UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of June 2002
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(Translation of registrant's name into English)
465 GODIN AVENUE, VANIER, QUEBEC, CANADA G1M 3G7
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [_]
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes [_] No [X]
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______.
On June 25, 2002, EXFO Electro-Optical Engineering Inc., a Canadian corporation,
reported its results of operations for the fiscal quarter ended May 31, 2002.
This report on Form 6-K sets forth the news release relating to EXFO's
announcement and certain information relating to EXFO's financial condition and
results of operations for the third fiscal quarter of the 2002 fiscal year. The
press release and certain information relating to EXFO's financial condition and
results of operations for the third fiscal quarter of the 2002 fiscal year are
hereby incorporated as a document by reference to Form F-3 (Registration
Statement under the Securities Act of 1933) declared effective as of July 30,
2001 and to Form F-3 (Registration Statement under the Securities Act of 1933)
declared effective as of March 11, 2002 and to amend certain material
information as set forth in these two Form F-3 documents.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
--------------------------------------------
Name: Germain Lamonde
Title: President and Chief Executive Officer
Date: June 26, 2002
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM CONSOLIDATED BALANCE SHEET
(in thousands of US dollars)
AS AT AS AT
AUGUST 31, MAY 31,
2001 2002
--------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,729 $ 7,127
Short-term investments 66,861 43,754
Accounts receivable
Trade, less allowance for doubtful accounts of $795
($893 as at August 31, 2001) 24,531 9,705
Other 3,660 3,732
Income taxes receivable -- 17,059
Inventories (notes 3 and 7) 44,345 27,023
Prepaid expenses 1,265 1,447
Future income taxes 1,423 2,532
--------- ---------
149,814 112,379
PROPERTY, PLANT AND EQUIPMENT 27,140 27,706
INTANGIBLE ASSETS AND GOODWILL (note 6) 264,242 36,855
FUTURE INCOME TAXES 1,381 9,926
--------- ---------
$ 442,577 $ 186,866
========= =========
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 4) $ 16,180 $ 13,686
Income taxes payable 2,623 --
Deferred revenue 616 310
Current portion of long-term debt 106 91
--------- ---------
19,525 14,087
DEFERRED GRANTS 1,002 667
LONG-TERM DEBT 664 597
FUTURE INCOME TAXES 6,581 165
--------- ---------
27,772 15,516
--------- ---------
CONTINGENCY (note 8)
SHAREHOLDERS' EQUITY
SHARE CAPITAL 429,995 489,611
CONTRIBUTED SURPLUS 1,457 1,483
CUMULATIVE TRANSLATION ADJUSTMENT (8,333) (5,874)
DEFICIT (8,314) (313,870)
--------- ---------
414,805 171,350
--------- ---------
$ 442,577 $ 186,866
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars, except share and per share data)
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2001 2001 2002 2002
---------------- ---------------- ---------------- ----------------
SALES $ 45,781 $ 110,593 $ 16,348 $ 51,087
COST OF SALES* 17,418 40,513 17,080 42,497
---------------- ---------------- ---------------- ----------------
GROSS MARGIN (LOSS) 28,363 70,080 (732) 8,590
---------------- ---------------- ---------------- ----------------
OPERATING EXPENSES
Selling and administrative 14,324 34,159 8,750 28,327
Net research and development (note 5) 4,460 9,747 3,454 10,272
Amortization of property, plant and equipment 1,033 2,263 1,544 4,379
Amortization of intangible assets 4,211 5,873 3,236 9,976
Write-down of intangible assets (note 6) -- -- 23,657 23,657
Restructuring and other charges (note 7) -- -- 2,023 2,880
---------------- ---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 24,028 52,042 42,664 79,491
---------------- ---------------- ---------------- ----------------
EARNINGS (LOSS) FROM OPERATIONS 4,335 18,038 (43,396) (70,901)
Interest income, net 963 5,371 261 1,239
Foreign exchange gain (loss) (152) 3,018 (801) (714)
---------------- ---------------- ---------------- ----------------
EARNINGS (LOSS) BEFORE INCOME TAXES
AND AMORTIZATION AND WRITE-DOWN OF
GOODWILL 5,146 26,427 (43,936) (70,376)
---------------- ---------------- ---------------- ----------------
INCOME TAXES
Current 3,252 10,842 (787) (8,602)
Future (1,531) (1,870) (13,964) (15,718)
---------------- ---------------- ---------------- ----------------
1,721 8,972 (14,751) (24,320)
---------------- ---------------- ---------------- ----------------
EARNINGS (LOSS) BEFORE AMORTIZATION
AND WRITE-DOWN OF GOODWILL 3,425 17,455 (29,185) (46,056)
AMORTIZATION OF GOODWILL 12,055 18,556 12,472 37,331
WRITE-DOWN OF GOODWILL (note 6) -- -- 222,169 222,169
---------------- ---------------- ---------------- ----------------
NET LOSS FOR THE PERIOD $ (8,630) $ (1,101) $ (263,826) $ (305,556)
================ ================ ================ ================
BASIC AND DILUTED EARNINGS (LOSS) PER
SHARE
Earnings (loss) before amortization and
write-down of goodwill $ 0.06 $ 0.34 $ (0.47) $ (0.76)
Net loss $ (0.15) $ (0.02) $ (4.29) $ (5.06)
BASIC WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000'S) 56,383 51,689 61,443 60,391
DILUTED WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING (000'S) (note 9) 56,860 52,023 61,443 60,391
* including inventory write-offs $9,101 and $18,463 for the three months and
the nine months ended May 31, 2002, respectively, nil in 2001 (see note 7).
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (DEFICIT)
AND CONTRIBUTED SURPLUS
(in thousands of US dollars)
RETAINED EARNINGS (DEFICIT)
NINE MONTHS
ENDED
MAY 31,
-----------------------------------------
2001 2002
------------------ -------------------
BALANCE - BEGINNING OF PERIOD $ 6,980 $ (8,314)
ADD
Net loss for the period (1,101) (305,556)
----------- ----------
BALANCE - END OF PERIOD $ 5,879 $ (313,870)
=========== ==========
CONTRIBUTED SURPLUS
NINE MONTHS
ENDED
MAY 31,
-----------------------------------------
2001 2002
------------------ -------------------
BALANCE - BEGINNING OF PERIOD $ -- $ 1,457
ADD
Premium on resale of share capital 1,457 26
----------- ----------
BALANCE - END OF PERIOD $ 1,457 $ 1,483
=========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
INTERIM UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2001 2001 2002 2002
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (8,630) $ (1,101) $(263,826) $(305,556)
Add (deduct) items not affecting cash and
cash equivalents
Discount on short-term investments 345 533 (14) 527
Amortization of property, plant and
equipment 1,033 2,263 1,544 4,379
Amortization of intangible assets 4,211 5,873 3,236 9,976
Write-down of goodwill and intangible
assets -- -- 245,826 245,826
Foreign exchange gains (losses) on
disposal of short-term investments (34) (3,222) 2 (74)
Restructuring and other charges -- -- 741 741
Future income taxes (1,531) (1,870) (13,964) (15,718)
Amortization of goodwill 12,055 18,556 12,472 37,331
Change in non-cash operating working capital
items
Accounts receivable 2,028 (5,269) 279 15,382
Income taxes (344) 4,039 (415) (16,715)
Inventories (7,132) (23,432) 10,780 20,115
Prepaid expenses 280 (325) 126 220
Accounts payable and accrued liabilities (3,223) 1,148 670 (4,777)
Deferred revenue (62) 114 (85) (304)
Deferred grants 231 170 -- (334)
--------- --------- --------- ---------
(773) (2,523) (2,628) (8,981)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances 1,373 2,177 -- --
Repayment of mandatorily redeemable
preferred shares -- (354) -- --
Repayment of long-term debt (7) (3,311) (23) (82)
Redemption of share capital (3) (33) -- (2)
Resale of share capital 110 1,490 -- 28
Share issue expenses -- (41) -- (14)
--------- --------- --------- ---------
1,473 (72) (23) (70)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (251,191) (461,981) (108,709) (491,755)
Proceeds from disposal of short-term
investments 285,605 549,436 110,527 514,658
Additions to property, plant and equipment
and intangible assets (7,469) (13,207) (369) (4,669)
Business combinations, net of cash and cash
equivalents acquired (25,150) (67,499) -- (9,756)
--------- --------- --------- ---------
1,795 6,749 1,449 8,478
--------- --------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS 2,495 4,154 (1,202) (573)
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS (74) (528) 224 (29)
CASH AND CASH EQUIVALENTS - BEGINNING OF
PERIOD 1,934 729 8,105 7,729
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 4,355 $ 4,355 $ 7,127 $ 7,127
========= ========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid $ (119) $ (276) $ (73) $ (169)
Interest received $ 1,435 $ 6,158 $ 230 $ 1,644
Income taxes recovered (paid) $ (3,820) $ (5,930) $ 381 $ (5,837)
The accompanying notes are an integral part of these consolidated financial
statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
1 INTERIM FINANCIAL INFORMATION
The financial information as at May 31, 2002 and for the periods ended May
31, 2001 and 2002 is unaudited. In the opinion of management, all
adjustments necessary to present fairly the results of these periods in
accordance with generally accepted accounting principles have been
included. The adjustments made were of a normal recurring nature. Interim
results may not necessarily be indicative of results anticipated for the
year.
These interim consolidated financial statements are prepared in accordance
with generally accepted accounting principles in Canada and use the same
accounting policies and methods used in the preparation of the company's
most recent annual consolidated financial statements. All disclosures
required for annual financial statements have not been included in these
financial statements. These interim consolidated financial statements
should be read in conjunction with the company's most recent annual
consolidated financial statements.
