Gennum Reports 2007 First Quarter Results



    BURLINGTON, ON, March 28 /CNW/ - Gennum Corporation (TSX: GND) today
reported financial results for the first quarter of fiscal 2007.

    

    ($ millions except
     per share amounts)
                                                 % of                % of
                                          2007   Revenue      2006   Revenue
                                          ----   -------      ----   -------
    First quarter
    Revenue                               34.9                34.5
    Gross margin                          23.7     68.0%      22.3     64.7%
    Sales, marketing and administration
     expense                               9.1     26.1%       8.8     25.4%
    R&D expense (gross)                   11.0     31.7%      11.1     32.2%
    Net earnings                           4.3     12.2%       3.7     10.6%
    Net earnings per share (basic)        0.12                0.10
    


    Revenue

    Revenue increased 1.1% over the prior year; however, excluding sales of
end-of-life audio analogue products, revenue grew 11.6%. A positive sales mix
and restructuring benefits drove higher gross margins this quarter, resulting
in a 24.1% increase in earnings from operations and a 20.0% increase in
diluted earnings per share. In addition, the financial position of the Company
continued to strengthen as evidenced by cash and short-term investments which
grew 35% over the prior year.
    Revenue was slightly higher in the first quarter of 2007 compared to the
same period in 2006, primarily due to strong sales growth in the Data
Communications segment where total revenue was up 65% to $5.1 million. Revenue
was not materially affected by foreign currency fluctuations compared to the
first quarter of 2006, as the stronger Canadian dollar relative to the
Japanese yen was offset by a weaker Canadian dollar compared to the US dollar.
    Video products revenue totaled $22.6 million in the first quarter of
2007, an increase of $0.8 million or 4% over the same period in 2006 on the
strength of higher volume of shipments, partially offset by lower selling
prices caused by competitive pressures. Revenue from high-definition products
increased by 2%, while revenue from standard-definition products declined 7%
compared to the prior year.
    Data Communications products revenue rose 65% to $5.1 million in the
first quarter of 2007, compared to $3.1 million in 2006, due to increased
revenue from sales of high-speed (10 Gigabit) optical transceiver products and
backplane products.
    Audio & Wireless products revenue declined by almost 27% to $6.9 million
in the first quarter of 2007 compared to the first quarter of 2006. The
primary reason for the decline was the expected erosion of analogue hearing
product revenue as the market completes the transition to digital products. 
The first quarter of 2007 saw revenue increase by almost 12% for digital
hearing components, modules and related systems.

    Gross Margin

    Gross Margin as a percentage of revenue in the first quarter of 2007 was
68.0%, an increase over the 2006 first quarter gross margin of 64.7%. This
increase is due primarily to a mix of sales that included a greater proportion
of higher margin Video and Data Communications products and a lesser
proportion of lower margin Audio & Wireless analogue revenue. Restructuring
benefits also helped to reduce cost of goods sold.

    Operating Expenses

    During the first quarter of 2007, sales, marketing and administration
expenditures increased $0.3 million, to $9.1 million, compared to $8.8 million
in Q1 2006. The increase relates primarily to an increase in legal fees
related to ongoing patent litigation, partially offset by a reduction in
recruitment costs as CEO search costs were incurred in Q1 2006. In addition,
there was an increase in spending in the Data Communications and Video
divisions to support growth in Korea and Europe.
    R&D spending in the first quarter of 2007 was consistent with the same
period in 2006. Lower incentive compensation accruals in the current quarter
were offset by salaries for new hires.

    Net Earnings

    In the first quarter of 2007, net earnings were $4.3 million, or $0.12
per share, compared with $3.7 million, or $0.10 per share in the first quarter
of 2006. Higher gross margins in the first quarter of 2007 were partially
offset by higher sales, marketing and administration expenses and higher tax
accruals.

    Financial Condition

    The cash and short-term investment balance at February 28, 2007 was
$44.7 million, a decrease of $2.7 million from the end of the 2006 fiscal
year, due mainly to the annual payout in February for 2006 performance under
the  Company's incentive compensation plans. Compared to February 28, 2006,
the cash and short-term investment balance has increased by $11.6 million.
    Cash used in operating activities was $1.1 million for the quarter,
compared to $4.7 million in 2006, primarily as a result of increased operating
earnings and a smaller annual bonus payment made relative to the prior year.
    Management believes the current balance in cash and short-term
investments, plus future cash flow from operations, will be sufficient to
finance organic growth and related investment and financing activities in the
foreseeable future.

    Other Developments

    New Senior Vice-President of Global Sales
    ------------------------------------------
    Continuing its efforts to increase its global market presence and expand
its customer base, the Company appointed industry veteran Klaus Mueller as its
Senior Vice-President of Global Sales on March 12, 2007. In this newly created
position, Klaus will be responsible for strengthening existing relationships
and identifying and developing new opportunities for Gennum's video transport
and image processing products, high speed data communications products and
wireless offerings for the audio space.
    Klaus brings over 25 years of semiconductor sales and operations
experience to Gennum, having most recently served as Vice-President of ZMD AG,
a mixed signal semiconductor company based in Germany. Prior to ZMD, Klaus was
President of WBC GmbH, a leading pan-European technical distributor, and also
held various senior level management positions with Motorola in Sales,
Operations and Global project team.

    New Toronto location
    ---------------------
    On March 6, 2007, Gennum opened an office in the Toronto area. The
Company plans to expand its image processing resource base, which is critical
to the success of this product line. The addition of a Toronto office will
allow us to grow this competency much more quickly.

    Commercial developments

    Video
    -----
    On January 4, 2007, Gennum announced a series of customer wins in both
the professional and consumer HDTV markets with its market-leading VXP(TM)
technology. JVC, MicroDisplay, Crestron Electronics, Momentum Data Systems,
and IRI Ubiteq have all chosen Gennum for a variety of home theatre and video
processing solutions.
    On January 8, 2007, Gennum announced that it had been selected to receive
a Technical Emmy(R) Award at the 2007 Consumer Electronics Show recognizing
more than a decade of technological innovation in the high definition (HD)
broadcasting market. The Emmy was awarded to Gennum for its chip-set
technology, called Serial Digital Interface (SDI), which allows TV studios to
transmit uncompressed, unencrypted digital signals quickly within a studio's
production facilities.

    Data Communications
    -------------------
    Gennum announced the sample availability of its new 10Gb/s Laser driver
products for optical transceivers. The direct modulated laser driver and
externally modulated laser driver products offer enhanced performance and
signal integrity features. Both devices use modern packages (24-pin QFFN) for
ease of implementation in current and next generation transceiver form
factors. The devices are suitable for use in 10G Ethernet, 10G Fiber Channel,
SONET OC-192, SDH STM-64 and emerging 10G FTTH applications.

    Audio & Wireless
    ----------------
    On January 4, 2007, Gennum announced the release of the nX6000(TM)
Bluetooth(R) headset. The nX6000 is an evolution in headset design that
incorporates industry-leading noise cancellation technology previously
introduced in Gennum's nXZEN(TM) Bluetooth headset. In addition, the nX6000
includes new features and functions that make the headset both easy to use and
versatile. The nX6000 adopts Bluetooth version 2.0 and incorporates a standard
mini-B-USB charge port, which allows users to download new features to the
headset. Lighter weight, increased comfort and six hours of talk time are all
features of this new headset.
    On January 5, 2007, Gennum announced the appointment of Ian Roane as
General Manager of the Audio & Wireless Products Division, assuming
responsibility for all aspects of the Division, including marketing, R&D and
product development. Mr. Roane previously held engineering management
positions with National Semiconductor, Novatel and Nortel, and has extensive
experience in ASIC, RF and mixed signal design. Most recently, he served as
Vice-President of Engineering and Chief Operating Officer of RF Odyssey, a
fabless semiconductor company focused on developing and marketing radio
frequency integrated circuits for the broadband wireless access market.

    Patent litigation
    -----------------
    As previously disclosed, we are the subject of a patent infringement
claim in the US courts. This claim relates to a limited number of non-core
Gennum products. Final argument in this matter was heard in January 2007. It
is anticipated that we will continue to incur legal costs until this matter is
resolved. Management continues to believe the plaintiff's claims are without
merit.
    In the ordinary course of business activities, the Company may become
involved in litigation or claims with customers, suppliers, former employees
and third parties.

