Calian Technologies Ltd.
TSX : CTY

Calian Technologies Ltd.

May 07, 2008 13:01 ET

Calian Reports Second Quarter Results

(All amounts in this release are in Canadian Dollars)

KANATA, ONTARIO--(Marketwire - May 7, 2008) - Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the second quarter ended March 31, 2008. Revenues for the quarter were $47.4 million, a decrease of 7% from the $50.9 million reported in the same quarter of the previous year. Net earnings were $2.3 million or $0.28 per share basic and diluted, compared to $2.5 million or $0.30 per share basic and diluted in the same quarter of the previous year.

"The SED division once again produced stellar results for the quarter. While revenues were slightly lower than the second quarter of last year, operational profitability was much improved. This was primarily due to a higher material component in last year's second quarter revenues. Higher labour utilization, excellent project control and positive project closeouts, contributed to SED achieving margin percentages that were significantly higher than the prior year. With higher margins and tight control of operating costs, the division recorded its highest quarterly contribution for a number of years" stated Ray Basler, President and CEO. "Conversely, the BTS division encountered a difficult period reporting reduced revenues and profitability. An extended government procurement cycle was the main contributor to this shortfall. This caused delays in expected procurements as well as constrained spending on existing contracts, as government departments modified their spending profiles to preserve funding in anticipation of further delays in the renewal process. Also, with the Easter holidays falling in March, both revenues and margins were adversely affected relative to last year. While we are disappointed in the BTS results for the quarter, we are still confident in the underlying businesses and markets we serve and we are optimistic that we will see improved results in the next quarters" continued Basler.

"The SED division is projected to remain strong for the balance of the year and with some expected recovery in the BTS division, we continue to believe that overall Company results will remain solid for the balance of the year. Our confidence in our ability to continue generating strong cash flows has enabled us to increase the quarterly dividend to $0.15 per share. At the same time, we have continued to repurchase shares within the limits of our Normal Course Issuer Bid" continued Basler.

Management continues to anticipate solid performance for the Company as a whole and based on the current outlook, consolidated revenues for fiscal 2008 are expected to be in the range of $190 million to $200 million and net earnings per share in the range of $1.10 to $1.20.

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.

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

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)
--------------------------------------------------------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------
Revenues $47,413 $50,852 $93,297 $95,918

Cost of revenues 38,405 41,592 75,585 78,099
--------------------------------------------------------------------------
Gross profit 9,008 9,260 17,712 17,819

Selling and marketing 1,250 1,317 2,504 2,601

General and administration 3,205 3,282 6,413 6,519

Facilities 812 698 1,596 1,392

Stock compensation (Note 7) 31 137 71 137

Amortization of equipment 265 258 523 529

Amortization of intangibles 78 78 156 156
--------------------------------------------------------------------------
Earnings before other income
(expense), interest income
and income tax expense 3,367 3,490 6,449 6,485

Unrealized gain (loss) on
fair value of conversion
options of long-term
investment (Note 5) (154) 168 (262) 99

Interest income (Note 6) 327 220 676 458
--------------------------------------------------------------------------
Earnings before income
tax expense 3,540 3,878 6,863 7,042
--------------------------------------------------------------------------
Income tax expense - current 1,216 1,317 2,319 2,415

Income tax expense - future 40 29 80 59
--------------------------------------------------------------------------
1,256 1,346 2,399 2,474
--------------------------------------------------------------------------
NET EARNINGS 2,284 2,532 4,464 4,568

Retained earnings, beginning
of period 32,499 28,321 31,852 28,448

Adjustment to opening
retained earnings:

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 (Note 7) (265) (518) (799) (518)

Dividend (998) (842) (1,997) (1,682)
--------------------------------------------------------------------------
Retained earnings,
end of period $33,520 $29,493 $33,520 $29,493
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Net earnings per share:
(Note 8)

