Calian Technologies Ltd.
TSX : CTY

Calian Technologies Ltd.

November 08, 2007 12:33 ET

Calian Reports Fourth Quarter Results: Annual Earnings Increase by More Than 15%

(All amounts in this release are in Canadian Dollars)

KANATA, ONTARIO--(Marketwire - Nov. 8, 2007) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the fourth quarter ended September 30, 2007. Revenues for the quarter were $45.7 million, an increase of 11% from the $41.1 million reported in the same quarter of the previous year. Net earnings were $2.1 million or $0.26 per share basic and diluted, compared to $1.8 million or $0.22 per share basic and diluted in the same quarter of the previous year. For the year 2007, the Company reported revenues of $190 million and net earnings of $9.2 million or $1.10 per share basic and diluted, compared to revenues of $183 million and net earnings of $6.6 million or $0.78 per share basic and diluted in the prior year. Prior to recording the $2 million settlement cost, net earnings for the year 2006 would have been $7.9 million or $0.93 per share basic and diluted.

"Both divisions reported solid returns again this year, resulting in an increase in annual earnings of more than 15%. The diversity of our service offerings once again paid dividends as we experienced a mixture of highs and lows within the various operating segments. Specifically with regards to the fourth quarter, the SED division ended the year on a high note with revenues for the quarter exceeding those of last year by 52%. Solid execution of projects in our traditional satellite sector augmented robust revenues in our contract manufacturing group, resulting in an increase of 63% in contribution from the division compared to the same quarter last year. By comparison, the BTS division had to cope with the traditional summer slowdown as well as the continuation of a marked reduction in manpower spending in certain federal government departments. While our outsourcing group remained strong, this spending constraint resulted in some short term impediments to our staffing group," stated Ray Basler, President and CEO. "Our strong backlog of longer term contracts positions us well as we enter the new fiscal year. At the same time, we look forward to an easing of federal government spending constraints and a return to normal levels of activity in the short-term staffing segment," continued Basler.

We anticipate solid performance from both divisions over the course of the next year. Based on management's current outlook, consolidated revenues for fiscal 2008 are expected to be in the range of $190 million to $210 million and net earnings per share in the range of $1.10 to $1.25.


About Calian

Calian sells technology services to industry and government in Canada and around the world. Calian provides customers with ready access to an exceptional team of engineers, telecommunications and technology professionals, health care professionals and other highly qualified staff. The Business and Technology Services Division augments customer workforces with flexible short and long-term placements, recruitment and outsourcing of engineering, health care professionals and other skilled professionals. The Systems Engineering Division plans, designs and implements solutions for many of the world's space agencies and leading communications satellite manufacturers and operators, as well as providing contract manufacturing services for customers in North America.


DISCLAIMER

Certain information included in this press release is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by Calian with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.



CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(dollars in thousands except per share data)

Three months ended Year ended
September 30 September 30
(Unaudited)
---------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------
Revenues $45,715 $41,067 $189,859 $182,846
Cost of revenues 36,971 33,376 153,982 149,881
---------------------------------------------------------------------
Gross profit 8,744 7,691 35,877 32,965
Selling and marketing 1,078 1,113 4,973 5,019
General and administration 3,135 3,003 12,926 12,527
Facilities 809 656 3,017 2,723
Stock option
compensation (Note 7) 152 - 310 -
Amortization of equipment 394 233 1,193 992
Amortization of intangibles 78 78 312 312
Prior years investment tax
credits (Note 9) - - - (409)
---------------------------------------------------------------------
Earnings before other income
and expense, interest income
and income tax expense 3,098 2,608 13,146 11,801
Litigation settlement
cost (Note 10) - - - (2,000)
Unrealized gain (loss) on
fair value of conversion
options of long-term
investment (Note 5) (55) - 106 -
Interest income (Note 6) 282 195 958 584
---------------------------------------------------------------------
Earnings before income
tax expense 3,325 2,803 14,210 10,385
---------------------------------------------------------------------
Income tax expense - current 1,182 924 4,911 3,426
Income tax expense - future 7 64 94 336
---------------------------------------------------------------------
1,189 988 5,005 3,762
---------------------------------------------------------------------
NET EARNINGS 2,136 1,815 9,205 6,623
Retained earnings, beginning
of period 31,099 27,772 28,448 25,807
Adjustment to opening
retained earnings (Note 2):
Unrealized loss on fair
value of conversion options
of long-term investment
at October 1, 2006 - - (1,391) -
Accreted interest on host
contract component of
long-term investment at
October 1, 2006 - - 68 -
Excess of purchase price
over stated capital on
repurchase of shares (380) (382) (953) (1,186)
Dividend (1,003) (757) (3,525) (2,796)
---------------------------------------------------------------------
Retained earnings,
end of period $31,852 $28,448 $31,852 $28,448
---------------------------------------------------------------------
---------------------------------------------------------------------
Net earnings per
share: (Note 8)
Basic $0.26 $0.22 $1.10 $0.78
---------------------------------------------------------------------
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Diluted $0.26 $0.22 $1.10 $0.78
---------------------------------------------------------------------
---------------------------------------------------------------------
Weighted average number
of shares: (Note 8)
Basic 8,367,714 8,425,263 8,387,663 8,465,246
---------------------------------------------------------------------
---------------------------------------------------------------------
Diluted 8,367,714 8,433,093 8,387,663 8,500,079
---------------------------------------------------------------------
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)


