<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 2000
REGISTRATION NO. 333-38956
--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
EXFO ELECTRO-OPTICAL ENGINEERING INC. /
EXFO INGENIERIE ELECTRO-OPTIQUE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
CANADA 3825 98-0131231
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR ORGANIZATION)
</TABLE>
465 GODIN AVENUE
VANIER, QUEBEC G1M 3G7, CANADA
(418) 683-0211
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
CT CORPORATION SYSTEM
111 EIGHTH AVENUE
NEW YORK, NEW YORK 10011, U.S.A.
(212) 894-8940
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
With copies to:
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<S> <C>
EDWIN S. MAYNARD, ESQ. CHRISTOPHER W. MORGAN, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1285 AVENUE OF THE AMERICAS SUITE 1820, NORTH TOWER
NEW YORK, NEW YORK 10019-6064, U.S.A. P.O. BOX 189, ROYAL BANK PLAZA
(212) 373-3000 TORONTO, ONTARIO M5J 2J4, CANADA
(416) 777-4700
ROBERT PARE, ESQ. NORMAN M. STEINBERG, ESQ.
FASKEN MARTINEAU DUMOULIN LLP OGILVY RENAULT
800 VICTORIA SQUARE 1981 MCGILL COLLEGE AVENUE
SUITE 3400, P.O. BOX 242 SUITE 1110
MONTREAL, QUEBEC H4Z 1E9, CANADA MONTREAL, QUEBEC H3A 3C1, CANADA
(514) 397-7400 (514) 847-4747
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO OFFERING PRICE AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED BE REGISTERED(1) PER SHARE(2) PRICE(2)
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Subordinate voting shares, without par value......... 8,050,000 shares US$25.00 US$201,250,000
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<S> <C>
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AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTRATION FEE(3)
-------------------------------------------------------------------------------------------------
Subordinate voting shares, without par value......... US$53,130
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</TABLE>
(1) Includes shares that the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated solely to calculate the amount of the registration fee in
accordance with Rule 457(o) under the Securities Act and based on a bona
fide estimate of the public offering price.
(3) US$40,076 of which has been previously paid.
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<PAGE> 2
PART I
INFORMATION REQUIRED TO BE
DELIVERED TO OFFEREES OR PURCHASERS
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 28, 2000
P R O S P E C T U S
7,000,000 SHARES
EXFO LOGO
EXFO ELECTRO-OPTICAL ENGINEERING INC.
SUBORDINATE VOTING SHARES
------------------------------
This is the initial public offering of EXFO Electro-Optical
Engineering Inc. EXFO is selling 7,000,000 subordinate voting shares. The
subordinate voting shares being sold represent 1.8% of the total outstanding
voting power after the offering. The underwriters named in this prospectus are
selling the subordinate voting shares in the United States and in each of the
provinces of Canada.
We expect the public offering price to be between US$23.00 and
US$25.00 per share. Currently, no public market exists for our shares. After
pricing of this offering, we expect that the subordinate voting shares will be
quoted on the Nasdaq National Market under the symbol "EXFO" and will be listed
on The Toronto Stock Exchange under the symbol "EXF".
INVESTING IN THE SUBORDINATE VOTING SHARES INVOLVES RISKS THAT ARE
DESCRIBED IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
---------------------------
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PER SHARE TOTAL
Public offering price....................... US$ US$
Underwriting discount....................... US$ US$
Proceeds, before expenses, to EXFO.......... US$ US$
</TABLE>
The public offering price for the subordinate voting shares offered in
the United States is payable in U.S. dollars and the public offering price for
the subordinate voting shares offered in Canada is payable in Canadian dollars.
The U.S. dollar amount is the equivalent of the Canadian price of the
subordinate voting shares based on the prevailing U.S. -- Canadian dollar
exchange rate as of the date of this prospectus.
The underwriters may also purchase up to an additional 1,050,000
subordinate voting shares from EXFO, at the public offering price, less the
underwriting commission, within 30 days from the date of this prospectus to
cover over-allotments.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The shares will be ready for delivery on or about , 2000.
------------------------------
MERRILL LYNCH & CO.
RBC DOMINION SECURITIES
WIT SOUNDVIEW
CIBC WORLD MARKETS
------------------------------
The date of this prospectus is , 2000.
<PAGE> 4
Description of the artwork
Inside front cover
EXFO logo
CAPTION:
EXFO is a leading designer, manufacturer and marketer of fiber-optic test,
measurement and monitoring instruments for the telecommunications
industry.
Picture of an engineer using test instruments in our research and
development department
Picture of an operating technician using test instruments in the field
Picture of a test instrument
CAPTION:
Our success has been largely due to our exclusive focus on fiber optic
test, measurement and monitoring instruments.
Gatefold
EXFO logo
CAPTION:
Fiber-optic test, measurement and monitoring equipment is mainly used by
optical network carriers, manufacturers, and research and development
laboratories to measure the physical characteristics of optical fiber,
optical components, value-added optical modules and optical networking
systems.
10 pictures of test instruments with various uses with the following
captions:
1 - Test instruments for conventional network installation and maintenance
2 - Remote fiber test system for network monitoring
3 - Automated test systems for production of DWDM component
4 - Test instruments for DWDM-based network installation and maintenance
5 - Automated environmental test system for DWDM component production
6 - Test instruments for use in developing and manufacturing optical fiber
7 - Test instruments for use in developing and manufacturing optical
components
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
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Prospectus Summary.......................................... 1
Risk Factors................................................ 6
Special Note Regarding Forward-Looking Statements........... 16
Enforceability of Civil Liabilities......................... 16
Exchange Rate Information................................... 16
Use of Proceeds............................................. 17
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 21
Selected Consolidated Financial Information................. 22
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Corporate Information....................................... 34
Business.................................................... 36
Management.................................................. 50
Transactions with Related Parties........................... 56
Principal Shareholders...................................... 59
Description of Share Capital................................ 60
Transfer Agent and Registrar................................ 64
Shares Eligible for Future Sale............................. 64
Tax Considerations.......................................... 66
Underwriting................................................ 72
Legal Matters............................................... 75
Experts..................................................... 75
Where You Can Find More Information......................... 76
Index to Our Consolidated Financial Statements.............. F-1
</TABLE>
------------------------------
You should rely only on the information contained in this prospectus. We
have not and the underwriters have not, authorized anyone to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not and the underwriters are not,
making an offer to sell these securities in any jurisdiction where the offer or
sale is not permitted. You should not assume that the information provided by
this prospectus is accurate as at any date other than the date of this
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
------------------------------
Our consolidated financial statements are reported in U.S. dollars and have
been prepared in accordance with accounting principles generally accepted in
Canada, or Canadian GAAP. To the extent applicable to our consolidated financial
statements included elsewhere in this prospectus, these principles conform in
all material respects with accounting principles generally accepted in the
United States, or U.S. GAAP, except as described in note 21 to our consolidated
financial statements.
All dollar amounts in this prospectus are expressed in U.S. dollars, except
where otherwise indicated. References to "$" or "US$" are to U.S. dollars and
references to "C$" are to Canadian dollars. This prospectus contains a
translation of some Canadian dollar amounts into U.S. dollars solely for your
convenience. See "Exchange Rate Information."
<PAGE> 6
PROSPECTUS SUMMARY
The summary highlights information contained elsewhere in this prospectus.
Because this is only a summary, it does not contain all the information that you
should consider before buying shares in this offering. You should read the
entire prospectus carefully, including our consolidated financial statements and
the related notes included elsewhere in this prospectus.
EXFO
We are a leading designer, manufacturer and marketer of fiber-optic test,
measurement and monitoring instruments for the telecommunications industry. We
believe that we are the largest manufacturer of test, measurement and monitoring
instruments that is exclusively dedicated to fiber optics. Unlike traditional
electrical transmission systems, which transmit electrical signals along copper
wires, fiber-optic transmission systems use pulses of light along glass or
plastic fiber, often referred to as optical fiber. When light travels along
optical fiber and through the optical equipment that link optical fibers
together, it is subject to unwanted effects such as reflection, attenuation,
noise and various types of dispersion, all of which degrade signal quality and
reduce transmission performance. Fiber-optic test, measurement and monitoring
equipment is critical for measuring these effects and for helping communications
carriers and manufacturers ensure network performance and reliability.
Demand for fiber-optic test, measurement and monitoring equipment has been
driven by increased production and deployment of optical fiber and related
equipment in order to meet the growing demand for telecommunications capacity.
Ryan, Hankin & Kent, a leading telecom market research firm, forecasts that
Internet traffic will increase from 350,000 terabytes, or trillions of bytes,
per month at the end of 1999 to more than 15 million terabytes per month in
2003, representing a compound annual average growth rate of 156%.
Our customers use fiber-optic test, measurement and monitoring equipment
mainly to:
- ensure the quality of networks as they are being deployed;
- diagnose and repair problems within an optical network;
- monitor the quality of an optical signal as it passes through a network;
- analyze fiber-optic components and equipment during production and
assembly as well as quality control and conformity testing; and
- conduct sophisticated tests during the research and development of
fiber-optic products.
We believe that we have positioned ourselves as the supplier offering the
most extensive range of products in the fiber-optic test, measurement and
monitoring industry. Our success has been largely based on our exclusive focus
on fiber-optic test, measurement and monitoring instruments. We have developed
optical technologies and advanced testing algorithms that we leverage across our
various product lines. Our success is primarily due to:
- our development of a range of products based on a modular system design
consisting of Windows-based platforms that can accommodate several data
acquisition test modules;
- our high degree of technological innovation, as illustrated by our
leading position in our industry in the development and
commercialization of a number of new fiber-optic test and measurement
products;
- the high quality of our products as a result of our comprehensive
quality assurance program, which has been certified ISO 9001 since 1994,
and our compliance with demanding industry standards; and
- our highly qualified and specialized internal customer support teams
that offer pre-sales evaluation, installation, channel and customer
training and post-sales support.
1
<PAGE> 7
We develop products principally for two markets. Our Portable and
Monitoring Division provides solutions primarily to telecommunications carriers,
cable television companies, public utilities, private network operators, as well
as third-party installers and equipment rental companies. Our Scientific
Division, established in 1996, designs an extensive line of more sophisticated
and higher performance instruments for manufacturers of optical fiber, optical
components, value-added optical modules and optical networking systems. Our
Scientific Division also designs products for research and development markets.
We intend to expand our leadership position in the fiber-optic test,
measurement and monitoring industry and to increase our market share through the
following initiatives:
- expand our technological leadership;
- invest in strategic sectors;
- leverage our modular design across our product lines;
- expand our sales and marketing efforts;
- reduce our delivery lead times; and
- pursue complementary acquisitions.
------------------------------
Our head office is located at 465 Godin Avenue, Vanier, Quebec, Canada, G1M
3G7 and our telephone number is (418) 683-0211. Our e-mail address is
[email protected] and our Web site is www.exfo.com. Information on our Web site is
not incorporated by reference in this prospectus. This prospectus contains
trademarks and registered trademarks of EXFO and other companies.
2
<PAGE> 8
THE OFFERING
Shares offered by this
prospectus...................... 7,000,000 subordinate voting shares
Shares to be outstanding after
this offering................... 7,707,264 subordinate voting shares
38,000,000 multiple voting shares
Total......................... 45,707,264 shares
Voting rights................... The subordinate voting shares will carry one
vote per share and the multiple voting shares
will carry ten votes per share. Subsequent to
the completion of this offering, the
outstanding multiple voting shares will
represent 98.0% of the voting power.
Conversion rights............... Each multiple voting share will be
convertible at any time at the holder's
option into one fully paid and non-assessable
subordinate voting share.
Undertaking in favor of holders
of subordinate voting shares.... The holders of subordinate voting shares will
benefit from protective provisions that give
them specified rights in the event of a
take-over bid for the multiple voting shares.
See "Description of Share Capital -- Equity
Shares -- Undertakings in Favor of Holders of
Subordinate Voting Shares."
Use of proceeds................. We intend to use the net proceeds of this
offering:
- to repay approximately $17.2 million
outstanding under promissory notes issued
to some of our existing shareholders as
payment of dividends declared on June 27,
2000;
- to repay approximately $9.9
million of our outstanding
indebtedness; and
- for working capital and other
general corporate purposes,
including potential strategic
investments and acquisitions.
Proposed Nasdaq National Market
symbol.......................... EXFO
Proposed Toronto Stock Exchange
Symbol.......................... EXF
The total number of shares to be outstanding after this offering does not
include:
- subordinate voting shares issuable upon the exchange of 800,000
preferred shares series 1 to be issued prior to the closing of this
offering. Assuming a conversion price of $24.00 per share, the 800,000
preferred shares series 1 will be convertible into 22,485 subordinate
voting shares at our option on November 30, 2000; and
- 4,470,961 subordinate voting shares reserved for future issuances under
our stock option plan, including 609,734 subordinate voting shares to be
issued upon the exercise of options to be granted prior to the closing
of this offering at an exercise price equal to the initial public
offering price.
3
<PAGE> 9
Unless otherwise indicated, all information in this prospectus, including
pro forma capitalization figures:
- assumes the underwriters have not exercised the over-allotment option
granted by us to purchase up to 1,050,000 of our subordinate voting
shares;
- gives effect to the exchange of all outstanding Class "A" shares into an
aggregate of 38,000,000 multiple voting shares, which will occur prior
to the closing of this offering;
- gives effect to the exchange of all outstanding Class "F" shares into an
aggregate of 707,264 subordinate voting shares, which will occur prior
to the closing of this offering; and
- gives effect to the exchange of all outstanding Class "G" shares into an
aggregate of 800,000 preferred shares series 1, which will occur prior
to the closing of this offering.
4
<PAGE> 10
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the following summary consolidated financial data in
conjunction with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the related notes included elsewhere in this prospectus.
The consolidated statements of earnings data for each of the three years
ended August 31, 1997, 1998 and 1999 and the consolidated balance sheets data as
at August 31, 1998 and 1999 are derived from our consolidated financial
statements that have been audited by PricewaterhouseCoopers LLP, independent
auditors, that are included elsewhere in this prospectus. The consolidated
statements of earnings data for the six months ended February 28, 1999 and
February 29, 2000 and the consolidated balance sheet data as of February 29,
2000 have been derived from our unaudited consolidated financial statements
included elsewhere in this prospectus. These unaudited financial statements
include, in the opinion of our management, all adjustments, consisting only of
normally recurring adjustments, necessary to present fairly this unaudited
financial information. The "Pro Forma As Adjusted" numbers in the table below
reflect the issuance of 483,196 Class "F" shares to employees under outstanding
subscription agreements, the share capital reorganization described under
"Description of Share Capital", which will be effected prior to this offering,
the declaration of a $17.5 million dividend, the sale of 7,000,000 subordinate
voting shares offered by EXFO at an assumed initial public offering price of
$24.00 per share and the application of the estimated net proceeds from this
offering. See "Use of Proceeds."
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
--------------------------- ---------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
------- ------- ------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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CONSOLIDATED STATEMENTS OF EARNINGS DATA:
AMOUNTS UNDER CANADIAN GAAP
Sales....................................................... $24,475 $31,605 $42,166 $18,728 $29,111
Cost of sales............................................... 9,652 11,345 14,998 7,021 9,609
------- ------- ------- ------- -------
Gross margin................................................ 14,823 20,260 27,168 11,707 19,502
Operating expenses
Selling and administrative................................ 7,827 9,898 13,279 5,964 9,938
Net research and development.............................. 1,592 3,014 4,315 1,791 3,221
Amortization of capital and other assets.................. 479 657 898 422 611
------- ------- ------- ------- -------
Earnings from operations.................................... 4,925 6,691 8,676 3,530 5,732
Interest expense (income) -- net............................ 89 (40) (136) (46) (25)
Foreign exchange loss (gain)................................ 184 (126) 506 398 116
------- ------- ------- ------- -------
Earnings before income taxes and amortization of goodwill... 4,652 6,857 8,306 3,178 5,641
Income taxes................................................ 1,582 2,356 2,492 958 1,887
------- ------- ------- ------- -------
Earnings before amortization of goodwill.................... 3,070 4,501 5,814 2,220 3,754
Amortization of goodwill.................................... -- -- -- -- 42
------- ------- ------- ------- -------
Net earnings for the period................................. $ 3,070 $ 4,501 $ 5,814 $ 2,220 $ 3,712
======= ======= ======= ======= =======
Basic and fully diluted net earnings per share.............. $ 0.08 $ 0.12 $ 0.14 $ 0.05 $ 0.10
Basic weighted average number of shares used in per share
calculations.............................................. 38,000 38,000 38,001 38,000 38,425
AMOUNTS UNDER U.S. GAAP
Net earnings for the period................................. $ 3,356 $ 4,538 $ 5,901 $ 2,245 $ 3,526
Basic and diluted net earnings per share.................... $ 0.09 $ 0.12 $ 0.15 $ 0.05 $ 0.09
Basic weighted average number of shares used in per share
calculations.............................................. 38,000 38,000 38,001 38,000 38,425
</TABLE>
<TABLE>
<CAPTION>
AS AT
FEBRUARY 29, 2000
----------------------
PRO FORMA AS
ACTUAL ADJUSTED
------- ------------
(IN THOUSANDS)
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CONSOLIDATED BALANCE SHEETS DATA:
AMOUNTS UNDER CANADIAN GAAP
Cash and cash equivalents................................... $ 539 $128,752
Working capital............................................. 13,578 149,291
Total assets................................................ 37,072 167,685
Long-term debt (excluding current portion).................. 283 283
Shareholders' equity........................................ 19,048 157,161
</TABLE>
5
<PAGE> 11
RISK FACTORS
Investing in our subordinate voting shares involves a high degree of risk.
You should carefully consider the risks described below as well as all the other
information in this prospectus, including our financial statements and related
notes, before investing in our subordinate voting shares. Our business,
operating results and financial condition could be seriously harmed due to any
of the following risks. The trading price of our subordinate voting shares could
decline due to any of these risks and you could lose all or part of your
investment.
RISKS RELATED TO OUR INDUSTRY AND BUSINESS
IF WE ARE UNABLE TO ADAPT TO CURRENT AND FUTURE CHANGES IN TECHNOLOGY, OUR
PRODUCTS MAY BECOME OBSOLETE.
Any failure by us to anticipate or respond to new technological
developments and customer requirements could have a material adverse effect on
our business, financial condition and results of operations. Moreover, the
markets addressed by our current and planned products are rapidly evolving and
are characterized by emerging standards and competing technological platforms.
There can be no assurance that products destined by us for sale into these
markets will adequately address the requirements dictated by evolving standards,
or that we will be able to adapt our products to changes in technology.
Accordingly, we may invest in products and technologies that never gain market
acceptance. Such investments could have a material adverse effect on our
business, financial condition and results of operations.
WE MUST CONTINUE TO OVERCOME SIGNIFICANT AND INCREASING COMPETITION IN OUR
INDUSTRY IN ORDER TO CONTINUE OUR GROWTH AND PRODUCTIVITY.
The market for fiber-optic test, measurement and monitoring equipment is
rapidly evolving and is marked by intense competition and technical innovations.
We expect the pace of change to accelerate in the future. We also expect many
new competitors to emerge as the market for fiber-optic test, measurement and
monitoring equipment expands and evolves in response to technical innovations.
Some of our current and potential competitors are global electronic test
and measurement manufacturers who complement their broad range of products with
fiber-optic test, measurement and monitoring equipment. Competitors, such as
Agilent Technologies Inc. and Wavetek Wandel & Golterman, have longer operating
histories and significantly greater financial, technical and marketing
resources. Consequently, these competitors are able to devote greater resources
to the development, marketing, sale and support of their products. They are also
better positioned than we are to acquire companies and new technologies that may
displace our products or make them obsolete.
WE DEVOTE CONSIDERABLE TIME AND RESOURCES TO SECURING NEW CUSTOMERS AND
IMPROVING SALES TO EXISTING CUSTOMERS. IF WE ARE UNSUCCESSFUL, OUR FUTURE
OPERATING RESULTS MAY SUFFER.
The long sales cycle for our products may cause our sales and operating
results to vary significantly from period to period. The period of time between
our initial contact with a customer and the receipt of a purchase order may span
a year or more. In addition, customers perform and require us to perform,
extensive product evaluation and testing of new instruments before purchasing
them. If we are unable to satisfy customer demands, considerable resources would
have been expended without deriving corresponding sales.
OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY, WHICH INCLUDES NINE
PATENTS AND FOURTEEN PATENT APPLICATIONS, ARE IMPORTANT TO THE CONTINUED SUCCESS
OF OUR BUSINESS. OUR FAILURE TO PROTECT THIS PROPRIETARY TECHNOLOGY MAY
SIGNIFICANTLY IMPAIR OUR COMPETITIVE POSITION.
Our success and ability to compete depend to a significant extent on our
proprietary technology, since that is how we attempt to keep others from using
the innovations that are central to our existing and future products. We
currently hold four U.S. and two Canadian issued patents, three foreign issued
patents and have six U.S. and eight Canadian patent applications pending. In
addition, we rely on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures, contractual provisions and license
agreements to protect our proprietary technology. We may have to engage in
litigation in order to protect our patents and other intellectual property
rights, or to determine the validity or scope of the proprietary rights of
others. This kind of litigation can be time-consuming and expensive, regardless
of whether we win or lose. Because it is critical to our success that we are
able to prevent competitors from copying our innovations, we intend to continue
to seek patent and
6
<PAGE> 12
trade secret protection for our technologies. The process of seeking patent
protection can be long and expensive and we cannot be certain that any currently
pending or future applications will actually result in issued patents, or that,
even if patents are issued, they will be of sufficient scope or strength to
provide meaningful protection or any commercial advantage to us. Furthermore,
others may develop technologies that are similar or superior to our technology,
or design around the patents that we own. We also rely on trade secret
protection for our technology, in part through confidentiality agreements with
our employees, consultants, distributors and third parties. However, these
agreements may be breached or otherwise not effective and we may not have
adequate remedies for any breach or shortfall of these agreements. In any case,
others may come to know about our trade secrets through a variety of methods. In
addition, our foreign issued patents only cover France, Germany and Japan, and
the laws of some territories in which we sell our products may not protect our
intellectual property rights to the same extent as do the laws of Canada and the
United States.
Despite our efforts, our intellectual property rights, particularly our
existing or future patents, may be invalidated, circumvented, challenged or
required to be licensed to others. Furthermore, others may develop technologies
that are similar or superior to our technology, duplicate or reverse engineer
our technology, or design around the patents owned or licensed by us. We cannot
be sure that the steps that we take to protect our technology will prevent
misappropriation or infringement. If we fail to protect our technology so that
others may copy or use it, we will be less able to differentiate our products
and our sales will decline.
IF OTHERS CLAIM THAT OUR PRODUCTS INFRINGE UPON THEIR INTELLECTUAL PROPERTY
RIGHTS, WE MAY BE FORCED TO SEEK EXPENSIVE LICENSES, RE-ENGINEER OUR PRODUCTS,
ENGAGE IN EXPENSIVE AND TIME-CONSUMING LITIGATION OR STOP MARKETING THE
CHALLENGED PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR
PRODUCTS AND COULD INCREASE OUR COSTS.
Litigation regarding intellectual property rights is common in the
technology industry and, for this reason, we expect that third-party
infringement claims involving technologies may increase. If an infringement
claim is filed against us, we may be prevented from using some of our
technologies and may incur significant costs to resolve the claim.
We could incur substantial costs in defending ourselves and our customers
against infringement claims. Litigation could also adversely affect sales of the
challenged product or technology and divert the efforts of our management and
technical personnel. In the event of a claim of infringement, we may be required
to obtain one or more licenses from third parties. We cannot assure you that we,
or our customers, could obtain necessary licenses from third parties at a
reasonable cost or at all. If we fail to obtain a license where one is required,
we could incur substantial liabilities and be forced to suspend the marketing of
the challenged products.
WE REQUIRE EMPLOYEES WHO ARE KNOWLEDGEABLE ABOUT THE SPECIALIZED NATURE OF OUR
BUSINESS. IF WE ARE UNABLE TO ATTRACT AND RETAIN SUFFICIENT NUMBERS OF HIGHLY
SKILLED TECHNICAL, SALES AND MARKETING AND OTHER PERSONNEL, OUR OPERATIONS AND
FINANCIAL RESULTS WOULD SUFFER.
Due to the specialized nature of our business, we are highly dependent on
the continued service of and on the ability to attract and retain, qualified
engineering, sales, marketing and senior management personnel in the area of
fiber optics. The competition for such personnel is intense. The loss of key
employees or management personnel could have a material adverse effect on our
business and operating results. We may not be able to continue to attract and
retain the qualified personnel necessary for the development of our business. In
addition, if we are unable to hire additional qualified personnel as needed, we
may not be able to adequately manage and complete our existing sales commitments
and to bid for and execute additional sales.
We must provide significant training for our growing employee base due to
the highly specialized nature of fiber-optic test, measurement and monitoring
equipment. Our current engineering personnel may be inadequate and we may fail
to assimilate and train new employees. Highly skilled employees with the
education and training that we require, especially employees with significant
experience and expertise in fiber optics, are in high demand. Once trained, our
employees may be hired by our competitors.
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OUR BUSINESS STRATEGY AND OUR ABILITY TO OPERATE PROFITABLY DEPEND ON THE
CONTINUED SERVICES OF OUR SENIOR MANAGEMENT TEAM LED BY GERMAIN LAMONDE, OUR
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER, OR ANY OF OUR
SENIOR MANAGEMENT, THE LOSS OF WHOM WOULD ADVERSELY AFFECT OUR BUSINESS.
Our ability to maintain our competitive position depends to a significant
extent on the efforts and abilities of our senior management, particularly
Germain Lamonde, our Chairman of the Board, President and Chief Executive
Officer. Although we expect to enter into an employment agreement with Mr.
Lamonde prior to the closing of the offering, we do not have employment
agreements with any of our other key executives. Their managerial, technical and
other services would be difficult to replace and if we lose the services of one
or more of our executive officers, or if one of them decides to join a
competitor or otherwise compete directly or indirectly against us, our business
would be seriously harmed. The loss of their services would jeopardize our
ability to maintain our competitive position. We do not have "key person" life
insurance policies covering any of our employees.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH EFFECTIVELY, WE MAY NOT BE ABLE TO
MAINTAIN OR IMPROVE OUR CURRENT LEVEL OF PROFITABILITY.
We expect our business and the industry in which we compete to continue to
undergo rapid change. We plan to significantly expand our distribution and
marketing capabilities by opening additional international sales offices and
service centers, by bolstering our key account management program, by hiring
application engineers and by increasing our sales network worldwide. We have
increased our manufacturing floor space by 167% through the acquisition of an
additional facility of approximately 112,000 square feet. Finally, we have had a
significant increase in our number of employees from 429 on May 31, 1999 to 671
on May 31, 2000. Our ability to be profitable depends on our ability to manage
this rapid growth. The failure of our management to respond effectively to and
manage changing technological and business conditions could have a material
adverse impact on our business, financial condition and results of operations.
WE DEPEND ON A SINGLE SUPPLIER OR A LIMITED NUMBER OF SUPPLIERS FOR SOME OF THE
KEY COMPONENTS AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO
SUPPLY SHORTAGES OR PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
We depend on a limited number of suppliers for parts used to manufacture
our products. All our orders are placed through individual purchase orders and,
therefore, our suppliers may stop supplying parts to us at any time. The
reliance on a single source or limited number of suppliers could result in
delivery problems and reduced control over product pricing and quality. The
process of qualifying a new contract manufacturer for complex products, designed
to our specifications, such as our optical and mechanical parts, is lengthy and
would consume a substantial amount of time of our technical personnel and
management. If we sought to change manufacturers in a short period of time, our
business would be disrupted. In addition, we may be unsuccessful in identifying
a new manufacturer capable of and willing to meet our needs on terms that we
would find acceptable.
WE EXPECT THE PRICE OF OUR EXISTING PRODUCTS TO DECLINE AND IF WE DO NOT REDUCE
OUR MANUFACTURING COSTS OR INTRODUCE NEW PRODUCTS WITH HIGHER MARGINS, OUR GROSS
MARGINS WILL DECLINE AND WE COULD INCUR LOSSES.
Our industry is very competitive and prices for fiber-optic test,
measurement and monitoring equipment will likely decline. These price declines
result from factors such as:
- increased competition for business;
- a limited number of potential customers;
- competition from companies with lower labor and production costs;
- introduction of new products by competitors; and
- greater economies of scale for higher-volume manufacturers.
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We may have to increase our manufacturing capacity and our unit volume sold
in order to maintain our existing sales. If we add capacity, our fixed costs
will increase. As a result, we would have to increase the level of sales to
maintain operating margins. If we are unable to continuously reduce our
manufacturing costs or introduce new products with higher margins, our gross
margins could decline.
IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES ASSOCIATED WITH OPERATING
INTERNATIONALLY, THE GROWTH OF OUR BUSINESS MAY BE IMPEDED AND OUR OPERATING
RESULTS MAY BE AFFECTED.
For the fiscal year ended August 31, 1999, customers outside of the United
States and Canada accounted for 44% of our sales and for the six months ended
February 29, 2000, these customers accounted for 36% of our sales. We plan to
increase our international sales activities and have recently opened offices in
China, Japan and Singapore. Our international sales will be limited if we cannot
establish relationships with international distributors, establish additional
foreign operations, expand international sales channel management, hire
additional personnel and develop relationships with international service
providers. Even if we are able to successfully continue our international
operations, we may not be able to maintain or increase international market
demand for our products. Our international operations are subject to a number of
risks, including:
- unexpected changes in regulatory requirements, tax rates or tariffs that
make our products and services more expensive and therefore less
attractive to potential customers;
- challenges in staffing and managing foreign operations due to the
limited number of qualified candidates, employment laws and practices in
foreign countries, any of which could increase the cost and reduce the
efficiency of operating in foreign countries;
- technology standards that differ from those on which our products are
based, which could require expensive redesign and retention of personnel
familiar with those standards;
- longer accounts receivable payment cycles and possible difficulties in
collecting payments which may increase our operating costs and hurt our
financial performance;
- political and economic instability; and
- certification requirements.
Any of these factors could harm our international operations and negatively
affect our financial performance. For example, we currently face problems with
increasing, and constantly changing, certification requirements. In addition,
although the amounts involved were not material, we have in the past encountered
difficulties collecting accounts receivable in countries experiencing economic
instability. The recurrence of weakness in these economies or of weakness in
other foreign economies could have a significant negative effect on our future
operating results.
OUR PRODUCTS MAY HAVE UNFORESEEN DEFECTS THAT COULD HARM OUR REPUTATION, IMPEDE
MARKET ACCEPTANCE OF OUR PRODUCTS AND NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS.
As a result of their complexity, our products may contain undetected errors
or compatibility problems or regulatory compliance issues, particularly when
they are first introduced or when new versions are released. There can be no
assurance that, despite our testing, errors will not be found in new products
after they have been fully deployed and operated under peak stress conditions.
If we are unable to fix defects or other problems, we could experience, among
other things:
- loss of customers;
- damage to our brand reputation;
- failure to attract new customers or achieve market acceptance;
- diversion of development and engineering resources;
- legal actions by our customers, including claims for consequential
damages and loss of profits; and
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- legal actions by governmental entities, including actions to impose
product recalls and/or forfeitures.
The occurrence of any one or more of the foregoing could seriously harm our
business, financial condition and results of operations.
OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL PRODUCT LIABILITY AND
WARRANTY CLAIMS. A SUCCESSFUL CLAIM EXCEEDING OUR POLICY LIMIT WILL REDUCE OUR
WORKING CAPITAL, INCREASE OUR EXPENSES AND HAVE A NEGATIVE EFFECT ON OUR
OPERATING RESULTS.
Our products are designed to help telecommunications carriers and
manufacturers of optical components, value-added optical modules and optical
networking systems ensure network reliability. The failure of our products to
perform to client expectations could give rise to product liability and warranty
claims. We carry product liability insurance that we consider adequate in view
of industry practice. However, a successful claim against us for an amount
exceeding our policy limit would force us to use our own resources to pay the
claim, which could result in a reduction of our working capital available for
other uses, increase our expenses and have a negative effect on our results of
operations.
AS OUR COMPETITORS CONSOLIDATE, THEY MAY OFFER PRODUCTS OR PRICING THAT WE
CANNOT MEET, WHICH COULD CAUSE OUR SALES TO DECLINE.
Consolidation in the fiber-optic test, measurement and monitoring industry
could intensify the competitive pressures that we face. Recently, some of our
competitors have merged or have been acquired by larger companies. These
combined companies could produce more high-performance products and offer them
at more competitive prices.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND YOU
SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE PERFORMANCE.
Our sales and operating results have fluctuated from quarter to quarter in
the past and may fluctuate significantly in the future. In addition, our revenue
and operating results generally depend on the volume and timing of the orders we
receive from customers as well as our ability to fulfill the orders received.
Our operating expenses, which include research and development, and selling and
administrative expenses, are relatively fixed in the short term. If our revenue
is lower than we expect because we sell fewer products than we anticipate or if
there is a delay in the release of new products, we may not be able to quickly
reduce our operating expenses in response. Factors that could affect the amount
and timing of our revenues, and cause quarterly fluctuations in our operating
results include:
- the length of our product sales cycle, especially for our higher priced
and more complex products;
- our ability to sustain product volumes and high levels of quality across
all product lines; and
- the timing of introduction and market acceptance of new products by us,
our competitors or our suppliers.
Our operating results could also be affected by the following factors over
which we have little or no control:
- changes in the capital budgets of our customers, which may cause
seasonal or other fluctuations in the product mix, volume, timing and
number of orders we receive from our customers; and
- difficulties in collecting accounts receivable.
Due to these factors, you should not rely on quarter-to-quarter comparisons
of our results of operations as an indication of our future performance.
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IF OPTICAL FIBER IS REPLACED BY ANOTHER MEDIUM AS THE PRIMARY SOLUTION FOR
BANDWIDTH-INTENSIVE APPLICATIONS, OR IF HIGH-BANDWIDTH TRANSMISSION NETWORKS ARE
NO LONGER IN GREAT DEMAND, WE COULD EXPERIENCE A SIGNIFICANT LOSS OF SALES.
The increase in fiber-optic cable production and the growth in fiber
deployment are causing increased demand for fiber-optic test, measurement and
monitoring equipment. If the demand for these markets decreases or disappears,
or if optical fiber is replaced by a higher-performance medium, it could have a
material adverse effect on our business, financial condition and results of
operations.
IF WE FAIL TO PREDICT OUR SUPPLY REQUIREMENTS ACCURATELY, WE WILL HAVE EXCESS
INVENTORY OR INSUFFICIENT INVENTORY, EITHER OF WHICH COULD CAUSE US TO INCUR
ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS.
We provide forecasts of our requirements to some of our suppliers up to six
months prior to scheduled delivery of products to our customers. If we
overestimate our requirements, we may have excess inventory, which could
increase our costs and harm our relationships with our suppliers due to reduced
future orders. If we underestimate our requirements, we may have an inadequate
inventory of parts. Inadequate inventory could interrupt manufacturing of our
products and result in delays in shipments. In addition, lead times for
materials and parts that we order are long and depend on factors such as the
procedures of, or supply terms with, a specific supplier and demand for each
part at a given time. In the case of some parts in short supply, suppliers have
imposed strict allocations that limit the number of these parts that they will
supply to a given customer in a specified time period. Although to date
suppliers have not made selective allocations that adversely affected us, these
suppliers may choose, in the future, to increase allocations to larger, more
established companies, which could reduce our allocations and harm our ability
to manufacture our products.
WE MAY NOT BE ABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS,
WHICH COULD PREVENT US FROM ACHIEVING OUR GROWTH STRATEGY AND ADVERSELY AFFECT
OUR OPERATING RESULTS.
The development of proprietary technologies entails significant technical
and business risks and requires substantial expenditures and lead time. If we
experience product delays in the future, we may face:
- customer dissatisfaction;
- cancellation of orders;
- negative publicity;
- loss of sales;
- slower market acceptance of our products; and
- legal actions by customers.
In the future, our efforts to remedy product delays may not be successful
and we may lose customers as a result. Delays in bringing to market new products
or product enhancements could be exploited by our competitors. If we lose market
share as a result of lapses in our product development, our business would
suffer.
FLUCTUATIONS IN THE EXCHANGE RATES BETWEEN THE CANADIAN DOLLAR AND THE U.S.
DOLLAR MAY ADVERSELY AFFECT OUR OPERATING MARGINS.
The majority of our sales is denominated in U.S. dollars. However, a
majority of our operating expenses and capital expenditures are denominated in
Canadian dollars. As a result, we are exposed to fluctuations in the exchange
rates between the Canadian dollar and the U.S. dollar. An increase in the value
of the Canadian dollar relative to the U.S. dollar could have a material adverse
effect on our operating margins.
AS OUR CUSTOMERS CONSOLIDATE, THEY MAY REDUCE PURCHASES OF OUR PRODUCTS, WHICH
WOULD CAUSE OUR SALES TO DECLINE.
Consolidation in the telecommunications industry could reduce the number of
customers to whom our products could be sold. Some of our customers have
recently merged. Although to date we have not experienced
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any adverse effects as a result of these mergers, these merged customers could,
in the future, obtain products from a source other than us, which would cause
our sales to decline. In addition, some of our manufacturer customers may merge
with or acquire our competitors and, as a result, discontinue their
relationships with us.
OUR CUSTOMERS ARE NOT OBLIGATED TO BUY MATERIAL AMOUNTS OF OUR PRODUCTS AND MAY
CANCEL OR DEFER PURCHASES ON SHORT NOTICE.
Our customers typically purchase our products under individual purchase
orders and may cancel or defer purchases on short notice without significant
penalty. Accordingly, sales in a particular period are difficult to predict.
