Calian Technologies Ltd.
TSX : CTY

Calian Technologies Ltd.

August 04, 2005 13:46 ET

Calian Reports Third Quarter Results: Revenues Exceed $50 Million

KANATA, ONTARIO--(CCNMatthews - Aug. 4, 2005) - Calian Technologies Ltd. (TSX:CTY) - All amounts are expressed in Canadian dollars unless otherwise indicated.

Calian Technologies Ltd. (TSX:CTY) today released unaudited results for the third quarter ended June 30, 2005. Revenues for the quarter were $ 50.6 million, an increase of 11.5% from the $45.4 million reported in the same quarter of the previous year. Net earnings were $2.4 million or $0.28 per share basic and diluted, compared to $3.4 million or $0.41 per share basic and $0.40 per share diluted in the same quarter last year.

"Our performance this quarter exceeded our expectations even though we did not match the third quarter 2004 results which contained significant contributions to revenue and profitability from the large MSTAR contract won earlier that year," stated Ray Basler, President and CEO.

"Our Health Services group has successfully completed its first quarter of operations and we have met or exceeded not only our own, but our customer's expectations as well. In addition, Titan continues to be very productive and we are realizing full benefit from this acquisition," continued Basler.

As expected, our cash balances decreased significantly during the quarter as the working capital requirements of the Health Services contract coupled with the drawdown of unearned contract revenue negatively impacted cash flow. Having made the significant initial working capital investment in the Health Services contract, further cash requirements will be limited to financing future growth.

Based on results to date coupled with our assessment of the next quarter, management's current expectations are that consolidated revenues for 2005 will be in the range of $180 million to $185 million and net earnings per share in the range of $0.92 to $0.97.

About Calian

Calian sells 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)
(Unaudited)

Three months ended Nine months ended
June 30 June 30
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------

Revenues $50,647 $45,372 $127,372 $131,961
Cost of revenues 41,703 35,361 104,024 105,787
--------------------------------------------------------------------
Gross profit 8,944 10,011 23,348 26,174
Selling and marketing 1,270 1,176 4,014 3,430
General and
administration 2,802 2,486 7,561 7,170
Facilities 702 699 2,051 2,058
Amortization of capital 293 292 841 844
assets
Amortization of intangibles 99 - 297 -
--------------------------------------------------------------------
Earnings before interest
and income taxes 3,778 5,358 8,584 12,672
Interest income, net 128 99 438 332
--------------------------------------------------------------------
Earnings before
income taxes 3,906 5,457 9,022 13,004
--------------------------------------------------------------------
Income taxes - current 1,510 1,307 3,411 2,995
Income taxes - future - 707 (41) 1,680
--------------------------------------------------------------------
1,510 2,014 3,370 4,675
--------------------------------------------------------------------
NET EARNINGS 2,396 3,443 5,652 8,329
Retained earnings,
beginning of period 21,661 17,253 19,740 13,202
Excess of purchase price
over stated capital
on repurchase of
shares (Note 9) - (1,044) - (1,044)
Dividend (673) (509) (2,008) (1,344)
--------------------------------------------------------------------
Retained earnings, end
of period $23,384 $19,143 $23,384 $19,143
--------------------------------------------------------------------
--------------------------------------------------------------------
Net earnings per share:
Basic $0.28 $0.41 $0.67 $0.99

--------------------------------------------------------------------
--------------------------------------------------------------------
Diluted $0.28 $0.40 $0.67 $0.97
--------------------------------------------------------------------
--------------------------------------------------------------------
Weighted average number
of shares: (Note 5)
Basic 8,410,133 8,460,475 8,377,530 8,390,819
--------------------------------------------------------------------
--------------------------------------------------------------------
Diluted 8,535,643 8,633,845 8,491,764 8,539,237
--------------------------------------------------------------------
--------------------------------------------------------------------

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

June 30, 2005 September 30, 2004
(Unaudited)
--------------------------------------------------------------------
ASSETS

CURRENT ASSETS
Cash and cash equivalents $14,573 $30,997
Accounts receivable 35,287 18,726
Note receivable 189 158
Work in process 4,568 3,747
Prepaid expenses and other 887 875
Future income taxes 2,399 2,428
--------------------------------------------------------------------
57,903 56,931

