Calian Technologies Ltd.
TSX : CTY

Calian Technologies Ltd.

May 03, 2007 12:11 ET

Calian Reports Second Quarter Results

Record Quarterly Revenues

KANATA, ONTARIO--(CCNMatthews - May 3, 2007) - (All amounts in this release are in Canadian Dollars)

Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the second quarter ended March 31, 2007. Revenues for the quarter were $50.9 million, an increase of 5% from the $48.5 million reported in the same quarter of the previous year. Net earnings were $2.5 million or $0.30 per share basic and diluted, compared to $2.3 million or $0.27 per share basic and diluted in the same quarter of the previous year.

"We are extremely pleased with the results for the second quarter of 2007. Although the divisional mix of revenues has changed significantly from the prior year, on a consolidated basis we achieved the highest quarterly revenues ever. In the SED division, the signings announced last year have culminated in significantly improved revenues for the quarter as some of the projects have now entered the integration phase. While quarterly revenues can fluctuate, we look forward to continued strong performance relative to last year" stated Ray Basler, President and CEO. "Quarterly revenues in our BTS division were down 10% from last year due to the completion of the call center contract. However, we have achieved continued growth in our traditional businesses and as expected our overall margin percentage has increased substantially. Most importantly, we've achieved our goal of replacing the lost contribution from the call-center contract as quarterly contribution from the division is up 15% over last year, despite the drop in revenue. With recent contract signings and an increased level of activity, we are excited about the future prospects for the division" continued Basler.

We anticipate continued solid performance in both divisions for 2007. Based on results to date and management's current outlook for the balance of the year, consolidated revenues for fiscal 2007 are expected to be in the range of $185 million to $200 million and net earnings per share in the range of $1.00 to $1.15.

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 Six months ended
March 31 March 31
(Unaudited) (Unaudited)
----------------------------------------------------------------------
2007 2006 2007 2006
----------------------------------------------------------------------

Revenues $50,852 $48,469 $95,918 $95,833
Cost of revenues 41,650 39,737 78,196 78,979
----------------------------------------------------------------------
Gross profit 9,202 8,732 17,722 16,854
Selling and marketing 1,317 1,314 2,601 2,563
General and
administration 3,224 3,338 6,422 6,560
Facilities 698 705 1,392 1,382
Stock compensation
(Note 7) 137 - 137 -
Amortization of
capital assets 258 253 529 515
Amortization of
intangibles 78 78 156 156
Prior years investment
tax credits (Note 9) - (409) - (409)
----------------------------------------------------------------------
Earnings before other
income, interest and
income taxes 3,490 3,453 6,485 6,087

Unrealized gain on
fair value of
conversion options
of long-term
investment (Note 5) 168 - 99 -
Interest income, net
(Note 6) 220 136 458 238
----------------------------------------------------------------------
Earnings before
income taxes 3,878 3,589 7,042 6,325
----------------------------------------------------------------------
Income taxes --
current 1,317 1,212 2,415 2,159
Income taxes --
future 29 55 59 130
----------------------------------------------------------------------
1,346 1,267 2,474 2,289
----------------------------------------------------------------------
NET EARNINGS 2,532 2,322 4,568 4,036
Retained earnings,
beginning of period 28,321 26,841 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 (518) (712) (518) (712)

Dividend (842) (682) (1,682) (1,362)
----------------------------------------------------------------------
Retained earnings,
end of period $29,493 $27,769 $29,493 $27,769
----------------------------------------------------------------------
----------------------------------------------------------------------

Earnings per share:
(Note 8)
Basic $0.30 $0.27 $0.54 $0.47
----------------------------------------------------------------------
----------------------------------------------------------------------
Diluted $0.30 $0.27 $0.54 $0.47
----------------------------------------------------------------------
----------------------------------------------------------------------

Weighted average
number of shares:
(Note 8)
Basic 8,397,101 8,489,765 8,400,328 8,497,019
----------------------------------------------------------------------
----------------------------------------------------------------------
Diluted 8,397,101 8,534,740 8,400,328 8,541,952
----------------------------------------------------------------------
----------------------------------------------------------------------



