Calian Technologies Ltd.
TSX : CTY

Calian Technologies Ltd.

November 09, 2006 11:54 ET

Calian Reports Fourth Quarter Results: Revenue and Profitability in Line With Expectations

All amounts in this release are in Canadian Dollars

KANATA, ONTARIO--(CCNMatthews - Nov. 9, 2006) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the fourth quarter ended September 30, 2006. Revenues for the quarter were $41.1 million, a decrease of 19% from the $50.4 million reported in the same quarter of the previous year. Net earnings were $1.8 million or $0.22 per share basic and diluted, compared to $3.1 million or $0.37 per share basic and $0.36 diluted in the same quarter of the previous year. For the year 2006, the Company reported net earnings of $6.6 million or $0.78 per share basic and diluted, compared to $8.7 million or $1.04 per share basic and $1.03 per share diluted in the prior year. Prior to recording the $2 million settlement cost, net earnings for the year would have been $7.9 million or $0.93 per share basic and diluted.

"The results for this quarter were in line with our previously issued guidance and reflect the impact of the completion of the call centre contract on June 30th as well as the company's traditional fourth quarter softness" stated Ray Basler, President and CEO. "With the wrap up of the call centre contract now behind us, the BTS division can utilize its management time to further concentrate on growing its core business. The SED division had revenues similar to last quarter, but down relative to last year. However, recently announced contract signings are a direct reflection of an improving market for satellite ground systems. With an increased backlog and newly signed contracts contributing to revenues we have renewed optimism for the SED division heading into next year" continued Basler.

We anticipate solid performance in both divisions for 2007. Based on management's current outlook, giving due consideration to the volatility in both timing and magnitude of revenues in certain segments of the Company's business, consolidated revenues for fiscal 2007 are expected to be in the range of $180 million to $200 million and net earnings per share in the range of $0.90 to $1.05.

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 Twelve months ended
September 30 September 30
(unaudited)
--------------------------------------------------------------------
--------------------------------------------------------------------
2006 2005 2006 2005
--------------------------------------------------------------------
Revenues $ 41,067 $ 50,405 $ 182,846 $ 177,777
Cost of revenues 33,376 41,184 149,881 145,208
--------------------------------------------------------------------
Gross profit 7,691 9,221 32,965 32,569
Selling and
marketing 1,113 1,166 5,019 5,180
General and
administration 3,003 3,007 12,527 10,568
Facilities 656 647 2,723 2,698
Amortization of
capital assets 233 298 992 1,139
Amortization of
intangibles 78 99 312 396
Prior years
investment
tax credits (Note 6) - (984) (409) (984)
--------------------------------------------------------------------
Earnings before
other expense,
interest and
income taxes 2,608 4,988 11,801 13,572
Litigation
settlement
cost (Note 9) - - (2,000) -
Interest income, net 195 107 584 545
--------------------------------------------------------------------
Earnings before
income taxes 2,803 5,095 10,385 14,117
--------------------------------------------------------------------
Income taxes --
current 924 1,748 3,426 5,159
Income taxes --
future 64 250 336 209
--------------------------------------------------------------------
988 1,998 3,762 5,368
--------------------------------------------------------------------
NET EARNINGS 1,815 3,097 6,623 8,749

Retained earnings,
beginning of period 27,772 23,384 25,807 19,740
Excess of purchase
price over stated
capital on
repurchase of
shares (382) - (1,186) -
Dividend (757) (674) (2,796) (2,682)

--------------------------------------------------------------------
Retained earnings,
end of period $ 28,448 $ 25,807 $ 28,448 $ 25,807
--------------------------------------------------------------------
--------------------------------------------------------------------
Earnings per share:
(Note 5)
Basic $ 0.22 $ 0.37 $ 0.78 $ 1.04
--------------------------------------------------------------------
--------------------------------------------------------------------
Diluted $ 0.22 $ 0.36 $ 0.78 $ 1.03
--------------------------------------------------------------------
--------------------------------------------------------------------
Weighted average
number of shares:
(Note 5)
Basic 8,425,263 8,426,163 8,465,246 8,389,688
--------------------------------------------------------------------
--------------------------------------------------------------------
Diluted 8,433,093 8,496,730 8,500,079 8,489,121
--------------------------------------------------------------------
--------------------------------------------------------------------