2 BUSINESS COMBINATION
On November 2, 2001, the company acquired a 100% interest in Avantas
Networks Corporation (renamed EXFO Protocol Inc. ("EXFO Protocol")), a
Canadian company specializing in fiber-optic protocol testing, in exchange
for a total consideration valued at $94,952,000 or $69,381,000 net of
$25,571,000 of cash and cash equivalents acquired. The total consideration
includes acquisition-related costs of $1,272,000.
The consideration paid consisted of $9,756,000 in cash, net of cash and
cash equivalents acquired of $25,571,000 and the issuance of 4,374,573
subordinate voting shares valued at $59,625,000. The fair value of the
subordinate voting shares issued was determined based on the market price
of the shares beginning three days before and ending three days after the
terms of the acquisition were agreed and announced, being August 20, 2001.
This acquisition has been accounted for using the purchase method and
consequently, the results of operations of EXFO Protocol have been included
in the consolidated statements of earnings of the company since November 2,
2001, being the date of acquisition.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
The purchase price, including acquisition-related costs, has been allocated
based on the estimated fair value of net assets at the date of acquisition
as follows:
(UNAUDITED)
Assets acquired
Current assets $ 6,040
Property, plant and equipment 2,003
In-process research and development 1,400
Core technology 5,050
Future income tax assets 476
Liabilities assumed (3,575)
--------------
Net identifiable assets acquired 11,394
Goodwill 57,987
--------------
Purchase price 69,381
Less: Subordinate voting shares issued 59,625
--------------
Cash paid, net of cash and cash equivalents acquired $ 9,756
==============
The fair value allocated to intangible assets acquired was based upon an
independent valuation performed in conjunction with this acquisition.
The existing technology that has reached technological feasibility was
classified as core technology.
In-process research and development represents the existing technology that
has not reached technological feasibility and has no future alternative
use.
In-process research and development and core technology are amortized on a
straight-line basis over their estimated useful lives of ten months and
five years, respectively. Goodwill is not amortized but is being reviewed
for impairment as described in note 6.
3 INVENTORIES
AS AT AS AT
AUGUST 31, MAY 31,
2001 2002
---------- ----------
(UNAUDITED)
Raw materials $ 29,891 $ 14,444
Work in progress 3,507 1,265
Finished goods 10,947 11,314
---------- ----------
$ 44,345 $ 27,023
========== ==========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
4 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AS AT
AUGUST 31, MAY 31,
2001 2002
---------- ----------
(UNAUDITED)
Trade $ 7,732 $ 5,317
Salaries and social benefits 3,917 3,845
Commissions 1,307 400
Tax on capital 463 839
Warranty 901 894
Restructuring charges (note 7) 1,230 1,328
Other 630 1,063
---------- ----------
$ 16,180 $ 13,686
========== ==========
5 NET RESEARCH AND DEVELOPMENT EXPENSES
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2001 2001 2002 2002
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Gross research and development
expenses $ 5,783 $ 13,139 $ 4,723 $ 13,756
Research and development tax credits (959) (2,526) (1,159) (3,176)
Government grants (364) (866) (110) (308)
----------- ----------- ----------- -----------
$ 4,460 $ 9,747 $ 3,454 $ 10,272
=========== =========== =========== ===========
6 WRITE-DOWN OF GOODWILL AND INTANGIBLE ASSETS
The company, as part of its review of financial results for the three
months ended May 31, 2002, performed an assessment of the carrying value of
goodwill and intangible assets recorded in conjunction with the
acquisitions of EXFO Burleigh, EXFO Photonic Solutions and EXFO Protocol.
The assessment was performed because of the severe and continued downturn
in the telecommunications industry, the persisting unfavorable market
conditions affecting the subsidiaries' industries and the decline in
technology valuations. The growth prospects for those subsidiaries are
significantly less than previously expected and those of historical periods
and the decline in market conditions affecting the subsidiaries is
significant and other than temporary. As a result, the company concluded
that the carrying value of goodwill and certain acquired intangible assets
was impaired and it recorded a charge of $222,169,000 to write-down a
significant portion of goodwill and a pre-tax charge of $23,657,000 to
write-down a significant portion of acquired core
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
technology during the three months ended May 31, 2002. Of the total
impairment loss of $245,826,000, $125,017,000 relates to EXFO Burleigh,
$71,508,000 relates to EXFO Photonic Solutions and $49,301,000 relates to
EXFO Protocol.
The impairment loss was calculated as the excess of the carrying value of
the assets over the pre-tax undiscounted future cash flows. The pre-tax
undiscounted future cash flows were estimated at the subsidiaries level
since the company had distinct cash flows for each of them and because they
are not fully integrated into the company's activities. The cash flow
periods used ranged from three to five years, using annual growth rates
ranging between 15% and 30%.
The assumptions supporting the estimated undiscounted future cash flows,
including the annual growth rates, reflect management's best estimates.
7 RESTRUCTURING AND OTHER CHARGES AND INVENTORY WRITE-OFFS
During the three months ended November 30, 2001, the company incurred
charges of $3,910,000 to align its cost structure to market conditions. The
company recorded $410,000 in severance expenses for the 101 employees who
were terminated, which are included in the restructuring and other charges
in the statement of earnings for the nine months ended May 31, 2002. The
company also recorded $3,500,000 in inventory write-off for excess and
obsolete inventories which is included in the cost of sales in the
statement of earnings for the nine months ended May 31, 2002. These
severance expenses were fully paid as at May 31, 2002.
During the three months ended February 28, 2002, the company incurred
additional charges of $6,309,000 to align its cost structure to market
conditions. The company recorded $447,000 in severance expenses for the
additional 57 employees who were terminated, which are included in the
restructuring and other charges in the statement of earnings for the nine
months ended May 31, 2002. The company also recorded $5,862,000 in
additional inventory write-off for excess and obsolete inventories which is
included in the cost of sales in the statement of earnings for the nine
months ended May 31, 2002. As at May 31, 2002, the accrued liabilities
related to the severance expenses amounted to $72,000.
During the three months ended May 31, 2002, the company incurred additional
charges of $11,124,000 to further reduce its costs. Under an additional
structured plan, the company recorded $1,155,000 in severance expenses for
the additional 192 employees who were terminated and $868,000 for the
write-off of property, plant and equipment. These charges are included in
the restructuring and other charges in the statements of earnings for the
three months and the nine months ended May 31, 2002. Finally, the company
recorded $9,101,000 in additional inventory write-off for excess and
obsolete inventories which is included in the cost of sales in the
statements of earnings for the three months and the nine months ended May
31, 2002. As at May 31, 2002, the accrued liabilities related to the
severance expenses amounted to $676,000.
Finally, as at May 31, 2002, the accrued liabilities related to the
restructuring plan of June 2001 amounted to $580,000 and consist of future
payments on exited leased facilities.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
8 CONTINGENCY
On November 27, 2001, a class action suit was filed in the United States
District Court for the Southern District of New York against the company,
four of the underwriters of its Initial Public Offering and some of its
executive officers pursuant to the Securities Exchange Act of 1934 and Rule
10b-5 promulgated thereunder and sections 11, 12 and 16 of the Securities
Act of 1933. This class action alleges that the company's registration
statement and prospectus filed with the Securities and Exchange Commission
on June 29, 2000 contained material misrepresentations and/or omissions
resulting from (i) the underwriters allegedly soliciting and receiving
additional, excessive and undisclosed commissions from certain investors in
exchange for which they allocated material portions of the shares issued in
connection with the company's Initial Public Offering; and (ii) the
underwriters allegedly entering into agreements with customers whereby
shares issued in connection with the company's Initial Public Offering
would be allocated to those customers in exchange for which customers
agreed to purchase additional amounts of shares in the after market at
pre-determined prices.
On April 19, 2002, the plaintiffs filed an amended complaint containing
master allegations against all of the underwriters in all of the 310 cases
included in this class action and, also filed an amended complaint
containing allegations specific to four of the company's underwriters, the
company and two of its executive officers. In addition to the allegations
mentioned above, the amended complaint alleges that the underwriters (i)
used their analysts to manipulate the stock market; and (ii) implemented
schemes that allowed issuer insiders to sell their shares rapidly after an
initial public offering and benefit from high market prices. As concerns
the company and its two executive officers in particular, the amended
complaint alleges that (i) the company's registration statement was
materially false and misleading because it failed to disclose the
additional commissions and compensation to be received by underwriters;
(ii) the two named executive officers learned of or recklessly disregarded
the alleged misconduct of the underwriters; (iii) the two named executive
officers had motive and opportunity to engage in alleged wrongful conduct
due to personal holdings of the company's stock and the fact that an
alleged artificially inflated stock price could be used as currency for
acquisitions; and (iv) the two named executive officers, by virtue of their
positions with the company, controlled the company and the contents of the
registration statement and had the ability to prevent its issuance or cause
it to be corrected. The plaintiffs in this suit seek an unspecified amount
for damages suffered.
Management believes that the company and its executive officers have fully
complied with all applicable securities laws and that the claims against it
and its officers are without merit. The company has referred this matter to
its insurers and plans to vigorously defend its position in this
litigation. However, at this time, it is not possible to predict the
outcome of this case, nor determine the amount of possible losses.
