Gennum Reports 2008 First Quarter Results



    BURLINGTON, ON, March 26 /CNW/ - Gennum Corporation (TSX: GND) today
reported unaudited financial results for the first quarter of fiscal 2008.

    
    (in millions of U.S. dollars except per share amounts)

                                                    % of                % of
                                          2008   Revenue      2007   Revenue
                                          ----   -------      ----   -------
    First quarter
    Revenue                               30.1                22.8
    Gross margin                          22.9      75.9      18.0      78.9

    Net earnings - continuing              4.6      15.2       6.2      27.0
    Net earnings per share -
     continuing                           0.13(*)             0.17
    Net earnings (loss) -
     discontinued                          8.7      29.1      (2.5)      n/a
    Net earnings per share -
     discontinued                         0.24               (0.07)

    (*) EPS of 15 cents before one-time tax adjustment to revalue future
        income tax assets for new federal tax rates.
    

    "We continue to outpace the industry as we experienced another quarter of
strong revenue growth," said Dr. Franz Fink, President and CEO of Gennum. "By
executing to our plan with speed and clarity, the new products we have
introduced to the market are enabling us to secure more design-wins with our
existing customers and gain new business in adjacent markets. We continue to
focus on optimizing our global resources and investing in key programs that
allow us to further accelerate our growth."

    Revenue
    -------
    Total revenue for the first quarter of 2008 increased by 31.8% compared
to the same period in 2007 as a result of higher revenues in analog and
mixed-signal (AMS), optical and new revenue from intellectual property (IP)
products.
    Specifically, revenue generated from AMS products rose 8.0% to $22.5
million in the first quarter of 2008 compared to the same quarter in the prior
year. The revenue increase is partly attributable to our CDR sales and the
continued ramp of our 3Gb/s products.
    Revenue generated from optical products was $5.3 million compared to $1.9
million in the same quarter in 2007, an increase of more than $3 million. This
increase was driven mainly by our 10Gb/s transimpedance amplifiers (TIAs)
(increase of $1.5 million), which are sold to all 10Gb/s optical transceiver
types (including XFP). The sale of limiting amplifier products also
contributed $1.2 million to the revenue increase.

    Gross Margin
    ------------
    Gross margin as a percentage of revenue in the first quarter of 2008 was
75.9%, up 1.2% over the fourth quarter of 2007. Comparing to the 2007 first
quarter, gross margins were down 3%. We continue to remain in the industry's
top tier for gross margin percentage. The cost reduction programs we have in
place and an increased mix of IP licensing revenue will help to maintain our
gross margins and offset market price pressures.

    Operating Expenses
    ------------------
    Sales, marketing and administration (SM&A) expenditures for the first
quarter of 2008 increased by 57.5% compared to the first quarter of 2007. The
strengthening Canadian dollar increased expenses reported in U.S. dollars by
$1.2 million. The acquisition of Snowbush added $0.3 million, and the
remaining increase represents investments in fundamental activities such as
broadening our sales presence, accelerating new product introductions,
globally launching our new corporate brand identity and increasing corporate
business development activities. Compared to the fourth quarter of 2007,
expenses for SM&A in the first quarter of 2008 decreased by $1.0 million.
    R&D spending in the first quarter of 2008 was higher compared to the same
period in 2007as we accelerated new product development activities for our
core portfolio of IP, optical, analog and mixed-signal solutions. The
acquisition of Snowbush Microelectronics, which occurred in October 2007,
added $1.6 million to our net R&D expenditures versus the first quarter of
2007. The strengthening Canadian dollar increased R&D expenses reported in
U.S. dollars by $1.2 million.

    Earnings
    --------
    In the first quarter of 2008, net earnings from continuing operations
were $4.6 million, or $0.13 per share, compared with net earnings from
continuing operations of $6.2 million, or $0.17 per share, in the first
quarter of 2007. The lower earnings were mainly attributable to lower gross
margin percentages, higher spending in R&D and sales, marketing and
administrative expenses and higher income tax expense. The increase in income
tax expense of $0.7 million resulted primarily from the revaluation of net
future income tax assets related to the enactment in December of lower 2008
federal tax rates.
    Discontinued operations contributed a gain of $8.7 million or $0.24 per
share in the first quarter of 2008 mainly due to the gain on the sale of the
VXP(R) Image Processing business which was completed in February 2008. More
information related to discontinued operations is found in note 4 of the first
quarter 2008 unaudited consolidated statements.
    Other income in the first quarter of 2008 was primarily related to a
$0.9 million foreign exchange gain compared to a $0.3 million foreign exchange
gain in the first quarter of 2007.

    Financial Condition
    -------------------
    The cash and cash equivalents balance at February 29, 2008 was
$46.5 million, an increase of $12.3 million from the end of the 2007 fiscal
year. This was primarily due to the cash proceeds received from the sale of
the VXP(R) Image Processing business to Sigma Designs for $16.9 million, net
of deal costs, and cash proceeds received from the sale of the manufacturing,
land and building for an additional $4.3 million. This was partially offset by
the payment of $4.1 million of the deferred equity related to the Snowbush
Microelectronics acquisition, the purchase of a second LTX high speed tester
for our prototyping operations, investment in an ERP system and a one-time
vacation pay-out to employees in December of $1.0 million.