Basic $0.28 $0.30 $0.54 $0.54
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Diluted $0.28 $0.30 $0.54 $0.54
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Weighted average number
of shares: (Note 8)

Basic 8,299,025 8,397,101 8,311,161 8,400,328
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Diluted 8,299,025 8,397,101 8,311,161 8,400,328
--------------------------------------------------------------------------
--------------------------------------------------------------------------



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

March 31, September 30,
2008 2007
(Unaudited) (Unaudited)
--------------------------------------------------------------------------

ASSETS

CURRENT ASSETS
Cash $24,477 $18,077
Accounts receivable 30,742 32,375
Work in process 3,579 3,744
Prepaid expenses and other 786 502
Future income taxes 1,676 1,111
Derivative assets (Note 12) 91 250
--------------------------------------------------------------------------
61,351 56,059

LONG-TERM INVESTMENT (Note 5) 3,127 3,162

EQUIPMENT 3,444 3,527

INTANGIBLES 236 392

GOODWILL 9,518 9,518
--------------------------------------------------------------------------
$77,676 $72,658
--------------------------------------------------------------------------
--------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and accrued liabilities $17,205 $16,958
Unearned contract revenue 9,168 5,160
Derivative liabilities (Note 12) 311 98
--------------------------------------------------------------------------
26,684 22,216
--------------------------------------------------------------------------

COMMITMENT AND CONTINGENCIES (Note 9)

SHAREHOLDERS' EQUITY
Share capital (Note 7) 17,376 17,309
Contributed surplus (Note 7) 381 310
Retained earnings 33,520 31,852
Accumulated other comprehensive
income (loss) (285) 971
--------------------------------------------------------------------------
50,992 50,442
--------------------------------------------------------------------------
$77,676 $72,658
--------------------------------------------------------------------------
--------------------------------------------------------------------------



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

Three months ended Six months ended
March 31 March 31
(Unaudited) (Unaudited)
--------------------------------------------------------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------

Net earnings $2,284 $2,532 $4,464 $4,568

Unrealized gain (loss) on
translating financial
statements of
self-sustaining foreign
operation, net of tax of
nil (March 31, 2007 - nil) 61 (20) 56 55


Unrealized gain (loss) on
fair value of host contract
component of long-term
investment, net of tax of
nil (March 31,2007 - nil) 7 (26) 27 27

Change in deferred gain
(loss) on derivatives
designated as cash flow
hedges, net of tax of $412
and $677 year to date
(March 31, 2007 - $171
and $14 year to date) (815) 303 (1,339) (24)
--------------------------------------------------------------------------
Other comprehensive
income (loss) (747) 257 (1,256) 58
--------------------------------------------------------------------------
Comprehensive income $1,537 $2,789 $3,208 $4,626
--------------------------------------------------------------------------
--------------------------------------------------------------------------



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

March 31, September 30,
2008 2007
(Unaudited) (Unaudited)
--------------------------------------------------------------------------
Unrealized cumulative loss on translating
financial statements of self-sustaining
foreign operation $(466) $(522)

Unrealized cumulative gain on fair value
of host contract component of long-term
investment 458 431

Deferred gain (loss) on derivatives
designated as cash flow hedges (277) 1,062
--------------------------------------------------------------------------
Accumulated other comprehensive income (loss),
end of period $(285) $971
--------------------------------------------------------------------------
Retained earnings, end of period 33,520 31,852
--------------------------------------------------------------------------
Accumulated other comprehensive income (loss)
and retained earnings, end of period $ 33,235 $32,823
--------------------------------------------------------------------------
--------------------------------------------------------------------------



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

Three months ended Six months ended
March 31 March 31
(Unaudited) (Unaudited)
--------------------------------------------------------------------------
2008 2007 2008 2007
--------------------------------------------------------------------------

CASH FLOWS FROM (USED IN)
OPERATINGACTIVITIES

Net earnings $2,284 $2,532 $4,464 $4,568

Items not affecting cash:

Interest accreted on note
receivable - (3) - (7)

Interest accreted on host
contract component of
long-term investment (Note 6) (102) (86) (200) (166)

Employee stock purchase plan
compensation expense 9 9 18 18

Stock option compensation
expense 31 137 71 137

Amortization 343 336 679 685

Future income taxes 40 29 80 59

Unrealized loss (gain) on fair
value of conversion options
of long-term investment 154 (168) 262 (99)
--------------------------------------------------------------------------
2,759 2,786 5,374 5,195

Change in non-cash working
capital

Accounts receivable (1,526) (4,634) 2,191 (6,979)
Work in process (129) (748) 165 (3,055)
Prepaid expenses and other 82 305 (285) (108)
Accounts payable and
accrued liabilities 2,016 3,398 (2,110) 1,924
Unearned contract revenue 94 (1,016) 4,178 (1,484)
--------------------------------------------------------------------------
3,296 91 9,513 (4,507)
--------------------------------------------------------------------------

CASH FLOWS USED IN FINANCING
ACTIVITIES
Issuance of common shares 220 228 220 252
Dividend (998) (842) (1,997) (1,682)
Repurchase of shares (320) (616) (952) (616)
--------------------------------------------------------------------------
(1,098) (1,230) (2,729) (2,046)
--------------------------------------------------------------------------

CASH FLOWS USED IN INVESTING
ACTIVITIES
Equipment expenditures (298) (215) (440) (633)
--------------------------------------------------------------------------
(298) (215) (440) (633)

FOREIGN CURRENCY ADJUSTMENT 61 (20) 56 55

NET CASH INFLOW (OUTFLOW) 1,961 (1,374) 6,400 (7,131)

CASH, BEGINNING OF PERIOD 22,516 11,261 18,077 17,018
--------------------------------------------------------------------------
CASH, END OF PERIOD $24,477 $9,887 $24,477 $9,887
--------------------------------------------------------------------------
--------------------------------------------------------------------------


CALIAN TECHNOLOGIES LTD.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the periods ended March 31, 2008 and 2007

(dollars in thousands, except per share amounts)
(Unaudited)

1. ACCOUNTING POLICIES

These interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. They do not include all of the information and notes required by generally accepted accounting principles for annual financial statements.

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, 2007 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, 2007 the Company adopted the following new accounting standards issued by the Canadian Institute of Chartered Accountants.

Capital management

Section 1535, Capital disclosures, requires the Company to disclose information about the Company's objectives, policies and processes for the management of its capital.

Financial Instruments - Disclosures and Presentation

Section 3862, Financial Instruments - Disclosures, and 3863, Financial Instruments - Presentation replace section 3861, Financial Instruments - Disclosure and Presentation. These sections require the disclosure of information with regards to the significance of financial instruments for the Company's financial position and performance and the nature and extent of risks arising from financial instruments to which the Company is exposed during the period and at the balance sheet date, and how the Company manages those risks.

Financial instrument classification is as follows:



Cash Held for trading
Accounts receivable Loans and receivables
Derivative assets and liabilities Held for trading
Long-term investment - Conversion option Held for trading
Long-term investment - Host contract Available-for-sale
Accounts payable and accrued liabilities Other liabilities


3. ACCOUNTING ESTIMATES

For the periods ended March 31, 2008 and March 31, 2007, there have 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 on conversion options (1,547)
Cumulative unrealized gain on fair value of host
contract component 458
Cumulative interest accretion on host contract 593
------------------------------------------------------------
Fair value of investment at March 31, 2008 $3,127
------------------------------------------------------------
------------------------------------------------------------


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 with changes in fair value recorded in net income. The fair value of the conversion options applies the following data and assumptions to the Black-Scholes option pricing model:



Med-Emerg share price at March 31, 2008 $0.12
Risk free interest rate l.89 %
Actual stock price volatility 104.10 %
Expected life of options 3.25 years


Under the Black-Scholes model, a one cent increase (decrease) in Med-Emerg share price would result in $56 increase (decrease) in the fair value of the conversion options. A 10% increase (decrease) in the volatility of Med-Emerg stock price would result in $75 increase (decrease) in the fair value of the conversion option. Med-Emerg shares are traded on the OTC Bulletin Board and currently trade in limited volume.