Decreases in purchases, cancellations of purchase orders, or deferrals of
purchases may have a material adverse effect on our operating results,
particularly if we do not anticipate them.
WE MAY NOT BE ABLE TO SUSTAIN OUR RESEARCH AND DEVELOPMENT ACTIVITIES AS OUR
RESEARCH AND DEVELOPMENT CREDITS AND GRANTS DECLINE BECAUSE OF THE INCREASING
EFFECTIVE COST OF OUR RESEARCH AND DEVELOPMENT ACTIVITIES.
Our historical operating results reflect substantial benefits from programs
sponsored by the Canadian and Quebec governments for the support of research and
development. Research and development tax credits and grants represented 32.5%
of our gross research and development expenses for the year ended August 31,
1999 and 31.4% for the six months ended February 29, 2000. These tax credits and
grants will decline as our assets grow. Accordingly, the effective cost of our
future research and development activities will increase.
UNEXPECTED DECLINES IN OUR RESEARCH AND DEVELOPMENT CREDITS AND GRANTS MAY HAVE
AN ADVERSE EFFECT ON OUR BUSINESS.
If unexpected changes in the laws or government policies terminate or
adversely modify the government programs, under which we receive research and
development tax credits and grants, or if we unexpectedly become unable to
participate in or take advantage of these programs, then our net research and
development expenses will materially increase. To the extent that we increase
our activities outside Canada or Quebec, which could result from, among other
things, future acquisitions, the increased activities may not be eligible for
these programs. If we are required to decrease our research and development
activities, we may be unable to compete effectively.
WE MAY NOT BE ABLE TO MAKE THE NECESSARY ACQUISITIONS NEEDED FOR THE DEVELOPMENT
OF OUR BUSINESS AND ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM
OUR FINANCIAL CONDITION.
Although we have no existing commitments or agreements regarding any
acquisitions, we intend to seek acquisitions of businesses, products and
technologies that are complementary to ours. There can be no assurance that we
will ultimately make any such acquisition.
We have in the past made strategic acquisitions of intellectual property,
such as the arrangements we have with GAP Optique S.A. and of complementary
products through the recent acquisition of Nortech Fibronic Inc. We anticipate
that in the future, as part of our business strategy, we will continue to make
strategic acquisitions of complementary companies, products and technologies. In
the event of any future acquisition, we could:
- issue shares that would dilute your percentage ownership;
- incur debt;
- assume liabilities; or
- incur expenses related to in-process research and development,
amortization of goodwill and other intangible assets.
These acquisitions also involve numerous risks, including:
- problems combining the acquired operations, technologies or products;
- unanticipated costs or liabilities;
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- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees, particularly those of acquired
organizations.
We cannot assure you that we will be able to successfully integrate any
businesses, products, technologies or personnel that we might acquire in the
future, which may harm our business.
OUR SALES WOULD SUFFER IF A KEY SALES REPRESENTATIVE OR DISTRIBUTOR STOPPED
SELLING OR REDUCED SALES OF OUR PRODUCTS.
We sell substantially all of our products through a network of independent
sales representatives and distributors, the majority of whom have exclusive
rights to sell our products in specific territories or markets. If we are unable
to provide competitive sales commissions, maintain an appropriate sales volume,
or offer sufficient channel-support, our independent sales representatives and
distributors may discontinue sales of our products and switch to representing
one or more of our competitors, which would result in reduced sales for us.
WE MAY NEED ADDITIONAL CAPITAL, AND MAY NOT BE ABLE TO RAISE ADDITIONAL CAPITAL
ON FAVORABLE TERMS OR AT ALL, WHICH COULD LIMIT OUR ABILITY TO GROW AND COULD
INCREASE OUR COSTS.
Our future liquidity and capital requirements are difficult to predict
because they depend on numerous factors, including the success of our existing
and new product offerings as well as competing technological and market
developments. As a result, we may not be able to generate sufficient cash from
our operations to meet additional working capital requirements, support
additional capital expenditures or take advantage of acquisition opportunities.
Accordingly, we may need to raise additional capital in the future.
Our ability to obtain additional financing will be subject to a number of
factors, including market conditions and our operating performance. These
factors may render the timing, amount, terms and conditions of additional
financing unattractive for us. If we raise additional funds by selling equity
securities, the relative ownership of our existing investors could be diluted or
the new investors could obtain terms more favorable than previous investors. If
we raise additional funds through debt financing, we could incur significant
borrowing costs. If we are unable to raise additional funds when needed, our
ability to operate and grow our business could be impeded.
OUR PRODUCTS MAY BE REQUIRED TO CONFORM TO NEW AND UNFORESEEN REGULATORY
REQUIREMENTS WHICH COULD INCREASE OUR COSTS AND REDUCE OUR MARKET SHARE.
Our products are designed to conform to the regulatory requirements of the
countries in which they are marketed. In the event that the technical
regulations applicable in a given country are in any way changed, we may be
required to modify, redesign or recall some or all of our products in order to
continue participating in that market. These changes likely would increase
manufacturing costs and could create technical advantages for products marketed
by our competitors.
RESIDUAL YEAR 2000 ISSUES MAY DISRUPT OUR OPERATIONS, SUBJECT US TO LIABILITIES
AND COSTS AND AFFECT THE TIMING OF OUR SALES.
Since many of our test systems rely on software, they could be affected by
Year 2000 issues. To date, we have not identified any specific Year 2000
problems adversely affecting our business. However, we may still be vulnerable
to any residual Year 2000 problems causing the failure of any of our products,
as a result of which we could lose customers, suffer significant disruptions in
our business, lose sales and incur substantial liabilities and expenses. We
could also become involved in costly litigation resulting from Year 2000
problems. This could seriously harm our business, financial condition and
results of operations.
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RISKS RELATED TO THIS OFFERING AND OWNING OUR SUBORDINATE VOTING SHARES
OUR PRINCIPAL SHAREHOLDER OWNS ALL OF OUR MULTIPLE VOTING SHARES AND WILL BE
ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER OUR AFFAIRS. HOLDERS OF SUBORDINATE
VOTING SHARES WILL HAVE A LIMITED ROLE IN OUR AFFAIRS.
Holders of our subordinate voting shares are entitled to one vote per share
and holders of our multiple voting shares are entitled to ten votes per share.
Following the closing of this offering, Germain Lamonde, our Chairman of the
Board, President and Chief Executive Officer, will have control over all of our
outstanding multiple voting shares representing 98.0% of the outstanding voting
power. As a result, he will be able to control all matters requiring approval by
our shareholders, including the election of directors and the approval of
mergers or other business combinations. The concentration of ownership would
make it more difficult for a third party to acquire our control if Germain
Lamonde were to oppose the change of control transaction. This could prevent our
shareholders from realizing a premium over the market prices for their
subordinate voting shares or from bringing about a change in management.
WE WILL HAVE BROAD DISCRETION REGARDING THE USE OF PROCEEDS FROM THIS OFFERING.
IF WE DO NOT USE THE PROCEEDS EFFECTIVELY TO DEVELOP AND GROW OUR BUSINESS, YOUR
INVESTMENT COULD SUFFER.
We intend to use approximately $17.2 million to repay promissory notes
issued to satisfy the dividends declared on June 27, 2000 to our existing
shareholders and approximately $9.9 million to repay indebtedness. While we do
not have specific uses for a significant portion of the balance of the proceeds
from this offering, we expect it will give us the opportunity to compete more
effectively against our competitors, many of which are larger than we are and
have significantly greater financial resources. Although to date we have not
identified any specific opportunity nor budgeted for any specific projects, we
may use the balance of the proceeds to acquire or invest in related businesses,
products and technologies. As a result, our management will have broad
discretion in how we use the net proceeds from this offering. You will not have
the opportunity to evaluate the economic, financial or other information on
which we base our decisions regarding the use of the net proceeds from this
offering and we may spend these proceeds in ways that do not increase our
operating results or market value.
TECHNOLOGY-RELATED STOCK PRICES ARE ESPECIALLY VOLATILE. THIS VOLATILITY MAY
DEPRESS OUR SHARE PRICE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT A PRICE
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
Stock market prices for technology companies have been volatile and the
market price of our subordinate voting shares may be volatile. In particular,
the market prices of the shares of many companies in the technology sector have
experienced wide fluctuations that have often been unrelated to their operating
performance. As a result, you may not be able to resell your subordinate voting
shares at or above the initial public offering price. Although the market price
of our subordinate voting shares will in part be based on our operating and
financial performance, it may also be based on conditions in the fiber-optic
industry and other factors beyond our control.
MORE THAN 38 MILLION SHARES, IN ADDITION TO THE SHARES COVERED BY THIS
PROSPECTUS, WILL BE OUTSTANDING AFTER THIS OFFERING AND SALES OF THESE SHARES
MAY DEPRESS OUR SHARE PRICE.
After this offering, we will have 45,707,264 shares outstanding. Sales of a
substantial number of our subordinate voting shares in the public market
following this offering could cause the market price of our subordinate voting
shares to drop. All of the subordinate voting shares sold in this offering will
be freely tradeable. Subordinate voting shares issuable upon conversion of
38,000,000 multiple voting shares, held by Germain Lamonde, will be available
for sale in the public market 180 days after the date of this prospectus,
subject to resale restrictions under applicable Canadian and U.S. securities
laws. See "Shares Eligible for Future Sale."
THERE MAY BE NO ACTIVE TRADING MARKET IN OUR SUBORDINATE VOTING SHARES AFTER
THIS OFFERING, WHICH MAY MAKE IT DIFFICULT FOR YOU TO RESELL YOUR SHARES.
Prior to this offering, there was no organized market on which to trade the
subordinate voting shares and there can be no assurance that an active market
for the trading of the shares will develop or be maintained after
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this offering. Factors such as our financial results and the financial results
of our competitors, general industry conditions and financial markets could
result in fluctuations in the share price of the subordinate voting shares.
YOU WILL SUFFER AN IMMEDIATE DILUTION OF YOUR INVESTMENT.
After giving effect to this offering, the offering price of each
subordinate voting share will exceed the net tangible book value per share by
$20.62, representing a dilution factor of 85.9%. Accordingly, investors who
purchase subordinate voting shares pursuant to this offering will be subject to
an immediate dilution in the book value of their investments. See "Dilution."
WE ARE NOT LIKELY TO PAY DIVIDENDS FOR THE FORESEEABLE FUTURE.
Except for the dividend declared on June 27, 2000, we do not plan to pay
dividends on our subordinate voting shares for at least the next three years. We
currently intend to retain any earnings for reinvestment in our business. See
"Dividend Policy."
SINCE WE ARE A CANADIAN COMPANY AND MOST OF OUR ASSETS AND KEY PERSONNEL ARE
LOCATED IN CANADA, YOU MAY NOT BE ABLE TO ENFORCE ANY U.S. JUDGMENT FOR CLAIMS
YOU MAY BRING AGAINST US, OUR ASSETS, OUR KEY PERSONNEL OR THE EXPERTS NAMED IN
THIS PROSPECTUS.
We have been organized under the laws of Canada. Many of our assets are
located outside the United States. In addition, a majority of the members of our
board of directors and our officers and the experts named in this prospectus are
residents of countries other than the United States. As a result, it may be
impossible for you to effect service of process within the United States upon us
or these persons or to enforce against us or these persons any judgments in
civil and commercial matters, including judgments under United States federal
securities laws. In addition, a Canadian court may not permit you to bring an
original action in Canada or to enforce in Canada a judgment of a U.S. court
based upon civil liability provisions of U.S. federal securities laws. See
"Enforceability of Civil Liabilities."
OUR BOARD OF DIRECTORS MAY ISSUE, WITHOUT SHAREHOLDERS' APPROVAL, AN UNLIMITED
NUMBER OF PREFERRED SHARES THAT HAVE RIGHTS AND PREFERENCES SUPERIOR TO THOSE OF
OUR SUBORDINATE VOTING SHARES. SUCH ISSUANCE MAY DELAY OR PREVENT A CHANGE OF
CONTROL.
Our articles of incorporation allow the issuance of an unlimited number of
preferred shares in one or more series. After this offering, there will only be
one series of non-voting preferred shares outstanding. However, our board of
directors may set the rights and preferences of any series of preferred shares
in its sole discretion without the shareholders' approval. The rights and
preferences of those preferred shares may be superior to those of the
subordinate voting shares. Accordingly, the issuance of preferred shares may
adversely affect the rights of holders of subordinate voting shares and could
have the effect of delaying or preventing a change of control. See "Description
of Share Capital."
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
expectations and intentions. We have identified these statements by the use of
words such as "may", "will", "expect", "anticipate", "intend", "plan",
"estimate", "believe", "continue" or other similar expressions. These
forward-looking statements reflect our current expectations and assumptions as
to future events that may not prove to be accurate. Our actual results are
subject to a number of risks and uncertainties and could differ materially from
those discussed in these statements. Factors that could contribute to these
differences include, but are not limited to, those discussed in the section
entitled "Risk Factors" and elsewhere in this prospectus. In light of the many
risks and uncertainties surrounding our business and operations, you should keep
in mind that we cannot guarantee that the forward-looking statements described
in this prospectus will transpire. We undertake no obligation and do not intend,
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as may be required under
applicable law.
ENFORCEABILITY OF CIVIL LIABILITIES
We have been organized under the laws of Canada and our executive offices
are located in Quebec, Canada. Many of our directors, controlling persons and
officers and representatives of the experts named in this prospectus, are
residents of Canada and a substantial portion of their assets and a majority of
our assets are located outside the United States. As a result, it may be
difficult for you to effect service of process within the United States upon the
directors, controlling persons, officers and representatives of experts who are
not residents of the United States or to enforce against them judgments obtained
in the courts of the United States based upon the civil liability provisions of
the federal securities laws or other laws of the United States. There is doubt
as to the enforceability in Canada against us or against any of our directors,
controlling persons, officers or experts who are not residents of the United
States, in original actions or in actions for enforcement of judgments of United
States courts, of liabilities based solely upon the civil liability provisions
of the U.S. federal securities laws. Therefore, it may not be possible to
enforce those actions against us, our directors and officers or the experts
named in this prospectus.
EXCHANGE RATE INFORMATION
The following table sets forth, for each period indicated, the high and low
exchange rates based on the noon buying rate in the city of New York for cable
transfers in Canadian dollars as certified by the Federal Reserve Bank of New
York, which is often referred to as the "noon buying rate." The exchange rates
are presented as Canadian dollars per $1.00. On June 27, 2000, the noon buying
rate was $1.00 equals C$1.4825 and the inverse noon buying rate was C$1.00
equals $0.6745.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
---------------------------------------------------- FEBRUARY 29,
1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C>
High.................. C$1.4238 C$1.3822 C$1.3995 C$1.5770 C$1.5570 C$1.4952
Low................... 1.3373 1.3285 1.3310 1.3713 1.4512 1.4350
Average(1)............ 1.3742 1.3634 1.3707 1.4490 1.5055 1.4652
End of Period......... 1.3432 1.3685 1.3890 1.5745 1.4965 1.4505
</TABLE>
---------------
(1) The average of the noon buying rate on the last business day of each month
in the period indicated.
16
<PAGE> 22
USE OF PROCEEDS
We expect to receive approximately $155,240,000 in net proceeds from the
sale of 7,000,000 subordinate voting shares in this offering, assuming an
initial public offering price of $24.00 per share, after deducting underwriting
commissions and our estimated expenses in connection with this offering. We
estimate that the net proceeds will be approximately $178,676,000 if the
underwriters' over-allotment option is exercised in full.
Of the net proceeds that we will receive from this offering, we will use:
- approximately $17.2 million to repay promissory notes issued as payment
for dividends that we declared on June 27, 2000 on the Class "A" shares
held by GEXFO Investissements Technologiques inc., a company controlled
by Germain Lamonde, Fiducie Germain Lamonde, a family trust for the
benefit of Germain Lamonde and members of his family and G. Lamonde
Investissements Financiers inc., a company controlled by Germain
Lamonde. The debt evidenced by the promissory notes bears no interest
and will be payable on demand;
- approximately $2.0 million to repay our bank operating loan of C$3.0
million. The loan bears interest at the prime rate of the bank plus
1/2% and is payable on demand. As of June 7, 2000, the interest rate of
this loan was 8.0%. We used the proceeds from that loan to pay the cash
consideration and related expenses relating to our acquisition of
Nortech Fibronic Inc. in February 2000;
- approximately $1.3 million to repay a C$2.0 million loan from 9080-9823
Quebec inc., a company controlled by Germain Lamonde. That loan bears
interest at a rate equal to the prime rate plus 1% and is payable on
demand. As of June 7, 2000, the interest rate of this loan was 8.5%;
- approximately $2.4 million to repay a C$3.5 million bank loan used in
connection with our acquisition of real property on June 7, 2000. The
loan bears interest at a rate equal to the prime rate plus 1/2%. As of
June 7, 2000, the interest rate of this loan was 8.0%;
- approximately $4.2 million to pay down debt under our revolving bank
credit facility. As of June 7, 2000, the interest rate of this credit
facility was 7.0%; and
- the remaining net proceeds for our working capital and other general
corporate purposes, including sales and marketing expenses and research
and development expenditures. The amount and timing of these
expenditures will vary depending on a number of factors, including
future revenue growth, if any, the amount of cash we generate from
operations and the progress of our product development efforts.
If the opportunity arises, we may use a portion of the net proceeds to
acquire or invest in related businesses, products and technologies. We currently
have no commitments or agreements for any material acquisition of, or investment
in, any third party. Pending any use of the net proceeds for the above purposes,
we intend to invest the funds in short-term, interest-bearing, investment grade
securities. See "Business -- Our Strategy."
17
<PAGE> 23
DIVIDEND POLICY
We have paid the following dividends per share during the five fiscal years
ended August 31, 1999 and the six months ended February 29, 2000:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
--------------------------------------------------- FEBRUARY 29,
1995 1996 1997 1998 1999 2000
------- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Class "A" Shares..... C$0.008 C$0.008 -- -- C$0.113 C$0.002
Class "E" Shares..... -- -- C$0.008 C$0.008 -- --
</TABLE>
On June 27, 2000 we declared a dividend of C$26.0 million (approximately
$17.5 million) to the holders of Class "A" and Class "F" shares. Holders of
Class "F" shares will receive a cash payment of C$475,075 (approximately
$320,000). We issued promissory notes to the holders of Class "A" shares for an
aggregate principal amount of C$25.5 million (approximately $17.2 million). The
promissory notes bear no interest and will be repaid from the proceeds of this
offering. We do not currently anticipate paying additional dividends for at
least the next three years. Our current intention is to reinvest our earnings in
our business long-term growth. Any future determination by us to pay dividends
will be at the discretion of our board of directors and in accordance with the
terms and conditions of any outstanding indebtedness and will depend upon our
financial condition, results of operations, capital requirements and such other
functions as our board of directors considers relevant.
18
<PAGE> 24
CAPITALIZATION
The following table sets forth our capitalization as of February 29, 2000:
- on an actual basis;
- on a pro forma basis, giving effect to the exchange of all Class "A"
shares into 38,000,000 multiple voting shares, the issuance of 483,196
Class "F" shares to employees under outstanding subscription agreements,
the exchange of 707,264 Class "F" shares into subordinate voting shares,
and the exchange of all Class "G" shares into 800,000 preferred shares
series 1, all of which will occur immediately prior to this offering and
the declaration of a $17.5 million dividend on June 27, 2000; and
- on a pro forma as adjusted basis, giving effect to the sale of 7,000,000
subordinate voting shares offered by this prospectus at an assumed
initial public offering price of $24.00 and the application of the
estimated net proceeds from this offering.
<TABLE>
<CAPTION>
AS AT FEBRUARY 29, 2000
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt (including current portion)............... $ 633 $ 633 $ 633
Mandatorily redeemable preferred shares:
Class "B", Class "C" and Class "E" shares: unlimited
authorized shares, no shares issued or outstanding,
actual; no shares authorized, issued or outstanding,
pro forma and pro forma as adjusted.................... -- -- --
Class "G" shares: unlimited authorized shares, 800,000
shares issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma and pro
forma as adjusted...................................... 555 -- --
Preferred shares series 1: no shares authorized, issued
or outstanding, actual; 800,000 shares authorized,
issued and outstanding, pro forma and pro forma as
adjusted............................................... -- 555 555
Shareholders' equity:
Class "A" shares: unlimited authorized shares,
38,000,000 issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma and pro
forma as adjusted...................................... 1 -- --
Class "D" shares: unlimited authorized shares, no
shares issued or outstanding, actual; no shares
authorized, issued or outstanding, pro forma and pro
forma as adjusted...................................... -- -- --
Class "F" shares: unlimited authorized shares, 224,068
shares issued and outstanding, actual; no shares
authorized, issued or outstanding, pro forma and pro
forma as adjusted...................................... 103 -- --
Multiple voting shares: no shares authorized, issued or
outstanding, actual; unlimited authorized shares,
38,000,000 shares, issued and outstanding, pro forma
and pro forma as adjusted.............................. -- 1 1
Subordinate voting shares: no shares authorized, issued
or outstanding, actual; unlimited shares authorized,
707,264 shares issued and outstanding, pro forma;
7,707,264 shares issued and outstanding, pro forma as
adjusted............................................... -- 476 155,716
Cumulative translation adjustment...................... 640 640 640
Retained earnings...................................... 18,304 804 804
------- ------ --------
Total shareholders' equity.......................... 19,048 1,921 157,161
------- ------ --------
Total capitalization........................... $20,236 $3,109 $158,349
======= ====== ========
</TABLE>
19
<PAGE> 25
The table above does not include:
- 22,485 subordinate voting shares issuable upon conversion of the
preferred shares series 1, assuming a conversion price of $24.00 per
share, which may occur at our option on November 30, 2000; and
- 4,470,961 subordinate voting shares reserved for future issuances under
our stock option plan, including 609,734 subordinate voting shares to be
issued upon the exercise of stock options to be granted prior to the
closing of this offering at an exercise price equal to the initial
public offering price.
20
<PAGE> 26
DILUTION
If you invest in our subordinate voting shares, your interest will be
diluted by the amount of the difference between the public offering price per
subordinate voting share and the pro forma as adjusted net tangible book value
per subordinate voting share of this offering.
Our pro forma net tangible book value as of February 29, 2000 was
$(641,000), or $(0.02) per subordinate voting share. Pro forma net tangible book
value per subordinate voting share is equal to our total tangible assets less
total liabilities, divided by the number of outstanding subordinate voting
shares and multiple voting shares combined.
After giving effect to our sale of 7,000,000 subordinate voting shares in
this offering at an assumed initial public offering price of $24.00 per
subordinate voting share and after deducting the estimated underwriting
commissions and estimated offering expenses, our pro forma as adjusted net
tangible book value as of February 29, 2000 is $154.6 million, or $3.38 per
share. This figure represents an immediate increase in our pro forma net
tangible book value of $3.40 per subordinate voting share to existing
shareholders and an immediate dilution of $20.62 per subordinate voting share to
new investors. Dilution is determined by subtracting the pro forma as adjusted
net tangible book value per subordinate voting share after this offering from
the amount of cash a new investor pays for a subordinate voting share. The
following table illustrates this dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per subordinate voting
share..................................................... $24.00
Pro forma net tangible book value per subordinate voting
share as of February 29, 2000............................. $ (0.02)
Increase per subordinate voting share attributable to this
offering.................................................. 3.40
-------
Pro forma as adjusted net tangible book value per
subordinate voting share after this offering.............. $ 3.38
------
Dilution in net tangible book value per subordinate voting
share to
new investors............................................. $20.62
======
Percentage of dilution in relation to the offering price.... 85.9%
======
</TABLE>
If the underwriters exercise their option to purchase additional
subordinate voting shares in this offering, our pro forma adjusted net tangible
book value as at February 29, 2000 would be $178.0 million, or $3.81 per
subordinate voting share, representing an immediate increase in net tangible
book value to our existing shareholders of $3.83 per share and immediate
dilution to new investors of $20.19 per share.
The following table summarizes as of February 29, 2000 and after giving
effect to the capital reorganization described above, the differences between
the number of shares purchased from EXFO, the total consideration paid and the
average price per share paid by our existing shareholders and by the new
investors in this offering, before deducting the estimated underwriting
commissions and estimated offering expenses:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders.......... 38,707,264 84.7% $ 477,000 0.3% $ 0.01
New investors.................. 7,000,000 15.3 168,000,000 99.7 24.00
---------- ----- ------------ -----
Total..................... 45,707,264 100.0% $168,477,000 100.0%
========== ===== ============ =====
</TABLE>
If the underwriters' over-allotment option to purchase additional
subordinate voting shares is exercised in full, the number of subordinate voting
shares held by new investors purchasing subordinate voting shares in this
offering will increase to 8,050,000 or 17.2%, of the total shares outstanding
after this offering.
21
<PAGE> 27
SELECTED CONSOLIDATED FINANCIAL INFORMATION
You should read the selected consolidated financial data set forth below in
conjunction with the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our consolidated financial
statements and the related notes included elsewhere in this prospectus.
The consolidated statements of earnings data for the years ended August 31,
1995 and 1996 and the consolidated balance sheets data as of August 31, 1995,
1996 and 1997 are derived from our unaudited consolidated financial statements
not included in this prospectus. The consolidated statements of earnings data
for each of the three years ended August 31, 1997, 1998 and 1999 and the
consolidated balance sheets data as of August 31, 1998 and 1999 are derived from
our consolidated financial statements that have been audited by
PricewaterhouseCoopers LLP, independent auditors, that are included elsewhere in
this prospectus. The consolidated statements of earnings data for the six months
ended February 28, 1999 and February 29, 2000 and the consolidated balance sheet
data as of February 29, 2000 have been derived from our unaudited consolidated
financial statements included elsewhere in this prospectus. These unaudited
financial statements include, in the opinion of our management, all adjustments,
consisting only of normally recurring adjustments, necessary to present fairly
this unaudited financial information.
Our consolidated financial statements are prepared in accordance with
Canadian GAAP, which differs in certain respects from U.S. GAAP. For a
description of the material differences between Canadian GAAP and U.S. GAAP in
regards to our consolidated financial statements, see note 21 to our
consolidated financial statements. Effective September 1, 1999, we adopted the
U.S. dollar as the reporting currency for our consolidated financial statements.
The financial statements for all periods prior to fiscal 2000 are presented in
U.S. dollars in accordance with a translation of convenience method under
Canadian GAAP using the representative exchange rate as at August 31, 1999 of
$1.00 = C$1.4958. See note 3 to our consolidated financial statements included
elsewhere in this prospectus. The historical results below are not necessarily
indicative of the results to be expected for any future period.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
----------------------------------------------- -------------------
FEB. 28, FEB. 29,
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
AMOUNTS UNDER CANADIAN GAAP
Sales..................................... $15,016 $19,229 $24,475 $31,605 $42,166 $18,728 $29,111
Cost of sales............................. 6,742 8,456 9,652 11,345 14,998 7,021 9,609
------- ------- ------- ------- ------- ------- -------
Gross margin.............................. 8,274 10,773 14,823 20,260 27,168 11,707 19,502
Operating expenses
Selling and administrative.............. 4,940 6,644 7,827 9,898 13,279 5,964 9,938
Net research and development............ 824 1,216 1,592 3,014 4,315 1,791 3,221
Amortization of capital and other
assets................................ 294 387 479 657 898 422 611
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 6,058 8,247 9,898 13,569 18,492 8,177 13,770
Earnings from operations.................. 2,216 2,526 4,925 6,691 8,676 3,530 5,732
Interest expense (income) -- net.......... 390 418 89 (40) (136) (46) (25)
Foreign exchange loss (gain).............. (42) 7 184 (126) 506 398 116
------- ------- ------- ------- ------- ------- -------
Earnings before income taxes and
amortization of goodwill................ 1,868 2,101 4,652 6,857 8,306 3,178 5,641
Income taxes.............................. 675 430 1,582 2,356 2,492 958 1,887
------- ------- ------- ------- ------- ------- -------
Earnings before amortization of
goodwill................................ 1,193 1,671 3,070 4,501 5,814 2,220 3,754
Amortization of goodwill.................. -- -- -- -- -- -- 42
------- ------- ------- ------- ------- ------- -------
Net earnings for the period............... $ 1,193 $ 1,671 $ 3,070 $ 4,501 $ 5,814 $ 2,220 $ 3,712
======= ======= ======= ======= ======= ======= =======
Basic and fully diluted net earnings per
share................................... $ 0.03 $ 0.04 $ 0.08 $ 0.12 $ 0.14 $ 0.05 $ 0.10
Basic weighted average number of shares
used in per share calculations.......... 38,000 38,000 38,000 38,000 38,001 38,000 38,425
</TABLE>
22
<PAGE> 28
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
----------------------------------------------- -------------------
FEB. 28, FEB. 29,
1995 1996 1997 1998 1999 1999 2000
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Gross research and development.......... $ 2,070 $ 2,667 $ 2,753 $ 4,406 $ 6,390 $ 2,816 $ 4,696
Net research and development............ $ 824 $ 1,216 $ 1,592 $ 3,014 $ 4,315 $ 1,791 $ 3,221
Dividends per share
Class "A" shares........................ $ 0.005 $ 0.005 -- -- $ 0.08 -- --
Class "C" shares........................ -- -- -- -- $ 340 $ 340 --
Class "E" shares........................ -- -- $ 0.005 $ 0.005 -- -- --
AMOUNTS UNDER U.S. GAAP
Sales..................................... $26,752 $32,853 $41,858 $18,340 $29,111
Net earnings for the period............... $ 3,356 $ 4,538 $ 5,901 $ 2,245 $ 3,526
Basic and diluted net earnings per
share................................... $ 0.09 $ 0.12 $ 0.15 $ 0.05 $ 0.09
Basic weighted average number of shares
used in per share calculations.......... 38,000 38,000 38,001 38,000 38,425
Dividends per share
Class "A" shares........................ $ 0.006 $ 0.006 -- -- $ 0.08 -- --
Class "C" shares........................ -- -- -- -- $ 333 $ 333 --
Class "E" shares........................ -- -- $ 0.006 $ 0.005 -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS AT AUGUST 31, AS AT
-------------------------------------------------- FEB. 29,
1995 1996 1997 1998 1999 2000
------ ------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
AMOUNTS UNDER CANADIAN GAAP
Cash and cash equivalents................. $1,022 $ 482 $ 354 $ 1,262 $ 423 $ 539
Working capital (1)....................... 2,293 3,550 5,973 9,797 12,745 13,578
Total assets.............................. 11,223 11,725 13,238 17,643 22,840 37,072
Long-term debt (excluding current
portion)................................ -- 40 20 -- -- 283
Shareholders' equity...................... $3,105 $ 4,676 $ 7,644 $12,045 $14,679 $19,048
AMOUNTS UNDER U.S. GAAP
Cash and cash equivalents................. $ 1,201 $ 423 $ 539
Working capital (2)....................... 9,179 12,781 13,685
Total assets.............................. 16,785 22,899 37,230
Long-term debt (excluding current
portion)................................ -- -- 283
Shareholders' equity...................... $11,318 $14,715 $19,155
</TABLE>
---------------
(1) Includes 19,000,000 mandatorily redeemable preferred shares with a nominal
carrying value as at August 31, 1997 and 1998 and 800,000 mandatorily
redeemable preferred shares with a carrying value of $555,000 as at
February 29, 2000.
(2) Includes 19,000,000 mandatorily redeemable preferred shares, with a nominal
carrying value as at August 31, 1998 and 800,000 mandatorily redeemable
preferred shares with a carrying value of $555,000 as at February 29, 2000.
23
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and the related notes, which are included
elsewhere in this prospectus.
OVERVIEW
EXFO was incorporated on September 18, 1985. We have expanded from a
company that provided low cost handheld fiber-optic test and measurements
instruments into a company that provides an extensive line of test, measurement
and monitoring products. Our original products were focused primarily on the
needs of installers and operators of fiber-optic networks. In 1996, we
supplemented our product line with an extensive line of scientific products that
is dedicated to the manufacturing and research and development markets in the
fiber-optic industry. Our scientific products tend to be more complex and higher
priced. In 1999, we entered the market for remote fiber test systems. Remote
fiber test systems allow carriers to deploy monitoring equipment throughout
their networks in order to monitor the status of their fiber-optic networks.
We sell our products to customers through our direct sales force and
indirectly through distribution channels. For products where the software is
incidental, we recognize sales when the products are delivered with appropriate
provisions made for estimated returns, warranties and support obligations. For
products where software is not incidental, sales are separated into two
components, product sales and customer support sales. The product sales are
recognized when the products are delivered with provisions made for estimated
returns and warranties. The customer support sales are deferred based on prices
for similar maintenance contracts and recognized ratably over the period of the
support arrangement, except where support is provided within one year of
delivery, costs of providing this support are insignificant and accrued at the
time of delivery and no upgrades of software are provided.
We deliver products to a large number of customers. No customer accounted
for more than 6.8% of total sales for the year ended August 31, 1999 or 5.5% of
total sales for the six months ended February 29, 2000.
The market for fiber-optic test, measurement and monitoring instruments is
highly competitive and we anticipate that the average selling prices of our
existing products will decrease in future periods, although the timing and
amount of these decreases cannot be predicted with any certainty. Those
decreases in the average selling price may be offset by continued product
improvement and new product introductions.
Cost of sales include raw materials, salaries and related expenses for
direct and indirect manufacturing personnel and manufacturing overhead. Cost of
sales may increase as a percentage of sales in future periods due to the high
demand for fiber-optic components, our use of more sophisticated and complex
fiber-optic components, as well as the planned expansion of our manufacturing
facilities. However, this increase may be mitigated by increased purchasing
power and productivity gains related to our expansion.
Our gross margin varies among our products and we expect that our overall
gross margin will fluctuate from period to period as a result of shifts in
product mix, anticipated decreases in average selling prices and our ability to
introduce new products.
Gross research and development expenses consist primarily of salaries and
related expenses for engineers and other technical personnel and fees paid to
third-party consultants. We are entitled to research and development tax credits
granted by the Canadian federal government and the government of the province of
Quebec. Federal tax credits are earned on qualified Canadian research and
development expenditures at a rate of 20% and can only be used to offset federal
income taxes otherwise payable. Provincial tax credits, which are refundable,
are earned on qualified research and development salaries in the province of
Quebec at a rate of 20%. Additional refundable provincial research and
development tax credits are earned at a rate of up to 20%. These additional tax
credits are reduced to nil, on a pro-rata basis, as total assets increase from
C$25.0 million to C$50.0 million. We are also entitled to government grants
resulting from agreements entered into with the government of the province of
Quebec. See "Liquidity and Capital Resources." Research and development tax
24
<PAGE> 30
credits and certain government grants are recorded as a reduction of gross
research and development expenses. We believe that continued investment in
research and development is critical to our long-term success. We expect that
our gross research and development expenses will increase with sales in future
periods. The rate of research and development tax credits will decrease as our
total assets continue to grow.
Selling and administrative expenses consist primarily of salaries and
related expenses for personnel, sales commissions, travel expenses, marketing
programs, professional services, management information systems, human resources
and other corporate expenses. We intend to expand our sales organization by
opening additional international sales offices and service centers. We expect
that, in support of our continued growth, the expansion of our sales efforts and
our operations as a public company, selling and administrative expenses will
continue to increase with sales for the foreseeable future.
In February 2000, in order to expand our portfolio of test equipment, we
acquired Nortech Fibronic Inc., a company specializing in fiber-optic testing
and temperature sensing. In connection with the acquisition, we recorded $2.5
million of goodwill, which will be amortized over five years.
Our consolidated financial statements are prepared in accordance with
Canadian GAAP, which differs in certain respects from U.S. GAAP. For a
description of the material differences between Canadian GAAP and U.S. GAAP in
regards to our consolidated financial statements, see note 21 to our
consolidated financial statements included elsewhere in this prospectus. All
dollar amounts are expressed in U.S. dollars. Effective September 1, 1999, we
adopted the U.S. dollar as the reporting currency for our consolidated financial
statements. The financial statements for all periods prior to fiscal 2000, are
presented in U.S. dollars in accordance with a translation of convenience method
under Canadian GAAP using the representative exchange rate as at August 31, 1999
of $1.00 = C$1.4958. The historical results below are not necessarily indicative
of the results to be expected for any future period.
We believe that period-to-period comparisons of our historical operating
results should not be relied upon as being a good indication of our future
performance. Our prospects must be considered in light of the risks experienced
by companies in new and rapidly evolving markets like ours. We cannot assure you
that we will successfully address the risks and challenges that we face.
Although we have experienced significant sales growth recently, we may not be
able to sustain this trend. Furthermore, we may not achieve or maintain
profitability in the future.
25
<PAGE> 31
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of earnings
data as a percentage of sales for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, ------------------
----------------------- FEB. 28 FEB. 29
1997 1998 1999 1999 2000
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 39.4 35.9 35.6 37.5 33.0
----- ----- ----- ----- -----
Gross margin.................................... 60.6 64.1 64.4 62.5 67.0
Operating expenses
Selling and administrative.................... 32.0 31.3 31.5 31.8 34.1
Net research and development.................. 6.5 9.5 10.2 9.6 11.1
Amortization of capital and other assets...... 2.0 2.1 2.1 2.3 2.1
----- ----- ----- ----- -----
Earnings from operations........................ 20.1 21.2 20.6 18.8 19.7
Interest expense (income) -- net................ 0.4 (0.1) (0.3) (0.3) (0.1)
Foreign exchange loss (gain).................... 0.7 (0.4) 1.2 2.1 0.4
----- ----- ----- ----- -----
Earnings before income taxes and amortization
of goodwill................................... 19.0 21.7 19.7 17.0 19.4
Income taxes.................................... 6.5 7.5 5.9 5.1 6.5
----- ----- ----- ----- -----
Earnings before amortization of goodwill........ 12.5 14.2 13.8 11.9 12.9
Amortization of goodwill........................ -- -- -- -- 0.1
----- ----- ----- ----- -----
Net earnings for the period..................... 12.5% 14.2% 13.8% 11.9% 12.8%
===== ===== ===== ===== =====
Research and Development Data:
Gross research and development................ 11.2% 13.9% 15.2% 15.0% 16.1%
Net research and development.................. 6.5% 9.5% 10.2% 9.6% 11.1%
</TABLE>
SIX MONTHS ENDED FEBRUARY 29, 2000 COMPARED TO SIX MONTHS ENDED FEBRUARY 28,
1999
SALES
Sales increased 55.4% from $18.7 million for the six months ended February
28, 1999 to $29.1 million for the six months ended February 29, 2000. This
growth was primarily due to the higher demand for our scientific products and a
general increase in sales of our other products. Accepted orders increased 74.2%
from $18.2 million for the six months ended February 28, 1999 to $31.7 million
for the six months ended February 29, 2000.
