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Calian Technologies Ltd.
2010 Annual Report
The following Management Discussion and Analysis is dated December 3, 2010 and should be read in conjunction with the
audited consolidated financial statements and notes included in this annual report. The Company's accounting policies are
in accordance with Canadian generally accepted accounting principles (GAAP) of the Canadian Institute of Chartered
Accountants. As in the consolidated financial statements, all dollar amounts in this Management Discussion and Analysis are
expressed in thousands of Canadian dollars unless otherwise noted.
Forward Looking Statements
The Company cautions that the forward-looking statements in the following Management Discussion and Analysis are based
on certain assumptions made by the Company that may prove to be inaccurate. Forward-looking statements include those
identified by the expressions "anticipate," "believe," "plan," "estimate," "expect," "intend" and similar expressions to the
extent that they relate to the Company or its management. These forward-looking statements are not historical facts, but reflect
the Company's current expectations and assumptions regarding future results or events. Assumptions made include customer
demand for the Company's services, the Company's ability to maintain and enhance customer relationships, as well as the
Company's ability to bring to market it services. Furthermore, the Company cautions that the forward-looking statements in
the following Management Discussion and Analysis are based on current expectations as at December 3, 2010 that are subject
to change and to risks and uncertainties including those set out under the heading "Risk Factors" below. Actual results may
differ due to facts such as customer demand, customer relationships, new service offerings, delivery schedules, revenue mix,
competition, pricing pressure, foreign currency fluctuations and uncertainty in the markets in which the Company conducts
business. Additional information identifying risks and uncertainties is contained in the Company's filings with the various
provincial securities regulators. Readers should not place undue reliance in the Company's forward-looking statements.
Business Overview and Strategic Direction
Calian sells technology services to industry and government. For many years, industry and government have searched for and
adopted new operating models and new technologies in an effort to improve the efficiency of their operations. Management
expects that they will continue to do so, and in recognizing this trend, the Company has built a unique combination of spe-
cialized skills and available capable resources in order to address the resulting market opportunities.
With these capable resources at the ready, Calian can quickly assemble and deploy teams of professionals with the requisite
skills to promptly assist customers implement their diverse operating and technology needs, whether it is the design and inte-
gration of a complex satellite ground system or the provision of specialized training, project management and operations services.
Calian's larger mainstream competitors often cannot duplicate the timeliness and reliability of Calian's services. Furthermore,
efficient and flexible operating processes, combined with a strong financial condition allow Calian to profitably address
lower margin business without compromising quality or performance, and this further distinguishes the Company from its
competitors. Due to the Company's successful delivery and execution of projects, Calian experiences repeat business and a
large number of contract renewals.
Calian's long-term direction is to continue to focus on providing its current service offerings to industry and government in
specialized niche areas outside the mainstream market, avoiding competition with larger competitors. Calian will concentrate
on those opportunities that entail agility and flexibility in both resources and capabilities to address customer requirements,
be it in our traditional markets or new ones with similar needs.
Calian's growth plans include building upon and expanding its current capabilities and addressing a wider range of cus-
tomers with a broader range of services without compromising its commitment to quality and delivery. Calian plans to
continue augmenting its service offerings and capitalizing on its reputation for delivery, building on its satisfied base of blue-
chip customers. In addition, the Company plans to continue to look for and acquire specialized companies that have also had
success in profitably addressing niche markets and whose operating philosophies align with those of Calian. With growing
revenues, an efficient back office, and the realization of economies of scale, the Company's objective is to enhance the
returns to its shareholders and build an enterprise that excels in its selected markets.
For existing operations, the key is controlled profitable growth. Management expects that growth will not only extract
economies of scale and provide additional returns, but will also provide an environment for its people to grow and advance
within the Company. Calian's strengths in delivering specialized services in niche markets have so far permitted the Company
to excel in a difficult business environment where many mainstream competitors have faltered. With this backdrop of con-
tinuing to do what Calian does best, there are no plans to materially alter the business of the Company.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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2010 Annual Report
Calian Technologies Ltd.
Calian currently operates in two reportable segments, defined by their primary type of service offerings:
Systems Engineering involves planning, designing and implementing solutions that meet a customer's specific business
and technical needs, primarily in the satellite communications sector. The Systems Engineering Division, also known as
SED, has its principal office in Saskatoon, Saskatchewan.
Business and Technology Services involves both short and long-term placements of personnel to augment customers'
workforces as well as the long-term management of projects, facilities and customer business processes. The Business
and Technology Services division (BTS) has its principal Canadian office in Ottawa, Ontario and its US office in Virginia.
As both of our divisions operate in very specific niche areas within large markets, there exists very little third party data to
compare to the Company's performance. Although referring to the general market trends provides insight into the health of
those markets and some clarity on the opportunities within those markets, it is not indicative of the health, demand and
funding of the individual customers of the Company. In order to compensate for this limited insight and to provide an indi-
cation of revenue potential, this annual report provides a detailed rollout of the Company's backlog by division showing both
contracted backlog and option renewals by fiscal year.
In addition, since referencing pricing or volumes of production are not applicable to our business to allow a proper under-
standing of the level of revenue generated during the year or expected in the future, the following discussions reference to
the types of contracts performed by each of the two divisions will provide some insight into the level of customer specific
demand for our services.
Systems Engineering Division
For over 45 years, SED's core strength has been communications systems engineering. SED builds equipment, systems, and
networks to maximize utilization, efficiency and throughput. Its primary market is the satellite industry, but it also applies
its capabilities and expertise to broader adjacent markets with needs for similar systems and services.
SED is a systems integrator and works with its customers on a project basis to develop custom systems tailored to their spe-
cific operational requirements. From one project to the next, SED attempts to reuse system architecture, core software
modules, and custom hardware designs to reduce development time, cost and technical risks. SED's manufacturing facility,
initially created to support its communication systems engineering group, now accounts for a substantial portion of the
revenue base and provides an on-going base of business that helps offset the ebb and flow of core project work.
SED's strengths are renowned around the world with exports typically accounting for more than 70% of annual sales. This com-
pares to a Canadian space industry average of 50%. Customers often request deployment our systems to other locations. We
now have systems operating on six continents and we are well versed in the logistics associated with international installations.
SED designs and manufactures equipment for the satellite ground-based infrastructure market and systems must be upgrad-
ed or replaced on a regular basis. The introduction of HDTV and the wide acceptance of Digital Audio Radio are also
presenting opportunities for additional capacity and enhancements. With recent world events, demand for reliable mobile
communications for disaster relief and satellite news gathering has now become center stage. Additional demands are being
driven by applications like mobile broadcast, military use of commercial satellites and the ongoing need to replace the exist-
ing capacity of satellites approaching end-of-life.
Overall, the business environment for the SED division is stable and sustainable. Inmarsat and Intelsat are increasing capital
spending after both having operated under restricted capital expenditure philosophies. This should bode well for integrators
such as SED. However, reduced credit availability continues to hamper the ability of start-ups and certain existing players to
get the funding or refinancing needed to drive their initiatives forward. Competition continues to be fierce as competing
companies look to fill their available capacity.