NOTE RECEIVABLE 358 358

CAPITAL ASSETS 3,728 3,873

INTANGIBLES 1,115 1,412

GOODWILL 5,923 5,923
--------------------------------------------------------------------
$69,027 $68,497
--------------------------------------------------------------------
--------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Accounts payable and
accrued liabilities $19,750 $18,136
Unearned contract revenue 8,876 14,094
--------------------------------------------------------------------
28,626 32,230

FUTURE INCOME TAX LIABILITY 26 96
--------------------------------------------------------------------
28,652 32,326
--------------------------------------------------------------------

CONTINGENCIES (Note 7)

SHAREHOLDERS' EQUITY

Share capital 16,991 16,431

Retained earnings 23,384 19,740
--------------------------------------------------------------------
40,375 36,171
--------------------------------------------------------------------
--------------------------------------------------------------------
$69,027 $68,497
--------------------------------------------------------------------
--------------------------------------------------------------------


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


Three months ended Nine months ended
June 30 June 30
--------------------------------------------------------------------
2005 2004 2005 2004
--------------------------------------------------------------------

CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES

Net earnings $2,396 $3,443 $5,652 $8,329

Items not affecting cash:

Amortization 392 292 1,138 844

Investment tax credits - 239 - 628

Future income taxes - 706 (41) 1,679
--------------------------------------------------------------------
2,788 4,680 6,749 11,480

Change in non-cash
working capital

Accounts receivable (13,168) (7,118) (16,561) (6,625)

Work in process (854) 3,562 (821) 612

Prepaid expenses
and other (265) 73 (43) 64

Accounts payable and
accrued liabilities 1,437 254 1,614 (339)

Unearned contract
revenue (2,640) (2,395) (5,218) (1,694)
--------------------------------------------------------------------
(12,702) (944) (14,280) 3,498
--------------------------------------------------------------------

CASH FLOWS USED IN
FINANCING ACTIVITIES

Issuance of common
shares 3 66 560 1,039
Repurchase of common
shares, including cost
associated with
repurchase (Note 9) - (1,232) - (1,232)
Dividend (673) (509) (2,008) (1,344)
--------------------------------------------------------------------
(670) (1,675) (1,448) (1,537)
--------------------------------------------------------------------

CASH FLOWS USED IN
INVESTING ACTIVITIES
Acquisition of capital
assets (276) (332) (696) (668)
--------------------------------------------------------------------

NET CASH INFLOW
(OUTFLOW) (13,648) (2,951) (16,424) 1,293

CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 28,221 29,429 30,997 25,185
--------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $14,573 $26,478 $14,573 $26,478
--------------------------------------------------------------------
--------------------------------------------------------------------



CALIAN TECHNOLOGIES LTD.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the periods ended June 30, 2005 and 2004
(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, 2004, with the exception of the application of the new recommendations 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

Stock-based compensation

Effective October 1, 2003, the Company early adopted the amended recommendations of the Canadian Institute of Chartered Accountants Handbook Section 3870, Stock-based Compensation and Other Stock-based Payments. The amended standard requires that all stock based awards made to employees be measured and recognized using the fair-value based method. During the nine-month period ending June 30, 2005, the Company recorded a compensation expense of $26 (2004: $31) relating to its Employee Share Purchase Plan.

Business combinations, goodwill and other intangible assets

As a result of its recent acquisition of Titan Consulting Group Ltd., the Company adopted the recommendations of the Canadian Institute of Chartered Accountants Handbook Section 1581, Business Combinations and Section 3062, Goodwill and Other Intangibles Assets. The standard requires that the acquisition be accounted for using the purchase method of accounting and accordingly, the purchase price is allocated to the assets and liabilities based on their estimated fair values as of the acquisition date. The results of operations relating to the acquisition must be included in the consolidated financial statements from the effective date of acquisition. Intangibles are comprised of acquired customer relationships, order backlog, consultant database and non-competition agreements. Intangibles are amortized on a straight-line basis over their estimated useful life not to exceed five years. A portion of the purchase price is based on a multiple of earnings achieved during the period September 1, 2004 to August 31, 2005. Once the final purchase price is determined, the final payment will be accounted for as an incremental cost of the acquisition resulting in an increase to goodwill.

