all related policies (including those mentioned above) are
available on our website at www.EXFO.com as
mentioned in Schedule A.
ADDITIONAL
INFORMATION
Additional
information relating to the Corporation is on SEDAR at www.sedar.com. The Corporation shall provide to
any person or company, free of charge upon request to the Corporate Secretary of
the Corporation, at 400 Godin Avenue, Quebec, Province of Quebec, Canada, G1M
2K2, phone number (418) 683-0913 ext. 3704 or fax number
(418) 683-9839:
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(a)
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one
copy of the Annual Report on Form 20-F of the Corporation filed with the
Securities and Exchange Commission (the “SEC”) in the United States
pursuant to the Securities Exchange Act of
1934, and with securities commissions or similar
authorities;
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(b)
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one
copy of the comparative consolidated financial statements of the
Corporation for its most recently completed financial year and the
Auditors report thereon, included in the Annual Report of the Corporation
and one copy of any interim consolidated financial statements of the
Corporation subsequent to the consolidated financial statements for its
most recently completed financial
year;
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(c)
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one
copy of this Management Proxy
Circular.
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Additional
information relating to the Corporation is also included in the Corporation’s
Annual Report for the year ended August 31, 2009. The Annual Report containing
the consolidated audited annual financial statements, the report of the
auditor and management’s discussion and analysis is being mailed to shareholders
with the Notice of Meeting and this Management Proxy
Circular. Additional copies of the Annual Report are available on
SEDAR at www.sedar.com and may be
obtained free of charge from the Corporation upon request and will be available
at the Meeting.
DIRECTORS’
APPROVAL
The
contents and the sending of this Management Proxy Circular have been approved by
the Directors of the Corporation.
DATED at
Quebec, Province of Quebec, Canada, this 2nd day
of November, 2009.
/s/ Benoit Ringuette
Benoit
Ringuette
Corporate
Secretary
EXFO
ELECTRO-OPTICAL ENGINEERING INC.
400 Godin
Avenue
Quebec,
Province of Quebec, Canada, G1M 2K2
SCHEDULE A
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CSA
Guidelines
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EXFO
Electro-Optical Engineering’s Corporate Governance
Practices
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1. Board
of Directors
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(a) Disclose
the identity of directors who are independent.
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The
following directors are independent:
Mr.
Pierre-Paul Allard
Mr.
Pierre Marcouiller
Mr.
Guy Marier
Dr.
David A. Thompson
Mr.
André Tremblay
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(b) Disclose
the identity of directors who are not independent, and describe the basis
for that determination.
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Mr.
Germain Lamonde – non-independent – is President and Chief Executive
Officer of the Corporation and the majority shareholder of the Corporation
as he has the ability to exercise a majority of the votes for the election
of the Board of Directors.
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(c) Disclose
whether or not a majority of directors are independent. If a majority of
directors are not independent, describe what the board of directors does
to facilitate its exercise of independent judgement in carrying out its
responsibilities.
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The
majority of directors are independent (5 out of 6).
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(d) If
a director is presently a director of any other issuer that is a reporting
issuer (or the equivalent) in a jurisdiction or a foreign jurisdiction,
identify both the director and the other issuer.
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Pierre
Marcouiller is a Director of Canam Group Inc., a publicly listed
corporation of Saint-Georges de Beauce, Quebec, Canada. Andre Tremblay is
a Director of Transcontinental Inc., a publicly listed corporation of
Montreal, Quebec, Canada.
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(e) Disclose
whether or not the independent directors hold regularly scheduled meetings
at which non-independent directors and members of management are not in
attendance. If the independent directors hold such meetings, disclose the
number of meetings held since the beginning of the issuer’s most recently
completed financial year. If the independent directors do not hold such
meetings, describe what the board does to facilitate open and candid
discussion among its independent directors.
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The
independent Directors hold as many meeting, as needed, annually and any
Director may request such meeting at any time. Since
September 1, 2008 and prior to November 2, 2009, four (4)
meetings of independent Directors without management
occurred.
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(f) Disclose
whether or not the chair of the board is an independent director. If the
board has a chair or lead director who is an independent director,
disclose the identity of the independent chair or lead director, and
describe his or her role and responsibilities. If the board has neither a
chair that is independent nor a lead director that is independent,
describe what the board does to provide leadership for its independent
directors.