GROSS MARGIN
Gross margin increased to 67.0% of sales for the six months ended February
29, 2000 from 62.5% of sales for the corresponding period in 1999. The
improvement of the gross margin resulted primarily from increased economies of
scale in our production process and from higher margin product sales. The
expected expansion of our manufacturing capacity to address future volume growth
may have an adverse impact on our gross margin until we can absorb the
additional fixed manufacturing expenses through increased sales.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses increased to $9.9 million during the
six months ended February 29, 2000 compared to $6.0 million for the
corresponding period in 1999, an increase of 66.6%. As a percentage of sales,
selling and administrative expenses amounted to 34.1% for the six months ended
February 29, 2000 compared to 31.8% of sales for the six months ended February
28, 1999. The $3.9 million increase in selling and
26
<PAGE> 32
administrative expenses reflects the hiring of additional sales, marketing and
administrative personnel and commissions on higher sales volume.
RESEARCH AND DEVELOPMENT
Gross research and development expenses amounted to $4.7 million for the
six months ended February 29, 2000 compared to $2.8 million for the
corresponding period in 1999, an increase of 66.8%. As a percentage of sales,
gross research and development expenses amounted to 16.1% for the six months
ended February 29, 2000 compared to 15.0% for the corresponding period in 1999.
The increase in gross research and development expenses reflects the hiring of
additional research and development personnel and the outsourcing of
non-critical research and development projects.
Tax credits and grants earned from federal and provincial governments for
our research and development activities increased 43.9% to $1.5 million for the
six months ended February 29, 2000 compared to $1.0 million for the six months
ended February 28, 1999. Research and development tax credits and grants as a
percentage of gross research and development expenses amounted to 31.4% for the
six months ended February 29, 2000 compared to 36.4% for the six months ended
February 28, 1999. The percentage decrease is due to the reduction of the rate
of the government tax credits due to the growth in our total assets.
As a result of these factors, net research and development expenses
increased 79.8% to $3.2 million for the six months ended February 29, 2000
compared to $1.8 million for the corresponding period in 1999. Net research and
development expenses increased as a percentage of total sales to 11.1% for the
six months ended February 29, 2000 compared to 9.6% for the six months ended
February 28, 1999.
INCOME TAXES
Our effective tax rate amounted to 33.7% for the six months ended February
29, 2000 compared to 30.1% for the six months ended February 28, 1999. The
increase is due to non-taxable items in the six months ended February 28,1999,
which lowered the effective tax rate of that period.
YEAR ENDED AUGUST 31, 1999 COMPARED TO YEAR ENDED AUGUST 31, 1998
SALES
Sales increased 33.4% from $31.6 million in fiscal 1998 to $42.2 million in
fiscal 1999. The increase in sales was due primarily to increased sales of our
IQ-200 Optical Test System product and related modules and the overall growth in
demand for test and measurement products.
GROSS MARGIN
Gross margin increased from 64.1% of sales in fiscal 1998 to 64.4% of sales
in fiscal 1999. The improvement of the gross margin resulted primarily from
increased economies of scale in our production process and increased sales of
higher margin products.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses increased from $9.9 million in fiscal
1998 to $13.3 million in fiscal 1999, an increase of 34.2%. As a percentage of
sales, selling and administrative expenses amounted to 31.5% in fiscal 1999 and
31.3% in fiscal 1998. The $3.4 million increase in fiscal 1999 reflects the
hiring of additional sales personnel, product managers, marketing and
administrative personnel, for the opening of offices in Asia and commissions on
higher sales volume.
RESEARCH AND DEVELOPMENT
Gross research and development expenses amounted to $6.4 million in fiscal
1999 compared to $4.4 million in fiscal 1998, an increase of 45.0%. As a
percentage of sales, gross research and development expenses amounted to 15.2%
in fiscal 1999 and 13.9% in fiscal 1998. The increase in gross research and
development
27
<PAGE> 33
expenses, due primarily to additional personnel, reflects our continued focus on
research and development activities.
Tax credits and grants earned from federal and provincial governments for
our research and development activities increased 49.1% to $2.1 million in
fiscal 1999 compared to $1.4 million in fiscal 1998. Research and development
tax credits and grants as a percentage of gross research and development
expenses amounted to 32.5% in fiscal 1999 compared to 31.6% in fiscal 1998.
As a result of these factors, net research and development expenses
increased 43.2% to $4.3 million in fiscal 1999 compared to $3.0 million for
fiscal 1998. Net research and development expenses increased as a percentage of
total sales to 10.2% for fiscal 1999 compared to 9.5% for fiscal 1998.
INCOME TAXES
Our effective income tax rate decreased to 30.0% in fiscal 1999 compared to
34.4% in fiscal 1998. The decrease was due to non-taxable items in fiscal 1999.
YEAR ENDED AUGUST 31, 1998 COMPARED TO YEAR ENDED AUGUST 31, 1997
SALES
Sales increased 29.1% from $24.5 million in fiscal 1997 to $31.6 million in
fiscal 1998. The increase in sales was primarily due to increased unit sales of
our IQ-200 Optical Test System product and related modules and the overall
growth in sales for test and measurement products.
GROSS MARGIN
Gross margin increased from 60.6% of sales in fiscal 1997 to 64.1% of sales
in fiscal 1998. The gross margin increase is due primarily to a reduction in raw
materials costs obtained by renegotiating supplier arrangements and by
aggregating the number of our suppliers.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses increased from $7.8 million in fiscal
1997 to $9.9 million in fiscal 1998, an increase of 26.5%. As a percentage of
sales, selling and administrative expenses amounted to 31.3% in fiscal 1998
compared to 32.0% in fiscal 1997. The increase of $2.1 million in 1998 reflects
the hiring of additional sales personnel, product managers, marketing and
administrative personnel and commissions on higher sales volume.
RESEARCH AND DEVELOPMENT
Gross research and development expenses amounted to $4.4 million in fiscal
1998 compared to $2.8 million in fiscal 1997, an increase of 60.0%. As a
percentage of sales, gross research and development expenses amounted to 13.9%
in fiscal 1998 and 11.2% in fiscal 1997. The increase in gross research and
development expenses, primarily due to additional personnel, reflects our
continued focus on research and development activities.
Tax credits and grants earned from federal and provincial governments for
our research and development activities increased 19.9% to $1.4 million in
fiscal 1998 compared to $1.2 million in fiscal 1997. Research and development
tax credits and grants as a percentage of gross research and development
expenses amounted to 31.6% in fiscal 1998 compared to 42.2% in fiscal 1997. The
percentage decrease is due to the reduction of the rate of government tax
credits due to the growth in our total assets.
As a result of these factors, net research and development expenses
increased 89.3% to $3.0 million for fiscal 1998 compared to $1.6 million for
fiscal 1997. Net research and development expenses increased as a percentage of
sales to 9.5% for fiscal 1998 compared to 6.5% for fiscal 1997.
28
<PAGE> 34
INCOME TAXES
Our effective income tax rate remained relatively constant at 34.4% in
fiscal 1998 compared to 34.0% in fiscal 1997.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited quarterly results prepared in
accordance with Canadian GAAP for the ten fiscal quarters ended February 29,
2000, as well as such data expressed as a percentage of sales for each quarter.
This information has been presented on the same basis as our audited
consolidated financial statements included elsewhere in this prospectus and, in
our opinion, includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary to present fairly the unaudited
quarterly results. This information should be read in conjunction with our
audited consolidated financial statements and the related notes appearing
elsewhere in this prospectus. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- ------- -------- -------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
EARNINGS
Sales.......................... $7,115 $7,486 $10,069 $6,935 $9,124 $9,604 $10,916 $12,522
Cost of sales.................. 2,400 2,421 3,980 2,544 3,402 3,619 3,753 4,224
------ ------ ------- ------ ------ ------ ------- -------
Gross margin................... 4,715 5,065 6,089 4,391 5,722 5,985 7,163 8,298
Operating expenses
Selling and administrative... 2,191 2,458 2,448 2,801 2,799 3,165 3,465 3,850
Net research and
development................ 571 520 972 951 833 958 1,058 1,466
Amortization of capital and
other assets............... 148 163 181 165 200 222 223 253
------ ------ ------- ------ ------ ------ ------- -------
Total operating expenses... 2,910 3,141 3,601 3,917 3,832 4,345 4,746 5,569
Earnings from operations....... 1,805 1,924 2,488 474 1,890 1,640 2,417 2,729
Interest expense (income) --
net.......................... 10 (5) (18) (27) (24) (22) (33) (57)
Foreign exchange loss (gain)... (43) 33 13 (129) 204 194 102 6
------ ------ ------- ------ ------ ------ ------- -------
Earnings before income taxes
and amortization of
goodwill..................... 1,838 1,896 2,493 630 1,710 1,468 2,348 2,780
Income taxes................... 623 641 858 234 535 423 725 809
------ ------ ------- ------ ------ ------ ------- -------
Earnings before amortization of
goodwill..................... 1,215 1,255 1,635 396 1,175 1,045 1,623 1,971
Amortization of goodwill....... -- -- -- -- -- -- -- --
------ ------ ------- ------ ------ ------ ------- -------
Net earnings for the period.... $1,215 $1,255 $ 1,635 $ 396 $1,175 $1,045 $ 1,623 $ 1,971
====== ====== ======= ====== ====== ====== ======= =======
<CAPTION>
THREE MONTHS ENDED
-------------------
NOV. 30, FEB. 29,
1999 2000
-------- --------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
EARNINGS
Sales.......................... $11,688 $17,423
Cost of sales.................. 3,733 5,876
------- -------
Gross margin................... 7,955 11,547
Operating expenses
Selling and administrative... 4,119 5,819
Net research and
development................ 1,462 1,759
Amortization of capital and
other assets............... 282 329
------- -------
Total operating expenses... 5,863 7,907
Earnings from operations....... 2,092 3,640
Interest expense (income) --
net.......................... (22) (3)
Foreign exchange loss (gain)... 236 (120)
------- -------
Earnings before income taxes
and amortization of
goodwill..................... 1,878 3,763
Income taxes................... 578 1,309
------- -------
Earnings before amortization of
goodwill..................... 1,300 2,454
Amortization of goodwill....... -- 42
------- -------
Net earnings for the period.... $ 1,300 $ 2,412
======= =======
</TABLE>
29
<PAGE> 35
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
NOV. 30, FEB. 28, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31, AUG. 31,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- ------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
EARNINGS AS A PERCENTAGE OF SALES
Sales............................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.................... 33.7 32.3 39.5 36.7 37.3 37.7 34.4 33.7
----- ----- ----- ----- ----- ----- ----- -----
Gross margin..................... 66.3 67.7 60.5 63.3 62.7 62.3 65.6 66.3
Operating expenses
Selling and administrative..... 30.8 32.8 24.3 40.4 30.7 32.9 31.8 30.8
Net research and development... 8.0 7.0 9.7 13.7 9.1 10.0 9.7 11.7
Amortization of capital and other
assets......................... 2.1 2.2 1.8 2.4 2.2 2.3 2.0 2.0
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses..... 40.9 42.0 35.8 56.5 42.0 45.2 43.5 44.5
Earnings from operations......... 25.4 25.7 24.7 6.8 20.7 17.1 22.1 21.8
Interest expense (income) --
net............................ 0.1 (0.0) (0.1) (0.4) (0.3) (0.2) (0.3) (0.5)
Foreign exchange loss (gain)..... (0.6) 0.4 0.1 (1.9) 2.2 2.0 0.9 0.1
----- ----- ----- ----- ----- ----- ----- -----
Earnings before income taxes and
amortization of goodwill....... 25.9 25.3 24.7 9.1 18.8 15.3 21.5 22.2
Income taxes..................... 8.8 8.5 8.5 3.4 5.9 4.4 6.6 6.5
----- ----- ----- ----- ----- ----- ----- -----
Earnings before amortization of
goodwill....................... 17.1 16.8 16.2 5.7 12.9 10.9 14.9 15.7
Amortization of goodwill......... -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net earnings for the period...... 17.1% 16.8% 16.2% 5.7% 12.9% 10.9% 14.9% 15.7%
===== ===== ===== ===== ===== ===== ===== =====
<CAPTION>
THREE MONTHS ENDED
-------------------
NOV. 30, FEB. 29,
1999 2000
-------- --------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF
EARNINGS AS A PERCENTAGE OF SALES
Sales............................ 100.0% 100.0%
Cost of sales.................... 31.9 33.7
----- -----
Gross margin..................... 68.1 66.3
Operating expenses
Selling and administrative..... 35.3 33.4
Net research and development... 12.5 10.1
Amortization of capital and other
assets......................... 2.4 1.9
----- -----
Total operating expenses..... 50.2 45.4
Earnings from operations......... 17.9 20.9
Interest expense (income) --
net............................ (0.2) (0.0)
Foreign exchange loss (gain)..... 2.0 (0.7)
----- -----
Earnings before income taxes and
amortization of goodwill....... 16.1 21.6
Income taxes..................... 5.0 7.5
----- -----
Earnings before amortization of
goodwill....................... 11.1 14.1
Amortization of goodwill......... -- 0.3
----- -----
Net earnings for the period...... 11.1% 13.8%
===== =====
</TABLE>
Quarterly sales figures have varied in the past and may continue to vary
significantly in the future. From time to time, we receive large orders which
require us to build significant inventories to aggregate for shipment. For
example, in the three months ended May 31, 1998, a large order of portable
products was delivered, explaining the high level of sales achieved in that
quarter. Change in demand for our products may also cause fluctuations
quarter-over-quarter. For example, the increased demand for our scientific
products generally explained the increase in sales for the three months ended
February 29, 2000. Other factors that may cause quarter-over-quarter
fluctuations in sales include:
- timing of sales;
- timing of customer orders;
- delivery date requested by the customer;
- unexpected delay in introducing new products;
- shortage in raw materials supply;
- delay in ramping up our manufacturing for high demand products;
- cancellation of orders by our customers;
- customers' capital budgets available for purchasing our products; and
- competitors' products and prices.
Consequently, these fluctuations in sales can cause significant
fluctuations in our gross margin as well as quarterly earnings.
Gross margin has also varied in the past and may continue to vary
significantly in the future depending on the mix of products sold, our capacity
to introduce new products with higher margins, our ability to achieve economies
of scale in our production process, the impact of large orders with reduced
margins, fluctuations in raw materials costs and increases in personnel costs.
For nine of the ten quarters, the gross margins were in a range of 62.3% to
68.1%. Gross margins for the quarter ended May 31, 1998 was 60.5%, due to the
delivery in March 1998 of a large order of portable products with lower margins.
30
<PAGE> 36
As a result of the factors listed above and elsewhere in the "Risk Factors"
section of this prospectus, it is possible that in some future periods our
results of operations may fall below our expectations as well as the
expectations of public market analysts and investors. In addition, we plan to
significantly increase our operating expenses to expand our manufacturing, sales
and marketing, customers support, administration and research and development
activities. If sales fall below our expectations in any quarter and we are
unable to reduce our spending appropriately, our operating results would be
lower than expected.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have financed operations and met our capital
expenditure requirements primarily through cash flows from our operations,
research and development tax credits and government grants. Cash flows from
operating activities were $4.6 million for fiscal 1997, $3.2 million for fiscal
1998 and $3.7 million for fiscal 1999. Cash flows used for operating activities
were $2.1 million for the six months ended February 29, 2000, reflecting the
large increase in accounts receivable and inventories. The increase in accounts
receivable is in line with the increase in sales in the quarter ended February
29, 2000. Increased levels of inventory were required to service this growth in
sales as well as the expected growth in future sales. As at February 29, 2000,
we had cash and cash equivalents of $539,000 and working capital of $13.6
million.
Net cash used in investing activities was $1.6 million for fiscal 1997,
compared to $2.0 million for fiscal 1998, $1.2 million for fiscal 1999 and $2.3
million for the six months ended February 29, 2000. The cash used in fiscal
1997, 1998 and 1999 was primarily for capital expenditures and short-term
investments. The cash used for the six months ended February 29, 2000 was
primarily for capital expenditures and the Nortech Fibronic Inc. acquisition. On
February 4, 2000, we acquired Nortech Fibronic Inc., for a total consideration
of approximately C$4.1 million of which approximately C$3.0 million was paid in
cash, C$800,000 of which was paid by the issuance of Class "G" shares of EXFO,
which will be converted into preferred shares series 1 prior to the closing of
this offering and of which C$200,000 was paid by a non-interest-bearing
debenture payable in November 2000. We purchased on June 7, 2000 a building
located in Vanier, Quebec for C$4.9 million financed through a C$3.5 million
bank loan and our available credit facility. We expect to make additional
capital expenditures in fiscal 2000 of approximately $5.8 million, primarily for
improvements to the building being acquired, the acquisition of production
equipment, the acquisition of research and development equipment and new
management information systems.
Net cash used in financing activities are primarily due to dividends paid
in fiscal 1999 and fiscal 1998 and to dividends paid and repayments of bank
advances and long-term debt in fiscal 1997. The total amount of bank advances
outstanding increased to $5.4 million as at February 29, 2000 compared to nil at
August 31, 1999. This substantial increase is due in part to the acquisition of
Nortech Fibronic Inc., for which we used approximately $2.1 million under our
operating loan facility. The balance of the increase results form advances drawn
under our available lines of credit in order to finance working capital
requirements, namely inventories and accounts receivable. In addition, we
declared a dividend on June 27, 2000 of C$26.0 million (approximately $17.5
million). We do not expect to pay any additional dividends for at least the next
three years.
Pursuant to an agreement with the Quebec Minister of Industry, Commerce,
Science and Technology, the Minister agreed to provide grants for job creation
up to a maximum of approximately C$2.2 million over the period from January 1,
1998 through December 31, 2002. These grants are payable based on the number of
full time jobs created during the period. In addition the Minister agreed to
contribute grants, up to a maximum of C$600,000 towards interest costs incurred
for the period from January 1, 1998 through December 31, 2002. Among other
conditions, each job created must be maintained for a minimum period of five
years from the date of hire. Should this or other conditions not be met, the
Minister may enforce various recourse options including suspension or
cancellation of the agreement or repayment of amounts received by us. See "Risk
Factors -- We may not be able to sustain our research and development activities
as our research and development credits and grants decline" and "Risk Factors --
Unexpected declines in our research and development credits and grants may have
an adverse effect on our business."
We have available credit facilities that provide for advances of up to
C$11.5 million under lines of credit and C$3.0 million as an operating loan.
These facilities, which must be renewable annually, bear interest at margins
31
<PAGE> 37
over prime rate ranging between nil and 1.25%. Accounts receivable, inventories
and all tangible and intangible assets have been pledged as security against
these facilities. As at February 29, 2000, an amount of C$7.7 million has been
drawn against the facilities. The interest rate of credit facilities drawn in
Canadian dollars is the Canadian prime rate (7.5% as at June 7, 2000) and the
credit facilities drawn in United States dollars is the U.S. prime rate (10.0%
as at June 7, 2000).
We expect to devote substantial resources to continue our research and
development efforts, expand our sales, support, marketing and product
development organizations, expand internationally and build the infrastructure
necessary to support our growth. As a result, we anticipate that capital
expenditures will continue to increase in absolute dollars for at least the next
three years. We believe that the net proceeds from this offering, together with
our current cash and cash equivalents, will be sufficient to fund our operations
for at least the next 12 months. Prior to or following the end of this period,
we may need or choose to raise additional funds or seek other financing
arrangements in order to facilitate more rapid expansion, including significant
increases in personnel and office facilities, to develop new or enhance existing
products or services, to respond to competitive pressures, or to acquire or
invest in complementary businesses, technologies, services or products. In the
event that additional financing is required, we may not be able to raise it on
acceptable terms or at all.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard, SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard, which must be applied
prospectively, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Under SFAS No. 133, all of our forward exchange
contracts would be carried on the balance sheet at fair value and any unrealized
gains or losses at each balance sheet date would be included in other
comprehensive income.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB")101, "Revenue Recognition." SAB 101, as amended by
SAB 101A, is effective commencing in the first fiscal quarter of the first
fiscal year beginning after December 15, 1999. The implementation of this SAB is
not expected to have any material effect on our financial statements or revenue
recognition policy on future periods.
MARKET RISK
Currency Risks
We are exposed to currency risk as a result of our export of products
manufactured in Canada, substantially all of which are denominated in U.S.
dollars. Our exposure to foreign exchange rate fluctuations is partially hedged
by operating expenses of our U.S. and European subsidiaries and the portion of
our raw materials purchased which are denominated in U.S. dollars. In addition,
we frequently enter into forward exchange contracts to sell U.S. dollars at
fixed forward rates in exchange for Canadian dollars in order to manage the risk
of exchange rate fluctuations between the Canadian and U.S. dollars on cash
flows related to anticipated future revenue streams and firmly committed future
sales transactions denominated in U.S. dollars. We do not enter into forward
exchange contracts for trading purposes.
The following table summarizes the forward exchange contracts in effect as
at February 29, 2000, classified by expected transaction dates, none of which
exceed two years. The table below presents the notional amounts of such
contracts (in thousands of dollars) along with the weighted average contractual
forward rates under such contracts. The notional amounts of such contracts are
used to calculate the contractual payments to be exchanged under these
contracts.
<TABLE>
<CAPTION>
YEARS ENDING
AUGUST 31,
----------------
2000 2001
------ ------
<S> <C> <C>
Forward exchange contracts to sell U.S. dollars in exchange
for Canadian dollars
Contractual amounts....................................... $3,000 $4,600
Weighted average contractual exchange rates............... 1.5010 1.4898
------ ------
</TABLE>
32
<PAGE> 38
Interest Rate Risks
The table below presents information about our financial instruments that
are sensitive to changes in interest rates, including debt instruments. For debt
instruments, the table presents the expected cash flows related to future
principal repayments and the related interest rates. Debt instruments that are
due on demand have been assumed to fall due during the year ending August 31,
2000. The table presents such debt instruments, which are all denominated in
Canadian dollars, presented in U.S. dollars using the prevailing exchange rate
as at February 29, 2000 of $1.00 = C$1.4403. Effective interest rates disclosed
below for instruments which bear interest at variable rates are those in effect
as at February 29, 2000.
<TABLE>
<CAPTION>
YEARS ENDING AUGUST 31,
------------------------------
2000 2001 2002 2003
------ ---- ---- ----
(IN THOUSANDS EXCEPT
PERCENTAGE)
<S> <C> <C> <C> <C>
Non-interest-bearing debt (excluding trade liabilities and
deferred grants, including mandatorily redeemable
preferred shares)........................................ $ 711 $ 16 $ 16 --
Loan from company under common control..................... $1,388 -- -- --
Effective interest rate.................................. 7.75%
Variable interest rate debt................................ $ 98 $182 $129 $36
Effective interest rate.................................. 8.28%
Bank advances.............................................. 5,351 -- -- --
Effective interest rate.................................. 6.83%
</TABLE>
Fair Value
As at February 29, 2000, financial instruments whose fair value approximate
their carrying value include cash and cash equivalents, accounts receivable,
bank advances, accounts payable and accrued liabilities, dividends payable,
mandatorily redeemable preferred shares, loan from a company under common
control, and long-term debt.
The fair value of the forward exchange contracts as at February 29, 2000,
based on the prevailing exchange rate at that date of $1.00 = C$1.4403, amounted
to C$10.9 million compared to a contractual value of C$11.4 million, resulting
in an unrealized gain of C$409,800 (approximately $285,000).
33
<PAGE> 39
CORPORATE INFORMATION
CORPORATE HISTORY
EXFO was incorporated on September 18, 1985 pursuant to the Canada Business
Corporations Act. Since that date, we have amended our articles on various
occasions:
- on August 9, 1996, to add the English version of EXFO Electro-Optical
Engineering Inc. to our name;
- on August 31, 1998, to change our name from Ingenierie Electro-Optique
EXFO Inc./EXFO Electro-Optical Engineering Inc. to EXFO Ingenierie
Electro-Optique Inc./EXFO Electro-Optical Engineering Inc. and to create
the Class "F" shares;
- on September 2, 1998, to effect a split of our Class "A" shares;
- on September 3, 1998 to effect a split of our Class "E" shares and to
convert our Class "E" shares into Class "A" shares;
- on February 7, 2000, to create our Class "G" shares;
- on April 13, 2000, to amend our articles of incorporation in order to:
-- repeal pre-emptive rights in favor of our shareholders;
-- repeal our right to have a lien over shares of shareholders who are
indebted to us;
-- amend the rights of the holders of Class "F" shares; and
-- repeal rights of first refusal in favor of our shareholders; and
- on June 8, 2000, to amend our articles of incorporation in order to:
-- eliminate the private-company restrictions; and
-- provide for a board of directors of a minimum of three and a maximum
of 12 directors.
Immediately prior to this offering, we will file articles of amendment to
create a class of multiple voting shares, a class of subordinate voting shares
and a class of preferred shares issuable in series and to exchange the Class "A"
shares into multiple voting shares, the Class "F" shares into subordinate voting
shares and the Class "G" shares into preferred shares series 1.
In 1996, GEXFO Investissements Technologiques inc., a company controlled by
Germain Lamonde, acquired a majority interest in GAP Optique S.A., a Swiss
limited liability company carrying out activities in the field of fiber-optic
testing and measurement technology. In 1996, GEXFO, EXFO, GAP Optique and the
University of Geneva entered into agreements whereby GAP Optique, EXFO and GEXFO
obtained worldwide exclusive rights to commercially develop, manufacture and
market specified technologies relating to fiber-optic telecommunications testing
and measurement instruments developed by the University of Geneva. In addition,
GAP Optique, EXFO and GEXFO acquired priority rights over the marketing of
fiber-optic telecommunication testing and measurement instruments prototypes
designed by the University of Geneva. This agreement was renegotiated under
similar terms and conditions in 1999 for a five-year term. On June 1, 2000, we
acquired the 85% interest held by GEXFO in GAP Optique for a consideration equal
to its book value of approximately $16,000 and GEXFO transfered all of its
rights in the agreements to us.
In February 2000, we acquired all of the shares of Nortech Fibronic Inc., a
company specializing in fiber-optic testing and temperature-sensing for a total
consideration of $2.8 million of which $2.1 million was paid in cash. We also
issued C$800,000 (approximately $540,000) of Class "G" shares and a debenture of
C$200,000 (approximately $135,000) bearing no interest and payable on November
30, 2000.
CAPITAL REORGANIZATION
As of June 27, 2000, our authorized share capital was composed of an
unlimited number of Class "A" shares, Class "B" shares, Class "C" shares, Class
"D" shares, Class "E" shares, Class "F" shares and Class "G" shares, of which
38,000,000 Class "A" shares, 707,264 Class "F" shares and 800,000 Class "G"
shares were issued and outstanding.
Immediately prior to this offering, we will modify our authorized share
capital to:
- an unlimited number of subordinate voting shares without par value;
- an unlimited number of multiple voting shares without par value; and
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<PAGE> 40
- an unlimited number of preferred shares without par value, issuable in
series.
As a result of the reorganization:
- the 38,000,000 Class "A" shares will be exchanged into 38,000,000
multiple voting shares;
- the 707,264 Class "F" shares will be exchanged into 707,264 subordinate
voting shares; and
- the 800,000 Class "G" shares will be exchanged into 800,000 preferred
shares series 1.
The exchange of Class "A" shares into multiple voting shares, of Class "F"
shares into subordinate voting shares and of Class "G" shares into preferred
shares series 1 is part of the capital reorganization and will not involve any
disbursement of funds. Likewise, the conversion of the preferred shares series 1
will not involve any disbursement of funds and is based on a predetermined
formula. See "Description of Share Capital -- Preferred Shares Series 1."
CORPORATE STRUCTURE
The following chart presents our corporate structure, the jurisdiction of
incorporation of our subsidiaries and the percentage of shares that we hold in
those subsidiaries.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
--------------------
EXFO ELECTRO-OPTICAL
ENGINEERING INC.
CANADA
--------------------
|
-------------------------------------------------------------------
| 85% | 100% | 100%
---------------------- ---------------------- ---------------------
GAP Optique S.A. GEXFO Distribution Nortech Fibronic Inc.
(Switzerland) Internationale Inc. (Canada)
(Quebec)
---------------------- ---------------------- ----------------------
| |
----------------------------- |
| | |
| 100% | 100% | 100%
---------------------- ---------------------- ----------------------
EXFO Europe S.A.R.L. EXFO America Inc. Nortech Fibronic Inc.
(France) (Delaware) (Texas)
---------------------- ----------------------- ----------------------
</TABLE>
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<PAGE> 41
BUSINESS
OVERVIEW
We are a leading designer, manufacturer and marketer of fiber-optic test,
measurement and monitoring instruments for the telecommunications industry. We
believe that we are the largest manufacturer of test, measurement and monitoring
instruments that is exclusively dedicated to fiber optics. Fiber-optic test,
measurement and monitoring equipment is mainly used by optical network carriers,
manufacturers, and research and development laboratories to measure the physical
characteristics of optical fiber and related hardware.
EXFO was founded in 1985 in Quebec City. We have grown from a two-employee
supplier of portable handheld test instruments to a leading designer,
manufacturer and marketer of an extensive line of fiber-optic test, measurement
and monitoring instruments. We currently employ more than 650 employees and our
products are distributed in over 70 countries. We have been profitable each year
of our 15-year existence.
We develop products principally for two markets. Our Portable and
Monitoring Division provides solutions primarily to telecommunications carriers,
cable television companies, public utilities, private network operators, as well
as third-party installers and equipment rental companies. Our Scientific
Division, established in 1996, designs an extensive line of more sophisticated
and higher performance instruments for manufacturers of optical components,
value-added optical modules and optical networking systems. Our Scientific
Division also designs products for research and development markets. We leverage
technologies that we develop for our Scientific Division into products for our
Portable and Monitoring Division.
In 1999, we released the first version of our remote fiber test system,
which surveys and monitors a fiber-optic network. Our remote fiber test system
consists of rack-mounted remote test units, which are strategically deployed
along a fiber-optic network and a test system controller that retrieves
information from as many remote test units as required. The test system
controller is typically located inside a network operations center. The
information obtained from these remote test units is combined with data from a
geographic information system in our software to pinpoint the exact location of
a system failure.
We have received 40 industry and commerce awards. Every year since 1995, we
have been recognized as one of the 50 Best-Managed Private Companies in Canada
by Arthur Andersen Consulting and the Financial Post. We have maintained ISO
9001 certification since 1994.
INDUSTRY OVERVIEW
Optical Networking Market
The past decade has witnessed an explosive growth in the volume of data
traffic largely due to the soaring popularity of the Internet and related
bandwidth-intensive applications. According to the Angus Reid Group, a leading
market research company, the number of Internet users around the world is
expected to increase from 300 million in early 2000 to 1 billion by 2005. Ryan,
Hankin & Kent, a leading telecom market research firm, forecasts that Internet
traffic will increase from 350,000 terabytes, or trillions of bytes, per month
at the end of 1999 to more than 15 million terabytes per month in 2003,
representing a compound annual average growth rate of 156%.
The dramatic increase in Internet users and traffic has created a
tremendous need for high-bandwidth communications networks. To meet this
increasing demand for bandwidth, many communications service providers are
designing and installing new networks based on optical fiber, deploying
additional fiber within their existing networks, or using advances in optical
technology such as dense wavelength division multiplexing, or DWDM. DWDM
involves combining beams of light of slightly different wavelengths through a
single fiber, with each wavelength carrying its own stream of information. This
technique requires separate laser sources for each signal or channel and more
complex equipment to control and amplify the signal in the network. Some DWDM
systems can carry as many as 160 separate channels per optical fiber. According
to Ryan, Hankin & Kent, the global DWDM and optical networking market is
expected to increase from $13 billion in 2000 to $41 billion in 2003.
Until recently, most of the fiber deployed had been dedicated to long-haul
and inter-office networks. The fiber-optic industry, however, is beginning to
shift its focus towards more complex metropolitan networks for
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<PAGE> 42
business-to-business applications and fiber-to-the-curb networks for residential
applications. These networks require more complex optical systems than long-haul
and inter-office networks.
Manufacturers are finding it difficult to keep pace with carrier demand for
optical fiber and optical networking equipment. At the end of 1999, 22.7 million
kilometers of fiber had been deployed in North America alone and this figure is
expected to reach 68.1 million kilometers by 2004, according to Kessler
Marketing Intelligence, a leading fiber-optic market research company. Corning
Incorporated, a world-leading manufacturer of optical fiber, announced earlier
this year that it plans to invest $750 million in order to expand its optical
fiber manufacturing capacity by 50%. Nortel Networks Corporation, a leading
supplier of DWDM equipment, announced in November 1999 that it will invest $400
million to triple its manufacturing capacity of high-performance optical
Internet systems.
Optical Test, Measurement and Monitoring Equipment Market
Conventional test, measurement and monitoring instruments used by
telecommunications carriers and manufacturers of communications equipment were
designed for electrical transmission systems and are unsuitable for optical
networking. Unlike traditional electrical transmission systems, which transmit
electrical signals along copper wires, fiber-optic transmission systems use
pulses of light along glass or plastic fiber, often referred to as optical
fiber. When light travels along optical fiber and through the optical components
and systems that link, optical fibers together, it is subject to unwanted
effects such as reflection, attenuation, noise and various types of dispersion,
all of which degrade signal quality and reduce transmission performance.
Fiber-optic test, measurement and monitoring equipment is critical for measuring
these effects and helping communications carriers and manufacturers of optical
components, value-added optical modules and optical networking systems ensure
network performance and reliability. The following are the main uses for
fiber-optic test, measurement and monitoring equipment:
- NETWORK INSTALLATION. Carriers and third-party network installers use
test and measurement instruments to ensure the quality of networks as
they are being deployed.
- NETWORK MAINTENANCE AND REPAIR. Carriers and third-party service
companies use test and measurement instruments to diagnose and repair
problems within an optical network.
- NETWORK MONITORING. By continually monitoring the quality of an optical
signal as it passes through a network, carriers can reduce downtime
through faster detection and diagnosis of network problems.
- MANUFACTURING. Manufacturers in the fiber-optic industry use test
measurement equipment during production and assembly as well as for
quality control and conformity testing.
- RESEARCH AND DEVELOPMENT. Developers and manufacturers in the
fiber-optic industry require sophisticated test and measurement
equipment during the prototyping stage of product development.
MARKET OPPORTUNITY
Demand for fiber-optic test, measurement and monitoring equipment is driven
by the following key trends:
INCREASED PRODUCTION OF CABLE AND FIBER. Cable and fiber manufacturers are
increasing production of optical fiber in order to meet the growing demand from
telecommunications carriers. Manufacturers of optical fiber require additional
test and measurement equipment to fulfill their product development and quality
control requirements. Fiber and cable manufacturers require improved test and
measurement instruments as they develop better products to respond to the demand
for increased transmission speeds and higher DWDM channel counts.
QUALIFICATION OF EXISTING PLANTS AND FURTHER DEPLOYMENT OF FIBER. Carriers
are upgrading their existing fiber networks, deploying more fiber and using more
advanced optical transmission technologies, such as DWDM, to handle the
increased demand for bandwidth. Test, measurement and monitoring equipment is
required for the qualification of existing fiber plants; for the installation,
maintenance and troubleshooting of newly deployed fiber and for the installation
and verification of DWDM networks.
MORE COMPLEX OPTICAL NETWORKS. The trend towards more complex optical
networks has rendered test, measurement and monitoring increasingly important.
First-generation fiber-optic networks carried only one wavelength and demanded
simpler loss measurements. Rapid advances in fiber-optic data transmission are
producing networks with higher data speeds, higher power transmission lasers,
greater distances without
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<PAGE> 43
reamplification, more narrowly spaced DWDM channels and higher channel counts.
Optical equipment used in these new and more complex networks requires the
verification of several parameters for each DWDM wavelength and has created a
demand for more complex test, measurement and monitoring instruments.
CONTINUED WORLDWIDE TELECOMMUNICATIONS DEREGULATION. Continued
deregulation of telecommunications markets has forced many carriers to upgrade
their networks to compete for customers. In order to compete, carriers must
offer services to provide increased bandwidth with greater reliability, while at
the same time reducing costs. To respond to these market conditions, carriers
are increasingly using sophisticated test, measurement and monitoring equipment
to ensure network quality, as fiber networks are being deployed and to reduce
restoration time for operating networks.
GROWING USE OF CUSTOMIZED AUTOMATED TEST SYSTEMS. Optical components,
value-added optical modules and optical networking systems are typically
assembled and aligned by hand. This task involves the extensive use of optical
measurement during the manufacturing and assembly process as well as during
final testing and certification. As systems become more complex, the number of
individual tests that must be performed increases dramatically. Testing and
certification procedures represent a significant portion of the total time
required to manufacture optical components, value-added optical modules and
optical networking systems. As a result, manufacturers are continually looking
for ways to automate their test and certification procedures. Although optical
components, value-added optical module and optical networking systems
manufacturers have typically integrated commercially available test instruments
into customized, automated test systems in-house, they are increasingly turning
to third-party test and measurement manufacturers to provide innovative
solutions, so that they can focus scarce technical resources on product
development and production.