3. ACCOUNTING ESTIMATES

For the period ended June 30, 2005 and June 30, 2004, 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. EARNINGS PER SHARE

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



Three Months ended Nine months ended
June 30 June 30
2005 2004 2005 2004
--------------------------------------------------------------------

Weighted average
number of shares
- basic 8,410,133 8,460,475 8,377,530 8,390,819

Addition to reflect
the dilutive effect
of employee stock
options 88,953 173,370 91,183 148,418
Addition to reflect
the dilutive effect
of shares to be
issued for the Titan
acquisition 36,557 - 23,051 -

--------------------------------------------------------------------
Weighted number
of shares -
diluted 8,535,643 8,633,845 8,491,764 8,539,237
--------------------------------------------------------------------


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 three and nine-month period ended June 30, 2005 and 2004 no stock options were excluded from the above computation of diluted weighted average number of common shares because they were anti-dilutive. The number of options outstanding at June 30, 2005 is 116,825.


6. 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 June 30, 2005
--------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------
Revenues $11,978 $38,669 $50,647
Earnings before
interest and
income taxes 1,663 2,601 (486) 3,778
Interest income, net 128
Income taxes 1,510
--------------------------------------------------------------------
Net earnings $2,396
--------------------------------------------------------------------
--------------------------------------------------------------------

--------------------------------------------------------------------
Total assets other than
cash and goodwill $11,876 $35,933 $722 $48,531
--------------------------------------------------------------------
Goodwill 5,923 5,923
Cash 14,573
--------------------------------------------------------------------
Total assets $69,027
--------------------------------------------------------------------
--------------------------------------------------------------------


Three months ended June 30, 2004
--------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------
Revenue $24,913 $20,459 $45,372
Earnings before interest
and income taxes 5,234 531 (407) 5,358
Interest income, net 99
Income taxes 2,014
--------------------------------------------------------------------
Net earnings $3,443
--------------------------------------------------------------------
--------------------------------------------------------------------

--------------------------------------------------------------------
Total assets other than
cash and goodwill $22,322 $16,680 $100 $39,102
Goodwill 3,246 3,246
Cash 26,478
--------------------------------------------------------------------
Total assets $68,826
--------------------------------------------------------------------
--------------------------------------------------------------------


Nine months ended June 30, 2005
--------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------
Revenue 38,116 89,256 127,372
Earnings before
interest and
income taxes 5,126 4,810 (1,352) 8,584
Interest income, net 438
Income taxes 3,370
--------------------------------------------------------------------
Net earnings 5,652
--------------------------------------------------------------------
--------------------------------------------------------------------

Nine months ended June 30, 2004
--------------------------------------------------------------------
Business and
Systems Technology
Engineering Services Corporate Total
--------------------------------------------------------------------
Revenue $67,622 $64,339 $131,961
Earnings before
interest and
income taxes 11,674 2,209 (1,211) 12,672
Interest income, net 332
Income taxes 4,675
--------------------------------------------------------------------
Net earnings $8,329
--------------------------------------------------------------------
--------------------------------------------------------------------


7. CONTINGENCIES

On January 24, 2005, the Company was served with a civil lawsuit by way of a Statement of Claim filed in the Ontario Superior Court of Justice claiming $100 million in damages from Calian and an employee of the Company for breach of confidence, breach of fiduciary duty and unlawful interference with economic interests. The claim relates to the recently awarded limitation of expenditure contract by the Department of National Defence for the provision and management of Health Service Providers. The contract value for the initial 5-year period is in excess of $400 million with the potential for 5 additional option years worth an additional $480 million in total. Calian intends to vigorously defend the claim, including the basis of the claim and the amounts being sought. Management believes that it will be successful in its defence of the claim advanced against the Company. The likely outcome of the lawsuit cannot be determined at this time. The plaintiff also filed a complaint with the Canadian International Trade Tribunal (CITT) related to this contract award. In June 2005, the Tribunal issued its determination, confirming Calian as the successful bidder. On July 15, 2005, the plaintiff applied to the Federal Court of Appeal seeking to set aside the decision of the CITT by seeking a judicial review of that decision.