While the satellite communications sector has been the core of SED's business, the contract manufacturing group continues
to provide a substantial base of revenues. Although the levels of activity peaked in 2009 and have since abated, the regular
base of work SED receives from several key customers continues to provide the manufacturing group with respectable levels
of utilization. We focus on opportunities requiring low volume and high reliability manufacturing; qualities that are well
suited to defence applications. These attributes also provide effective immunization from offshore competitors.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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Calian Technologies Ltd.
2010 Annual Report
In 2010 the SED division performed well despite the expected drop in our manufacturing business. During the year, SED signed
$79 million in new contracts and ended the year with a backlog of $74 million of which $41 million is expected to be earned
during 2011.
Satellite Operations continue to provide a steady revenue stream. SED continues to operate both of the Radarsat Satellites
under contract to the Canadian Space Agency (CSA) and MDA. SED has expanded its customer base and now provides satel-
lite operations to Ciel for the Ciel II satellite. SED is also under contract to host SkyTerra's communications gateway
equipment in a building adjacent to our current facility in Saskatoon.
Early in 2010, SED received the final contract from ESA for the provision of a third 35-metre deep space antenna and RF system
destined for installation in South America in 2012. This $24 million increase brought the full contract value to $39 million to
be earned over three years. As activities ramped up quickly, it was a major contributor to SED's revenue base in 2010 and is
expected to be in 2011 as well. In addition, during 2010, SED was awarded a contract to provide operations and maintenance
services for the CSA Satellite Operations Directorate at its facilities in Saint-Hubert, Quebec and in Saskatoon, Saskatchewan.
The contract runs until March 31, 2012 and is valued at over $10 million. This contract is a continuation of work SED has per-
formed for CSA since 1994 and involves services that support CSA's current satellites Radarsat-1 and SciSat-1.
While our manufacturing group was downsized during 2010 to reflect the decreased level of activity relative to the peak in
2009, this segment of our business is still a strong contributor to revenues and profitability. Overall, more than $24 million of
new orders were signed during the year. Our manufacturing related revenues are derived mainly from harnesses and elec-
tronic modules for KDS and Arial Head Assemblies for DRS; legacy products that SED has been manufacturing for a number
of years. The area of highest growth within the manufacturing group is the assembly of test sets for RIM used in the manu-
facture of their popular Blackberry smartphones. The level of test set assembly increased during 2010 due to the number of
new phone models introduced. Also, we started manufacturing certain component parts for the test sets as well as for RIM's
internal consumption.
The markets in which SED operates are stable and we expect new opportunities to surface during the year ahead. In addi-
tion our manufacturing base is expected to stay at levels consistent with those experienced in 2010. In the communication
business sector, in addition to the ESA Third Deep Space Antenna, SED expects to work closely with Inmarsat as they con-
tinue to evolve and expand their service offerings. In the digital audio broadcast market, we anticipate additional business
with Sirius/XM Radio as they seek to realize further merger related efficiencies and also strive to bolster their product offer-
ings. In the test systems area, we expect a solid level of business from RIM test sets and we will continue to pursue
opportunities with our traditional test systems market for Communications Monitoring Systems and In-Orbit Test Systems.
Finally, within our network management business, we will continue to exploit our resource management software as well as
pursue further sales of our ancillary satellite products.
As worldwide competitors continue to vie for market share, margins are expected to come under pressure. Continued
strength of the Canadian dollar relative to other major currencies could also weaken our export position.
Business and Technology Services Division
BTS is a leader in the business and technology services field, providing professional and technical personnel to meet and
anticipate its customers' unique needs. Across Canada and in parts of the USA, we have a workforce in excess of 2,000 indi-
viduals in both full and part-time capacities. Our primary market is the Canadian federal government with an emphasis on the
Department of National Defence (DND), but we also provide services to large multi-national and Fortune 500 companies as well
as to other departments within the federal government and to the Governments of the United States, Spain and Australia.
We are in the people business. We work with our customers to define their needs and satisfy their requirements through
short and medium-term placements of personnel to augment customers' workforces (Staffing) or through the long-term
management of projects, facilities and customer business processes (Outsourcing).
The division's success comes from its focus on delivering a quality service through careful attention to both customer and
contractor needs. BTS is a continuous improvement organization and is accredited to Level 4 under the Progressive
Excellence Program of the National Quality Institute of Canada. In 2009, BTS received a gold level Canada Award of
Excellence for Health and Wellness.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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2010 Annual Report
Calian Technologies Ltd.
Over the past several years, we have continued to build and enhance our reputation as a very competent, high quality, but
reasonably priced, supplier. We have consciously focused on niche markets that do not attract significant attention or large
numbers of competitors. This strategy has allowed us to maintain our prices and effectively develop a capability that few
of our competitors can match.
The major market for our BTS division continues to be the Canadian Federal government with an emphasis on DND, par-
ticularly for outsourcing services. DND continues to be a priority for the federal government especially as it relates to
strengthening personnel in both the regular and reserve forces and to supporting increased training and medical care. Both of
these priorities target areas of expertise within the division. DND has started to involve private contractors in all facets of their
training to free up their relatively scarce military personnel for mission critical operational duties. The BTS division is well posi-
tioned to take advantage of the increased training requirements in areas where the shortages are most prominent.
Demographics continue to work in our favour within the marketplace. Due to retirements, large corporations along with
various Federal Government departments and the military continue to lose large numbers of employees with in-depth
knowledge of their internal workings. In many cases the remaining employees are not yet able to assume additional respon-
sibilities. This has created a necessity for these entities to re-acquire this lost knowledge. The BTS division has placed a
special emphasis on attracting retirees with their extensive corporate knowledge and expertise, and accordingly has been
successful in assisting them in bridging the knowledge gap while they train and mentor replacement staff. At the present
time, we continue to see increased demand for this solution and will continue to take advantage of this trend to provide
"ready made" support services to our customers.
In order to cope with the backlog of procurement, federal government departments are implementing new processes and
tools. In the Information Technology and Management (IT/IM) arena, the trend to larger, more complex ERP systems con-
tinues. New installations continue to provide opportunities; however system upgrades, enhancements and migrations are
assuming an ever increasing share of the IT/IM budgets and hence our business opportunities. This is particularly the case
in many larger organizations where legacy system databases are being mandated to interface with these ERP systems. Within
the federal government particularly, there is not only a need for new applications but also a need to provide access to both
the application and the information in its underlying database. Government wide, there is a greater focus on developing and
supporting wider web access coupled with an even greater attention to the associated security concerns of protecting the
users and their data. Accordingly, we continue to focus on related business development activities and the investment of
internal resources to accommodate these new approaches.
2009 was a year of significant contract renewal activity for BTS, particularly within OSD where numerous multi year con-
tracts (6 to 9 years in duration) were successfully retained within DND, effectively allowing us to dominate this niche
training market. These wins coupled with the renewal in 2010 of the division's remaining long-term contracts ensures many
more years of stability allowing us to seek out and exploit new niche markets.
Albeit a smaller portion of our revenues, the private sector continues to feel the effects of the economic crisis and certain key
customers have struggled. We have seen some improvements in 2010 and are hopeful that the positive trend will continue.