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

March 31, 2007 September 30, 2006
(Unaudited)
----------------------------------------------------------------------
ASSETS

CURRENT ASSETS
Cash and cash equivalents $9,887 $17,018
Accounts receivable 34,458 27,529
Note receivable 193 186
Work in process 6,777 3,721
Prepaid expenses and other 601 493
Future income taxes 1,855 1,857
Derivative assets (Note 13) 198 -
----------------------------------------------------------------------
53,969 50,804
LONG-TERM INVESTMENT (Note 5) 3,011 3,623
CAPITAL ASSETS 3,688 3,584
INTANGIBLES 548 704
GOODWILL 9,518 9,518
----------------------------------------------------------------------
$70,734 $68,233
----------------------------------------------------------------------
----------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued
liabilities $20,701 $18,785
Unearned contract revenue 2,806 4,017
Derivative liabilities (Note 13) 94 -
----------------------------------------------------------------------
23,601 22,802

FUTURE INCOME TAXES 50 70
----------------------------------------------------------------------
$23,651 $22,872
----------------------------------------------------------------------

COMMITMENT (Note 11)

SHAREHOLDERS' EQUITY
Share capital (Note 7) $17,390 $17,236
Contributed surplus 137 -
Retained earnings 29,493 28,448
Accumulated other comprehensive
income (loss) (Note 2) 63 (323)
----------------------------------------------------------------------
47,083 45,361
----------------------------------------------------------------------
$70,734 $68,233
----------------------------------------------------------------------
----------------------------------------------------------------------



CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(dollars in thousands)

Three months ended Six months ended
March 31 March 31
(Unaudited) (Unaudited)
-----------------------------------------------------------------------
2007 2006 2007 2006
-----------------------------------------------------------------------
Net earnings $2,532 $2,322 $4,568 $4,036
Unrealized gain (loss) on
translating financial
statements of self-sustaining
foreign operation (20) (8) 55 6

Unrealized gain (loss) on fair
value of host contract
component of long-term
investment, net of tax (26) - 27 -

Change in deferred gain (loss)
on derivatives designated
as cash flow hedges, net of tax 303 - (24) -
-----------------------------------------------------------------------

Other comprehensive income
(loss), net of tax 257 (8) 58 6
-----------------------------------------------------------------------

Comprehensive income $2,789 $2,314 $4,626 $4,042
-----------------------------------------------------------------------
-----------------------------------------------------------------------



CALIAN TECHNOLOGIES LTD.
CONSOLIDATED STATEMENT OF ACCUMULATED OTHER COMPREHENSIVE INCOME
(dollars in thousands)

Three months Six months
ended March 31 ended March 31
(Unaudited) (Unaudited) September 30
2007 2007 2006
Accumulated other
comprehensive loss,
beginning of period $(194) $(323) $-
Adjustment to accumulated
other comprehensive
income, beginning
of period (Note 2):

Cumulative adjustment
on translation of
financial statements
of self-sustaining
foreign operations - - (323)

Cumulative unrealized
gain on fair value of
host contract
component of long-term
investment at October
1, 2006 - 419 -

Cumulative change in
deferred loss on
derivatives designated
as cash flow hedges at
October 1, 2006 - (91) -
----------------------------------------------------------------------
Accumulated other
comprehensive income
(loss), beginning
of period (194) 5 (323)
Other comprehensive
income, net of tax 257 58 -
----------------------------------------------------------------------
Accumulated other
comprehensive income
(loss), end of period $63 $63 $(323)
----------------------------------------------------------------------
----------------------------------------------------------------------



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

Three months ended Six months ended
March 31 March 31
(Unaudited) (Unaudited)
---------------------------------------------------------------------
2007 2006 2007 2006
---------------------------------------------------------------------
CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Net earnings $2,532 $2,322 $ 4,568 $4,036
Items not affecting cash:
Interest accreted on note
receivable (3) (7) (7) (14)
Interest accreted on host
contract component of
long-term investment (86) - (166) -
Employee share purchase
plan compensation expense 9 9 18 17
Stock option compensation
expense 137 - 137 -
Amortization 336 331 685 671
Future income taxes 29 55 59 130
Unrealized gain on fair value
of conversion options of
long-term investment (168) - (99) -
---------------------------------------------------------------------
2,786 2,710 5,195 4,840