Accordingly, no provision for this case has been made in the interim
consolidated financial statements as of May 31, 2002.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
9 EARNINGS (LOSS) PER SHARE
The following table summarizes the reconciliation of the basic weighted
average number of shares outstanding and the diluted weighted average
number of shares outstanding used in the diluted earnings (loss) per share
calculation:
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2001 2001 2002 2002
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Basic weighted average number of
shares outstanding (000's) 56,383 51,689 61,443 60,391
Exercise of stock options 117 120 -- --
Exercise of restricted stock awards 360 214 -- --
----------- ----------- ----------- -----------
Diluted weighted average number of
shares outstanding (000's) 56,860 52,023 61,443 60,391
=========== =========== =========== ===========
10 DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
These interim consolidated financial statements are prepared in accordance
with Canadian GAAP which differ in certain respects from U.S. GAAP. Note 19
to the company's most recent annual consolidated financial statements
describes the significant differences between Canadian and U.S. GAAP that
affect the company. This note describes significant additional changes
occurring since the most recent annual consolidated financial statements
and provides a quantitative analysis of the significant differences. All
disclosures required in annual financial statements under U.S. GAAP have
not been provided in these interim consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
RECONCILIATION OF NET LOSS TO CONFORM WITH U.S. GAAP
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2001 2001 2002 2002
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Net loss for the period in accordance
with Canadian GAAP $ (8,630) $ (1,101) $(263,826) $(305,556)
Non-cash stock-based compensation costs
related to stock option plan (434) (608) (138) (569)
Non-cash stock-based compensation costs
related to stock purchase plan (116) (350) (231) (590)
Non-cash stock-based compensation costs
related to restricted stock award
plan (1,306) (1,645) (415) (2,442)
Unrealized gains on forward exchange
contracts 9 112 617 397
Future income taxes on forward exchange
contracts (16) (50) (204) (131)
Acquired in-process research and
development 128 (1,181) 420 (420)
Future income taxes on acquired in-
process research and development (694) (532) (133) (312)
Write-down of goodwill and intangible
assets a) -- -- (62,557) (62,557)
Future income taxes on write-down of
intangible assets a) -- -- 865 865
Amortization of goodwill (3,127) (5,161) (3,244) (9,723)
--------- --------- --------- ---------
Net loss available to common
shareholders for the period in
accordance with U.S. GAAP (14,186) (10,516) (328,846) (381,038)
Other comprehensive income (loss)
Foreign currency translation adjustments (1,674) (9,552) 13,360 2,459
Reclassification of realized foreign
exchange gains on
available-for-sale securities, net
of related future income taxes (419) (37) -- --
--------- --------- --------- ---------
Comprehensive loss $ (16,279) $ (20,105) $(315,486) $(378,579)
========= ========= ========= =========
Basic and diluted net loss per share
in accordance with U.S. GAAP $ (0.25) $ (0.20) $ (5.35) $ (6.31)
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
SHARE CAPITAL
AS AT AS AT
AUGUST 31, MAY 31,
2001 2002
--------- ----------
(UNAUDITED)
Share capital in accordance with Canadian GAAP $ 429,995 $ 489,611
Stock-based compensation costs related to stock purchase plan
Current period (150) --
Cumulative effect of prior periods 2,692 2,542
Shares issued upon business combinations 65,584 65,584
--------- ---------
Share capital in accordance with U.S. GAAP $ 498,121 $ 557,737
========= =========
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AS AT
AUGUST 31, MAY 31,
2001 2002
--------- ----------
(UNAUDITED)
Deferred stock-based compensation costs in accordance with
Canadian GAAP $ -- $ --
Stock-based compensation costs related to stock-based
compensation plans
Current period (8,145) --
Cumulative effect of prior periods (19,429) (7,968)
Amortization for the period 4,912 3,601
Reduction of stock-based compensation costs 14,694 382
--------- ---------
Deferred stock-based compensation costs in accordance with U.S.
GAAP $ (7,968) $ (3,985)
========= =========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
OTHER CAPITAL
AS AT AS AT
AUGUST 31, MAY 31,
2001 2002
--------- ----------
(UNAUDITED)
Other capital in accordance with Canadian GAAP $ -- $ --
Stock-based compensation costs related to stock-based
compensation plans
Current period 8,145 --
Cumulative effect of prior periods 18,749 12,350
Reduction of stock-based compensation costs (14,544) (382)
--------- ---------
Other capital in accordance with U.S. GAAP $ 12,350 $ 11,968
========= =========
DEFICIT
AS AT AS AT
AUGUST 31, MAY 31,
2001 2002
--------- ----------
(UNAUDITED)
Deficit in accordance with Canadian GAAP $ (8,314) $(313,870)
Stock-based compensation costs related to stock-based
compensation plans
Current period (4,912) (3,601)
Cumulative effect of prior periods (2,012) (6,924)
Unrealized gains on forward exchange contracts, net of
related future income taxes
Current period 117 266
Cumulative effect of prior periods -- 117
Acquired in-process research and development
Current period -- (420)
Future income taxes on acquired in-process research and
development
Current period (936) (312)
Cumulative effect of prior periods -- (936)
Write-down of goodwill and intangible assets a)
Current period (62,557)
Future income taxes on write-down of intangible assets a)
Current period 865
Amortization of goodwill
Current period (8,453) (9,723)
Cumulative effect of prior periods -- (8,453)
Change in reporting currency
Cumulative effect of prior periods 1,016 1,016
--------- ---------
Deficit in accordance with U.S. GAAP $ (23,494) $(404,532)
========= =========
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
ACCUMULATED OTHER COMPREHENSIVE LOSS
AS AT AS AT
AUGUST 31, MAY 31,
2001 2002
--------- ---------
(UNAUDITED)
Foreign currency translation adjustments
Balance - Beginning of period $ 539 $ (9,349)
Change during the period (9,888) 2,459
--------- ---------
Balance - End of period (9,349) (6,890)
--------- ---------
Unrealized holding gains on available-for-sale securities,
net of future income taxes
Balance - Beginning of period 37 --
Reclassification adjustment for amounts included in net
loss, net of related future income taxes (37) --
--------- ---------
Balance - End of period -- --
--------- ---------
Accumulated other comprehensive loss $ (9,349) $ (6,890)
========= =========
BALANCE SHEETS
AS AT AUGUST 31, 2001 AS AT MAY 31, 2002
------------------------------ ---------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
(UNAUDITED) (UNAUDITED)
Intangible assets a)
Cost $ 55,044 $ 55,044 $ 38,530 $ 33,702
Accumulated amortization 9,974 9,974 20,210 19,186
-------------- -------------- -------------- -------------
$ 45,070 $ 45,070 $ 18,320 $ 14,516
============== ============== ============== =============
Goodwill a)
Cost $ 250,497 $ 315,547 $ 87,720 $ 93,315
Accumulated amortization (31,325) (39,762) 69,185 87,509
-------------- -------------- -------------- -------------
$ 219,172 $ 275,785 $ 18,535 $ 5,806
============== ============== ============== =============
Shareholders' equity
Share capital $ 429,995 $ 498,121 $ 489,611 $ 557,737
Contributed surplus 1,457 1,457 1,483 1,483
Cumulative translation
adjustment (8,333) -- (5,874) --
Deferred stock-based
compensation costs -- (7,968) -- (3,985)
Other capital -- 12,350 -- 11,968
Deficit (8,314) (23,494) (313,870) (404,532)
Accumulated other
comprehensive loss -- (9,349) -- (6,890)
-------------- -------------- -------------- -------------
$ 414,805 $ 471,117 $ 171,350 $ 155,781
============== ============== ============== =============
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
a) Write-down of goodwill and intangible assets
Under U.S. GAAP, when assets being tested for recoverability were acquired
in business combinations accounted for the purchase method, the goodwill
that arose in that transaction shall be included as part of the assets
grouping in determining recoverability. The intangible assets tested for
recoverability during the three months ended May 31, 2002 were acquired in
business combinations accounted for 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 impaired intangible
assets. Intangible assets were then written down to their fair value.
The fair value of intangible assets was determined based on discounted
future cash flows. The cash flows periods used were ten and eleven years,
using annual growth rates ranging between 10% and 30% and discount rates
ranging between 15% and 18%. The assumptions supporting discounted cash
flows, including the cash flow periods, the annual growth rates and the
discount rates, reflect management's best estimate. The discount rates were
based upon the company's weighted average cost of capital as adjusted for
the risks associated with operations.
The unallocated portion of goodwill was tested for recoverability at the
subsidiaries level based on the related pre-tax undiscounted future cash
flows using the same assumptions and methodology as used for Canadian GAAP
purposes.
Under U.S. GAAP, the company recorded a charge of $281,278,000 to
write-down a significant portion of goodwill and a pre-tax charge of
$27,105,000 to write-down a significant portion of acquired core technology
during the three months ended May 31, 2002. Of the total charge of
$308,383,000, $170,079,000 relates to EXFO Burleigh, $83,637,000 relates to
EXFO Photonic Solutions and $54,667,000 relates to EXFO Protocol.Under
Canadian GAAP, no allocation of goodwill is required and each asset is
tested for recoverability separately based on its pre-tax undiscounted cash
flows over its expected period of use. Also, under Canadian GAAP, the
impairment loss for intangible assets is measured as the difference between
the carrying value and the pre-tax undiscounted cash flows.
Finally, under U.S. GAAP, the carrying value of goodwill reviewed for
impairment was $46,380,000 higher than the carrying value of the same
goodwill tested under Canadian GAAP because the measurement dates used to
account for the business combinations were different between U.S. and
Canadian GAAP.
STATEMENTS OF CASH FLOWS
For the periods ended May 31, 2001 and 2002, there are no significant
differences between the statements of cash flows under Canadian GAAP as compared
to U.S. GAAP.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
UNAUDITED PRO FORMA INFORMATION ON BUSINESS COMBINATION
Under U.S. GAAP, pro forma information must be provided as though the business
combination had occurred at the beginning of the reported periods.The following
unaudited pro forma information reflects the results of operations as if the
acquisition of EXFO Protocol had been completed on September 1, 2000 and
2001.Such information is not necessarily indicative of the actual results which
would have been achieved, nor is it necessarily indicative of future
consolidated results of the company.