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The
Chair of the Board is not an independent director. During the financial
year ended August 31, 2002, the Board of Directors designated Mr. Michael
Unger to act as the independent “Lead Director” and in January 2007, Mr.
Guy Marier was designated to act as the independent “Lead Director” in
replacement of Mr. Unger.
The
Lead Director is an outside and unrelated director appointed by the Board
of Directors to ensure that the Board can perform its duties in an
effective and efficient manner independent of management. The appointment
of a Lead Director is part of EXFO’s ongoing commitment to good corporate
governance. The Lead Director will namely:
· provide
independent leadership to the Board;
· select
topics to be included in the Board of Directors meetings;
· facilitate
the functioning of the Board independently of the
Corporation’s
management;
· maintain
and enhance the quality of the Corporation’s corporate
governance
practices;
· in
the absence of the Executive Chair, act as chair of meetings of the
Board;
· recommend,
where necessary, the holding of special meetings of the
Board;
· serve
as Board ombudsman, so as to ensure that questions or comments
of
individual directors are heard
and addressed;
· manage
and investigate any report received through the Corporation
website
pursuant to the Corporation’s
Statement on reporting Ethical Violations and Ethics and
Business Conduct Policy;
· work
with the Board of Directors to facilitate the process for
developing,
monitoring and evaluating specific
annual objectives for the Board each year.
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||||||
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(g) Disclose
the attendance record of each director for all board meetings held since
the beginning of the issuer’s most recently completed financial
year.
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The
table below indicates the directors’ record of attendance at meetings of
the Board of Directors and its committees during the financial year ended
August 31, 2009:
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||||||
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Director
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Board
meetings
attended
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Audit
Committee
meetings
attended
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Human
Resources
Committee
meetings
attended
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Independent
Directors
meetings
attended
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Total
Board and
Committee
meetings
attendance
rate
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Lamonde,
Germain
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10
of 10
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n/a
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n/a
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n/a
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100%
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Allard,
Pierre-Paul
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9 of
10
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2 of
2
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2
of 2
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2 of
3
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88%
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Marcouiller,
Pierre
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10
of 10
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4
of 4
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4
of 4
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3
of 3
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100%
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Marier,
Guy
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10 of
10
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4 of
4
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4 of
4
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3
of 3
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100%
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Thompson,
David
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9 of
10
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4
of 4
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4
of 4
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3
of 3
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95%
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Tremblay,
André
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8
of 10
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4 of
4
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3 of
4
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3 of
3
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86%
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Attendance
Rate:
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93%
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100%
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94%
|
93%
|
95%
|
||
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2. Board Mandate –
Disclose the text of the board’s written mandate. If the board does not
have a written mandate, describe how the board delineates its role and
responsibilities.
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(a) Assuring
the integrity of the executive officers and creating a culture of
integrity throughout the organisation.
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The
Board is committed to maintaining the highest standards of integrity
throughout the organisation. Accordingly, the Board adopted an Ethics and
Business Conduct Policy and a Statement on Reporting Ethical Violations
(“Whistleblower Policy”) which are available on EXFO website at
www.EXFO.com to all employees and initially distributed to every new
employees of the Corporation.
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(b) Adoption
of a strategic planning process
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The
Board provides guidance for the development of the strategic planning
process and approves the process and the plan developed by management
annually. In addition, the Board carefully reviews the strategic plan and
deals with strategic planning matters that arise during the
year.
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(c) Identification
of principal risks and implementing of risk management
systems
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The
Board works with management to identify the Corporation’s principal risks
and manages these risks through regular appraisal of management’s
practices on an ongoing basis.
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(d) Succession
planning including appointing, training and monitoring senior
management
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The
Human Resources Committee is responsible for the elaboration and
implementation of a succession planning process and its updates as
required. The Human Resources Committee is responsible to monitor and
review the performance of the Chief Executive Officer and that of all
other senior officers.