September 30, September 30,
2007 2006
---------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $18,077 $17,018
Accounts receivable 32,375 27,529
Note receivable - 186
Work in process 3,744 3,721
Prepaid expenses and other 502 493
Future income taxes 1,111 1,787
Derivative assets (Note 14) 250 -
---------------------------------------------------------------------
56,059 50,734
LONG-TERM INVESTMENT (Note 5) 3,162 3,623
EQUIPMENT 3,527 3,584
INTANGIBLES 392 704
GOODWILL 9,518 9,518
---------------------------------------------------------------------
$72,658 $68,163
---------------------------------------------------------------------
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and
accrued liabilities $16,958 $18,785
Unearned contract revenue 5,160 4,017
Derivative liabilities (Note 14) 98 -
---------------------------------------------------------------------
22,216 22,802
---------------------------------------------------------------------
CONTINGENCIES (Note 10) AND
COMMITMENT (Note 12)

SHAREHOLDERS' EQUITY
Share capital (Note 7) 17,309 17,236
Contributed surplus (Note 7) 310 -
Retained earnings 31,852 28,448
Accumulated other comprehensive
income (loss) (Note 2) 971 (323)
---------------------------------------------------------------------
50,442 45,361
---------------------------------------------------------------------
$72,658 $68,163
---------------------------------------------------------------------
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)


Three months ended Year ended
September 30 September 30
(Unaudited)
---------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------
Net earnings $2,136 $1,815 $9,205 $6,623
Unrealized gain (loss) on
translating financial
statements of self-
sustaining foreign operation
net of tax (114) 10 (199) (85)
Unrealized gain on fair
value of host contract
component of long-term
investment, net of tax 22 - 12 -
Change in deferred gain on
derivatives designated as
cash flow hedges, net
of tax 378 - 1,153 -
---------------------------------------------------------------------
Other comprehensive income
(loss), net of tax 286 10 966 (85)
---------------------------------------------------------------------
Comprehensive income $2,422 $1,825 $10,171 $6,538
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CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)

Three months ended Year ended
September 30 September 30
(Unaudited)
---------------------------------------------------------------------
2007 2007 2006
---------------------------------------------------------------------
Accumulated other
comprehensive income (loss),
beginning of period $685 $(323) $(238)
Adjustment to accumulated other
comprehensive loss, beginning of
period (Note 2):
Cumulative adjustment on translation
of financial statements of self-
sustaining foreign operations net
of tax - - -
Cumulative unrealized gain on fair
value of host contract component of
long-term investment at October 1,
2006 net of tax - 419 -
Cumulative change in deferred loss on
derivatives designated as cash flow
hedges at October 1, 2006 net of tax - (91) -
---------------------------------------------------------------------
Accumulated other comprehensive income
(loss), beginning of period 685 5 (238)
Other comprehensive income (loss),
net of tax 286 966 (85)
---------------------------------------------------------------------
Accumulated other comprehensive
income (loss), end of period 971 971 (323)
Retained earnings, end of period 31,852 31,852 28,448
---------------------------------------------------------------------
Accumulated other comprehensive income
(loss) and retained earnings, end
of period $32,823 $32,823 $28,125
---------------------------------------------------------------------
---------------------------------------------------------------------



CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

Three months ended Year ended
September 30 September 30
(Unaudited)
---------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net earnings $2,136 $1,815 $9,205 $6,623
Items not affecting cash:
Interest accreted on note
receivable (4) (7) (14) (28)
Interest accreted on host
contract component of
long-term investment (Note 6) (81) - (325) -
Employee stock purchase plan
compensation expense 8 9 34 35
Stock option compensation
expense 152 - 310 -
Amortization 472 311 1,505 1,304
Future income taxes 7 64 94 336
Unrealized (gain) loss on fair
value of conversion options
of long-term investment 55 - (106) -
---------------------------------------------------------------------
2,745 2,192 10,703 8,270
Change in non-cash
working capital
Accounts receivable 647 4,330 (5,267) 8,314
Work in process 2,042 546 (23) (112)
Prepaid expenses and other 399 388 (9) 332
Accounts payable and
accrued liabilities (350) (4,123) (618) (2,274)
Unearned contract revenue 1,271 (1,153) 1,813 (3,295)
---------------------------------------------------------------------
6,754 2,180 6,599 11,235
---------------------------------------------------------------------
CASH FLOWS USED IN FINANCING
ACTIVITIES
Issuance of common shares - 5 252 241
Dividend (1,003) (757) (3,525) (2,796)
Repurchase of shares
(Note 13) (451) (468) (1,132) (1,461)
---------------------------------------------------------------------
(1,454) (1,220) (4,405) (4,016)
---------------------------------------------------------------------
CASH FLOWS USED IN INVESTING
ACTIVITIES
Notes receivable 200 200 200 200
Equipment expenditures (279) (257) (1,136) (1,025)
Business acquisition - (355) - (3,557)
Investment (Note 7) - (3,623) - (3,623)
---------------------------------------------------------------------
(79) (4,035) (936) (8,005)
---------------------------------------------------------------------
FOREIGN CURRENCY ADJUSTMENT (114) 10 (199) (85)
---------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW) 5,107 (3,065) 1,059 (871)
CASH, BEGINNING OF PERIOD 12,970 20,083 17,018 17,889
---------------------------------------------------------------------
CASH, END OF PERIOD $18,077 $17,018 $18,077 $17,018
---------------------------------------------------------------------
---------------------------------------------------------------------


CALIAN TECHNOLOGIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the periods ended September 30, 2007 and 2006

(dollars in thousands, except per share amounts)

(Unaudited)

1. ACCOUNTING POLICIES

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles except that these interim consolidated financial statements do not provide full note disclosure.