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, MAY 31, MAY 31, MAY 31,
2001 2001 2002 2002
------------ ------------ ------------ ------------
Sales $ 45,891 $ 110,921 $ 16,419 $ 51,158
Net loss $ (15,509) $ (15,621) $ (329,507) $ (381,699)
Basic and diluted net loss
per share $ (0.26) $ (0.28) $ (5.36) $ (6.21)
NEW ACCOUNTING STANDARDS
In November 2001, The Canadian Institute of Chartered Accountants (CICA) revised
section 1650, "Foreign Currency Translation", which is effective for fiscal
years beginning on or after January 1, 2002. The revised standard, which the
company will adopt retroactively on September 1, 2002, no longer permits the
deferral and amortization of unrealized exchange gains and losses that arise on
the translation of long-term foreign currency denominated monetary assets and
liabilities. Under the new rules, such gains and losses must be reported in
earnings as they arise. Adopting this revised standard is not expected to have a
significant impact on the company's financial statements.
In November 2001, the CICA issued Accounting Guideline No. 13, "Hedging
Relationships", which shall be applied to hedging relationships in effect in
fiscal years beginning on or after July 1, 2002. This new accounting guideline,
which the company will adopt prospectively on September 1, 2002, establishes
basic criteria that must be met before hedge accounting can be used. It also
describes the types of exposures that can be hedged and the types of instruments
that qualify as hedges, sets detailed designation and documentation requirements
and requires formal effectiveness testing. The company has not yet assessed the
impact of the adoption of this new guideline.
In November 2001, the CICA issued section 3870, "Stock-Based Compensation and
Other Stock-Based Payments", which is effective for fiscal years beginning on or
after January 1, 2002. The new section applies to awards granted on or after the
date of adoption, and requires that stock-based payments to non-employees and
direct awards of stock to employees be accounted for using a fair value-based
method. The company will adopt this new standard prospectively on September 1,
2002 and its adoption is not expected to have a significant impact on the
company's financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and other intangible assets" and
in August 2001 the CICA issued section 1581 "Business Combinations" and section
3062 "Goodwill and other intangible assets". SFAS 141 and section 1581 require
business combinations initiated after June 30, 2001 or business combinations
accounted for by the purchase method with a date of acquisition after June 30,
2001 to be accounted for using the purchase method of accounting. SFAS 141 and
section 1581 also broaden criteria for recording intangible assets separately
from goodwill. Upon the adoption of SFAS 142 and section 3062, recorded goodwill
and intangible assets will be evaluated against those new criteria and may
result in certain intangible assets being reclassified into goodwill or,
alternatively, amounts initially recorded as goodwill being separately
identified and recognized apart from goodwill as intangible assets. SFAS 142 and
section 3062 require the use of a non-amortization approach to account for
purchased goodwill and indefinite-lived intangibles. Under the non-amortization
approach, goodwill and indefinite-lived intangibles will not be amortized, but
instead they will be reviewed for impairment and written down and charged to
earnings only in the periods in which the recorded value of goodwill and
indefinite-lived intangibles exceed the fair value. SFAS 142 and section 3062
will be adopted on September 1, 2002.
The impact of adopting SFAS 142 and section 3062 will result in the
non-amortization of goodwill recorded prior to July 1, 2001 resulting in the
elimination of goodwill amortization for the year ending August 31, 2003 by
approximately $63,000,000 under SFAS 142 and $50,000,000 under section 3062.
Moreover, the company will implement a new goodwill impairment methodology and
any potential initial impairment losses on goodwill determined by this
methodology will be charged to earnings under SFAS 142 and to deficit under
section 3062. Any subsequent impairment losses on goodwill will be charged to
earnings in the period in which it is incurred under both Canadian and U.S.
GAAP. The company has not yet assessed the impact this new impairment
methodology will have on its financial statements.
Under the transitional provisions of SFAS 142 and section 3062, the company did
not amortize the goodwill resulting from the acquisition of EXFO Protocol Inc.,
for which the effective date of acquisition was November 2, 2001.
In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligation", which is effective for fiscal years beginning on or after June 15,
2002. This standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The company will adopt this new
standard prospectively on September 1, 2002 and has not yet assessed the impact
of its adoption.
In October 2001, the FASB issued SFAS 144 "Accounting for Impairment or Disposal
of Long-Lived Assets", which supersedes SFAS 121 and the provisions of APB 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" with regard to reporting the effects of a disposal of a
segment of a business. SFAS 144 retains many of the provisions of SFAS 121, but
significantly changes the criteria that would have to be met to classify an
asset as held for disposal such that long-lived assets to be disposed of other
that by sale are considered held and used until disposed of. In addition, SFAS
144 retains the basic provisions of APB 30 for presentation of discontinued
operations in the statement of earnings but broadens that presentation to a
component of an entity. This new standard is effective for fiscal years
beginning on or after December 15, 2001.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and
as otherwise noted)
The company will adopt this new standard prospectively on September 1, 2002 and
its adoption is not expected to have a significant impact on the company's
financial statements.
In April 2002, the FASB issued SFAS 145 "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections". This new
standard is effective for fiscal years beginning on or after May 15, 2002 or for
transactions occurring after May 15, 2002 related to SFAS 13, paragraph 8 and 9
(c).
This statement rescinds SFAS 4 "Reporting Gains and Losses from Extinguishment
of Debt" and an amendment of that Statement, SFAS 64 "Extinguishments of Debt
Made to Satisfy Sinking-Funds Requirements". This Statement also rescinds SFAS
44 "Accounting for Intangible Assets of Motor Carriers". This Statement amends
SFAS 13 "Accounting for Leases" to eliminate an inconsistency between the
required accounting for sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The company will adopt this new standard prospectively on September
1, 2002 and its adoption is not expected to have a significant impact on the
company's financial statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS DISCUSSION AND ANALYSIS MAY CONTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE U. S. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND WE
INTEND THAT SUCH FORWARD LOOKING STATEMENTS BE SUBJECT TO THE SAFE HARBORS
CREATED THEREBY. FORWARD-LOOKING STATEMENTS ARE STATEMENTS OTHER THAN HISTORICAL
INFORMATION OR STATEMENTS OF CURRENT CONDITION. WORDS SUCH AS "MAY," "WILL,"
"EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE" OR "CONTINUE"
OR THE NEGATIVE OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS. IN ADDITION, ANY STATEMENTS THAT REFER TO
EXPECTATIONS, PROJECTIONS OR OTHER CHARACTERIZATIONS OF FUTURE EVENTS OR
CIRCUMSTANCES ARE FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS ARE NOT
GUARANTEES OF FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS AS A
RESULT OF VARIOUS FACTORS, INCLUDING CONTINUED ECONOMIC UNCERTAINTY, CAPITAL
SPENDING IN THE TELECOMMUNICATIONS SECTOR AND OUR ABILITY TO EXECUTE
SUCCESSFULLY IN THESE UNCERTAIN CONDITIONS; THE EFFECTS OF THE ADDITIONAL
ACTIONS WE HAVE TAKEN IN RESPONSE TO SUCH ECONOMIC UNCERTAINTY (INCLUDING
WORKFORCE REDUCTIONS, ABILITY TO QUICKLY ADAPT COST STRUCTURES TO ALIGN WITH
DECREASED LEVELS OF BUSINESS, ABILITY TO MANAGE INVENTORY LEVELS TO ADAPT TO
SLOWDOWNS); MARKET ACCEPTANCE OF OUR NEW PRODUCTS AND OTHER UPCOMING NEW
PRODUCTS; LIMITED VISIBILITY WITH REGARDS TO CUSTOMER ORDERS AND THE TIMING OF
SUCH ORDERS; OUR ABILITY TO SUCCESSFULLY INTEGRATE OUR ACQUIRED AND
TO-BE-ACQUIRED COMPANIES; THE RETENTION OF KEY TECHNICAL AND MANAGEMENT
PERSONNEL; AND FUTURE ECONOMIC, COMPETITIVE AND MARKET CONDITIONS. ASSUMPTIONS
RELATING TO THE FOREGOING INVOLVE JUDGMENTS AND RISKS, ALL OF WHICH ARE
DIFFICULT OR IMPOSSIBLE TO PREDICT ACCURATELY AND MANY OF WHICH ARE BEYOND OUR
CONTROL. OTHER RISK FACTORS THAT MAY AFFECT OUR FUTURE PERFORMANCE AND OUR
OPERATIONS ARE DETAILED IN OUR ANNUAL REPORT ON FORM 20-F AND OUR OTHER FILINGS
WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION AND THE CANADIAN SECURITIES
COMMISSIONS. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS ARE REASONABLE BASED ON INFORMATION CURRENTLY
AVAILABLE TO US, WE CANNOT ASSURE YOU THAT THE EXPECTATIONS WILL PROVE TO HAVE
BEEN CORRECT. ACCORDINGLY, YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS. IN ANY EVENT, THESE STATEMENTS SPEAK ONLY AS OF THE
DATE OF THIS DOCUMENT. WE UNDERTAKE NO OBLIGATION TO REVISE OR UPDATE ANY OF
THEM TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
ALL DOLLAR AMOUNTS ARE EXPRESSED IN US DOLLARS, EXCEPT AS OTHERWISE NOTED.