Fair value of the host contract component is determined using interest rates in effect at each reporting period. A 1% increase (decrease) to the interest rate would result in $78 decrease (increase) in the fair value of the host contract component. The interest rate used at March 31, 2008 is 12.54% and represents an approximation of the borrowing rate available for companies with risk profiles similar to Med-Emerg based on BBB credit rating.

6. INTEREST INCOME

Interest income is comprised of the following amounts:



---------------------------------------------------------------------
Three months ended Six months ended
March 31 March 31
2008 2007 2008 2007
---------------------------------------------------------------------
Interest earned on cash balances $225 $131 $476 $285
Accreted interest on host contract
component of long-term
investment 102 86 200 166
Accreted interest on
note receivable - 3 - 7
---------------------------------------------------------------------
Interest income $327 $220 $676 $458
---------------------------------------------------------------------


7. SHARE CAPITAL

Share repurchase

During the quarter (and six-month period) ending March 31, 2008, the Company acquired 26,100 (73,300) of its outstanding common shares at an average price of $12.23 ($12.95) per share for a total of $320 ($952) including related expenses, through normal course issuer bids in place during the period. During the quarter and the six-month period ending March 31, 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 in place during the period. The excess of the purchase price over the stated capital of the shares has been charged to retained earnings.

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, of which 165,000 have been issued at March 31, 2008.

During the quarter ended and the six-month period ending March 31, 2008 under the fair value based method, compensation expense related to general and administrative costs of $31 and $71 was recorded related to stock options granted in previous periods, compared to $137 recorded for the period ending March 31, 2007. The offsetting credit was applied to contributed surplus. The compensation costs reflected in the financial statements for 2008 were calculated using the Black-Scholes option pricing model using the following assumptions:



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


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
2008 2007 2008 2007
---------------------------------------------------------------------
Weighted average number
of shares - basic 8,299,025 8,397,101 8,311,161 8,400,328
Addition to reflect the
dilutive effect of
employee stock options - - - -
---------------------------------------------------------------------
Weighted average number
of shares - diluted 8,299,025 8,397,101 8,311,161 8,400,328
---------------------------------------------------------------------


Options that are anti-dilutive because the exercise price was greater than the average market price of the common shares are not included in the computation of diluted earnings per share. For the period ended March 31, 2008, 165,000 options were excluded from the above computation of diluted weighted average number of common shares because they were anti-dilutive (March 31, 2007: 80,000).

9. COMMITMENT AND CONTINGENCIES

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 $959 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.

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

10. CAPITAL MANAGEMENT

The Company's objective is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business and provide the ability to continue as a going concern. Management defines capital as the Company's shareholders' equity excluding accumulated other comprehensive income relating to cash flow hedges. The Company does not have any debt and therefore net earnings generated from operations are available for reinvestment in the Company or distribution to the Company's shareholders. The Board of Directors does not establish quantitative return on capital criteria for management; but rather promotes year over year sustainable profitable growth. The Board of Directors also reviews on a quarterly basis the level of dividends paid to the Company's shareholders and monitors the share repurchase program activities. The Company does not have a defined share repurchase plan and buy and sell decisions are made on a specific transaction basis and depend on market prices and regulatory restrictions.

There were no changes in the Company's approach to capital management during the period. Neither the Company nor any of its subsidiaries is subject to externally imposed capital requirements.