CALIAN TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)


September 30, September 30,
2006 2005
-----------------------------------------------------------
ASSETS

CURRENT ASSETS
Cash and cash equivalents $ 17,018 $ 17,889
Accounts receivable 27,529 35,843
Note receivable 186 172
Work in process 3,721 3,609
Prepaid expenses and other 493 825
Future income taxes 1,857 2,166
-----------------------------------------------------------
50,804 60,504

NOTE RECEIVABLE - 186
LONG-TERM INVESTMENT (Note 7) 3,623 -
CAPITAL ASSETS 3,584 3,551
INTANGIBLES 704 1,016
GOODWILL 9,518 9,518
-----------------------------------------------------------
$ 68,233 $ 74,775
-----------------------------------------------------------
-----------------------------------------------------------

LIABILITIES AND SHAREHOLDERS'
EQUITY

CURRENT LIABILITIES
Accounts payable and accrued
liabilities $ 18,785 $ 24,343
Unearned contract revenue 4,017 7,312
-----------------------------------------------------------
22,802 31,655

FUTURE INCOME TAXES 70 43
-----------------------------------------------------------
$ 22,872 $ 31,698

CONTINGENCIES (Note 10)

COMMITMENTS (Note 11)

SHAREHOLDERS' EQUITY
Share capital (Note 12) $ 17,236 $ 17,270
Retained earnings 28,448 25,807
Cumulative translation
adjustment (323) -
-----------------------------------------------------------
45,361 43,077
-----------------------------------------------------------
$ 68,233 $ 74,775
-----------------------------------------------------------
-----------------------------------------------------------




CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
Three months ended Twelve months ended
September 30 September 30
(unaudited)
--------------------------------------------------------------------
--------------------------------------------------------------------
2006 2005 2006 2005
--------------------------------------------------------------------
CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Net earnings $ 1,815 $ 3,097 $ 6,623 $ 8,749
Items not affecting
cash:
Interest on note
receivable (7) (11) (28) (42)
Employee Share Purchase
Plan compensation expense 9 8 35 32
Amortization 311 397 1,304 1,535
Future income taxes 64 250 336 209
Translation adjustment (323) - (323) -
--------------------------------------------------------------------
1,869 3,741 7,947 10,483

Change in non-cash
working capital
Accounts receivable 4,330 (556) 8,314 (17,117)
Work in process 546 959 (112) 138
Prepaid expenses and
other 388 62 332 50
Accounts payable and
accrued liabilities (3,790) 998 (2,036) 2,612
Unearned contract
revenue (1,153) (1,564) (3,295) (6,782)
--------------------------------------------------------------------
2,190 3,640 11,150 (10,616)
--------------------------------------------------------------------
CASH FLOWS USED IN
FINANCING
ACTIVITIES
Issuance of common
shares 5 271 241 807
Dividend (757) (674) (2,796) (2,682)
Repurchase of shares,
including cost
associated with
repurchase (Note 12) (468) - (1,461) -
--------------------------------------------------------------------
(1,220) (403) (4,016) (1,875)
--------------------------------------------------------------------

CASH FLOWS FROM (USED IN)
INVESTING ACTIVITIES
Notes receivable 200 200 200 200
Acquisition of capital
assets (257) (121) (1,025) (817)
Business acquisition (355) - (3,557) -
Investment (Note 7) (3,623) - (3,623) -
--------------------------------------------------------------------
(4,035) 79 (8,005) (617)
--------------------------------------------------------------------

NET CASH INFLOW (OUTFLOW) (3,065) 3,316 (871) (13,108)

CASH AND CASH
EQUIVALENTS,
BEGINNING OF PERIOD 20,083 14,573 17,889 30,997
--------------------------------------------------------------------
CASH, END OF PERIOD $ 17,018 $ 17,889 $ 17,018 $ 17,889
--------------------------------------------------------------------
--------------------------------------------------------------------


CALIAN TECHNOLOGIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the periods ended September 30, 2006 and 2005 (dollars in thousands) (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, 2005 with the exception of the application of the accounting policy 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 POLICY

Long-term investment

Investments, where significant influence by the Company does not exist are recorded at cost with earnings from investments recognized when received or receivable. Any loss in value that is other than a temporary decline is recorded as a reduction of the investment and included in net income. (Refer to Note 7 of these financial statements).