    OUTLOOK

    The outlook for the semiconductor industry for 2007 forecasts growth in a
range of five to seven percent. Gennum revenue for the first quarter was up
slightly but reductions in Audio & Wireless analogue product shipments masked
continued strong growth in high speed mixed signal and digital products. 
Management believes revenue from high speed analogue and mixed signal video
and data communications products will continue to benefit from a robust market
environment. Image processing products grew strongly as well in the first
quarter over the prior year and we expect continued growth driven by design
wins achieved in 2005 and 2006. Digital product sales in Audio & Wireless are
also on a growth path.
    Consistent with our strategic imperative to grow and develop a more
significant global sales presence, we hired our Senior Vice-President of
Global Sales during the first calendar quarter of the year. We expect to move
quickly to expand Gennum's presence in China, Korea and Taiwan with new sales
and technical support offices.
    Management expects 2007 will continue to be a year of significant change
at Gennum. We are exploring the impact of several potential portfolio actions
within the Company. We are confident any changes made will strengthen the
Company for the future benefit of all stakeholders.

    Dividend

    Gennum's Board of Directors has declared a cash dividend of 3.5 cents per
share to be paid on April 25, 2007 to shareholders of record on April 11,
2007. The dividend is considered an "eligible dividend" for tax purposes.

    -------------------------------------------------------------------------
    Management will hold a conference call to discuss first quarter results
    on Thursday, March 29, 2007 at 9:00 a.m. (ET). To access the call,
    participants should dial 1-800-731-5319. The conference call will also be
    Webcast live at www.gennum.com or www.newswire.ca/webcast and
    subsequently archived on the Gennum site. A rebroadcast of the call will
    be available until midnight on April 30, 2007. To access the rebroadcast,
    dial 416-640-1917 and enter the passcode 21222089 followed by the number
    sign.
    -------------------------------------------------------------------------


    About Gennum Corporation

    Gennum Corporation designs, manufactures and markets industry-leading
semiconductors and semiconductor-based products for leading segments of the
global video, audio, and data communications markets. The Company's
understanding of the unique needs of its targeted markets allows it to deliver
high performance solutions that provide superior value. Gennum serves an
international customer base from its head office in Burlington, Canada, and
subsidiaries in Japan and the United Kingdom. The Company has design centres
in Burlington and Ottawa, Canada and in the United Kingdom.

    Disclaimer
    This document may contain forward-looking statements relating to our
goals, strategies, financial condition and results as well as the environment
in which we operate, investments, and litigation in which we are involved,
which may involve estimates, forecasts and projections.  Forward-looking
statements may include words such as "plans", "intends", "anticipates",
"should", "estimates", "expects", "believes" and similar expressions. These
statements are not guarantees of future performance and involve risks and
uncertainties that are difficult to predict, and/or are beyond our control.  
A number of important factors could cause actual outcomes and results to
differ materially from those expressed in these forward-looking statements. 
These factors include those set forth in this report and other public filings.
 Consequently, readers should not place any undue reliance on such
forward-looking statements. In addition, these forward-looking statements
relate to the date on which they are made. We disclaim any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.



    2007 FIRST QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS

    Caution about forward-looking statements

    This document may contain forward-looking statements relating to our
goals, strategies, financial condition and results as well as the environment
in which Gennum operates, investments, and litigation in which Gennum is
involved, which may involve estimates, forecasts and projections.
Forward-looking statements may include, but are not limited to, words such as
"plans", "become", "intends", "will", "anticipates", "should", "estimates",
"expects", "believes" and similar expressions. These statements are not
guarantees of future performance and involve risks and uncertainties that are
difficult to predict and/or are beyond our control. A number of important
factors could cause actual outcomes and results to differ materially from
those expressed in these forward-looking statements. These factors include the
level of market acceptance of our new products and our ability to offset
reductions in the sale of end-of-life analogue products within our Audio &
Wireless group, as well as those other factors set forth in this report and
other public filings. Consequently, readers should not place any undue
reliance on such forward-looking statements. In addition, these
forward-looking statements relate to the date on which they are made. We
disclaim any intention or obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or
otherwise.

    The following discussion and analysis is intended to provide readers with
an assessment of our performance for the first quarter of 2007 together with
the comparable period in the prior year, as well as our financial position and
future prospects. It should be read in conjunction with the Company's
unaudited consolidated financial statements for the first quarter of fiscal
2007 and 2006, and the fiscal 2006 and 2005 audited consolidated financial
statements and accompanying notes and MD&A contained in our 2006 annual
report, which have been prepared in accordance with Canadian generally
accepted accounting principles. Our public disclosure documents, including our
historical financial statements and our annual information form, can be viewed
at www.sedar.com.
    In this discussion and analysis, "Gennum", "the Company", "we", "our" and
similar references include Gennum Corporation and its subsidiaries. All
amounts are in Canadian dollars.

    RESULTS FROM OPERATIONS

    

    -------------------------------------------------------------------------
    (in millions of dollars except
     earnings per share)                              Three Months ended
                                                 Feb. 28   Feb. 28      %
                                                    2007      2006    Change
                                                                      ------
    Revenue                                         34.9      34.5       1.1
    Gross margin                                    23.7      22.3       6.2
    Earnings from operations                         5.6       4.5      24.1
    Net earnings                                     4.3       3.7      16.2
    Earnings per share                              0.12      0.10      20.0
    Cash & short term investments                   44.7      33.1      35.0
    -------------------------------------------------------------------------

    Revenue increased 1.1% over the prior year; however, excluding sales of
end-of-life audio analogue products, revenue grew 11.6%. A positive sales mix
and restructuring benefits drove higher gross margins this quarter, resulting
in a 24.1% increase in earnings from operations and a 20.0% increase in
diluted earnings per share. In addition, the financial position of the Company
continued to strengthen as evidenced by cash and short-term investments which
grew 35% over the prior year.

     Revenue
    (in millions of dollars)
                                                      Three Months ended
    -------------------------------------------------------------------------

                                                 Feb. 28   Feb. 28      %
                                                    2007      2006    Change
    -------------------------------------------------------------------------
    Video                                           22.6      21.8       3.9
    Data Communications                              5.1       3.1      65.4
    Audio & Wireless                                 7.0       9.4     (26.6)
    Other                                            0.2       0.2         -
    -------------------------------------------------------------------------
    Total Revenue                                   34.9      34.5       1.1
    -------------------------------------------------------------------------

    Revenue was slightly higher in the first quarter of 2007 compared to the
same period in 2006, primarily due to strong sales growth in the Data
Communications segment where total revenue was up 65% to $5.1 million. In
addition, Video products revenue increased $0.8 million as the division's
image processing (VXP(TM)) product line gained traction in the market. Video
transport product revenue was flat compared to last year as significant
increases in North America were offset by declines in Asia. These increases
were partially offset by lower revenue in the Audio & Wireless division, where
increasing digital signal processor (DSP) revenue was more than offset by
declines in analogue revenue. Revenue was not materially affected by foreign
currency fluctuations compared to the first quarter of 2006, as the stronger
Canadian dollar relative to the Japanese yen was offset by a weaker Canadian
dollar compared to the US dollar.