    Product and Customer Developments
    ---------------------------------
    In the first quarter of 2008, Gennum introduced a series of new products
and demonstrated new capabilities that highlight the opportunities for our
products in new markets.
    We launched ActiveConnect(TM), the longest reach, highest performance
high-definition multimedia interface (HDMI) connectivity solution. Supporting
distances up to 100 meters, the ActiveConnect(TM) solution is being integrated
into new consumer connectivity products by Belden, Gefen, Orbital Development,
Liberty Cable and Kramer Electronics.
    In a joint technology demonstration at DesignCon 2008, Gennum combined
its advanced clock and data recovery (CDR) solutions with Meritec cable
technology to drive a 10Gb/s signal serially over low-cost 30-gauge America
wire gauge (AWG) copper cable enabling new opportunities for Gennum's CDRs
products in low-cost enterprise connectivity applications.
    We introduced a new line of receive optical sub-assembly (ROSA) products
significantly broadening our component offerings and providing dramatic
performance and manufacturing benefits for data communications optical module
applications.

    Other Developments
    ------------------
    In February 2008, we closed the sale of our VXP(R) Image Processing group
to Sigma Designs. Cash proceeds from the sale of the VXP(R) business were
approximately U.S. $18 million.
    Gennum recently welcomed Chad Hutchison as the Company's new
Vice-President, General Counsel and Corporate Secretary. Mr. Hutchison has a
broad background in mergers and acquisitions, corporate finance practices and
general securities law. In his new role, Mr. Hutchison manages all of Gennum's
legal and regulatory matters.
    Gennum signed key agreements with new sales and distribution partners.
Infinity Sales Inc. will provide technical sales coverage in the greater
Southern California area. To strengthen its support and presence in Korea and
China, Gennum signed Seung Jun Sang Sa, a distributor of many leading
semiconductor companies in these high growth regions. Finally, Leading Light
Technologies will be manufacturer's representatives for Gennum's analog and
mixed-signal products in the UK and Norway.
    Reflecting the Company's aggressive strategy to expand the market for its
optical, analog and mixed-signal, and intellectual property (IP) solutions,
Gennum unveiled a new corporate identity and brand strategy. Designed to
better position the Company in existing markets and gain recognition in new
markets, the new brand is now more reflective of who Gennum is today and going
forward.

    Outlook
    -------
    Semiconductor industry analysts have revised their forecasted yearly
growth rate from an average of 7% to approximately 3% for 2008. With our focus
in optical, analog and mixed-signal, and IP areas, we address a unique,
high-growth segment of the semiconductor industry. We remain confident that
our company is well positioned to continue to outpace the industry's average
growth rate in 2008.
    As we progress through 2008, we will continue to invest in new products
to drive increased design-wins, defend our position in our core markets and
capitalize on new opportunities in adjacent markets. We remain committed to
optimizing our overall sales, marketing and administration expenditures and
investing in programs that are essential for our future growth and
profitability.
    On a product line basis, AMS revenues in the first quarter were up year
over year. We expect the video broadcast and data communications markets to
remain robust and to benefit from new products introduced to the market.
Optical revenue is expected to show good growth over 2007, but the rate of
growth by quarter in 2008 is expected to be more variable. IP revenue is on
track to meet our 2008 revenue expectations.
    Our gross margins are expected to remain strong. Our continued focus on
driving operational efficiencies and increasing productivity is expected to
help offset market price pressures. We are committed to meeting our operating
margin target of greater than 20%.
    With our final divestiture completed in February 2008, we are now fully
focused on investing in and growing our core portfolio. We believe that we are
now better positioned to capitalize on the strong demand in our core markets.
Additionally, by leveraging our product and IP portfolio to address adjacent
high-growth markets, we can significantly increase the total available market
for Gennum products. Our expanded global sales and distribution network
provides the conduit through which these products will more efficiently reach
existing and new customers in regions critical to our future growth.
    Management is confident the continued execution to its well-defined and
focused growth plan will strengthen the Company and enhance shareholder value.

    Dividend
    --------
    Gennum's Board of Directors has declared a regular cash dividend of 3.5
cents per share Canadian to be paid on April 23, 2008 to shareholders of
record on April 9, 2008. The dividend is considered an "eligible dividend" for
tax purposes.