All in all, despite the current impediments created by global financial instability that has had significant impact on our private
sector business, we continue to believe that the long-term business environment in the public sector for the services of the
BTS division remains favourable, and will more than offset any private sector slow down for the foreseeable future.
2010 has been a year of solid performance. The Health Service Support Contract (HSSC) with DND grew this year over the
prior year as a result of increased demand for professional resources. Similarly, the DLSE (Directorate of Synthetic Land
Environments) contract generated organic growth as DND ramped up its training activities under a contract renewal
obtained in the second half of 2009. This contract is expected to continue running strong into 2011 as the team continues
to support various DND training initiatives.
During 2010 BTS completed its renewal cycle by renewing a Standing Offer with the DND to provide the Royal Military
College (RMC) with the services of researchers to perform research activities, on an as and when requested basis. The initial
five-year period covers January 1, 2010 to December 31, 2014 with an option to extend the Standing Offer for a further one-
year period, for a potential value of $60 million over the six year duration. This standing offer will allow Calian to continue
to provide research assistance to University Teachers at RMC who carry out research and development in the broad disci-
plines of engineering, science and humanities. This new agreement allows Calian to further its relationship with RMC which
began in 1997.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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Management's Discussion and Analysis of Financial Condition and Results of Operations
BTS was also successful in winning new contracts in 2010 among those were:
An award by DND to expand the training services it currently provides to DND through the supply of services to
support Basic Military Qualification (BMQ) and Primary Leadership Qualification (PLQ) training in three streams:
Administrative Support, Training Support, and Instructional Support. Individuals will fill a wide range of positions,
including role players, military occupation instructors, training support supervisors and exam/test invigilators. This con-
tract commenced in January 2010 and may extend as far as May 31, 2015 with a full contract value estimated at
approximately $65 million.
An award by DND to deliver maintenance services in support of DND activities at five main Canadian Forces Army bases
across Canada and carry out the full range of maintenance services on Class "B" (non-armored) vehicles under a single
contractual arrangement. This requirement is for a two-year period plus a one-year option and encompasses all mainte-
nance, mandated modifications and inspections, as well as preservation of equipment across the Army. The overall
contract value is approximately $24 million if the option year is exercised. Under the contract, Calian will augment mil-
itary vehicle technicians through the provision of vehicle and trailer maintenance services. Calian will plan, hire and
deploy technicians to deliver the various vehicles and trailer maintenance services at these five main Army bases.
BTS enters 2011 with a strong backlog of work and excellent opportunities on recently submitted proposals. In the coming
year, we believe our existing contracts are well positioned to experience organic growth; however revenue growth from new
opportunities will be greatly influenced by the timing of both the actual competition and the subsequent contract award.
With the Health Services Support Contract (HSSC), we are considered a major player in private sector heath care delivery.
The existing DND contract has funding room for significant increases in activity but these have not yet materialized and
increased investment in mental health resources has yet to impact our contract. Until any new resources are authorized, we
do not expect to see significant growth within this contract and we presently do not expect authorization to occur in the
coming year. However, we continue to meet with some success in signing small contracts for the supply of physicians to
other smaller government departments. These contract wins have opened the door for us to pursue increased requirements
within these departments and our challenge in the future is to demonstrate that the DND model can be tailored to fit their
smaller health care environments.
The IT/IM markets continue to offer significant potential. The increasing complexity of both business and government,
coupled with the ever increasing demand for information is driving the need for sophisticated information management
and information sharing systems. The level of sophistication, particularly in the ERP realm, often requires specialized
resources not often found in-house and accordingly is driving demand for outside specialists. Our traditional staffing model
and our expertise in the areas of general IT and ERP puts us in a strong position to address these requirements. Our SSD
service offerings are well positioned and competitively priced in the local Ottawa market and we continue to increase our
level of business within our key customer departments. At the same time, we started to see a resurgence of activity in the
Toronto market place and improved uptake of our offerings there. Our selection as to the Vendor of Record Agreement for
IT Resources with the Ontario Provincial Government is expected to both increase and diversify our revenue streams in
this market. The omnibus IT staffing supply arrangement for the Federal Government, called TBIPS (Task Based Information
and Professional Services) is now the contract staffing vehicle of choice for the majority of Federal Government
Departments and we have been very successful in winning new business under this vehicle. We expect that this success
will continue into the new year.
In the long-term, BTS will continue to focus in areas where it has been successful in the past and will build on newly
acquired expertise to branch out into additional adjacent markets.
The Company's backlog at September 30, 2010 was $924 million with terms extending to fiscal 2018. This compares to $873
million reported at the end of September 2009. 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. Backlog is adjusted for work performed, new contract wins or extension options on new
contracts, previous extension options exercised or lapsed, changes in revenue profiles, changes in customer utilization pat-
terns or for changes in contract scope.
2010 Annual Report
Calian Technologies Ltd.
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During 2010 the following contracts were the major contributor to the increase in the Company's backlog. There were no
contracts which were cancelled unexpectedly which resulted in a decrease in our backlog. These contracts are further
described in the business overview section of this Management Discussion and Analysis.
Royal Military College for $60 million to December 31, 2015
Canadian Defence Agency for $65 million to May 31, 2015
National Maintenance for DND for $15 million to August 31, 2013
European Space Agency for $24 million expected completion in mid 2012
Canadian Space Agency for $10 million expected completion in mid 2012
$24 million in ongoing manufacturing orders from KDS, RIM, Ericsson and DRS
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 fol-
lowing table represents management's best estimate of the backlog realization for 2011, 2012 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 $228 million. The majority of this amount relates to the
health services support contract. The Company's policy is to reduce the reported contractual backlog once it receives con-
firmation from the customer that indicates the utilization of the full contract value may not materialize.
Excess over
portion of
(dollars in millions)
Contracted Backlog
$ 430
Option Renewals
$ 146
$ 924
Business and Technology Services
$ 128
$ 850
Systems Engineering
$ 146
$ 924
Selected Annual Information
(dollars in millions, except per share data)
Net earnings
Net earnings per share, basic
Net earnings per share, diluted
Total assets
Dividends per share
Management's Discussion and Analysis of Financial Condition and Results of Operations
Calian Technologies Ltd.
2010 Annual Report
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2010 Results of Operations
Earnings before other income and expense, interest and income taxes were $18,633 in 2010 compared with $24,272 in 2009
and net earnings were $13,610 for the year compared with $16,452 in the previous year. The Company completed the year
with $29,055 of cash compared to $43,662 at the end of 2009.
% change
SED revenues
$ 64,000
$ 75,527
BTS revenues
$ 151,725
$ 151,703
- %
Consolidated revenues
$ 215,725
$ 227,230
( 5%)
The general business environment in 2010 continued to be very competitive. The Company began the year with $151 million
of its backlog to be earned in 2010. This base of work combined with the win of several larger contracts during 2010 resulted
in a solid revenue stream for the year.
SED saw continued stability in the satellite industry, However, as expected, revenues are back to more traditional levels of
activity in both the satellite engineering and contract manufacturing sectors due to the completion or near-completion of
several large contracts in 2009 and decreased demand in the custom manufacturing area. It should be noted that due to the
project nature of its business, the SED division is susceptible to significant variation in volumes of activity from period to period.
