Firan Technology Group Corporation
TSX : FTG

Firan Technology Group Corporation

January 23, 2008 20:19 ET

Firan Technology Group (FTG) Announces Full Year 2007 Financial Results

TORONTO, ONTARIO--(Marketwire - Jan. 23, 2008) - Firan Technology Group Corporation (TSX:FTG) today announced the fourth quarter and the fiscal year ended November 30, 2007.



Fiscal Year 2007 Results (twelve months ended November 30, 2007 compared
------------------------ with twelve months ended November 30, 2006)

Fiscal Year 2007 Fiscal Year 2006
---------------- ----------------
---------------- ----------------

Sales $55,632,000 $55,400,000
(Loss) / Earnings Before Tax and
Before SR&ED Tax Credits(2) ($1,523,000) $948,000
------------ --------

Taxes and SR&ED Tax Credits $4,308,000 ($849,000)

------------ ----------
Net (Loss) / Earnings ($5,831,000) $1,797,000
------------ ----------
(Loss) / Earnings per share
- basic ($0.33) $0.10
- diluted ($0.33) $0.09


The Corporation's revenue grew in fiscal year 2007 to $55,632,000, an increase of $232,000 over 2006 and 115% growth over the past five years. This growth is the result of the corporate development activities including the merger of FTG and Circuit World in 2003 and the acquisition of Young Electronics in December 2004 as well as organic growth through the re-structured, enhanced sales organization. During the year, FTG's largest customer transitioned some printed circuit board production to the Far East. This impacted FTG's total revenue by $2,945,000 in 2007, primarily from the Circuits - Toronto facility. When comparing 2007 to 2006, the strengthening of the Canadian dollar versus the US dollar negatively impacted FTG's revenue by $2,000,000. FTG's revenue growth excluding the impact of the change in the exchange rate and the transition of revenue from this one customer was $5,210,000 or 9.4%.

Fiscal year 2007 sales for the Circuits' segment were $43,413,000, a decrease of $1,346,000 or 3% over the comparable period in 2006. The revenue change was slightly positive year-over-year, excluding the impact of the US/Canada exchange rate and was up 7.5% excluding the impact of the transition of revenue from the one customer.

Fiscal year 2007 sales for the Aerospace segment were $12,219,000 compared to $10,641,000 for the comparable period in 2006, an increase of 15%. The increase was over 17% excluding the impact of the strengthening Canada dollar.

FTG had a net loss of $5,831,000 in fiscal year 2007, compared to net earnings of $1,797,000 in fiscal year 2006. The 2006 results include the benefit of $1,120,000 SR&ED tax credits recorded in recovery of research & development whereas the 2007 results have the reversal of the 2006 credits and no new credits.

The Corporation wrote off $4,310,000 of the future tax asset and investment tax credits recoverable based on management's inability to forecast future trends in exchange rates, decreases in income tax rates, the dynamics associated with the transfer of manufacturing to the Far East and historical cumulative tax losses.

In spite of this write down, management believes they are taking steps to overcome these challenges and return to their expected levels of performance. Such steps include the recent acquisition of Filtran Microcircuits Inc., the major capital asset program initiated in the current year and the expansion of capacity at the FTG Circuits -Chatsworth facility.



The results in 2007 were negatively impacted by the following items:

- The non-cash write down of future income taxes of $4,310,000 - including
the $1,120,000 of SR&ED tax credits noted above
- The strengthening of the Canadian dollar of $1,100,000
- Increased expenses associated with outside subcontracted manufacturing
services during the year, before new equipment was installed,
of $1,000,000
- The move of FTG Aerospace into a new facility of $300,000
- Increased material and other costs of $800,000

FTG accomplished many goals in 2007 that continue to improve the company
and position it for the future, including:

- Contract wins, new/increased qualification levels, new programs with
Honeywell, Rockwell Collins, General Electric, Harris Corp,
Northrop Grumman, Benchmark Electronics, ACSS, Jabil, Sanmina-SCI,
Bombardier, Embraer, Lockheed Martin, BAe, and others.
- New Manufacturing Resource Planning (" MRP") system in FTG
Circuits-Chatsworth
- New engineering system in FTG Circuits-Toronto
- New facility for FTG Aerospace
- Increased technical capabilities in the Circuits business including rigid
flex, high density interconnects, high frequency materials, buried
passive components, micro-vias and stacked micro-vias
- Increased technical capabilities in the Aerospace business including
lighting power supplies, increased range of Light Emitting Diodes ("LED")
applications, increased electronic design and test capabilities
- Continued improving performance on quality and delivery metrics
with customers
- Strengthened management team with additions and promotions across
the Corporation.