Change in non-cash
working capital
Accounts receivable (4,634) 6,544 (6,979) 10,907
Work in process (748) (1,476) (3,055) (729)
Prepaid expenses and other 305 548 (108) 264
Accounts payable and
accrued liabilities 3,398 1,117 1,924 (2,050)
Unearned contract revenue (1,016) (2,095) (1,484) (2,617)
---------------------------------------------------------------------
91 7,348 (4,507) 10,615
---------------------------------------------------------------------

CASH FLOWS USED IN FINANCING
ACTIVITIES
Issuance of common shares 228 216 252 224
Dividend (842) (682) (1,682) (1,362)
Purchase price over stated
capital on repurchase
of shares (Note 12) (616) (881) (616) (881)
---------------------------------------------------------------------
(1,230) (1,347) (2,046) (2,019)
---------------------------------------------------------------------

CASH FLOWS USED IN INVESTING
ACTIVITIES
Acquisition of capital assets (215) (152) (633) (505)
Business acquisition - (355) - (3,202)
---------------------------------------------------------------------
(215) (507) (633) (3,707)

FOREIGN CURRENCY ADJUSTMENT (20) (8) 55 6

NET CASH INFLOW (OUTFLOW) (1,374) 5,486 (7,131) 4,895
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 11,261 17,298 17,018 17,889
---------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $9,887 $22,784 $9,887 $22,784
---------------------------------------------------------------------
---------------------------------------------------------------------


CALIAN TECHNOLOGIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the periods ended March 31, 2007 and 2006

(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, 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 has adopted the following new accounting standards. Any changes in measurement resulting from applying the new standards on October 1, 2006 was 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) Note receivable

The note receivable is measured at amortized cost with interest accretion recorded in net income.

iii) Long-term investment

Under the previous standards, the long-term investment was recorded at cost with any loss in value that was other than a temporary decline recorded as a reduction of the investment and included in net income. The new standards related to financial instruments require a fair value measurement of the long-term investment at each reporting period. 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 other comprehensive income. On October 1, 2006, the Company recorded an adjustment to opening retained earnings of $1,391 net of tax 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 representing the accretion of interest. Also an adjustment of $419 net of tax was recorded to opening other comprehensive income representing the unrealized gain on fair value of the host contract portion of the long-term investment.

iv) 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. 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 representing the cumulative change in cash flow 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 cash flow 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 March 31, 2007 and March 31, 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 (1,292)
Cumulative interest accretion on host contract 234
Cumulative unrealized gain on fair value of host
contract component 446
----------------------------------------------------------------
Fair value of investment at March 31, 2007 $3,011
----------------------------------------------------------------
----------------------------------------------------------------


6. INTEREST INCOME

Interest income is comprised of the following amounts:
-------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
2007 2006 2007 2006
-------------------------------------------------------------------------
Interest income, net of
interest expense $130 $129 $284 $224
Accreted interest on host
contract component of
long-term investment 86 - 166 -
Accreted interest on note
receivable 4 7 8 14
-------------------------------------------------------------------------
Interest income, net $220 $136 $458 $238
-------------------------------------------------------------------------


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 quarter, 80,000 options were granted to directors and officers at a price of $13.47 per share with 43,200 vesting immediately and 36,800 options vesting over a period of two years. The options expire February 4, 2012. At March 31, 2007 there were 80,000 options outstanding.

During the period ended March 31, 2007 under the fair value based method, compensation expense of $137 was recorded.

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



Risk free interest rate 3.7%
Expected dividend yield 3.0%
Stock price volatility 32.8%
Expected life of options 3.35 years

The weighted average fair value of options granted during the period was
$2.98 per option.