    -------------------------------------------------------------------------
    Management will hold a conference call to discuss first quarter results
    on Thursday, March 27, 2008 at 9 a.m. (ET). To access the call,
    participants should dial 1-800-731-6941. The conference call will also be
    Webcast live at www.gennum.com or www.newswire.ca/en/webcast and
    subsequently archived on the Gennum site. A rebroadcast of the call will
    be available until midnight on April 24, 2008. To access the rebroadcast,
    dial 416-640-1917 and enter the passcode 21265902, followed by the number
    sign.
    -------------------------------------------------------------------------

    About Gennum Corporation

    Gennum Corporation (TSX: GND) designs innovative semiconductor solutions
and intellectual property (IP) cores for the world's most advanced consumer
connectivity, enterprise, video broadcast and data communications products.
Leveraging the company's proven optical, analog and mixed-signal products and
IP, Gennum enables multimedia and data communications products to send and
receive information without compromising the signal integrity. Recognized as
an award winner for advances in high definition (HD) broadcasting, Gennum is
headquartered in Burlington, Canada, and has global design, research and
development and sales offices in Canada, Mexico, Japan, Korea, Germany, United
States, Taiwan and the United Kingdom. www.gennum.com

    Disclaimer

    This document contains 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. Often, but
not always, forward-looking statements can be identified by the use of 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. Please refer to
the sections entitled "Risks and Uncertainties" in our 2007 Annual Report and
"Risk Factors" in our Annual Information Form dated February 13, 2008, for a
description of material risks associated with forward-looking statements. 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, but are not limited to, our exposure to currency rate
fluctuations, and the level of market acceptance of our new products, 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. Forward-looking statements are provided for the
purpose of providing information about management's current expectations and
plans relating to the future. Readers are cautioned that such information may
not be appropriate for other purposes. 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.

    2008 FIRST QUARTER MANAGEMENT'S DISCUSSION AND ANALYSIS

    Caution about forward-looking statements

    This document contains 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. Often, but
not always, forward-looking statements can be identified by the use of 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. Please refer to
the sections entitled "Risks and Uncertainties" in our 2007 annual report and
"Risk Factors" in our annual information form dated February 13, 2008, for a
description of material risks associated with forward-looking statements. 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, but are not limited to, our exposure to currency rate
fluctuations, and the level of market acceptance of our new products, 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. Forward-looking statements are provided for the
purpose of providing information about management's current expectations and
plans relating to the future. Readers are cautioned that such information may
not be appropriate for other purposes. 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 2008 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
2008 and 2007, and the fiscal 2007 and 2006 audited consolidated financial
statements and accompanying notes and MD&A contained in our 2007 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 U.S. dollars, unless otherwise stated.

    CORPORATE OVERVIEW AND BUSINESS STRATEGY

    Gennum's clearly articulated and focused corporate strategy is to
leverage core technological capabilities into selected, high-growth markets
that provide a competitive advantage for the Company and its customers.
Specifically, Gennum's strategic financial priorities for 2008 include
generating revenue growth greater that the industry average, maintaining
industry leading gross margins and delivering strong operating earnings. To
achieve these 2008 goals, Gennum plans to double the number of new product and
IP introductions in 2008, strengthen its global team, drive increased
operational efficiencies and leverage a strong cash position to complement the
portfolio of optical, analog, mixed-signal and IP products.

    Focused Portfolio

    As disclosed in August 2007, we conducted a detailed review of our VXP(R)
Image Processing group to determine options that would accelerate return on
investment and achieve a more significant scale. As a result of this analysis,
we determined the best course of action to meet our overall growth and
profitability targets was to explore strategic alternatives for our VXP(R)
Image Processing group. In February 2008, we closed the sale of our VXP(R)
Image Processing group to Sigma Designs. Cash proceeds from the sale of the
VXP business are approximately U.S. $18 million.

    New Product Introductions

    In the first quarter of 2008, Gennum introduced a series of new products
and showcased new technology demonstrations highlighting the opportunities for
its products in new markets.
    With Gennum's expertise in HD video transport, we unveiled
ActiveConnect(TM), a new ultra high-performance technology that enables cable
manufacturers and home theater installers to provide competitively priced,
high-performance HDMI connectivity solutions that stream multimedia at
distances up to 100 meters. Ideal for both the short range consumer cable and
long-range professional installer markets, ActiveConnect(TM) supports current
and legacy versions of HDMI, including 1.1, 1.2 and 1.3, enabling
compatibility with existing equipment. Our HDMI/DVI solution has been adopted
by several OEMs including Belden, Gefen, Orbital Development, Liberty Cable
and Kramer Electronics.
    As data rates move to 10Gb/s and higher, enterprise users require
low-cost cabling solutions that enable maximum signal integrity between
servers, switches and storage equipment. Until now, users have had to use
expensive optical solutions in order to enable high-speed communications
beyond a few meters. In a joint technology demonstration at DesignCon 2008,
Gennum combined its advanced clock and data recovery (CDR) solutions with
Meritec cable technology to drive a 10Gb/s signal serially over low-cost
30-gauge America wire gauge (AWG) copper cable. This key demonstration proves
that thin, low-cost copper cable can be used to transmit 10Gb/s per lane at
distances never before thought possible enabling new opportunities for
Gennum's CDRs products in low-cost enterprise connectivity applications.
    Gennum also launched a new line of receive optical sub-assembly (ROSA)
products. This significantly broadens its component offerings for the optical
transceiver market. Today, ROSA solutions are typically comprised of four to
five discrete components and have traditionally experienced significant
manufacturing and test issues. The Gennum ROSA products feature the industry's
first receiver on a chip, the patented R-chip, which integrates all the
required circuitry and passive components into a single assembly. This Gennum
innovation provides dramatic performance and manufacturing benefits for data
communications optical module applications.