Earnings before interest, taxes, depreciation and amortization (EBITDA)(1)
for the full year were $2,229,000, a decrease of $3,573,000 or 61.5%
over 2006.

Fourth Quarter Results (three months ended November 30, 2007 compared
---------------------- with three months ended November 30, 2006)

Q4 2007 Q4 2006
------- -------
------- -------

Sales $12,563,000 $13,603,000
(Loss) / Earnings Before Tax and
Before SR&ED Tax Credits(2) ($1,716,000) $121,000
------------ --------

Taxes and SR&ED Tax Credits $4,757,000 ($790,000)

------------ --------
Net (Loss) / Earnings ($6,473,000) $911,000
------------ --------

(Loss) / Earnings per share - basic ($0.37) $0.05
- diluted ($0.37) $0.04


Sales for the fourth quarter of 2007 were $12,563,000, a decrease of 8% compared with $13,603,000 for the fourth quarter of 2006. Excluding the impact of the strengthening Canadian dollar, sales increased 1% versus the prior year.

The Circuits segment sales for the quarter were $9,708,000, a decrease of $815,000 or 8% over the prior year. The reduction was due partly to the strength of the Canadian dollar compared to the prior year that reduced sales by more than $1,000,000 and partly due to reduced shipments to FTG's largest customer who transitioned some business to Far East suppliers. Offsetting these negative factors was increased activity from other customers and the addition of new customers.

The Aerospace segment sales for the current quarter ended at $2,855,000 which was a decrease of 7% versus the same quarter last year. The fourth quarter shipments were impacted $200,000 by the strengthening exchange rate and by the move of the business into a new, larger facility.

Net loss for the fourth quarter was $6,473,000 or loss of $0.37 per share ($0.37 per diluted share) as compared with net income of $911,000 or $0.05 per share ($0.04 earnings per diluted share) in the same period in 2006. In addition to the write down of the future tax asset by $4,850,000, including the reversal of the SR&ED tax credits recorded in recovery of research & development costs, the quarter was impacted by:



- The impact of change in the U.S. exchange rate of $1,200,000
- The impact of the move of the Aerospace facility of $300,000
- The impact of the an aggressive plan to reduce inventories by $1,346,000


As at November 30, 2007, the Corporation's primary source of liquidity included, accounts receivable of $10,761,000 and inventory of $7,621,000. Working capital at November 30, 2007 was $9,730,000.

Subsequent to the year-end, FTG acquired substantially all the assets of Filtran Microcircuits, Inc., for $1,450,000 plus the assumption of some liabilities. The acquisition will accelerate FTG's penetration of very high frequency circuit board applications. FTG intends to transition the activities of Filtran into its existing facilities in Toronto, Ontario and Chatsworth California. In addition to the strategic benefit of penetrating a new market segment, the acquisition immediately offsets the loss of revenues from business transitioned to Far East suppliers.

"While the end of 2007 brought a number of new challenges to FTG, we are confident that we can overcome them and return to our expected levels of performance. We will remain committed to Operational Excellence and to exceeding the expectations of our customers" stated Mr. Brad Bourne, President and Chief Executive Officer. "While the transition of work from FTG to the Far East is another challenge, we are accelerating our plans to be able to address this demand for all our customers. Such steps include the recent acquisition of Filtran Microcircuits Inc., the major capital asset program initiated in the current year and the expansion of capacity at the FTG Circuits - Chatsworth facility. While we are not overly concerned with our level of customer concentration, we continue to take steps to add key new customers to reduce the impact of any one customer on our total business", he added.