3. ACCOUNTING ESTIMATES

For the periods ended September 30, 2006 and September 30, 2005, there has been no material changes in estimates of amounts reported in prior interim periods or of amounts related to prior fiscal years, with the exception of the litigation settlement cost referred to in Note 9.

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. EARNINGS PER SHARE

The diluted weighted average number of shares has been calculated as
follows:
Three Months ended Twelve months ended
September 30 September 30
2006 2005 2006 2005
---------------------------------------------------------------------------
Weighted average number of
shares -- basic 8,425,263 8,426,163 8,465,246 8,389,688

Additions to reflect the
dilutive effect of employee
stock options 7,830 19,050 10,381 73,408

Shares to be issued for Titan
acquisition - 51,517 24,452 26,025
---------------------------------------------------------------------------

Weighted number of shares --
diluted 8,433,093 8,496,730 8,500,079 8,489,121
---------------------------------------------------------------------------


The number of options outstanding at September 30, 2006 is 10,000.

6. PRIOR YEARS' INVESTMENT TAX CREDITS

During 2006, and 2005, the Company received assessments from the Canada Revenue Agency regarding its 2005, 2004 and 2003 scientific research and experimental development (R&D) activities allowing additional R&D costs to be claimed. As a result the Company recorded $409 ($984) of investment tax credits (ITC) which resulted in a recovery of taxes already paid. During 2006 the Company recorded $91 of ITC related to $330 of research and development costs incurred during the year. These costs and related ITC have been recorded in cost of sales.

7. 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 preferred shares, which have a face value of $3,897, will be convertible into 8,750,000 common shares of Med-Emerg at the Company's option. 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. The investment is recorded at cost.

8. 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 (Staffing) as well as the long-term management of projects, facilities and customer business processes (Outsourcing).

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, 2006
---------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------------
Revenues $9,457 $31,610 $- $41,067

Earnings before interest and
income taxes 1,163 2,179 (734) 2,608
Interest income, net 195
Income taxes 988
---------------------------------------------------------------------------
Net earnings $1,815
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets other than
cash and goodwill $10,403 $30,972 $322 $41,697
Goodwill 9,518 9,518
Cash 17,018
---------------------------------------------------------------------------
Total assets $68,233
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Three months ended September 30, 2005
---------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------------
Revenues $12,187 $38,218 $- $50,405

Earnings before interest and
income taxes 3,173 2,405 (590) 4,988
Interest income, net 107
Income taxes 1,998
---------------------------------------------------------------------------
Net earnings $3,097
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Total assets other than
cash and goodwill $14,578 $32,257 $533 $47,368
Goodwill 9,518 9,518
Cash 17,889
---------------------------------------------------------------------------
Total assets $74,775
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Twelve months ended September 30, 2006
---------------------------------------------------------------------------
Systems Business and
Engineering Technology Corporate Total
Services
---------------------------------------------------------------------------
Revenues $36,689 $146,157 $- $182,846

Earnings before other
expense, interest and
income taxes 4,967 9,453 (2,619) 11,801
Litigation settlement
cost (Note 9) (2,000)
Interest income, net 584
Income taxes 3,762
---------------------------------------------------------------------------
Net earnings $6,623
---------------------------------------------------------------------------
---------------------------------------------------------------------------

Twelve months ended September 30, 2005
---------------------------------------------------------------------------
Systems Business and
Engineering Technology Corporate Total
Services
---------------------------------------------------------------------------
Revenues $50,303 $127,474 $- $177,777

Earnings before interest
and income taxes 8,298 7,215 (1,941) 13,572
Interest income, net 545
Income taxes 5,368
---------------------------------------------------------------------------
Net earnings $8,749
---------------------------------------------------------------------------
---------------------------------------------------------------------------


9. LITIGATION SETTLEMENT

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. This payment was recorded at June 30, 2006 in accounts payable and accrued liabilities.