    Video products revenue totalled $22.6 million in the first quarter of
2007, an increase of $0.8 million or 4% over the same period in 2006 on the
strength of higher volume of shipments, partially offset by lower selling
prices caused by competitive pressures.  Revenue from high-definition products
increased by 2%, while revenue from standard-definition products declined 7%
compared to the prior year. North American revenue increased 17% compared to
the first quarter of 2006 but was flat to the fourth quarter of 2006. Our
European revenue for high-definition products increased almost 20% in the
first quarter of 2007 compared to 2006, offset by a decline in
standard-definition. Sales to Japanese customers were 19% lower in the quarter
versus 2006 primarily as a result of lower unit sales in Japan as phase 3 of
the HDTV build out was largely completed in 2006. Compared to the fourth
quarter of 2006, sales in Japan increased by 14% and management believes the
market there has bottomed out. The Company expects sales in the Japanese
domestic market going forward to be based primarily on maintenance and upgrade
requirements.  As well, we expect ongoing sales to Japanese OEM customers for
export into foreign markets. Revenue into the HD-SDI market represented 63% of
total Video revenue in the first quarter of 2007 (2006 - 64%).
    Demand for high-definition and standard-definition products continued to
increase in the United States in the first quarter versus the prior year, as
broadcasters reacted to the growing number of purchases of digital televisions
and the requirements set out in the new Digital Transmission Bill. Revenue for
image processing components more than doubled in the first quarter of 2007
compared to the prior year. A number of design wins were achieved in 2005 and
2006 from which we have begun to see benefits, and we expect to continue
producing revenue growth in this product area in 2007.
    In the first quarter of 2007, 69% of Video products revenue came from US
dollar sales (2006 - 62%) while 25% came from sales denominated in Japanese
yen (2006 - 32%). Video products revenue represented 65% of total revenue in
the first quarter of 2007 (2006 - 63%).

    Data Communications products revenue rose 65% to $5.1 million in the first
quarter of 2007, compared to $3.1 million in 2006, due to increased revenue
from high-speed (10 Gigabit) optical transceiver products and backplane
product sales.
    The market for 10 Gigabit optical transceivers continues to grow, driving
sales of 10 Gigabit CDR and 10 Gigabit TIA products. In the first quarter of
2007, revenue of our 10 Gigabit CDR's, which are sold exclusively to the 10
Gigabit XFP optical transceiver market, increased 49% versus 2006 and our 10
Gigabit TIAs, which are sold to all 10 Gigabit optical transceiver types
(including XFP), increased 108% versus 2006.
    Our backplane product line experienced a 35% sales growth relative to the
prior year as a result of increased product demand for core router equipment
as well as the introduction of a new backplane equalizer product for use in
Ethernet switch equipment.
    In the first quarter of 2007, 77% of Data Communications revenue came from
US dollar sales (2006 - 72%) while 23% came from sales in Japanese yen (2006 -
28%).
    Data Communications products revenue represented 15% of total revenue in
the first quarter of 2007 (2006 - 9%).

    Audio & Wireless products revenue declined by almost 27% to $6.9 million
in the first quarter of 2007 compared to the first quarter of 2006. The
primary reason for the decline was the expected erosion of analogue hearing
product revenue as the end-of-life program entered its final phase. The first
quarter of 2007 saw revenue increase by almost 12% for digital hearing
components, modules and related systems.
    Revenue from sales of digital components only was higher than the prior
year by 26% as a result of higher sales of our VOYAGEUR(TM) and FOUNDATION(TM)
products. This increase was partially offset by lower sales of our PARAGON(TM)
product, which has been shipping since the beginning of 2002 and is in the
mature phase of the product life cycle. VENTURE(TM), a preconfigured version
of our VOYAGEUR open platform DSP product which targets mid-sized and smaller
customers, continues to gain traction as these customers introduce products
into the market. We expect that in the future digital revenue will come
primarily from VOYAGEUR and VOYAGEUR-based products, as well as FOUNDATION
products. In addition, we continue to work with lead customers on the
development of the ultra-low power wireless FALCON(TM) platform and continue
to invest in this product roadmap.
    We are currently in a product transition phase in audio headsets. Our
newest model, nX6000 was positively received at the 2007 Consumer Electronics
Show and shipping is expected to commence during the second quarter of 2007. 
Management believes that additional US carrier penetration and OEM support is
required for this product to be successful. Other products recently introduced
include wired and VOIP-enabled headset models.
    Audio & Wireless products revenue represented 20% of total revenue in the
first quarter of 2007, compared with 27% in the first quarter of 2006.

    Other revenue was consistent at $0.2 million in the first quarter of 2007,
compared to 2006. This revenue consists primarily of legacy user specific
integrated circuits products outside of our core markets.

    Revenue by technology
    The growth of our high-speed analogue and mixed signal product lines
(video transport interfaces, data communications optical transceiver and
backplane products), which leverage common technology and IP, grew 9% over the
prior year. Image processing products revenue more than doubled, but is still
in a relatively early stage of its development. The growth of our VXP product
line was due to recent design wins going to production with key customers. 
Our digital signal processors, which now form the basis for ongoing business
in the Audio & Wireless segment, grew almost 12% over the prior year; however,
our audio analogue processor revenue fell almost 63%, reflecting that the
end-of-life program is entering its final phase.

    Gross margin
    (in millions of dollars)
                                                      Three Months ended
    -------------------------------------------------------------------------

                                                 Feb. 28   Feb. 28      %
                                                    2007      2006    Change
    -------------------------------------------------------------------------
    Gross margin                                    23.7      22.3       6.2
    -------------------------------------------------------------------------

    Percentage of revenue                           68.0      64.7
    -------------------------------------------------------------------------

    Gross margin as a percentage of revenue in the first quarter of 2007 was
68.0%, an increase over the 2006 first quarter gross margin of 64.7%. This
increase is due primarily to a mix of sales that included a greater proportion
of higher margin Video and Data Communications products and a lesser
proportion of lower margin Audio & Wireless analogue revenue.  Restructuring
benefits also helped to reduce cost of goods sold.

    Sales, marketing and administration expenditures
    (in millions of dollars)
                                                      Three Months ended
    -------------------------------------------------------------------------

                                                 Feb. 28   Feb. 28      %
                                                    2007      2006    Change
    -------------------------------------------------------------------------

    Sales, marketing and administration              9.1       8.8       4.1
    -------------------------------------------------------------------------

    Percentage of revenue                           26.1      25.4
    -------------------------------------------------------------------------

    During the first quarter of 2007, sales, marketing and administration
expenditures increased $0.3 million, to $9.1 million, compared to $8.8 million
in Q1 2006. The increase relates primarily to an increase in legal fees
related to ongoing patent litigation, partially offset by a reduction in
recruitment costs as CEO search costs were incurred in Q1 2006. In addition,
there was an increase in spending in Datacom and Video to support growth in
Korea and Europe. The impact of the restructuring implemented in the fourth
quarter of 2006 allowed us to focus spending in areas that will drive top-line
growth.

    Research and development (R&D) expenditures
    (in millions of dollars)
                                                      Three Months ended
    -------------------------------------------------------------------------

                                                 Feb. 28   Feb. 28      %
                                                    2007      2006    Change
    -------------------------------------------------------------------------
    R&D expense (gross)                             11.0      11.1      (0.5)
    -------------------------------------------------------------------------

    Percentage of revenue                           31.7      32.2
    -------------------------------------------------------------------------

    R&D spending in the first quarter of 2007 was consistent with the same
period in 2006. Lower incentive compensation accruals in the current quarter
were offset by salaries for new hires.
    The primary focus of R&D initiatives in the first quarter of 2007 was on
development of high speed mixed signal products in Video transport and Data
Communications and continued investment in next generation VXP image
processing products. In Audio & Wireless, R&D investment was focussed on next
generation VOYAGEUR and FALCON products.

    Other income
    (in millions of dollars)
                                                      Three Months ended
    -------------------------------------------------------------------------

                                                 Feb. 28   Feb. 28      %
                                                    2007      2006    Change
    -------------------------------------------------------------------------
    Other income                                     0.4       0.5      (9.9)
    -------------------------------------------------------------------------

    Percentage of revenue                            1.3       1.4
    -------------------------------------------------------------------------

    Other income is primarily comprised of $0.5 million in foreign exchange
gains (2006- $0.6 million), consisting, of translation gains of $0.7 million
(2006 - losses of $0.6 million), partially offset by $0.2 million in hedging
losses (2006 - gains of $1.2 million).

    Income taxes
    (in millions of dollars)
                                                      Three Months ended
    -------------------------------------------------------------------------

                                                 Feb. 28   Feb. 28      %
                                                    2007      2006    Change
    -------------------------------------------------------------------------
    Income taxes                                     2.3       1.7      35.5
    -------------------------------------------------------------------------

    Income taxes for the first quarter of 2007 represented 35.2% of income
before taxes, compared to 31.8% in 2006. The effective tax rate in the first
quarter of 2006 was below the statutory tax rate of 34.1% due to an adjustment
in future income tax benefits related to our R&D investment tax credits. The
higher tax rate in Q1 2007 was a result of additional permanent differences
such as stock option amortization.