    Strengthening the Team

    Gennum recently welcomed Chad Hutchison as the Company's new
Vice-President, General Counsel and Corporate Secretary. Previously, Mr.
Hutchison was General Counsel and Corporate Secretary of Stelco Inc. (now U.S.
Steel Canada Inc.), a leading steel producer in Canada. Mr. Hutchison has a
broad background in mergers and acquisitions, corporate finance practices and
general securities law. In his new role, Mr. Hutchison manages all of Gennum's
legal and regulatory matters.
    To support the Company's efforts to enable global customers quicker
access to its products, Gennum signed key agreements with new sales and
distribution partners. Infinity Sales Inc. will provide technical sales
coverage in the greater Southern California area. To strengthen its support
and presence in Korea and China, Gennum signed Seung Jun Sang Sa, a
distributor of many leading semiconductor companies in these high growth
regions. Finally, Leading Light Technologies will be manufacturers
representatives for Gennum's analog and mixed-signal products in the UK and
Norway.

    New Corporate Identity Unveiled

    Reflecting the Company's aggressive strategy to expand the market for its
optical, analog and mixed-signal, and intellectual property (IP) solutions,
Gennum unveiled a new corporate identity and brand strategy. Designed to
better position the Company in existing markets and gain recognition in new
markets, the new brand is now more reflective of who Gennum is today and going
forward. To customers, the brand promises to be more approachable and
collaborative, while continuing to communicate the ingenuity and performance
attributes that have made Gennum a leader in its core markets. The brand
strategy leverages Gennum's reputation for innovation and high quality, as
well as highlights its unique collaborative approach in working with customers
to transform their most ambitious ideas into tomorrow's technology. The new
brand strategy represents these key attributes, while underscoring the
creativity on which Gennum has been built.

    
    RESULTS FROM OPERATIONS
    (in millions of U.S. dollars except earning per share)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Revenue                                         30.1      22.8      31.8
    Gross margin                                    22.9      18.0      26.5
    Earnings from continuing operations before
     income taxes                                    7.7       9.4     (18.2)
    As a % of revenue                               25.7      41.4     (15.7)

    Net earnings before discontinued operations      4.6       6.2     (25.8)
    Net earnings (loss) from discontinued
     operations                                      8.7      (2.5)      n/a
    Net earnings                                    13.3       3.7     263.3

    Continuing operations EPS                       0.13      0.17     (29.4)
    Discontinued operations EPS                     0.24     (0.07)      n/a
    Net earnings per share                          0.37      0.10     270.0

    Cash & cash equivalents                         46.5      38.2      21.5
    -------------------------------------------------------------------------

    In December 2007, the federal government substantially enacted a lower
corporate income tax rate. This resulted in a reduction in future income tax
assets and an increase in income tax expense of $663. This adjustment lowered
earnings per share from continuing operations from 15 cents to 13 cents.

    Revenue
    (in millions of U.S. dollars)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Analog & Mixed Signal (AMS)                     22.5      20.9       8.0
    Optical                                          5.3       1.9     171.2
    IP Licensing                                     2.3         -       n/a
    -------------------------------------------------------------------------

    -------------------------------------------------------------------------
    Total Revenue                                   30.1      22.8      31.8
    -------------------------------------------------------------------------
    

    Total revenue for the first quarter of 2008 increased by 31.8% compared
to the same period in 2007 as a result of higher revenues in each of the AMS
and Optical product groups. The remaining increase is attributable to revenues
generated from the acquisition of Snowbush Microelectronics in the fourth
quarter of 2007.

    AMS Products

    Revenue generated from Gennum's AMS products portfolio rose 8.0% to
$22.5 million in the first quarter of 2008, compared to the same quarter in
the prior year.
    Global AMS revenue from high-definition (HD) products increased by 14%
compared to the same quarter in 2007, partly attributable to the continued
ramp of our 3Gb/s products. On a geographical basis, North American revenue
for HD products increased 12% compared to the first quarter of 2007 and
decreased 10% compared to the fourth quarter of 2007. The increase compared to
the prior year period is primarily driven by the need for studios to meet the
requirements of the US-based Digital Transmission Bill.
    Japan revenue for HD products increased 12% compared to the first quarter
of 2007 and decreased 16% compared to the fourth quarter of 2007. The increase
compared to the prior year period is caused by strengthening HD demand in
Japan driven by maintenance and upgrades into a market where the HD transition
has already taken place.
    On a global basis, sales for standard definition (SD) products decreased
25% in the first quarter of 2008 compared to the prior year. Sales are
expected to decline as studios continue to focus on upgrading their equipment
to support HD and multi-standard capabilities.
    Revenue from backplane products remained essentially flat compared to the
same quarter in 2007, but CDR sales have generated a 75% increase in revenue
compared to the first quarter of 2007 as the market for the XFP optical
transceiver market continues to grow.
    AMS products revenue represented 75% of the total Gennum consolidated
revenue in the first quarter of 2008 (2007 - 90%). Revenue generated from the
HD-SDI market represented 64% of the total AMS revenue in the first quarter of
2008 (2007 - 60%).