Mr. Bourne added, "The Corporation's external focus will continue to be in the aerospace and defense markets and on strengthening our leadership positions in the market segments in which we participate. Our customer base is forecasting continued growth. With a solid business foundation and a great management team, we continue to proactively take steps to further improve the company. We look to advance our technology levels in both businesses, continue our never-ending focus on operational excellence and proactively investigate acquisitions. We will continue to drive towards creating shareholder value everyday."



Full Year Full Year
Reconciliation of EBITDA(1): 2007 2006
---------- ----------
---------- ----------

Net (loss) / earnings ($5,831,000) $1,797,000

Add:

Income taxes and SR&ED credits $4,310,000 $ 271,000
Interest expense $ 578,000 $ 483,000
Amortization of capital assets $2,977,000 $3,099,000
Amortization of other financing costs $ 195,000 $ 152,000
---------- ----------

EBITDA $2,229,000 $5,802,000
---------- ----------
---------- ----------


(1) EBITDA is not a measure recognized under Canadian generally accepted accounting principles ("GAAP"). EBITDA is calculated as earnings before provision for income taxes, interest expense, amortization of capital assets and other financing costs. Management believes that many of the Corporation's shareholders, creditors, other stakeholders and analysts prefer to assess the Corporation's performance using EBITDA in addition to the GAAP measures. The Corporation's method of calculating EBITDA may differ from other companies and accordingly may not be comparable to measures used by other companies.

(2) (Loss) / Earnings Before Tax and Before SR&ED Tax Credits is not a measure recognized under Canadian generally accepted accounting principles ("GAAP"). It is calculated as (Loss) / Earnings Before Income Taxes of $2,643,000 less the impact of the $1,120,000 of Scientific Research & Experimental Development ("SRED") tax credits. Management believes that many of the Corporation's shareholders, creditors, other stakeholders and analysts prefer to assess the Corporation's performance using this measure in addition to the GAAP measures.

The Corporation will host a live conference call on January 24, 2008 at 8:30am (EDT) to discuss the results of 2007.

Anyone wishing to participate in the call should dial 416-695-9748 or 1-866-902-2211 and identify that you are calling to participate in the FTG conference call. The Chairperson is Mr. Bradley Bourne. A replay of the call will be available until February 7, 2008 and will be available on the FTG website at www.ftgcorp.com. The number to call for a rebroadcast is 416-695-5800 or 1-800-408-3053, pass code 3249124.

ABOUT FIRAN TECHNOLOGY GROUP CORPORATION

FTG is an aerospace and defense electronics product and subsystem supplier to the North American marketplace. FTG has two operating units.

FTG Circuits is a manufacturer of high technology/high reliability printed circuit boards. Our customers are leaders in the aviation, defense, and high technology industries. FTG Circuits has operations in Toronto, Ontario and Chatsworth, California.

FTG Aerospace manufactures illuminated cockpit panels, keyboards and sub-assemblies for original equipment manufacturers of avionics products as well as airframe manufacturers.

The Company's shares are traded on the Toronto Stock Exchange under the symbol FTG.

This news release contains certain forward-looking statements. Such statements are based on the current expectations of management of the Company and inherently involve numerous risks and uncertainties, known and unknown, including economic factors and the Company's industry, generally. The preceding list is not exhaustive of all possible factors. Such forward-looking statements are not guarantees of future performance and actual events and results could differ materially from those expressed or implied by forward-looking statements made by the Company. The reader is cautioned to consider these and other factors carefully when making decisions with respect to the Company and not place undue reliance on forward-looking statements.



FIRAN TECHNOLOGY GROUP CORPORATION
Consolidated Balance Sheets
As at November 30, 2007 and 2006
(in thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

2007 2006
--------- ---------
ASSETS

CURRENT
Cash $ 234 $ 2,348
Accounts receivable 10,761 10,432
Income taxes recoverable 74 254
Inventories 7,621 7,622
Prepaid expenses 412 491
---------------------------------------------------------------------------
19,102 21,147

DUE FROM RELATED PARTY - 154
CAPITAL ASSETS 7,757 6,969
INVESTMENT TAX CREDITS RECOVERABLE (Note 5) - 1,120
FUTURE INCOME TAXES (Note 10) 34 3,230
GOODWILL (Note 6) 3,904 4,549
---------------------------------------------------------------------------