BTS did not see any revenue growth this year. Although improvements were realized in some areas this year, belt-tightening
by government departments, midway into the year, the completion of a certain contract and a slowdown in private sector
staffing were the main contributors to the absence of revenue growth for the year.
The Company derives a significant portion of its revenues from the Government of Canada. During 2010 (2009), 64% (60%)
of revenues were related to contracts with various departments and agencies of the Government of Canada with approximately
55% (55%) directly with DND. Both of the Company's divisions conduct business with the Government of Canada.
Management expects that the marketplace in 2011 will continue to be very competitive. The market conditions for SED are
expected to be stable and present new opportunities in 2011 although the related timing continues to be somewhat uncer-
tain. The level of manufacturing activity is expecting to be stable; however customer requirements are subject to change on
short notice. With a solid level of activity on existing contracts heading into 2011 and new opportunities available in the
marketplace, BTS revenue levels are expected to improve over the prior year. However, the timing of future contract awards
will ultimately determine BTS revenues for the next 12 months. While the Company begins the year with $181 million of
backlog to be earned in 2011, the above noted variables will have an impact on revenues ultimately realized.
Cost of revenues and Gross profit
% change
SED gross profit
$ 17,075
$ 23,269
As a percentage of SED revenues
BTS gross profit
$ 25,707
$ 25,943
( 1%)
As a percentage of BTS revenues
Consolidated gross profit
$ 42,782
$ 49,212
As a percentage of consolidated revenues
The Company's cost of revenues includes all direct costs incurred in the provision of its products and services. These costs
include all expenses associated with direct full-time staff, contract staff and subcontractors. They also include other direct
costs including the landed cost of hardware and software sold as components of a solution, travel and living expenses nec-
essary in the delivery of the services, and provision for warranty where applicable.
Management's Discussion and Analysis of Financial Condition and Results of Operations
2010 Annual Report
Calian Technologies Ltd.
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The consolidated gross margin for 2010 was affected by lower margins realized in both divisions and was also biased by the
smaller proportion of SED revenues.
The above average gross margin at SED in 2009 was due to a combination of several positive factors. With increased
activity in all components of its business, SED was able to achieve exceptional utilization resulting in economies of scale. In
addition, the excellent project execution and retirement of risk on certain projects provided for additional margin as well.
With the level of business for 2010 returning to more traditional levels, especially in the contract manufacturing sector,
economies of scale achieved in the prior year could not be realized.
While the BTS gross margin was mostly in line with the prior year, the mix of business, and competitive pressures particu-
larly in the private sector had a slight effect on overall margins.
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. Management will continue to focus on
execution in order to maximize margins. Increased competition is expected to put downward pressure on future margins in
both divisions. In addition, the continued volatility of the Canadian dollar coupled with lower utilization levels in the short
term are expected to further dampen margins in the SED division.
Selling and marketing
% change
Selling and marketing
As a percentage of consolidated revenues
Selling and marketing expenses as a percentage of sales remain stable. Costs for 2011 are expected to remain relatively stable
over the 2010 levels.
General and administration
% change
General and administration
$ 15,310
$ 15,714
Write-off of Nortel receivable
General and administration excluding Nortel
As a percentage of consolidated revenues
General and administration costs increased slightly in line with cost escalation factors. General and administration costs
increased as a percentage of revenue as a result of a significant decrease in revenues in 2010 compared to 2009 with most
costs not scalable on a short-term basis. Looking ahead, management believes that general and administration costs will
remain mostly in line with activity levels. However, during 2011, BTS expects to increase its business excellence efforts by
realigning its information systems and making further improvements in scalability; the foundation on which future operating
costs will be controlled and the long-term competitiveness maintained and ultimately improved.
% change
Facility expenses, which include costs associated with office space, have been relatively stable over the past several years.
2010 costs were slightly lower as minor repairs were required to certain leased facilities in 2009. Overall facility costs are not
expected to increase significantly in 2011.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Calian Technologies Ltd.
2010 Annual Report
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Depreciation and amortization
% change
Depreciation and amortization
The Company modified its depreciation policy in 2010 resulting in a favorable adjustment to its depreciation expense for the
year. The Company does not require a significant amount of new capital every year.
Interest income
Interest income is comprised of interest earned on the Company's cash balances and accrued interest related to the invest-
ment in AIM Health Group Inc. (AIM). Interest income earned on cash balances decreased to $193 in 2010 from $241 in 2009
as a result of a slight decrease in interest rates during 2010.
Unrealized loss on fair value of conversion options of investment
The Company recorded a loss of $52 for the year compared to a loss of $220 in 2009 relating to the fair value of conversion
options of long-term investment. The reported unrealized loss is a reflection of the movement in quoted market prices of AIM
shares and the remaining option term.
Loss on share exchange
On January 20, 2009, Med-Emerg announced that it successfully merged with AIM in an all-stock transaction. At that time,
Calian surrendered its preferred shares in Med-Emerg in exchange for a secured convertible debenture of AIM with a face
value of $3,897. The share exchange resulted in a loss on exchange of $125 in 2009.
Prior year investment tax credits
During 2009 the Company recorded additional investment tax credits of $311 with respect to its re-filing of its fiscal year
2006 R&D claims.
Income tax expense
The Company reports its results on a fully taxed basis. The provision for income taxes for 2010 was $5,724 or 29.6% of earn-
ings before income taxes compared to $8,190 or 33.2% of earnings before income taxes in 2009. The decrease in the effective
tax rate for 2010 is mainly the result of a decrease in federal and provincial prescribed income tax rates and the positive
impact of adjustments related to 2009. With prescribed federal and provincial tax rates continuing to decrease, the effective
tax rate for 2011, prior to considering the impact of non-taxable transactions, is expected to be approximately 29%.
Net earnings
The Company reported net earnings of $13,610 or $1.75 per share basic and diluted for 2010 compared to $16,452 or $2.12
per share basic and $2.11 per share diluted in 2009.
Selected Quarterly Financial Data
(dollars in millions, except per share data)
$ 52.9
$ 57.6
$ 53.1
$ 52.1
$ 54.4
$ 57.8
$ 59.9
$ 55.1
Net earnings
$ 3.1
$ 3.4
$ 3.5
$ 4.5
$ 3.3
Net earnings per share
$ 0.42
$ 0.49
$ 0.40
$ 0.44
$ 0.45
$ 0.58
$ 0.67
$ 0.42
$ 0.42
$ 0.49
$ 0.40
$ 0.44
$ 0.44
$ 0.58
$ 0.67
$ 0.42
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
Management's Discussion and Analysis of Financial Condition and Results of Operations
2010 Annual Report
Calian Technologies Ltd.
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pay for statutory holidays. This results in reduced levels of revenues and 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.
The full text of the Company's fourth quarter management discussion and analysis can be found on SEDAR at
Liquidity and Capital Resources
Calian's net cash position was $29,055 at September 30, 2010, compared to $43,662 at September 30, 2009.