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(e) Communications
policy
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The
Chief Financial Officer of the Corporation is responsible for
communications between Management and the Corporation’s current and
potential shareholders and financial analysts. The Board adopted and
implemented Disclosure Guidelines to ensure consistency in the manner that
communications with shareholders and the public are managed. The Audit
Committee reviews press releases containing the quarterly results of the
Corporation prior to release. In addition, all material press releases of
the Corporation are reviewed by the President and Chief Executive Officer,
Chief Financial Officer, Investor Relations Manager, Manager of Financial
Reporting and Accounting and Internal Legal Counsel. The Disclosure
Guidelines have been established in accordance with the relevant
disclosure requirements under applicable Canadian and United States
securities laws.
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(f) Integrity
of internal control and management information systems
|
The
Audit Committee has the responsibility to review the Corporation’s systems
of internal controls regarding finance, accounting, legal compliance and
ethical behaviour. The Audit Committee meets with the Corporation’s
external auditors on a quarterly basis. Accordingly, the Corporation fully
complies with Sarbanes-Oxley Act requirements within the required period
of time.
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(g) Approach
to corporate governance including developing a set of corporate governance
principles and guidelines that are specifically applicable to the
issuer
|
The
Board assumes direct responsibility for the monitoring of the Board’s
corporate governance practices, the functioning of the Board and the
powers, mandates and performance of the committees. These responsibilities
were previously assumed by the Human Resources Committee. Accordingly, the
Board updated and adopted in March 2005 the following policies to
fully comply with these responsibilities which are updated on a regular
basis:
· Audit
Committee Charter*;
· Board
of Directors Corporate Governance Guidelines*;
· Code
of Ethics for our Principal Executive Officer and Senior
Financial
Officers*;
· Disclosure
Guidelines;
· Ethics
and Business Conduct Policy*;
· Human
Resources Committee Charter*;
· Securities
Trading Policy;
· Statement
on Reporting Ethical Violations (Whistle Blower)*;
· Policy
Regarding Hiring Employees and Former Employees of
Independent
Auditor*.
The
Board also adopted in October 2006 the Policy Regarding Hiring Employees
and Former Employees of Independent Auditors which is also available on
EXFO website at www.EXFO.com. The Board also adopted in April 2007 the
Best Practice regarding the Granting Date of Stock Incentive Compensation
and adopted in October 2008 the Guidelines regarding the filing and
disclosure of material contracts.
*
available on EXFO website at www.EXFO.com.
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(h) Expectations
and responsibilities of Directors, including basic duties and
responsibilities with respect to attendance at board meetings and advance
review of meeting materials
|
The
Board is also responsible for the establishment and functioning of all
Board committees, their compensation and their good standing. At regularly
scheduled meetings of the Board, the Directors receive, consider and
discuss committee reports. The Directors also receive in advance of any
meeting, all documentation required for the upcoming meetings and they are
expected to review and consult this documentation.
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3. Position
Descriptions
|
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|
(a) Disclose
whether or not the board has developed written position descriptions for
the chair of the board and the chair of each board committee. If the board
has not developed written position descriptions for the chair and/or the
chair of each board committee, briefly describe how the board delineates
the role and responsibilities of each such position.
|
There
is no specific mandate for the Board, however the Board of Directors is,
by law, responsible for managing the business and affairs of the
Corporation. Any responsibility which is not delegated to senior
management or to a committee of the Board remains the responsibility of
the Board. Accordingly, the chair of the Board, of the Audit Committee and
of the Human Resources Committee will namely:
· provide
leadership to the Board or Committee;
· ensure
that the Board or Committee can perform its duties in an effective
and efficient
manner;
· facilitate
the functionary of the Board or Committee;
· promote
best practices and high standards of corporate governance.
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(b) Disclose
whether or not the board and CEO have developed a written position
description for the CEO. If the board and CEO have not developed such a
position description, briefly describe how the board delineates the role
and responsibilities of the CEO.
|
No
written position description has been developed for the CEO. The President
and Chief Executive Officer, along with the rest of management placed
under his supervision, is responsible for meeting the corporate objectives
as determined by the strategic objectives and budget as they are adopted
each year by the Board of Directors.
|
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4. Orientation
and Continuing Education
|
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|
(a) Briefly
describe what measures the board takes to orient new directors
regarding
(i) the
role of the board, its committees and its directors, and
(ii) the
nature and operation of the issuer’s business.
|
The
Human Resources Committee Charter foresees that the Human Resource
Committee maintains an orientation program for New Directors.