8. NET EARNINGS PER SHARE

The diluted weighted average number of shares has been calculated as
follows:
------------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
2007 2006 2007 2006
------------------------------------------------------------------------
Weighted average number of
shares - basic 8,397,101 8,489,765 8,400,328 8,497,019
Addition to reflect the
dilutive effect of
employee stock options - 12,360 - 12,552
Shares to be issued for the
Titan acquisition - 32,615 - 32,381
------------------------------------------------------------------------
Weighted number of shares -
diluted 8,397,101 8,534,740 8,400,328 8,541,952
------------------------------------------------------------------------


9. PRIOR YEARS INVESTMENT TAX CREDITS

During the second quarter of 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. 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 March 31, 2007
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
Revenues $15,505 $35,347 $- $50,852
Earnings before other
income, interest and
income taxes 1,589 2,665 (764) 3,490
Unrealized gain on fair
value of conversion
options of long-term
investment (Note 5) 168
Interest income, net 220
Income taxes 1,346
--------------------------------------------------------------------------
Net earnings $2,532
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets other than
cash and goodwill $19,341 $31,524 $464 $51,329
Goodwill 9,518
Cash 9,887
--------------------------------------------------------------------------
Total assets $70,734
--------------------------------------------------------------------------

Three months ended March 31, 2006
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
Revenues $9,018 $39,451 $- $48,469
Earnings before interest
and income taxes 1,763 2,308 (618) 3,453
Interest income, net 136
Income taxes 1,267
--------------------------------------------------------------------------
Net earnings $2,322
--------------------------------------------------------------------------
--------------------------------------------------------------------------

Year ended September 30, 2006
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
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
--------------------------------------------------------------------------

Six months ended March 31, 2007
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
Revenues $27,615 $68,303 $- $95,918
Earnings before other
income, interest and
income taxes 2,833 4,980 (1,328) 6,485
Unrealized gain on
fair value of conversion
options of long-term
investment (Note 5) 99
Interest income, net 458
Income taxes 2,474
--------------------------------------------------------------------------
Net earnings $4,568
----------------------- --------------------------------------------------
--------------------------------------------------

Six months ended March 31, 2006
--------------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------------
Revenues
$17,897 $77,936 $- $95,833
Earnings before
interest and income taxes 2,673 4,640 (1,226) 6,087
Interest income, net 238
Income taxes 2,289
--------------------------------------------------------------------------
Net earnings
$4,036
--------------------------------------------------------------------------
--------------------------------------------------------------------------


11. COMMITMENTS

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 $1,612 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.

12. SHARE REPURCHASE

During the second quarter of 2007, the Company acquired 47,900 of its outstanding common shares at an average price of $12.83 per share for a total of $616 including related expenses, through the Normal Course Issuer Bid initiated in November 2006. The excess of the purchase price over the average stated capital of the shares has been charged to retained earnings.

During the second quarter of 2006, the Company acquired 82,100 of its outstanding common shares at an average price of $10.72 per share for a total of $881 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.

13. 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 March 31, 2007, the Company had the following forward foreign exchange contracts:


--------------------------------------------------------------------------
Equivalent Fair Value
Type Cdn. March 31,
Notional Currency Maturity Dollars 2007
------------------------------------------------------------- ----------
SELL 39,968 USD April 2007 $46,343 $196
SELL 615 EURO April 2007 951 2
------------------------------------------------------------- ----------
Derivative assets $198
------------------------------------------------------------- ----------

------------------------------------------------------------- ----------
BUY 17,859 USD April 2007 $20,708 $88
BUY 49 EURO April 2007 76 -
BUY 529 GBP April 2007 1,208 6
------------------------------------------------------------- ----------
Derivative liabilities $94
------------------------------------------------------------- ----------


Fair value of the forward exchange contracts reflects the cash flows due to or from the Company if settlement had taken place on March 31, 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 March 31, 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.



Management Discussion and Analysis - March 31, 2007:

RESULTS OF OPERATIONS

Revenues:

For the second quarter of 2007, revenues increased by 5% to $50.9 million, compared to $48.5 million reported in the second quarter of 2006. For the six-month period ending March 31, 2007 revenues were similar to the prior year at $95.9 compared to $95.8 million.