    Optical

    Revenue generated from the Optical product line was $5.3 million compared
to $1.9 million in the same quarter in 2007, an increase of more than $3
million. This increase was driven mainly by our 10Gb/s transimpedance
amplifiers (TIAs) (increase of $1.5 million), which are sold to all 10Gb/s
optical transceiver types (including XFP). The sale of limiting amplifier
products also contributed $1.2 million to the revenue increase.
    In the first quarter of 2008, the Company unveiled a family of ROSAs at
the Optical Fibre Conference (OFC) in San Diego. The family includes a short
wave ROSA (GN3150), a long wave 10km ROSA (GN3050), a long wave 40km ROSA
(GN3250) and a ROSA for LRM (Long Reach Multi-mode) applications (GN3052). All
ROSAs are based on the Company's patented R-chip TIA technology that improves
ROSA performance while reducing ROSA manufacturing costs. The short wave ROSA
began production sales in latter part of the first quarter of 2008 with a tier
1 U.S.-based customer. The other ROSAs are in design-in trials with various
customers.
    The first quarter of 2008 benefited from an unusually fast SFP+
production ramp by two tier 1 customers that included initial stocking orders.
The volume ramp was accompanied by increasing price pressures expected in
future quarters.
    Optical products revenue represented 18% of the total Gennum consolidated
revenue in the first quarter of 2008 (2007 - 8%).

    IP Licensing

    IP licensing is attributable to revenue associated with the acquisition
of Snowbush Microelectronics in October 2007.

    
    Gross margin
    (in millions of U.S. dollars)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Gross margin                                    22.9      18.0      26.8

    Percentage of revenue                           75.9      78.9      (3.0)
    -------------------------------------------------------------------------

    Gross margin as a percentage of revenue in the first quarter of 2008 was
75.9%, compared to the 2007 first quarter gross margin of 78.9% and 2007
fourth quarter gross margin of 74.7%. We continue to remain in the industry's
top tier for gross margin percentage. The cost reduction programs we have in
place and an increased mix of IP licensing revenue will help to maintain our
gross margins and offset market price pressures.

    Sales, marketing and administration expenditures
    (in millions of U.S. dollars)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Sales, marketing and administration expense      8.2       5.2      57.5
    Percentage of revenue                           27.3      22.8       4.5
    -------------------------------------------------------------------------

    Sales, marketing and administration expenditures for the first quarter of
2008 increased by 57.5% compared to the first quarter of 2007 ($1.2 million of
the increase is related to the translation of Canadian dollars to U.S. dollar
reporting). The acquisition of Snowbush added $0.3 million, and the remaining
increase represents investments in fundamental activities such as broadening
our sales presence, accelerating new product introductions, branding and
corporate business development. The figure for the first quarter of 2008
represents a $1.0 million decrease from the fourth quarter of 2007.

    Research and development (R&D) expenditures
    (in millions of U.S. dollars)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    R&D expense (gross)                              9.9       5.0      95.6
    Percentage of revenue                           32.8      22.1      10.7
    -------------------------------------------------------------------------

    R&D spending in the first quarter of 2008 was higher compared to the same
period in 2007 as we increased our focus around a core portfolio of optical,
analog and mixed-signal solutions and increased the R&D spending on new
product development. Of the 95.6% increase in R&D expenses, $1.2 million is
related to translating Canadian dollars to U.S. dollar reporting. The
acquisition of Snowbush Microelectronics, which occurred in October 2007,
added $2.0 million to our gross R&D expenditures versus the first quarter of
2007.

    Other income (expense)
    (in millions of U.S. dollars)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Other income (expense)                           0.9       0.3     197.4
    Percentage of revenue                            3.1       1.4       1.7
    -------------------------------------------------------------------------

    Other income in the first quarter of 2008 was primarily related to a
$0.9 million foreign exchange gain (Q1 2007 - $0.3 million foreign exchange
gain). This gain is a result of a $0.6 million gain on foreign exchange
contracts and a translation gain of $0.3 million (Q1 2007 - $0.2 million loss
on foreign exchange contracts, offset by a translation gain of $0.5 million).

    Income taxes
    (in millions of U.S. dollars)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Income taxes                                     3.2       3.3      (3.8)
    -------------------------------------------------------------------------

    Income taxes for the first quarter of 2008 represented 40.9% of earnings
before taxes, compared to income taxes of 34.8% of earnings before taxes for
the same period in 2007. The effective tax recovery rate in the first quarter
of 2008 was above the statutory tax rate of 33.5% due primarily to the
reduction in the general federal corporate income tax rate for the calendar
year 2008 from 20.5% to 19.5%, which resulted in a reduction in net future
income tax assets, and an increase in income tax expense of approximately
$663.

