EXFO receives 10-year tax credit with announcement of major expansion

The Quebec government's new tax holiday program for major investments is being utilized by one of the province's fastest growing firms in the hot technology sector of fibre optics. EXFO Electro-Optical Engineering Inc has been granted a 10-year tax credit that exempts the Vanier PQ-based manufacturer from paying taxes on company income, capital and the employer contribution to Quebec's Health Services Fund. In return, EXFO will undertake a major expansion of its operations, and has committed to increase its payroll by at least $15 million within 36 months.

EXFO has been enjoying rapid growth in its two main market niches, both of which are directly linked to the boom in fibre-optic transmission in the telecommunications industry. The firm's portable and monitoring division targets telecommunications carriers, cable television firms, public utilities, private network installers and third-party installers. The industrial and scientific division designs instruments for manufacturers of optical components, value-added optical modules, optical networking systems and various R&D markets. Prior to the expansion, EXFO employed 750 people and has sold products to more than 70 countries.

The tax holiday program was introduced in the last Quebec budget as a means of increasing private investment by encouraging Quebec-based companies to expand operations within the province and undertaking major projects (R$, April 7/00). If decreed eligible, a company has until October 1st of any given year to apply under the program. If approved, it is granted an annual eligibility certificate, and subsequent certificates are issued if the firm complies with the program's criteria and meet their forecasts for employee generation or investment.

To qualify, companies must be in the primary, manufacturing or "propulsive service" sectors. They have the option of increasing their payroll by $15 million, or increasing payroll by $4 million for projects involving an investment of at least $300 million. They will then be able to deduct tax on capital when calculating taxable income, based on the income it earns from the business relating to the project.

To accommodate the expansion, EXFO has taken out an option to purchase 4.2 million square feet of land in the Quebec Metro High-Tech Park and plans to construct facilities to house research and development, marketing, administrative services, merchandising and some production. The first 15,000-sq-m building will be ready for occupancy next fall, allowing EXFO to meet its goal of creating 500 new jobs in FY01. The existing 18,000-sq-m facility in Vanier will eventually used exclusively for manufacturing.

EXFO has been riding the current boom on optical networking equipment with considerable success, filing an initial public offering (IPO) earlier this year that raised $187 million, and racking up more than $100 million in sales for FY2000 (ended August 31). R&D expenditures were $13.1 for the year, representing more than 13% of revenue and up 74% from FY99. That's in line with EXFO's stated intention of spending 12-16% of sales on R&D. The company has also stated that it intends to devote 25% of its personnel to R&D activities, including an "advanced research group" that conducts research, monitors the industry's technological trends and maintains liaison with industry associations, universities and standards bodies.

Prior to the IPO, EXFO was 99.8% controlled by Germain Lamonde, its founder president, CEO and board chairman. After the IPO, his share drops to 98% Lamonde holds a BSc from Ecole Polytechnique and a masters in optics from the Univ of Laval.

R$