Systems Engineering's (SED) revenues were $15.5 million in the quarter and $27.6 million on a year-to-date basis representing an increase of 72% and 54% respectively from the $9.0 million and $17.9 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 the first six-months of 2007, SED ramped up work on several large contracts signed late in 2006 and early 2007. During the same period in 2006, SED was winding down on several larger contracts.

Business and Technology Services (BTS) revenues were $35.3 million in the quarter and $68.3 million on a year-to-date basis representing a decrease of 10% and 12% respectively from the $39.5 million and $77.9 million recorded last year. Excluding the revenue reduction associated with call-center services, the BTS division would have reported a 5% increase in revenues in both the quarter and on a year-to-date basis. The call-center services contract was completed on June 30, 2006.

During the second quarter of 2007, both the SED and BTS divisions signed new contracts and both divisions continue to see increases in opportunities. Management expects that this market improvement, especially within the SED division, will have a positive impact on revenues relative to the prior year.

Gross margin:

Gross margin was 18.1% in the second quarter of 2007, similar to the 18.0% reported in the second quarter a year ago. On a year-to-date basis the Company reported margins of 18.5% compared to 17.6% for the same period last year. Although the margin percentages are similar, 2007 margins were impacted positively by the wind-down of the call-center services contract offset by lower margin percentage realized on SED projects.

Gross margin in Systems Engineering was 18.1% this quarter compared to 28.9% in the second quarter of 2006. For the six-month period ending March 31, 2007, gross margin was 19.4% compared to 26.4% . Margins in the prior year reflected the positive impact associated with closeouts of several large projects while margins in 2007 reflect a higher proportion of the lower margin non-labour component in revenues, a strong Canadian dollar and the highly competitive nature of the recent signings for the SED division.

Gross margin in Business and Technology Services was 18.1% compared to the 15.5% reported in the second quarter of 2006 and 18.1% for the six-month period compared to 15.6% for the same period last year. The increase in margin percentage is a reflection of the changing revenue mix resulting from the wind-down of the low margin call-center services contract.

Overall margins for the balance of 2007 are expected to approximate those experienced in the first half of 2007.

Operating expenses:

Selling, marketing, general and administration, facilities and stock compensation expenses totalled $5.4 million or 10.6% of revenues in the second quarter of 2007 which is similar to the $5.4 million or 11.1% of revenues reported in the second quarter of 2006. For the six-month period ending March 31, 2007, operating expenses totalled $10.6 million compared to $10.5 million in 2006. Although operating expenses where similar in absolute dollars, the increase in revenues during the quarter resulted in a lower cost as a percentage of revenues. For 2007, management believes that it can maintain its operating expenses at similar levels experienced to date this year.

Prior year investment tax credits:

As indicated in Note 9, during the second quarter of 2006 the Company recorded additional investment tax credits (ITC) of $0.4 million with respect to 2004 and 2005.

Interest income

Interest income for the second quarter of 2007 was $0.2 million compared to $0.1 million in 2006. For the six-month period ending March 31, 2007, interest income was $0.5 million compared to $0.2 million in 2006. As a result of the adoption of new accounting rules described below, interest income for 2007 includes $0.1 million for the quarter and $0.2 million on a year-to-date basis 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 $0.2 million for the quarter and $0.1 million on a year-to-date basis of unrealized gain on fair value of conversion options of long-term investment.

Income taxes

The provision for income taxes for the second quarter of 2007 was $1.3 million or 34.7% of earnings before tax compared to $1.3 million in 2006 or 35.3% of earnings before tax. On a year-to-date basis, the provision for incomes taxes was $2.5 million or 35.1% of earnings before tax compared to $2.3 million in 2006 or 36.2% of earnings before tax. The tax rate for 2007 is impacted by the non-taxable gains related to the valuation of the long-term investment. Otherwise tax rates are in line with the Company's current effective tax rate.

Net earnings:

As a result of the foregoing, in the second quarter of 2007 the Company recorded net earnings of $2.5 million or $0.30 per share basic and diluted, compared to $2.3 million or $0.27 per share basic and diluted in the same quarter of the prior year. For the six-month period ending March 31, 2007 the Company reported net earnings of $4.6 million or $0.54 per share basic and diluted compared to $4.0 million or $0.47 per share basic and diluted in the same period of the prior year.