    Net earnings from continuing operations
    (in millions of U.S. dollars except earnings per share)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Net earnings from continuing operations          4.6       6.2     (25.8)
    Net earnings from continuing operations
     as % of revenue                                15.2      27.0     (11.8)

    Basic earnings from continuing operations
     per share                                     $0.13     $0.17     (23.5)
    -------------------------------------------------------------------------

    In the first quarter of 2008, net earnings from continuing operations were
$4.6 million, or $0.13 per share, compared with net earnings from continuing
operations of $6.2 million, or $0.17 per share in the first quarter of 2007.
The lower earnings were mainly attributable to lower gross margin percentages,
higher spending in R&D and sales, marketing and administrative expenses, and
higher income tax expense. The increase in income tax expense of $0.7 million
resulted primarily from the revaluation of net future income tax assets
related to the enactment in December of lower 2008 federal tax rates.

    Discontinued operations, net of tax
    (in millions of U.S. dollars)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Falcon                                             -      (0.5)      n/a
    Headset                                            -      (0.6)      n/a
    Hearing/Mfg.                                    (0.6)      0.1       n/a
    VXP, including gain on sale                      9.3      (1.5)      n/a
    -------------------------------------------------------------------------
    Total earnings (loss) on discontinued
     operations, net of taxes                        8.7      (2.5)      n/a
    Basic earning per share                        $0.24    $(0.07)      n/a
    -------------------------------------------------------------------------

    On February 8, 2008, the Company completed the sale of its VXP(R) Image
Processing business to Sigma Designs for $18.3 million that resulted in a
pre-tax gain on the sale of $13.8 million. The sale of the VXP(R) Image
Processing business also resulted in the termination of approximately 30
employees in January 2008. The cost of severing these employees was
approximately $1.3 million and was reflected in discontinued operations in the
first quarter of 2008.
    For comparative purposes, the first quarter 2007 results from operations,
net of tax, for Falcon, Headset, Hearing Instrument and Manufacturing
Operations and VXP(R) Image Processing have been reclassified to discontinued
operations.

    Net earnings
    (in millions of U.S. dollars except earnings per share)

                                                      Three Months Ended
    -------------------------------------------------------------------------
                                                February  February
                                                29, 2008  28, 2007  % change
    -------------------------------------------------------------------------
    Net earnings                                    13.3       3.7     263.3

    Net earnings as % of revenue                    44.3      16.1      28.2

    Basic earnings per share                       $0.37     $0.10     270.0
    -------------------------------------------------------------------------

    In the first quarter of 2008, net earnings were $13.3 million, or $0.37
per share, compared with net earnings of $3.7 million, or $0.10 per share in
the first quarter of 2007. The increase in net earnings was largely
attributable to the gain on the sale of the VXP(R) Image Processing business.

    Quarterly Results
    (in millions of U.S. dollars except earnings per share)

    The following analysis uses the average historical Canadian to U.S.
exchange rate for each quarter to produce revenues, earnings and earnings per
share for our continuing and discontinued operations by quarter:

    -------------------------------------------------------------------------
                          First         Fourth        Third         Second
                         Quarter       Quarter       Quarter       Quarter
                       2008   2007   2007   2006   2007   2006   2007   2006
    -------------------------------------------------------------------------

    Revenue            30.1   22.8   29.9   23.5   25.5   23.8   23.6   27.2

    Net earnings,
     continuing         4.6    6.2    4.4    4.6    5.3    6.5    4.4    6.7

    Continuing
     operations
     basic and
     diluted           0.13   0.17   0.12   0.13   0.15   0.18   0.12   0.19

    Net earnings
     (loss) on
     discontinued       8.7   (2.5)  (4.8)  (2.1)  (6.8)  (0.8) (10.6)  (2.7)

    Discontinued
     operations
     basic and
     diluted           0.24  (0.07) (0.13) (0.06) (0.19) (0.02) (0.29) (0.08)
    -------------------------------------------------------------------------

    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.
    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.

    Changes in Reporting - Supplemental Information

    This is the first quarter that Gennum has reported as a single segment and
with a U.S. dollar reporting currency. The functional currencies of the
Company have not changed. The following information is being provided to
assist in the understanding of these changes.

    i)  U.S. Dollar Revenues by Product Line
        (in thousands)

                                  AMS      Optical         IP          Total

    2006          Q1           19,843          928          -         20,771
                  Q2           22,412        1,384          -         23,796
                  Q3           22,023        1,774          -         23,797
                  Q4           21,867        1,669          -         23,536

    2007          Q1           20,896        1,935          -         22,831
                  Q2           20,621        2,984          -         23,605
                  Q3           22,818        2,672          -         25,490
                  Q4           24,941        4,315        654         29,910
    -------------------------------------------------------------------------

    ii) Year-Over-Year Operating Expenses by Currency
        (in thousands)