OVERVIEW
The fiber-optic telecommunications industry has not rebounded as quickly as many
industry experts forecasted. Established telecommunications carriers have
further reduced their capital expenditures, while a number of others have filed
for bankruptcy. Lower spending levels have produced a trickle-down effect
throughout the fiber-optic industry including research and development,
manufacturing, installation and maintenance as well as network monitoring
companies. Test, measurement, monitoring and automation equipment vendors, in
turn, have been negatively affected, due to the dramatic reduction in the
deployment of optical networks.
(1)
In the first three quarters of 2002, we implemented cost-cutting measures to
align our cost structure to market conditions that provided approximately $13.0
million in annualized pre-tax savings. We lowered operating expenses, froze
employee salaries, reduced our workforce, wrote-off excess and obsolete
inventories and wrote-down property, plant and equipment. These measures
incurred charges of $3.9 million, consisting of an inventory write-off of $3.5
million and severance expenses of $410,000 in the first quarter of 2002; $6.3
million, consisting of an inventory write-off of $5.9 million and severance
expenses of $447,000 in the second quarter of 2002; and $11.1 million,
consisting of an inventory write-off of $9.1 million, severance expenses of $1.2
million and a write-down of property, plant and equipment of $868,000 in the
third quarter of 2002.
In the third quarter of 2002, considering on-going unfavorable market
conditions, which negatively affect our expected growth rates, we performed an
assessment of the carrying value of goodwill and intangible assets recorded in
conjunction with our three strategic acquisitions made in the last two years.
Consequently, we recorded a charge of $222.2 million to write-down a significant
portion of goodwill and a pre-tax charge of $23.7 million to write-down a
significant portion of acquired intangible assets.
In terms of new product development, we have launched 24 new products so far in
2002. This unprecedented number of product launches means that EXFO will be well
positioned once the recovery in the fiber-optic telecom industry occurs.
On December 1, 2001, our new Enterprise Resource Planning (ERP) system was
implemented at our major facility in Quebec City, QC. This ERP system will
enable us to improve the efficiency of our operations and should provide our
customers with better and more prompt service down the line.
On November 2, 2001, we completed our acquisition of Avantas Networks
Corporation (renamed EXFO Protocol Inc.) for a total consideration valued at
$95.0 million or $69.4 million net of $25.6 million of cash and cash equivalents
acquired. This acquisition has been accounted for using the purchase method and
has resulted in goodwill of $58.0 million which, under new accounting rules, is
not amortized. EXFO Protocol Inc., a Montreal-based company, is a supplier of
leading-edge fiber-optic testing and optical network performance management
equipment that supports a wide range of protocols and data transmission rates.
This acquisition has enabled us to enter the critical protocol-layer testing
market.
(2)
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of
operations for the periods ended May 31, 2001 and 2002 should be read in
conjunction with our interim consolidated financial statements and the related
notes thereto. All figures are expressed in thousands of US dollars, except per
share data and as otherwise noted. Our interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
in Canada, or Canadian GAAP, which conform in all material respects with
generally accepted accounting principles in the United States, or U.S. GAAP,
except as described in note 10 to our interim consolidated financial statements.
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------------------- -------------------
2001 2002 2001 2002
---- ---- ---- ----
(UNAUDITED)
Sales $ 45,781 $ 16,348 $ 110,593 $ 51,087
Cost of sales 17,418 17,080 40,513 42,497
--------- --------- --------- ---------
Gross margin (loss)* 28,363 (732) 70,080 8,590
Operating expenses
Selling and administrative 14,324 8,750 34,159 28,327
Net research and development 4,460 3,454 9,747 10,272
Amortization of property, plant and
equipment 1,033 1,544 2,263 4,379
Amortization of intangible assets 4,211 3,236 5,873 9,976
Write-down of intangible assets -- 23,657 -- 23,657
Restructuring and other charges -- 2,023 -- 2,880
--------- --------- --------- ---------
Total operating expenses 24,028 42,664 52,042 79,491
Earnings (loss) from operations 4,335 (43,396) 18,038 (70,901)
Interest income, net 963 261 5,371 1,239
Foreign exchange gain (loss) (152) (801) 3,018 (714)
--------- --------- --------- ---------
Earnings (loss) before income taxes and
amortization and write-down of
goodwill 5,146 (43,936) 26,427 (70,376)
Income tax expense (recovery) 1,721 (14,751) 8,972 (24,320)
--------- --------- --------- ---------
Earnings (loss) before amortization and
write-down of goodwill 3,425 (29,185) 17,455 (46,056)
Amortization of goodwill 12,055 12,472 18,556 37,331
Write-down of goodwill -- 222,169 -- 222,169
--------- --------- --------- ---------
Net loss for the period $ (8,630) $(263,826) $ (1,101) $(305,556)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.15) $ (4.29) $ (0.02) $ (5.06)
Research and development data:
Gross research and development $ 5,783 $ 4,723 $ 13,139 $ 13,756
Net research and development $ 4,460 $ 3,454 $ 9,747 $ 10,272
Other data:
Pro forma net earnings (loss)** $ 6,228 $ (3,930) $ 21,354 $ (9,966)
Basic and diluted pro forma net earnings
(loss) per share** $ 0.11 $ (0.06) $ 0.41 $ (0.17)
* Including inventory write-offs of $9,101 and $18,463 for the three months
and the nine months ended May 31, 2002, respectively, nil in 2001.
** Net earnings (loss) excluding amortization and write-down of goodwill and
the after-tax effect of amortization and write-down of intangible assets,
restructuring and other charges and inventory write-offs. This information
may not be comparable to similarly titled measures reported by other
companies because it is non-GAAP information.
(3)
THREE MONTHS ENDED NINE MONTHS ENDED
MAY 31, MAY 31,
------------------- -------------------
2001 2002 2001 2002
---- ---- ---- ----
(UNAUDITED)
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 38.0 104.5 36.6 83.2
--------- --------- --------- ---------
Gross margin (loss)* 62.0 (4.5) 63.4 16.8
Operating expenses
Selling and administrative 31.3 53.5 30.9 55.4
Net research and development 9.7 21.1 8.8 20.1
Amortization of property, plant and
equipment 2.3 9.4 2.1 8.6
Amortization of intangible assets 9.2 19.8 5.3 19.5
Write-down of intangible assets -- 144.7 -- 46.3
Restructuring and other charges -- 12.4 -- 5.6
--------- --------- --------- ---------
Total operating expenses 52.5 260.9 47.1 155.5
Earnings (loss) from operations 9.5 (265.4) 16.3 (138.7)
Interest income, net 2.1 1.6 4.9 2.4
Foreign exchange gain (loss) (0.3) (4.9) 2.7 (1.4)
--------- --------- --------- ---------
Earnings (loss) before income taxes and
amortization and write-down of
goodwill 11.3 (268.7) 23.9 (137.7)
Income tax expense (recovery) 3.8 (90.2) 8.1 (47.6)
--------- --------- --------- ---------
Earnings (loss) before amortization and
write-down of goodwill 7.5 (178.5) 15.8 (90.1)
Amortization of goodwill 26.3 76.3 16.8 73.1
Write-down of goodwill -- 1359.0 -- 434.9
--------- --------- --------- ---------
Net loss for the period (18.8)% (1613.8)% (1.0)% (598.1)%
========= ========= ========= =========
Research and development data:
Gross research and development 12.6% 28.9% 11.9% 26.9%
Net research and development 9.7% 21.1% 8.8% 20.1%
Other data:
Pro forma net earnings (loss)** 13.6% (24.0)% 19.3% (19.5)%
* Including inventory write-offs of 55.7% and 36.2% of sales for the three
months and the nine months ended May 31, 2002, respectively. Excluding
these special charges, gross margin would have reached 51.2% and 53.0% of
sales for the three months and the nine months ended May 31, 2002,
respectively.
** Net earnings (loss) excluding amortization and write-down of goodwill and
the after-tax effect of amortization and write-down of intangible assets,
restructuring and other charges and inventory write-offs. This information
may not be comparable to similarly titled measures reported by other
companies because it is non-GAAP information.
(4)
SALES
For the three months ended May 31, 2002, sales decreased 64% to $16.3 million
from $45.8 million for the same period last year. The decrease in sales is
directly related to a reduced demand for our products and pricing pressure
attributable to the continued and severe downturn in the telecommunications
industry. Indeed, the fiber-optic telecommunications industry has not rebounded
as quickly as many industry experts forecasted. Established telecommunications
carriers have further reduced their capital expenditures, while a number of
others have filed for bankruptcy. Lower spending levels have produced a
trickle-down effect throughout the fiber-optic industry including research and
development, manufacturing, installation and maintenance as well as network
monitoring companies. Test, measurement, monitoring and automation equipment
vendors, in turn, have been negatively affected, due to the dramatic reduction
in the deployment of optical networks. Consequently, both our Portable and
Monitoring products and our Industrial and Scientific products suffered from
this lack of demand and pricing pressure and they decreased almost
proportionally compared to the same period last year.
Our net book-to-bill ratio was at 0.91 and 0.95 for the last two quarters of
2002, respectively. Despite the difficult market, our sales increased
sequentially by 12% from $14.6 million to $16.3 million in the third quarter of
2002. Order cancellations amounted to approximately $2.0 million and $0.7
million during the last two quarters of 2002, respectively. Without these
cancellations, our book-to-bill ratio would be at 1.05 and 1.00 for the last two
quarters of 2002, respectively.
North American sales accounted for 51% and 59% of sales for the three months
ended May 31, 2002 and 2001, respectively. International sales represented 49%
and 41% of sales for the three months ended May 31, 2002 and 2001, respectively.
The increase in our international sales is the result of our sustained efforts
to develop the international market. For the three months ended May 31, 2002, no
customer accounted for more than 7.8% of sales.