10. CONTINGENCIES

During the second quarter of 2006, the Company amended its agreement for the final payment of its acquisition in 2004 of Titan Consulting Group Ltd. The amended agreement resulted in the Company paying cash of $355 on February 28, 2006 and cash of $355 on August 31, 2006.

11. COMMITMENTS

As part of its e-business strategy, during the year 2000, the Company entered into a 10-year lease for an office building in the Ottawa area expiring in April 2010. Upon exit of the e-business sector in 2001, the Company did not have any requirements for the space and accordingly sublet the excess space to a third party for a period of 5 years ending May 2006. During 2005, the Company entered into a new agreement with the existing sub-tenant to lease a significant portion of the space for a 5-year period extending to April 2010 at the current market price. As a result, the Company will be required to assume a portion of the costs associated with this facility. Unless the sub-lessee defaults on future payments, it is expected that the current provision of $1,724 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 $988 per year.

12. SHARE REPURCHASE

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.

Management Discussion and Analysis -- September 30, 2006:

RESULTS OF OPERATIONS

Revenues:

For the fourth quarter of 2006, revenues were $41.1 million, compared to $50.4 million reported in the fourth quarter of 2005 representing a decrease of 19%. For the year ending September 30, 2006 revenues were $182.8 compared to $177.8 million, representing an increase of 3% from the prior year.

Systems Engineering's (SED) revenues were $9.5 million in the quarter and $36.7 million on a year-to-date basis representing a decrease of 22% and 27% respectively from the $12.2 million and $50.3 million recorded last year. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period. During 2006, SED completed the wind down on several of its larger long-term contracts. The general softness in SED's markets experienced throughout the year did not allow the division to compensate for the reduced revenues on these contracts in 2006.

Business and Technology Services (BTS) reported a 17% decrease in the quarter with revenues of $31.6 million compared to $38.2 million for the same period of last year. The decrease relates solely to the reduction of revenues associated with call-center services, with its other business units reporting a nominal increase. The call-center services contract was completed as planned on June 30, 2006. For the year, BTS reported an increase of 15% with revenues of $146.2 million compared to $127.5 million reported last year. The majority of the increase is due to the inclusion of 12 months of revenues relating to the Health Services Support contract compared with 6 months in the prior year; partially offset by a reduction in activity in the call-center services contract with the balance of the division continuing to report modest growth.

Both divisions have seen increases in opportunities recently and SED generated several new contract signings during the later part of 2006. Management expects that this market improvement, especially within the SED division, will have a positive impact on revenues for 2007.

Gross margin:

Gross margin was 18.7% in the fourth quarter of 2006, which is slightly higher than the 18.3 % reported in the fourth quarter a year ago. The increase in this quarter's margin is a reflection of the changing revenue mix as a result of the wind-down of the call-center services contract partially offset by a reduced contribution of SED division to the overall sales mix. On a year-to-date basis the Company reported margins of 18.0 % compared to 18.3 % for the same period last year. The decrease is largely attributable to a change in divisional proportions with the Business and Technology Services accounting for a greater percentage of the overall revenue base.

Gross margin in Systems Engineering was 24.6 % this quarter compared to 27.8 % in the fourth quarter of 2005. Margins in the prior year reflected the positive impact associated with closeouts of certain projects. For the year ending September 30, 2006, gross margin was 25.6 % compared to 24.8% . Overall for the year, the SED division realized excellent gross margins due to solid execution and retiring risk on large contracts completed during the year, combined with a higher labour content in its revenue base.