These interim consolidated financial statements have been prepared using the same accounting policies used in the preparation of the audited annual consolidated financial statements for the year ended September 30, 2006 with the exception of the application of the accounting policies described in Note 2. These interim consolidated financial statements should be read in conjunction with the audited annual consolidated financial statements.

2. ADOPTION OF NEW ACCOUNTING POLICIES

Effective October 1, 2006 the Company adopted the following new accounting standards. Any changes in measurement resulting from applying the new standards on October 1, 2006 were recorded against opening retained earnings or opening other comprehensive income with no impact on net income.

Financial instruments

All financial assets and liabilities are recorded on the balance sheet. Initial recognition of financial assets and liabilities is at fair value. Subsequent measurement of the financial assets and liabilities is determined as follows:

i) Current monetary assets and liabilities

Cash is measured at fair value with changes in fair value recorded in net income. The carrying amount approximates fair value. Accounts receivables and accounts payable and accrued liabilities are measured at amortized costs with interest accretion recorded in net income. Due to the short-term nature of these assets and liabilities, the carrying amounts approximate amortized cost.

ii) Long-term investment

Under the new standards, the Company's long-term investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independently of the underlying preferred share investment "host contract". The conversion options are measured at fair value using a Black-Scholes model with changes in fair value recorded in net income. The host contract is adjusted to fair value each period end. The effective interest rate method is used to calculate interest income on the host contract. The remaining change in value of the host contract is recorded in other comprehensive income. Fair value of the host contract is determined using interest-rates in effect at each reporting period. The sum of the fair value of both the embedded derivative and the host contract represents the fair value of the long-term investment. This new policy is adopted prospectively with changes in fair value to October 1, 2006 recorded in opening retained earnings or opening accumulated other comprehensive income. On October 1, 2006, the Company recorded an adjustment to opening retained earnings of $1,391 net of tax of nil representing the unrealized loss in fair value of the conversion options component of the long-term investment from the date the investment was acquired to September 30, 2006 and recorded an adjustment to opening retained earnings of $68 net of tax of nil representing the accretion of interest. An adjustment of $419 net of tax of nil was also recorded to opening other comprehensive income representing the unrealized gain on fair value of the host contract portion of the long-term investment.

iii) Derivative financial instruments

Derivatives are recorded on the balance sheet at fair value with changes in fair value recorded in net income unless the derivative is designated as a cash flow hedge. Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place at the end of the period. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative are recorded in other comprehensive income and are recognized in net income when the hedged item affects net income. The company expenses transaction costs related to its foreign exchange contract. This new policy is adopted on a prospective basis with changes related to the prior fiscal year recorded in opening retained earnings or opening accumulated other comprehensive income. On October 1, 2006, the Company recorded an adjustment to opening accumulated other comprehensive income of $91 net of tax of $51 representing the cumulative change in fair value on derivatives designated as cash flow hedges to September 30, 2006. No adjustment was made to opening retained earnings.


Foreign currency translation

The accounts of a wholly-owned subsidiary, which is considered to be a self-sustaining foreign operation, have been translated into Canadian dollars using the current rate method of foreign currency translation. Under this method, assets and liabilities are translated at the rate of exchange in effect at year-end. Revenues and expenses are translated at rates in effect during the year. Translation gains and losses are included in other comprehensive income. Comparative statements have been restated to reflect the application of the new standards for foreign currency translation of a self-sustaining foreign operation.

Comprehensive income

Comprehensive income includes net earnings and other comprehensive income (OCI). OCI refers to changes in net assets from certain transactions and other events and circumstances, other than transactions with shareholders. These changes are recorded directly as a separate component of shareholders' equity and excluded from net earnings. The Company's OCI includes the foreign currency translation adjustment for its US subsidiary that does not use the Canadian dollar as its measurement currency, the unrealized gain or loss on fair value of the host contract portion of its long-term investment and the change in fair value on effective portion of derivatives designated as cash flow hedges where the hedged item has not yet been recognized in income.

3. ACCOUNTING ESTIMATES

For the periods ended September 30, 2007 and September 30, 2006, other than the changes required in adopting new accounting standards as described in Note 2, there has been no material changes in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years.

4. SEASONALITY

The Company's revenues and earnings have historically been subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays.

5. LONG TERM INVESTMENT

On July 11, 2006, the Company invested $3,623 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares. The investment cost included acquisition costs of $116. The preferred shares will be convertible into 8,750,000 common shares of Med-Emerg at the Company's option. After two years, Med-Emerg is also entitled to cause the preferred shares to be converted into common shares when trading volumes of Med-Emerg common shares exceed 600,000 shares and the weighted average share price is at least $0.46 USD in the preceding 60 days. On a fully converted basis, this investment represents a 13% interest based on the current number of common shares outstanding. In the event the shares are not converted by July 11, 2011, the preferred shares will be redeemed, and at the option of Med-Emerg, the face value will be satisfied either in cash or in Med-Emerg common shares based on the then fair market value of the common shares.