For the nine months ended May 31, 2002, sales decreased 54% to $51.1 million
from $110.6 million for the same period last year. The decrease in sales is
directly related to a reduced demand for our products and pricing pressure
attributable to the continued and severe downturn in the telecommunications
industry. Indeed, the fiber-optic telecommunications industry has not rebounded
as quickly as many industry experts forecasted. Established telecommunications
carriers have further reduced their capital expenditures, while a number of
others have filed for bankruptcy. Lower spending levels have produced a
trickle-down effect throughout the fiber-optic industry including research and
development, manufacturing, installation and maintenance as well as network
monitoring companies. Test, measurement, monitoring and automation equipment
vendors, in turn, have been negatively affected, due to the dramatic reduction
in the deployment of optical networks. Consequently, both our Portable and
Monitoring products and our Industrial and Scientific products suffered from
this lack of demand and pricing pressure and they decreased almost
proportionally compared to the same period last year.
North American sales accounted for 52% and 60% of sales for the nine months
ended May 31, 2002 and 2001, respectively. International sales represented 48%
and 40% of sales for the nine months ended May 31, 2002 and 2001, respectively.
The increase in our international sales is the result of our sustained efforts
to develop the international market. For the nine months ended May 31, 2002, no
customer accounted for more than 6.5% of sales.
(5)
GROSS MARGIN (LOSS)
We recorded a gross loss of 4.5% of sales for the three months ended May 31,
2002, compared to a gross margin of 62.0% for the same period last year.
The percentage decline in gross margin is due to the following reasons. First of
all, we recorded an additional inventory write-off of $9.1 million for obsolete
and excess inventories. This special charge was taken considering weak demand
for our products and our expected needs for the upcoming 24 months. Excluding
this special charge, gross margin would have reached 51.2%. Secondly, the weak
demand for our products and pricing pressure prevented a better absorption of
our fixed manufacturing costs. Our manufacturing capacity in Quebec City, QC and
Victor, NY, has almost doubled since November 2000, while our sales decreased
significantly in the third quarter of 2002 compared to the same period last
year.
Gross margin represented 16.8% of sales for the nine months ended May 31, 2002,
compared to 63.4% for the same period last year.
The percentage decline in gross margin is due to the following reasons. First of
all, we recorded $18.5 million in inventory write-offs for obsolete and excess
inventories over the last three quarters of 2002. These special charges were
taken considering weak demand for our products and our expected future needs.
Excluding these special charges, gross margin would have reached 53.0%.
Secondly, the weak demand for our products and pricing pressure prevented a
better absorption of our fixed manufacturing costs. Our manufacturing capacity
in Quebec City, QC and Victor, NY, has almost doubled since November 2000, while
our sales decreased significantly in the first three quarters of 2002 compared
to the same period last year.
Gross margin can be negatively affected by competitive pricing pressure,
increase in obsolescence costs, shifts in product mix, reductions in government
grants, under-absorption of fixed manufacturing costs and increases in products
offerings by other suppliers in the fiber-optic test, measurement, monitoring
and automation industry.
SELLING AND ADMINISTRATIVE
For the three months ended May 31, 2002, selling and administrative expenses
were $8.8 million, or 53.5% of sales, compared to $14.3 million, or 31.3% of
sales, for the same period last year. The dollar decrease is mainly due to lower
expenses resulting from our restructuring plans implemented since June 2001 and
lower commission expenses since our sales decreased significantly during the
third quarter of 2002. However, the dollar decrease was offset in part by the
impact of the EXFO Protocol acquisition.
The significant decrease in sales in the third quarter of 2002 caused the
percentage to increase since a large portion of our selling and administrative
expenses tends to be fixed and because sales decreased at a faster rate than
selling and administrative expenses.
For the nine months ended May 31, 2002, selling and administrative expenses were
$28.3 million, or 55.4% of sales, compared to $34.2 million, or 30.9% of sales
for the same period last year. The dollar decrease is due to lower expenses
resulting from our restructuring plans implemented since June 2001 and lower
commission expenses as our sales decreased significantly during the first three
quarters of 2002. However, the dollar decrease was offset in part by the impact
of the EXFO Protocol acquisition.
(6)
The significant decrease in sales during the first three quarters of 2002 caused
the percentage to increase since a large portion of our selling and
administrative expenses tends to be fixed and because sales decreased at a
faster rate than selling and administrative expenses.
Considering challenging market conditions, we will continue to maintain our
selling and administrative expenses at an acceptable level without impeding our
efforts to strategically position our company, improve sales, service and
satisfy our customers and integrate our acquired companies.
RESEARCH AND DEVELOPMENT
For the three months ended May 31, 2002, gross research and development expenses
were $4.7 million, or 28.9% of sales, compared to $5.8 million, or 12.6% of
sales for the same period last year. The decrease in gross research and
development expenses is mainly due to different mix of projects under
development, the timing of their development cycle and to lower expenses
resulting from our restructuring plans implemented since June 2001. The decrease
in our gross research and development expenses was offset in part by the impact
of the EXFO Protocol acquisition.
The percentage increase reflects our continued focus on innovation despite the
significant decrease in sales. We firmly believe that innovation and new product
introductions are the key to gaining market share in this current economic
environment and ensure the long-term growth and profitability of the company. We
launched eight new products during the third quarter of 2002. Key launches
included the FTB-8000 SONET/SDH 10 Gb/s test module for protocol testing of
high-performance optical networks, the ProalignTM 5000 Component Assembly that
helps lower the cost of manufacturing array-type devices and the IQS-1700
High-performance Optical Power Meter and OHS-1713-UH Ultra-High-PowerTM Optical
Remote Heads for production floor and development lab applications.
For the three months ended May 31, 2002, tax credits and grants from federal,
provincial and state governments for research and development activities were
$1.3 million, or 26.9% of gross research and development expenses, compared to
$1.3 million, or 22.9% of gross research and development expenses, for the same
period last year.
Our tax credits and government grants remained flat in dollars despite the
decrease in our gross research and development expenses. During the third
quarter of 2001, EXFO Burleigh Products Group Inc. ("EXFO Burleigh"), which is
not entitled to research and development tax credit and grants, represented a
larger portion of our gross research and development expenses. In addition, our
newly acquired EXFO Protocol generated tax credits at a higher combined rate
than other companies of the group.
In terms of net research and development expenses, they amounted to $3.5
million, or 21.1% of sales for the three months ended May 31, 2002, compared to
$4.5 million, or 9.7% of sales, for the same period last year.
For the nine months ended May 31, 2002, gross research and development expenses
were $13.8 million, or 26.9% of sales, compared to $13.1 million, or 11.9% of
sales, for the same period last year. The slight increase in gross research and
development dollars is mainly related to the acquisition of EXFO Protocol as
well as the mix and timing of research and development projects.
(7)
The percentage increase reflects our strong and continued focus on innovation
despite the significant decrease in sales. We firmly believe that innovation and
new product introductions are the key to gaining market share in this current
economic environment and ensure the long-term growth and profitability of the
company. In the first three quarters of 2002, 50% of our sales originated from
products that have been on the market for two years or less. This is a strong
improvement compared to 33% of our sales reached in the same period last year.
For the nine months ended May 31, 2002, we released 24 new products. In
comparison, we released just over 20 new products during the entire fiscal year
in 2001.
For the nine months ended May 31, 2002, tax credits and grants from federal,
provincial and state governments for research and development activities
remained flat at $3.5 million, or 25.3% of gross research and development
expenses, compared to $3.4 million, or 25.8% of gross research and development
expenses, for the same period last year.
In terms of net research and development expenses, they amounted to $10.3
million, or 20.1% of sales, for the nine months ended May 31, 2002, compared to
$9.7 million, or 8.8% of sales, for the same period last year.
We expect to continue investing significantly in research and development in
upcoming quarters, reflecting our focus on innovation, our desire to gain market
share and our goal to exceed customers' needs and expectations.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the acquisitions of EXFO Burleigh, EXFO Photonic Solutions
and EXFO Protocol, we recorded $61.1 million in intangible assets, primarily
consisting of core technology. These intangible assets, which are amortized over
periods from five months to five years from the date of acquisition, resulted in
amortization expenses of $3.2 million and $10.0 million for the three months and
the nine months ended May 31, 2002, respectively, compared to $4.2 million and
$5.9 million for the corresponding periods of last year.
Intangible assets related to these acquisitions have been reviewed for
impairment as described below and this resulted in a pre-tax write-down charge
of $23.7 million in the third quarter of 2002. Considering this write-down, the
quarterly amortization of intangible assets will decrease by approximately $2.3
million for the upcoming quarters.
WRITE-DOWN OF GOODWILL AND INTANGIBLE ASSETS
During the three months ended May 31, 2002, as part of our review of financial
results, we performed an assessment of the carrying value of intangible assets
and goodwill recorded in conjunction with the acquisitions of EXFO Burleigh,
EXFO Photonic Solutions and EXFO Protocol. The assessment was performed because
of the severe and continued downturn in the telecommunications industry, the
persisting unfavorable market conditions affecting our subsidiaries' industries
and the decline in technology valuations. The growth prospects for our
subsidiaries are significantly less than previously expected and those of
historical periods and the decline in market conditions affecting the
subsidiaries is significant and other than temporary. As a result, we concluded
that the carrying value of goodwill and certain acquired intangible assets was
impaired and we recorded a charge of $222.2 million to write-down a significant
portion of goodwill and a pre-tax charge of $23.7 million to write-down a
significant
(8)
portion of acquired core technology during the three months ended May 31, 2002.
Of the total impairment loss of $245.8 million, $125.0 million relates to EXFO
Burleigh, $71.5 million relates to EXFO Photonic Solutions and $49.3 million
relates to EXFO Protocol.