On September 7, 2004, the company acquired all of the outstanding shares of Titan Consulting Group Ltd ("Titan"). The purchase price is based on the book value of assets and liabilities as of the date of acquisition plus a multiple of 4.5 times Titan's earnings before interest, taxes and amortization (EBITDA) of up to $1,567 and 1 times EBITDA in excess of $1,567 achieved during the period September 1, 2004 to August 31, 2005. Following the completion of the 12-month earnout period, the balance of the cash and shares are to be calculated and paid during the first six months of fiscal 2006. The final purchase price will be determined and accounted for as an incremental cost of the acquisition resulting in an increase to goodwill.

8. COMMITMENTS

As part of its e-business strategy, during the year 2000, the Company entered into a 10-year lease for an office building in the Ottawa area expiring in April 2010. Upon exit of the e-business sector in 2001, the Company did not have any requirements for the space and accordingly sublet the excess space to a third party for a period of 5 years ending May 2006.

During the quarter ending June 30, 2005, the Company entered into a new agreement with the existing subtenant to lease a significant portion of the space for a 5-year period extending to April 2010 at the current market price. As a result, the Company will be required to assume a portion of the costs associated with this facility. Unless the sub-lessee defaults on future payments, it is expected that the current provision of $2,200 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 $960 per year.

9. SHARE REPURCHASE

During the three and nine-month periods ending June 30, 2004, the Company acquired 94,900 (or 1.1%) of its outstanding common shares at an average price of $12.95 per share for a total of $1,232 including related expenses, through both the Normal Course Issue Bid initiated in May 2003 and the Normal Course Issuer Bid initiated in May 2004 for a period of one year. The excess of the purchase price over the average stated capital of the shares has been charged to retained earnings.


Management Discussion and Analysis - At June 30, 2005:


RESULTS OF OPERATIONS - THIRD QUARTER 2005

Revenues:

For the third quarter of 2005, revenues were $50.6 million, representing an increase of 11.5% over the $45.4 million reported in the third quarter of 2004.

Systems Engineering's revenues were $12.0 million in the quarter, a decrease of 51.8% over the $24.9 million recorded in the third quarter of last year. While the mix of projects has changed from the previous year, reduced MSTAR revenues account for the majority of this decrease. 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 reported an 88.8% increase with revenues of $38.7 million compared to $20.5 million for the same quarter of last year. The majority of the increase is due to the inclusion of three months of revenues relating to the Health Services Support contract and the acquisition of Titan Consulting Group Ltd. The balance of the division also reported modest growth in this third quarter of 2005 compared to the prior year.

Gross margin:

Gross margin was 17.7 % in the third quarter of 2005, which is significantly lower than the 22.1% reported in the third quarter a year ago.

Gross margin in Systems Engineering was 24.7% compared to 27.9 % in the third quarter of 2004. Although the SED division realized excellent margins this quarter due to solid execution and retiring risk on certain large contracts, the 2004 margin was also positively impacted by the realized margin on the MSTAR contract.

Gross margin in Business and Technology Services was 15.5 % compared to the 15.0 % reported in the third quarter of 2004 as a result of the inclusion of Titan and the Health Services Support contract, which improved the overall mix for the division.

Operating expenses:

Selling, marketing, general and administration expenses totaled $4.1 million or 8.0% of revenues in the third quarter of 2005 compared to the $3.7 million or 8.0% of revenues reported in the third quarter of 2004. The increase in absolute dollars is mainly attributable to the inclusion of three months of operating expenses relating to the Health Services Support contract and the acquisition of Titan.

Amortization of intangibles

The Company acquired intangibles as a result of its acquisition of Titan in September 2004. These intangibles are amortized over their expected useful life, not exceeding 5 years. During the third quarter of 2005, the Company amortized $0.1 million.

Income taxes

The provision for income taxes for the third quarter of 2005 was $1.5 million compared to $2.0 million a year ago commensurate with the level of earnings before income taxes.

Net earnings:

As a result of the foregoing, the Company recorded net earnings of $2.4 million or $0.28 per share basic and diluted in the third quarter of 2005, compared to $3.4 million or $0.41 per share basic and $0.40 per share diluted in the same quarter of the prior year.