Presentations
and reports relating to the Corporation’s business and affairs are
provided to new Directors. In addition, new Board members meet with senior
management of the Corporation to review the business and affairs of the
Corporation.
|
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(b) Briefly
describe what measures, if any, the board takes to provide continuing
education for its directors. If the board does not provide continuing
education, describe how the board ensures that its directors maintain the
skill and knowledge necessary to meet their obligations as
directors.
|
The
Human Resources Committee Charter foresees that the Human Resources
Committee maintains a continuing education programs for
Directors.
|
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5. Ethical
Business Conduct
|
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|
(a) Disclose
whether or not the board has adopted a written code for the directors,
officers and employees. If the board has adopted a written
code:
i. disclose
how a person or company may obtain a copy of the code;
ii. describe
how the board monitors compliance with its code, or if the board does not
monitor compliance, explain whether and how the board satisfies itself
regarding compliance with its code; and
|
The
Corporation is committed to maintaining the highest standard of business
conduct and ethics. Accordingly, the Board updated and established (i) a
Board of Directors Corporate Governance Guidelines (ii) a Code of Ethics
for our Principal Executive Officer and senior Financial Officers (iii)
Ethics and Business Conduct Policy and (iv) a Statement on Reporting
Ethical Violations “Whistleblower Policy” which are available on the
Corporation’s website at www.EXFO.com.
The
Board of Directors will determine, or designate appropriate persons to
determine, appropriate actions to be taken in the event of a violation of
the Code of Ethics for our Principal Executive Officer and senior
Financial Officers. Someone that does not comply with this Code of Ethics
will be subject to disciplinary measures, up to and including discharge
from the Corporation. Furthermore, a compliance affirmation must be
filled in a written form agreeing to abide by the policies of the Code of
Ethics.
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iii. provide
a cross-reference to any material change report filed since the beginning
of the issuer’s most recently completed financial year that pertains to
any conduct of a director or executive officer that constitutes a
departure from the code.
|
No
material change report has been required or filed during our financial
year ended August 31, 2009 with respect to any conduct constituting a
departure from our Code of Ethics.
|
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(b) Describe
any steps the board takes to ensure directors exercise independent
judgement in considering transactions and agreements in respect of which a
director or executive officer has a material interest.
|
Activities
that could give rise to conflicts of interest are prohibited. Board
members should contact the Lead Director or in-house legal counsel
regarding any issues relating to possible conflict of interest. If such
event occurs, the implicated Board member will not participate in the
meeting and discussion with respect to such possible conflict of interest
and will not be entitled to vote on such matter. Senior executives should
also contact the in-house legal counsel regarding any issues relating to
possible conflict of interest.
|
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(c) Describe
any other steps the board takes to encourage and promote a culture of
ethical business conduct.
|
The
Corporation has instituted and follows a “Whistleblower Policy” where each
member of the Board as well as any senior officer, every employee of the
Corporation and any person is invited and encouraged to report anything
appearing or suspected of being non-ethical to our Lead Director, in
confidence. The Lead Director has the power to hire professional
assistance to conduct an internal investigation should he so fell
required.
|
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6. Nomination
of Directors
|
|
|
(a) Describe
the process by which the board identifies new candidates for board
nomination.
|
The
Board adopted and implemented a Human Resources Committee Charter which
integrates the Compensation Committee Charter and the Nominating and
Governance Committee Charter. The Human Resources Committee is responsible
for nomination, assessment and compensation of directors and
Officers.
|
|
(b) Disclose
whether or not the board has a nominating committee composed entirely of
independent directors. If the board does not have a nominating committee
composed entirely of independent directors, describe what steps the board
takes to encourage an objective nomination process.
|
The
Human Resources Committee consists of five members all of who are
independent Directors. The Chairman of the Human Resources Committee is
Mr. Guy Marier per interim following the departure of Mr. Unger in June
2008 and starting October 2008 he was confirmed as Chairman.