Cash flows from operating activities before changes in working capital
Changes in working capital
Cash flows from operating activities
Cash flows used for financing activities
Cash flows used for investing activities
Currency translation
Increase (decrease) in cash
Operating activities
Cash inflows from operating activities for the year ending September 30, 2010 were $2,148 compared to $26,055 in 2009.
This year's decrease is the result of lower earnings coupled with working capital fluctuations in line with the ebbs and flows
of the business and a decrease in advance customer payments of $9,029 compared to an increase of $8,244 in the prior year.
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 September 30, 2010, the Company's total unearned revenue
amounted to $11,763. This compares to $20,792 one year earlier, with the decrease primarily attributable to work progress-
ing on the third deep space antenna contract for ESA.
Financing activities
As a result of continuing earnings and a strong cash position, the Company once again increased its dividend in 2010. The
Company paid quarterly dividends totaling $6,138 or $0.79 cents per share compared to 2009 when the Company paid
$4,970 in dividends or $0.64 cents per share. In 2010, the Company also paid a special dividend of $7,802 or $1.00 per share.
The Company intends to continue with its quarterly dividend policy for the foreseeable future.
During 2010, the Company repurchased 147,950 common shares at an average price of $17.43 and during 2009 the Com-
pany repurchased 472,400 common shares at an average price of $10.44 through its normal course issuer bids.
At September 30, 2010 there were 76,800 options outstanding at an average exercise price of $11.71 expiring at various
dates between February 4, 2012 and November 18, 2013.
At September 30, 2010 there were 7,706,895 common shares outstanding and as of the date of this Management Discussion
and Analysis, there were 7,718,595 common shares outstanding.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Calian Technologies Ltd.
2010 Annual Report
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Calian Technologies Ltd.
2010 Annual Report
Management's Discussion and Analysis of Financial Condition and Results of Operations
Investing activities
Equipment expenditures
Calian acquired $1,378 in equipment, furniture and fixtures during 2010, compared to $1,392 during 2009. During 2011
expenditures are expected to be in line with normal levels. At September 30, 2010 there were no significant commitments
to expend capital assets.
Capital resources
At September 30, 2010 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. An amount of $612 was drawn to issue a letter of credit to meet
customer contractual requirements. Management believes that the Company has sufficient cash resources to continue to
finance its working capital requirements and pay a quarterly dividend.
Contractual obligations
Payments due:
<1 year
1-3 years
4-5 years
>5 years
Operating leases
$ 12,278
$ 2,414
$ 4,378
$ 4,179
Purchase obligations
Total contractual obligations
$ 24,956
$ 10,161
$ 9,309
$ 4,179
Purchase obligations include agreements to purchase goods and services that are enforceable and legally binding. They do
not include agreements that are cancellable without penalty.
Off-Balance Sheet Arrangements
There were no off-balance sheet arrangements at September 30, 2010.
Operating leases
The Company leases various premises and office equipment through operating leases.
Related party transactions
There were no transactions with related parties during 2010 and 2009.
Critical Accounting Estimates
The preparation of financial statements in accordance with Canadian GAAP requires management to make estimates and
assumptions that affect the Company's financial condition and results of operations. On an on-going basis, management
reviews its estimates and assumptions, including those related to revenue recognition on fixed-price projects, provisions and
contingencies, estimated timing of reversals of income tax temporary differences, allowance for doubtful accounts, valuation
of investment and impairment of goodwill. Management bases its estimates and assumptions on historical experience and on
various other factors that it believes to be reasonable under the circumstances; actual results could differ from those estimates.
Revenue recognition
The Business and Technology Services Division's revenue is derived primarily from per-diem contracts where revenue is rec-
ognized when the services are provided. However, a significant portion of the Systems Engineering Division's revenue is derived
from fixed-price contracts. Revenue from these fixed-price projects is recognized using the percentage of completion method
using management's best estimate of the costs and related risks associated with completing the projects. The greatest risk on
fixed-price contracts is the possibility of cost overruns. Management's approach to revenue recognition is tightly linked to
detailed project management processes and controls. The information provided by the project management system combined
with a knowledgeable assessment of technical complexities and risks are used in estimating the percentage completion.
The Company provides warranties for systems delivered to its customers. A provision for warranty cost is recorded when
revenue for the underlying system is recognized. The cost is estimated based on a number of factors, including historical war-
ranty claims and cost experience, the type and duration of warranty coverage, the nature of the system delivered and the
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2010 Annual Report
Calian Technologies Ltd.
Management's Discussion and Analysis of Financial Condition and Results of Operations
counter-warranty coverage available from our suppliers. Warranty provisions are reviewed quarterly, and any adjustment is
recognized to income. Warranty expense is recorded as a component of cost of sales.
From time to time the Company is involved in claims in the normal course of business. Management assesses such claims
and where considered likely to result in a material exposure and, where the amount of the claim is quantifiable, provisions
for loss are made based on management's assessment of the likely outcome. The Company does not provide for claims that
are considered unlikely to result in a significant loss, claims for which the outcome is not determinable or claims where the
amount of the loss cannot be reasonably estimated. Any settlements or awards under such claims are provided for when rea-
sonably determinable.
Income taxes
The Company records future income tax assets and liabilities related to deductible temporary differences. The Company assess-
es the value of these assets and liabilities based on their realizability given management assessments of future taxable income.
Allowance for doubtful accounts
The Company has extensive commercial history upon which to base its provision for doubtful accounts. Due to the nature
of the industry in which the Company operates, the Company does not create a general provision for bad debts but rather
determines bad debts on a specific account basis. Due to the blue-chip list of customers, the Company's allowance for doubt-
ful accounts at September 30, 2010 and 2009 was minimal.
Goodwill is tested for impairment annually or more frequently when events occur or circumstances arise that could indicate
a reduction in its fair value. Testing for impairment is accomplished by determining whether the fair value of the reporting
unit exceeds the net carrying value as of the assessment date. If the fair value is greater than the carrying amount, no impair-
ment is necessary. The determination of fair value is based on management's estimate of future results of operations of the
reporting unit using reasonable assumptions relating to growth levels when considering the current and forecasted business
environment and the Company's weighted average cost of capital (WACC). For purposes of determining fair value, manage-
ment considered a growth level range of 0% to 5% and a WACC range of 13% to 15%.
As described in Note 6 of the Company's consolidated financial statement, the investment in AIM is reviewed for events or
circumstances that indicate a credit loss was incurred. At September 30, 2010, there were no events indicating that a credit
loss was incurred.
Adoption of New Accounting Policies During The Year
For the year ended September 30, 2010, the Company adopted the following accounting policies.
Equipment and Intangible Assets
Effective October 1, 2009, the Company modified its depreciation methodology from declining balance to straight-line depre-
ciation, with amortization calculated over 5 to 10 years, to better reflect the estimated usage of the Company's equipment
and intangible. The change did not have a material impact on the financial statements.