$ 30,797 $ 37,169
---------------------------------------------------------------------------
---------------------------------------------------------------------------

LIABILITIES

CURRENT
Bank indebtedness $ 400 $ -
Accounts payable and accrued liabilities 7,604 8,567
Current portion of long-term debt 1,368 990
---------------------------------------------------------------------------
9,372 9,557
LONG-TERM DEBT 5,900 5,561
---------------------------------------------------------------------------
15,272 15,118
---------------------------------------------------------------------------
CONTINGENCIES AND COMMITMENTS

SHAREHOLDERS' EQUITY

Share capital
Common shares 12,681 12,681
Preferred shares 2,218 2,218
Contributed surplus 7,939 7,804
Deficit (6,484) (653)
Accumulated other comprehensive (loss) income (829) 1
---------------------------------------------------------------------------
15,525 22,051
---------------------------------------------------------------------------

$ 30,797 $ 37,169
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes.



FIRAN TECHNOLOGY GROUP CORPORATION
Consolidated Statements of (Loss) Earnings
Years ended November 30, 2007 and 2006
(in thousands of dollars except per share amounts)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

2007 2006
--------- ---------

SALES $ 55,632 $ 55,400

COST OF SALES 43,645 40,615
---------------------------------------------------------------------------
11,987 14,785
---------------------------------------------------------------------------

EXPENSES
Selling, general and administrative 7,040 7,680
Research and development costs (Note 9) 3,150 2,575
Recovery of research and development costs (Note 9) 885 (1,120)
Amortization of capital assets 2,977 3,099
Interest expense on long-term debt 578 483
---------------------------------------------------------------------------
14,630 12,717
---------------------------------------------------------------------------

(LOSS) EARNINGS BEFORE INCOME TAXES (2,643) 2,068

INCOME TAXES (Note 10) 3,188 271
---------------------------------------------------------------------------

NET (LOSS) EARNINGS $ (5,831) $ 1,797
---------------------------------------------------------------------------
---------------------------------------------------------------------------

NET (LOSS) EARNINGS PER SHARE
Basic $ (0.33) $ 0.10
Diluted $ (0.33) $ 0.09
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes.



FIRAN TECHNOLOGY GROUP CORPORATION
Consolidated Statements of Shareholders' Equity
Years ended November 30, 2007 and 2006
(in thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Common Preferred Total Contributed
Shares Shares Capital Surplus
------------------------------------------------
------------------------------------------------

Balance, November 30, 2006 $ 12,681 $ 2,218 $ 14,899 $ 7,804
Net loss
Other comprehensive
income (loss):
Foreign currency
translation
adjustments (Note 14)
Comprehensive loss
Stock based compensation 135
------------------------------------------------
Balance, November 30, 2007 $ 12,681 $ 2,218 $ 14,899 $ 7,939
------------------------------------------------
------------------------------------------------


Accumulated Total
Other Deficit Total
Comprehensive and Shareholders'
Deficit Loss ("AOCL") AOCL Equity
-------------------------------------------------------
-------------------------------------------------------

Balance, November
30, 2006 $ (653) $ 1 $ (652) $ 22,051
-------------------------------------------------------
Net loss (5,831) - (5,831) (5,831)
Other comprehensive
income (loss):
Foreign currency
translation
adjustments
(Note 14) - (830) (830) (830)
-------------------------------------------------------
Comprehensive loss (5,831) (830) (6,661) (6,661)
-------------------------------------------------------
Stock based
compensation - - - 135
-------------------------------------------------------
Balance, November
30, 2007 $ (6,484) $ (829) $ (7,313) $ 15,525
-------------------------------------------------------
-------------------------------------------------------



Common Preferred Total Contributed
Shares Shares Capital Surplus
------------------------------------------------
------------------------------------------------

Balance, November 30, 2005 $ 12,681 $ 2,218 $ 14,899 $ 7,604
------------------------------------------------
Net earnings
Other comprehensive
income:
Foreign currency
translation
adjustments (Note 14)
Comprehensive income
Stock based compensation 200