RESULTS OF OPERATIONS - NINE-MONTH PERIOD ENDING JUNE 30, 2005

Revenues:

During the first nine months of this year, revenues were $127.4 million compared to $132.0 million for the first nine months of 2004, representing a decrease of 3.5%. This is mostly attributable to a decrease in MSTAR revenues offset by the inclusion of 3 months of revenues on the Health Services Support contract and 9 months of revenues relating to the Titan acquisition.

Revenues in the Systems Engineering segment decreased 43.6% to $38.1 million from $67.6 million and revenues in the Business and Technology Services segment increased 38.8% to $89.3 million from $64.3 million.

For the Systems Engineering Division we continue to view positively future prospects for the MSTAR product. However, because of the long lead-time required to deliver this product, we do not expect a significant amount of revenue to be generated during the remaining quarter of 2005.

For the Business and Technology Services Division although the environment is showing signs of modest recovery, we do not expect a significant increase in additional government spending over the next several quarters. The Health Services Support Contract began generating revenues effective April 1, 2005 which will have a significant impact on the overall growth for this division in 2005.

Gross Margin:

Although the revenue mix was significantly different than in the prior year, gross margin during the first nine months of 2005 was 18.3%, compared to 19.8% for the equivalent period of 2004.

The overall gross margin for the Company decreased as a result of the change in revenue mix created by the addition of the Health Services Support contract and the Titan acquisition offset by a reduction in MSTAR activities.

Operating expenses:

Selling, marketing and general and administration, totaled $11.6 million or 9.1% of revenues in the first nine months of 2005 compared to $10.6 million or 8.0% of revenues for the same period in 2004. The inclusion of 3 months of the Health Services Support contract and 9 months of Titan's operating expenses represents the majority of the increase in absolute dollars. Operating expenses as a percentage of revenue increased primarily as a result of a change in revenue mix: revenue generated from MSTAR in 2004 which did not attract additional operating expenses, was replaced in 2005 with revenue from the Health Services Support contract and the Titan acquisition which does attract additional operating expenses.

Income Taxes:

The provision for income taxes for the nine-month period ending June 30, 2005 was $3.4 million, compared to $4.7 million a year ago. The income tax expense for the first 9 months of 2004 was positively impacted by an increase in the effective income tax rate applied to the valuation of future income tax assets. In 2005 the Company is required to pay taxes on all of its earnings.

Net Earnings:

As a result of the foregoing, the Company recorded net earnings of $5.7 million or $0.67 per share basic and diluted for the first nine months of fiscal 2005, compared to $8.3 million or $0.99 per share basic and $0.97 per share diluted in the same period of the prior year.


COMMITMENTS:

During the third quarter of 2005, the Company renegotiated a new lease with the sub-tenant for a significant portion of its excess space at current market rates. As a result, the Company will be required to assume a portion of the costs associated with this facility. Management believes that the current provision of $2,200 will be sufficient to cover the Company's share of the costs.

SUMMARY OF QUARTERLY FINANCIAL INFORMATION

(dollars in millions, except per share data)



Q3/05 Q2/05 Q1/05 Q4/04 Q3/04 Q2/04 Q1/04 Q4/03

Revenues 50.6 38.7 38.0 37.7 45.4 49.2 37.3 34.2
Earnings from
continuing
operations 2.4 1.8 1.5 2.9 3.4 3.2 1.7 1.4

Net earnings 2.4 1.8 1.5 2.1 3.4 3.2 1.7 1.4

Per Common Share
Earnings from
continuing
operations
per share
Basic $0.28 $0.21 $0.18 $0.34 $0.41 $0.38 $0.20 $0.17
Diluted $0.28 $0.21 $0.18 $0.34 $0.40 $0.37 $0.20 $0.16

Net earnings
per share
Basic $0.28 $0.21 $0.18 $0.25 $0.41 $0.38 $0.20 $0.17
Diluted $0.28 $0.21 $0.18 $0.25 $0.40 $0.37 $0.20 $0.16


BACKLOG

The backlog at June 30, 2005 is $1,107 million with terms extending to fiscal 2014. This compares to $257 million reported at the end of September 2004. Contracted backlog represents revenues remaining to be earned on signed contracts, whereas option renewals represent a customer's option to further extend existing contracts under similar terms and conditions. Most contracts provide the customer with the ability to adjust the timing and level of effort throughout the contract life and as such the following represents management's best estimate of the ultimate backlog and related consumption profile. During the quarter, the Company won a number of contract renewals in competitive bidding situations thereby maintaining the Company's excellent track record of securing repeat business.