MORE STRINGENT INDUSTRY REQUIREMENTS. Industry standards committees, such
as the Telecommunication Industry Association, International Electrotechnical
Commission and International Telecommunications Union, are adopting more
stringent technical specifications to address increased transmission rates,
greater power and higher channel counts being demanded by the industry.
Manufacturers of optical components, value-added optical modules and optical
networking systems, as well as network carriers and installers, all require
improved test, measurement and monitoring solutions to meet the demands of
advanced optical networks.
THE EXFO SOLUTION
We believe that we offer the most extensive range of products in the
fiber-optic test, measurement and monitoring industry. Our success has been
largely based on our exclusive focus on fiber-optic test, measurement and
monitoring instruments. We have developed optical technologies and advanced
testing algorithms that we leverage across our various product lines.
The success of our solution is based on the following key attributes:
MODULAR SYSTEM DESIGN. In 1996, we introduced the first products designed
around our modular system design. These system designs consist of Windows-based
platform that can accommodate several data acquisition test modules. We have
since developed products for each of our divisions based on the same modular
design. Our modular design provides the following advantages:
- Unlike stand-alone units, new test modules can be rapidly developed to
address the changing requirements of the industry.
- As customers' testing requirements change, they can purchase additional
modules that are compatible with their previously purchased platforms,
thus protecting their initial investments.
- Our standard graphical user interface reduces training costs because
customers are familiar with previously acquired software products.
- The flexibility of our systems allows customers to develop customized
and automated solutions directed at specific testing requirements.
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The diagram below illustrates our modular system design:
LOGO
HIGH DEGREE OF TECHNOLOGICAL INNOVATION. We have continually been at the
forefront of fiber-optic test, measurement and monitoring technology. For
example, we were the first in our industry to develop and commercialize a number
of fiber-optic test and measurement products:
- All-in-one loss test set. In 1992, we launched the first handheld unit
for automated bidirectional loss testing. This rugged and compact loss
test set combined four high-performance instruments in a single unit.
The all-in-one loss test set, based upon our patented technology,
allowed the user to save a considerable amount of time in the field. In
1997, we released a second-generation of this product which combines six
instruments in a single unit.
- Portable modular platform. In 1996, we released the FTB-300 Universal
Test System, which was the first portable test platform in our industry
based on a modular design. This portable modular platform, which
includes multiple optical testing technologies, enables the user to
carry out numerous test operations for outside plant installation,
maintenance and troubleshooting applications.
- Portable polarization mode dispersion analyzer. In 1996, we introduced
the industry's first handheld polarization mode dispersion analyzer.
Polarization mode dispersion is a physical phenomenon inherent to
optical fiber and other optical components that causes a spreading of
light pulses as they travel along a fiber, thus degrading the
transmission signal.
PRODUCTS OF HIGH QUALITY. Product quality is an integral part of our
solution. We have implemented a comprehensive quality assurance program, which
has been certified ISO 9001 since 1994. Our products meet industry standards,
such as those set by Telcordia, formerly Bellcore, an industry-leading standards
body. During manufacturing, each product has a related quality assurance plan,
with rigorous checkpoints, to reduce defects to a minimum. More than 40 people
are dedicated to various tasks in the quality assurance process including
quality control, conformity testing, product documentation, product improvement,
regulatory compliance, metrology and calibration.
SUPERIOR CUSTOMER SUPPORT. We use highly qualified and specialized
internal groups to offer pre-sales evaluation, installation, channel and
customer training, communications and post-sales support. We believe that this
approach provides us with an advantage over our competitors, who often outsource
some of these functions. Our inside sales group is mainly responsible for
supporting our sales force, selecting instruments that best match our customers'
testing, measurement and monitoring needs and for providing detailed quotations.
Our customer support group manages three main tasks: order processing, technical
support and training and calibration and repair services. Furthermore, our
communications and marketing group, which operates like an internal advertising
agency, educates our customers and our sales force by providing detailed
marketing and technical information. Literature includes specification sheets,
application notes, media releases, product catalogues and a bi-monthly corporate
newsletter. Finally, our writing services group, which consists of more than 15
university-trained professionals, provides technical writing for product
instruction manuals and online help. We translate most of our documentation in
seven different languages.
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OUR STRATEGY
We intend to expand our leadership position in the fiber-optic test,
measurement and monitoring industry and to increase our market share through the
following initiatives:
EXPAND TECHNOLOGICAL LEADERSHIP. We believe that our ultimate success will
depend on our ability to introduce enhanced products that meet the changing
needs of our customers. We, therefore, will continue to invest heavily in
research and development. We have increased gross research and development
expenditures from 11.2% to 15.2% of total sales between the years ended August
31, 1997 and August 31, 1999 and we intend to spend between 12% to 16% of our
sales on research and development during the next three years. We also intend to
dedicate more than 25% of our employees to research and development, including
an advanced research group that carries out research activities, monitors
technological trends in the industry and maintains links with numerous
universities, industry associations and standards bodies.
We also intend to maintain our profile as experts in the field of
fiber-optic test, measurement and monitoring instrumentation through activities
such as publishing our DWDM reference guide, a widely distributed reference tool
and presenting scientific papers at industry conferences, such as the Optical
Fiber Conference and the National Fiber-Optic and Engineering Conference.
INVEST IN STRATEGIC SECTORS. We have established a structured review
process to ensure that our research and development activities are aligned with
our corporate strategy. This rigorous review process has led us to focus on the
following strategic sectors:
- DWDM Market. We recently launched a number of DWDM testing solutions,
including optical spectrum analyzers, tunable laser sources and fully
automated test systems to capitalize on the DWDM market opportunity. We
believe that we are well positioned to take advantage of this growing
market because we offer one of the most comprehensive selections of DWDM
test products. We intend to further improve our DWDM testing solutions
to address the requirements of systems requiring higher channel counts
and increased transmission speeds.
- Network Monitoring Market. Carriers have become increasingly concerned
about the loss of revenue related to system downtime, especially with
the widespread deployment of DWDM networks that concentrate data traffic
along fewer fibers. As a result, carriers need to automatically carry
out network monitoring in real time to locate faults and degradation
points along a network in order to prevent system downtime or shorten
restoration time. We have developed our remote fiber test system to
address the needs of this market. As carriers' optical networks become
more complex, we intend to upgrade our remote fiber test system by
providing features like wavelength monitoring, which enables the
analysis of power and drift of each wavelength and by supplying improved
software for better integration with carriers' existing operational
support systems.
- Scientific Product Market. We believe that several new market
opportunities exist for our family of scientific products, especially
with the increasing reliance of optical component, value-added optical
module and optical networking system manufacturers on automated test,
measurement and monitoring equipment. We intend to provide manufacturers
with both off-the-shelf and customized test solutions. We have
established a team of 13 product managers in this division, consisting
of engineers and scientists, several of whom hold master's or doctorate
degrees in Optical Sciences or Electrical Engineering.
LEVERAGE OUR MODULAR DESIGN. The modularity and compatibility of our
Windows-based platforms enable us to offer the same instrument design to as many
as three different market segments with a single research and development
project. This practice lessens the number of different designs, including
optical, mechanical, electronics and software, that we must develop and
manufacture. We intend to capitalize on the flexible architecture of our
Windows-based systems to expand our solutions portfolio and to offer specialized
products to specific markets. By being able to provide new functionality through
the design of a new module rather than through the design of a complete
instrument, we can be quicker to market with new testing technologies and
provide more specialized testing solutions.
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EXPAND SALES AND MARKETING EFFORTS. We have adopted a focused sales and
marketing approach to improve service to existing customers and to pursue new
customer opportunities. We intend to:
- expand our direct sales force by opening additional international
offices;
- bolster our key account management program by hiring application
engineers dedicated to large system manufacturers that are current
customers, such as Nortel Networks Corporation, Lucent Technologies,
Inc. and Alcatel Optronics;
- increase our network of distributors worldwide;
- open additional service centers in selected, high-growth markets to
support our sales activities with calibration and repair services; and
- deploy a customer relationship management software initiative to keep
better track of our customers' individual demands and to store
information about potential customer opportunities, profiles and
histories.
REDUCE DELIVERY LEAD TIMES. The majority of our sales are derived from
complex products that are assembled to order. We maintained an average delivery
lead time of 30 calendar days for our products during the twelve months ended
May 31, 2000. However, in recent weeks we have experienced an increase in
delivery lead times. We believe that our delivery lead times are shorter than
most of those of our competitors. To further reduce our delivery lead times, we
have adopted a number of measures:
- Adhere to Vertically Integrated Manufacturing. We handle all major
manufacturing operations in-house because we generally produce short
runs of complex products. We believe it is a competitive advantage to
have our manufacturing operations centralized since we have greater
flexibility and better control over our delivery lead times.
- Increase Manufacturing Capacity. We recently purchased a building of
approximately 112,000 square feet and we intend to make available 60,000
square feet of this additional space for manufacturing. This facility,
once equipped, should increase our manufacturing floor space by 167%.
- Implement Enterprise Resource Planning and Supply-Chain Management
Software Tools. We intend to improve our information systems
environment by implementing enterprise resource planning and
supply-chain management software tools. This will enable us to enhance
our forecasting, planning and scheduling and procurement activities.
PURSUE COMPLEMENTARY ACQUISITIONS. We believe that market fragmentation in
the test, measurement and monitoring industry creates opportunities for
consolidation. We plan to pursue strategic acquisitions that will provide us
with additional key technologies, complement our product offerings, increase our
sales channels and add to our overall level of expertise.
PRODUCTS
Our products are designed for the fiber-optic test, measurement and
monitoring industry. We have adapted our product offerings to meet the needs of
two main markets: portable and monitoring products for the carrier market and
scientific products for the optical component, value-added optical module and
optical networking system manufacturer market.
The carrier market primarily encompasses the needs of telecommunications
carriers, such as AT&T Corporation, Bell Atlantic Corporation, GTE Corporation
and TelMex S.A. de C.V., cable television companies, public utilities, private
network operators, as well as third-party network installers and equipment
rental companies. This market requires rugged, field-portable and easy-to-use
equipment.
The scientific product market includes optical component and value-added
optical module companies such as E-Tek Dynamics, Inc. and JDS Uniphase Inc.;
optical system manufacturers such as Nortel Networks Corporation and Lucent
Technologies, Inc.; optical fiber and cable manufacturers such as Corning
Incorporated, Lucent Technologies, Inc. and Sumitomo Electric Lightwave Corp.;
as well as university and government research laboratories.
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At the core of our test, measurement and monitoring instruments are our
FTB-300 Universal Test System (UTS) and IQ-200 Optical Test System (OTS)
products. Our FTB-300 UTS provides carriers with a simple, yet efficient way to
perform multiple, advanced test operations for installation, maintenance and
troubleshooting applications. Our IQ-200 OTS is a scalable unit that is suited
for manufacturing, laboratory engineering and research applications. The added
benefit of our IQ-200 OTS is that manufacturers can design their own automated
test setup or we can customize a setup for them. Our FTB-300 UTS and IQ-200 OTS
platforms are fully supported by integrated and highly intuitive graphical user
interfaces, enabling the user to easily store, handle and retrieve a large
amount of data.
At the Optical Fiber Conference in March 2000, we introduced 13 new
products, including optical spectrum analyzer test modules for our FTB-300 UTS
and IQ-200 OTS platforms, widely tunable laser sources for DWDM testing,
automated test systems for DWDM optical components and value-added optical
modules, a single-slot optical time domain reflectometer platform and related
test modules, as well as high-power and low-polarization sensitivity power
meters.
The following table summarizes the principal types of instruments we
provide, their typical applications and the format in which we offer them:
<TABLE>
<CAPTION>
FORMAT
--------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION PORTABLE SCIENTIFIC
--------------- -------------------------------------------------------- ---------------------- -------------------------
FTB 300 IQ200 BENCHTOP
UTS MODULES HANDHELD OTS MODULES INSTRUMENTS
----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Optical time domain Like a radar, it measures the time of arrival of X X
reflectometers reflections of an optical signal to determine the
(OTDRs) distance to the breaks or points of excessive loss in a
fiber network.
Optical spectrum Produces a graphical representation of power versus X X
analyzers wavelength for an optical signal. Useful for measuring
the drift, power and signal-to-noise ratio for each
wavelength in a DWDM system.
Optical power meters Measures the power of an optical signal. It is the basic X X X X
tool for the verification of transmitters, amplifiers
and optical transmission path integrity.
Widely tunable Can produce laser light across a broad range of X X
lasers wavelengths. Used to test DWDM components and
value-added optical modules.
Narrowly tunable A laser that can be precisely tuned to simulate a DWDM X
lasers light sources. Used primarily in testing optical
amplifiers.
Polarization mode Measures the dispersion of light that is caused by X X
dispersion polarization. Generally used to determine the bandwidth
analyzers capacity of fiber and cables.
Multi-wavelength Measures the power and drift for multiple wavelengths in X X
meters a DWDM system.
Variable optical Used in network simulation setups to provide calibrated X X X
attenuators variable reduction of the strength of an optical signal.
Polarization Measures the difference in loss of power for the X
dependent loss different states of polarization.
meters
Loss test sets Integrates a power meter and a light source to manually X X X
or automatically measure the loss of optical signal
along a fiber.
Stable light sources Emitting diode or lasers used in connection with a power X X X X
meter to measure signal loss.
Optical fiber Measures the geometric and light guiding properties of X
parameters an optical fiber. Used in new fiber research and
analyzer development and quality control applications.
Optical amplifier Amplifiers which boost the power of source lasers. Used X
for the testing and calibration of test systems.
Optical switches Provides switching between fibers. Used to provide X X
flexible and automated test setups such as the
measurement of multiple fibers or components with
multiple ports with one instrument.
Optical power Provides a highly accurate and traceable measurement of X
reference module power for the calibration or verification of other power
measurement instruments.
</TABLE>
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<TABLE>
<CAPTION>
FORMAT
--------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION PORTABLE SCIENTIFIC
--------------- -------------------------------------------------------- ---------------------- -------------------------
FTB 300 IQ200 BENCHTOP
UTS MODULES HANDHELD OTS MODULES INSTRUMENTS
----------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Broadband source Used for testing wavelength dependent behavior of DWDM X
optical components and value-added optical modules.
Talk sets A device which attaches to an optical fiber and serves X X
as a temporary voice link facilitating coordination of
work among installation crews.
Optical return loss Combines a laser and a power meter to measure the amount X X X X
meters of potentially degrading back reflection.
Visual fault A visible laser that can be connected to an optical X X
locators fiber network to help locate breaks or points of
excessive loss.
Live fiber detector Clips on to a fiber and is used to detect the presence X
and direction of a signal without interrupting the
traffic.
Clip-on coupling Clips to an optical fiber and allows non-invasive X
device testing.
</TABLE>
Portable and Monitoring Products
We offer an extensive range of products for fiber-optic testing,
measurement and monitoring in the carrier market.
Our test and measurement products are available as handheld test
instruments modular and field-portable platforms. Our handheld instruments are
durable, compact and easy to use. Our portable platforms are rugged,
Windows-based, battery-powered units. Their large, environmentally robust
touchscreens are very practical for field use.
We recently introduced our remote fiber test system known as FiberVisor.
Our FiberVisor consists of rack-mounted remote test units, which are
strategically deployed along a fiber-optic network and a test system controller
that retrieves information from as many remote test units as required. The test
system controller is typically located inside a network operations center. The
information obtained from these remote test units is combined with data from a
geographic information system in our FiberVisor system to pinpoint the exact
location of a system failure and rapidly provide the required information to a
restoration team.
Scientific Products
Our scientific product line is mainly built around our IQ-200 OTS platform
and is available as modules or stand-alone benchtop instruments. This base
platform is a Windows-based system, which includes a Pentium processor, liquid
crystal screen and three slots to accept test modules. This base platform can be
supplemented by as many as four expansion platforms, each capable of housing six
additional modules, which can be connected and controlled to provide additional
functionality and capacity. These expansion platforms can also be controlled via
a personal computer. Altogether, the IQ-200 OTS platform and expansion platforms
can hold as many as 27 modules and test as many as 105 channels.
The modular nature of our IQ-200 OTS platform is adapted for complex
applications involving the synchronized operation of several instruments. For
example, several types of lasers, a variable attenuator and an optical spectrum
analyzer can be combined to automatically characterize a number of key
performance parameters of fiber-optic amplifiers.
Our Scientific Division also addresses testing problems that cannot be
handled by standard modules or stand-alone benchtop instruments. We have
dedicated a team of engineers to develop custom-made, integrated test systems
for customers with specific needs. Some of these integrated test systems, in
turn, are modified and offered as off-the-shelf test systems to suit a wider
range of customers. In addition, we have created a software development kit for
developers who prefer writing their own programs for our instruments. We provide
automated systems for assembly, calibration and environmental testing for
optical components, value-added optical modules and optical networking systems
such as:
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<TABLE>
<S> <C>
- Fiber assembly test system Used for quality assurance testing of optical connector
cables known as jumpers. Jumpers are used to interconnect
optical networking equipment.
- Optical calibration test system Used to calibrate power meters, light sources, variable
attenuators, and optical time domain reflectometers.
- Environmental test system Allows users to perform long term qualification testing of
optical components and value-added optical modules under
varying environmental conditions primarily to ensure
compliance with industry standards.
- DWDM passive component test Provides optical DWDM component and value-added optical
system module manufacturers an automated testing, quality
assurance, and test data storage solution.
- Optical amplifier test system Provides manufacturers of optical amplifiers with an
integrated automated testing, quality assurance, and test
data storage solution.
</TABLE>
RESEARCH AND DEVELOPMENT
We believe that our future success largely depends on our ability to
maintain and enhance our core technology and product functionality. To keep
developing new products and enhancements, it is important that we recruit and
retain highly skilled engineers, scientists and technicians. As of May 31, 2000,
our research and development department included 185 full-time engineers,
scientists and technicians, of whom 36 hold post-graduate degrees. Gross
research and development expenditures for fiscal 1999 were $6.4 million and for
the last six months ended February 29, 2000, they were $4.7 million.
Through a market-oriented, product portfolio review process, we ensure that
our investments in research and development are aligned with our corporate
strategy. This approach enables us to maximize our returns on research and
development investments by focusing our resources on a limited number of
prioritized projects. Quarterly product portfolio review meetings enable us to
choose a realistic, balanced mix of new products and allocate the necessary
resources for their development. All our projects, including those already
underway, are reviewed, given a priority rating and allocated budgets and
resources. Our existing projects can be stopped or substantially redefined if
there have been significant changes in market conditions, or if the project
development schedule or budget has been significantly exceeded.
To manage our research projects once they are underway, we use a structured
management process known as the stage-gate approach. The stage-gate approach is
based on a systematic review of a project's feasibility at various stages of its
life cycle. The following are the key review stages of the stage-gate approach:
- market study and research feasibility;
- product definition;
- development feasibility;
- development;
- qualification; and
- transfer to production.
At each stage, we review our project risks, costs and estimated completion
time. We compare our design to anticipated market needs and ensure that our
project is synchronized with other internal departments and external industry
events.
CUSTOMERS
Since 1985, we have sold more than 85,000 product units to more than 1,500
customers and our products are distributed in over 70 countries. Our customers
include telecommunications carriers, cable television companies, public
utilities, private network operators, third-party installers, equipment rental
companies, as well as optical component, value-added optical module and optical
networking system manufacturers. During fiscal 1999, we delivered products to
more than 650 customers and for the six months ended February 29, 2000, we
delivered products to approximately 480 customers. During fiscal 1999, no single
customer represented more than 6.8% of our sales and for the six months ended
February 29, 2000, no single customer accounted for more than 5.5% of our sales.
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United States and Canada
During fiscal 1999, U.S. and Canadian customers accounted for 49% and 7% of
our sales. For the six months ended February 29, 2000, U.S. and Canadian
customers accounted for 51% and 13% of our sales.
The following table is a list of our top U.S. and Canadian customers based
on gross sales during the last 12 months:
AT&T Corporation
Bell Atlantic Corporation
General Dynamics Corporation
GTE Corporation
Newcourt Technologies Corp
Nortel Networks Corporation
Qwest Communications International, Inc.
SBC Communications, Inc.
US West Communications, Inc.
International
Our international sales are largely handled by a network of distributors
around the world. During fiscal 1999, international customers accounted for 44%
of our sales and for the six months ended February 29, 2000, they represented
36% of our sales.
The following is a list of some international end-users of our products:
Bestel S.A. de C.V. (Mexico)
Daewon Corporation (Korea)
ECI Telecom LTD. (Israel)
FOCI Fiber-Optic Communications Inc. (Taiwan)
Instituto Costarricense de Electricidad (Costa Rica)
Korea Informatics Telesis Inc. (Korea)
Marconi Communications SPA (Italy)
Nortel Networks Corporation (United Kingdom)
Telecom Argentina (Argentina)
Telkom S.A. LTD. (South Africa)
SALES
We sell our fiber-optic test, measurement and monitoring products through
direct and indirect sales networks in the United States and Canada as well as
around the world. We also have an inside sales group, consisting of 10 people,
to meet the needs of existing and new customers. Our inside sales group is
responsible for providing quotations to customers, supporting our sales force
and managing more than 2,000 demonstration units.
United States and Canada Sales
In the United States and Canada, our direct sales network consists of a
vice-president, four national sales managers and 16 regional sales managers and
application engineers, who are located throughout major metropolitan areas. Our
main sales office in the United States is located in Richardson, Texas. We also
maintain sales personnel in the following metropolitan areas: Atlanta, Georgia;
Charlotte, North Carolina; Chicago, Illinois; Columbus, Ohio; Dallas, Texas;
Denver, Colorado; Los Angeles, California; Newark, New Jersey; Wilmington,
Delaware; Montreal, Quebec; Ottawa, Ontario; Toronto, Ontario; and Vancouver,
British Columbia. Our group of 21 sales professionals has an average of 12 years
of experience in the fields of telecommunications, fiber optics, or test,
measurement and monitoring.
In the United States, we have adopted a market-specific sales strategy.
Three different sales organizations have been created to maximize coverage and
penetration of our main markets:
- CARRIER MARKET. This sales team targets customers who own, operate or
install networks as their primary business. This market includes
telecommunications carriers, cable television companies, public
utilities, private network operators, as well as third-party installers
and equipment rental companies. A national sales manager, seven regional
sales managers and a team of independent sales representatives and
distributors concentrate on selling our product line to this customer
market.
- MANUFACTURING/R&D MARKET. This sales team targets customers who
research, develop or manufacture optical networking products. This sales
group consists of one national sales manager and seven regional sales
managers, who oversee a network of independent sales representatives.
Some regional sales managers also have direct responsibility for serving
our larger manufacturing customers. This group also includes field
application engineers because pre-sales requirements, including the
setup of full-scale demonstration units, often require a significant
level of technical on-site expertise. The
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presence of field application engineers enables our regional sales
managers to concentrate on other sales and management activities. This
organizational structure allows us to adequately cover the demands of a
highly technical customer base and to identify and penetrate the large
number of start-up companies in the component manufacturer market.
- PRIVATE NETWORK MARKET. We have recently initiated a program to pursue
additional business opportunities in this market. We anticipate a
growing market with the emergence of Gigabit Ethernet, an advanced
transmission protocol used in high-speed local area network applications
and other optical technologies that will accelerate the delivery of
communications services over optical fiber to the desktop. We recently
hired a national sales manager to develop this market for our products
through new distributor channels.
International Sales
Our international sales network includes a vice-president, three sales
directors covering Europe, Latin America and Asia and eight regional sales
managers. Our direct sales network around the world is supported by a main
office in Paris, France, which maintains our head European sales operations and
also provides repair and calibration services for our European, Middle East and
African customers. We also have established several sales offices in strategic
locations around the world to support our network of distributors and customers.
These offices are located in Brazil, China, Germany, Great Britain, Japan and
Singapore. Finally, we rely on more than 50 distributors to support our
international sales. We feel that the local presence and cultural attributes of
our distributors allow us to better serve our global markets.
MARKETING, COMMUNICATIONS AND CUSTOMER SUPPORT
Marketing
Our marketing group consists of 33 products managers and marketing analysts
who have various degrees in engineering, science and business administration.
Product managers, with the assistance of marketing analysts, are responsible for
all aspects of our marketing program including new product introductions,
definition of new features and functions, pricing, product launches and
advertising campaigns. Marketing analysts help product managers develop
marketing programs with tools such as our Web site, CD-ROMs, advertisements,
mailouts and customer presentations. We follow up our marketing initiatives by
attending industry trade shows. Furthermore, we are implementing a customer
relationship management system to compile market and customer information
including forecasts, leads and competitive data. We use this information to make
strategic business decisions.
Communications
Our communications group, which is mainly composed of commercial writers
and graphic artists, supports our marketing group by producing marketing and
corporate documentation. Literature includes specification sheets, application
notes, media releases, product catalogues, advertising copy and a bi-monthly
corporate newsletter. Our communications group is also responsible for
maintaining and updating our Web site.
Customer Support
We have developed a customer support group that serves customers and
distributors around the world in English, French, Spanish and German. Our
customer support group consists of three distinct units: technical support,
customer service and a repair and calibration authorization service center. A
frequently asked question database is also updated regularly on our Web site.
MANUFACTURING
Manufacturing operations consist mainly of material planning, procurement,
sub-assembly, final assembly, testing, software loading, calibration, quality
assurance and shipping and billing. As of May 31, 2000, we had 258 employees
involved in our manufacturing operations. We have two surface-mount,
circuit-board assembly lines and we occupy more than 36,000 square feet for
manufacturing purposes. Through our purchase of a new facility at 400 Godin
Avenue, we occupy more than 95,000 square feet for manufacturing. Our
manufacturing operations are handled by three inter-related departments:
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<PAGE> 52
- PRODUCTION. Our production department, which is divided into ten cells,
is responsible for manufacturing high-quality products on time. Each
cell consists of specialized technicians and has full responsibility
over a product group. Technicians are versatile enough so that they can
perform specific functions within a cell and they can be transferred to
other cells when required to alleviate bottlenecks.
- PRODUCTION ENGINEERING AND QUALITY. This department, which supports our
production cells, acts like a gatekeeper to ensure the quality of our
products and the effectiveness of our manufacturing processes. It is
responsible for the transfer of products from research and development
to manufacturing, product improvement, documentation, calibration,
repairs and the quality assurance and regulatory compliance process.
Quality assurance represents a key element in our manufacturing
operations. We meticulously verify our instruments to ensure that they
meet stringent industry requirements and provide our customers with
detailed product test sheets. Our quality assurance program has been
certified ISO 9001 since 1994.
- SUPPLY-CHAIN MANAGEMENT. This department is responsible for
manufacturing schedules, parts procurement, raw materials and finished
goods warehousing, customs management, shipping and billing. Our
products consist of optical, electronic and mechanical parts.
Approximately one-third of our parts are manufactured to our
specifications. Some parts are obtained from single-source suppliers. We
manage risks associated with single-source suppliers, as well as parts
that are subject to industry shortages or long delivery lead times,
through a strategic forecasting process that involves procuring excess
inventory where appropriate.
COMPETITION
The fiber-optic test, measurement and monitoring industry is highly
competitive and subject to rapid change as a result of technological
developments and other factors. We compete with many different companies,
depending on product family and geographical market. We believe that the main
competitive factors in the industry include the following:
- product performance and reliability;
- level of technological innovation;
- product lead times;
- product offering;
- ease of use;
- customer service and technical support;
- strength of sales and distribution relationships; and
- price.
Generally, our competitors fall into two categories. The first category
consists of global electronic test and measurement manufacturers, who complement
their broad range of products with fiber-optic test, measurement and monitoring
equipment. These companies include Agilent Technologies, Inc., Wavetek Wandel &
Golterman, Anritsu Corporation Ando Corporation, Telecommunications Technique
Corporation (TTC Dynatec Division), Tektronics, Inc., GN Nettest and Newport
Corporation. The second category refers to niche companies in the fiber-optic
test, measurement and monitoring industry. These companies typically have
limited product lines and are often geographically limited in their customer
base. Such companies include Santec Corporation, Photonetics, Inc., Fotec, Inc.,
ILX Lightwave Corporation and Kingfisher International PTY Ltd. We also face
competition from JDS Uniphase Corp., an optical component and value-added
optical module vendor that designs and markets its own line of test and
measurement instruments.
REGULATORY ENVIRONMENT
In most countries where our products are sold, our products must comply
with the regulations of one or more governmental entities. These regulations
often are complex and vary from country to country. Depending upon the country
and the relevant product, the applicable regulations may require product
testing, approval,
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<PAGE> 53
registration, marking and unique design restrictions. Accordingly, we have
appointed a team of engineers who are responsible for ensuring that our products
comply with all applicable regulations.
In the United States, our products must comply with the regulations of
several agencies of the U.S. federal government, including the Federal
Communications Commission, or the FCC, the Food and Drug Administration, or the
FDA and the Occupational Safety and Health Administration, or OSHA. Under the
FCC's regulations, our products must comply with, among other things, rules
concerning unintentional radio frequency emissions that interfere with protected
radio communications systems. Depending upon the product, compliance with these
rules may necessitate applying for and obtaining an FCC equipment authorization
prior to importing into the United States, or marketing, any units of the
relevant product. Additionally, some of our products must comply with the FDA's
performance standards and related rules concerning light-emitting products, such
as lasers. The FDA's regulations are intended to promote safety by limiting
human exposure to harmful electromagnetic radiation. Similarly, our products
must comply with OSHA's design safety standards for systems that utilize
electricity. These rules are intended to reduce the risk of accidental human
electrocution.
Similar regulations apply in other countries. For example, our products are
subject to the safety standards of Industry Canada and the Canadian Standards
Association with respect to electricity utilization and radio frequency
emissions. Other countries in the world require equipment marking in accordance
with the standards of the European Community, often referred to as CE marking,
testing to ensure compliance with International Electrotechnical Commission
standards and other international product approval. Other significant types of
regulations not described in this prospectus also may apply, depending upon the
relevant product and country.
INTELLECTUAL PROPERTY
Our success and ability to compete are dependent in part on our ability to
develop and protect our proprietary technology. We file U.S. and Canadian patent
applications to protect technology, inventions and improvements important to the
development of our business. We also rely on a combination of copyright,
trademark, trade secret rights, licensing and confidentiality agreements.
We currently hold four U.S.-issued, two Canadian-issued and three
foreign-issued patents and we have six U.S. and eight Canadian patent
applications pending. These issued and pending patents cover various aspects of
our products and processes. The expiration dates of our issued patents range
from July 17, 2011 to October 9, 2016.
We consider three of our inventions for which patents have either been
granted or are pending to be material. These inventions are:
- the optical time domain reflectometer with internal reference reflector
for which a patent was granted in the United States and is pending in
Canada. This invention permits the control of the optical time domain
reflectometer detector gain and the determination of the loss of the
initial optical connector and is used in most of our optical time domain
reflectometer-based products;
- the measurement of attenuation of optical fibers using bidirectional
transmission of information via the fiber for which patents were granted
in the United States and Canada. This invention forms the basis of our
FOT-920 and FTB-3920 products; and
- an adapter for interconnecting optical fiber connectors for which
patents are pending in Canada and the United States. This invention
permits a wide variety of connectors to be joined to our test and
measurement instruments.
Confidentiality and proprietary information agreements with our senior
management, employees and others generally stipulate that all confidential
information developed or made known to these individuals by us during the course
of their relationship is to be kept confidential and not disclosed to third
parties, except in specific circumstances. The agreements also generally provide
that all intellectual property developed by the individual in the course of
rendering services to us belongs exclusively to us. These efforts afford only
limited protection.
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FACILITIES
Our main offices and facilities are located near Quebec City, Canada. We
occupy four buildings, totalling approximately 193,868 square feet. These
buildings house our executive and administrative offices, research and
development facilities and production facilities. In addition, we also maintain
sales offices in Brazil, China, France, Germany, Japan, United States, Singapore
and the United Kingdom. The following table sets forth information with respect
to the main facilities that we occupy.
<TABLE>
<CAPTION>
LOCATION USE OF SPACE SQUARE FOOTAGE TYPE OF INTEREST
-------- -------------------------------- -------------- ----------------
<S> <C> <C> <C>
436 Nolin Street Manufacturing 44,164 Leased
Vanier (Quebec)
400 Godin Avenue Research and Development 112,000 Owned
Vanier (Quebec) and Administrative
465 Godin Avenue Executive and Administrative 24,000 Leased
Vanier (Quebec)
500 St-Jean-Baptiste Street Administrative and Manufacturing 13,694 Leased
Quebec (Quebec)
</TABLE>
The acquisition of the building located at 400 Godin Avenue in Vanier,
Quebec will progressively make available approximately 87,000 square feet to be
used for manufacturing and research and development. With the additional space,
we believe that the existing facilities will be adequate to meet our current
needs. However, as we continue to experience growth, additional space will be
required by mid to late 2001.
EMPLOYEES
We have fostered a corporate culture where growth and change are strongly
encouraged. In fact, employees are constantly evolving with the rapid pace of
technology to meet new challenges and realities. We believe that we possess a
good cross-section of experience and youth to handle these inevitable changes in
the industry. The average age of our employees is around 30 years old. Over the
years, we have benefited from our proximity to Laval University, which is
located near Quebec City. Laval University has post-graduate programs in optical
and electronic engineering.
As of May 31, 2000, we employed 671 full-time employees who originate from
approximately 20 countries. 185 are involved in research and development, 258 in
manufacturing, 93 in sales and marketing, 77 in general administrative positions
and 58 in communications and customer support. During the last 12 months, we
added more than 240 employees. We have agreements with the majority of our
employees covering confidentiality and non-competition. Only manufacturing
employees are represented by a collective bargaining agreement, which expires in
2004. We have never experienced a work stoppage. We believe that relations with
our employees are good.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings, nor are we aware of
any such legal proceedings that are contemplated.
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MANAGEMENT
EXECUTIVE OFFICERS, SENIOR MANAGERS AND DIRECTORS
The following table sets forth information about our executive officers,
senior managers and directors as of June 28, 2000.
<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF RESIDENCE AGE POSITIONS WITH EXFO
---------------------------------- --- -------------------
<S> <C> <C>
GERMAIN LAMONDE.................... 41 Chairman of the Board, President and Chief Executive
Cap-Rouge, Quebec Officer
PIERRE PLAMONDON................... 41 Vice-President, Finance and Chief Financial Officer
Quebec City, Quebec
BRUCE BONINI....................... 43 Vice-President, North American Sales
Fairview, Texas
JUAN-FELIPE GONZALEZ............... 41 Vice-President, International Sales
Quebec City, Quebec
JEAN-FRANCOIS BOULET............... 44 Vice-President, Human Resources
Montmagny, Quebec
MARIO LAROSE....................... 45 Vice-President, Marketing
Laval, Quebec
STEPHEN BULL....................... 41 Vice-President, Research and Development
Lac-Beauport, Quebec
MARYSE IMBEAULT.................... 39 Communications and Customer Relations Director
Ancienne-Lorette, Quebec
ROXANE VEZINA...................... 36 Information Technology and Supply-Chain Management
Quebec City, Quebec Director
JEAN LAFLAMME...................... 34 Research and Development Director
Duberger, Quebec
LUC GAGNON......................... 41 Manufacturing Director
Saint-Augustin-de-Desmaures, Quebec
PIERRE BERGERON.................... 38 Quality Assurance and Engineering Production Director
Cap-Rouge, Quebec
GREGORY SCHINN..................... 42 Chief Technology Officer
Quebec City, Quebec
KIMBERLEY ANN OKELL................ 39 Secretary and Legal Counsel
Sainte-Foy, Quebec
PIERRE MARCOUILLER................. 44 Director
Magog, Quebec
DAVID A. THOMPSON.................. 49 Director
Horseheads, New York
ANDRE TREMBLAY..................... 45 Director
Outremont, Quebec
MICHAEL UNGER...................... 59 Director
Woodbridge, Ontario
</TABLE>
The following is a brief biography of each of our executive officers,
senior managers and directors.
Germain Lamonde is one of our founders. Germain Lamonde has been our
Chairman of the Board, President and Chief Executive Officer since our inception
in 1985. Mr. Lamonde holds a bachelor's degree in Physics Engineering from Ecole
Polytechnique, University of Montreal in Canada and a master's degree in Optics
from Laval University in Canada. Mr. Lamonde is a member of the board of
directors of Laval University's Research Center for Excellence in Photonics and
a member of the Council for Science and Technology of the government of the
province of Quebec.
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<PAGE> 56
Pierre Plamondon has been our Vice-President, Finance and Chief Financial
Officer since January 1996 and was a director from December 1999 to May 2000.
Prior to joining us, Mr. Plamondon served as senior manager for Price
Waterhouse, now PricewaterhouseCoopers LLP, from September 1981 to December 1995
in Canada and France. Mr. Plamondon holds a bachelor's degree in Business
Administration and a license in Accounting, both from Laval University in
Canada. Mr. Plamondon has been a member of the Canadian Institute of Chartered
Accountants since 1983.
Bruce Bonini has been our Vice-President, North American Sales since
December 1998. Prior to joining us, Mr. Bonini held the position of
Vice-President Sales-Eastern Region for Wandel & Golterman, now Wavetek Wandel &
Golterman, a company specializing in communications test solutions, from
September 1997 to December 1998. Mr. Bonini was successively Sales Director and
Vice-President of Sales for Digital Lightwave Inc., a synchronous optical
network test equipment manufacturer, from August 1996 to January 1997. From
August 1987 to August 1996, Mr. Bonini held different sales and senior
management positions for Laser Precision Corporation, an optical test equipment
manufacturer. Following the acquisition of Laser Precision by GN Nettest, Mr.