------------------------------------------------
Balance, November 30, 2006 $ 12,681 $ 2,218 $ 14,899 $ 7,804
------------------------------------------------
------------------------------------------------



Accumulated Total
Other Deficit Total
Comprehensive and Shareholders'
Deficit Loss ("AOCL") AOCL Equity
-------------------------------------------------------
-------------------------------------------------------

Balance, November
30, 2005 $ (2,450) $ (4) $ (2,454) $ 20,049
-------------------------------------------------------
Net earnings 1,797 - 1,797 1,797
Other comprehensive
income:
Foreign currency
translation
adjustments
(Note 14) - 5 5 5
-------------------------------------------------------
Comprehensive income 1,797 5 1,802 1,802
-------------------------------------------------------
Stock based
compensation - - - 200

-------------------------------------------------------
Balance, November
30, 2006 $ (653) $ 1 $ (652) $ 22,051
-------------------------------------------------------
-------------------------------------------------------
See accompanying notes.


FIRAN TECHNOLOGY GROUP CORPORATION
Consolidated Statements of Cash Flows
Years ended November 30, 2007 and 2006
(in thousands of dollars)
---------------------------------------------------------------------------
---------------------------------------------------------------------------

2007 2006
--------- ---------
NET (OUTFLOW) INFLOW OF CASH RELATED
TO THE FOLLOWING ACTIVITIES:

OPERATING
Net (loss) earnings $ (5,831) $ 1,797
Items not affecting cash
Stock based compensation expense 135 200
Future income taxes 3,190 494
Scientific research and experimental development
tax credits 1,120 (1,120)
Effect of exchange rates on U.S. dollar
Canadian debt (430) (116)
Amortization of capital assets 2,977 3,099
---------------------------------------------------------------------------
1,161 4,354
Changes in non-cash operating working capital (1,418) (2,065)
---------------------------------------------------------------------------
(257) 2,289
---------------------------------------------------------------------------

INVESTING
Additions to capital assets (3,983) (2,870)
---------------------------------------------------------------------------
(3,983) (2,870)
---------------------------------------------------------------------------

FINANCING
Increase in bank indebtedness 400 -
Decrease in due from related party 154 -
Proceeds from long-term debt 2,634 6,819
Re-payments of long-term debt (1,031) (6,039)
---------------------------------------------------------------------------
2,157 780
---------------------------------------------------------------------------

Effects of foreign exchange rate changes on cash flow (31) 98
---------------------------------------------------------------------------

NET CASH FLOW (2,114) 297

CASH, BEGINNING OF YEAR 2,348 2,051
---------------------------------------------------------------------------

CASH, END OF YEAR $ 234 $ 2,348
---------------------------------------------------------------------------
---------------------------------------------------------------------------
See accompanying notes.

DISCLOSURE OF CASH PAYMENTS
Payments for interest $ 577 $ 450
Payments for income taxes $ - $ 373
Refunds of income taxes $ 167 $ -


FIRAN TECHNOLOGY GROUP CORPORATION
Notes to the Consolidated Financial Statements
November 30, 2007 and 2006
(in thousands of dollars except per share amounts)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles and are presented in Canadian dollars.

Basis of consolidation and statement presentation

The consolidated financial statements include the accounts of Firan Technology Group Corporation (the "Corporation") and its 100% owned subsidiaries, FTG Circuits Inc. ("FTG Circuits - Chatsworth") and Firan Technology Group (USA) Corporation. All significant inter-company accounts and transactions have been eliminated.

Cash

Cash consists of balances with chartered banks.

Inventories

Raw materials and spare parts are valued at the lower of cost and replacement cost. Work-in-process and finished goods are valued at the lower of cost and net realizable value. Cost is determined on the first-in, first-out basis. Direct labour and an allocation of overheads are included in the determination of work-in-process and finished goods amounts.