(dollars in millions) TOTAL Fiscal 2005 Fiscal 2006 Beyond
--------------------------------------------------------------------
Contracted Backlog $510 $47 $111 $352
Option Renewals $597 - 4 593
--------------------------------------------------------------------
TOTAL $1,107 $47 $115 $945
--------------------------------------------------------------------
--------------------------------------------------------------------

Business and
Technology Services 1,082 36 103 943
Systems Engineering 25 11 12 2
--------------------------------------------------------------------
TOTAL $1,107 $47 $115 $945
--------------------------------------------------------------------
--------------------------------------------------------------------


FINANCIAL CONDITION AND CASHFLOWS:

Cash flows used in operating activities during the first nine-months of 2005 were $14.3 million as compared with a cash inflow of $3.5 million during the same period of 2004. Cash flows from earnings decreased by $4.7 million. As expected, working capital requirements increased by $13.1 million over 2004 mainly due to requirements associated with the Health Services contract and a decrease in unearned contract revenues as the Company performed the work associated with upfront customer advances. At June 30, 2005, 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. An outstanding letter of credit in the amount of $0.6 million was applied against the available line.

As a result of increasing its dividend payment to $0.08 per share during the first quarter of 2005, the Company paid $0.7 million in dividends compared to $0.5 million or $0.06 cents per share in the third quarter of the prior year.

Over the course of the next several quarters, management expects cash balances will be positively affected by an improvement in the working capital requirement related to the Health Services Support contract and negatively affected by a decrease in unearned contract revenue and the final payment for the Titan acquisition. Management believes that Calian has sufficient cash resources to continue to finance its working capital requirements and pay a quarterly dividend.

SEASONALITY

The Company's operations have historically been 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. Its acquisition strategy focusing on adding complementary businesses to the Company's mix will also be an additional source for growth.

The Systems Engineering Division has been working within a depressed satellite sector for the last few years with no significant rebound expected in the near-term. In addition, several large satellite operators have recently been purchased using highly leveraged financial structures and we believe this may impact capital spending, which in turn may reduce new opportunities in the near term. However, management believes that new satellites adopting the latest technologies will be required in the medium term to maintain and improve service offerings. Although management cannot predict the timing and extent of future orders, it is confident that systems such as MSTAR will continue to be in demand in the security and surveillance market. The continued strengthening of the Canadian dollar will impact the Systems Engineering Division's competitiveness when bidding against foreign competition on projects denominated in US dollars.

The Business and Technology Services Division's services are adaptable to many different markets. Currently, its strength lies in providing program management and delivery services to the Department of National Defence. Management believes that this department and many others within the federal government will continue to require more support services from private enterprises to supplement their current workforce. Although Calian has experienced delays during the last few years, management believes that the types of service the division offers will continue to be attractive to government agencies going forward. With its recent acquisition of Titan and the award to Calian of two standing agreements for SAP and Peoplesoft resources, Calian is now well positioned to take advantage of the expected growth in government ERP requirements.

As indicated in Note 7 of the Company's financial statements, the Company was served with a civil lawsuit by way of a Statement of Claim for $100 million in damages from Calian and an employee of the Company. Calian intends to vigorously defend the claim, including the basis of the claim and the amounts being sought. Management believes that it will be successful in its defence of the claim advanced against the Company. The likely outcome of the lawsuit cannot be determined at this time. The plaintiff also filed a complaint with the Canadian International Trade Tribunal (CITT) related to this contract award. In June 2005, the Tribunal issued its determination, confirming Calian as the successful bidder. On July 15, 2005, the plaintiff applied to the Federal Court of Appeal seeking to set aside the decision of the CITT by seeking a judicial review of that decision.

GUIDANCE

As a result of our present backlog and based on the above information related to the current market conditions and demand, the Company expects 2005 revenues to be in the range of $180 million to $185 million and net earnings per share in the range of $0.92 to $0.97.

REVIEW OF QUARTERLY STATEMENTS BY AUDITORS

The Company's auditors have not reviewed the comparative financial statements for the period ending June 30, 2004.

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 third quarter of 2005 and 2004, and with the Management Discussion and Analysis in the 2004 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