    Net earnings
    (in millions of dollars except earnings
     per share)
                                                      Three Months ended
    -------------------------------------------------------------------------

                                                 Feb. 28   Feb. 28      %
                                                    2007      2006    Change
    -------------------------------------------------------------------------
    Net earnings                                     4.3       3.7      16.2
    Net earnings as % of revenue                    12.2      10.6
    Earnings per share (basic and diluted)          0.12      0.10
    -------------------------------------------------------------------------

    In the first quarter of 2007, net earnings were $4.3 million, or $0.12 per
share, compared with $3.7 million, or $0.10 per share in the first quarter of
2006. Higher gross margins in the first quarter of 2007 were partially offset
by higher sales, marketing and administration expenses and higher tax
accruals.
    Within the business segments, the Video business operating earnings
increased by 5% to $7.9 million in 2007 compared to the first quarter of 2006,
as higher gross margins were partially offset by an increase in patent
litigation fees and costs related to additional tradeshows. The Data
Communications product group reported operating earnings of $0.5 million,
compared to a loss of $0.9 million in the first quarter of 2006, due to higher
sales and margins. Datacom continued to develop its business infrastructure to
support sales growth. Lower gross margins in the Audio & Wireless unit were
partially offset by lower marketing and sales expenses, as the first quarter
of 2006 included higher advertising and consulting fees related to the launch
of our headset products. This resulted in an operating loss in Audio &
Wireless of $2.7 million for the quarter compared to a loss of $2.2 million in
the first quarter of 2006.

    Quarterly Results
    (in millions of dollars except earnings per share)
    -------------------------------------------------------------------------
                First Quarter  Fourth Quarter  Third Quarter  Second Quarter
                  2007   2006     2006   2005    2006   2005     2006   2005
    -------------------------------------------------------------------------

    Revenue       34.9   34.5     37.0   37.4    38.7   37.4     37.1   37.4

    Net earnings   4.3    3.7      2.8    5.3     6.3    5.3      4.5    5.3

    Net earnings
     per share
      Basic and
       diluted    0.12   0.10     0.08   0.15    0.18   0.15     0.12   0.15
    -------------------------------------------------------------------------
    

    Our revenue and net earnings performance fluctuate on a quarterly basis
due to a wide variety of factors. Sales can vary significantly each quarter,
depending on the timing of purchasing decisions by customers. The evolving
nature of our many markets is discussed in a number of sections in this
report.
    In addition, expenditures to fabricate new computer-simulated circuit
designs into silicon form, legal expenditures on the continuing patent
litigation and foreign exchange gains or losses can also vary significantly
each quarter.

    FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RE

SOURCES Cash and short-term investments The cash and short-term investment balance at February 28, 2007 was $44.7 million, a decrease of $2.7 million from the end of the 2006 fiscal year, due mainly to the annual payout in February for 2006 performance under the Company's incentive compensation plans. Compared to February 28, 2006, the cash and short-term investment balance has increased by $11.6 million. Cash used in operating activities was $1.1 million for the quarter, compared to $4.7 million in 2006, primarily as a result of increased operating earnings and a smaller annual bonus payment made relative to the prior year. Management believes the current balance in cash and short-term investments, plus future cash flow from operations, will be sufficient to finance organic growth and related investment and financing activities in the foreseeable future. Accounts receivable At February 28, 2007, the accounts receivable balance was $21.5 million, which is down $1.3 million compared to the end of the 2006 fiscal year. The decrease reflected the timing of sales during the quarter versus the fourth quarter of 2006. In addition, the Company was successful in collecting some older receivables in the quarter. An additional $0.1 million in allowance for doubtful accounts was recorded in the quarter, though no material write-offs occurred. Inventories Inventories of $32.5 million at February 28, 2007 represent an increase of 3%, compared to the end of the 2006 fiscal year. The increase of $1.0 million came primarily from semi-finished wafers for high-definition components in Video, partially offset by a reduction in Audio & Wireless products. We also continued to build inventory in new products to meet anticipated future demand. Long-term investment As a result of the new accounting standards adopted this quarter, our investment in Nanoscience is recorded on the balance sheet at its market value of $2.5 million. A $0.7 million loss was recorded to the opening balance of "accumulated other comprehensive loss" (note 6 of the financial statement) to reflect the adjustment of the investment at December 1, 2006. There was a gain on the investment of $0.1 million recorded to other comprehensive income in the quarter to reflect the movement in market value. The shares of Nanoscience are traded on the AIM exchange in London, England in British pounds and are therefore subject to foreign exchange fluctuations. Accounts payable and accrued liabilities Accounts payable and accrued liabilities at February 28, 2007 were $11.2 million, which represents a decrease of 38% or $6.9 million compared to year end. This reduction resulted primarily from the annual payment under the Company's incentive compensation plan in February. There were also lower severance accruals as the majority of the severance payments related to the restructuring action taken in 2006 were paid in the quarter. Offsetting these items was a $0.6 million accrual for foreign currency hedge contracts as a result of new accounting standards applied this quarter. Total assets Total assets as at February 28, 2007 were $163.9 million, a decrease of $6.6 million from 2006 year end, resulting primarily from the reduction in cash and short-term investments, accounts receivable, future income tax assets, capital assets and long-term investments, partially offset by an increase in inventory. Capital expenditures Capital additions were $0.7 million in the first quarter of 2007 compared to $1.4 million in the same period in 2006. Capital additions in 2007 consisted primarily of R&D tools (46%) and manufacturing equipment (27%). Dividends Total dividends of $1.3 million, or $0.035 per share, were paid in the first quarter of 2007 (2006 - $1.1 million, or $0.03 per share). Derivative financial instruments During the quarter, the Company adopted new accounting policies that affected derivative and other financial instruments. See below under Changes in Significant Accounting Policies and Note 1 to the unaudited consolidated financial statements for the first quarter for a discussion on the changes. As at February 28, 2007, we had entered into foreign exchange forward contracts to sell an aggregate amount of US $15.4 million and Japanese yen 1,043 million. These contracts mature at the latest on January 24, 2008, at exchange rates varying between Canadian $1.0979 and Canadian $1.1556 against the US dollar, and between Canadian $0.00964 and Canadian $0.01033 against the Japanese yen. Management estimates that a loss of $611 thousand would be realized if the contracts were terminated on February 28, 2007. In accordance with new accounting standards effective this quarter, these forward contracts are considered cash flow hedges and therefore this loss has been included in other comprehensive income, net of tax of $208 thousand. This loss is expected to be reclassified to net income over the next twelve months as the forward contracts mature. Realized losses on foreign exchange forward and spot contracts were $0.2 million during the quarter (Q1 2006 - gains of $1.2 million). CONTRACTUAL OBLIGATIONS (in millions of dollars) ------------------------------------------------------------------------- Payments Due by Period ---------------------- Less than Total 1 year 1-3 years 4+ years Operating leases 11,799 3,160 6,307 2,332 Purchase obligations(1) 8,890 8,594 296 - License fee obligations and other 2,053 794 1,056 203 ------------------------------------------------------------------------- Total contractual obligations 22,742 12,548 7,659 2,535 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) Agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed or variable price provisions; and the approximate timing of the transactions. The purchase obligations relate primarily to inventory, product development, and general operating costs. RELATED PARTY TRANSACTIONS In the normal course of business, we may enter into transactions with related parties. These transactions occur under market terms consistent with the terms of transactions with unrelated arms-length third parties. The Company did not enter into any related party transactions during the quarter. OTHER DEVELOPMENTS New Senior Vice-President of Global Sales Continuing its efforts to increase its global market presence and expand its customer base, the Company appointed industry veteran Klaus Mueller as its Senior Vice-President of Global Sales on March 12, 2007. In this newly created position, Klaus will be responsible for strengthening existing relationships and identifying and developing new opportunities for Gennum's video transport and image processing products, high speed data communications products and wireless offerings for the audio space. Klaus brings over 25 years of semiconductor sales and operations experience to Gennum, having most recently served as Vice-President of ZMD AG, a mixed signal semiconductor company based in Germany. Prior to ZMD, Klaus was President of WBC GmbH, a leading pan-European technical distributor, and also held various senior level management positions with Motorola in Sales, Operations and Global project team. New Toronto location On March 6, 2007 Gennum opened an office in the Toronto area. The Company plans to expand its image processing resource base, which is critical to the success of this product line. The addition of a Toronto office will allow us to grow this competency much more quickly. Commercial developments Video On January 4, 2007, Gennum announced a series of customer wins in both the professional and consumer HDTV markets with its market-leading VXP technology. JVC, MicroDisplay, Crestron Electronics, Momentum Data Systems, and IRI Ubiteq have all chosen Gennum for a variety of home theatre and video processing solutions. On January 8, 2007, Gennum announced that it had been selected to receive a Technical Emmy(R) Award at the 2007 Consumer Electronics Show recognizing more than a decade of technological innovation in the high definition (HD) broadcasting market. The Emmy was awarded to Gennum for its chip-set technology, called Serial Digital Interface (SDI), which allows TV studios to transmit uncompressed, unencrypted digital signals quickly within a studio's production facilities. Data Communications On January 8, 2007, Gennum announced the sample availability of its new 10Gb/s Laser driver products for optical transceivers. The direct modulated laser driver and externally modulated laser driver products offer enhanced performance and signal integrity features. Both devices use modern packages (24-pin QFFN) for ease of implementation in current and next generation transceiver form factors. The devices are suitable for use in 10G Ethernet, 10G Fiber Channel, SONET OC-192, SDH STM-64 and emerging 10G FTTH applications. Audio & Wireless On January 4, 2007, Gennum announced the release of the nX6000(TM) Bluetooth(R) headset. The nX6000 is an evolution in headset design that incorporates industry-leading noise cancellation technology previously introduced in Gennum's nXZEN(TM) Bluetooth headset. In addition, the nX6000 includes new features and functions that make the headset both easy to use and versatile. The nX6000 adopts Bluetooth version 2.0 and incorporates a standard mini-B-USB charge port, which allows users to download new features to the headset. Lighter weight, increased comfort and six hours of talk time are all features of this new headset. On January 5, 2007, Gennum announced the appointment of Ian Roane in the position of General Manager of the Audio & Wireless Products Division, assuming responsibility for all aspects of the Division, including marketing, R&D and product development. Mr. Roane previously held engineering management positions with National Semiconductor, Novatel and Nortel, and has extensive experience in ASIC, RF and mixed signal design. Most recently, he served as Vice-President of Engineering and Chief Operating Officer of RF Odyssey, a fabless semiconductor company focused on developing and marketing radio frequency integrated circuits for the broadband wireless access market. Patent litigation As previously disclosed, we are the subject of a patent infringement claim in the US courts. This claim relates to a limited number of non-core Gennum products. Final argument in this matter was heard in January 2007. It is anticipated that we will continue to incur legal costs until this matter is resolved. Management continues to believe the plaintiff's claims are without merit. In the ordinary course of business activities, the Company may become involved in litigation or claims with customers, suppliers, former employees and third parties. NEW ACCOUNTING POLICIES AND CRITICAL ESTIMATES A summary of significant accounting policies is presented in Note 1 to our 2006 consolidated financial statements. Certain of our accounting policies are critical to understanding the results of operations and financial condition of Gennum. These critical accounting policies require us to make certain judgements and estimates, some of which may relate to matters that are uncertain. For a description of the judgements and estimates involved in the application of critical accounting policies and assumptions made, refer to our 2006 Annual Report. The accounting policies used in the preparation of these Consolidated Financial Statements are consistent with those used in the Company's November 30, 2006 audited Consolidated Financial Statements, except as described below. Changes in Significant Accounting Policies Effective December 1, 2006, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments - Recognition and Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income and Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of the new standards resulted in changes in accounting for financial instruments and hedges as well as the recognition of certain transition adjustments that have been recorded in opening accumulated other comprehensive loss. The comparative Consolidated Financial Statements have not been restated, except for the presentation of translation gains or losses on self-sustaining foreign operations. For a description of the principal changes in accounting for financial instruments and hedges due to the adoption of the accounting standards and for further details on changes in significant accounting policies, see Note 1 to the unaudited Consolidated Financial Statements for the quarter ended February 28, 2007. Changes in Critical Estimates During the quarter, the Company re-evaluated the estimated useful lives of its buildings and determined that the estimated useful lives should be increased to thirty years from twenty years. The impact of this change was applied on a prospective basis commencing with the first quarter of 2007. The impact of this change of accounting estimate resulted in a decrease in depreciation expense of $133 in the first quarter fiscal 2007. CONTROLS AND PROCEDURES Under the supervision of our management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures as at February 28, 2007. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at a reasonable assurance level to ensure that information required to be disclosed in reports that we file or submit under Canadian securities legislation is recorded, processed, summarized and reported within the time periods specified. There have been no changes in the Company's internal control over financial reporting during the first quarter ended February 28, 2007 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. Common shares outstanding At February 28, 2007, there were 35,802,286 common shares of Gennum outstanding, compared with 35,784,636 shares at November 30, 2006, and at March 28, 2007, there were 35,805,286 common shares outstanding. RISKS AND UNCERTAINTIES We are subject to a number of risks and uncertainties that could significantly affect our financial condition and performance. As we grow, continue our commitment to R&D, and enter into new markets, these risks increase. At the same time, by diversifying revenue streams across additional product areas, we believe we can mitigate the risk associated with any difficulties encountered in any one product line or market. A comprehensive planning process exists to identify risks and minimize them wherever possible. There have been no significant changes during the quarter with regard to our key risks, a discussion of which can be found in our 2006 annual MD&A. OUTLOOK The outlook for the semiconductor industry for 2007 forecasts growth in a range of five to seven percent. Gennum revenue for the first quarter was up slightly but reductions in Audio & Wireless analogue product shipments masked continued strong growth in high speed mixed signal and digital products. Management believes revenue from high speed analogue and mixed signal video and data communications products will continue to benefit from a robust market environment. Image processing products grew strongly as well in the first quarter over the prior year and we expect continued growth driven by design wins achieved in 2005 and 2006. Digital product sales in Audio & Wireless are also on a growth path. Consistent with our strategic imperative to grow and develop a more significant global sales presence, we hired our Senior Vice-President of Global Sales during the first calendar quarter of the year. We expect to move quickly to expand Gennum's presence in China, Korea and Taiwan with new sales and technical support offices. Management expects 2007 will continue to be a year of significant change at Gennum. We are exploring the impact of several potential portfolio actions within the Company. We are confident any changes made will strengthen the Company for the future benefit of all stakeholders. March 29, 2007 GENNUM CORPORATION Unaudited Consolidated Financial Statements For the Three Months ended February 28, 2007 The attached consolidated financial statements have been prepared by Management of Gennum Corporation and have not been reviewed by an auditor. Gennum Corporation CONSOLIDATED BALANCE SHEETS (Canadian dollars, amounts in thousands) As at February 28, November 30, 2007 2006 (unaudited) (audited) ------------------------------------------------------------------------- ASSETS Current Cash and short-term investments 44,733 47,421 Accounts receivable 21,462 22,773 Inventories 32,522 31,490 Prepaid expenses and other assets 2,499 2,827 Income taxes receivable 240 - Loan receivable (note 2) 287 275 Future income taxes 9,634 10,892 ------------------------------------------------------------------------- Total current assets 111,377 115,678 ------------------------------------------------------------------------- Capital assets, net 41,847 43,220 Long-term investment (note 3) 2,542 3,217 Intangible assets, net (note 4) 2,229 2,366 Long-term loan receivable (note 2) 74 147 Long-term prepaid royalty 1,222 1,222 Goodwill 2,531 2,531 Future income taxes 2,057 2,051 ------------------------------------------------------------------------- 163,879 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 11,152 18,048 Income taxes payable - 432 Future income taxes 586 2,594 ------------------------------------------------------------------------- Total current liabilities 11,738 21,074 ------------------------------------------------------------------------- Future income taxes 68 66 ------------------------------------------------------------------------- Shareholders' equity Capital stock (note 5) 11,205 11,001 Deferred compensation (1,755) (2,148) Retained earnings 146,065 143,068 Contributed surplus 252 94 Accumulated other comprehensive loss (note 6) (3,694) (2,723) ------------------------------------------------------------------------- Total shareholders' equity 152,073 149,292 ------------------------------------------------------------------------- 163,879 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments and contingencies (note 11) Gennum Corporation CONSOLIDATED STATEMENT OF EARNINGS (unaudited) (Canadian dollars, amounts in thousands except per share data) Three Months Ended February 28, February 28, 2007 2006 ------------------------------------------------------------------------- Revenue (note 8) 34,881 34,495 Cost of goods sold 11,162 12,166 ------------------------------------------------------------------------- Gross margin 23,719 22,329 ------------------------------------------------------------------------- Sales, marketing and administration expense 9,108 8,750 Research and development expense 11,048 11,105 Less government assistance (2,082) (2,075) ------------------------------------------------------------------------- 18,074 17,780 ------------------------------------------------------------------------- Earnings from operations 5,645 4,549 Investment income 475 327 Other income (note 9) 439 487 ------------------------------------------------------------------------- Earnings before income taxes 6,559 5,363 Provision for income taxes (note 10) 2,309 1,704 ------------------------------------------------------------------------- Net earnings for the period 4,250 3,659 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share (note 5) Basic $0.12 $0.10 Diluted $0.12 $0.10 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Dividends declared per share $0.035 $ 0.03 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended February 28, February 28, 2007 2006 ------------------------------------------------------------------------- Capital stock Balance at beginning of period 11,001 9,392 Proceeds from shares issued on exercise of options 204 1,470 ------------------------------------------------------------------------- Balance at end of period 11,205 10,862 ------------------------------------------------------------------------- Deferred compensation Balance at beginning of period (2,148) (1,383) New awards - (160) Forfeitures 132 - Amortization 261 186 ------------------------------------------------------------------------- Balance at end of period (1,755) (1,357) ------------------------------------------------------------------------- Retained earnings Balance at beginning of period 143,068 132,765 Net income 4,250 3,659 Dividends (1,253) (1,076) ------------------------------------------------------------------------- Balance at end of period 146,065 135,348 ------------------------------------------------------------------------- Contributed surplus Balance at beginning of period 94 - Stock option amortization 158 - ------------------------------------------------------------------------- Balance at end of period 252 - ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), net of income taxes Balance at beginning of period (2,723) (3,264) Transition adjustment on adoption of financial instruments standards (782) - Other comprehensive income (loss) for the period (note 6) (189) 35 ------------------------------------------------------------------------- Balance at end of period (3,694) (3,229) ------------------------------------------------------------------------- Total shareholders' equity at end of period 152,073 141,624 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended February 28, February 28, 2007 2006 ------------------------------------------------------------------------- Net earnings for the period 4,250 3,659 Other comprehensive income, net of income taxes Change in unrealized gains on translating financial statements of self-sustaining foreign operations 107 35 Change in losses on derivative instruments designated as cash flow hedges(1) (372) - Reclassification to earnings of losses on cash flow hedges(2) 24 Change in unrealized gains on available-for-sale financial assets(3) 52 - ------------------------------------------------------------------------- Comprehensive income for the period 4,061 3,694 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 1 - Net of income taxes of $208 2 - Net of income taxes of $12 3 - There are no income tax implications as the Company has capital loss carryforwards to offset potential capital gains Gennum Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Canadian dollars, amounts in thousands) Three Months Ended February 28, February 28, 2007 2006 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings for the period 4,250 3,659 Items not affecting cash Depreciation and amortization 2,316 2,693 Deferred compensation and stock option amortization 419 186 Interest and currency impact on loans receivable (17) 2 Gain on financial instrument valuation (24) - Future income taxes (548) (1,555) ------------------------------------------------------------------------- 6,396 4,985 Net change in non-cash working capital balances related to operations (7,470) (9,715) ------------------------------------------------------------------------- Cash used in operating activities (1,074) (4,730) ------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of capital assets (708) (1,450) Payment of license fees (93) (113) Repayment of loan receivable 77 23 ------------------------------------------------------------------------- Cash used in investing activities (724) (1,540) ------------------------------------------------------------------------- FINANCING ACTIVITIES Stock options exercised 204 1,470 Deferred compensation forfeited (awarded) 132 (160) Dividends paid (1,253) (1,076) ------------------------------------------------------------------------- Cash provided (used) in financing activities (917) 234 ------------------------------------------------------------------------- Effect of exchange rate changes on cash and short-term investments 27 19 ------------------------------------------------------------------------- Net decrease in cash and short-term investments during the period (2,688) (6,017) Cash and short-term investments, beginning of the period 47,421 39,112 ------------------------------------------------------------------------- Cash and short-term investments, end of the period 44,733 33,095 ------------------------------------------------------------------------- ------------------------------------------------------------------------- GENNUM CORPORATION Notes To Consolidated Financial Statements (Canadian dollars, amounts in thousands except share and per share data) 1. ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements have been prepared by the Company in accordance with Canadian Generally Accepted Accounting Principles (GAAP) on a basis consistent with those followed in the most recent audited financial statements, except as noted below. These unaudited consolidated financial statements do not include all the information and footnotes required by GAAP for annual financial statements and therefore should be read in conjunction with the audited consolidated financial statements and notes included in the Company's Annual Report for the year ended November 30, 2006. Changes in accounting policies Effective December 1, 2006, the Company adopted the Canadian Institute of Chartered Accountants (CICA) Handbook Section 3855, Financial Instruments - Recognition and Measurement; Section 3865, Hedges; Section 1530, Comprehensive Income and Section 3861, Financial Instruments - Disclosure and Presentation. The adoption of the new standards resulted in changes in accounting for financial instruments and hedges as well as the recognition of certain transition adjustments that have been recorded in opening accumulated other comprehensive loss. The comparative Consolidated Financial Statements have not been restated, except for the presentation of translation gains or losses on self sustaining foreign operations. a) Financial Assets and Financial Liabilities Prior to the adoption of the new standards, the Company classified all of its financial assets as short-term investments, investment securities or loans and receivables. Short-term investments were accounted for at fair value. Long-term investments were accounted for at cost, net of any adjustment for other-than-temporary impairment. Loans and receivables were accounted for at amortized cost using the effective interest rate method. All of the Company's financial liabilities were accounted for on an accrual basis. Under the new standards, financial assets and financial liabilities are initially recognized at fair value and are subsequently accounted for based on their classification as described below. The classification depends on the purpose for which the financial instruments were acquired and their characteristics. Except in very limited circumstances, the classification is not changed subsequent to initial recognition. Transaction costs are recognized immediately in income or are capitalized, depending upon the nature of the transaction and the associated product. Trading Financial assets and financial liabilities that are purchased and incurred with the intention of generating profits in the near term are classified as trading. These instruments are accounted for at fair value with the change in the fair value recognized in investment income. Available-for-sale Financial assets classified as available-for-sale are carried at fair value with the changes in fair value recorded in other comprehensive income. Securities that are classified as available-for-sale and do not have a readily available market value are recorded at cost. Available-for-sale securities are written down to fair value through income whenever it is necessary to reflect other-than-temporary impairment. Previously, such write-downs were to net realizable value. Gains and losses realized on disposal of available-for-sale securities, which are calculated on an average cost basis, are recognized in other income. The long-term investment on the balance sheet has been designated as available-for-sale, which resulted in an after-tax loss of $727 recorded as an adjustment to opening accumulated other comprehensive loss. Held-to-maturity Securities that have a fixed maturity date, where the Company intends and has the ability to hold to maturity, are classified as held-to-maturity and accounted for at amortized cost using the effective interest rate method. Loans Loans are accounted for at amortized cost using the effective interest rate method. This classification is consistent with the classification under the prior accounting standards. b) Derivatives and Hedge Accounting Embedded derivatives Derivatives may be embedded in other financial instruments (the "host instruments"). Prior to the adoption of the new standards, such embedded derivatives were not accounted for separately from the host instrument. Under the new standard, embedded derivatives are treated as separate derivatives when their economic characteristics and risks are not clearly and closely related to those of the host instrument, the terms of the embedded derivatives are measured at fair value with subsequent changes recognized in trading income. The impact of the change in accounting policy related to embedded derivatives was not material. Hedge accounting At the inception of a hedging relationship, the Company documents the relationship between the hedging instrument and the hedged item, its risk management objective and its strategy for undertaking the hedge. The Company also requires a documented assessment, both at hedge inception and on an ongoing basis, of whether or not the derivatives that are used in hedging transactions are highly effective in offsetting the changes attributable to the hedged risks in the cash flows of the hedged items. Under the previous standards, derivatives that met the requirements for hedge accounting were generally accounted for on an accrual basis. Under the new standards, all derivatives are recorded at fair value and are recorded in prepaid expenses and other assets or accounts payable and accrued liabilities. The Company's hedges are classified as hedges of the variability in highly probable future cash flows attributable to a forecasted transaction (cash flow hedges). The Company is exposed to variability in future revenue cash flows, as much of the Company's revenues are denominated in US dollars or Japanese yen. The amount and timing of future cash flows are projected for the next four quarters. The actual foreign currency revenue over time forms the basis for identifying the effective portion of gains and losses on the derivatives designated as cash flow hedges on forecasted transactions. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. Any gains or losses in fair value relating to the ineffective portion are recognized immediately in the statement of earnings in other income (expense). Amounts accumulated in other comprehensive income are reclassified to the statement of earnings in the period in which the hedged item affects income. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income until the forecasted transaction is eventually recognized in the statement of earnings. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that was reported in other comprehensive income is immediately transferred to the statement of earnings. Upon adoption of the new standard, the Company recorded a net increase in accounts payable and other liabilities of $55 designated as cash flow hedges and an increase of $55 after-tax in accumulated other comprehensive income. c) Comprehensive Income Comprehensive income is composed of the Company's net earnings and other comprehensive income. Other comprehensive income includes unrealized gains and losses on available-for-sale financial assets, foreign currency translation gains and losses on the net investment in self-sustaining operations and changes in the fair market value of derivative instruments designated as cash flow hedges, all net of income taxes. The components of comprehensive income are disclosed in the Consolidated Statement of Comprehensive Income. d) Capital Assets Capital assets are stated at cost less accumulated depreciation, net of related government assistance. No depreciation is provided until the assets are ready for use. Buildings are depreciated using the straight-line method over an estimated useful life of thirty years. Equipment and furniture are depreciated using the straight-line method over estimated useful lives ranging from five to seven years. Computer software and hardware are depreciated using the straight-line method over the estimated useful life of three years. During fiscal 2007, the Company re-evaluated the estimated useful lives of its buildings and determined that the estimated useful lives should be increased to thirty years from twenty years. The impact of this change was applied on a prospective basis commencing with the first quarter of 2007. The impact of this change of accounting estimate resulted in a decrease in depreciation expense of $133 in the first quarter fiscal 2007. 2. LOAN RECEIVABLE The Company has a loan receivable due in weekly installments of US $5, accruing interest at 7% and maturing on July 31, 2008. As at February 28, 2007, the loan balance was $361, of which $287 was current. 3. Long-Term Investment In November 2005, the Company received a 6% interest in Nanoscience Inc. (11.1 million shares) as consideration for the sale of its investment in Toumaz Technology Limited to Nanoscience. The shares of Nanoscience are traded on the AIM exchange in London, England and have a market value of $2,542 as at February 28, 2007. Under the new standards, this investment has been classified as available-for-sale and is therefore recorded on the balance sheet at its fair value. An after-tax loss of $727 was recorded as an opening balance adjustment to Other Comprehensive Income, with the unrealized gain of $52 recorded to other comprehensive income in the quarter. 4. INTANGIBLE ASSETS February 28, November 30, 2007 2006 ------------------------------------------------------------------------- Licence fees 4,067 3,975 Technology intangibles 2,221 2,221 ------------------------------------------------------------------------- 6,288 6,196 Less accumulated amortization (4,059) (3,830) ------------------------------------------------------------------------- 2,229 2,366 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Licence fees are amortized using the straight-line method over the estimated useful lives ranging from three to five years. Technology intangibles represent those intangible assets resulting from the SiGe Semiconductor acquisition in May 2004. Technology intangibles are amortized using the straight-line method over the estimated useful life of seven years. There were no intangible assets written off due to impairment in the first quarter of 2007 (Q1 2006 - $58). 5. CAPITAL STOCK The issued common shares of the Company as at February 28, 2007 consist of 35,802,286 common shares (November 30, 2006 - 35,784,636) at a stated value of $11,205 (November 30, 2006 - $11,001). An unlimited number of preferred shares have also been authorized, none of which have been issued. The number of common stock options outstanding as at February 28, 2007 is 1,835,015, of which 611,538 are exercisable. In the first quarter of 2007, 460,000 options were granted, 17,650 were exercised and 36,300 were forfeited or relinquished. Stock Option Plan The Company has an incentive stock option plan, which provides for the granting of options for the benefit of employees and officers. The total number of Company shares that may be issued under this plan is 1,750,000 of which 278,573 remain available for new grants. An additional 700,000 options were issued outside the plan to new officers upon hiring at exercise prices ranging from $9.75 - $13.27. Options issued outside the plan are governed by the same conditions as applicable to the employee stock option plan. A summary of the plan and changes during Q1 2007 and 2006 are as follows: 2007 2006 ------------------------------------------------------------------------- Weighted Weighted average average Number exercise Number exercise of shares price of shares Price ------------------------------------------------------------------------- Outstanding, beginning of fiscal year 1,428,965 11.53 812,713 12.44 Granted 460,000 13.05 774,527 10.79 Forfeited (36,300) 12.29 (23,625) 13.23 Exercised (17,650) 11.54 (134,650) 12.44 ------------------------------------------------------------------------- Outstanding, end of first quarter 1,835,015 11.88 1,428,965 11.53 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options exercisable at February 28, 2007 611,538 12.40 651,938 12.40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table summarizes information about options outstanding at February 28, 2007: Options outstanding Options Exercisable ------------------------------------------------------------------------- Weighted average Weighted Weighted Range of remaining average average exercise Number contractual exercise Number exercise prices outstanding life price exercisable price ------------------------------------------------------------------------- $9.75 - $12.00 876,538 4.7 years 10.50 351,538 11.61 ------------------------------------------------------------------------- $12.01 - $14.25 922,477 5.4 years 13.06 224,000 13.13 ------------------------------------------------------------------------- $14.26 - $16.50 