Fair value of long-term investment:
--------------------------------------------------------------------------
Long-term investment, at cost $3,623
Cumulative unrealized loss of conversion options (1,285)
Cumulative interest accretion on host contract 393
Cumulative unrealized gain on fair value
of host contract component 431
--------------------------------------------------------------------------
Fair value of investment at September 30, 2007 $3,162
--------------------------------------------------------------------------
--------------------------------------------------------------------------

6. INTEREST INCOME

Interest income is comprised of the following amounts:
--------------------------------------------------------------------------
Three months ended Year ended
September 30 September 30
2007 2006 2007 2006
--------------------------------------------------------------------------
Interest income $197 $188 $619 $556
Accreted interest on host contract
component of long-term investment 81 - 325 -
Accreted interest on note receivable 4 7 14 28
--------------------------------------------------------------------------
Interest income $282 $195 $958 $584
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7. SHARE CAPITAL

Stock Options

The Company has an established stock option plan, which provides that the Board of Directors may grant stock options to eligible directors and employees. Under the plan eligible directors and employees are granted the right to purchase shares of common stock at a price established by the Board of Directors on the date the options are granted but in no circumstances below fair market value of the shares at the date of grant. A total of 250,000 common shares have been authorized for issuance under the plan.

During the fourth quarter (and year) ending September 30, 2007 the Company granted 85,000 (165,000) options to directors and officers at an average price of $13.00 ($13.22) per share with 48,200 (91,400) vesting immediately and 36,800 (73,600) options vesting over a period of two years. The options expire at various dates through to August 21, 2012. At September 30, 2007 there were 165,000 options outstanding.

During the quarter ended and the twelve month period ending September 30, 2007 under the fair value based method, compensation expense related to general and administrative costs of $152 and $310 was recorded with an offsetting credit to contributed surplus.

The compensation costs reflected in the consolidated financial statements for the year were calculated using the Black-Scholes option pricing model using the following weighted average assumptions:



Risk free interest rate 4.0%
Expected dividend yield 3.4%
Stock price volatility 31.9%
Expected life of options 3.3 years

The weighted average fair value of options granted during the quarter
ended and year ended September 30, 2007 was $2.64 and $2.80 per option
respectively.


8. NET EARNINGS PER SHARE

The diluted weighted average number of shares has been calculated as
follows:

--------------------------------------------------------------------------
Three months ended Year ended
September 30 September 30
2007 2006 2007 2006
--------------------------------------------------------------------------
Weighted average number of
shares - basic 8,367,714 8,425,263 8,387,663 8,465,246
Addition to reflect the
dilutive effect of
employee stock options - 7,830 - 10,381
Shares to be issued for
the Titan acquisition - - - 24,452
Weighted number of shares -
diluted 8,367,714 8,433,093 8,387,663 8,500,079
--------------------------------------------------------------------------


Options that are anti-dilutive because the exercise price was greater than the average market price of the common shares are not included in the computation of diluted earnings per share. For the periods ended September 30, 2007, 165,000 options were excluded from the above computation of diluted weighted average number of common shares because they were anti-dilutive (2006: nil).

9. PRIOR YEARS INVESTMENT TAX CREDITS

During 2006, the Company received an assessment from the Canada Revenue Agency regarding its 2004 scientific research and experimental development (R&D) claim allowing additional R&D costs to be claimed. As a result, the Company recorded $409 of investment tax credits related to its 2004 and 2005 R&D activities which are available to be recovered from taxes already paid. The investment tax credits have been recorded against income taxes otherwise payable.

10. LITIGATION AND CONTINGENCIES

On July 11, 2006 the Company paid $2.0 million in return for a complete and full release and discharge of the previously disclosed $100 million claim. The release confirms that the Company does not admit and in fact denies all allegations.

In the normal course of business, the Company is party to employee related claims. The potential outcomes related to existing matters faced by the company are not determinable at this time. The Company intends to defend these actions, and management believes that the resolution of these matters will not have a material adverse effect on the Company's financial condition.

11. SEGMENTED INFORMATION

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, regarding how to allocate resources and assess performance. The Company's chief operating decision maker is the Chief Executive Officer. The Company operates in two reportable segments described below, defined by their primary type of service offering, namely Systems Engineering and Business and Technology Services.

- Systems Engineering involves planning, designing and implementing solutions that meet a customer's specific business and technical needs, primarily in the satellite communications sector.

- Business and Technology Services involves both short and long-term placements of personnel to augment customers' workforces as well as the long-term management of projects, facilities and customer business processes.

The Company evaluates performance and allocates resources based on earnings before interest and income taxes. The accounting policies of the segments are the same as those described in the significant accounting policies note in the audited annual consolidated financial statements.