Capital assets

Capital assets are recorded at cost, net of related government grants and investment tax credits. The assets are amortized using the straight-line method over their estimated useful lives as follows:



Machinery and equipment 3 to 7 years
Furniture and fixtures 4 years
Leasehold improvements Term of the lease plus term of first
renewal option


Impairment of long-lived assets

Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized when their carrying value exceeds the total undiscounted cash flows expected from their use and eventual disposition. The amount of the impairment loss is determined as the excess of the carrying value of the asset over its fair value.

Goodwill

The Corporation accounts for acquired goodwill in accordance with the provisions of Section 3062 of the Canadian Institute of Chartered Accountants Handbook ("CICA"), whereby the purchase price of an acquired business is allocated to assets and liabilities based on their fair values. Any purchase price amount in excess of those fair values is recorded as goodwill. Goodwill is not amortized, but must be tested annually for impairment on a fair value basis, and where the carrying value exceeds fair value, goodwill impairment must be recorded in the statement of (loss) earnings. Goodwill was tested at November 30, 2007 and 2006 and no impairment adjustment was required. The reduction in goodwill resulted from the foreign exchange translation adjustment made for the U.S. self sustaining operation.

Revenue recognition

The Corporation has one revenue stream which is derived from the sale of printed circuit boards, illuminated cockpit display panels and keyboards. The Corporation uses customer supplied engineering, specifications and design plans. The Corporation's sales cycle can vary between a few days to a few months. The Corporation recognizes revenue when the following conditions have been met:

- persuasive evidence of a sales arrangement exists, typically a customer purchase order,

- when the sales terms are fixed and determinable,

- title and risk of loss have transferred upon shipment

- and collectibility is reasonably assured

The Corporation provides its customers with limited right of return for defective products and the returns must be authorized by the Corporation prior to their acceptance in its facilities. Normal warranty period is one year from the date of shipment and the Corporation accrues an estimate for bad debts and warranty at the time of sale based on historical information.

Translation of foreign currencies

Monetary assets and liabilities are translated into Canadian dollars at the year-end rate. Non-monetary assets and liabilities are translated at rates prevailing at the date of the transaction. Revenues and expenses are translated at the average monthly exchange rates. Exchange gains and losses are included in operations.

FTG Circuits - Chatsworth and Firan Technology Group (USA) Corporation are considered self-sustaining subsidiaries. Accordingly, their assets and liabilities are translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during each month. The resulting translation adjustments are accumulated as a separate component in the accumulated other comprehensive loss section of shareholders' equity until there is a realized reduction in the net investment.

Measurement uncertainty

The preparation of the Corporation's financial statements, in accordance with Canadian 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 revenues and expenses during the reporting year. Due to the inherent uncertainty involved in making such estimates, actual results reported in future periods could differ from those estimates. Estimates include provisions for accounts receivable, inventory obsolescence, estimated useful lives of capital assets, warranty, investment tax credits, future income tax assets and goodwill.

Income taxes

The Corporation follows the liability method of accounting for income taxes. Under the liability method, future income tax assets and liabilities are recognized for loss carry forwards and for the differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted and substantively enacted tax rates and laws that are expected to be in effect in the periods in which the future income tax assets or liabilities are expected to be settled or realized.

A future tax asset would be recorded only to the extent that based on available evidence, it is more likely than not that a future tax asset would be realized. The valuation allowance is reviewed and adjusted for each reporting period. Should management estimates of taxable income change in future periods, it may be necessary to adjust the valuation allowance, which could affect the results of operations in the period such a determination was made.

Research and development

Research costs are expensed as incurred. Development costs are expensed as incurred unless they meet the capitalization criteria in the CICA Handbook Section 3450 and are then deferred to future periods. No development costs were capitalized in 2007 or 2006.

Investment tax credits

Investment tax credits are accounted for using the cost reduction method whereby the credits are applied to reduce the related qualifying expenditure. Investment tax credits have been recognized in the accounts on the basis of reasonable assurance of realization. The amounts recorded have been determined by the Corporation based on current legislation and management's best estimates. The amount that will ultimately be received may differ from the amount recorded.

Derivative financial instruments

The Corporation's foreign exchange contracts do not qualify for hedge accounting; accordingly they have been recognized on the balance sheet at their fair value. Any resulting gain or loss on the recording of the foreign exchange contracts at fair value is included in earnings.