Bonini was named Global Vice-President of Sales for GN Nettest/Fiber-Optics
Division. Mr. Bonini holds a bachelor's degree in Business Administration
(industrial marketing) from Western Michigan University in the United States.
Juan-Felipe Gonzalez has been our Vice-President, International Sales since
September 1998. From January 1997 to September 1998, he was our International
Sales Director and, from September 1993 to January 1997, our Sales Manager for
Latin America and the Caribbean. Prior to joining us in September 1993, Mr.
Gonzalez was Marketing and Sales Director at Reyde, Barcelona, a plastics
technical product corporation in Spain. Mr. Gonzalez holds a bachelor's degree
in Industrial Chemistry from Complutense University of Madrid in Spain and a
master's degree in Business Administration from the School of Industrial
Organization in Spain.
Jean-Francois Boulet joined us in March 2000 as Vice-President, Human
Resources. Mr. Boulet was formerly employed by Societe de portefeuille du Groupe
Desjardins -- Assurances Generales since 1996 where he had been successively
Senior Vice-President, Human Resources and Senior Vice-President, Human
Resources and Corporate Communications. From 1992 to 1996, Mr. Boulet held
different senior management positions related to human resources and
organizational development for Inglis Limited, a leading manufacturer of home
appliances. Mr. Boulet holds a bachelor's degree in Industrial Relations from
Laval University in Canada.
Stephen Bull was appointed our Vice-President, Research and Development in
December 1999. He joined us in July 1995 and held the positions of Assistant
Director-Engineering from September 1997 to December 1999 and Group Leader
(Engineering Management) from July 1995 to September 1997. From June 1990 to
March 1995, Mr. Bull held the position of General Manager and Managing Director
for Space Research Corporation, a military engineering company in Belgium. Mr.
Bull holds a bachelor's degree in Electrical Engineering from Laval University
in Canada.
Mario Larose was appointed Vice-President, Marketing on June 7, 2000. Prior
to joining us, Mr. Larose was Interim General Manager with C-MAC Corporation, a
manufacturer of microelectronic products, from September 1999 to January 2000.
Prior to the acquisition by C-MAC of L.G. Technologies Ltee, Mr. Larose held the
position of Vice-President, Marketing and Sales with L.G. Technologies Ltee, a
sub-contract electronic manufacturer from January 1998 to September 1999. Prior
to that, Mr. Larose was Vice-President, Engineering with Unican Security Systems
Limited, a public security systems manufacturer, from August 1995 to December
1997. Prior to joining Unican, Mr. Larose held various positions with Northern
Telecom, now Nortel Networks Limited, a provider of telephony, data, wireless
and wire-line solutions for the Internet. Mr. Larose is President and a
shareholder of LAMA2 inc., a private management consulting company. Mr. Larose
holds a bachelor's degree in Applied Sciences, Engineering Physics from Ecole
Polytechnique, University of Montreal in Canada and a master's in Business
Administration from Universite du Quebec a Montreal in Canada.
Maryse Imbeault has been our Communications and Customer Services Director
since May 1996. Prior to that appointment, Ms. Imbeault was our Marketing and
Communications Director from September 1994 to May 1996, our Marketing Director
from January 1994 to September 1994 and a Marketing Assistant from August 1992
to January 1994. Ms. Imbeault holds an Associate Arts and Science Diploma,
specializing in Marketing Management, from Capilano College in Canada.
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Roxane Vezina joined us in January 2000 as Information Technology and
Supply-Chain Management Director. From October 1995 to December 1999, Ms. Vezina
served as Vice-President, Information Systems and Strategic Planning for Venmar
Ventilation and Broan-NuTone Canada, manufacturers of home comfort and indoor
air quality products. From August 1991, when she joined Venmar, to October 1995,
Ms. Vezina acted as the Quality Improvement and Special Projects Manager. Ms.
Vezina holds a bachelor's degree in Industrial Engineering from Ecole
Polytechnique, University of Montreal in Canada.
Jean Laflamme was appointed our Research and Development Director in March
2000 after having served as our Production Director since June 1996. Mr.
Laflamme joined us in 1990 as an electrical engineer and since then has led many
successful projects, serving successively as Group Leader and Production Line
Manager. Mr. Laflamme holds a bachelor's degree in Electrical Engineering from
Laval University in Canada.
Luc Gagnon joined us in March 2000 as Manufacturing Director. Prior to
joining us, Mr. Gagnon served as Operations Manager for Mendes Inc., a company
specializing in amusement equipment, from March 1999 to March 2000. From
December 1997 to February 1999, Mr. Gagnon was Plant Manager for C-MAC
Corporation, Micro-Circuits Division. Prior to that, Mr. Gagnon served as
Operations Manager for Steris Corporation, a manufacturer of specialized
cleaning equipment, from March 1993 to December 1997. Previously, Mr. Gagnon
held various engineering positions with Unitel Inc., a telecommunications
carrier. Mr. Gagnon holds a bachelor's degree in Electrical Engineering and a
master's degree in Engineering from Sherbrooke University in Canada.
Pierre Bergeron has been our Engineering Production and Quality Assurance
Director since May 1998. From March 1987 to May 1998, Mr. Bergeron held
successively the positions of Project Manager, Project Director and Executive
Vice-President for Groupe Expert Conseil RDS in Canada, a company of engineers
specializing in quality and productivity improvement and human resources. This
company declared bankruptcy in 1998. Mr. Bergeron holds a bachelor's degree in
Mechanical Engineering from Laval University in Canada.
Gregory Schinn was appointed our Chief Technology Officer in November 1999,
after simultaneously holding the positions of Scientific Director and Head of
the Research Group since joining us in April 1996. Prior to joining us, Dr.
Schinn led the research and development team responsible for optical amplifier
and fiber laser development at MPB Technologies, Inc., a diversified technology
company, in Montreal from 1990 to 1996. Dr. Schinn holds a bachelor's degree in
Engineering Science and a master's degree in Aerospace Engineering from the
University of Toronto. He also holds a Ph.D. in Physics from the University of
Colorado at Boulder and has spent two years as a post-doctoral research
associate at the University of Virginia. Dr. Schinn has been published in
numerous scientific journals and he has served on the technical organizing
committees of several international scientific conferences. He is currently the
Director of the Division of Applied Physics of the Canadian Association of
Physicists.
Kimberley Ann Okell has been our in-house legal counsel since February 2000
and our Secretary since May 2000. Prior to joining us, Ms. Okell was
Vice-President Legal Affairs and Secretary with Groupe Equiconcept Inc. from
October 1999 to February 2000 and Director of Legal Services and Secretary with
Informission Group Inc., now nurun Inc., an information technology company, from
December 1997 to October 1999. Prior to that, Ms. Okell was an associate with
the law firm McCarthy Tetrault from August 1994 to December 1997. Ms. Okell has
been a member of the Quebec Bar since September 1993. Ms. Okell holds a
bachelor's degree in Civil Law from Laval University in Canada, a bachelor's
degree in Common Law from The University of Western Ontario in Canada and an
Honors bachelor of Arts degree from York University in Canada.
Pierre Marcouiller is the founder and has been sole shareholder of Nexcap
Inc., an investment company in the manufacturing sector, since December 1996.
Mr. Marcouiller worked with Venmar Ventilation Inc., a private ventilation
equipment manufacturer, from January 1983 to December 1996. Mr. Marcouiller was
the controlling shareholder of Venmar from 1991 to 1996 and held the position of
President and General Manager of Venmar from December 1986 to December 1996. Mr.
Marcouiller is also a director of IPL Inc., a manufacturer of thermoplastic
products. Mr. Marcouiller holds a bachelor's degree in Business Administration
from Universite du Quebec a Trois-Rivieres in Canada and a Master in Business
Administration from Sherbrooke University in Canada.
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David A. Thompson has held various positions with Corning Inc., a
manufacturer of optical fiber and other products for the telecommunications,
television and other communications-related industries, since 1976. Mr. Thompson
has been the Director -- Technology and Strategy of Corning's Components
Business-Photonic Technologies since March 1995. Mr. Thompson holds a bachelor's
degree in Chemistry from the Ohio State University, in the United States, and a
doctorate in Inorganic chemistry from the University of Michigan, in the United
States.
Andre Tremblay has been President and Chief Executive Officer of Microcell
Telecommunications Inc., a wireless telecommunications provider, since May 1995.
Mr. Tremblay has been a member of the board of directors of Microcell since
November 1995. Mr. Tremblay is also a member of the executive committee and a
member of the board of directors of Telesystem Ltd. and, since 1992, Executive
Vice-President of Telesystem Ltd. Prior to joining Telesystem Ltd., a
privately-held holding company. Mr. Tremblay was a tax partner and member of the
management committee of Raymond, Chabot, Martin, Pare, a Canadian accounting
firm. Mr. Tremblay holds a bachelor's degree in Business Administration and a
license in Accounting from Laval University in Canada, as well as a master's
degree in taxation from Sherbrooke University in Canada. He also completed the
Advanced Management Program offered by the Harvard Business School in the United
States.
Michael Unger worked with Nortel Networks Limited, now Nortel Networks
Corporation, from 1962 to 2000. Mr. Unger's most recent position was President
of Nortel's Optical Networks Business Unit, a position he held from May 1998 to
April 2000. Prior to this appointment, Mr. Unger was Nortel's Group
Vice-President, Transport Networks from March 1990 to May 1998. Mr. Unger holds
a bachelor's degree in Science from Concordia University in Canada.
TERM OF EXECUTIVE OFFICERS
Executive officers are appointed annually by the board of directors and
serve until their successors are appointed and qualified or until earlier
resignation or removal.
BOARD OF DIRECTORS
Our directors are elected at the annual meeting of shareholders for
one-year terms and serve until their successors are elected or appointed, unless
they resign or are removed earlier. Our articles of incorporation provide for a
board of directors of a minimum of three and a maximum of 12 directors. Our
board will initially consist of five directors. Under the Canada Business
Corporations Act, a majority of the directors and of the members of any
committee of the board of directors must be composed of resident Canadians.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established an audit committee and a human
resources committee.
Our audit committee will recommend a firm to be appointed as independent
auditors to audit financial statements and to perform services related to the
audit, review the scope and results of the audit with the independent auditors,
review with management and the independent auditors our annual operating results
and consider the adequacy of the internal accounting procedures and the effect
of the procedures relating to the auditors' independence. In addition, the audit
committee will monitor the board's corporate governance practices, propose
nominees annually for election to the board, make recommendations as to the
composition of the committees of the board and review the functioning of the
board and the powers, mandates and performance of the committees. The audit
committee is composed of three independent directors: Andre Tremblay, Michael
Unger and Pierre Marcouiller. The chairperson of the audit committee is Andre
Tremblay.
Our human resources committee will evaluate, review and supervise our
procedures with regards to human resources and will assess the performance of
our officers. This committee will also review annually the remuneration of the
directors and will recommend to the board of directors general remuneration
policies regarding salaries, bonuses and other forms of remuneration for our
directors and executive officers. The human resources committee is composed of
three independent directors: David A. Thompson, Michael Unger and Pierre
Marcouiller. The chairperson of the human resources committee is Michael Unger.
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DIRECTOR COMPENSATION
Our directors who are not officers or employees will receive annual
compensation of C$6,000 comprised of cash or the equivalent value of our
subordinate voting shares. In addition, they will be eligible to participate in
our stock option plan. Directors who are also committee members will receive
additional annual compensation of C$3,000 per committee and committee
chairpersons will receive C$5,000 annually comprised of cash or the equivalent
value of our subordinate voting shares. This compensation for chairing or
participating on a committee is also payable by way of stock options. All
directors will be reimbursed for travelling and other expenses incurred in
connection with attendance at meetings.
EXECUTIVE COMPENSATION
In fiscal 1999, we paid an aggregate $652,175 in cash compensation to our
directors, executive officers and other members of senior management named under
the caption "Executive Officers, Senior Management and Directors" as a group
(eight persons in fiscal 1999).
The table below provides information on the compensation of our Chairman of
the Board, President and Chief Executive Officer and our other executive
officers whose compensation exceeded $70,000 for all services rendered while
acting as our executive officers in respect of the year ended August 31, 1999.
The annual compensation below excludes perquisites and other personal benefits
because these benefits did not exceed 10% of the total annual salary and bonus
for any of these officers.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------
SECURITIES
OTHER ANNUAL ISSUED UNDER
COMPENSATION LONG-TERM
NAME AND PRINCIPAL OCCUPATION SALARY BONUS(1) ($) COMPENSATION(3)
------------------------------------------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
GERMAIN LAMONDE........................... $116,853 $ 9,025 -- --
Chairman of the Board, President and Chief
Executive Officer
BRUCE BONINI(2)........................... $154,220 -- -- 49,324
Vice-President, North American Sales
JUAN-FELIPE GONZALEZ...................... $110,049 $ 3,980 -- 51,452
Vice-President, International Sales
PIERRE PLAMONDON.......................... $ 64,156 $ 9,110 -- 32,927
Vice-President, Finance and Chief
Financial Officer
</TABLE>
---------------
(1) Bonuses are paid in cash in the year following the fiscal year in which
they are earned.
(2) Mr. Bonini joined us on December 9, 1998.
(3) Number of Class "F" shares, which will be converted into subordinate voting
shares prior to the closing of this offering, issued under the 1998 Stock
Purchase Plan.
EMPLOYMENT AGREEMENT
We have entered into an employment agreement with Germain Lamonde. The
agreement provides for Mr. Lamonde's employment as our President and Chief
Executive Officer at a base salary, without adjustment, during the time between
the signing of the agreement and August 31, 2000 of C$275,000 per year. Mr.
Lamonde shall also be entitled to receive, during the period from September 1,
2000 to August 31, 2001, a base salary of C$275,000 plus a variable portion
based on a formula established by our board of directors. The agreement is for
an indeterminate period and the salary will be reviewed annually after September
1, 2001. In the event of the termination of Mr. Lamonde's employment with us,
other than for cause, Mr. Lamonde will be entitled to severance payments (in no
case exceeding 24 months of remuneration) and the vesting of all stock options,
upon the incapacity of Mr. Lamonde, a merger, acquisition by a third party of
substantially all of our assets or of the majority of our share capital or
termination of Mr. Lamonde without cause by us.
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<PAGE> 60
STOCK OPTION PLAN
We have a stock option plan for our directors, executive officers,
employees and consultants and those of our subsidiaries as determined by our
board of directors, to attract and retain competent directors, executive
officers, employees and consultants motivated to work toward ensuring our
success and to encourage them to acquire our shares.
All of the options that will be granted under the plan may be exercised
within a maximum period of ten years following the grant date of the options.
The board of directors will designate the recipients of options and determine
the number of subordinate voting shares covered by each of these options, the
date of vesting of each option, the exercise price of each option, the expiry
date and any other conditions relating to these options, in each case in
accordance with the applicable legislation of the securities regulatory
authorities. The price at which the subordinate voting shares may be purchased
under the plan will not be lower than the highest of the closing prices of the
subordinate voting shares on the stock exchanges where the subordinate voting
shares are listed at the date of grant.
The maximum number of subordinate voting shares that is issuable under the
plan may not exceed 4,470,961 shares. The maximum number of subordinate voting
shares that may be granted to any individual may not exceed 5% of the
outstanding subordinate voting shares. The board of directors may accelerate the
vesting of any or all outstanding options of any or all optionees upon the
occurrence of a change of control.
Prior to the closing of this offering, we intend to grant to 576 of our
employees and to all directors who are not officers or employees options to
purchase a total of 609,734 subordinate voting shares at the initial public
offering price with a vesting period of up to five years following the date of
the grant. Following this grant, there will be 3,861,227 options that are
available for future grants under the plan.
SHARE PLAN
In September 1998, we established a stock purchase plan for officers,
directors and key employees as amended in April 2000. As of June 27, 2000,
707,264 Class "F" shares had been issued and fully paid under the 1998 Stock
Purchase Plan for a weighted average cash consideration of C$0.98 per share. The
plan provides that all shares issued under the plan are restricted as to sale
and transferability for a minimum period of five years upon the date of
acquisition. Immediately prior to this offering, all of the 707,264 Class "F"
shares will be converted into subordinate voting shares.
On April 3, 2000, we adopted a new share plan which replaced the 1998 Stock
Purchase Plan. No additional shares will be issued under the new share plan. The
new share plan established restrictions on the rights of the holders of
subordinate voting shares who hold those shares as a result of the conversion of
the Class "F" shares issued under the 1998 Stock Purchase Plan. The new share
plan also requires the subordinate voting shares to be held in trust by a
trustee until August 31, 2004, except for 256,017 subordinate voting shares
which will be released between October 21, 2003 and January 20, 2004. The new
share plan also provides for the earlier release of shares in the event that the
employment of a holder of shares is terminated or upon the occurrence of a
change of control. The new share plan does not permit any transfer, except
within the trust to a registered retirement savings plan or a registered
retirement income fund or to a trustee in bankruptcy. The new share plan also
established the conditions pursuant to which the shares of a shareholder are to
be sold by the trustee on the public market.
DEFERRED PROFIT SHARING PLAN
Under the plan, we contribute an amount equal to 1% of each employee's
gross salary to that employee's individual deferred profit sharing plan to the
extent that such employee contributes at least 2% of his or her gross salary to
his or her individual tax-deferred registered retirement savings plan. We may
also make discretionary contributions of up to 4% of an employee's gross salary
to his or her individual tax deferred registered retirement savings plan,
depending on our and the employee's performance. In the year ended August 31,
1999, the aggregate amount of contributions under the plan was $104,000
(C$156,000).
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<PAGE> 61
401(K) PLAN OF EXFO AMERICA INC.
We maintain a 401(k) plan to provide employees of EXFO America Inc. who are
residents of the United States, with a tax preferential savings and investment
program. Employees become eligible to participate in the 401(k) plan on the
first day of the month following the completion of three months of continuous
service. Employees may elect to defer their current compensation up to the
lesser of 1% of eligible compensation or the statutorily prescribed annual limit
and have the deferral contributed to the 401(k) plan. The 401(k) plan permits,
but does not require, us to make additional matching contributions to the 401(k)
plan on behalf of the eligible participants, subject to a maximum of 50% of the
first 6% of the participant's current compensation. The contributions made by
and on behalf of employees may not exceed the maximum contribution limitation
currently equal to the lesser of 15% of their compensation or $10,500 per year
under current statutory limitations. In the year ended August 31, 1999, we made
an aggregate of $21,000 in matching contributions to the 401(k) plan.
Contributions by employees or by us to the 401(k) plan and income earned on plan
contributions are generally not taxable to the employees until withdrawn and
contributions by us are generally deductible by us when made. At the direction
of each participant, the trustee of the 401(k) plan invests the assets of the
401(k) plan in selected investment options.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our by-laws require us, subject to the limitations provided by law, to
indemnify our present or former directors and officers or any persons who act or
acted at our request as directors or officers of a body corporate of which we
are or were a shareholder and for all costs, losses, charges and expenses that
arose or may arise by reason of their status as directors or officers of EXFO or
such body corporate. A policy of directors' and officers' liability insurance is
maintained by us which insures our directors and officers and those of our
subsidiaries against liability incurred by, arising from or against them for
certain of their acts, errors or omissions.
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND EMPLOYEES
We have guaranteed the repayment of loans granted to employees by a
financial institution for the purchase of our Class "F" shares that will be
converted into subordinate voting shares prior to the closing of this offering.
As of June 27, 2000, the total principal amount guaranteed by us is C$187,399
(approximately $126,000) and $56,200. We loaned to some of our employees up to
$26,000 to finance the acquisition of our Class "F" shares. These loans are to
be reimbursed no later than five years from the date of the loans. These loans
will accrue interest at prime rate and will be secured by a pledge of the
employees' shares to us.
TRANSACTIONS WITH RELATED PARTIES
Except as disclosed in this section, none of our directors, executive
officers, associates or affiliates had any material interest in any transaction
with us during the past three years or in any proposed transaction which has
materially affected or could materially affect us.
LEASES
We have entered into lease agreements with 9080-9823 Quebec inc., a company
controlled by Mr. Germain Lamonde, for the manufacturing facilities located at
436 Nolin Street and the executive and administrative offices located at 465
Godin Avenue in Vanier, Quebec. The table below sets forth the leased space,
annual rent and term of the leases:
<TABLE>
<CAPTION>
LOCATION SQUARE FOOTAGE ANNUAL RENT EXPIRY DATE
-------- -------------- ----------- -----------------
<S> <C> <C> <C>
436 Nolin 44,164 C$220,820 February 28, 2001
465 Godin 24,000 C$144,000 November 30, 2001
</TABLE>
Based on third-party valuations of the property values, we believe these
lease agreements are at prevailing market terms.
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<PAGE> 62
LOAN TO GEXFO INVESTISSEMENTS TECHNOLOGIQUES INC.
In February 2000, we extended a non-interest-bearing loan with a principal
amount of C$1.0 million to GEXFO Investissements Technologiques inc., a company
controlled by Germain Lamonde. We will demand repayment of this loan immediately
following the closing of this offering.
PROMISSORY NOTES ISSUED TO OUR SHAREHOLDERS
On June 27, 2000, we declared a dividend of C$26.0 million (approximately
$17.5 million) to the holders of Class "A" and Class "F" shares. Holders of
Class "F" shares will receive a cash payment of C$475,075 (approximately
$320,000). We have issued promissory notes to the holders of Class "A" shares
listed below with an aggregate principal amount of C$25.5 million (approximately
$17.2 million). Holders of Class "A" shares are:
- GEXFO Investissements Technologiques inc., a company controlled by
Germain Lamonde;
- Fiducie Germain Lamonde, a family trust for the benefit of Germain
Lamonde and members of his family; and
- G. Lamonde Investissements Financiers inc., a company controlled by
Germain Lamonde.
The promissory notes bear no interest and are payable on demand. We plan to
repay indebtedness under the promissory notes immediately after the closing of
this offering with a portion of the net proceeds from this offering.
ACQUISITION OF GEXFO DISTRIBUTION INTERNATIONALE INC.
On September 1, 1998, we acquired all the issued and outstanding shares of
GEXFO Distribution Internationale inc. from GEXFO Investissements Technologiques
inc., a company controlled by Germain Lamonde, in exchange for one Class "C"
share of EXFO. This share was redeemed on September 1, 1998 at a price of
C$509,000 ($340,000). GEXFO Distribution Internationale inc. has two
wholly-owned subsidiaries, EXFO America Inc. and EXFO Europe S.A.R.L., which
markets fiber-optic test and measurement instruments for the U.S. and European
markets.
LOAN FROM 9080-9823 QUEBEC INC.
As of February 29, 2000, we have outstanding a loan of approximately $1.4
million owed to 9080-9823 Quebec inc., a company controlled by Germain Lamonde.
This loan bears interest at prime rate plus 1% and is repayable on demand. As of
June 7, 2000, the interest rate on this loan was 8.5%. A portion of the net
proceeds from this offering will be used to repay all amounts outstanding under
this loan. See "Use of Proceeds."
CAPITAL REORGANIZATION OF GEXFO INVESTISSEMENTS TECHNOLOGIQUES INC.
In connection with the capital reorganization of GEXFO Investissements
Technologiques inc., Germain Lamonde undertook to cause us to declare a dividend
in an amount sufficient for GEXFO Investissements Technologiques inc. to be able
to redeem those of its shares not currently owned by Mr. Lamonde and we
undertook to apply our retained earnings primarily for this purpose. To that
end, we declared on June 27, 2000 a dividend in an amount of C$26.0 million to
our shareholders of which C$23.7 million will be paid to GEXFO Investissements
Technologiques inc. See "Use of Proceeds."
REGISTRATION RIGHTS AGREEMENT
We will enter into a registration rights agreement with Germain Lamonde
prior to the closing of this offering, under which Mr. Lamonde and entities
affiliated with him will be granted demand registration rights in the United
States in respect of the subordinate voting shares, including the subordinate
voting shares issued upon conversion of the multiple voting shares held by him
or entities affiliated with him. With respect to the demand registration rights
of Mr. Lamonde, subject to minimum dollar amounts, Mr. Lamonde may make a demand
once every 12 consecutive month period. Mr. Lamonde also will have an unlimited
number of piggyback
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registration rights in respect of the subordinate voting shares issued upon
conversion of the multiple voting shares held by him or entities affiliated with
him. The piggyback registration rights generally will allow Mr. Lamonde to
include all or a portion of the subordinate voting shares issuable upon
conversion of the multiple voting shares under any registration statement filed
by us.
We will pay all expenses, other than underwriting discounts and commissions
and taxes, in connection with the exercise of any demand registration rights or
piggyback registration rights. We also will agree to indemnify any sellers and
underwriters against some liabilities, including liabilities arising under
applicable securities laws. Mr. Lamonde has agreed not to exercise his
registration rights without the prior written consent of Merrill Lynch on behalf
of the underwriters of this offering for a period of 180 days following the date
of this prospectus.
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PRINCIPAL SHAREHOLDERS
The following table presents information regarding the beneficial ownership
of our share capital immediately prior to this offering and as adjusted to
reflect the sale of our subordinate voting shares in this offering, by:
- persons or groups of affiliated persons known by us to own more than 5%
of our voting shares;
- our directors;
- our Chief Executive Officer and our three highest compensated executive
officers; and
- all of our directors and executive officers as a group.
Each multiple voting share is convertible at the option of the holder into
one subordinate voting share. In addition, each preferred share series 1 is
convertible at our option into a number of subordinate voting shares based on
the market price of our subordinate voting shares at the time of conversion.
Holders of our subordinated voting shares are entitled to one vote per share and
holders of our multiple voting shares are entitled to ten votes per share. The
preferred shares series 1 do not have any voting rights.
Unless otherwise indicated, the address of each person who beneficially
owns 5% or more of our subordinate voting shares or multiple voting shares is
c/o EXFO Electro-Optical Engineering Inc., 465 Godin Avenue, Vanier, Quebec,
Canada.
<TABLE>
<CAPTION>
PERCENTAGE OF VOTING
NUMBER OF NUMBER OF MULTIPLE POWER OWNED
SUBORDINATE VOTING VOTING SHARES --------------------
SHARES OWNED PRIOR TO OWNED PRIOR TO PRIOR TO AFTER
NAME AND AFTER THIS OFFERING AND AFTER THIS OFFERING OFFERING OFFERING
---- ----------------------- ----------------------- -------- --------
<S> <C> <C> <C> <C>
Germain Lamonde..................... -- 38,000,000 99.8% 98.0%
Juan-Felipe Gonzalez................ 51,452 -- * *
Bruce Bonini........................ 49,324 -- * *
Pierre Plamondon.................... 32,927 -- * *
All directors and executive officers
as a group (9 persons)............ 165,979 38,000,000 99.9% 98.0%
</TABLE>
---------------
* Less than 1%.
The number of shares held by Germain Lamonde includes:
- 35,340,000 multiple voting shares held of record by GEXFO
Investissements Technologiques inc., a company controlled by Mr.
Lamonde;
- 1,900,000 multiple voting shares held of record by Fiducie Germain
Lamonde, a family trust for the benefit of Mr. Lamonde and members of
his family; and
- 760,000 multiple voting shares held of record by G. Lamonde
Investissements Financiers inc., a company controlled by Mr. Lamonde.
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<PAGE> 65
DESCRIPTION OF SHARE CAPITAL
CAPITAL REORGANIZATION
As of June 27, 2000, our authorized share capital was composed of an
unlimited number of Class "A" shares, Class "B" shares, Class "C" shares, Class
"D" shares, Class "E" shares, Class "F" shares and Class "G" shares of which
38,000,000 Class "A" shares, 707,264 Class "F" shares and 800,000 Class "G"
shares will be issued and outstanding.
Immediately prior to this offering, we will modify our authorized share
capital to:
- an unlimited number of subordinate voting shares without par value;
- an unlimited number of multiple voting shares without par value; and
- an unlimited number of preferred shares without par value, issuable in
series.
As a result of the reorganization:
- the 38,000,000 Class "A" shares will be exchanged into 38,000,000
multiple voting shares;
- the 707,264 Class "F" shares will be exchanged into 707,264 subordinate
voting shares; and
- the 800,000 Class "G" shares will be exchanged into 800,000 preferred
shares series 1.
EQUITY SHARES
Except as otherwise described, the equity shares, which means the multiple
voting shares and the subordinate voting shares, have the same rights, are equal
in every respect and are treated as if they were shares of one and the same
class.
Rank
The equity shares rank junior to the preferred shares in the payment of
dividends, return of capital and distribution of assets in the event of
liquidation, dissolution or any distribution of our assets for the purpose of
winding up our affairs.
Dividends
The holders of outstanding equity shares may receive dividends on a
share-for-share basis, in the amounts and at the times our board of directors
may determine, out of our assets legally available for this purpose, without
preference or distinction among or between the multiple voting shares and the
subordinate voting shares.
Voting Rights
The subordinate voting shares carry one vote per share and the multiple
voting shares carry ten votes per share. The holders of equity shares are
entitled to receive notice of any meeting of our shareholders and to attend and
vote as a single class on all matters to be voted on by our shareholders, except
at meetings where the holders of shares of one class or of a particular series
of shares are entitled to vote separately.
Modification
The rights, privileges, conditions and restrictions attaching to the equity
shares may be modified if the amendment is authorized by at least two-thirds of
the votes cast at a meeting of the holders of equity shares duly held for that
purpose. However, if the holders of subordinate voting shares, as a class, or
the holders of multiple voting shares, as a class, are to be affected in a
manner different from the other classes of shares, the amendment must, in
addition, be authorized by at least two-thirds of the votes cast at a meeting of
the holders of the class of shares which is affected differently.
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<PAGE> 66
Additional Issuance of Multiple Voting Shares
We may not issue multiple voting shares without the approval of at least
two-thirds of the votes cast at a meeting of the holders of subordinate voting
shares duly held for that purpose. However, approval is not required in
connection with a subdivision on a pro rata basis as between the subordinate
voting shares and the multiple voting shares.
Conversion
Each outstanding multiple voting share may, at any time, at the option of
the holder, be converted into one subordinate voting share. The subordinate
voting shares cannot be converted into any other class of shares.
Subdivision or Consolidation
No subdivision or consolidation of the multiple voting shares or the
subordinate voting shares will be made without, concurrently, having the
multiple voting shares or subordinate voting shares, as the case may be,
subdivided or consolidated under the same conditions.
Liquidation Rights and Other Matters
The equity shares are not redeemable by us or by the holder. Upon the
liquidation, dissolution or any distribution of our assets for the purpose of
winding up our affairs, the holders of equity shares are entitled to participate
equally, on a share-for-share basis, in our remaining property and assets
available for distribution to the holders of equity shares.
Undertakings in Favor of Holders of Subordinate Voting Shares
Under applicable Canadian law, an offer to purchase multiple voting shares
would not necessarily require that an offer be made to purchase subordinate
voting shares. In accordance with the rules of The Toronto Stock Exchange, we
and each of Germain Lamonde, GEXFO Investissements Technologiques inc., Fiducie
Germain Lamonde and G. Lamonde Investissements Financiers inc., as the
beneficial and registered owners of all the outstanding multiple voting shares
will enter into a trust agreement prior to the closing of this offering with a
third party trustee. Under the trust agreement, Germain Lamonde, GEXFO
Investissements Technologiques inc., Fiducie Germain Lamonde and G. Lamonde
Investissements Financiers inc. will place their multiple voting shares on
deposit with the trustee and undertake not to sell or dispose of, directly or
indirectly, any multiple voting shares pursuant to a take-over bid, as defined
by applicable securities legislation, under circumstances in which securities
legislation would have required the same offer or a follow-up offer to be made
to all holders of subordinate voting shares if the sale had been of subordinate
voting shares rather than multiple voting shares, but otherwise on the same
terms. This undertaking does not apply if:
- such sale is made pursuant to an offer to purchase multiple voting
shares made to Germain Lamonde, GEXFO Investissements Technologiques
inc., Fiducie Germain Lamonde and G. Lamonde Investissements Financiers
inc. and an identical offer, concurrently made to purchase subordinate
voting shares, which identical offer has no condition attached other
than the right not to take up and pay for the subordinate voting shares
tendered if no shares are purchased pursuant to the offer for multiple
voting shares; or
- there is a concurrent unconditional offer, with terms at least as
favourable as the terms of the offer to purchase multiple voting shares,
to purchase all the subordinate voting shares at a price per share at
least as high as the highest price per share offered in connection with
the sale or disposition of the multiple voting shares.
The trust agreement provides that if the conditions of our shares include a
provision pursuant to which shares are automatically converted in shares of
another class or otherwise in certain circumstances, and if there is an offer
that would have been a take-over bid if not for the existence of such provision,
such offer shall be deemed to be a take-over bid.
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Under the trust agreement, any direct or indirect sale or disposition of
multiple voting shares, including a transfer to a pledgee as security, by a
party bound by its terms or any person or corporation which it controls is
conditional upon the transferee becoming a party to an agreement on
substantially similar terms and conditions as are contained in the trust
agreement. The conversion of multiple voting shares into subordinate voting
shares shall not constitute a sale or disposition for purposes of the trust
agreement.
The trust agreement provides that if a person or corporation carries out an
indirect sale or a disposition in respect of any multiple voting shares in
contravention of the trust agreement, then the holders of such multiple voting
shares shall not at the time such sale becomes effective and thereafter do any
of the following with respect to any multiple voting shares to sold:
- dispose of such multiple voting shares or convert them into subordinate
voting shares, in either case, without the prior written consent of the
trustee; or
- exercise any voting rights attaching to such multiple voting shares
except in accordance with the written instructions of the trustee.
The trustee may attach conditions to its consent and must exercise its
rights in the best interest of the holders of the subordinate voting shares,
other than Germain Lamonde, GEXFO Investissements Technologiques inc., Fiducie
Germain Lamonde and G. Lamonde Investissements Financiers inc. and holders of
multiple voting shares who, in the opinion of the trustee, participated directly
or indirectly in the transaction that triggered the operation of this provision.
The trust agreement provides that the prior written consent of the trustee
shall be required in connection with any sale or disposition of multiple voting
shares, whether direct or indirect, by Germain Lamonde, GEXFO Investissements
Technologiques inc., Fiducie Germain Lamonde and G. Lamonde Investissements
Financiers inc. The trustee must give its written consent if it receives
evidence satisfactory to it that the sale or disposition is not in contravention
of the trust agreement. The trustee also has the right to require from time to
time satisfactory evidence to it of the number of equity shares held directly or
indirectly by Germain Lamonde, GEXFO Investissements Technologiques inc.,
Fiducie Germain Lamonde and G. Lamonde Investissements Financiers inc.
The trust agreement contains provisions for the authorization of action by
the trustee to enforce the rights under the agreement on behalf of the holders
of the subordinate voting shares. The obligation of the trustee to take such
action is conditional on the provision of required funds and indemnity by us or
holders of subordinate voting shares. No holder of the subordinate voting shares
will have the right, other than through the trustee, to institute any action or
proceeding or to exercise any other remedy to enforce any rights arising under
the trust agreement unless the trustee fails to act on a request authorized by
holders of not less than 10% of the outstanding subordinate voting shares,
excluding any subordinate voting shares beneficially held by the Germain
Lamonde, GEXFO Investissements Technologiques inc., Fiducie Germain Lamonde and
G. Lamonde Investissements Financiers inc. or any holders of multiple voting
shares, after provision of reasonable funds and indemnity to the trustee.
The trust agreement provides that it may not be amended and no provision
thereof may be waived, without the approval of:
- any Canadian stock exchange upon which the subordinate voting shares are
quoted or listed and any other applicable securities regulatory
authorities; and
- at least two-thirds of the votes cast by holders of subordinate voting
shares.
No provision of the trust agreement limits the rights of any holders of
subordinate voting shares under applicable securities legislation.
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Mandatory Conversion
The trust agreement also provides that, except as otherwise provided, if at
any time:
- members of the Lamonde Family do not beneficially own, directly or
indirectly, in any manner, a number of equity shares representing either
more than 50% of the votes attaching to all issued and outstanding
equity shares or 60% of the total number of multiple voting shares held
by them on the closing of this offering (or 22,800,000 multiple voting
shares); or
- Germain Lamonde no longer occupies the position of either our Chairman
of the Board or our Chief Executive Officer for any reason, including
voluntary or forced retirement, death or incapacity,
then all our the multiple voting shares shall be automatically converted into
subordinate voting shares, unless such situation is remedied within 60 days from
its occurrence or within one year from the occurrence, if such occurrence
results from the incapacity of Germain Lamonde. Moreover, if at any time, the
Lamonde Family or any of its members sells or otherwise transfers multiple
voting shares to a party who is not a member of the Lamonde Family, the
transferred shares shall automatically be converted into subordinate voting
shares on the date of such sale or transfer.
The term "Lamonde Family" means:
- Germain Lamonde;
- his spouse, in fact or in law;
- any lineal descendant of Germain Lamonde, born or to be born;
- any trust constituted primarily for the benefit of Germain Lamonde, his
spouse, in fact or in law, or any of his descendants, born or to be
born; and
- any corporation where 90% of the votes attaching to all outstanding
shares and at least 50% of all outstanding shares are controlled by any
one or more of the persons listed above;
PREFERRED SHARES
Our board of directors may from time to time issue one or more series of
preferred shares. The preferred shares will rank prior to the equity shares with
respect to the payment of dividends and the distribution of assets. In the event
of our dissolution, the distribution of our assets upon our liquidation or the
distribution of all or part of our assets among our shareholders, holders of
preferred shares will be entitled to receive, in cash or in property, an amount
equal to the value of the consideration paid in respect of the outstanding
preferred shares, plus an amount equal to accrued and unpaid dividends, or
declared and unpaid dividends and any amount specified in our articles.