11. SEGMENTED INFORMATION

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

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

- Business and Technology Services involves both short and long-term placements of personnel to augment customers' workforces (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, 2008
---------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------
Revenues $14,403 $33,010 $- $47,413
Earnings before
other expense,
interest income
and income tax
expense 2,396 1,580 (609) 3,367
Unrealized loss on
fair value of
conversion options
of long-term
investment (Note 5) (154)
Interest income 327
Income tax expense 1,256
---------------------------------------------------------------------
Net earnings $2,284
---------------------------------------------------------------------
Total assets other
than cash and
goodwill $14,636 $28,767 $278 $43,681
Goodwill - 9,518 - 9,518
Cash - - 24,477 24,477
---------------------------------------------------------------------
Total assets $14,636 $38,285 $24,755 $77,676
---------------------------------------------------------------------
---------------------------------------------------------------------


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
income and income
tax expense 1,589 2,665 (764) 3,490
Unrealized gain on
fair value of
conversion options
of long-term
investment (Note 5) 168
Interest income 220
Income tax expense 1,346
---------------------------------------------------------------------
Net earnings $2,532
---------------------------------------------------------------------
---------------------------------------------------------------------


September 30, 2007
---------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------
Total assets other
than cash
and goodwill $16,004 $28,904 $155 $45,063
Goodwill - 9,518 - 9,518
Cash - - 18,077 18,077
---------------------------------------------------------------------
Total assets $16,004 $38,422 $18,232 $72,658
---------------------------------------------------------------------
---------------------------------------------------------------------


Six months ended March 31, 2008
---------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
---------------------------------------------------------------------
Revenues $28,534 $64,763 $- $93,297
Earnings before
other expense,
interest income
and income tax
expense 4,023 3,596 (1,170) 6,449
Unrealized loss on
fair value of
conversion options
of long-term
investment (Note 5) (262)
Interest income 676
Income tax expense 2,399
---------------------------------------------------------------------
Net earnings $4,464
---------------------------------------------------------------------
---------------------------------------------------------------------


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 income
and income tax
expense 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 458
Income tax expense 2,474
---------------------------------------------------------------------
Net earnings $4,568
---------------------------------------------------------------------
---------------------------------------------------------------------


12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Market Risk

Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Company's income or the value of its holding of financial instruments.

Foreign currency risk related to contracts

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 objective is to manage and control exposures and secure the Company's profitability on existing contracts and therefore, the Company's policy is to hedge 100% of its foreign currency exposure. The Company does not 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. Hedge ineffectiveness is insignificant.

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, 2008, the Company had the following forward foreign exchange contracts:



------------------------------------------------------------------------
Equivalent Fair Value
Type Notional Currency Maturity Cdn. Dollars March 31, 2008
------------------------------------------------------------------------
BUY 12,838 USD April 2008 $13,089 $89
BUY 49 EURO April 2008 78 1
BUY 68 GBP April 2008 138 1
------------------------------------------------------------------------
Derivative
assets $91
------------------------------------------------------------------------
------------------------------------------------------------------------
SELL 42,539 USD April 2008 $43,371 $295
SELL 314 EURO April 2008 502 8
SELL 15,000 JPY April 2008 147 8
------------------------------------------------------------------------
Derivative
liabilities $311
------------------------------------------------------------------------


A 10% strengthening (weakening) of the Canadian dollar against the following currency at March 31, 2008 would have decreased (increased) other comprehensive income by the amounts shown below.



March 31,
2008
---------------------------
USD $3,049
EURO 43
GBP (14)
JPY 15
---------------------------
$3,093
---------------------------
---------------------------


Foreign currency risk on US-based subsidiary

The Company is exposed to foreign currency fluctuations related to its net investment in a US-based subsidiary denominated in US dollars. The Company does not hedge its investment in the subsidiary as the currency position is considered long term in nature. At March 31, 2008 the net investment in the US-based subsidiary was $1,808. A 10% strengthening (weakening) of the Canadian dollar against the US dollar at March 31, 2008 would have decreased (increased) OCI by $176.