The
Human Resources Committee Charter namely foresees:
· The
Committee to identify individuals qualified to become members of the
Board,
to conduct background
checks respecting such individuals, to recommend that
the Board select the director nominees for the next annual meeting of
shareholders;
|
|
(c) If
the board has a nominating committee, describe the responsibilities,
powers and operation of the nominating committee.
|
|
7. Compensation
|
|
|
(a) Describe
the process by which the board determines the compensation for the
issuer’s directors and officers.
|
The
Human Resources Committee reviews periodically compensation policies in
light of market conditions, industry practice and level of
responsibilities. Only independent Directors are compensated for acting as
a Director of the Corporation.
|
|
(b) Disclose
whether or not the board has a compensation committee composed entirely of
independent directors. If the board does not have a compensation committee
composed entirely of independent directors, describe what steps the board
takes to ensure an objective process for determining such
compensation.
|
The
Human Resources Committee consists of five members all of who are
independent Directors. The Chairman of the Human Resources Committee is
Mr. Guy Marier per interim following the departure of Mr. Unger in June
2008 and starting October 2008 he was confirmed as
Chairman.
|
|
(c) If
the board has a compensation committee, describe the
responsibilities, powers and operation of the compensation
committee.
|
The
Human Resources Committee Charter namely foresees:
· The
Committee to review and approve on an annual basis with respect to the
annual
compensation of all
senior officers;
· The
Committee to review and approve, on behalf of the Board of Directors
(“the
Board”) or in collaboration
with the Board as applicable, on the basis of
the attribution authorized by the Board, to whom
options to purchase shares of
the Corporation, RSUs or DSUs shall be offered as the case
may be
and if so, the
terms of such options, RSUs or DSUs in accordance with the terms of the
Corporation’s
Long-Term Incentive Plan or the Deferred Share Unit Plan provided
that
no options, RSUs
or DSUs shall be granted to members of this committee without
the approval of the Board;
· The
committee to recommend to the Board from time to time the remuneration
to be paid by the Corporation
to Directors;
· The
Committee to make recommendations to the Board with respect to the
Corporation’s
incentive compensation
plans and equity-based plans.
|
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(d) If
a compensation consultant or advisor has, at any time since the beginning
of the issuer’s most recently completed financial year, been retained to
assist in determining compensation for any of the issuer’s directors and
officers, disclose the identity of the consultant or advisor and briefly
summarize the mandate for which they have been retained. If the consultant
or advisor has been retained to perform any other work for the issuer,
state that fact and briefly describe the nature of the work.
|
In
2004, the Corporation hired Mercer Human Resource Consulting to conduct a
full market benchmarking and review of the Corporation’s executive
compensation plans. In 2006, Mercer provided data regarding market
competitive annual base salary increases, which were applied to the
executive compensation structure developed in 2004. In addition, Mercer
completed mandates on the following topics in 2006:
· Job
classification structure & salary scales (Define Job positions vs.
comparable
market including salary
scale);
· Development
of compensation management policies & practices (to manage
employee
progression through
the salary scale).
In
2007, the Corporation appointed two human resources consultants, Mercer an
AON Corporation to confirm that the compensation positioning of the
Corporation was still aligned with the comparative market.
In
2008, Hewitt has conducted a world-wide market analysis for selected
international positions. The survey included annual base salary, bonuses
and commission plans.
In
2009, Mercer reviewed the compensation positioning of the
Corporation.
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8. Other Board
Committees – If the board has standing committees other than
the audit, compensation and nominating committees identify the committees
and describe their function.
|
The
Board has no other standing committee.
|
|
9. Assessments –
Disclose whether or not the board, its committees and individual directors
are regularly assessed with respect to their effectiveness and
contribution. If assessments are regularly conducted, describe the process
used for the assessments. If assessments are not regularly conducted,
describe how the board satisfies itself that the board, its committees,
and its individual directors are performing effectively.
|
The
Board assumes direct responsibility for the monitoring of the Board’s
corporate governance practices, the functioning of the Board and the
powers, mandates and performance of the Committee. The Human Resources
Committee, composed solely of independent Directors, initiates a
self-evaluation of the Board’s performance on an annual
basis.
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