Financial Instruments
Effective October 1, 2009, management adopted amended Section 3855, Financial Instruments Recognition and
Measurement. Based on the amendments, management has the choice of classifying the host contract portion of its invest-
ment in AIM as an Available-For-Sale asset or as a Loans and Receivables asset. Management chose to classify the host contract
as a Loans and Receivable asset. Loans and Receivable assets are recognized at amortized cost. At October 1, 2009, the car-
rying amount of the investment was decreased by $128 with a corresponding adjustment to Accumulated Other
Comprehensive Income to return the investment to amortized cost.
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Calian Technologies Ltd.
2010 Annual Report
Management's Discussion and Analysis of Financial Condition and Results of Operations
In June 2009, the CICA issued amendments to Section 3862, Financial Instruments - Disclosures. The amendments provide
for additional disclosure requirements about fair value measurements of financial instruments and enhanced liquidity risk dis-
closure requirements for publicly accountable enterprises. In the first fiscal year of application, comparative information for
the disclosures is not required. The amendments are effective for the Company's annual financial statement for the year
ended September 30, 2010. The required disclosure is provided in Note 18.
Impact of Accounting Pronouncements Not Yet Implemented
Business Combinations
In January 2009, the CICA issued Section 1582, Business Combinations, replacing Section 1581, Business Combinations. This new
Section will be applicable to financial statements relating to the Company's annual financial statements beginning on October
1, 2011. Earlier adoption is permitted although at this time the Company does not anticipate early adopting the standard. The
Section establishes standards for the accounting for a business combination and is harmonized with IFRS. The Company does
not anticipate that the adoption of the new standard will have a significant impact on the financial statements of the Company.
Consolidated Financial Statements
In January 2009, the CICA issued Section 1601, Consolidated Financial Statements and Section 1602, Non-Controlling
Interests, which together replace Section 1600, Consolidated Financial Statements. These new Sections will be applicable to
financial statements relating to the Company's annual financial statements beginning on October 1, 2011. Earlier adoption is
permitted when early adopting Section 1582, Business Combinations. Section 1601 establishes standards for the preparation
of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a sub-
sidiary in consolidated financial statements subsequent to a business combination. The Company does not anticipate that the
adoption of the new standards will have a significant impact on the financial statements of the Company.
Multiple Deliverable Revenue Arrangements
In December 2009, the CICA issued Emerging Issues Committee-175 Multiple Deliverable Revenue Arrangements. This new
EIC will be applicable to financial statements relating to the Company's annual financial statements beginning on October 1,
2011. Earlier adoption is permitted. The abstract addresses some aspects of the accounting by a vendor for arrangements
under which it will perform multiple revenue-generating activities. The Company does not anticipate that the adoption of
the new standards will have a significant impact on the financial statements of the Company.
International Financial Reporting Standards
The Canadian Accounting Standards Board has announced that Canadian publicly accountable enterprises will be required
to report under International Financial Reporting Standards (IFRS) as replacement guidance for Canadian generally accept-
ed accounting principles (Canadian GAAP) effective for fiscal years beginning after January 1, 2010. Therefore, the Company
will adopt IFRS as the basis of preparation for its interim and annual financial statements for periods beginning on October
1, 2011 with a transition date of October 1, 2010 to allow for comparative financial information.
IFRS uses a conceptual framework similar to current Canadian GAAP, but there are significant differences in recognition,
measurement and disclosures. In addition, it is expected that IFRS in effect at the time of reporting the Company's first IFRS
financial statements will evolve from current IFRS and may result in additional differences. In order to prepare for the con-
version to IFRS, the Company has developed an IFRS changeover plan. This plan addresses key elements of the Company's
conversion to IFRS including:
Accounting policy changes and financial reporting requirements;
Education and training requirements;
Impacts on business activities and on Information technology and data systems;
Internal control over financial reporting
Disclosure controls and procedures
We have also established a formal governance structure for the conversion to IFRS. The initiative is lead by the Chief Financial
Officer who reports regularly to the Chief Executive Officer. The Chief Financial Officer also reports quarterly to the Audit
Committee of the Board of Directors on the status of the project and the implications of the changeover to IFRS.
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2010 Annual Report
Calian Technologies Ltd.
During 2009, we completed the high-level diagnostic gap and impact analysis between Canadian GAAP and IFRS applicable
to the Company including identifying significant technical accounting and disclosure differences, identifying key IFRS
accounting policy alternatives and identifying major operational and systems impacts.
During 2010, the following activities were performed:
A detailed assessment was substantially completed for all key standards and significant accounting policy choices
including IFRS 1 elective exemption choices (see summary of key expected changes hereafter);
The creation of a duplicate IFRS compliant environment to track all adjusting IFRS entries for the Company's opening
balance sheet and throughout the Company's dual reporting period of October 1, 2010 to September 30, 2011;
A detailed assessment was performed of required changes to internal controls. Management concluded that internal
controls applicable to the Company's reporting process under Canadian GAAP are fundamentally the same as those
required in the Company's IFRS reporting environment;
A detailed assessment was performed and some required changes to disclosure controls and procedures were identi-
fied. Disclosure controls and procedures have been updated to include all data required for financial statement
disclosures under IFRS.
A detailed assessment has been completed of the impact of IFRS on key performance indicators and business activi-
ties such as compensation arrangements, hedging activities and risk management practices. No significant changes
were required;
A detailed assessment was performed of required changes to systems, processes and documentation. No significant changes
were required;
A complete IFRS financial statement model was built and reviewed by management and the board of directors;
Data collection for the opening balance sheet is in progress; and
Key finance employees responsible to carry out the IFRS conversion were provided with adequate training and resources
throughout this process. The Company also held an IFRS information session with all members of the board of directors.
The Audit Committee is also appraised quarterly on IFRS standards and policy choices available to the Company.
During 2011 the following activities will take place:
Monitor standards to be issued by the IASB and provide related training on such;
Assess the impact of new IASB standards on the Company's opening balance sheet and its financial position and results
of operations throughout the conversion period;
Complete the data collection and finalize the assessment of the impact of adopting IFRS. Data collection for each
quarter in fiscal 2011 is intended to be performed shortly following the closing of each quarter under Canadian GAAP;
Complete the necessary work required to quantify the impact of the changeover to IFRS on the Company's financial
position and results of operations at the date of transition and affecting the comparative year 2011 and the first
reporting year 2012;
Prepare fiscal 2011 quarterly financial statements under IFRS standards, in preparation for reporting comparative infor-
mation in 2012; the Company's first year of reporting under IFRS.
Summary of expected changes
The International Accounting Standards Board (IASB) has a number of ongoing projects on its agenda. Management contin-
ues to monitor standards to be issued by the IASB, but we do not expect these standards to be mandatory for the Company's
fiscal 2012 financial statements. The summary of key expected changes set out in the tables below was completed with the
expectation that we will apply IFRS standards as currently written at our transition date. However, management will only
make final decisions regarding early adoption of any new standards as they are issued by the IASB.
Management's Discussion and Analysis of Financial Condition and Results of Operations
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IFRS 1 First-Time Adoption of International Financial Reporting Standards generally requires that a first-time adopter apply
IFRS accounting policies retrospectively to all periods presented in its first IFRS compliant financial statements. IFRS 1 also
provides certain mandatory and optional exemptions to the full retrospective application. The significant optional exemp-
tions applicable to the Company are as follows:
Cumulative translation adjustment (CTA)
Management elected to eliminate all cumulative foreign exchange losses
recorded in the CTA at transition. Opening balance sheet:
An elimination of $357 debit balance in the CTA with an offsetting
decrease in retained earnings. No impact on total equity.