The impairment loss was calculated as the excess of the carrying value of the
assets over the pre-tax undiscounted future cash flows. The pre-tax undiscounted
future cash flows were estimated at the subsidiaries level since we had distinct
cash flows for each of them and because they are not fully integrated into our
activities. The cash flow periods used ranged from three to five years, using
annual growth rates ranging between 15% and 30%.
The assumptions supporting the estimated undiscounted future cash flows,
including the annual growth rates, reflect our best estimates.
On September 1, 2002, goodwill will be reviewed for impairment under new
accounting rules. For a complete description of the new accounting rules, we
refer you to the section "New Accounting Standards" further in this document.
RESTRUCTURING AND OTHER CHARGES
During the first three quarters of 2002, we implemented structured plans to
align our cost structure to market conditions and to better position ourselves
amidst a challenging environment. Under these plans, we lowered our operating
expenses, froze employee salaries, reduced our global work force and write-down
property, plant and equipment.
As a result, we recorded restructuring and other charges of $2.9 million,
consisting of $410,000 in severance expenses for the 101 employees who were
terminated in the first quarter of 2002; $447,000 in severance expenses for the
57 employees who were terminated in the second quarter of 2002; and $1.2 million
in severance expenses for the 192 employees who were terminated and $868,000 for
the write-down of property, plant and equipment in the third quarter of 2002.
Our cost-cutting measures represent our best efforts to respond to the difficult
market conditions. However, these efforts may be inappropriate or insufficient.
Our actions in this regard may not be successful in achieving the cost
reductions or other benefits expected, may be insufficient to align our cost
structure to market conditions, or may be more costly or extensive than
anticipated.
INTEREST INCOME, NET
For the three months and the nine months ended May 31, 2002, net interest income
amounted to $261,000 and $1.2 million, respectively, compared to $1.0 million
and 5.4 million for the corresponding periods last year. These decreases are
directly related to the use of short-term investments to finance our strategic
acquisitions, our operating activities and the purchases of property, plant and
equipment as well as a general decrease in interest rates. We expect our net
interest income to decrease in the upcoming quarters because of the
aforementioned reasons.
(9)
FOREIGN EXCHANGE GAIN (LOSS)
For the three months ended May 31, 2002, foreign exchange loss amounted to
$801,000 compared to $152,000 for the same period last year. These foreign
exchange losses are the result of the translation of operating activities
denominated in currencies other than the Canadian dollar.
For the nine months ended May 31, 2002, foreign exchange loss amounted to
$714,000 compared to a foreign exchange gain of $3.0 million for the same period
last year. Last year's foreign exchange gain was mainly due to the translation
of short-term investments denominated in US dollars.
During the three months and the nine months ended May 31, 2002, we managed our
exposure to currency risk with forward exchange contracts and operating
activities of Canadian entities denominated in currencies other than the
Canadian dollar.
INCOME TAXES
For the three months ended May 31, 2002, our effective income tax recovery rate
remained flat at 33.6% compared to our effective income tax rate of 33.4% for
the same period last year.
For the nine months ended May 31, 2002, our effective income tax recovery rate
was 34.6%, compared to our effective income tax rate of 34.0% for the same
period last year. The slight increase in our effective income tax recovery rate
can be explained by the fact that our current operating loss will be carried
back for tax purposes and applied against specific prior years' taxable income
that was imposed at higher rates.
AMORTIZATION OF GOODWILL
In conjunction with the acquisitions of EXFO Burleigh and EXFO Photonic
Solutions, we recorded $248.5 million in goodwill, which is amortized over five
years. These acquisitions resulted in amortization expenses of $12.5 million and
$37.3 million for the three months and the nine months ended May 31, 2002,
respectively, compared to $12.1 million and $18.6 million for the corresponding
periods last year. The acquisition of EXFO Protocol has been accounted for using
new accounting standards contained in sections 1581 and 3062 of the CICA and,
consequently, goodwill resulting from this acquisition is not amortized but
instead reviewed for impairment.
Goodwill related to these acquisitions has been reviewed for impairment as
described above and this resulted in a write-down charge of $222.2 million in
the third quarter of 2002. Considering this write-down, the amortization of
goodwill for the next quarter will decrease by approximately $11.5 million.
Starting September 1, 2002, goodwill will no longer be amortized under new
accounting rules.
(10)
NET LOSS
Net loss amounted to $263.8 million, or $4.29 per share and $305.6 million, or
$5.06 per share, for the three months and the nine months ended May 31, 2002,
respectively. In comparison, net loss totalled $8.6 million, or $0.15 per share
and $1.1 million, or $0.02 per share, for the corresponding periods last year.
PRO FORMA NET EARNINGS (LOSS)
As a measure to assess financial performance, we use pro forma net earnings
(loss) and pro forma net earnings (loss) per share. Pro forma net earnings
(loss) represent net earnings (loss) excluding amortization and write-down of
goodwill and the after-tax effect of amortization and write-down of intangible
assets, restructuring and other charges and inventory write-offs.
Pro forma net loss amounted to $3.9 million, or $0.06 per share and $10.0
million, or $0.17 per share, for the three months and the nine months ended May
31, 2002, respectively, compared to pro forma net earnings of $6.2 million, or
$0.11 per share, and $21.4 million, or $0.41 per share, for the corresponding
periods last year.
Pro forma net earnings (loss) is reconciled as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
MAY 31, MAY 31,
------------------------ -------------------------
2001 2002 2001 2002
----------- ----------- ------------ -----------
(UNAUDITED)
(in thousands of US dollars, except per share data)
Net loss in accordance with GAAP $ (8,630) $(263,826) $ (1,101) $(305,556)
Pro forma adjustments:
Amortization of goodwill 12,055 12,472 18,556 37,331
Write-down of goodwill -- 222,169 -- 222,169
Amortization of intangible assets 4,211 3,236 5,873 9,976
Tax effect of amortization of intangible
assets (1,408) (1,086) (1,974) (3,512)
Write-down of intangible assets -- 23,657 -- 23,657
Tax effect of write-down of intangible
assets -- (7,942) -- (7,942)
Restructuring and other charges and
inventory write-offs -- 11,124 -- 21,343
Tax effect of the restructuring and other
charges and inventory write-offs -- (3,734) -- (7,432)
--------- --------- --------- ---------
Pro forma net earnings (loss) $ 6,228 $ (3,930) $ 21,354 $ (9,966)
========= ========= ========= =========
Basic and diluted pro forma net earnings
(loss) per share $ 0.11 $ (0.06) $ 0.41 $ (0.17)
(11)
We provide pro forma financial information to help the reader better understand
our operating results. This information is not in accordance with, or an
alternative for, generally accepted accounting principles and may not be
comparable to similarly titled measures reported by other companies.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our Initial Public Offering, we financed operations and met our capital
expenditure requirements mainly through cash flows from operations, research and
development tax credits and government grants. On June 29, 2000, we closed our
Initial Public Offering of 8,050,000 subordinate voting shares for net proceeds
of approximately $209 million, including the over-allotment option exercised by
the underwriters. Since our Initial Public Offering, we have financed our major
investments mainly by the issuance of subordinate voting shares and the use of
our short-term investments.
CASH POSITION AND SHORT-TERM INVESTMENTS
As at May 31, 2002, cash and cash equivalents and short-term investments
consisted of $50.9 million. Our working capital was at $98.3 million. Our cash
and cash equivalents and short-term investments decreased by only $0.6 million
since February 28, 2002. Indeed the use of short-term investments to finance our
operating activities for $2.6 million and the cash payment of $369,000 for the
purchases of property, plant and equipment and intangible assets was mainly
offset by an unrealized foreign exchange gain of $2.3 million on our cash and
cash equivalents and short-term investments. This unrealized foreign exchange
gain results from the translation of our financial statements in US dollars and
is recorded in the cumulative translation adjustment in the balance sheet.
Our cash and cash equivalents and short-term investments have decreased by
approximately $23.7 million since August 31, 2001, mainly due to the cash
payment of $9.8 million for the acquisition of EXFO Protocol, the cash payment
of $4.7 million for the purchases of property, plant and equipment and
intangible assets as well as the financing of operating activities of $9.0
million for the first three quarters of 2002.
OPERATING ACTIVITIES
Cash flows used by operating activities were $2.6 million for the three months
ended May 31, 2002, compared to $0.8 million for the same period last year. Cash
flows used by operating activities were primarily due to the net loss after
items not affecting cash and cash equivalents of $14.0 million. This figure was
mainly offset by the decrease in inventories of $11.0 million. The decrease in
inventories is due to our inventory write-off and our efforts to maintain
inventories at the lowest acceptable level.
For the three months ended May 31, 2002, the major items not affecting cash and
cash equivalents consisted of write-down of goodwill and intangible assets of
$245.8 million, amortization expenses of $17.2 million and future income tax
recovery of $14.0 million.
Cash flows used by operating activities were $9.0 million for the nine months
ended May 31, 2002, compared to $2.5 million for the same period last year. Cash
flows used by operating activities were primarily due to the net loss after
items not affecting cash and cash equivalents of $22.6 million. This figure was
mainly offset by the net result of the decrease in accounts receivable and
inventories of $35.5 million over the decrease in accounts payable
(12)
and accrued liabilities of $4.8 million and the increase in income taxes
receivable of $16.7 million. The decrease in our accounts receivable,
inventories and accounts payable and accrued liabilities is respectively due to
the reduction in our sales level, our inventory write-offs and our efforts to
maintain inventories at the lowest acceptable level and the reduction in our
purchases due to the actual slowdown in our industry. The increase in our income
taxes receivable is directly related to income tax recovery following the carry
back to previous years' taxable income of our consolidated tax loss for the
first three quarters of 2002.