36,000 1.1 years 15.54 36,000 15.54 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The estimated weighted average fair value of stock options granted during the first quarter of 2007 was $4.21 per share using the Black-Scholes option-pricing model with the following weighted average assumptions: ------------------------------------------------------------------------- Risk-free interest rate 4.15% Expected dividend yield 1.07% Expected volatility 30.7% Expected time until exercise 5.5 years ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company utilizes the fair-value based method of accounting for all its stock-based compensation, which has been applied on a prospective basis. Had compensation been determined based on the fair value at the grant date for all awards granted since the inception of the incentive stock option plan, the Company's net earnings for the quarter would not have been affected, however earnings for prior periods would have been reduced by $2,861. Earnings per Share The Company uses the treasury stock method of calculating the dilutive effect of options on earnings per share. The following is a reconciliation of the numerator and denominator of earnings per share computations: Q1, 2007 Q1, 2006 ------------------------------------------------------------------------- Net earnings for the quarter 4,250 3,659 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average shares outstanding (numbers in thousands) 35,791 35,981 Effect of dilutive stock options 71 197 ------------------------------------------------------------------------- Diluted weighted average shares outstanding 35,862 36,178 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share Basic $0.12 $0.10 Diluted $0.12 $0.10 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options to purchase 793,027 common shares were not included in the computation of diluted earnings per share for the quarter ended February 28, 2007 because the option' exercise prices and unamortized compensation costs were greater than the average market price of the common shares. New options of 130,000 were issued to a new officer upon hiring at an exercise price of $12.29 on March 12, 2007. As this issue was subsequent to quarter end, these options are not included in the EPS calculation. 6. ACCUMULATED OTHER COMPREHENSIVE LOSS ------------------------------------------------------------------------- Unrealized gain (loss) on Loss on translating Unrealized derivative financial gain (loss) instruments statements of on available designated self-sustaining for sale as cash foreign financial flow hedges operations assets Total ------------------------------------------------------------------------- Balance, as at December 1, 2006 - (2,723) - (2,723) Adjustment to opening balance (55) - (727) (782) Changes incurred during the quarter (348) 107 52 (189) ------------------------------------------------------------------------- Balance, as at February 28, 2007 (403) (2,616) (675) (3,694) ------------------------------------------------------------------------- ------------------------------------------------------------------------- 7. FOREIGN EXCHANGE RISK Transactions and balances denominated in currencies other than Canadian dollars are translated on the following basis. Current assets and current liabilities are translated at the quarter-end rate of exchange. Exchange gains and losses on these balances are recognized in earnings in the quarter. Revenue and expenses are translated at the average of the monthly rates of exchange during the quarter. Fixed assets and depreciation are translated at rates prevailing when the related assets are acquired. The Company's operations outside of Canada are considered self-sustaining and accordingly, the assets and liabilities are translated to Canadian dollars using the quarter-end exchange rates and revenue and expenses are translated at the average of the monthly rates during the quarter. Exchange gains or losses on assets and liabilities are deferred and included in other comprehensive income. In order to manage the risk associated with fluctuations in foreign exchange rates, the Company has entered into foreign exchange forward contracts to sell an aggregate amount of US $15,350 and yen 1,043,000 as at February 28, 2007. These contracts mature at the latest on January 24, 2008 at exchange rates varying between Canadian $1.0979 and Canadian $1.1556 against the US dollar, and between Canadian $0.00964 and Canadian $0.01033 against the Japanese yen. Management estimates that a loss of $611 would be realized if the contracts were terminated on February 28, 2007. In accordance with the new standards, these forward contracts are designated as cash flow hedges and therefore this loss has been included in other comprehensive income, net of tax of $208. This loss is expected to be reclassified to net income over the next twelve months as the forward contracts mature. During the three months ended February 28, 2007, there were no firm commitments that no longer qualified as hedges and no forecasted transactions that failed to occur. Realized losses on foreign exchange forward and spot contracts were $203 during the quarter (2006 - gains of $1,211). In addition, there were translation gains of $681 during the quarter (2006 - losses of $602). 8. SEGMENTED INFORMATION The Company has three reportable segments: Video Products (Video): Develops and supplies high-performance image processing, serial digital transmission and timing generation components for display and professional video/film applications. Audio & Wireless Products (Audio): Develops and supplies a wide range of components, systems and sub-systems for use by manufacturers of analogue and digital signal processing products in the hearing instrument and other specialized markets. Wireless devices include low power links for hearing aids and wireless headset products. Data Communication Products (Datacom): Develops and supplies high-performance physical layer integrated circuits for high-speed backplane and high-speed optical transceiver applications. Each of the segments represents a strategic business unit that offers products to distinct markets. The total of segment operating earnings and Other reconciles to earnings before income taxes disclosed in the Consolidated Statement of Earnings. Corporate allocations consist of general and administrative costs which are charges for corporate services and centralized operational activities allocated to the operating segments based upon estimates of usage. The Company's Other segment revenue consists primarily of user specific integrated circuit products, which are not included within the operating segment revenues. The Company has included investment income and foreign exchange gains or losses in the determination of Other segment profit. The total assets in Other include: cash and short-term investments, future income taxes, income tax receivable or payable and capital assets not allocated to the operating segments. The significant accounting policies of the reportable segments are the same as those referred to in note 1. Quarter Ended February 28, 2007 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 22,616 6,941 5,132 192 34,881 Segment earnings (losses) 7,933 (2,717) 485 858 6,559 Depreciation and amortization 1,105 845 366 - 2,316 Corporate allocations 2,099 1,298 520 - 3,917 Capital asset additions 298 177 233 - 708 Total assets 48,267 46,749 12,025 56,838 163,879 ------------------------------------------------------------------------- Quarter Ended February 28, 2006 Video Audio Datacom Other Total ------------------------------------------------------------------------- Segment revenue 21,766 9,459 3,102 168 34,495 Segment earnings (losses) 7,536 (2,171) (900) 898 5,363 Depreciation and amortization 1,384 731 578 - 2,693 Corporate allocations 2,135 1,533 440 - 4,108 Capital asset additions 954 173 323 - 1,450 Total assets 44,745 55,091 12,146 43,571 155,553 ------------------------------------------------------------------------- Revenue by principal markets is as follows: Three Months Ended February 28 2007 2006 ------------------------------------------------------------------------- United States 12,794 13,312 Europe 5,306 6,482 Pacific Rim 11,233 10,219 Canada 5,548 4,482 ------------------------------------------------------------------------- 34,881 34,495 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue is attributable to countries based upon the location of customers. Assets per country are as follows: February 28, November 30, 2007 2006 ------------------------------------------------------------------------- Canada 148,430 154,138 UK 5,607 5,834 Japan 9,842 10,460 ------------------------------------------------------------------------- 163,879 170,432 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 9. OTHER INCOME (EXPENSE) Three Months Ended February 28 2007 2006 ------------------------------------------------------------------------- Realized gains (losses) on foreign exchange contracts (note 7) (203) 1,211 Unrealized foreign exchange gains on other contracts 24 - Foreign exchange gains (losses) on translation (note 7) 681 (602) ------------------------------------------------------------------------- Gain on foreign exchange 502 609 Other expense (63) (122) ------------------------------------------------------------------------- 439 487 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 10. INCOME TAXES The following is a reconciliation of the expected income tax expense obtained by applying the combined Canadian corporate tax rates to earnings before income taxes: Three Months Ended February 28 2007 2006 ------------------------------------------------------------------------- Expected income tax expense using statutory tax rates 2,238 1,830 Adjustment to future income taxes - Provincial benefit on ITCs - (156) Permanent differences 74 - Different income tax rates on earnings of foreign subsidiaries 25 (7) Changes in tax rates and other (28) 37 ------------------------------------------------------------------------- Provision for income taxes 2,309 1,704 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Effective tax rate 35.2% 31.8% ------------------------------------------------------------------------- ------------------------------------------------------------------------- 11. COMMITMENTS AND CONTINGENCIES The Company is committed to future minimum lease payments under operating leases for software design tools and buildings as at February 28, 2007 as follows: ------------------------------------------------------------------------- Design Tools Buildings Total ------------------------------------------------------------------------- 2007 1,854 534 2,388 2008 2,369 550 2,919 2009 2,896 463 3,359 2010 2,896 237 3,133 ------------------------------------------------------------------------- 10,015 1,784 11,799 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has committed to approximately $8.9 million in purchase obligations as at February 28, 2007. The purchase obligations relate primarily to inventory, product development, general operating costs and authorized capital projects. The Company is also committed to license fee payments of $1.5 million over the next 3 years and other payments of $0.6 million within the next 5 year. In the ordinary course of business activities, the Company may be contingently liable for litigation and claims with customers, suppliers, former employees and third parties. Management believes that adequate provisions have been recorded in the accounts where required. Although it may not be possible to accurately estimate the extent of potential costs and losses, if any, management believes that the ultimate resolution of such contingencies would not have a material adverse effect on the financial position of the Company. 12. COMPARATIVE AMOUNTS Certain of the comparative amounts have been reclassified to conform to the presentation adopted in the current year.

For further information:

For further information: Dr. Franz Fink, President and Chief Executive
Officer; Gordon Currie, Senior Vice-President, Finance & Administration and
Chief Financial Officer, Gennum Corporation, Tel: (905) 632-2996, Fax: (905)
632-2055, Web site: www.gennum.com

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GENNUM CORPORATION

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