Management elected not to report equipment, in its opening balance
sheet on the transition date, using fair value as the deemed cost. Instead
the Company will continue to report equipment and intangibles at
historical cost. Opening balance sheet: No impact.
Share-based payment
Management elected not to apply IFRS2 to options granted and vested
before the transition date. IFRS2 was applied to non-vested options.
Opening balance sheet: Impact insignificant.
Business combinations
Under the exemption allowed by IFRS 1, management elected to apply
the provisions of IFRS 3 Business Combinations, prospectively from the
date of transition. Opening balance sheet: No impact.
The following are some of the Company's key changes in accounting policies required under IFRS standards which could
have a significant impact with respect to the recognition and measurement of certain balance sheet and income statement
items. Unless indicated, all changes in accounting policy will be applied retrospectively.
Key differences in
Potential key
accounting treatment
Calian Technologies Ltd.
2010 Annual Report
Management's Discussion and Analysis of Financial Condition and Results of Operations
Impairment of
long-lived assets
Provision and
IFRS requires a one-step impairment test for identifying
and measuring impairment, comparing an asset's carry-
ing value to the higher of its value in use and fair value
less cost to sell. Under Canadian GAAP, impairment is
based on discounted cash flows only if the asset's
undiscounted cash flows are below its carrying value.
IFRS allows the option of measuring equipment using
either an historical cost model or a revaluation model.
Under Canadian GAAP, equipment was required to be
recognized at historical cost.
IFRS requires a provision to be recognized when it is
probable (more likely than not) that an outflow of
resources will be required to settle the obligation,
while a higher threshold is used under Canadian
GAAP. Other differences exists such as the determina-
tion of the best estimate where there is a range of
equally possible outcomes (IFRS uses the mid-point of
the range whereas Canadian GAAP uses the low end),
and the requirement under IFRS for provisions to be
discounted where material.
Opening balance sheet: No impact is
expected. Subsequent to transition: The
one-step impairment test under IFRS may
result in more frequent write-downs of
Management will elect to measure its
equipment at historical cost. Opening
balance sheet and subsequent to tran-
sition: No impact
Opening balance sheet: Based upon
management's initial assessment of the
Company's provisions and contingencies,
no additional provisions have been identi-
fied which are required to be recognized
at October 1, 2010. Subsequent to tran-
A review will be performed at each
balance sheet date to determine if any
new provisions should be recognized.
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Key differences in
Potential key
accounting treatment
The differences identified in this document should not be regarded as an exhaustive list and other changes may result from
the Company's conversion to IFRS. Furthermore, the disclosed impacts reflect our most recent assumptions, estimates and
expectations. As a result of changes in circumstances, such as economic conditions or operations, and the inherent uncer-
tainty from the use of assumptions, the actual impacts may be different from those presented above.
Management's Conclusion on the Effectiveness of Disclosure Controls
The Chief Executive Officer and the Chief Financial Officer of the Company, after evaluating the effectiveness of the
Company's disclosure controls and procedures as of September 30, 2010, have concluded that the Company's disclosure con-
trols and procedures were adequate and effective to ensure that material information relating to the Company and its
consolidated subsidiaries would have been known to them and that information required to be disclosed by the Company
is recorded, processed, summarized and reported within the time periods specified in the securities legislation.
2010 Annual Report
Calian Technologies Ltd.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Income taxes
and disclosure
Statement of
cash flows
Tax consequences of a transaction recorded in Other
Comprehensive Income (OCI) or directly in equity in
previous periods must be recorded in OCI or directly
in equity (i.e. backward tracing) under IFRS. Under
Canadian GAAP, all subsequent changes in deferred
income taxes are recorded through earnings.
Under IFRS, management will assess the effectiveness
of hedge relationships quantitatively. Hedge ineffec-
tiveness will be recognized in net income. Under
Canadian GAAP, a quantitative assessment is not
required if certain specific criteria are met
(known as the critical-terms match).
IFRS stipulates that an obligation is created when an
agreement is entered into with a third party which
provides for automatic repurchases of the Company's
shares without the Company having the ability to
influence the purchases. The financial liability is
determined as the present value of the maximum
redemption amount.
IFRS minimum classification and presentation is
different than Canadian GAAP.
IFRS allows the option of presenting the statement
of cash flow using either the direct method or
indirect method.
Opening balance sheet: No signifi-
cant impact is expected. Subsequent to
transition: The impact on earnings will
depend on the extent of changes in
deferred income taxes that will be
recorded in OCI or directly in equity.
Opening balance sheet: No significant
impact is expected. Subsequent to tran-
sition: The impact on earnings is not
expected to be significant.
Opening balance sheet: A reclassifica-
tion of $179 and $1,135 debit balance in
the share capital and retained earnings
accounts respectively with an offsetting
adjustment to a share repurchase liability
account. Subsequent to transition: An
income adjustment will result on any
share repurchased below the maximum
amount per share. Based on historical
trends, the amount of income to recog-
nize is not expected to be significant.
Opening balance sheet and subse-
quent to transition: The format of the
balance sheet and profit and loss state-
ment will change to reflect the required
classification and presentation.
Management will elect to present its
Statement of cash flow using the indi-
rect method. Opening balance sheet
and subsequent to transition:
No impact is expected.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's Conclusion on the Effectiveness of Internal Control over Financial Reporting
The Chief Executive Officer and the Chief Financial Officer of the Company, after evaluating the effectiveness of the
Company's internal control over financial reporting as of September 30, 2010, have concluded that the Company's internal
controls over financial reporting provide reasonable assurance regarding the reliability of financial reporting for external pur-
poses in accordance with Canadian GAAP.
During the most recent interim quarter ending September 30, 2010, 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.
Risk Factors
The Company is subject to a number of risks and uncertainties that could significantly affect the Company's financial con-
dition and future results of operations. Risk management is an integral part of how the Company plans and monitors the
business strategies and results and we have embedded risk management activities in the operational responsibilities of
management and made them an integral part of our overall governance, organizational and accountability structure. The
Systems Engineering and Business and Technology Services divisions face some or all of the following risks and uncertainties:
Competition for contracts within key markets
The markets for the Company's services are intensely competitive, rapidly evolving and subject to technological changes. The
principal competitive factors in the Company's markets are quality, performance, price, timeliness, customer support and
reputation. The Company has a disciplined approach to management of all aspects of its business. The Company is a propo-
nent of quality management; SED is registered under ISO 9001-2008 standards and BTS is accredited at Level 4 of the
Progressive Excellence Program by the National Quality Institute. This approach to management was developed to help the
Company ensure that its employees deliver services consistently according to the Company's high standards and based on
strong values underlying its client-focused culture.