PREFERRED SHARES SERIES 1
In addition to the provisions attaching to the preferred shares as a class,
the 800,000 preferred shares series 1 have specific provisions applicable to
them. We are required to redeem all outstanding preferred shares series 1 on
November 30, 2000, by paying to the holders of the preferred shares series 1 a
cash payment of C$1.00 per share. We have the option to convert all of such
shares into subordinate voting shares on November 30, 2000. The number of
subordinate voting shares resulting from such conversion shall be equal to the
result obtained by dividing the aggregate redemption price of the preferred
shares series 1, being the number of preferred shares series 1 outstanding
multiplied by C$1.00 by the conversion price equal to (1) the average closing
prices of the subordinate voting shares for the 10 days of market activity
preceding November 30, 2000; or (2) if the subordinate voting shares have been
traded fewer than 5 days of the 10 days of market activity preceding November
30, 2000, the conversion price is obtained by averaging the closing price or if
the closing price is not published, the average between the highest and the
lowest prices, for each day that there has been trading and the average of the
bid and ask prices for each day on which there was no trading. The conversion
price will be determined by reference to the market on which the greatest volume
of trading of the subordinate voting shares occurred during the 10 day period.
Subject to the provisions of the Canada Business Corporation Act, the preferred
shares series 1 will not carry any voting rights.
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MODIFICATIONS, SUBDIVISIONS AND CONSOLIDATIONS
Under the Canada Business Corporations Act, amendment of the rights of
holders of a class of shares, including subordinate voting shares, requires the
approval of not less than two-thirds of the votes cast by the holders of those
shares voting separately as a class at a special meeting. The Canada Business
Corporations Act also gives these holders the right to dissent from the
amendment and to require us to pay them the fair value of their shares.
OWNERSHIP RESTRICTIONS
There is no law or governmental decree or regulation in Canada that
restricts the export or import of capital, or affects the remittance of
dividends, interest or other payments to non-resident holders of our subordinate
voting shares, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by our articles of
incorporation or our other charter documents on the right of a non-resident to
hold or vote subordinate voting shares, other than as provided by the Investment
Canada Act, the North American Free Trade Agreement Implementation Act (Canada)
and the World Trade Organization Agreement Implementation Act. The Investment
Canada Act requires notification and, in certain cases, advance review and
approval by the Government of Canada of the acquisition by a "non-Canadian" of
"control" of a "Canadian business", all as defined in the Investment Canada Act.
Generally, the threshold for review will be higher in monetary terms for a
member of the World Trade Organization or North American Free Trade Agreement.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the subordinate voting shares in
Canada is CIBC Mellon Trust Company, at its principal offices in Montreal,
Toronto and Vancouver and in the United States is ChaseMellon Shareholder
Services, L.L.C., at its principal office in New York.
SHARES ELIGIBLE FOR FUTURE SALE
The sale of substantial numbers of subordinate voting shares in the public
market, or the possibility of this sale, could adversely affect prevailing
market prices for our subordinate voting shares.
Upon completion of this offering:
- 7,707,264 of subordinate voting shares will be outstanding;
- 38,000,000 multiple voting shares convertible into 38,000,000
subordinate voting shares will be outstanding;
- 800,000 preferred shares series 1 convertible into 22,485 subordinate
voting shares, assuming a conversion price of $24.00 per share, will be
outstanding; and
- 4,470,961 subordinate voting shares will be issuable under our stock
option plan, including 609,734 subordinate voting shares to be issued
upon the exercise of the options to be granted to employees prior to the
closing of this offering at an exercise price equal to the initial
public offering price.
All of the subordinate voting shares sold in this offering in the United
States and Canada will be freely tradeable without restriction under either the
U.S. Securities Act, except by "affiliates" as defined in Rule 144 under the
U.S. Securities Act, or applicable Canadian securities laws, except by "control
persons" as defined under these laws.
Each of our officers, directors and shareholders have agreed that they will
not dispose of or hedge any of their shares for at least 180 days following the
date of this prospectus.
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CANADIAN RESALE RESTRICTIONS
Under applicable Canadian securities laws, all of the subordinate voting
shares outstanding immediately prior to this offering and all subordinate voting
shares issuable upon the conversion of all other classes of shares outstanding
and resulting from the conversion of the preferred shares series 1, outstanding
immediately prior to this offering and the subordinate voting shares resulting
from the exercise of options granted prior to this offering held by Canadian
residents may not be sold or otherwise disposed of for value in Canada, except
through or with a prospectus, a discretionary exemption or a statutory exemption
available only in specific limited circumstances or until we have been a
reporting issuer for the prescribed period of time, as applicable, and
disclosure to applicable Canadian securities regulatory authorities has been
made. We will become a reporting issuer in all the provinces of Canada when we
file this prospectus with the securities regulatory authorities of those
provinces and when those authorities issue receipts for the prospectus. We
expect that the receipts will be issued on or about the date of this prospectus.
We are applying to the applicable regulatory authorities for a discretionary
exemption to permit the resale of shares without a prospectus required. In
addition, sales of our subordinate voting shares in Canada by our majority
shareholder will also be restricted.
U.S. RESALE RESTRICTIONS
In general, under Rule 144, as in effect on the date of this prospectus,
any person, including our affiliates, who has beneficially owned subordinate
voting shares for at least one year will be entitled to sell, in any three-
month period, a number of shares that (together with subordinate voting shares
with which the person's shares must be aggregated) does not exceed the greater
of:
- 1% of the then outstanding subordinate voting shares; and
- the average weekly trading volume of the subordinate voting shares on
the Nasdaq National Market during the four calendar weeks immediately
preceding the filing of a Form 144 with respect to the sale.
Sales of restricted securities under Rule 144 must also satisfy
requirements relating to manner of sale, notice and availability of current
public information about us. Our affiliates must also comply with the
restrictions and requirements of Rule 144, other than the one-year holding
period requirement, in order to sell subordinate voting shares which are not
restricted securities.
We intend to file with the SEC a registration statement on Form S-8 within
approximately 180 days after the date of this prospectus. The S-8 registration
statement will allow holders of subordinate voting shares who are residents of
the United States and countries other than Canada to resell subordinate voting
shares issued under equity incentive arrangements and subordinate voting shares
issued in connection with option exercises.
OTHER RESALE RESTRICTIONS
Of the 707,264 subordinate voting shares issued to our employees under the
1998 Stock Purchase Plan, 256,017 subordinate voting shares will be held in
trust and restricted from resale until dates ranging from October 21, 2003 to
January 20, 2004 and the balance will be held in trust and restricted from
resale until August 31, 2004. See "Management -- Share Plan."
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TAX CONSIDERATIONS
UNITED STATES TAXATION
In the opinion of Paul, Weiss, Rifkind, Wharton & Garrison, the information
set forth below under the caption "United States Taxation" is a summary of the
material U.S. federal income tax consequences of the acquisition, ownership and
disposition of subordinate voting shares by a U.S. Holder, as defined below.
These discussions are not a complete analysis or listing of all of the possible
tax consequences of such transactions and do not address all tax considerations
that may be relevant to particular holders in light of their personal
circumstances or to persons that are subject to special tax rules. In
particular, the information set forth under the caption "United States Taxation"
deals only with U.S. Holders that will hold subordinate voting shares as capital
assets within the meaning of the Internal Revenue Code of 1986, as amended, and
who do not at any time own individually, nor are treated as owning 10% or more
of the total combined voting power of all classes of our stock entitled to vote.
In addition, this description of U.S. tax consequences does not address the tax
treatment of special classes of U.S. Holders, such as banks, tax-exempt
entities, insurance companies, persons holding subordinate voting shares as part
of a hedging or conversion transaction or as part of a "straddle," U.S.
expatriates, persons subject to the alternative minimum tax, dealers or traders
in securities or currencies and holders whose "functional currency" is not the
U.S. dollar. This summary does not address estate and gift tax consequences or
tax consequences under any foreign, state or local laws other than as provided
in the section entitled "Canadian Federal Income Tax Considerations" provided
below.
As used in this section, the term "U.S. Holder" means:
(a) an individual citizen or resident of the United States;
(b) a corporation created or organized under the laws of the United
States or any state thereof including the District of Columbia;
(c) an estate the income of which is subject to United States federal
income taxation regardless of its source;
(d) a trust if a court within the United States is able to exercise
primary jurisdiction over its administration and one or more U.S.
persons have authority to control all substantial decisions of the
trust; or
(e) a partnership to the extent the interests therein are owned by any of
the persons described in clauses (a), (b), (c) or (d) above.
Holders of subordinate voting shares who are not U.S. Holders, sometimes
referred to as "Non-U.S. Holders", should also consult their own tax advisors,
particularly as to the applicability of any tax treaty.
The following discussion is based upon:
- the Internal Revenue Code;
- U.S. judicial decisions;
- administrative pronouncements;
- existing and proposed Treasury regulations; and
- the Canada -- U.S. Income Tax Treaty.
Any of the above is subject to change, possibly with retroactive effect. We
have not requested, and will not request, a ruling from the U.S. Internal
Revenue Service with respect to any of the U.S. federal income tax consequences
described below, and as a result, there can be no assurance that the U.S.
Internal Revenue Service will not disagree with or challenge any of the
conclusions we have reached and describe here.
POTENTIAL PURCHASERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE
PARTICULAR CONSEQUENCES TO THEM UNDER U.S. FEDERAL, STATE, LOCAL AND APPLICABLE
FOREIGN TAX LAWS OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SUBORDINATE
VOTING SHARES.
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Dividends
Subject to the discussion of passive foreign investment companies below,
the gross amount of any distribution paid by us to a U.S. Holder will generally
be subject to U.S. federal income tax as foreign source dividend income to the
extent paid out of our current or accumulated earnings and profits, as
determined under U.S. federal income tax principles. The amount of any
distribution of property other than cash will be the fair market value of such
property on the date of the distribution. Dividends received by a U.S. Holder
will not be eligible for the dividends received deduction allowed to
corporations. To the extent that an amount received by a U.S. Holder exceeds
such holder's allocable share of our current and accumulated earnings and
profits, such excess will be applied first to reduce such U.S. Holder's tax
basis in his subordinate voting shares, thereby increasing the amount of gain or
decreasing the amount of loss recognized on a subsequent disposition of the
subordinate voting shares. Then, to the extent such distribution exceeds such
U.S. Holder's tax basis, it will be treated as capital gain. We do not currently
maintain calculations of our earnings and profits for U.S. federal income tax
purposes.
The gross amount of distributions paid in Canadian dollars, or any
successor or other foreign currency, will be included in the income of such U.S.
Holder in a dollar amount calculated by reference to the spot exchange rate in
effect on the day the distributions are paid regardless of whether the payment
is in fact converted into U.S. dollars. If the Canadian dollars, or any
successor or other foreign currency, are converted into U.S. dollars on the date
of the payment, the U.S. Holder should not be required to recognize any foreign
currency gain or loss with respect to the receipt of Canadian dollars as
distributions. If, instead, the Canadian dollars are converted at a later date,
any currency gains or losses resulting from the conversion of the Canadian
dollars will be treated as U.S. source ordinary income or loss. Any amounts
recognized as dividends will generally constitute foreign source "passive
income" or, in the case of certain U.S. Holders, "financial services income" for
U.S. foreign tax credit purposes. A U.S. Holder will have a basis in any
Canadian dollars distributed equal to their dollar value on the payment date.
A Non-U.S. Holder of subordinate voting shares generally will not be
subject to U.S. federal income or withholding tax on dividends received on
subordinate voting shares unless such income is effectively connected with the
conduct by such Non-U.S. Holder of a trade or business in the United States.
Sale or Exchange
A U.S. Holder's initial tax basis in the subordinate voting shares will
generally be cost to the holder. A U.S. Holder's adjusted tax basis in the
subordinate voting shares will generally be the same as cost, but may differ for
various reasons including the receipt by such holder of a distribution that was
not made up wholly of earnings and profits as described above under the heading
"Dividends." Subject to the discussion of passive foreign investment companies
below, gain or loss realized by a U.S. Holder on the sale or other disposition
of subordinate voting shares will be subject to U.S. federal income taxation as
capital gain or loss in an amount equal to the difference between the U.S.
Holder's adjusted tax basis in the subordinate voting shares and the amount
realized on the disposition. In the case of a non-corporate U.S. Holder, the
federal tax rate applicable to capital gains will depend upon:
- the holder's holding period for the subordinate voting shares, with a
preferential rate available for subordinate voting shares held for more
than one year; and
- the holder's marginal tax rate for ordinary income.
Any gain realized will generally be treated as U.S. source gain and loss
realized by a U.S. Holder generally also will be treated as from sources within
the United States.
The ability of a U.S. Holder to utilize foreign taxes as a credit to offset
U.S. taxes is subject to complex limitations and conditions. The consequences of
the separate limitation calculation will depend upon the nature and sources of
each U.S. Holder's income and the deductions allocable thereto. Alternatively, a
U.S. Holder may elect to claim all foreign taxes paid as an itemized deduction
in lieu of claiming a foreign tax credit. A deduction does not reduce U.S. tax
on a dollar-for-dollar basis like a tax credit, but the availability of the
deduction is not subject to the same conditions and limitations applicable to
foreign tax credits.
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If a U.S. Holder receives any foreign currency on the sale of subordinate
voting shares, such U.S. Holder may recognize ordinary income or loss as a
result of currency fluctuations between the date of the sale of subordinate
voting shares and the date the sale proceeds are converted into U.S. dollars.
A Non-U.S. Holder of subordinate voting shares generally will not be
subject to U.S. federal income or withholding tax on any gain realized on the
sale or exchange of such subordinate voting shares unless:
- such gain is effectively connected with the conduct by such Non-U.S.
Holder of a trade or business in the United States; or
- in the case of any gain realized by an individual Non-U.S. Holder, such
Non-U.S. Holder is present in the United States for 183 days or more in
the taxable year of such sale and certain other conditions are met.
Personal Holding Company
We could be classified as a personal holding company for U.S. federal
income tax purposes if both of the following tests are satisfied:
- if at any time during the last half of our taxable year, five or fewer
individuals own or are deemed to own more than 50% of the total value of
our shares; and
- we receive 60% or more of our U.S. related gross income from specified
passive sources, such as royalty payments.
A personal holding company is taxed on a portion of its undistributed U.S.
source income, including specific types of foreign source income which are
connected with the conduct of a U.S. trade or business, to the extent this
income is not distributed to shareholders. We do not believe we are a personal
holding company presently and we do not expect to become one. However, we can
not assure you that we will not qualify as a personal holding company in the
future.
Foreign Personal Holding Company
We could be classified as a foreign personal holding company if in any
taxable year both of the following tests are satisfied:
- five or fewer individuals who are United States citizens or residents
own or are deemed to own more than 50% of the total voting power of all
classes of our shares entitled to vote or the total value of our shares;
and
- at least 60%, 50% in some cases, of our gross income, as adjusted,
consists of "foreign personal holding company income", which generally
includes passive income such as dividends, interests, gains from the
sale or exchange of shares or securities, rent and royalties.
If we are classified as a foreign personal holding company and if you hold
shares in us, you may have to include in your gross income as a dividend your
pro rata portion of our undistributed foreign personal holding company income.
If you dispose of your shares prior to such date, you will not be subject to tax
under these rules. We do not believe we are a foreign personal holding company
presently and we do not expect to become one. However, we can not assure you
that we will not qualify as a foreign personal holding company in the future.
Passive Foreign Investment Company
We believe that our subordinate voting shares should not currently be
treated as stock of a passive foreign investment company for United States
federal income tax purposes, but this conclusion is a factual determination made
annually and thus may be subject to change based on future operations. In
general, we will be a passive foreign investment company with respect to a U.S.
Holder if, for any taxable year in which the U.S. Holder holds our subordinate
voting shares, either:
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- at least 75% of our gross income for the taxable year is passive income;
or
- at least 50% of the average value of our assets is attributable to
assets that produce or are held for the production of passive income.
For this purpose, passive income includes income such as:
- dividends;
- interest;
- rents or royalties, other than certain rents or royalties derived from
the active conduct of trade or business;
- annuities; or
- gains from assets that produce passive income.
If a foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the passive
foreign investment company tests as owning its proportionate share of the assets
of the other corporation and as receiving directly its proportionate share of
the other corporation's income.
If we are treated as a passive foreign investment company, a U.S. Holder
that did not make a qualified electing fund election or, if available, a
mark-to-market election, as described below, would be subject to special rules
with respect to:
- any gain realized on the sale or other disposition of subordinate voting
shares; and
- any "excess distribution" by us to the U.S. Holder.
Generally, "excess distributions" are any distributions to the U.S. Holder
in respect of the subordinate voting shares during a single taxable year that
are greater than 125% of the average annual distributions received by the U.S.
Holder in respect of the subordinate voting shares during the three preceding
taxable years or, if shorter, the U.S. Holder's holding period for the
subordinate voting shares.
Under the passive foreign investment company rules,
- the gain or excess distribution would be allocated ratably over the U.S.
Holder's holding period for the subordinate voting shares;
- the amount allocated to the taxable year in which the gain or excess
distribution was realized would be taxable as ordinary income;
- the amount allocated to each prior year, with certain exceptions, would
be subject to tax at the highest tax rate in effect for that year; and
- the interest charge generally applicable to underpayments of tax would
be imposed in respect of the tax attributable to each such year.
A U.S. Holder owning actually or constructively "marketable stock" of a
passive foreign investment company may be able to avoid the imposition of the
passive foreign investment company tax rules described above by making a
mark-to-market election. Generally, pursuant to this election, such holder would
include in ordinary income, for each taxable year during which such stock is
held, an amount equal to the increase in value of the stock, which increase will
be determined by reference to the value of such stock at the end of the current
taxable year compared with their value as of the end of the prior taxable year.
Holders desiring to make the mark-to-market election should consult their tax
advisors with respect to the application and effect of making such election.
In the case of a U.S. Holder who does not make a mark-to-market election,
the special passive foreign investment company tax rules described above will
not apply to such U.S. Holder if the U.S. Holder makes an election to have us
treated as a qualified electing fund and we provide certain required information
to holders. For a U.S. Holder to make a qualified electing fund election, we
would have to satisfy certain reporting requirements. We have not determined
whether we will undertake the necessary measures to be able to satisfy such
requirements in the event that we were treated as a passive foreign investment
company.
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A U.S. Holder that makes a qualified electing fund election will be
currently taxable on its pro rata share of our ordinary earnings and net capital
gain, at ordinary income and capital gains rates, respectively, for each of our
taxable years, regardless of whether or not distributions were received. The
U.S. Holder's basis in the subordinate voting shares will be increased to
reflect taxed but undistributed income. Distributions of income that had
previously been taxed will result in a corresponding reduction of basis in the
subordinate voting shares and will not be taxed again as a distribution to the
U.S. Holder. U.S. Holders desiring to make a qualified electing fund election
should consult their tax advisors with respect to the advisability of making
such election.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
A U.S. Holder may be subject to information reporting with respect to
dividends paid on, or proceeds of the sale or other disposition of, our
subordinate voting shares, unless the U.S. Holder is a corporation or comes
within certain other categories of exempt recipients. A U.S. Holder that is not
an exempt recipient may be subject to backup withholding at a rate of 31% with
respect to the proceeds from the sale or the disposition of, or with respect to
dividends on, subordinate voting shares unless the U.S. Holder provides a
taxpayer identification number and otherwise complies with applicable
requirements of the backup withholding rules. Any amount withheld under these
rules will be creditable against the U.S. Holder's U.S. federal income tax
liability or refundable to the extent that it exceeds such liability. A U.S
Holder who does not provide a correct taxpayer identification number may be
subject to penalties imposed by the United States Internal Revenue Service.
Non-U.S. Holders may be subject to information reporting and possible
backup withholding with respect to the proceeds of the sale or other disposition
of subordinate voting shares effected within the United States, unless the
holder certifies to its foreign status or otherwise establishes an exemption if
the broker does not have actual knowledge that the holder is a U.S. holder.
Treasury regulations will modify certain of the rules discussed above with
respect to payments on the subordinate voting shares made after December 31,
2000. In particular, a payor within the United States will be required to
withhold 31% of any payments of dividends on or proceeds from the sale of
subordinate voting shares within the United States to a non-exempt U.S. or
Non-U.S. Holder if such holder fails to provide appropriate certification. In
the case of such payments by a payor within the United States to a foreign
partnership other than a foreign partnership that qualifies as a "withholding
foreign partnership" within the meaning of such Treasury regulations, the
partners of such partnership will be required to provide the certification
discussed above in order to establish an exemption from backup withholding tax
and information reporting requirements.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In the opinion of Fasken Martineau DuMoulin LLP, the following is a summary
of the material Canadian federal income tax considerations generally applicable
to a U.S. person who holds subordinate voting shares and who, for the purposes
of the Income Tax Act (Canada), or the ITA, and the Canada-United States Income
Tax Convention (1980), or the Convention, as applicable and at all relevant
times:
- is resident in the United States and not resident in Canada,
- holds the subordinate voting shares as capital property,
- does not have a "permanent establishment" or "fixed base" in Canada, as
defined in the Convention; and
- deals at arm's length with us. Special rules, which are not discussed
below, may apply to "financial institutions", as defined in the ITA, and
to non-resident insurers carrying on an insurance business in Canada and
elsewhere.
This discussion is based on the current provisions of the ITA and the
regulations promulgated under the ITA and the Convention, all specific proposals
to amend the ITA or the regulations promulgated under the ITA announced by or on
behalf of the Canadian Minister of Finance prior to the date of this Offering
Circular and the current published administrative practices of the Canada
Customs and Revenue Agency, or the Agency. It does
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not otherwise take into account or anticipate any changes in law or
administrative practice nor any income tax laws or considerations of any
province or territory of Canada or any jurisdiction other than Canada, which may
differ from the Canadian federal income tax consequences described in this
document.
Under the ITA and the Convention, dividends paid or credited, or deemed to
be paid or credited, on the subordinate voting shares to a U.S. person who owns
less than 10% of the voting shares will be subject to Canadian withholding tax
at the rate of 15% of the gross amount of those dividends or deemed dividends.
If a U.S. person is a corporation and owns 10% or more of the voting shares, the
rate is reduced from 15% to 5%. As described above and subject to specified
limitations, a U.S. person may be entitled to credit against U.S. federal income
tax liability for the amount of tax withheld by Canada.
Under the Convention, dividends paid to specified religious, scientific,
charitable and similar tax exempt organizations and specified organizations that
are resident and exempt from tax in the United States and that have complied
with specified administrative procedures are exempt from this Canadian
withholding tax.
A capital gain realized by a U.S. person on a disposition or deemed
disposition of the subordinate voting shares will not be subject to tax under
the ITA unless the subordinate voting shares constitute taxable Canadian
property within the meaning of the ITA at the time of the disposition or deemed
disposition. In general, the subordinate voting shares will not be "taxable
Canadian property" to a U.S. person if they are listed on a prescribed stock
exchange, which includes The Toronto Stock Exchange, unless, at any time within
the five-year period immediately preceding the dispositions, the U.S. person,
persons with whom the U.S. person did not deal at arm's length, or the U.S.
person together with those persons, owned or had an interest in or a right to
acquire more than 25% of any class or series of our shares.
If the subordinate voting shares are taxable Canadian property to a U.S.
person, any capital gain realized on a disposition or deemed disposition of
those subordinate voting shares will generally be exempt from tax under the ITA
by virtue of the Convention if the value of the subordinate voting shares at the
time of the disposition or deemed disposition is not derived principally from
real property, as defined by the Convention, situated in Canada. The
determination as to whether Canadian tax would be applicable on a disposition or
deemed disposition of the subordinate voting shares must be made at the time of
the disposition or deemed disposition.
POTENTIAL PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM, INCLUDING THE APPLICATION AND
EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS, OF THE
ACQUISITION, OWNERSHIP AND DISPOSITION OF SUBORDINATE VOTING SHARES.
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UNDERWRITING
Subject to the terms and conditions described in a purchase agreement among
us and the underwriters named below, for whom Merrill Lynch, Pierce, Fenner &
Smith Incorporated, RBC Dominion Securities Inc., Wit SoundView Corporation and
CIBC World Markets Inc., are acting as representatives, we have agreed to sell
to the underwriters and the underwriters severally have agreed to purchase from
us, the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
RBC Dominion Securities Inc.................................
Wit SoundView Corporation...................................
CIBC World Markets Inc......................................
---------
Total.......................................... 7,000,000
=========
</TABLE>
In the purchase agreement, each of the underwriters have severally agreed
to purchase all of the shares sold under the purchase agreement if any of these
shares are purchased. The obligations of the underwriters under the purchase
agreement may be terminated at their discretion on the basis of their assessment
of the state of the financial markets and also upon the occurrence of certain
stated events. Under the purchase agreement, the commitments of non-defaulting
underwriters may be increased.
This offering is being made concurrently in the United States and in all of
the provinces of Canada. The subordinate voting shares will be offered in the
United States and Canada through the underwriters either directly or through
their respective U.S. or Canadian registered broker-dealer affiliates or agents.
Subject to applicable law, the underwriters may offer the subordinate voting
shares outside of Canada and the United States.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the U.S. Securities Act and applicable Canadian
securities legislation, or to contribute to payments the underwriters may be
required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
The subordinate voting shares will be ready for delivery in New York, New
York on or about , 2000.
COMMISSIONS
The representatives have advised us that the underwriters propose initially
to offer the shares to the public at the initial public offering price on the
cover page of this prospectus. With respect to the offering in the United
States, the underwriters may offer the shares to dealers at the initial public
offering price less a concession not in excess of $ per share and the
underwriters may allow and the dealers may reallow, a discount not in excess of
$ per share to other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting
commission and proceeds before expenses to EXFO. The information assumes either
no exercise or full exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price................ $ $ $
Underwriting discount................ $ $ $
Proceeds, before expenses, to EXFO... $ $ $
</TABLE>
72
<PAGE> 78
The public offering price for subordinate voting shares offered in the
United States is payable in U.S. dollars and the public offering price for
subordinate voting shares offered in Canada is payable in Canadian dollars. The
U.S. dollar amount is the equivalent of the Canadian price of the subordinate
voting shares based on the prevailing U.S. -- Canadian dollar exchange rate as
of the date of this prospectus. See "Exchange Rate Information."
The expenses of this offering, not including the underwriting commission,
are estimated at $1,000,000 and are payable by EXFO.
OVER-ALLOTMENT OPTION
We have granted options to the underwriters to purchase up to 1,050,000
additional shares at the public offering price less the underwriting commission.
The underwriters may exercise these options for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
these options, each will be obligated, subject to conditions contained in the
purchase agreement, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 7% of the shares offered by this prospectus for
sale to some of our directors, officers, employees, distributors, dealers,
business associates and related persons. If these persons purchase reserved
shares, this will reduce the number of shares available for sale to the general
public. Any reserved shares that are not orally confirmed for purchase within
one day of the pricing of this offering will be offered by the underwriters to
the general public on the same terms as the other shares offered by this
prospectus. No commitment to purchase reserved shares will be accepted until
after the registration statement of which this prospectus is a part is effective
and a public offering price has been established.
NO SALES OF SIMILAR SECURITIES
We and our executive officers and directors and all existing shareholders
have agreed not to sell or transfer any subordinate voting shares for 180 days
after the date of this prospectus without first obtaining the written consent of
Merrill Lynch. Specifically, we and these other individuals have agreed not to
directly or indirectly:
- offer, pledge, sell or contract to sell any subordinate voting shares;
- sell any option or contract to purchase any subordinate voting shares;
- purchase any option or contract to sell any subordinate voting shares;
- grant any option, right or warrant for the sale of any subordinate
voting shares;
- lend or otherwise dispose of or transfer any subordinate voting shares;
- request or demand that we file a registration statement related to the
subordinate voting shares; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any subordinate voting
shares whether any such swap or transaction is to be settled by delivery
of shares or other securities, in cash or otherwise.
This lockup provision applies to subordinate voting shares and to
securities convertible into or exchangeable or exercisable for or repayable with
subordinate voting shares. It also applies to subordinate voting shares owned
now or acquired later by the person executing the agreement or for which the
person executing the agreement later acquires the power of disposition.
73
<PAGE> 79
NASDAQ NATIONAL MARKET AND TORONTO STOCK EXCHANGE LISTINGS AND FACTORS
CONSIDERED IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE
We expect the shares to be approved for quotation on the Nasdaq National
Market, subject to notice of issuance, under the symbol "EXFO". The shares have
been conditionally approved for listing on The Toronto Stock Exchange, under the
symbol "EXF". The quotation on the Nasdaq National Market and the listing on The
Toronto Stock Exchange are subject to our fulfilling all of the requirements of
the Nasdaq National Market and The Toronto Stock Exchange, including the
distribution of the subordinate voting shares to a minimum number of public
shareholders.
Before this offering, there has been no public market for our subordinate
voting shares. The initial public offering price will be determined through
negotiations among us and the underwriters. In addition to prevailing market
conditions, the factors to be considered in determining the initial public
offering price are:
- the valuation multiples of publicly traded companies that the
underwriters believe to be comparable to us;
- our financial information;
- the history of, and the prospects for, our company and the industry in
which we compete;
- an assessment of our management, its past and present operations and the
prospects for and timing of, our future sales;
- the present state of our development; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after this offering the shares will not trade in the public market
at or above the initial public offering price.
The underwriters do not expect to sell more that 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
ELECTRONIC PROSPECTUS
Merrill Lynch will be facilitating Internet distribution for this offering
to certain of its Internet subscription customers. Merrill Lynch intends to
allocate a limited number of shares for sale to its online brokerage customers.
An electronic prospectus is available on the Web site maintained by Merrill
Lynch. Other than the prospectus in electronic format, the information on the
Merrill Lynch Web site relating to this offering is not a part of this
prospectus.
A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit SoundView's affiliate, Wit Capital Corporation. Other
than the prospectus in electronic format, the information on Wit Capital's Web
site and any information contained on any other Web site maintained by Wit
Capital is not part of the prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by us or any
underwriter in its capacity as underwriter and should not be relied upon by
investors.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
subordinate voting shares. However, the underwriters may engage in transactions
that stabilize the price of subordinate voting shares, such as bids or purchases
to peg, fix or maintain that price.
If the underwriters create a short position in the subordinate voting
shares in connection with this offering, i.e., if they sell more shares than are
listed on the cover of this prospectus, the underwriters may reduce that short
position by purchasing shares in the open market. The underwriters may also
elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the subordinate voting
shares
74
<PAGE> 80
to stabilize its price or to reduce a short position may cause the price of the
subordinate voting shares to be higher than it might be in the absence of such
purchases.
The underwriters may also impose a penalty bid on underwriters and selling
group members. This means that if the underwriters purchase shares in the open
market to reduce the underwriter's short position or to stabilize the price of
such shares, they may reclaim the amount of the selling concession from the
underwriters and the selling group members who sold those shares. The imposition
of a penalty bid may also affect the price of the shares in that it discourages
resales of those shares.
Pursuant to policy statements of the Commission des valeurs mobilieres du
Quebec and the Ontario Securities Commission, the underwriters in Canada may
not, throughout the period of distribution, bid for or purchase subordinate
voting shares. The foregoing restriction is subject to certain exceptions, on
the condition that the bid or purchase not be engaged in for the purpose of
creating actual or apparent active trading in, or raising the price of, the
subordinate voting shares. Such exceptions include a bid or purchase permitted
under the by-laws and rules of The Toronto Stock Exchange relating to market
stabilization and passive market making activities and a bid or purchase made
for and on behalf of a customer where the order was not solicited during the
period of distribution. We have been advised that in connection with this
offering and pursuant to the first exception mentioned above, the underwriters
may over-allot or effect transactions which stabilize or maintain the market
price of the subordinate voting shares at levels other than those that might
otherwise prevail on the open market. These transactions, if commenced, may be
discontinued at any time.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the subordinate voting shares. In
addition, neither we nor any of the underwriters makes any representation that
the underwriters will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
LEGAL MATTERS
Legal matters relating to this offering as to Canadian law and the validity
of the subordinate voting shares offered in this offering are being passed upon
for us by Fasken Martineau DuMoulin LLP, Montreal, Quebec. Legal matters
relating to this offering as to New York and United States law will be passed
upon for us by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York.
Legal matters relating to this offering as to Canadian law are being passed upon
for the underwriters by Ogilvy Renault, a general partnership, Montreal, Quebec.
Legal matters relating to this offering as to New York and United States law are
being passed upon for the underwriters by Skadden, Arps, Slate, Meagher & Flom
LLP, Toronto, Ontario.
EXPERTS
The consolidated financial statements included in this prospectus as of
August 31, 1998 and 1999 and for the years ended August 31, 1997, 1998 and 1999
included in this prospectus have been audited by PricewaterhouseCoopers LLP,
Chartered Accountants in Canada and are included in reliance upon such reports
given on the authority of PricewaterhouseCoopers LLP as experts in auditing and
accounting.
75
<PAGE> 81
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the U.S. Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, a registration statement on Form F-1 under
the Securities Act for subordinate voting shares offered by this prospectus. We
have not included in this prospectus all the information contained in the
registration statement and you should refer to the registration statement and
its exhibits for further information.
Any statement in this prospectus about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to the registration statement, the contract or document is deemed to
modify the description contained in this prospectus. You must review the
exhibits themselves for a complete description of the contract or document.
You may review a copy of the registration statement, including exhibits and
schedules filed with it, at the SEC's public reference facilities in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the SEC located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such
materials from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You
may call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. The SEC maintains a Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC such as us.
You may read and copy any reports, statements or other information that we
file with the SEC at the addresses indicated above and you may also access them
electronically at the Web site set forth above. These SEC filings are also
available to the public from commercial document retrieval services.
Prior to this offering, we have not been required to file reports with the
SEC. Following consummation of this offering, we will be required to file
reports and other information with the SEC under the Securities Exchange Act of
1934. As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements and our
officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange
Act. Under the Exchange Act, as a foreign private issuer, we are not required to
publish financial statements as frequently or as promptly as United States
companies.
76
<PAGE> 82
INDEX TO OUR CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C>
Auditors' Report............................................ F-2
Consolidated balance sheets as at August 31, 1998 and 1999
and February 29, 2000 (unaudited)......................... F-3
Consolidated statements of earnings for the years ended
August 31, 1997, 1998 and 1999 and the six months ended
February 28, 1999 and February 29, 2000 (unaudited)....... F-4
Consolidated statements of retained earnings for the years
ended August 31, 1997, 1998 and 1999 and the six months
ended February 28, 1999 and February 29, 2000
(unaudited)............................................... F-5
Consolidated statements of cash flows for the years ended
August 31, 1997, 1998 and 1999 and the six months ended
February 28, 1999 and February 29, 2000 (unaudited)....... F-6
Notes to the consolidated financial statements.............. F-7
</TABLE>
F-1
<PAGE> 83
AUDITORS' REPORT
To the Directors of
EXFO ELECTRO-OPTICAL ENGINEERING INC.
We have audited the consolidated balance sheets of EXFO ELECTRO-OPTICAL
ENGINEERING INC. as at August 31, 1999 and 1998 and the EXFO ELECTRO-OPTICAL
ENGINEERING INC. statements of earnings, retained earnings and cash flows for
each of the years in the three-year period ended August 31, 1999. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the company as at August 31,
1999 and 1998 and the results of its operations and its cash flows for each of
the years in the three-year period ended in accordance with Canadian generally
accepted accounting principles.
LOGO
CHARTERED ACCOUNTANTS
Quebec, Quebec, Canada
October 15, 1999
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition
of an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the company's financial statements, such as the change described in note 2 to
the financial statements. Our report to the shareholders dated October 15, 1999,
is expressed in accordance with Canadian reporting standards which do not
require a reference to such a change in accounting principles in the auditor's
report when the change is properly accounted for and adequately disclosed in the
financial statements.