Stock based compensation

The Corporation uses the fair value method to measure compensation expense at the date of grant of stock options to employees. The fair value of options is determined using the Black-Scholes option pricing model and is amortized to earnings over the vesting period with an offset to contributed surplus. When options are exercised, the corresponding contributed surplus and the proceeds received by the Corporation are credited to capital stock. The impact of forfeitures are recorded as incurred.

5. INVESTMENT TAX CREDITS RECOVERABLE

The investment tax credits recoverable of nil at November 30, 2007 ($1,120 at November 30, 2006) represents claims for non-refundable Scientific Research and Experimental Development ("SR&ED") credits which can be used to reduce future taxable income. A valuation allowance of $1,120 has been recorded in research and development costs in the current year for the 2006 amount as a result of management's inability to forecast future trends in exchange rates, decreases in income tax rates, the dynamics associated with the transfer of manufacturing to the Far East and historical cumulative tax losses.

The Corporation has available SR&ED tax credits of $1,642 at November 30, 2007 which can be used to reduce future taxable income and will expire as follows:



2013 164
2014 319
2015 484
2016 535
------------
1642
------------
------------


6. GOODWILL

Goodwill results from the Circuit World Corporation and FTG Inc. combination in fiscal 2003 of $1,039 and $2,865 from the acquisition of FTG Circuits - Chatsworth in fiscal 2005. FTG Circuits - Chatsworth is a considered self-sustaining subsidiary, accordingly its goodwill is translated at exchange rates in effect at the balance sheet date. The resulting translation loss of $645 is included in the accumulated other comprehensive loss section of shareholders' equity.

9. RESEARCH AND DEVELOPMENT COSTS AND RECOVERIES

Research and development costs include the cost of direct labour, materials and an allocation of overhead. Generally, these costs represent specific activities regarding the technical uncertainty of production processes and exotic materials.

In 2006, recovery of research and development costs represented $1,120 of non-refundable SR&ED tax credit claims which could be used to reduce future taxable income. A valuation allowance of $1,120 has been recorded in research and development costs in the current year for the 2006 amount as a result of management's inability to forecast future trends in exchange rates, decreases in income tax rates, the dynamics associated with the transfer of manufacturing to the Far East and historical cumulative tax losses.

Offsetting the $1,120 valuation allowance for the SR&ED tax credits recoverable and included in the recovery of research and development costs for November 30, 2007 are amounts receivable from the Ontario Innovation Tax Credit ("OITC") and the amounts received from the Industrial Research Assistance Program ("IRAP") of $219 and $16 respectively.

10. INCOME TAXES



2007 2006
-------- ---------
Future tax asset consists of:
Tax losses carried forward $ - $ 156
SR&ED deductible expenditures 1,784 868
Non-deductible allowances - 43
Excess of undepreciated capital cost for tax purposes
over net book value of capital assets 5,638 6,176
---------------------------------------------------------------------------
7,422 7,243
Valuation allowance 7,388 2,893
---------------------------------------------------------------------------
Future income tax asset $ 34 $ 4,350
---------------------------------------------------------------------------
---------------------------------------------------------------------------


An increase in the valuation allowance in 2007 occurred as a result of management's inability to forecast future trends in exchange rates, decreases in income tax rates, the dynamics associated with the transfer of manufacturing to the Far East and historical cumulative tax losses.

The SR&ED deductible expenditures have no expiry date for income tax purposes.

A reconciliation of income taxes at the statutory tax rates to income taxes at the effective tax rate is as follows:



2007 2006
--------- --------
Combined Canadian Federal and Provincial statutory rates 34.1% 34.1%
---------------------------------------------------------------------------
Provision for income taxes
Income taxes at statutory rate (901) 705
Rate adjustment for foreign jurisdiction (1) (41)
Permanent differences 66 73
Impact of investment tax credits not
previously recognized - (382)
Impact of change in tax rates 754 213
Valuation allowance 3,270 (297)
---------------------------------------------------------------------------
Income tax provision $ 3,188 $ 271
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Consisting of:
Current $ (2) $ (223)
Future 3,190 494
---------------------------------------------------------------------------

$ 3,188 $ 271
---------------------------------------------------------------------------
---------------------------------------------------------------------------


In addition, the Corporation has $14,400 of capital losses, which can be used to reduce income tax on future capital gains. The benefit of these capital losses has not been recorded in the accounts.