For the nine months ended May 31, 2002, the major items not affecting cash and
cash equivalents consisted of a write-down of goodwill and intangible assets of
$245.8 million, amortization expenses of $52.2 million and future income tax
recovery of $15.7 million.
FINANCING ACTIVITIES
Cash flows used by financing activities were $23,000 for the three months ended
May 31, 2002, compared to cash flows provided by financing activities of $1.5
million for the same period last year. The cash flows provided by financing
activities during the three months ended May 31, 2001 were due to the use of
bank advances of $1.4 million during this period.
Cash flows used by financing activities were $70,000 and $72,000 for the nine
months ended May 31, 2002 and 2001, respectively.
As at May 31, 2002, we have credit facilities that provide for advances of up to
$6.5 million under lines of credit. These lines of credit bear interest at prime
rate.
INVESTING ACTIVITIES
Cash flows provided by investing activities were $1.4 million for the three
months ended May 31, 2002, compared to $1.8 million for the same period last
year. During the third quarter of 2002, we disposed of $1.8 million in
short-term investments to finance the $369,000 purchases of property, plant and
equipment and intangible assets and to finance operating activities.
Cash flows provided by investing activities were $8.5 million for the nine
months ended May 31, 2002, compared to $6.7 million for the same period last
year. During the first three quarters of 2002, we disposed of $22.9 million in
short-term investments to finance the $4.7 million purchases of property, plant
and equipment and intangible assets and to pay the cash consideration of $9.8
million for the acquisition of EXFO Protocol. Despite these purchases and
acquisition, the disposal of short-term investments generated net cash flows of
$8.5 million in the first three quarters of 2002 which were used to finance our
operating activities.
OUTLOOK
As described above, we incurred an operating loss in the three months and the
nine months ended May 31, 2002. In addition, operating activities for these
periods used $2.6 million and $9.0 million in cash flows, respectively. There
can be no assurance as to whether and when we will return to profitability or
that our sales will return to prior levels. However, we believe that our cash
balances and short-term investments, combined with available credit facilities,
will be sufficient to meet our expected liquidity and capital requirements for
the next twelve
(13)
months. On the other hand, possible additional operating losses and/or possible
investments in or acquisitions of complementary businesses, products or
technologies may require additional financing prior to such time. There can be
no assurance that additional debt or equity financing will be available when
required or, if available, it can be secured on terms satisfactory to us.
NEW ACCOUNTING STANDARDS
In November 2001, The Canadian Institute of Chartered Accountants (CICA) revised
section 1650, "Foreign Currency Translation", which is effective for fiscal
years beginning on or after January 1, 2002. The revised standard, which we will
adopt retroactively on September 1, 2002, no longer permits the deferral and
amortization of unrealized exchange gains and losses that arise on the
translation of long-term foreign currency denominated monetary assets and
liabilities. Under the new rules, such gains and losses must be reported in
earnings as they arise. Adopting this revised standard is not expected to have a
significant impact on our financial statements.
In November 2001, the CICA issued Accounting Guideline No. 13, "Hedging
Relationships", which shall be applied to hedging relationships in effect in
fiscal years beginning on or after July 1, 2002. This new accounting guideline,
which we will adopt prospectively on September 1, 2002, establishes basic
criteria that must be met before hedge accounting can be used. It also describes
the types of exposures that can be hedged and the types of instruments that
qualify as hedges, sets detailed designation and documentation requirements and
requires formal effectiveness testing. We have not yet assessed the impact of
the adoption of this new guideline.
In November 2001, the CICA issued section 3870, "Stock-Based Compensation and
Other Stock-Based Payments", which is effective for fiscal years beginning on or
after January 1, 2002. The new section applies to awards granted on or after the
date of adoption, and requires that stock-based payments to non-employees and
direct awards of stocks to employees be accounted for using a fair value-based
method. We will adopt this new standard prospectively on September 1, 2002 and
its adoption is not expected to have a significant impact on our financial
statements.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS 141
"Business Combinations" and SFAS 142 "Goodwill and other intangible assets" and
in August 2001 the CICA issued section 1581 "Business Combinations" and section
3062 "Goodwill and other intangible assets". SFAS 141 and section 1581 require
business combinations initiated after June 30, 2001 or business combinations
accounted for by the purchase method with a date of acquisition after June 30,
2001 to be accounted for using the purchase method of accounting. SFAS 141 and
section 1581 also broaden criteria for recording intangible assets separately
from goodwill. Upon the adoption of SFAS 142 and section 3062, recorded goodwill
and intangible assets will be evaluated against those new criteria and may
result in certain intangible assets being reclassified into goodwill or,
alternatively, amounts initially recorded as goodwill being separately
identified and recognized apart from goodwill as intangible assets. SFAS 142 and
section 3062 require the use of a non-amortization approach to account for
purchased goodwill and indefinite-lived intangibles. Under the non-amortization
approach, goodwill and indefinite-lived intangibles will not be amortized, but
instead they will be reviewed for impairment and written down and charged to
earnings only in the periods in which the recorded value of goodwill and
indefinite-lived intangibles exceed the fair value. SFAS 142 and section 3062
will be adopted on September 1, 2002.
(14)
The impact of adopting SFAS 142 and section 3062 will result in the
non-amortization of goodwill recorded prior to July 1, 2001 resulting in the
elimination of goodwill amortization for the year ending August 31, 2003 by
approximately $63 million under SFAS 142 and $50 million under section 3062.
Moreover, we will implement a new goodwill impairment methodology and any
potential initial impairment losses on goodwill determined by this methodology
will be charged to earnings under SFAS 142 and to deficit under section 3062.
Any subsequent impairment losses on goodwill will be charged to earnings in the
period in which it is incurred under both Canadian and U.S. GAAP. We have not
yet assessed the impact this new impairment methodology will have on our
financial statements.
Under the transitional provisions of SFAS 142 and section 3062, we did not
amortize the goodwill resulting from the acquisition of EXFO Protocol Inc., for
which the effective date of acquisition was November 2, 2001.
In June 2001, the FASB issued SFAS 143 "Accounting for Asset Retirement
Obligation", which is effective for fiscal years beginning on or after June 15,
2002. This standard requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. We will adopt this new standard
prospectively on September 1, 2002 and have not yet assessed the impact of its
adoption.
In October 2001, the FASB issued SFAS 144 "Accounting for Impairment or Disposal
of Long-Lived Assets", which supersedes SFAS 121 and the provisions of APB 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" with regard to reporting the effects of a disposal of a
segment of a business. SFAS 144 retains many of the provisions of SFAS 121, but
significantly changes the criteria that would have to be met to classify an
asset as held for disposal such that long-lived assets to be disposed of other
that by sale are considered held and used until disposed of. In addition, SFAS
144 retains the basic provisions of APB 30 for presentation of discontinued
operations in the statement of earnings but broadens that presentation to a
component of an entity. This new standard is effective for fiscal years
beginning on or after December 15, 2001. We will adopt this new standard
prospectively on September 1, 2002 and its adoption is not expected to have a
significant impact on our financial statements.
In April 2002, the FASB issued SFAS 145 "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections". This new
standard is effective for fiscal years beginning on or after May 15, 2002 or for
transactions occurring after May 15, 2002 related to SFAS 13, paragraph 8 and 9
(c).
This statement rescinds SFAS 4 "Reporting Gains and Losses from Extinguishment
of Debt" and an amendment of that Statement, SFAS 64 "Extinguishments of Debt
Made to Satisfy Sinking-Funds Requirements". This Statement also rescinds SFAS
44 "Accounting for Intangible Assets of Motor Carriers". This Statement amends
SFAS 13 "Accounting for Leases" to eliminate an inconsistency between the
required accounting for sale-leaseback transactions. This Statement also amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. We will adopt this new standard prospectively on September 1, 2002
and its adoption is not expected to have a significant impact on our financial
statements.
(15)
RISKS AND UNCERTAINTIES
We operate in a highly competitive field that is in constant evolution and, as a
result, we encounter various risks and uncertainties that must be given
appropriate consideration in our strategic management policies.
The main risks and uncertainties related to the fiber-optic test, measurement,
monitoring and automation industry involve the quick development of new products
that have short lifecycles and require extensive research and development; the
difficulty of attracting and retaining highly skilled employees as well as
offering them effective training programs; and the ability to quickly adapt our
cost structure to changing market conditions in order to return to
profitability.
In addition, given our strategic goals for growth and competitive positioning in
our industry, we are expanding into international markets. This exposes us to
certain risks and uncertainties related to changes in local laws and
regulations, multiple technological standards, protective legislation and
pricing pressure.
Furthermore, while the important strategic acquisitions we have made are
essential to our long-term growth, they also expose us to certain risks and
uncertainties related to the rapid and effective integration of these companies
as well as their products, technologies and personnel.
We are also exposed to currency risks as a result of the export of our products
manufactured in Canada, substantially all of which are denominated in US
dollars. These risks are partially hedged by the operating expenses of certain
international subsidiaries, the purchase of raw materials in US dollars and
forward exchange contracts.
The economic slowdown in our industry could also result in some of our customers
experiencing difficulties and, consequently, this could have a negative effect
on our results. 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 and cash equivalents, short-term investments and forward exchange
contracts. Our short-term investments consist of debt instruments issued by
high-credit quality financial institutions and corporations. Our cash and cash
equivalents and forward exchange contracts are held with or issued by
high-credit quality financial institutions; therefore, we consider the risk of
non-performance on these instruments to be remote.
For a more complete understanding of risk factors that may affect us, we refer
you to the risk factors set forth in our disclosure documents published with
securities commissions.