LOGO
CHARTERED ACCOUNTANTS
Quebec, Quebec, Canada
October 15, 1999
F-2
<PAGE> 84
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
AS AT
AS AT AUGUST 31, FEBRUARY 29,
------------------- ------------
1998 1999 2000
-------- ------- ------------
(NOTE 3) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,262 $ 423 $ 539
Short-term investments (notes 9 and 19)................... 1,338 1,371 --
Accounts receivable (notes 5 and 9)....................... 6,020 9,895 15,934
Income taxes receivable (note 9).......................... -- 381 1,533
Inventories (notes 6 and 9)............................... 6,332 7,591 11,878
Prepaid expenses and deposits............................. 270 475 465
------- ------- -------
15,222 20,136 30,349
CAPITAL ASSETS (notes 7 and 9)............................ 2,315 2,639 4,161
GOODWILL AND OTHER ASSETS (notes 8 and 9)................. 106 65 2,562
------- ------- -------
$17,643 $22,840 $37,072
======= ======= =======
LIABILITIES
CURRENT LIABILITIES
Bank advances (note 9).................................... $ 136 $ -- $ 5,351
Accounts payable and accrued liabilities (note 10)........ 3,558 5,523 8,652
Income taxes payable...................................... 115 -- --
Dividend payable.......................................... -- 51 --
Mandatorily redeemable preferred shares (note 11)......... -- -- 555
Loan from a company under common control (note 15)........ 1,337 1,337 1,388
Deferred revenue.......................................... -- 218 341
Current portion of long-term debt......................... 20 -- 350
Future income taxes (note 17)............................. 259 262 134
------- ------- -------
5,425 7,391 16,771
DEFERRED REVENUE.......................................... -- 109 61
DEFERRED GRANTS........................................... -- 533 813
LONG-TERM DEBT (note 12).................................. -- -- 283
FUTURE INCOME TAXES (note 17)............................. 173 128 96
------- ------- -------
5,598 8,161 18,024
------- ------- -------
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 13)................................... 1 87 104
CUMULATIVE TRANSLATION ADJUSTMENT......................... -- -- 640
RETAINED EARNINGS......................................... 12,044 14,592 18,304
------- ------- -------
12,045 14,679 19,048
------- ------- -------
$17,643 $22,840 $37,072
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 85
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of U.S. dollars, except share and per share data)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
------------------------------ ---------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 3) (NOTE 3) (NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
SALES (note 18)............................... $24,475 $31,605 $42,166 $18,728 $29,111
COST OF SALES................................. 9,652 11,345 14,998 7,021 9,609
------- ------- ------- ------- -------
GROSS MARGIN.................................. 14,823 20,260 27,168 11,707 19,502
------- ------- ------- ------- -------
OPERATING EXPENSES
Selling and administrative.................... 7,827 9,898 13,279 5,964 9,938
Net research and development (note 15)........ 1,592 3,014 4,315 1,791 3,221
Amortization of capital assets................ 465 609 857 401 590
Amortization of other assets.................. 14 48 41 21 21
------- ------- ------- ------- -------
TOTAL OPERATING EXPENSES...................... 9,898 13,569 18,492 8,177 13,770
------- ------- ------- ------- -------
EARNINGS FROM OPERATIONS...................... 4,925 6,691 8,676 3,530 5,732
Interest expense (income) -- net.............. 89 (40) (136) (46) (25)
Foreign exchange loss (gain).................. 184 (126) 506 398 116
------- ------- ------- ------- -------
EARNINGS BEFORE INCOME TAXES AND AMORTIZATION
OF GOODWILL................................. 4,652 6,857 8,306 3,178 5,641
INCOME TAXES (note 17)........................ 1,582 2,356 2,492 958 1,887
------- ------- ------- ------- -------
EARNINGS BEFORE AMORTIZATION OF GOODWILL...... 3,070 4,501 5,814 2,220 3,754
AMORTIZATION OF GOODWILL...................... -- -- -- -- 42
------- ------- ------- ------- -------
NET EARNINGS FOR THE PERIOD................... $ 3,070 $ 4,501 $ 5,814 $ 2,220 $ 3,712
======= ======= ======= ======= =======
BASIC AND FULLY DILUTED EARNINGS PER SHARE
Earnings before amortization of goodwill.... $ 0.08 $ 0.12 $ 0.14 $ 0.05 $ 0.10
Net earnings................................ $ 0.08 $ 0.12 $ 0.14 $ 0.05 $ 0.10
BASIC WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING (000'S)......................... 38,000 38,000 38,001 38,000 38,425
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 86
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in thousands of U.S. dollars, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 3) (NOTE 3) (NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
BALANCE -- BEGINNING OF PERIOD... $ 4,673 $ 7,643 $12,044 $12,044 $14,592
ADD
Net earnings for the period...... 3,070 4,501 5,814 2,220 3,712
-------- ------- ------- ------- -------
7,743 12,144 17,858 14,264 18,304
-------- ------- ------- ------- -------
DEDUCT
Dividends
Class A shares................. -- -- 2,926 -- --
Class C share (note 4)......... -- -- 340 340 --
Class E shares................. 100 100 -- -- --
-------- ------- ------- ------- -------
100 100 3,266 340 --
-------- ------- ------- ------- -------
BALANCE -- END OF PERIOD......... $ 7,643 $12,044 $14,592 $13,924 $18,304
======== ======= ======= ======= =======
DIVIDENDS PER SHARE
Class A shares................. $ -- $ -- $ 0.08 $ -- $ --
Class C share.................. $ -- $ -- $ 340 $ 340 $ --
Class E shares................. $ 0.005 $ 0.005 $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 87
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 3) (NOTE 3) (NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings for the period................ $ 3,070 $ 4,501 $ 5,814 $ 2,220 $ 3,712
Add (deduct) items not affecting cash and
cash equivalents
Amortization of capital assets........... 465 609 857 401 590
Amortization of goodwill and other
assets................................. 14 48 41 21 63
Foreign exchange loss.................... -- -- -- -- 3
Future income taxes...................... 6 289 (42) (65) 24
Change in non-cash operating working
capital items
Accounts receivable...................... (644) (1,297) (3,875) (1,816) (5,028)
Income taxes receivable.................. 741 -- (381) (348) (538)
Inventories.............................. (607) (758) (1,259) (555) (3,243)
Prepaid expenses and deposits............ (26) (117) (205) 19 47
Accounts payable and accrued
liabilities............................ 970 369 1,965 233 1,907
Income taxes payable..................... 605 (490) (115) (115) --
Deferred revenue......................... -- -- 327 175 75
Deferred grants.......................... -- -- 533 295 255
------- ------- ------- ------- -------
4,594 3,154 3,660 465 (2,133)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances.............................. (2,731) (142) (136) 61 4,552
Repayment of long-term debt................ (243) (21) (20) (10) (16)
Issuance of share capital.................. -- -- 86 -- 17
Dividends paid............................. (100) (100) (3,215) (340) (51)
------- ------- ------- ------- -------
(3,074) (263) (3,285) (289) 4,502
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Short-term investments..................... (604) (647) (33) (34) 1,400
Additions to capital assets................ (1,044) (1,336) (1,181) (540) (1,587)
Business combination, net of cash and cash
equivalents acquired (note 4)............ -- -- -- -- (2,108)
------- ------- ------- ------- -------
(1,648) (1,983) (1,214) (574) (2,295)
------- ------- ------- ------- -------
CHANGE IN CASH AND CASH EQUIVALENTS........ (128) 908 (839) (398) 74
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS................ -- -- -- -- 42
CASH AND CASH EQUIVALENTS -- BEGINNING OF
PERIOD................................... 482 354 1,262 1,262 423
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS -- END OF
PERIOD................................... $ 354 $ 1,262 $ 423 $ 864 $ 539
======= ======= ======= ======= =======
SUPPLEMENTARY INFORMATION
Interest paid.............................. $ 244 $ 145 $ 148 $ 76 $ 136
Income taxes paid.......................... $ 270 $ 2,032 $ 2,801 $ 1,870 $ 3,098
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 88
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted)
1. INCORPORATION AND NATURE OF ACTIVITIES
The company, incorporated in 1985 under the Canada Business Corporations
Act, designs, manufactures and markets a full line of fiber-optic test,
measurement and monitoring equipment and instruments for the
telecommunications industry. The company derives substantially all of its
revenue from customers located in the United States, Canada, Europe and
Asia. Marketing activities outside Canada are carried out by subsidiaries
located in the United States and Europe and independent representatives
worldwide. The company's customers consist primarily of telecommunications
carriers, cable television companies, public utilities, private network
operators, third-party installers, equipment rental companies, as well as
optical component, value-added optical module, and optical networking
system manufacturers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada. These principles
conform, in all material respects, with accounting principles generally
accepted in the United States, except as described in note 21. The
principal accounting policies of the company, which have been consistently
applied, are summarized as follows:
INTERIM FINANCIAL INFORMATION
The financial information as at February 29, 2000 and for the six months
ended February 28, 1999 and February 29, 2000 is unaudited. In the opinion
of management, all adjustments necessary to present fairly the results of
these periods have been included. The adjustments made were of a normal
recurring nature. The results of operations for the six months ended
February 29, 2000 are not necessarily indicative of the operating results
anticipated for the full year.
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Significant estimates include the allowance
for doubtful accounts receivable, tax credits receivable, provisions for
obsolete inventories, the useful lives of capital assets and goodwill and
certain accrued liabilities. Actual results could differ from those
estimates.
CONSOLIDATION
These consolidated financial statements include the accounts of the company
and its wholly owned subsidiaries.
FOREIGN CURRENCY TRANSLATION
FOREIGN SUBSIDIARIES
The company's wholly owned subsidiaries are considered to be integrated. As
a result, the subsidiaries' accounts are remeasured into the functional
currency using the temporal method. Under this method, monetary assets and
liabilities are remeasured at the exchange rates in effect at the balance
sheet date. Non-monetary assets and liabilities are remeasured at
historical rates. Revenue and expenses are remeasured at the average rate
for the period. Gains and losses resulting from remeasurement are reflected
in the statement of earnings.
F-7
<PAGE> 89
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
FOREIGN CURRENCY TRANSACTIONS
Transactions denominated in foreign currencies are measured into the
functional currency using the temporal method.
FORWARD EXCHANGE CONTRACTS
The company enters into forward exchange contracts in order to hedge
against potential exchange rate fluctuations on cash flows related to
anticipated future revenue streams denominated in foreign currencies.
Unrealized gains and losses on these forward exchange contracts are
deferred and recognized upon settlement of the related transactions.
Accordingly, cash flows resulting from forward exchange contract
settlements are classified as cash flows from operating activities along
with the corresponding cash flows being hedged.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and balances with banks
and all highly liquid short-term investments with original maturities of
three months or less.
SHORT-TERM INVESTMENTS
Short-term investments are valued at the lower of cost and market value.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value. The
cost of raw materials and work in progress inventories is determined using
the first-in, first-out method. The cost of finished goods is determined
using the average cost method.
CAPITAL ASSETS AND AMORTIZATION
Capital assets are recorded at cost less related government grants and
research and development tax credits. Amortization is provided on a
straight-line basis over the estimated useful lives of the capital assets
as follows:
<TABLE>
<CAPTION>
TERM
----
<S> <C>
Equipment 3 to 5 years
Leasehold improvements Remaining lease term including lease renewal option
</TABLE>
The carrying value of capital assets is evaluated whenever significant
events occur which may indicate an impairment in value, based upon a
comparison of the carrying value to the net recoverable amount.
GOODWILL, OTHER ASSETS AND AMORTIZATION
Goodwill, which represents the excess of the purchase price of an acquired
business over the net identifiable assets acquired, is amortized on a
straight-line basis over the estimated useful life of five years. The
company assesses the carrying value of goodwill for future recoverability
on an annual basis by estimating the associated net undiscounted future
cash flows. The amount of impairment loss, if any, is the excess of the
carrying value over the estimated net undiscounted cash flows. Goodwill is
written down for any permanent impairment in value of the unamortized
portion.
Other assets include the cost of acquired patents, net of accumulated
amortization. Patents are amortized on a straight-line basis over the
estimated useful lives of four years.
F-8
<PAGE> 90
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
GOVERNMENT GRANTS
Government grants are accrued as a receivable when there is reasonable
assurance that the company has complied and will continue to comply with
all the conditions related to the grant. Grants related to operating
expenses are included in earnings when the related expenses are incurred.
Grants related to capital expenditures are deducted from the related asset.
Grants related to job creation programs for extended periods are deferred
and amortized on a straight-line basis over five years, the minimum period
for which the created job must be maintained.
REVENUE RECOGNITION
For products where the software is incidental, the company recognizes
revenue when the products are delivered, with provisions made for
warranties and support obligations.
For products where software is not incidental, the revenues are separated
into two components, product and customer support revenues based upon
vendor-specific objective evidence of fair value. The product revenues for
these sales are recognized when the products are delivered with provisions
made for estimated returns and warranties. The customer support revenues
are deferred and recognized ratably over the period of the support
arrangement, except where provided within one year of delivery, costs of
providing this support is insignificant and accrued at the time of delivery
and no upgrades of software are provided. Prior to September 1, 1998, the
revenues for support were included in sales upon delivery with a provision
for any costs associated with future support obligations where the support
was provided for one year or less, the estimated cost of providing the
support was insignificant and where enhancements offered have been and are
expected to be minimal. The effect of this accounting change for the years
ended August 31, 1997 and 1998 was not determinable by the company. For the
year ended August 31, 1999, the company deferred revenues amounting to
$327,000 which had an effect on net earnings of $226,000. The change
resulted in a reduction in net earnings per share for the year ended August
31, 1999 of $0.01.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
INCOME TAXES
The company provides for income taxes using the liability method of tax
allocation. Under this method, future income tax assets and liabilities are
determined based on deductible or taxable temporary differences between
financial statement values and tax values of assets and liabilities using
enacted income tax rates expected to be in effect for the year in which the
differences are expected to reverse.
The company establishes a valuation allowance against future income tax
assets if, based on available information, it is more likely than not that
some or all of the future income tax assets will not be realized.
TAX CREDITS
The company is entitled to scientific research and experimental development
("SRED") tax credits granted by the Canadian federal government ("Federal")
and the government of the Province of Quebec ("Provincial"). Federal SRED
tax credits are earned on qualified Canadian SRED expenditures at a rate of
20% and can only be used to offset Federal income taxes otherwise payable.
Provincial SRED tax credits, which are refundable, are earned on qualified
SRED salaries in the Province of Quebec at a rate of 20%. Additional
refundable provincial SRED tax credits are earned at a rate of up to 20%.
These additional tax credits are reduced to nil, on a pro-rata basis, as
total assets of the company increase from Cdn$25 million to Cdn$50 million.
SRED tax credits are accounted for as a reduction of the related
expenditures. The refundable portion of SRED tax credits is recorded in the
year in which the related expenditures are incurred. The non-refundable
portion of SRED tax credits is recorded in the year in which the related
expenditures are incurred, provided the company has reasonable assurance
the credits will be realized.
F-9
<PAGE> 91
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
RESEARCH AND DEVELOPMENT EXPENSES
All expenses related to development activities, which do not meet generally
accepted criteria for deferral, and research are expensed as incurred.
Development expenses which meet generally accepted criteria for deferral
are capitalized and amortized against earnings over the estimated period of
benefit.
As at February 29, 2000, the company had not deferred any development
costs.
STOCK-BASED COMPENSATION PLAN
The company maintains a stock-based compensation plan, which is described
in note 13. Under accounting principles generally accepted in Canada, no
compensation cost is recognized for this plan when shares are issued to
plan participants. Any consideration received from plan participants is
credited to share capital.
EARNINGS AND DIVIDENDS PER SHARE
Basic earnings and dividends per share are determined using the weighted
average number of common shares outstanding during the period, as adjusted
for the effects of stock splits and other reorganizations of share capital
in prior periods.
Fully diluted earnings per share is determined using the weighted average
number of shares and dilutive share equivalents outstanding during the
period. Earnings for the period are increased by the estimated additional
earnings, net of applicable income taxes, on the proceeds, if any, from the
exercise of dilutive common share equivalents.
ACCOUNTING CHANGES
During 1999, the company retroactively adopted the recently revised
recommendations of the Canadian Institute of Chartered Accountants (CICA)
regarding accounting for income taxes. Under these revised recommendations,
income taxes are now accounted for using the liability method. These new
recommendations are consistent with those of SFAS 109 under accounting
principles generally accepted in the United States. The adoption of these
revised recommendations did not result in any changes to prior years'
earnings, shareholders' equity or cash flows. However, certain additional
disclosures have been provided.
The company also retroactively applied the new recommendations of the CICA
regarding statements of cash flows. The application of this new basis of
presentation did not have any effect on prior years' earnings or
shareholders' equity. However, certain comparative figures have been
reclassified in order to conform with the new basis of presentation.
3. CHANGE IN REPORTING CURRENCY
The consolidated financial statements of the company were presented in
Canadian dollars up to August 31, 1999. Effective September 1, 1999, the
U.S. dollar has been adopted as the reporting currency. The functional
currency continues to be the Canadian dollar. The financial statements for
the years ended August 31, 1997, 1998 and 1999 and the six months ended
February 28, 1999 are presented in U.S. dollars in accordance with a
translation of convenience method using the representative exchange rate as
at August 31, 1999 of US$1.00 = Cdn$1.4958. The translated amount for
monetary and non-monetary items as at August 31, 1999 becomes the
historical basis for those items in subsequent periods.
The financial statements as at February 29, 2000 and for the six months
then ended have been translated using the current rate method. Under this
method, the financial statements are translated into the reporting currency
as follows: assets and liabilities are translated at the exchange rate in
effect at the date of the balance sheet and revenue and expenses are
translated at the average exchange rate for the period. All gains and
losses from the translation of the financial statements into the reporting
currency are included in the cumulative translation adjustment in
shareholders' equity. Changes in the cumulative translation adjustment
during each period result solely from the application of this translation
method.
It is management's intention to declare dividends, if any, in Canadian
dollars.
F-10
<PAGE> 92
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
4. BUSINESS COMBINATIONS
NORTECH ACQUISITION
On February 4, 2000, the company acquired a 100% interest in Nortech
Fibronic Inc. ("Nortech"), a company specializing in fiber-optic testing
and temperature sensing, in exchange for total consideration valued at
Cdn$4,051,000 (US$2,799,000). The consideration paid consisted of
Cdn$3,051,000 (US$2,108,000) in cash, the issuance of 800,000 Class G
shares which are mandatorily redeemable, for cash or Class A shares at the
option of the company, on November 30, 2000 for an amount of Cdn$800,000
(US$553,000) (note 11), and a non-interest-bearing debenture in the amount
of Cdn$200,000 (US$138,000) due November 30, 2000.
This acquisition, which has been accounted for using the purchase method,
resulted in goodwill amounting to Cdn$3,677,000 (US$2,542,000) based on the
following allocation of the purchase price to the identifiable assets
acquired and liabilities assumed.
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Current assets.............................................. $1,842
Capital assets.............................................. 409
Future income taxes......................................... 237
------
2,488
------
Current liabilities......................................... 1,933
Long-term debt.............................................. 298
------
2,231
------
Net identifiable assets acquired............................ 257
Goodwill.................................................... 2,542
------
Purchase price.............................................. 2,799
Less: Class G shares issued................................. 553
Less: Non-interest-bearing debenture........................ 138
Less: Cash and cash equivalents acquired.................... --
------
Cash paid net of cash and cash equivalents acquired......... $2,108
======
</TABLE>
The net earnings of Nortech have been included in the consolidated
statement of earnings of the company from the date of acquisition, February
4, 2000.
PRO FORMA INFORMATION
The following unaudited pro forma information regarding the acquisition of
Nortech has been prepared by the company's management based upon the
audited consolidated financial statements of the company for the year ended
August 31, 1999, the unaudited consolidated financial statements of the
company for the six months ended February 29, 2000 and the unaudited
consolidated financial statements of Nortech.
This pro forma information includes adjustments related to the amortization
of goodwill as well as the income tax effects of the acquisition.
Consequently, such information is not necessarily indicative of the actual
results which would have been achieved, nor is it necessarily indicative of
future consolidated results of the company.
F-11
<PAGE> 93
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
4. BUSINESS COMBINATIONS -- (CONTINUED)
The following unaudited pro forma information for the year ended August 31,
1999 has been prepared as if the acquisition had occurred on September 1,
1998. The unaudited pro forma information for the six months ended February
29, 2000 has been prepared as if the acquisition had occurred on September
1, 1999:
<TABLE>
<CAPTION>
YEAR SIX MONTHS
ENDED ENDED
AUGUST 31, FEBRUARY 29,
1999 2000
----------- ------------
(UNAUDITED) (UNAUDITED)
(NOTE 3)
<S> <C> <C>
Sales....................................................... $44,948 $30,495
Earnings before amortization of goodwill.................... 6,091 3,712
Net earnings................................................ $ 5,602 $ 3,504
Basic and fully diluted earnings per share
Earnings before amortization of goodwill.................. $ 0.15 $ 0.10
Net earnings.............................................. $ 0.14 $ 0.09
</TABLE>
REORGANIZATION
On September 1, 1998, the company acquired, from its parent company, all
the issued and outstanding shares of GEXFO Distribution Internationale Inc.
in exchange for 1 Class C share of the company, which was redeemed at a
price of Cdn$509,000 (US$340,000). This holding company has two wholly
owned subsidiaries, EXFO America Inc. and EXFO Europe S.A.R.L., which
market fiber-optic test and measurement and monitoring equipment and
instruments for the American and European markets.
Since the exchange was between entities under common control, the exchange
has been accounted for in a manner similar to a pooling of interests. The
assets, liabilities and shareholders' equity of the company and the other
companies have been combined using their respective carrying amounts and
financial statements of prior periods have been restated as if the
companies had always been combined. The statements of earnings and cash
flows for 1997 and 1998 reflect the results of operations and cash flows on
a combined basis. The creation, issuance and redemption of the Class C
share on September 1, 1998 has been presented as a mandatorily redeemable
preferred share and a dividend distribution from the combined retained
earnings.
The combined companies' net assets as at August 31, 1998 are as follows:
<TABLE>
<CAPTION>
EXFO GEXFO
ELECTRO-OPTICAL DISTRIBUTION
ENGINEERING INC. INTERNATIONALE INC. ELIMINATIONS TOTAL
---------------- ------------------- ------------ --------
(NOTE 3)
<S> <C> <C> <C> <C>
Total assets.................... $17,384 $ 639 $(380) $17,643
Total liabilities............... (5,679) (299) 380 (5,598)
------- ----- ----- -------
Net assets...................... $11,705 $ 340 $ -- $12,045
======= ===== ===== =======
</TABLE>
Consolidated sales and net earnings for GEXFO Distribution Internationale
Inc. during the years ended August 31, 1997 and 1998 were insignificant.
F-12
<PAGE> 94
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
4. BUSINESS COMBINATIONS -- (CONTINUED)
SUBSEQUENT EVENT
The company intends to acquire the 85% interest in GAP Optique S.A. held by
its parent company for a cash consideration of approximately $16,000. The
carrying value of the net assets of GAP Optique S.A. was $19,000 as at
December 31, 1999. GAP Optique S.A. did not have any material operations in
1997, 1998, 1999 or 2000. Since the exchange will occur between entities
under common control, the exchange will be accounted for in a manner
similar to a pooling of interests.
5. ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
AS AT AUGUST 31,
------------------ AS AT FEBRUARY 29,
1998 1999 2000
-------- ------ ------------------
(NOTE 3) (UNAUDITED)
<S> <C> <C> <C>
Trade, net of an allowance for doubtful accounts of
$26,000, $30,000 and $61,000 as at August 31,
1998 and 1999 and February 29, 2000,
respectively..................................... $5,637 $8,869 $13,815
Grants receivable.................................. 104 479 614
Related parties
Non-interest bearing advances to parent
company....................................... -- -- 822
Companies under common control................... 98 27 17
Other.............................................. 181 520 666
------ ------ -------
$6,020 $9,895 $15,934
====== ====== =======
</TABLE>
6. INVENTORIES
<TABLE>
<CAPTION>
AS AT AUGUST 31, AS AT FEBRUARY 29,
---------------- ------------------
1998 1999 2000
------ ------ ------------------
(NOTE (UNAUDITED)
3)
<S> <C> <C> <C>
Raw materials...................................... $3,133 $4,005 $ 7,095
Work in progress................................... 935 1,177 1,809
Finished goods..................................... 2,264 2,409 2,974
------ ------ -------
$6,332 $7,591 $11,878
====== ====== =======
</TABLE>
7. CAPITAL ASSETS
<TABLE>
<CAPTION>
AS AT AUGUST 31, 1998
(NOTE 3)
--------------------------------
ACCUMULATED
COST AMORTIZATION NET
------ ------------ ------
<S> <C> <C> <C>
Equipment............................................... $3,376 $1,764 $1,612
Leasehold improvements.................................. 1,038 335 703
------ ------ ------
$4,414 $2,099 $2,315
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS AT AUGUST 31, 1999
--------------------------------
ACCUMULATED
COST AMORTIZATION NET
------ ------------ ------
<S> <C> <C> <C>
Equipment............................................... $4,426 $2,469 $1,957
Leasehold improvements.................................. 1,146 464 682
------ ------ ------
$5,572 $2,933 $2,639
====== ====== ======
</TABLE>
F-13
<PAGE> 95
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
7. CAPITAL ASSETS -- (CONTINUED)
<TABLE>
<CAPTION>
AS AT FEBRUARY 29, 2000
(UNAUDITED)
--------------------------------
ACCUMULATED
COST AMORTIZATION NET
------ ------------ ------
<S> <C> <C> <C>
Equipment............................................... $6,839 $3,501 $3,338
Leasehold improvements.................................. 1,453 630 823
------ ------ ------
$8,292 $4,131 $4,161
====== ====== ======
</TABLE>
8. GOODWILL AND OTHER ASSETS
<TABLE>
<CAPTION>
AS AT
AS AT AUGUST 31, FEBRUARY 29,
------------------ ------------
1998 1999 2000
-------- ------ ------------
(NOTE 3) (UNAUDITED)
<S> <C> <C> <C>
Goodwill -- net of accumulated amortization of $42,000... $ -- $ -- $2,511
Patents -- net of accumulated amortization of $69,000,
$111,000 and $137,000 as at August 31, 1998 and 1999
and February 29, 2000, respectively.................... 106 65 51
------ ------ ------
$ 106 $ 65 $2,562
====== ====== ======
</TABLE>
9. CREDIT FACILITIES
The company, and one of its subsidiaries, has available credit facilities
which provide for advances of up to Cdn$11,500,000 (US$7,984,000) under
lines of credit and Cdn$3,000,000 (US$2,083,000) as an operating loan.
These facilities, which are renewable annually, bear interest at margins
over prime rate ranging between nil and 1.25%. Accounts receivable,
inventories and all tangible and intangible assets have been pledged as
security against these facilities. Amounts of Cdn$203,000 (US$136,000), nil
and Cdn$7,707,000 (US$5,351,000) were drawn against the facilities as at
August 31, 1998 and 1999 and as at February 29, 2000. As at February 29,
2000, Cdn$298,000 (US$207,000) of the advances were secured by certain tax
credits receivable.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
AS AT
AS AT AUGUST 31, FEBRUARY 29,
------------------ ------------
1998 1999 2000
-------- ------ ------------
(NOTE 3) (UNAUDITED)
<S> <C> <C> <C>
Trade.................................................... $1,467 $1,884 $4,779
Salaries and social benefits............................. 653 1,112 2,111
Outstanding cheques...................................... 1,143 1,942 696
Company under common control............................. -- -- 131
Other.................................................... 295 585 935
------ ------ ------
$3,558 $5,523 $8,652
====== ====== ======
</TABLE>
F-14
<PAGE> 96
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
11. MANDATORILY REDEEMABLE PREFERRED SHARES
Authorized -- unlimited as to number, without par value
Class B shares, non-voting, participating, redeemable at the option of
the holder at their paid-in value, ranking in priority to Class A, E
and F shares (note 13)
Class C shares, non-voting, non-participating, bearing a non-cumulative
annual dividend at a rate to be determined by the Board of Directors
but not less than 10% of their paid-in value, redeemable at the option
of the holder or company at their paid-in value plus any unpaid
dividends, ranking in priority to Class A, B and F shares (note 13)
Class E shares, non-voting, non-participating, bearing a non-cumulative
dividend at a rate of 0.5% per month of their paid-in value, redeemable
at the option of the holder or the company at their paid-in value plus
a premium and any unpaid dividends, ranking in priority to Class A, C,
D and F shares (note 13)
Class G shares, non-voting, non-participating, mandatorily redeemable on
November 30, 2000 at their paid-in value, ranking in priority to Class
B, C, D and E shares (note 13). The company may elect to settle the
redemption value, provided the company has effected an initial public
offering of its Class A shares by issuing the number of Class A shares
obtained by dividing the paid-in value of the Class G shares, being
Cdn$800,000, by the average trading price of the Class A shares for a
period of ten trading days preceding November 30, 2000, ranking after
Class A and F shares
The following table summarizes the preferred share activity since August
31, 1997:
<TABLE>
<CAPTION>
CLASS C SHARE CLASS E SHARES CLASS G SHARES
--------------- -------------------- ---------------- TOTAL
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT AMOUNT
------ ------ ----------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as at August 31, 1997
and 1998.................... -- $ -- 19,000,000 $ -- -- $ -- $ --
Business combination (note
4).......................... 1 340 -- -- -- -- 340
Redemption of Class C share... (1) (340) -- -- -- -- (340)
Conversion of Class E shares
into Class A shares (note
13)......................... -- -- (19,000,000) -- -- -- --
-- ----- ----------- ---- ------- ---- -----
Balance as at August 31,
1999........................ -- -- -- -- -- -- --
Business combination (note 4)
(unaudited)................. -- -- -- -- 800,000 555 555
-- ----- ----------- ---- ------- ---- -----
Balance as at February 29,
2000 (unaudited)............ -- $ -- -- $ -- 800,000 $555 $ 555
== ===== =========== ==== ======= ==== =====
</TABLE>
During the six months ended February 29, 2000, the company filed articles
of amendment pursuant to which the Class G shares were created.
F-15
<PAGE> 97
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
12. LONG-TERM DEBT
<TABLE>
<CAPTION>
AS AT
FEBRUARY
AS AT AUGUST 31, 29,
-------------------- -----------
1998 1999 2000
-------- -------- -----------
(NOTE 3) (UNAUDITED)
<S> <C> <C> <C>
Term loans secured by a moveable hypothec on certain
assets of a wholly owned subsidiary, bearing
interest at margins over prime rate ranging between
0.75% and 2.25%, repayable through June 2003....... $ -- $ -- $ 445
Unsecured non-interest-bearing debenture due
November 30, 2000............................... -- -- 139
Unsecured non-interest-bearing loan repayable
through July 2002............................... -- -- 49
Non-interest-bearing loan, repaid in 1999.......... 20 -- --
-------- -------- --------
20 -- 633
Less: Current portion.............................. 20 -- 350
-------- -------- --------
$ -- $ -- $ 283
======== ======== ========
</TABLE>
As at February 29, 2000, minimum principal repayments required in each of
the next four years are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
2001.................................................... $ 350
2002.................................................... 175
2003.................................................... 103
2004.................................................... 5
</TABLE>
13. SHARE CAPITAL
Authorized -- unlimited as to number, without par value
Class A shares
Class D shares, non-voting, non-participating, bearing a cumulative
annual dividend calculated on their paid-in value using the Bank of
Canada base rate in effect at the beginning of the company's fiscal
year, redeemable at the option of the company at their paid-in value
plus any unpaid dividends, ranking in priority to Class A, B, C and F
shares (note 11)
Class F shares, non-voting, participating, automatically converted into
Class A shares on a one-for-one basis upon an initial public offering
of the company's Class A shares, ranking pari passu with Class A shares
F-16
<PAGE> 98
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
13. SHARE CAPITAL (CONTINUED)
The following table summarizes the share capital activity since August 31,
1997:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS F SHARES
------------------- ---------------- TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
---------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Balance as at August 31, 1997 and 1998... 19,000,000 $1 -- $ -- $ 1
Conversion of Class E shares into Class A
shares (note 11)....................... 19,000,000 -- -- -- --
Issued for cash under stock purchase
plan................................... -- -- 197,588 86 86
---------- -- ------- ---- ----
Balance as at August 31, 1999............ 38,000,000 1 197,588 86 87
Issued for cash under stock purchase plan
(unaudited)............................ -- -- 26,480 17 17
---------- -- ------- ---- ----
Balance as at February 29, 2000
(unaudited)............................ 38,000,000 $1 224,068 $103 $104
========== == ======= ==== ====
</TABLE>
On September 2, 1998, the company filed articles of amendment pursuant to
which the Class A shares were split on a 190,000-to-one basis. Pursuant to
articles of amendment dated September 3, 1998, the 100 issued and
outstanding Class E shares (note 11) were converted into Class A shares on
a 190,000-to-one basis. All references to numbers of shares and per share
amounts have been restated in order to reflect the share split and
conversion noted above.
In accordance with a stock purchase plan established by the company,
officers, directors and key employees may purchase Class F shares up to a
maximum of 5% of all participating, issued and outstanding shares of the
company. The maximum number of shares held by one person cannot exceed 1%
of all issued and outstanding shares of the company. The purchase price of
shares under the plan is determined as a multiple of the company's equity
as at the end of the preceding fiscal year. Shares issued under the plan
are restricted as to sale and transferability for a period of at least five
years. As at February 29, 2000, employees have subscribed for, and the
company is committed to issue, an aggregate of 504,650 Class F shares in
exchange for a weighted average cash consideration of Cdn$1.12 (US$0.78)
per share. The subscription price for these shares has not yet been paid.
Included in share capital is Cdn$564,000 (US$392,000) for shares to be
issued under the subscriptions, net of the subscriptions receivable of
Cdn$564,000 (US$392,000). As at February 29, 2000, the company has
guaranteed the repayment of third party loans totalling Cdn$56,000
(US$39,000) obtained by certain employees with respect to the purchase of
Class F shares.
14. COMMITMENTS
OPERATING LEASES
The company has entered into operating leases for its premises, which
expire at various dates through to 2003. As at February 29, 2000, the
minimum rentals payable during each of the next three years are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
2001.................................................... $493
2002.................................................... 265
2003.................................................... 146
----
$904
====
</TABLE>
F-17
<PAGE> 99
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
14. COMMITMENTS (CONTINUED)
During the years ended August 31, 1997, 1998 and 1999, and the six months
ended February 28, 1999 and February 29, 2000, rental expense amounted to
$274,000, $283,000, $344,000, $164,000, and $274,000, respectively.
OTHER
As at February 29, 2000, the company is committed to purchase a building
for a gross amount of Cdn$4,900,000 (US$3,402,000) in cash. This purchase
is expected to close in June 2000.
15. OTHER DISCLOSURES
LOAN FROM A COMPANY UNDER COMMON CONTROL
The loan from a company under common control bears interest at prime rate
plus 1%, is unsecured, and is repayable on demand.
During the years ended August 31, 1997, 1998 and 1999 and the six months
ended February 28, 1999 and February 29, 2000, the effective interest rate
on this loan was 4.7%, 4.2%, 4.6%, 4.6% and 4.8%, respectively.
NET RESEARCH AND DEVELOPMENT EXPENSES
Net research and development expenses comprise the following:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 3) (NOTE 3) (NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
Gross research and development
expenses..................... $ 2,753 $ 4,406 $ 6,390 $ 2,816 $ 4,696
Research and development tax
credits...................... (737) (1,332) (1,935) (1,017) (1,216)
Government grants.............. (424) (60) (140) (8) (259)
------- ------- ------- ------- -------
$ 1,592 $ 3,014 $ 4,315 $ 1,791 $ 3,221
======= ======= ======= ======= =======
</TABLE>
OTHER GRANTS
During 1998, the company entered into an agreement with the Quebec Minister
of Industry, Commerce, Science and Technology (the "Minister"). Pursuant to
this agreement, the Minister agreed to contribute, in the form of grants,
up to a maximum of Cdn$600,000 (US$417,000) towards interest costs incurred
over the period from January 1, 1998 through December 31, 2002. In
addition, the Minister agreed to provide grants up to a maximum of
Cdn$2,220,000 (US$1,541,000) over the period from January 1, 1998 through
December 31, 2002, payable based on the number of full-time jobs created
during the period.
The above grants are subject to the condition that the company maintain its
Canadian principal place of business within the Province of Quebec until at
least December 31, 2002 and that jobs created pursuant to the agreement be
maintained for a period of at least five years from the date of creation.
Should these conditions not be met by the company, the Minister may enforce
various recourse options, which include suspension or cancellation of the
agreement or requiring the repayment of amounts received by the company. As
of February 29, 2000, the company has recognized a total of Cdn$1,576,000
(US$1,094,000)
F-18
<PAGE> 100
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
15. OTHER DISCLOSURES -- (CONTINUED)
under this program, of which Cdn$696,000 (US$483,000) has been credited to
earnings with the balance of Cdn$880,000 (US$611,000) having been included
in deferred grants. Should any repayments of amounts received pursuant to
this agreement be required, such repayments will be charged to earnings as
the amounts of any repayments become known.
Following is a summary of the classification of these and certain other
grants in the statements of earnings.
Interest expense (income) for the years ended August 31, 1997, 1998 and
1999 and the six months ended February 28, 1999 and February 29, 2000 is
net of related government grants of nil, $66,000, $126,000, $57,000 and
$76,000, respectively.
Cost of sales for the years ended August 31, 1997, 1998 and 1999 and the
six months ended February 28, 1999 and February 29, 2000 is net of
government grants of nil, $11,000, $33,000, $13,000 and $326,000,
respectively.
Selling and administrative expenses for the years ended August 31, 1997,
1998 and 1999 and six months ended February 28, 1999 and February 29, 2000
are net of government grants of nil, $22,000, $21,000, $9,000 and $80,000,
respectively.
DEFINED CONTRIBUTION EMPLOYEE BENEFITS PLANS
The company maintains two separate defined contribution employee benefits
plans for certain eligible employees. These plans, which are accounted for
on an accrual basis, are summarized as follows:
- Deferred profit sharing plan
This plan, maintained for eligible Canadian resident employees, requires
the company to contribute an amount equal to 1% of an employee's gross
salary, provided that the employee has contributed at least 2% of gross
salary to a tax-deferred registered retirement savings plan. In addition,
at the end of each fiscal year, the company may contribute an additional
amount of up to 4% of an employee's gross salary to the employee's
tax-deferred registered retirement savings plan. Contributions to this plan
during the years ended August 31, 1997, 1998 and 1999 and the six months
ended February 28, 1999 and February 29, 2000 amounted to nil, nil,
Cdn$156,000 (US$104,000), Cdn$84,000 (US$56,000) and Cdn$126,000
(US$86,000), respectively.
- 401K plan
The company maintains a 401K plan for eligible U.S. resident employees.
Under the plan, the company may elect to contribute an amount of up to 50%
of the first 6% of an employee's current compensation, subject to certain
legislated maximum contribution limits. During the years ended August 31,
1997, 1998 and 1999 and the six months ended February 28, 1999 and February
29, 2000, the company made contributions totalling nil, US$8,000,
US$21,000, US$8,000 and US$5,000, respectively.