Three months ended September 30, 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues $14,306 $31,409 $- $45,715
Earnings before other
expense, interest and
income tax expense 1,899 1,860 (661) 3,098
Unrealized loss on fair
value of conversion
options of long-term
investment (Note 5) (55)
Interest income 282
Income tax expense 1,189
--------------------------------------------------------------------------
Net earnings $2,136
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Three months ended September 30, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues $9,457 $31,610 $- $41,067
Earnings before interest
income and income
tax expense 1,163 2,179 (734) 2,608
Interest income 195
Income tax expense 988
--------------------------------------------------------------------------
Net earnings $1,815
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Year ended September 30, 2007
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Systems Business and
Engineering Technology Corporate Total
Services
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues $55,586 $134,003 $- $189,859
Earnings before other
income, interest income
and incom tax expense 6,515 9,143 (2,512) $13,146
Unrealized gain on fair
value of conversion
options of long-term
investment (Note 5) 106
Interest income (Note 6) 958
Income tax expense 5,005
--------------------------------------------------------------------------
Net earnings $9,205
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets other
than cash and goodwill $16,004 $28,904 $155 $45,063
Goodwill 9,518 9,518
Cash 18,077 18,077
--------------------------------------------------------------------------
Total assets $16,004 $38,422 $18,232 $72,658
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Equipment expenditures $748 $388 $- $1,136
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Year ended September 30, 2006
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenues $36,689 $146,157 $- $182,846
Earnings before
other expense,
interest income
and income tax expense 4,967 9,453 (2,619) 11,801
Litigation settlement
cost (2,000)
Interest income 584
Income tax expense 3,762
--------------------------------------------------------------------------
Net earnings $6,623
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets other
than cash and goodwill $10,403 $30,902 $322 $41,627
Goodwill 9,518 9,518
Cash 17,018
--------------------------------------------------------------------------
Total assets $10,403 $40,420 $17,340 $68,163
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Equipment expenditures $675 $350 $- $1,025
--------------------------------------------------------------------------
--------------------------------------------------------------------------


12. COMMITMENT

During the year 2000, the Company entered into a 10-year lease for an office building in the Ottawa area expiring in April 2010. The Company currently has an agreement with a sub-tenant to lease a significant portion of the space for a period extending to the end of the lease period. The Company is required to assume the remaining portion of the costs associated with this facility. Unless the sub-lessee defaults on future payments, it is expected that the current provision of $1,287 will be sufficient to cover the Company's share of the costs. The lease payments including operating costs relating to the excess space amount to approximately $990 per year.

13. SHARE REPURCHASE

During the fourth quarter (and year) ending September 30, 2007, the Company acquired 34,200 (87,100) of its outstanding common shares at an average price of $13.16 ($12.98) per share for a total of $451 ($1,133) including related expenses, through the Normal Course Issuer Bid initiated in November 2006. During the fourth quarter (and year) ending September 30, 2006, the Company acquired 41,600 (134,000)of its outstanding common shares at an average price of $11.21 ($10.88)per share for a total of $468 ($1,461) including related expenses, through the Normal Course Issuer Bid initiated in November 2005. The excess of the purchase price over the average stated capital of the shares has been charged to retained earnings.

14. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Foreign currency risk

The Company is exposed to foreign currency fluctuations on its cash balance, accounts receivable, accounts payable and future cash flows related to contracts denominated in a foreign currency. Future cash flows will be realized over the life of the contracts. The Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The Company's policy is not to utilize derivative financial instruments for trading or speculative purposes. The Company applies hedge accounting when appropriate documentation and effectiveness criteria are met.

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives to specific firm contractually related commitments on projects.

The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

The forward foreign exchange contracts primarily require the Company to purchase or sell certain foreign currencies with or for Canadian dollars at contractual rates. At September 30, 2007, the Company had the following forward foreign exchange contracts:



---------------------------------------------------------- --------------
Fair Value
Equivalent September 30,
Type Notional Currency Maturity Cdn. Dollars 2007
---------------------------------------------------------- --------------
SELL 40,545 USD October 2007 40,581 $247
BUY 70 EURO October 2007 99 -
BUY 254 GBP October 2007 513 3
---------------------------------------------------------- --------------
Derivative
assets $250
---------------------------------------------------------- --------------
BUY 15,701 USD October 2007 15,715 $96
SELL 462 EURO October 2007 653 2
---------------------------------------------------------- --------------
Derivative
liabilities $98
---------------------------------------------------------- --------------


Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place on September 30, 2007.

Interest rate risk

The Company's long-term investment is not exposed to interest-rate risk. However, the fair value of long-term investment will be affected by interest rate fluctuations. An increase to the interest rate would result in a decrease in the fair value of the investment.

Credit risk

The Company has an unsecured credit facility, subject to annual renewal. The credit facility permits the Company to borrow funds up to an aggregate of $10 million. As of September 30, 2007 there were no direct borrowings under the Company's credit facility.

The Company is exposed to credit-related losses in the event of non-performance by counter-parties to derivative financial instruments but does not expect any counter-parties to fail to meet their obligations. The Company only deals with major financial institutions.

The Company is exposed to credit-related losses on accounts receivable but does not expect any customer to fail to meet their obligations. The Company's customers are largely Federal government departments and large private companies.

Management Discussion and Analysis -- September 30, 2007:

(dollars in thousands, except per share data)

RESULTS OF OPERATIONS

Revenues:

For the fourth quarter of 2007, revenues increased by 11% to $45,715, compared to $41,067 reported in the fourth quarter of 2006. For the year ending September 30, 2007 revenues improved to $189,859 compared to $182,846 in the prior year.

Systems Engineering's (SED) revenues were $14,306 in the quarter and $55,856 for the year representing an increase of 52% from the $9,457 and $36,689 recorded last year. SED revenues improved significantly over the prior year as a result of a rejuvenated satellite industry, which translated into improved market opportunities for satellite ground equipment. During 2007, SED ramped up work on several large contracts signed late in 2006 and early 2007. By comparison, during 2006, SED was winding down on several larger contracts. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period.