The availability of qualified professionals
Competition from other firms has a two-fold impact on the Company. The Company must not only vie for qualified employ-
ees for its own operations but must have ready access to a large pool of qualified professionals to satisfy contractual
arrangements with customers. The Company mitigates these factors through a number of means. The Company's perform-
ance driven remuneration policies and its favorable working environment are conducive to attracting ambitious, qualified
professionals. As a supplier of professional employees through outsourcing contracts, the Company regularly establishes rela-
tionships with a significant number of professionals in key markets.
Performance on fixed-price contracts
A large percentage of SED's contracts are based on a fixed price for the provision of a specified service or system against an
agreed delivery schedule. These fixed-price contracts at times involve the completion of large-scale system engineering
projects. There is a risk in all fixed-price contracts that the Company will be unable to deliver the system within the time spec-
ified and at the expected cost. The Company employs sophisticated design and testing processes and practices, which include
a wide range of stringent factory and on-site acceptance tests with criteria and requirements jointly developed with the cus-
tomer. However, non-performance could result in a customer being in a position to terminate the contract for default, or to
demand repayments or penalties. Program management methodologies have been implemented to adequately manage each
project and any customer change, and to identify and mitigate potential technical risks and related cost overruns. In addition,
the Company employs procedures to ensure accurate estimating of costs and performs regular detailed reviews of progress
on each project.
2010 Annual Report
Calian Technologies Ltd.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Non-performance of a key supplier or contractor
The Company's business is often dependent on performance by third parties and subcontractors for completion of contracts
for which the Company is the prime contractor. Subcontractors for large systems are selected in concurrence with the cus-
tomer's requirements, and if not directed by the customer, are selected through a competitive bid or negotiated process. Most
major development subcontracts are established as fixed-price contracts. The Company believes that these subcontractors
have an economic incentive to perform such subcontracts for the Company. However, no company can protect itself against
all material breaches, particularly those related to financial insolvency of the subcontractors or to cost overruns by subcon-
tractors. Risks include a significant price increase in those few subcontracts that are not fixed-price, delay in performance,
failure of any major subcontractor to perform or the inability of the Company to obtain replacement subcontractors at a rea-
sonable price. The performance of key subcontracts is closely monitored as part of the Company's project management
process to promptly identify potential issues and develop remedial actions.
Rapidly changing technologies and customer demands
The markets in which the Company operates are characterized by changing technology and evolving industry standards. The
Company keeps pace with developments in the industries it serves and actively monitors the evolution of these markets, thus
ensuring that it can meet the evolving needs of its clients. The Company achieves this by continually recruiting profession-
als in high demand positions and providing regular training to ensure employee skills remain current. The Company's ability
to anticipate changes in technology, technical standards and service offerings will be a significant factor in the Company's
ability to compete or expand into new markets.
Government contracts
During 2010, approximately 64% of the Company's total revenues were derived from contracts with the Canadian govern-
ment and its agencies. The government may change its policies, priorities or funding levels through agency or program budget
reductions or impose budgetary constraints. Furthermore, contracts with governments, including the Canadian government,
may be terminated or suspended by the government at any time, with or without cause. Although in the past the Company
has not experienced any significant cancellations of previously awarded contracts by the Canadian government, there can be
no assurance that any contract with the government will not be terminated or suspended in the future.
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. At
September 30, 2010 the Company's backlog included $228 million of contract value in excess of the current estimated uti-
lization levels. Should additional customer requirements for the Company's services under these contracts not materialize,
this excess will not be realized.
Credit risk concentration with respect to accounts receivable
As the Company grows, it monitors the concentration of its business in its various segments and with particular customers. In
management's opinion, the fact that the Company operates in two segments that provide some diversification of its customer
base mitigates the potential impact on earnings and cash flow of problems related to an individual sector or customer.
Insufficient or inappropriate mix of work for fixed labour resources
Virtually all employees of SED are full time staff and represent a broad spectrum of unique skill sets. Accordingly, SED strives
to secure sufficient labour sales that adequately match the skill sets. SED's business development practices are designed to
dynamically adjust pursuits of contracts to address the sufficiency and mix of available resources.
Calian Technologies Ltd.
2010 Annual Report
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Operational risk
Operational risk is managed through the establishment of effective infrastructure and controls. Key elements of the infra-
structure are qualified, well-trained personnel, clear authorization levels and reliable technology. Controls established by
documented policies and procedures include the regular examination of internal controls by internal employees as well as
our auditors, segregation of duties, and financial management and reporting. In addition, the Company maintains insurance
coverage and contingency plans for systems failures or catastrophic events.
Foreign currency risk
The Company operates internationally with approximately 23% of its business derived from non-Canadian sources. A sub-
stantial portion of this international business is denominated in major foreign currencies and therefore the Company's results
from operations are affected by exchange rate fluctuations of these currencies relative to the Canadian dollar. The Company
uses financial instruments, principally in the form of forward exchange contracts, in its management of foreign currency
exposures. At September 30, 2010 the Company had various forward exchange contracts, which are explained in Note 18 to
the Company's consolidated financial statements for the year ended September 30, 2010. The strengthening of the Canadian
dollar relative to other foreign currencies may negatively impact the Company's competitiveness and increase pressure on
margins for new work.

Sufficiency of insurance
The Company carries various forms of insurance to protect itself from a variety of insurable risks. However, such coverage
may not be sufficient in extreme circumstances and accordingly there exists a risk to the Company. While the Company
cannot reasonably insure itself for all events, it regularly reviews the availability, scope and amounts of coverage with its pro-
fessional advisors and implements an approach balancing both cost and risk.
Medical malpractice
As a result of the Company executing the health services support contract for the Department of National Defence, the
Company is subject to risks associated with the medical profession. In order to mitigate such risks to the degree possible,
the Company has obtained medical malpractice and professional liability insurance in accordance with the terms of this
contract. In addition, it is a condition of employment for doctors, dentists and other medical professionals to maintain
appropriate credentials, be in good standing with their medical associations and obtain medical malpractice insurance from
their respective association.
Political and trade barriers
Revenues on certain projects are derived from customers in foreign jurisdictions and are subject to trade and political bar-
riers relating to the protection of national interests. These barriers could have an adverse effect on our ability to win repeat
business and attract new customers.
Consolidation of customer base
The satellite industry has experienced both restructuring and consolidation. As the newly formed entities focus on optimiz-
ing cash flows and gaining economies of scale, opportunities for systems integrators may be diminished thereby creating a
very competitive environment with commensurate pressure on margins.
2010 Annual Report
Calian Technologies Ltd.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
Long-term 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 busi-
ness in adjacent markets.
The Systems Engineering Division has been working within a stable satellite sector for the last two years and the division is
expecting new opportunities to arise as 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. Custom manufac-
turing activity levels will continue to be directly dependant upon SED's customers' requirements. The continued volatility of
the Canadian dollar could impact the Systems Engineering Division's competitiveness when bidding against foreign compe-
tition on projects denominated in foreign currencies.
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. Management believes that the types of service the division offers will
continue to be attractive to government agencies going forward.
Additional Information
Additional information about the Company such as the Company's 2010 Annual Information Form and Management Circular
can be found on SEDAR at www.SEDAR.com
Dated: December 3, 2010
Calian Technologies Ltd.
2010 Annual Report