14. TRANSLATION OF FOREIGN CURRENCIES

FTG Circuits - Chatsworth and Firan Technology Group (USA) Corporation are considered self-sustaining subsidiaries. Accordingly, their assets (including goodwill) and liabilities are translated at exchange rates in effect at the balance sheet date. Revenues and expenses are translated at average exchange rates prevailing during each month. The resulting translation loss of $830 (2006 gain of $5) is included in the accumulated other comprehensive loss section of shareholders' equity until there is a realized reduction in the net investment.

15. SEGMENTED INFORMATION

The Corporation operates in two operating segments, FTG Circuits and FTG Aerospace. FTG Circuits is a leading manufacturer of high technology/high reliability printed circuit boards within the North American marketplace. FTG Aerospace is a manufacturer of illuminated cockpit panels, keyboards, bezels and sub assemblies for original equipment manufacturers of avionic products and airframe manufacturers. FTG Circuits and FTG Aerospace financial information is shown below:



2007
---------------------------------------------
Corporate
Circuits Aerospace Office Total
---------------------------------------------
Sales $ 43,413 $ 12,219 $ - $ 55,632
Costs and SG&A expenses 37,981 10,803 1,901 50,685
Amortization of capital assets 2,831 146 - 2,977
Research and development costs 3,057 93 - 3,150
Recovery of research and
development costs 901 (16) - 885
---------------------------------------------
(Loss) earnings before
interest and taxes (1,357) 1,193 (1,901) (2,065)
Interest expense on long-term
debt 578 - - 578
Income taxes (recovery) 2,782 406 - 3,188
---------------------------------------------
Net (loss) earnings (4,717) 787 (1,901) (5,831)
---------------------------------------------
---------------------------------------------

Segment assets 22,804 7,993 - 30,797
Goodwill 3,904 - - 3,904
Additions to capital assets 3,000 983 - 3,983



2006
---------------------------------------------
Corporate
Circuits Aerospace Office Total
---------------------------------------------

Sales $ 44,759 $ 10,641 $ - $ 55,400
Costs and SG&A expenses 37,109 9,249 1,937 48,295
Amortization of capital assets 2,923 176 - 3,099
Research and development costs 2,575 - - 2,575
Recovery of research and
development costs (1,120) - - (1,120)
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Earnings before interest and
taxes 3,272 1,216 (1,937) 2,551
Interest expense on long-term
debt 483 - - 483
Income taxes (recovery) (142) 413 - 271
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Net earnings (loss) 2,931 803 (1,937) 1,797
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Segment assets 29,693 7,476 - 37,169
Goodwill 4,549 - - 4,549
Additions to capital assets 2,593 277 - 2,870


18. SUBSEQUENT EVENT

On December 28, 2007, the Corporation acquired substantially all of the assets of Filtran Microcircuits Inc. ("Filtran"), a Canadian printed circuit board manufacturer based in Ottawa, Ontario and focused primarily on the manufacture of microwave printed circuit boards for high frequency applications. Filtran had annual revenues of approximately $4,000 in 2007.

The transaction was effected pursuant to an asset purchase agreement entered into between FTG, Filtran and Filtran's parent company, Merrimac Industries Inc. ("Merrimac"). The total consideration payable by FTG is $1,450 in cash plus the assumption of liabilities. FTG paid $800 of the purchase price at closing with the balance payable near the conclusion of an eight-week transitional period. FTG is financing the acquisition from existing cash and its bank operating line.

The preliminary allocation of the purchase price to the fair values of assets and liabilities acquired was made using the purchase method of accounting and are as follows:



Accounts receivable $ 375
Inventories 386
Prepaid expenses 22
Capital assets 1,160
Accounts payable and accrued liabilities (1,034)
Goodwill and intangible assets 524
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Purchase price including acquisition cost of
$30 (net of cash acquired of $47) $ 1,433
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