Business and Technology Services (BTS) revenues were $31,409 in the quarter and $134,003 for the year representing a decrease of 1% and 8% respectively from the $31,610 and $146,157 recorded last year. The decrease in BTS revenues over the prior year is attributable mainly to the loss of the call center services contract in June 2006. A tightening of federal government spending on short-term staffing during the second half of 2007 also contributed to the reduction. This was however partially offset by an increase in the outsourcing business due to additional demand and organic growth within existing long-term contracts. Excluding the revenue reduction associated with call-center services, the BTS division reported a 3% increase in revenues for the year.

Management expects that the marketplace in 2008 will continue to be very competitive. The market conditions for SED are expected to be strong and should present many new opportunities in 2008. The eventual lifting of the recent constraints within the federal government and the timing of future contract wins will ultimately determine the BTS revenue growth for the next 12 months. While the Company begins the year with $150 million of backlog to be earned in 2008, the above noted variables will have an impact in revenues ultimately realized. Overall, management is expecting a respectable increase from the level of business experienced in 2007.

Gross margin:

Gross margin was 19.1% in the fourth quarter of 2007, compared to 18.7% reported in the fourth quarter a year ago. On a year-to-date basis the Company reported margins of 18.9% compared to 18.0% for the same period last year. The 2007 margins were impacted positively by the wind-down of the call-center services contract and an increase in SED's proportion of overall revenues.

Gross margin in Systems Engineering was 23.7% this quarter compared to 24.6% in the fourth quarter of 2006. For the twelve month period ending September 30, 2007, gross margin was 21.6% compared to 25.6% . SED gross margin in the prior year reflected the positive impact associated with closeouts of several large projects whereas gross margins in 2007 reflect a higher proportion of lower margin non-labour component in revenues, a strong Canadian dollar and the highly competitive nature of the recent signings for the division.

Gross margin in Business and Technology Services was 17.1% compared to the 17.0% reported in the fourth quarter of 2006 and 17.8% for the twelve month period compared to 16.1% for the same period last year. BTS improvement in gross margin is a reflection of the changing revenue mix resulting from the wind-down of the call center services contract. Gross margin in all other business area are relatively constant between 2007 and 2006.

Because of the significant difference in gross margin between each of the two divisions, the overall gross margin of the Company is dependent on the relative level of revenue generated from each division. The highly competitive environment faced by SED and BTS coupled with the strengthened Canadian dollar is expected to put pressure on margins. However, by continuing to focus on execution, management believes that this impact can be negated and realized margins can be maintained at levels consistent with the prior year.

Operating expenses:

Selling, marketing, general and administration, facilities totalled $5,022 or 11.0% of revenues in the fourth quarter of 2007 compared to $4,772 or 11.6% of revenues reported in the fourth quarter of 2006. Facility maintenance, program start up costs and incentives tied to profitability, all contributed to the increase over the same quarter last year. For the twelve month period ending September 30, 2007, operating expenses amounting to $20,916 represent only a marginal increase over the $20,269 expended in 2006. For 2008, management believes that it can maintain its operating expenses at the same percentage of revenues as in 2007.

Stock option compensation:

As indicated in Note 8, the Company granted 165,000 options during the year and recorded $310 of stock compensation expense.

Prior years' investment tax credits:

During 2006 the Company recorded additional investment tax credits (ITC) of $409 with respect to prior fiscal years' re-filing of R&D claims. This resulted in a recovery in 2006 of taxes already paid. For future years, ITC related to qualified R&D activity is recorded in the year in which the R&D costs are incurred.

Litigation:

As indicated in Note 10 to the Company's consolidated financial statements, on July 11, 2006, the Company paid $2 million in exchange for a complete and full release and discharge of the $100 million claim. The release confirms that the Company does not admit and in fact denies all allegations. Management was confident in its position, however, faced with the substantial legal costs and extensive management diversion associated with a multi-year litigation, management believes that the agreement reached is in the best interests of the Company.

Interest income:

Interest income for the fourth quarter of 2007 was $282 compared to $195 in 2006. For the twelve month period ending September 30, 2007, interest income was $958 compared to $584 in 2006. As a result of the adoption of new accounting rules described below, interest income for 2007 includes $81 for the quarter and $325 for the year related to interest accretion on the host contract portion of the long-term investment.

Unrealized gain on fair value of conversion options of long-term investment
As a result of the adoption of new accounting rules described below, the Company recorded a loss of $55 for the quarter and a gain of $106 for the year relating to the fair value of conversion options of long-term investment.

Income taxes

The provision for income taxes for the fourth quarter of 2007 was $1,189 or 35.8% of earnings before tax compared to $988 in 2006 or 35.2% of earnings before tax. On a year-to-date basis, the provision for incomes taxes was $5,005 or 35.2% of earnings before tax compared to $3,762 in 2006 or 36.2% of earnings before tax. The 2007 provision was positively impacted by the non-taxable gains related to the valuation of the long-term investment. As a result of changes in prescribed tax rates with the federal and various provincial governments, the tax rate for 2008, prior to considering the impact of non-taxable transactions, is expected to decrease by approximately 1.5% from the rate experienced in 2007.