Interest rate risk

The Company is not directly exposed to interest-rate risk. However, the fair value of the host contract component of the long-term investment which is determined on a discounted cash flow basis will be affected by interest rate fluctuations. A 1% increase (decrease) to the interest rate would result in $78 decrease (increase) in the fair value of the investment.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company's accounts receivable and its foreign exchange contracts.

The Company's exposure to credit risk with its customers is influenced mainly by the individual characteristics of each customer. The Company's customers are for the most part, federal and provincial government departments and large private companies. A significant portion of the Company's accounts receivable is from long-time customers and at March 31, 2008 60% of its accounts receivable were due from the Government of Canada. Over the last five years, the Company has not suffered any credit related losses with any of its customers.

The Company limits its exposure to credit risks from counter-parties to derivative financial instruments by dealing only with major financial institutions. Management does not expect any counter-parties to fail to meet their obligations.

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:



------------------------------------------------------------------------
March 31 September 30
2008 2007
------------------------------------------------------------------------
Cash $24,477 $18,077
Accounts receivable 30,742 32,375
Derivative assets 91 250
Long-term investment 3,127 3,162
------------------------------------------------------------------------
$58,437 $53,864
------------------------------------------------------------------------

The aging of accounts receivable at the reporting date was:

------------------------------------------------------------------------
March 31 September 30
2008 2007
------------------------------------------------------------------------
Current $29,939 $31,581
Past due (61-120 days) 701 673
Past due (greater than 120 days) 102 121
------------------------------------------------------------------------
$30,742 $32,375
------------------------------------------------------------------------


Based on historic default rates, the Company believes that there are minimal requirements for an allowance for doubtful accounts.

Liquidity risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet liabilities when due. At March 31, 2008 the Company has a cash balance of $24,477 and 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 at March 31, 2008 there were no direct borrowings under the Company's credit facility. All of the Company's financial liabilities have contractual maturities of less than 30 days.

Fair Value

The fair value of cash, accounts receivable, accounts payable and accrued liabilities approximates their carrying values due to their short-term maturity.

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, 2008.

The fair value of the conversion options of the long-term investment is calculated using the Black-Scholes model that incorporates current market price, the contractual price and the volatility of the underlying instrument, the expected life of the option and the time value of money. The fair value of the host contract component of the long-term investment is calculated on a discounted cash flow basis using externally available yields used for investments of similar risk.


Management Discussion and Analysis - March 31, 2008:

(dollars in thousands, except per share data)

RESULTS OF OPERATIONS

Revenues:

For the second quarter of 2008, revenues were $47,413, compared to $50,852 reported in the second quarter of 2007. For the six-month period ending March 31, 2008 revenues were $93,297 compared to $95,918 for 2007.

Systems Engineering's (SED) revenues were $14,403 in the quarter and $28,534 on a year-to-date basis representing a decrease of 7% and an increase of 3% respectively from the $15,505 and $27,615 recorded last year. During the second quarter of 2008, SED continued the momentum of recent quarters and delivered and executed solidly on all contracts. Due to the project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period.

Business and Technology Services (BTS) revenues were $33,010 in the quarter and $64,763 on a year-to-date basis representing a decrease of 8% and 5% respectively from the $35,347 and $68,303 for the same period of last year. The decrease in revenues is a direct reflection of a continued tightening of federal government spending on short-term staffing services, procurement delays related to amendments to some of the Company's existing contracts and an increase in the number of statutory holidays in the second quarter of 2008 compared to 2007.

Management expects that the marketplace in 2008 will continue to be very competitive. The market conditions for SED continue to be strong and with the current level of business in hand, it is expected that SED will deliver solid revenue consistent with the prior year. For the BTS division, we are optimistic that procurement delays and government constraints may start to ease in the coming quarters. However, the timing of future contract wins will ultimately determine the BTS revenue growth for the balance of the year.