F-19
<PAGE> 101
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
16. RELATED PARTY TRANSACTIONS
In the normal course of operations, the company entered into transactions
with certain companies under common control. These transactions have been
measured at the exchange amount which is the amount of consideration agreed
upon by the related parties. These transactions have been reflected in the
financial statements as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 3) (NOTE 3) (NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
Rent.............................. $215 $219 $232 $116 $119
Interest expense.................. 94 84 92 46 48
Other expenses.................... 341 130 107 107 30
</TABLE>
17. INCOME TAXES
The reconciliation of the income tax provision calculated using the
Canadian federal and provincial statutory income tax rates to the provision
for income taxes per the financial statements is as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(NOTE 3) (NOTE 3) (NOTE 3) (UNAUDITED) (UNAUDITED)
(NOTE 3)
<S> <C> <C> <C> <C> <C>
Income taxes at combined Canadian
federal and provincial
statutory tax rate (38%)....... $1,768 $2,606 $3,156 $1,208 $2,128
Increase (decrease) due to:
Manufacturing and processing
deduction...................... (263) (387) (519) (189) (318)
Non-deductible expenses........ 19 43 40 20 24
Other.......................... 58 94 (185) (81) 53
------ ------ ------ ------ ------
$1,582 $2,356 $2,492 $ 958 $1,887
====== ====== ====== ====== ======
Income taxes consist of:
Current........................ $1,576 $2,067 $2,534 $1,023 $1,863
Future......................... 6 289 (42) (65) 24
------ ------ ------ ------ ------
$1,582 $2,356 $2,492 $ 958 $1,887
====== ====== ====== ====== ======
</TABLE>
F-20
<PAGE> 102
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
17. INCOME TAXES -- (CONTINUED)
Future income tax liabilities are detailed as follows:
<TABLE>
<CAPTION>
AS AT AUGUST 31, AS AT FEBRUARY 29,
---------------- ------------------
1998 1999 2000
-------- ---- ------------------
(NOTE 3) (UNAUDITED)
<S> <C> <C> <C>
Current future income tax liabilities
Research and development tax credits............... $259 $330 $ 409
Reserves and accruals.............................. -- -- (169)
Deferred revenue................................... -- (68) (106)
---- ---- -----
259 262 134
---- ---- -----
Long-term future income tax liabilities
Capital assets..................................... 146 183 253
Government grants.................................. -- (18) (64)
Deferred revenue................................... -- (33) (18)
Other.............................................. 27 (4) (75)
---- ---- -----
173 128 96
==== ==== =====
Total future income tax liabilities.................. $432 $390 $ 230
==== ==== =====
</TABLE>
18. SEGMENT INFORMATION
Management has organized the company under one operating segment, that
being the development, manufacture and marketing of fiber-optic test,
measurement and monitoring equipment and instruments. Substantially all of
the company's long-lived assets are located in Canada.
Sales by geographic region are detailed as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
-------- -------- -------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 3) (NOTE 3) (NOTE 3) (NOTE 3)
<S> <C> <C> <C> <C> <C>
United States................. $11,039 $13,644 $20,755 $ 7,556 $14,831
Canada........................ 1,652 2,353 2,973 1,429 3,885
Europe........................ 4,593 6,717 8,721 4,694 5,102
Asia.......................... 2,977 3,229 3,199 1,146 2,179
Other......................... 4,214 5,662 6,518 3,903 3,114
------- ------- ------- ------- -------
$24,475 $31,605 $42,166 $18,728 $29,111
======= ======= ======= ======= =======
</TABLE>
Sales have been allocated to geographic regions based on the country of
residence of the related customers.
During all periods presented above, there were no customers from which 10%
or more of total sales were derived.
F-21
<PAGE> 103
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
19. FINANCIAL INSTRUMENTS
SHORT TERM INVESTMENTS
Short-term investments consist of the following:
<TABLE>
<CAPTION>
AS AT AUGUST 31, AS AT FEBRUARY 29,
---------------- ------------------
1998 1999 2000
------ ------ ------------------
(NOTE 3) (UNAUDITED)
<S> <C> <C> <C>
Corporate bonds denominated in Canadian dollars
bearing interest at annual rates of 4.9% to 5%;
maturing on January 22, 1999 and October 10, 2000
(August 31, 1999 -- October 10, 2000)............ $1,338 $1,371 $ --
====== ====== ======
</TABLE>
FAIR VALUE
Cash and cash equivalents, accounts receivable, bank advances, accounts
payable and accrued liabilities, dividend payable, mandatorily redeemable
preferred shares, loan from a company under common control and long-term
debt are financial instruments whose fair values approximate their carrying
values.
The fair value of short-term investments, determined based on market value,
amounted to $1,343,000 and $1,430,000 as at August 31, 1998 and August 31,
1999, respectively.
CREDIT RISK
Financial instruments which potentially subject the company to credit risk
consist principally of cash and cash equivalents, short-term investments,
accounts receivable and forward exchange contracts. The company's
short-term investments consist of debt instruments issued by high-credit
quality financial institutions and corporations and the company's cash and
cash equivalents and forward exchange contracts are held with or issued by
high-credit quality financial institutions; therefore the company considers
the risk of non-performance on these instruments to be remote.
Due to the North American and European distribution of the company's
customers, there is no particular concentration of credit risk. Generally,
the company does not require collateral or other security from customers
for trade accounts receivable, however, credit is extended to customers
following an evaluation of creditworthiness. In addition, the company
performs ongoing credit reviews of all its customers and establishes an
allowance for doubtful accounts receivable when accounts are determined to
be uncollectible.
INTEREST RATE RISK
As at February 29, 2000, the company's exposure to interest rate risk is
summarized as follows:
<TABLE>
<S> <C>
Cash and cash equivalents................................... Non-interest bearing
Accounts receivable......................................... Non-interest bearing
Bank advances............................................... Prime rate plus nil to 1.25%
Accounts payable and accrued liabilities.................... Non-interest bearing
Mandatorily redeemable preferred shares..................... Non-interest bearing
Loan from a company under common control.................... Prime rate plus 1%
Long-term debt.............................................. As described in note 12
</TABLE>
F-22
<PAGE> 104
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
19. FINANCIAL INSTRUMENTS -- (CONTINUED)
FORWARD EXCHANGE CONTRACTS
The company is exposed to currency risks as a result of its export sales,
substantially all of which are denominated in U.S. dollars, of products
manufactured in Canada. These risks are partially hedged by forward
exchange contracts and certain operating expenses. As at August 31, 1998
and 1999 and February 29, 2000, the company held contracts to sell U.S.
dollars at various forward rates, which are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
CONTRACTUAL CONTRACTUAL
AMOUNTS FORWARD RATE
----------- ------------
<S> <C> <C>
As at August 31, 1998
September 1998 to August 1999............................. $4,800 1.4058
September 1999 to June 2000............................... 2,900 1.4531
As at August 31, 1999
September 1999 to August 2000............................. $5,800 1.4815
September 2000 to June 2001............................... 3,000 1.5014
As at February 29, 2000 (unaudited)
March 2000 to February 2001............................... $5,700 1.4989
March 2001 to November 2001............................... 1,900 1.4800
</TABLE>
As at August 31, 1998 and 1999, these contracts resulted in deferred
unrealized losses amounting to US$693,000 and US$35,000, respectively (as
at February 29, 2000 -- deferred unrealized gain amounting to US$285,000).
20. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. The effects of the Year 2000 Issue
may be experienced before, on, or after January 1, 2000, and, if not
addressed, the impact on operations and financial reporting may range from
minor errors to significant systems failure which could affect an entity's
ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting the company,
including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
21. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
As a registrant with the Securities and Exchange Commission in the United
States, the company is required to reconcile its financial results for
significant differences between generally accepted accounting principles as
applied in Canada (Canadian GAAP) and those applied in the United States
(U.S. GAAP).
Additional disclosures required under U.S. GAAP have been provided in the
accompanying financial statements and notes. In addition, the following
summarizes differences between Canadian and U.S. GAAP and other required
disclosures under U.S. GAAP.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under U.S. GAAP, the company has elected to measure stock-based
compensation costs using the intrinsic value method (APB 25). Under this
method, compensation cost is measured as the difference between the
F-23
<PAGE> 105
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
21. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
fair value of the purchased stock and the purchase price paid by plan
participants. Compensation cost is amortized to expense over a period of
five years, being the restriction period (note 13). Under Canadian GAAP, no
compensation cost is recognized.
During the year ended August 31, 1999 and the six months ended February 29,
2000, the weighted average fair value per share under the stock purchase
plan amounted to approximately $0.68 and $6.87, respectively. The fair
value per share since inception of the plan ranged between $0.68 and
$18.00. As at August 31, 1999 and February 29, 2000, the balance of
deferred stock-based compensation amounted to $40,000 and $2,711,000,
respectively (August 31, 1998 -- nil).
CHANGE IN REPORTING CURRENCY
As mentioned in note 3, on September 1, 1999, the company adopted the U.S.
dollar as its reporting currency. Under U.S. GAAP, the financial
statements, including prior years, are translated according to the current
rate method. Under Canadian GAAP, at the time of change in reporting
currency, the historical financial statements are presented using a
translation of convenience.
Under Canadian GAAP, the statements of earnings for the years ended August
31, 1997, 1998 and 1999 and the six months ended February 28, 1999 were
translated into U.S. dollars using an exchange rate of US$1.00 =
Cdn$1.4958. Under U.S. GAAP, revenue and expenses would be translated at
exchange rates prevailing at the respective transaction dates. Average
exchange rates for the years ended August 31, 1997, 1998 and 1999 and the
six months ended February 28, 1999 were US$1.00 = Cdn$1.3685, Cdn$1.4390,
Cdn$1.5068 and Cdn$1.5274, respectively. The exchange rates as at August
31, 1998 and 1999 were US$1.00 = Cdn$1.5722 and Cdn$1.4958, respectively.
SHORT-TERM INVESTMENTS
Under U.S. GAAP, the short-term investments would be classified as
"available for sale" securities. Consequently, these securities would be
carried at fair value, with any unrealized holding gains or losses at each
balance sheet date being reflected in other comprehensive income on a net
of tax basis. Under Canadian GAAP, short-term investments are carried at
the lower of cost and market value.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with SFAS 121, Accounting for the impairment of long-lived
assets and for long-lived assets to be disposed of, the company reviews the
carrying value of its long-lived assets, including goodwill associated with
assets acquired in a purchase business combination, when events or changes
in circumstances indicate that the carrying value may not be recoverable.
If this review indicates that the carrying amounts of the assets and
goodwill, where applicable, will not be recoverable, as determined based on
estimated undiscounted cash flows, an impairment loss is recorded.
Impairment losses, if any, are measured as the excess of the carrying
values over the fair values of the related assets. In addition, goodwill is
reviewed periodically as disclosed in note 2.
FORWARD EXCHANGE CONTRACTS
Under U.S. GAAP, in accordance with SFAS 52, certain of the forward
exchange contracts held by the company, for which the underlying sales
transactions are not firmly committed, would not qualify for hedge
accounting. Consequently, unrealized gains or losses on these contracts at
each balance sheet date would be reflected in earnings for the
corresponding period. Under Canadian GAAP, all of the company's forward
F-24
<PAGE> 106
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
21. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
exchange contracts qualify for hedge accounting, therefore, any unrealized
gains or losses are deferred and recognized in the statement of earnings
upon settlement of the related transactions.
EARNINGS PER SHARE
For purposes of earnings per share calculations, the Class A, E and F
shares, collectively, are considered to constitute common shares.
Under U.S. GAAP, diluted net earnings per share is calculated based on the
weighted average number of common shares outstanding during the period,
plus the effects of potential common shares, such as options, and
conversions of senior shares outstanding during the period. This method
requires that diluted net earnings per share be calculated, using the
treasury stock method, as if all potential common shares had been exercised
at the later of the beginning of the period or the date of issue, as the
case may be, and that the funds obtained thereby were used to purchase
common shares of the company at the average fair value of the common shares
during the period.
Under U.S. GAAP, the presentation of per share figures for earnings before
amortization of goodwill is not permitted. In addition, under U.S. GAAP,
amortization of goodwill would be included in the computation of earnings
from operations.
FUTURE INCOME TAXES
As a result of adjustments from Canadian GAAP to U.S. GAAP, future income
tax liabilities under U.S. GAAP include an adjustment of $(67,000) as at
August 31, 1998, $23,000 as at August 31, 1999 and $51,000 as at February
29, 2000 related to short-term investments and forward exchange contracts
carried at fair value.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The standard, which must be applied
prospectively, is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000. Under SFAS No. 133, all of the company's
forward exchange contracts would qualify for hedge accounting.
Consequently, all of the company's forward exchange contracts would be
carried on the balance sheet at fair value and any unrealized gains or
losses at each balance sheet date would be included in other comprehensive
income.
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition". SAB101, as amended
by SAB+101A, is effective commencing in the first fiscal quarter of the
first fiscal year beginning after December 15, 1999. The implementation of
this SAB is not expected to have any material effect on the company's
financial statements or revenue recognition policy in future periods.
RECONCILIATION OF NET EARNINGS TO CONFORM WITH U.S. GAAP
The following summary sets out the material adjustments to the company's
reported net earnings and net earnings per share which would be made to
conform with U.S. GAAP.
F-25
<PAGE> 107
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
21. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
------------------------ ---------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
------ ------ ------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings for the period in accordance
with Canadian GAAP....................... $3,070 $4,501 $5,814 $2,220 $3,712
Stock-based compensation costs............. -- -- (10) -- (293)
Change in reporting currency............... 286 178 (44) (48) --
Unrealized gains (losses) on forward
exchange contracts....................... -- (208) 208 108 158
Future income taxes on forward exchange
contracts................................ -- 67 (67) (35) (51)
------ ------ ------ ------ ------
Net earnings for the period in accordance
with U.S. GAAP........................... 3,356 4,538 5,901 2,245 3,526
Other comprehensive income (loss) Foreign
currency translation adjustments......... (121) (1,350) 606 205 640
Unrealized holding gains (losses) on
short-term investments, net of related
income taxes of $23,000............... -- -- 36 -- (36)
------ ------ ------ ------ ------
Comprehensive income....................... $3,235 $3,188 $6,543 $2,450 $4,130
------ ------ ------ ------ ------
Basic and diluted net earnings per share in
accordance with U.S. GAAP................ $ 0.09 $ 0.12 $ 0.15 $ 0.05 $ 0.09
====== ====== ====== ====== ======
Pro-forma basic and diluted net earnings
per share in accordance with U.S. GAAP
(unaudited)(1)........................... $ 0.14 $ 0.09
====== ======
</TABLE>
---------------
(1) The pro-forma basic and diluted net earnings per share in accordance with
U.S. GAAP reflect management's intention to pay a dividend in the amount of
$17.5 million. This pro-forma information also assumes the issuance of
497,000 shares for the year ended August 31, 1999 based on earnings
available to shareholders for the year then ended and 430,000 shares for
the six months ended February 29, 2000 based on the earnings available to
shareholders for the twelve months ended February 29, 2000 at a price of
$24 per share in order to provide funds for the dividend payment.
Earnings available to common shareholders is reconciled as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
------ ------ ------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings for the period...... $3,356 $4,538 $5,901 $2,245 $3,526
Dividend on Class C share........ -- -- (333) (333) --
------ ------ ------ ------ ------
Earnings available to common
shareholders................... $3,356 $4,538 $5,568 $1,912 $3,526
====== ====== ====== ====== ======
</TABLE>
F-26
<PAGE> 108
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
21. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
The diluted weighted average number of common shares outstanding calculated
according to U.S. GAAP is as follows:
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
-------------------------- ----------------------------
FEBRUARY 28, FEBRUARY 29,
1997 1998 1999 1999 2000
------ ------ ------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average number of common
shares outstanding --
Basic (000's).................. 38,000.. 38,000 38,001 38,000 38,425
Conversion of Class G shares..... -- -- -- -- 4
------ ------ ------ ------ ------
Weighted average number of common
shares outstanding --
Diluted (000's)................ 38,000.. 38,000 38,001 38,000 38,429
====== ====== ====== ====== ======
</TABLE>
The number of common shares issuable upon the assumed conversion of the
Class G shares has been determined by dividing the paid-in value of the
Class G shares by the estimated fair value of the Class A shares as at
February 4, 2000 (the date the Class G shares were issued), or $18.00 per
Class A share, weighted from the date of issuance of the Class G shares to
the end of the period.
As a result of the above adjustments to net earnings, differences with
respect to the shareholders' equity under U.S. GAAP are as follows:
SHARE CAPITAL
<TABLE>
<CAPTION>
AS AT AS AT
AUGUST 31, FEBRUARY 29,
-------------- ------------------
1998 1999 2000
---- ---- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Share capital in accordance with Canadian GAAP........ $1 $87 $104
Stock-based compensation costs........................ -- 10 303
-- --- ----
Share capital in accordance with U.S. GAAP............ $1 $97 $407
== === ====
</TABLE>
RETAINED EARNINGS
<TABLE>
<CAPTION>
AS AT AS AT
AUGUST 31, FEBRUARY 29,
------------------ ------------------
1998 1999 2000
------- ------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Retained earnings in accordance with Canadian
GAAP........................................... $12,044 $14,592 $18,304
Forward exchange contracts....................... (141) -- 107
Stock-based compensation costs................... -- (10) (303)
Change in reporting currency
Current period
Net earnings................................ 178 (44) --
Dividends................................... (4) 24 --
Cumulative effect of prior periods............. 862 1,036 1,016
------- ------- -------
Retained earnings in accordance with U.S. GAAP... $12,939 $15,598 $19,124
======= ======= =======
</TABLE>
F-27
<PAGE> 109
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
21. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
ACCUMULATED OTHER COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
AUGUST 31, FEBRUARY 29,
------------------ ------------------
1998 1999 2000
------- ------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Foreign currency translation adjustments
Balance -- Beginning of period.................. $ (272) $(1,622) $(1,016)
Change during the period........................ (1,350) 606 640
------- ------- -------
Balance -- End of period........................ (1,622) (1,016) (376)
------- ------- -------
Unrealized holding gains (losses) on short-term
investments, net of income taxes
Balance -- Beginning of period.................. -- -- 36
Unrealized gains (losses) arising during the
period....................................... -- 36 --
Reclassification adjustment for amounts included
in net earnings.............................. -- -- (36)
------- ------- -------
Balance -- End of period........................ -- 36 --
------- ------- -------
Accumulated other comprehensive loss.............. $(1,622) $ (980) $ (376)
======= ======= =======
</TABLE>
Following are statements of earnings for the years ended August 31, 1997,
1998 and 1999 and the six months ended February 28, 1999 and February 29,
2000 and condensed balance sheets as at August 31, 1998 and 1999 and
February 29, 2000 prepared under U.S. GAAP:
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, SIX MONTHS ENDED
--------------------------- -------------------------------------
1997 1998 1999 FEBRUARY 28, 1999 FEBRUARY 29, 2000
------- ------- ------- ----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales.......................... $26,752 $32,853 $41,858 $18,340 $29,111
Cost of sales.................. 10,550 11,793 14,889 6,876 9,609
------- ------- ------- ------- -------
Gross margin................... 16,202 21,060 26,969 11,464 18,502
Total operating expenses....... 10,819 14,105 18,367 8,008 14,105
------- ------- ------- ------- -------
Earnings from operations....... 5,583 6,955 8,602 3,456 5,397
======= ======= ======= ======= =======
Net earnings for the period.... $ 3,356 $ 4,538 $ 5,901 $ 2,245 $ 3,526
======= ======= ======= ======= =======
</TABLE>
F-28
<PAGE> 110
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
21. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
BALANCE SHEETS
<TABLE>
<CAPTION>
AS AT AUGUST 31, AS AT FEBRUARY 29,
----------------------------------- ----------------------------
1998 1999 1999 2000 2000
------- ------- ------------- ----------- -------------
PRO-FORMA(1) PRO-FORMA(1)
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Current assets
Cash and cash
equivalents.......... $ 1,201 $ 423 $ 423 $ 539 $ 539
Accounts receivable..... 5,727 9,895 9,895 16,092 16,092
Inventories............. 6,024 7,591 7,591 11,878 11,878
Other current assets.... 1,529 2,286 2,286 1,998 1,998
------- ------- ------- ------- -------
14,481 20,195 20,195 30,507 30,507
Capital assets............ 2,203 2,639 2,639 4,161 4,161
Goodwill and other
assets.................. 101 65 65 2,562 2,562
------- ------- ------- ------- -------
$16,785 $22,899 $22,899 $37,230 $37,230
======= ======= ======= ======= =======
Current liabilities
Bank advances........... $ 129 $ -- $ -- $ 5,351 $ 5,351
Accounts payable and
accrued
liabilities.......... 3,593 5,523 5,523 8,652 8,652
Dividends payable....... -- -- 17,500 -- 17,500
Other current
liabilities.......... 1,580 1,891 1,891 2,819 2,819
------- ------- ------- ------- -------
5,302 7,414 24,914 16,822 34,322
Long-term liabilities..... 165 770 770 1,253 1,253
------- ------- ------- ------- -------
5,467 8,184 25,684 18,075 35,575
Shareholders' equity
(negative)
Share capital........... 1 97 97 407 407
Accumulated other
comprehensive loss... (1,622) (980) (980) (376) (376)
Retained earnings
(deficit)............ 12,939 15,598 (1,902) 19,124 1,624
------- ------- ------- ------- -------
11,318 14,715 (2,785) 19,155 1,655
------- ------- ------- ------- -------
$16,785 $22,899 $22,899 $37,230 $37,230
======= ======= ======= ======= =======
</TABLE>
---------------
(1) The pro-forma balance sheets reflect management's intention to pay a
dividend in the amount of $17.5 million.
F-29
<PAGE> 111
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of U.S. dollars, except share and per share data
and as otherwise noted) -- (Continued)
21. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES -- (CONTINUED)
STATEMENT OF CASH FLOWS
Under Canadian GAAP, the statements of cash flows, which have been prepared
on a basis consistent with International Accounting Standards, for the
years ended August 31, 1997, 1998 and 1999 and the six months ended
February 28, 1999 were translated into U.S. dollars using an exchange rate
of US$1.00 = Cdn$1.4958. Under U.S. GAAP, the historical exchange rates on
the dates of the cash flow activities would be used. Following are summary
statements of cash flows under U.S. GAAP:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED AUGUST 31, FEBRUARY 28,
--------------------------- ----------------
1997 1998 1999 1999
------- ------- ------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Operating activities............................ $ 5,020 $ 3,278 $ 3,633 $ 455
Financing activities............................ (3,360) (273) (3,261) (283)
Investing activities............................ (1,801) (2,061) (1,206) (562)
------- ------- ------- ------
Change in cash and cash equivalents............. (141) 944 (834) (390)
Effect of foreign exchange rate changes on cash
and cash equivalents.......................... (5) (124) 56 46
Cash and cash equivalents --
Beginning of period........................... 527 381 1,201 1,201
------- ------- ------- ------
Cash and cash equivalents --
End of period................................. $ 381 $ 1,201 $ 423 $ 857
======= ======= ======= ======
</TABLE>
For the six months ended February 29, 2000, there are no material
differences between the statement of cash flows under Canadian GAAP as
compared to U.S. GAAP.
F-30
<PAGE> 112
Inside Back Cover
EXFO logo
Picture of pulses of light travelling along fiber optic cables
Picture of an agent from our customer support department
Picture of a modem connected to the Earth
CAPTION:
To meet the increasing demand for communications bandwith, carriers are
installing networks based on optical fiber.
<PAGE> 113
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
7,000,000 SHARES
EXFO LOGO
EXFO ELECTRO-OPTICAL ENGINEERING INC.
SUBORDINATE VOTING SHARES
---------------------
P R O S P E C T U S
---------------------
MERRILL LYNCH & CO.
RBC DOMINION SECURITIES
WIT SOUNDVIEW
CIBC WORLD MARKETS
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 114
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of EXFO Electro-Optical Engineering Inc. (the
"Registrant") attributable to this offering of the securities, other than
underwriting commissions, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... US$ 53,130
NASD filing fee............................................. 20,625
Nasdaq National Market Fee.................................. 96,000
The Toronto Stock Exchange Fee.............................. 36,526
Blue Sky Fees and Expenses.................................. 25,000
Registrar and Transfer Agent Fees........................... 11,000
Printing and Engraving Expenses............................. 175,000
Legal Fees and Expenses..................................... 350,000
Accounting Fees and Expenses................................ 200,000
Miscellaneous............................................... 32,719
------------
Total.................................................. US$1,000,000
============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's by-laws provide that the Registrant will indemnify any of
its directors, former directors, officers and former officers and other parties
specified by the by-laws, against all costs reasonably incurred by them for any
civil, criminal or administrative action or proceeding to which they are or may
made a party by reason of having been a director or officer. The indemnity
covers amounts paid to settle actions or to satisfy judgments. However, the
Registrant may only indemnify such these persons, if such person acted honestly
and in good faith with a view to the Registrant's best interests and, in the
case of a criminal or administrative action or proceeding, if such person has
reasonable grounds for believing that his or her conduct was lawful. The Canada
Business Corporations Act provides that court approval is required for the
payment of any indemnity in connection with an action brought by or on the
Registrant's behalf.
A policy of directors' and officers' liability insurance is maintained by
the Registrant which insures directors and officers of the Registrant and its
subsidiaries against liability incurred by, arising from or against them for
certain of their acts, errors or omissions.
Reference is made to the Underwriting Agreement, the proposed form of which
is filed as Exhibit 1.1, which contains provisions for the indemnification by
the Underwriters of the Registrant and directors and officers of the Registrant
who signed the Registration Statement against certain civil liabilities under
the U.S. Securities Act of 1933.
Reference is made to Item 17 for the undertakings of the Registrant with
respect to indemnification for liabilities arising under the U.S. Securities Act
of 1933.
II-1
<PAGE> 115
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following is a summary of transactions by the Registrant involving
sales of the Registrant's securities that were not registered under the
Securities Act during the last three years preceding the date of this
registration statement:
(a) On April 23, 1997, the Registrant issued an aggregate of 100 Class
"A" shares to five non-U.S. residents at a price of C$1.00 per share.
(b) On September 1, 1998, the Registrant issued one Class "C" share to
one non-U.S. resident at a price of C$1,000.00. The share was redeemed
on September 1, 1998 at a price of C$509,000.00.
(c) On September 1, 1998, the Registrant issued 100 Class "E" shares to
one non-U.S. resident for an aggregate consideration of C$100.00.
(d) On September 2, 1998, the Registrant issued 19 million Class "A"
shares upon the split of the outstanding 100 Class "A" shares on the
basis of 190,000 Class "A" shares for each outstanding Class "A" share.
(e) On September 3, 1998, the Registrant issued 19 million Class
"A"shares to one non-U.S. resident upon the conversion of 100 Class "E"
shares on the basis of 190,000 Class "A" shares for each outstanding
Class "E" share.
(f) On August 31, 1999, the Registrant issued 176,348 Class "F" shares to
one U.S. resident and 21,240 Class "F" shares to two non-U.S. residents
at a price of C$0.6579 per share.
(g) Between October 15, 1999 and November 23, 1999, the Registrant issued
9,925 Class "F" shares to one U.S. resident and 16,555 Class "F" shares
to four non-U.S. residents at a price of C$1.00 per share.
(h) On February 7, 2000, the Registrant issued 800,000 Class "G" shares
to three non-U.S. residents at a price C$1.00 per share in connection
with the acquisition of Nortech Fibronic Inc.
(i) On May 15, 2000, the Registrant issued 485,537 Class "F" shares to
106 non-U.S. residents and 16 U.S. residents at a price of C$1.2818 per
share under outstanding subscription agreements.
The issuance to U.S. residents described in Item 15(f), 15(g) and 15(i)
were exempt from registration under the Securities Act in reliance on Rule 701
of the Securities Act in that they were offered or sold pursuant to a
compensatory benefit plan. In addition, the issuances were exempt from
registration under Section 4(2) of the Securities Act as transactions by an
issuer not involving a public offering. The issuances to non-U.S. residents
described in Item 15(a), (b), (c), (h) and (i) were exempt from registration
under the Securities Act in reliance on Regulation S under the Securities Act.
The issuances described in Item 15(d) and 15(e) may not be deemed a "sale", and
were otherwise exempt from registration under the Securities Act in reliance of
Section 3(a)(9) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<S> <C>
1.1 Form of Purchase Agreement.
3.1+ Amended Articles of Incorporation of the Registrant, as
currently in effect.
3.2+ By-laws of the Registrant.
3.3+ Form of Amended and Restated Articles of Incorporation of
the Registrant, to be effective immediately prior to the
consummation of this offering.
4.1+ Form of Subordinate Voting Share Certificate.
4.2+ Form of Trust Agreement among the Registrant, Germain
Lamonde, GEXFO Investissements Technologiques inc., Fiducie
Germain Lamonde and G. Lamonde Investissements Financiers
inc.
</TABLE>
II-2
<PAGE> 116
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<S> <C>
5.1+ Opinion of Fasken Martineau DuMoulin LLP regarding the
legality of the securities.
8.1+ Opinion of Fasken Martineau DuMoulin LLP regarding Canadian
tax matters.
8.2+ Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
regarding U.S. Federal Income Tax Matters.
10.1+ Credit Agreement, dated July 6, 1995, among the Registrant,
National Bank of Canada and Banque Nationale de Paris
(Canada), as amended on December 22, 1999 and on March 28,
2000 (including summary in English).
10.2+ Offer to purchase shares of Nortech Fibronic Inc. dated
February 6, 2000 among the Registrant, Claude Adrien Noel,
9086-9330 Quebec inc., Michel Bedard, 9086-9314 Quebec inc.,
Christine Bergeron and Societe en Commandite Capidem Quebec
Enr. and Certificate of Closing, dated February 7, 2000
among the same parties (including summary in English).
10.3+ Offer to acquire a building, dated February 23, 2000,
between the Registrant and Groupe Mirabau inc. and as
accepted by Groupe Mirabau inc. on February 24, 2000
(including summary in English).
10.4+ Lease Agreement, dated December 1, 1996, between the
Registrant and GEXFO Investissements Technologiques inc., as
assigned to 9080-9823 Quebec inc. on September 1, 1999
(including summary in English).
10.5+ Lease Agreement, dated March 1, 1996, between the Registrant
and GEXFO Investissements Technologiques inc., as assigned
to 9080-9823 Quebec inc. on September 1, 1999 (including
summary in English).
10.6+ Deferred Profit Sharing Plan, dated September 1, 1998.
10.7+ Stock Option Plan, dated May 25, 2000.
10.8+ Share Plan, dated April 3, 2000.
10.9+ Loan Agreement between the Registrant and GEXFO
Investissements Technologiques inc., dated May 11, 1993, as
assigned to 9080-9823 Quebec inc. on September 1, 1999
(including summary in English).
10.10+ Resolution of the board of directors of the Registrant,
dated September 1, 1999, authorizing the Registrant to
acquire GEXFO Distribution Internationale inc. from GEXFO
Investissements Technologiques inc. (including summary in
English).
10.11+ Term Loan Offer, dated March 28, 2000, among the Registrant
and National Bank of Canada as accepted by the Registrant on
April 3, 2000 (including summary in English).
10.12+ Form of Promissory Note of the Registrant to be issued to
GEXFO Investissements Technologiques inc.
10.13+ Form of Registration Rights Agreement between the Registrant
and Germain Lamonde.
10.14+ Sale Agreement, dated September 1, 1999, between the
Registrant and GEXFO Investissements Technologiques inc.
(including summary in English).
10.15 Employment Agreement of Germain Lamonde dated May 29, 2000.
10.16 Purchase Agreement to acquire a building dated June 7, 2000,
between the Registrant and Groupe Mirabau inc.
10.17 Directors' Compensation Plan
21.1 Subsidiaries of the Registrant (included on page 35 of the
prospectus).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2+ Consent of Fasken Martineau DuMoulin LLP (contained in
Exhibit 8.1).
23.3+ Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(contained in Exhibit 8.2).
24.1 Powers of Attorney (certain powers of attorney were
previously filed).
</TABLE>
---------------
+ Previously filed.
II-3
<PAGE> 117
ITEM 17. UNDERTAKINGS.
(a) The Registrant undertakes to provide to the underwriter at the closing
specified in the underwriting agreements certificates in such denominations and
registered in such names as required by the underwriter to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defence of any action, suit or
proceeding) is asserted by such director, officer nor controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of their counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by them is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(i) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein and this offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this amendment no. 1 to
the registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized to sign this amendment, in the City of Vanier,
Province of Quebec, Canada on the 28(th) day of June, 2000.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ GERMAIN LAMONDE
-------------------------------------
Name: Germain Lamonde
Title: Chairman of the Board,
President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration amendment no. 1 to the statement has been signed by the following
persons in the capacities indicated on June 28, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ GERMAIN LAMONDE Chairman of the Board, President and Chief Executive
--------------------------------------------- Officer
Germain Lamonde (Principal Executive Officer)
* Vice-President, Finance and Chief Financial Officer
--------------------------------------------- (Principal Financial and Accounting Officer)
Pierre Plamondon, CA
* Director
---------------------------------------------
Pierre Marcouiller
/s/ DAVID A. THOMPSON Director
---------------------------------------------
David A. Thompson
* Director
---------------------------------------------
Michael Unger
*By: /s/ GERMAIN LAMONDE
-------------------------------------------
Germain Lamonde
Attorney-in-fact
</TABLE>
II-5
<PAGE> 119
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, the undersigned
certifies that it is the duly authorized United States representative of EXFO
Electro-Optical Engineering Inc. and has duly caused this amendment no. 1 to the
registration statement to be signed on behalf of each of them by the
undersigned, thereunto duly authorized to sign this amendment, in the City of
Vanier, Province of Quebec, Canada, on June 28, 2000.
EXFO AMERICA INC.
(Authorized United States
Representative)
By: /s/ GERMAIN LAMONDE
------------------------------------
Name: Germain Lamonde
Title: Director
II-6
<PAGE> 120
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
NUMBER EXHIBIT
------ -------
<C> <S>
1.1 Form of Purchase Agreement.
3.1+ Amended Articles of Incorporation of the Registrant, as
currently in effect.
3.2+ By-laws of the Registrant.
3.3+ Form of Amended and Restated Articles of Incorporation of
the Registrant, to be effective immediately prior to the
consummation of this offering.
4.1+ Form of Subordinate Voting Share Certificate.
4.2+ Form of Trust Agreement among the Registrant, Germain
Lamonde, GEXFO Investissements Technologiques inc., Fiducie
Germain Lamonde and G. Lamonde Investissements Financiers
inc.
5.1+ Opinion of Fasken Martineau DuMoulin LLP regarding the
legality of the securities.
8.1+ Opinion of Fasken Martineau DuMoulin LLP regarding Canadian
tax matters.
8.2+ Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
regarding U.S. Federal Income Tax Matters.
10.1+ Credit Agreement, dated July 6, 1995, among the Registrant,
National Bank of Canada and Banque Nationale de Paris
(Canada), as amended on December 22, 1999 and on March 28,
2000 (including summary in English).
10.2+ Offer to purchase shares of Nortech Fibronic Inc. dated
February 6, 2000 among the Registrant, Claude Adrien Noel,
9086-9330 Quebec inc., Michel Bedard, 9086-9314 Quebec inc.,
Christine Bergeron and Societe en Commandite Capidem Quebec
Enr. and Certificate of Closing, dated February 7, 2000
among the same parties (including summary in English).
10.3+ Offer to acquire a building, dated February 23, 2000,
between the Registrant and Groupe Mirabau inc., as accepted
by Groupe Mirabau inc. on February 24, 2000 (including
summary in English).
10.4+ Lease Agreement, dated December 1, 1996, between the
Registrant and GEXFO Investissements Technologiques inc., as
assigned to 9080-9823 Quebec inc. on September 1, 1999
(including summary in English).
10.5+ Lease Agreement, dated March 1, 1996, between the Registrant
and GEXFO Investissements Technologiques inc., as assigned
to 9080-9823 Quebec inc. on September 1, 1999 (including
summary in English).
10.6+ Deferred Profit Sharing Plan, dated September 1, 1998.
10.7+ Stock Option Plan, dated May 25, 2000.
10.8+ Share Plan, dated April 3, 2000.
10.9+ Loan Agreement between the Registrant and GEXFO
Investissements Technologiques inc., dated May 11, 1993, as
assigned to 9080-9823 Quebec inc. on September 1, 1999 and
Trust Deed, dated May 11, 1993, between the Registrant and
Mr. Richard Ouellet (including summary in English).
10.10+ Resolution of the board of directors of the Registrant,
dated September 1, 1999, authorizing the Registrant to
acquire GEXFO Distribution Internationale inc. from GEXFO
Investissements Technologiques inc. (including summary in
English).
10.11+ Term Loan Offer, dated March 28, 2000, among the Registrant
and National Bank of Canada, as accepted by the Registrant
on April 3, 2000 (including Summary in English).
10.12+ Form of Promissory Note of the Registrant to be issued to
GEXFO Investissements Technologiques inc.
10.13+ Form of Registration Rights Agreement between the Registrant
and Germain Lamonde.
10.14+ Sale Agreement, dated September 1, 1999, between the
Registrant and GEXFO Investissements Technologiques inc.
(including summary in English).
10.15 Employment Agreement of Germain Lamonde dated May 29, 2000.
10.16 Purchase Agreement to acquire a building dated June 7, 2000
between Registrant and Groupe Mirabau inc.
10.17 Directors' Compensation Plan.
21.1 Subsidiaries of the Registrant (included on page 35 of the
prospectus).
23.1 Consent of PricewaterhouseCoopers LLP.
23.2+ Consent of Fasken Martineau DuMoulin LLP (contained in
Exhibit 8.1).
23.3+ Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(contained in Exhibit 8.2).
24.1 Powers of Attorney (certain powers of attorney were
previously filed).
</TABLE>
---------------
+ Previously filed.