Net earnings:

As a result of the foregoing, in the fourth quarter of 2007 the Company recorded net earnings of $2,136 or $0.26 per share basic and diluted, compared to $1,815 or $0.22 per share basic and diluted in the same quarter of the prior year. For the twelve month period ending September 30, 2007 the Company reported net earnings of $9,205 or $1.10 per share basic and diluted compared to $6,623 or $.78 per share basic and diluted in the same period of the prior year.

BACKLOG

The Company's backlog at September 30, 2007 was $960 million with terms extending to fiscal 2014. This compares to $1,010 million reported at the end of September 2006. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions.

Most fee for service contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the amount actually realized could be materially different from the original contract value. The following table represents management's best estimate of the backlog consumption for 2008 and 2009 based on its current visibility into customers' planned utilization.

Amounts shown as beyond 2009 represent the unearned portion of the contract value remaining after deducting the expected consumption for 2008 and 2009. These amounts exceed current utilization rates and known customer requirements by approximately $326 million. The majority of this amount relates to the health services support contract. Should additional customer requirements for the Company's services under these contracts not materialize, this excess will not be realized. The Company's policy is to reduce the reported contractual backlog once it receives official confirmation from the customer that indicates the utilization of the full contract value is unlikely.



Backlog:
(dollars in millions) Backlog at
Excess over estimated
Fiscal Fiscal Beyond estimated utilization
2008 2009 2009 TOTAL utilization levels

Contracted Backlog $140 $81 $192 $413 $160 $253

Option Renewals 10 14 523 547 166 381
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TOTAL $150 $95 $715 $960 $326 $634
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Business and
Technology
Services $112 $83 $708 $903 $326 $577

Systems
Engineering 38 12 7 57 - 57
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TOTAL $150 $95 $715 $960 $326 $634
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FINANCIAL CONDITION AND CASHFLOWS:

Operating activities

Cash flows from operating activities in 2007 decreased by $4,636 compared to 2006 despite increased profitability. Working capital elements changed in line with the ebbs and flows of the business. Specifically, accounts receivable increased as a result of higher activities at SED in 2007, accounts payable decreased as a result of the payment of large supplier milestones near year-end and unearned contract revenues increased as a result of receiving customer advance payments near September 30, 2007. The market for the Systems Engineering Division is characterized by long-term contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance payments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at September 30, 2007, the Company's total unearned revenue amounted to $5,160. This compares to $4,017 one year earlier.

Financing activities:

During the year ending September 30, 2007 the Company paid a dividend of $0.42 per share compared to $0.33 per share during the same period of 2006.

During 2007, the Company repurchased 87,100 common shares through its normal course issuer bid at an average price of $12.98 and during 2006, the Company repurchased 134,000 common shares through its normal course issuer bid at an average price of $10.88.

During 2007 (2006), the Company issued 10,000 (14,245) common shares for cash as a result of options being exercised during the year at an average price of $2.45 ($2.95) . At September 30, 2007 there were 165,000 options outstanding at an average price of $13.22 expiring at various dates between February 4, 2012 and August 21, 2012.

Investing activities:

During the year ending September 30, 2006, the Company paid $3,557 related to the Titan acquisition.

As indicated in Note 3 to the Company's consolidated financial statements, on July 11, 2006, Calian invested $3,623, including transaction costs of $116 in Med-Emerg International Inc. (Med-Emerg) in the form of convertible preferred shares. Management believes that given the enormous pressures on governments to streamline their healthcare systems there will be increasing opportunities generated in this emerging market. Med-Emerg has a good long-standing reputation in many aspects of private delivery of healthcare services and is a premier consultant for policy makers and various healthcare organizations which puts them in an ideal position to address future requirements and for Calian to participate in that process.

Capital resources

At September 30, 2007 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company against which no amounts were drawn. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.

ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON 2007 FINANCIAL RESULTS

As described in Note 2 to these interim financial statements, the Company was required to adopt new accounting rules which came in effect for the Company's first fiscal quarter 2007.

Long-term investment:

The new standards require a fair value measurement of the long-term investment at each reporting period. Previously the long-term investment would have been measured at cost. Change in the valuation of the long-term investment resulting from applying the new standards at October 1, 2006 is recorded in opening retained earnings or opening other comprehensive income. Under the new standards, the Company's long-term investment is considered a hybrid instrument as it includes rights of conversion to common shares. The conversion options are considered to be embedded derivatives to be separated and valued independent of the underlying host contract.

The conversion options are measured at fair value using a Black-Scholes model with changes in fair value recorded in net income. The Black-Scholes model derives a fair value of the conversion options using factors such as the option period and the volatility and price of the underlying instrument. On October 1, 2006, the application of these factors resulting in an unrealized loss in fair value of the conversion options of $1,391 which was recorded to opening retained earnings. For the twelve month period ending September 30, 2007 using the same approach, an unrealized gain in fair value of the conversion options of $106 was recorded to net earnings.

The host contract is measured initially at amortized cost using the effective interest rate method with the interest income recorded in net income. Interest accretion of $68 and $325 respectively were accrued to opening retained earnings and to interest income for the twelve month period ended September 30, 2007. Subsequently the host contract is adjusted to fair value with changes in fair value recorded in other comprehensive income. Fair value of the host contract is determined using interest-rates in effect at each reporting period. As a result, the Company recorded an unrealized gain on the host contract component of $419 to opening other comprehensive income and an unrealized gain of $12 to changes in other comprehensive income for the twelve months ended September 30, 2007.