Gross margin:

Gross margin was 19.0% in the second quarter of 2008, compared to the 18.2% reported in the second quarter a year ago. On a year-to-date basis the Company reported margins of 19.0% compared to 18.5% for the same period last year.

Gross margin in Systems Engineering was 25.6% this quarter compared to 18.1% in the second quarter of 2007 and was 23.3% for the six-month period ending March 31, 2008.compared to 19.4% for the same period last year. The increased labour component of sales combined with excellent project execution and retirement of risk on certain contracts allowed the division to report above average margins.

Gross margin in Business and Technology Services was 16.1% compared to the 18.1% reported in the second quarter of 2007 and 17.1% for the six-month period compared to 18.1% for the same period last year. Two principal factors contributed to the decline in gross margin this quarter: with the Easter Holiday falling into March 2008, the division was faced with an increased number of statutory holidays this quarter compared to the same period last year. In addition, a certain project with an extremely low margin contributed to the decline. This project was completed at the end of the quarter.

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

Operating expenses:

Selling, marketing, general and administration, facilities totalled $5,267 or 11.1% of revenues in the second quarter of 2008 compared to $5,297 or 10.4% of revenues reported in the second quarter of 2007. For the six-month period ending March 31, 2008 operating expenses totalled $10,513 compared to $10,512 in 2007. Management's approach of continually reviewing operating efficiencies allowed the Company to maintain operating expenses near prior year levels. For the balance of 2008, management believes that it can continue to maintain operating expenses at its current level.

Interest income:

Interest income for the second quarter of 2008 was $327 compared to $220 in 2007. The increase in interest income is attributable to an increase in average cash on hand compared to the prior year. For the six-month period ending March 31, 2008, interest income was $676 compared to $458 in 2007.

Unrealized loss on fair value of conversion options of long-term investment

The Company recorded a loss of $154 for the quarter and $262 on a year-to-date basis compared to a gain of $168 and $99 for 2007 relating to the fair value of conversion options of long-term investment.

Income taxes

The provision for income taxes for the second quarter of 2008 was $1,256 or 35.5% of earnings before tax compared to $1,346 in 2007 or 34.7% of earnings before tax. On a year-to-date basis, the provision for income taxes was $2,399 or 35.0% of earnings before tax compared to $2,474 in 2007 or 35.1% of earnings before tax. The 2008 provision was positively impacted by changes in prescribed tax rates with the federal and various provincial governments enacted prior to December 31, 2007; offset by the effect of the non-taxable loss on the fair value of the long-term investment.

Net earnings:

As a result of the foregoing, in the second quarter of 2008 the Company recorded net earnings of $2,284 or $0.28 per share basic and diluted, compared to $2,532 or $0.30 per share basic and diluted in the same quarter of the prior year. For the six-month period ending March 31, 2008 the Company reported net earnings of $4,464 or $0.54 per share basic and diluted compared to $4,568 or $0.54 per share basic and diluted in the same period of the prior year.

BACKLOG

The Company's backlog at March 31, 2008 was $933 million with terms extending to fiscal 2014. This compares to $960 million reported at the end of September 2007. Contracted Backlog represents maximum potential revenues remaining to be earned on signed contracts, whereas Option Renewals represent customers' options to further extend existing contracts under similar terms and conditions.

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

Management's estimate of the realizable portion (current utilization rates and known customer requirements) is less than the total value of signed contracts and related options by approximately $369 million. The majority of this amount relates to the health services support contract. Based on existing requirements, the customer for the health services support contract does not foresee a significant increase in spending in future years. Should additional requirements for the Company's services under these contracts not materialize; the excess will not be realized. The Company's policy is to reduce the reported contractual backlog once it receives official confirmation from the customer that indicates the utilization of the full contract value will not materialize.