Gross margin in Business and Technology Services was 17.0 % compared to the 15.2 % reported in the fourth quarter of 2005 and 16.1 % for the year compared to 15.8 % for the same period last year. The increase in this quarter and year-to-date margin is a reflection of the changing revenue mix as a result of the wind-down of the call-center services contract.

The highly competitive nature of the recent signings for the SED division are expected to result in 2007 margins being lower than the division has experienced in recent years. However, by continuing to focus on execution, management believes that this impact can be partially negated. For the BTS division margins should increase over the prior year as a result of the change in revenue mix associated with the absence of the call-center services contract. On a consolidated basis, margins are expected to be similar to those experienced in the prior year.

Operating expenses:

Selling, marketing, general and administration expenses totalled $4.1 million or 10.0 % of revenues in the fourth quarter of 2006 which is similar to the $4.2 million or 8.3 % of revenues reported in the fourth quarter of 2005. Although operating expenses where similar in absolute dollars, the decrease in revenues during the quarter resulted in a higher cost as a percentage of revenues. For the year ending September 30, 2006, operating expenses totalled $17.5 million in 2006 compared to $15.7 million in 2005. The increase in absolute dollars is mainly attributable to the inclusion of 12 months of operating expenses relating to the Health Services Support contract compared to 6 months in the prior year and increased corporate governance costs. For 2007, management believes that it can maintain its operating expenses at the same percentage of revenues as 2006.

Prior year investment tax credits:

As indicated in Note 6, during 2006 and 2005 the Company recorded additional investment tax credits (ITC) of $409 and $984 respectively with respect to prior fiscal years' refilling of R&D claims. This resulted in a recovery in 2006 of taxes already paid. For 2006 and 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 9 to these financial statements, during the fourth quarter of 2006, the Company paid $2 million in exchange for a complete and full release and discharge of a $100 million claim against the Company. 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 was in the best interests of the Company.

Income taxes

The provision for income taxes for the fourth quarter of 2006 was $1.0 million or 35.2 % of earnings before tax compared to $2.0 million in 2005 or 39% of earnings before tax. On a year-to-date basis, the provision for incomes taxes was $3.8 million or 36.2 % of earnings before tax compared to $8.7 million in 2005 or 38% of earnings before tax. The 2006 provision was positively impacted by final adjustments related to the 2005 income tax returns.

Net earnings:

As a result of the foregoing, in the fourth quarter of 2006 the Company recorded net earnings of $1.8 million or $0.22 per share basic and diluted, compared to $3.1 million or $0.37 per share basic and $0.36 diluted in the same quarter of the prior year. For the year ended September 30, 2006 net earnings were $6.6 million or $0.78 per share basic and diluted compared to $8.7 million or $1.04 per share basic and $1.03 diluted in the prior year.

BACKLOG

The backlog at September 30, 2006 is $1,010 million with terms extending to fiscal 2014. This compares to $1,098 million reported at the end of September 30, 2005. Contracted Backlog represents 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 2007 and 2008 based on its current visibility into customers' planned utilization. Amounts shown as beyond 2008 represent the unearned portion of the contract value remaining after deducting the expected consumption for 2007 and 2008. These amounts exceed current utilization rates and known customer requirements by approximately $285 million. The majority of this amount relates to the Health services support contract. Should customer requirements for the company's services under these contracts not increase, this excess may not be realized. The Company's policy is to reduce the reported contractual backlog once it receives confirmation from the customer that indicates the utilization of the full contract value is unlikely.



(dollars in millions) TOTAL Fiscal 2007 Fiscal 2008 Beyond
2008
-------------------------------------------------------------
Contracted Backlog $426 $125 $77 $224

Option Renewals 584 12 29 543
-------------------------------------------------------------
TOTAL $1,010 $137 $106 $767
-------------------------------------------------------------
-------------------------------------------------------------
Business and
Technology Services $969 $107 $97 $765

Systems Engineering 41 30 9 2
-------------------------------------------------------------
TOTAL $1,010 $137 $106 $767
-------------------------------------------------------------
-------------------------------------------------------------


FINANCIAL CONDITION AND CASHFLOWS:

Operating activities

Cash inflows from operating activities for the three-month period ending September 30, 2006 were $2.2 million compared to $3.6 million in the fourth quarter of 2005. Cash flows were in line with the normal ebbs and flows of the business taking into consideration the payment of the litigation settlement during the fourth quarter of 2006 which was set up in accounts payable at June 30, 2006. Cash generated from operating activities during the fiscal year 2006 was $11.2 million as compared with a cash outflow of $10.6 million during the same period in 2005. Although net earnings decreased in 2006 compared to 2005 by $2.1 million, 2005 cash flows were affected by a permanent increase in working capital requirements of $8 million related to the Health services support contract. In addition, other working capital elements decreased from September 30, 2005 in line with the ebbs and flows of the business. Specifically, accounts receivable decreased as a result of receiving large milestone billings accrued prior to September 30, 2005. Accounts payable decreased as a result of the payment of a large supplier milestone which was recorded near 2005 year-end and unearned contract revenues decreased as a result of performing the work associated with customer payments received prior to September 30, 2005.

Financing activities:

During the quarter and year ended September 30, 2006, the Company repurchased 41,600 (134,000) shares at an average price of $11.21 ($10.88) per share for a total of $468 ($1,461). During the first three quarters of 2006 the Company paid a quarterly dividend of $0.08 per share and increased the payment to $0.09 per share during the fourth quarter. In 2005, the Company paid a quarterly dividend of $0.08 per share in each of its four quarters.

Investing activities:

During the year, the Company made the final payments related to the acquisition in 2004 of Titan for a total of $3.6 million. Also, as indicated in Note 7 to these financial statements, during the fourth quarter 2006, Calian invested $3.6 million in 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, 2006 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. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.

SELECTED QUARTERLY FINANCIAL DATA



Q4/06 Q3/06 Q2/06 Q1/06 Q4/05 Q3/05 Q2/05 Q1/05

Revenues $41,067 $45,946 $48,469 $47,364 $50,405 $50,647 $38,688 $38,037
Net earnings $1,815 $772 $2,322 $1,714 $3,097 $2,396 $1,752 $1,504
Net earnings
per share
Basic $0.22 $0.09 $0.27 $0.20 $0.37 $0.28 $0.21 $0.18
Diluted $0.22 $0.09 $0.27 $0.20 $0.36 $0.28 $0.21 $0.18


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 sustained growth in the long-term. The Company operates in markets that will continue to require the services that the Company delivers. 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. Its acquisition strategy, focused on adding complementary businesses to the Company's mix, may also be a potential source of growth.

The Systems Engineering Division has 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 reduced new opportunities during that period. However, management believes that new systems adopting the latest technologies will be required in the medium term to maintain and improve service offerings. Recently, the Company has seen a rejuvenated market and his currently experiencing increased demand for its products and services. 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 Calian has experienced delays during the last few years, management believes that the types of service the division offers will continue to be attractive to government agencies going forward. The acquisition of Titan coupled with existing standing agreements for SAP and Peoplesoft resources, positions the Company to take advantage of the expected growth in government ERP requirements. With the call center services contract lapsing, management believes that it can effectively refocus its resources on traditional business to offset the impact on earnings.

Due to significant long term contracts in the BTS division coupled with a few large contracts completed by the SED division in 2006, the Company's backlog is heavily weighted towards BTS. Accordingly, management expects the shift experienced in both revenue and profitability proportions towards the BTS division to remain.

GUIDANCE

For 2007, we expect solid performances in both divisions. The BTS division will be pursuing new opportunities in traditional markets to offset the loss of contribution from the call centre. The SED division is starting to see signs of recovery in the satellite communications market, however, the risks of program delays or cutbacks are always present in this sector. Based on the above, management expects that consolidated revenues for 2007 will be in the range of $180 million to $200 million and net earnings per share in the range of $0.90 to $1.05.

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 2006, and with the Management Discussion and Analysis in the 2005 annual report, including the section on risks and opportunities.

For further information, please visit our website at www.calian.com, or contact us at ir@calian.com

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