PREVIOUS
STANDARDS NEW STANDARDS
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Acquisition Initial Transition
date recognition date September
July 11, 2006 July 11, 2006 October 1, 2006 30, 2007
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Conversion Options $2,019 $628 $734
Host contract 1,604 2,091 2,428

Reported $3,623 $3,623 $2,719 $3,162

Opening retained earnings - conversion options (1,391)
Opening retained earnings - interest accretion 68
Opening other comprehensive income - fair value
of the host contract 419
Accreted interest income on host contract during the year 325
Unrealized gain on fair value of the conversion options
during the year 106
Changes in other comprehensive income during the
twelve month period 12
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Foreign exchange hedging contracts:

As described in Note 14 to these interim financial statements, the Company utilizes derivative financial instruments, principally in the form of forward exchange contracts, in the management of its foreign currency exposures. The new standards require the recognition of the fair value of the forward exchange contracts with the corresponding adjustment recorded to other comprehensive income. In addition, deferral of gains and losses associated with forward exchange contracts that meet the requirements of hedge accounting is now recorded in other comprehensive income until the hedged future transactions are recorded in net earnings. Previously this amount was recorded in accounts payable and accrued liabilities.



SELECTED QUARTERLY FINANCIAL DATA

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Q4/07 Q3/07 Q2/07 Q1/07 Q4/06 Q3/06 Q2/06 Q1/06
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Revenues $45,715 $48,226 $50,852 $45,066 $41,067 $45,946 $48,469 $47,364

Net earnings $2,136 $2,501 $2,532 $2,036 $1,815 $772 $2,322 $1,714

Net earnings
per share
Basic $0.26 $0.30 $0.30 $0.24 $0.22 $0.09 $0.27 $0.20
Diluted $0.26 $0.30 $0.30 $0.24 $0.22 $0.09 $0.27 $0.20

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SEASONALITY

The Company's operations are subject to some quarterly seasonality due to the timing of vacation periods and statutory holidays. Typically the Company's first and last quarter will be negatively impacted as a result of the Christmas season and summer vacation period. During these periods, the Company can only invoice for work performed and is also required to pay for statutory holidays. This results in reduced levels of revenues and in a drop in gross margins. This seasonality may not be apparent in the overall results of the Company depending on the impact of the realized sales mix of its various projects.

OUTLOOK

Management believes the Company is well positioned for long-term sustained growth. The Company operates in markets that will continue to require the services that the Company offers. To further assure itself of a stable source of revenues, the Company will focus on increasing the percentage of its revenues derived from recurring business while pursuing new business in adjacent markets. Potential acquisitions, focused on adding complementary businesses to the Company's mix, could also be a possible source of growth.

The Systems Engineering Division had been working within a depressed satellite sector for the last few years. In addition, several large satellite operators were purchased using highly leveraged financial structures and industry consolidation continues. This depressed environment resulted in fewer opportunities during that period. During 2007, the division has seen a rejuvenated market and is currently experiencing increased demand for its products and services. Management believes that new systems adopting the latest technologies will be required by customers to maintain and improve their service offerings. Management is also confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. The continued strengthening of the Canadian dollar will impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in US dollars and EUROs.

The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Although the division has seen delays and spending constraints within certain federal government departments, management believes that the types of service the division offers will continue to be attractive to government agencies going forward.

GUIDANCE

For 2008, we expect continued solid performance in both divisions. The BTS division will continue pursuing new opportunities in traditional markets and build upon recent successes. The SED division is expected to continue to benefit from the recovery in the satellite communications market, even with the always-present risk of program delays associated with this sector. Based on the above, management expects that consolidated revenues for 2007 will be in the range of $190 million to $210 million and net earnings per share in the range of $1.10 to $1.25.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the most recent interim quarter ending September 30, 2007, there have been no changes in the design of the Company's internal controls over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

FORWARD-LOOKING STATEMENT

Certain information included in this management discussion and analysis is forward-looking and is subject to important risks and uncertainties. The results or events predicted in these statements may differ materially from actual results or events. Such statements are generally accompanied by words such as "intend", "anticipate", "believe", "estimate", "expect" or similar statements. Factors which could cause results or events to differ from current expectations include, among other things: the impact of price competition; scarce number of qualified professionals; the impact of rapid technological and market change; loss of business or credit risk with major customers; technical risks on fixed price projects; general industry and market conditions and growth rates; international growth and global economic conditions, and including currency exchange rate fluctuations; and the impact of consolidations in the business services industry. For additional information with respect to certain of these and other factors, please see the Company's most recent annual report and other reports filed by the Company with the Ontario Securities Commission. Calian disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. No assurance can be given that actual results, performance or achievement expressed in, or implied by, forward-looking statements within this disclosure will occur, or if they do, that any benefits may be derived from them.

The foregoing discussion and analysis should be read in conjunction with the financial statements for the fourth quarter of 2007, and with the Management Discussion and Analysis in the 2006 annual report, including the section on risks and opportunities.

Date: November 8, 2007

Contact Information

  • Calian Technologies Ltd.
    Ray Basler
    President and Chief Executive Officer
    306-931-3425
    or
    Calian Technologies Ltd.
    Jacqueline Gauthier
    Chief Financial Officer
    613-599-8600
    ir@calian.com
    www.calian.com