Estimated Excess over
realizable estimated
(dollars Fiscal Fiscal Beyond portion of realizable
in millions) 2008 2009 2009 Backlog portion TOTAL
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Contracted
Backlog $85 $99 $29 $213 $170 $383
Option Renewals 6 12 333 351 199 550
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TOTAL $91 $111 $362 $564 $369 $933
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Business and
Technology
Services $62 $83 $347 $492 $369 $861
Systems
Engineering 29 28 15 72 - 72
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TOTAL $91 $111 $362 $564 $369 $933
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FINANCIAL CONDITION AND CASHFLOWS:

Operating activities

Cash inflows from operating activities for the six-month period ending March 31, 2008 were $9,513 compared to cash outflows of $4,507 during the same period in 2007. Working capital elements changed in line with the ebbs and flows of the business. Specifically, unearned contract revenues increased as a result of receiving customer advance payments during the quarter. The market for the Systems Engineering Division is characterized by long-term contracts with billings tied to milestones achieved, which often results in significant working capital requirements. Conversely, given the nature of this business, it is sometimes possible to negotiate advance payments on contracts. Such advance payments give rise to unearned revenue that will be realized as revenue over the course of the contract. As at March 31, 2008, the Company's total unearned revenue amounted to $9,168. This compares to $2,806 one year earlier.

Financing activities:

During the six-month period ending March 31, 2008 the Company paid a dividend of $0.24 per share compared to $0.20 per share during the same period of 2007.

During the six-month period ending March 31, 2008, the Company repurchased 73,300 common shares through its normal course issuer bid at an average price of $12.95.

At March 31, 2008 there were 165,000 options outstanding at an average price of $13.22 expiring at various dates between February 4, 2012 and August 21, 2012.

Capital resources

At March 31, 2008 the Company had a short-term credit facility of $10,000 with a Canadian chartered bank that bears interest at prime and is secured by assets of the Company against which no amounts were drawn. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.

ADOPTION OF NEW ACCOUNTING RULES AND IMPACT ON 2008 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 of 2008.

SELECTED QUARTERLY FINANCIAL DATA



Q2/08 Q1/08 Q4/07 Q3/07 Q2/07 Q1/07 Q4/06 Q3/06
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Revenues $47,413 $45,884 $45,715 $48,226 $50,852 $45,066 $41,067 $45,946
Net
earnings $2,284 $2,180 $2,136 $2,501 $2,532 $2,036 $1,815 $772

Net
earnings
per share
Basic $0.28 $0.26 $0.26 $0.30 $0.30 $0.24 $0.22 $0.09
Diluted $0.28 $0.26 $0.26 $0.30 $0.30 $0.24 $0.22 $0.09
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SEASONALITY

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

OUTLOOK

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

Over the last year, the SED division has experienced a rejuvenated market, following several years of a depressed satellite sector and extensive industry consolidation. Accordingly, SED is currently experiencing increased demand for its products and services. Management believes that new systems adopting the latest technologies will be required by customers to maintain and improve their service offerings. Management is also confident that systems such as MSTAR will continue to be in demand in the security and surveillance market although it cannot predict the timing and extent of future orders. The continuing 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 the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Although the division continues to see procurement delays and spending constraints within certain federal government departments, management believes that the types of service the division offers will continue to be attractive to government agencies going forward.

GUIDANCE

For the balance of 2008, management expects the BTS division to see some recovery, as procurement delays and government constraints are expected to ease. The SED division is expected to continue to benefit from the recovery in the satellite communications market, even with the always-present risk of program delays associated with this sector. Based on the above, management expects that consolidated revenues for 2008 will be in the range of $190 million to $200 million and net earnings per share in the range of $1.10 to $1.20.

INTERNAL CONTROLS OVER FINANCIAL REPORTING

During the most recent interim quarter ending March 31, 2008, 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, 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 2008, and with the Management Discussion and Analysis in the 2007 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