BACKLOG

The backlog at March 31, 2007 is $1,008 million with terms extending to fiscal 2014. This compares to $1,010 million reported at the end of September 2006. 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 for DND. 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 $404 $82 $94 $228
Option Renewals 604 1 28 575
---------------------------------------------------------------
TOTAL $1,008 $83 $122 $803
---------------------------------------------------------------
---------------------------------------------------------------

Business and
Technology
Services $957 $61 $104 $792
Systems
Engineering 51 22 18 11
---------------------------------------------------------------
TOTAL $1,008 $83 $122 $803
---------------------------------------------------------------
---------------------------------------------------------------


FINANCIAL CONDITION AND CASHFLOWS:

Operating activities

Cash outflows from operating activities for the six-month period ending March 31, 2007 were $4.5 million compared to cash inflows of $10.6 million during the same period in 2006. Cash flows for both periods reflect the normal ebbs and flows of the business. Specifically for 2007, accounts receivable increased as a result of large milestone billings near March 31, 2007 and work-in-process increased as a result of a significant level of activity on SED projects during the quarter. For 2006, accounts receivable decreased as a result of receiving several large government payments shortly before March 31, 2006.

Financing activities:

During the six-month period ending March 31, 2007 the Company paid a dividend of $0.20 per share compared to $0.16 per share during the same period of 2006.

Investing activities:

During the six-month period ending March 31, 2006, the Company paid $3.2 million related to the Titan acquisition.

Capital resources

At March 31, 2007 the Company had a short-term credit facility of $10 million 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.

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 six-month period ending March 31, 2007 using the same approach, $99 unrealized gain in fair value of the conversion options 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 $166 respectively were accrued to opening retained earnings and to interest income for the six-month period ended March 31, 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 $27 to changes in other comprehensive income for the first half of 2007.



PREVIOUS
STANDARDS
----------------------------
(dollars in
thousands) Acquisition date Initial recognition
July 11, 2006 July 11, 2006

Conversion Options $2,019
Host contract 1,604

Reported $3,623 $3,623


Transition date
October 1, 2006 March 31, 2007

Conversion Options $628 $727
Host contract 2,091 2,284

Reported $2,719 $3,011

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 six-month period 166
Unrealized gain on fair value of the
conversion options during the six- month period 99
Changes in other comprehensive income during the
six-month period 27


Foreign exchange hedging contracts:

As described in note 13 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
(dollars in thousands)

Q2/07 Q1/07 Q4/06 Q3/06 Q2/06 Q1/06

Revenues $50,852 $45,066 $41,067 $45,946 $48,469 $47,364
Net earnings $2,532 $2,036 $1,815 $772 $2,322 $1,714
Net earnings per
share
Basic $0.30 $0.24 $0.22 $0.09 $0.27 $0.20
Diluted $0.30 $0.24 $0.22 $0.09 $0.27 $0.20


Q4/05 Q3/05

Revenues $50,405 $50,647
Net earnings $3,097 $2,396
Net earnings per share
Basic $0.37 $0.28
Diluted $0.36 $0.28


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, which has endured a depressed satellite sector for the last few years, is now benefiting from a recently rejuvenated market and is currently experiencing increased demand for its products and services. Management continues to believe that new systems adopting the latest technologies will be required in the medium term to maintain and improve 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 relative strength 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 various government departments including 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 this environment is laden with delays and shifting priorities, management believes that the types of service the division offers will continue to be attractive to government agencies going forward. With existing standing agreements for SAP and Peoplesoft resources, the Company is positioned to take advantage of the expected growth in government ERP requirements.

Due to significant long term contracts in the BTS division, the Company's backlog is heavily biased towards BTS. Accordingly, management expects the current weighting of both revenue and profitability towards the BTS division to continue.

GUIDANCE

For 2007, 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 benefit from a 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 $185 million to $200 million and net earnings per share in the range of $1.00 to $1.15.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the most recent interim quarter ending March 31, 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 second quarter of 2007, and with the Management Discussion and Analysis in the 2006 annual report, including the section on risks and opportunities.

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