    The average rate of exchange for the Canadian to U.S. dollar has shown
significant strengthening over the last twelve months. The average rate has
moved from 0.8627 in the first fiscal quarter of 2007 to 1.0034 in the first
quarter of 2008. The average rate in the fourth quarter of 2007 was 1.0010.
While Gennum revenues are primarily in U.S. dollars and Japanese yen,
operating expenses are primarily in the Canadian dollar local currency. As a
result, the change to U.S. dollar reporting can have a significant impact when
we report our operating expenses in U.S. dollars:

                        Q1 2007             Q4 2007             Q1 2008
    -------------------------------------------------------------------------

                     Cdn $    U.S. $    Cdn. $    U.S. $    Cdn. $    U.S. $

    R&D, net         4,746     4,094     6,181     6,187     8,123     8,155
    S,M & A          6,038     5,209     9,338     9,347     8,175     8,205
                    -------   ------   -------   -------   -------   -------
                    10,784     9,303    15,519    15,534    16,298    16,360
    -------------------------------------------------------------------------
    

    Net R&D expenses have grown in U.S. dollars over the first quarter of the
prior year partially as a result of aligning our product investment for video
transport, data communications and consumer connectivity markets to be more in
line with our Company's focus. As a result, we expect a significant increase
in new product introductions in 2008. In addition, $1.1 million of the
year-over-year increase in net R&D is due to the change in the exchange rate.
Our acquisition of Snowbush Microelectronics, which occurred in October 2007,
added $1.6 million to our net R&D expense versus the first quarter of 2007.
    Net R&D expense is up $2.0 million over the fourth quarter of 2007
primarily due to the inclusion of a full quarter of expenses from Snowbush
Microelectronics and an increase in tapeout activity in the first quarter of
2008.
    Sales, marketing and administrative expense has increased by $3.0 million
in 2008 over the first quarter of 2007 of which $1.2 million is a result of
the change in the exchange rate and has increased by $0.3 million is a result
of the acquisition of Snowbush Microelectronics.
    The rest of the increase represents investments in fundamental activities
such as broadening our sales presence, accelerating new product introductions,
branding and corporate business development.
    Versus the fourth quarter of 2007, sales, marketing and administrative
expenses decreased by $1.1 million. The change in currency rate was not a
factor. Now, with a stronger foundation in place, and the Company positioned
for growth in revenue, we expect to leverage investments made.

    FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RE

SOURCES Cash and cash equivalents The cash and cash equivalents balance at February 29, 2008 was $46.5 million, an increase of $12.3 million from the end of the 2007 fiscal year. This was primarily due to the cash proceeds received from the sale of the VXP(R) Image Processing business to Sigma Designs for $16.9 million, net of deal costs, and cash proceeds received from the sale of the manufacturing land and building for an additional $4.3 million. This was partially offset by the payment of $4.1 million of the deferred equity related to the Snowbush Microelectronics acquisition, the purchase of a second LTX high speed tester for our prototyping operations, investment in an ERP system and a one-time vacation pay out to employees in December of $1.0 million. Cash generated in continuing operating activities was $1.9 million for the quarter, compared to cash used of $0.7 million in the first quarter of 2007. Management believes that the current balance in cash and cash equivalents, 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 29, 2008, the accounts receivable balance was $21.6 million, consistent with the balance at the end of the 2007 fiscal year. The November 30, 2007 balances exclude receivables related to the assets held for sale. There were no material write-offs during the quarter. Inventories Inventories of $13.5 million at February 29, 2008 were slightly higher by $1.4 million compared to the end of the 2007 fiscal year. The November 30, 2007 balances exclude inventory related to the assets held for sale. The increase was caused by a planned investment in finished goods related to legacy products approaching the end-of-life stage. Instruments held for trading and long-term investments On August 24, 2007, the Company received a 9% interest, or $1,877, in shares of CellPoint Connect (2.3 million shares), as partial consideration for the sale of the Company's Consumer Headset product line. The agreement with CellPoint required it to repurchase $938 of the shares based on the price at which the shares were issued in two installments of $469 each; the first such repurchase occurred in February 2008, and the second repurchase is expected to occur in the second quarter of 2008. The shares related to the second repurchase have been classified as held for trading and are recorded on the balance sheet at $516 at its fair value. The portion of the shares which are not designated for repurchase by CellPoint are recorded on the balance sheet at their market value of $532 and are classified as available for sale under long-term investments. In the first quarter of 2008, an unrealized increase in market value of $6 was recorded to Other Comprehensive Income. In November 2005, the Company received a 6% interest, or $2,734, in shares of Nanoscience Inc. (11.1 million shares) as consideration for the sale of the Company's 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 $1,704 as at February 29, 2008 (November 30, 2007 - $2,563). This investment has been classified as available for sale and is therefore recorded on the balance sheet at its fair value with changes in the fair value in the period of $897 recorded in Other Comprehensive Income. Fair value is based on the trading price of the shares and the impact of currency fluctuations. Accounts payable and accrued liabilities Accounts payable and accrued liabilities at February 29, 2008 were $11.9 million, which represents a decrease of 33% or $5.8 million compared to the end of fiscal 2007. The November 30, 2007 balance exclude payables related to the liabilities held for sale. The reduction resulted primarily from the payment of $4.1 million of the deferred equity component of the Snowbush Microelectronics acquisition, the purchase of a second LTX high speed tester for our prototyping operations and a one-time vacation pay out to employees in December of $1.0 million. Total assets Total assets as at February 29, 2008 were $169.3 million, an increase of $5.5 million from the 2007 year end, resulting primarily from the proceeds received on the sale of the VXP(R) Image Processing business and the sale of the manufacturing land and building, partially offset by the disposal of assets held for sale and payment of the deferred equity component related to the Snowbush Microelectronics acquisition. Capital expenditures Capital additions were $2.2 million in the first quarter of 2008 compared to $0.5 million in the same period in 2007. Capital additions in the first quarter of 2008 consisted partially of R&D items (21%) and manufacturing test equipment (3%). R&D spending is supporting the continued investment in product development. Spending on our new ERP system also contributed to the increase. Dividends Total dividends of $1.2 million, or $0.035 per share, were paid in the first quarter of 2008 (Q1 2007 - $1.1 million, or $0.035 per share). Derivative financial instruments Effective December 1, 2007, the Company adopted new accounting policies that required additional disclosures on financial instruments. See below under Changes in Significant Accounting Policies and note 1 to the unaudited consolidated financial statements for the first quarter of 2008 for a discussion regarding the changes. As at February 29, 2008, we had entered into foreign exchange forward contracts to sell an aggregate amount of US $20,300 and yen 1,058,000 as at February 29, 2008. These contracts mature at the latest on February 24, 2009 at exchange rates varying between Canadian $0.9870 and Canadian $1.0712 against the US dollar, and between Canadian $0.00884 and Canadian $0.00969 against the Japanese yen. Management estimates that a gain of $49 would be realized if the contracts were terminated on February 29, 2008. The fair values of the foreign exchange forward contracts are based on market information from major financial institutions. These forward contracts are considered cash flow hedges and therefore the gain of $33, net of future income tax liability, has been included in Other Comprehensive Income. This gain is expected to be reclassified to net income over the next twelve months as the forward contracts mature. During the quarter, there were no firm commitments that no longer qualified as hedges and no forecasted transactions that failed to occur. Realized gains on foreign exchange forward and spot contracts were $0.6 million during the 2008 first quarter (Q1 2007 - realized losses of $0.1 million). CONTRACTUAL OBLIGATIONS (in thousands of U.S. dollars) ------------------------------------------------------------------------- Payments Due by Period ---------------------- Less than Total 1 year 1-3 years 4+ years Operating leases 12,705 4,007 6,257 2,441 Purchase obligations(1) 12,917 10,256 2,661 - License fee obligations and other 89 89 - - ------------------------------------------------------------------------- Total contractual obligations 25,711 14,352 8,918 2,441 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (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. Authorized capital projects in addition to the purchase obligations totalled $6.2 million. 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 Patent litigation As previously disclosed, we were the subject of a patent infringement claim in the United States District Court. This claim related to a limited number of non-core Gennum products. A judgment received in June 2007 ruled that the Gennum devices which were the subject matter of the claim did not infringe most of the asserted claims and that the rest of the other asserted claims were not valid. The case has been appealed and Gennum has cross-appealed. It is our expectation that the appeal will be heard in mid-2008. 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 audited November 30, 2007 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 2007 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, 2007 audited Consolidated Financial Statements, except as described below. Changes in Significant Accounting Policies Effective December 1, 2007, the Company adopted the following Canadian Institute of Chartered Accountants (CICA) Handbook Section 3862, Financial Instruments - Disclosures; Section 3863, Financial Instruments - Presentation; and Section 1535, Capital Disclosures. The adoption of the new standards resulted in additional note disclosure requirements. For a description of the principal changes 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 29, 2008. CONTROLS AND PROCEDURES There have been no changes in the Company's internal control over financial reporting during the first quarter of 2008 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. Common shares outstanding At February 29, 2008, there were 35,618,486 common shares of Gennum outstanding, compared with 35,775,086 shares at November 30, 2007. On June 28, 2007, the Company announced a normal course issuer bid to acquire for cancellation up to 3,458,782 of its common shares (approximately 10% of the public float). The bid commenced on July 3, 2007 and will expire on July 2, 2008. Under this bid, the Company repurchased 24,800 common shares for approximately $0.3 million in the first quarter (an additional 131,800 common shares were repurchased in the fourth quarter of 2007 but not cancelled until the first quarter of 2008). The June 28, 2007 bid replaces the Company's previous normal course issuer bid, which expired on June 29, 2007. Under that bid, the Company purchased a total of 212,300 of its common shares. At the end of the first quarter of 2008, there were 1,975,510 options, each entitling the holder to purchase one common share of Gennum outstanding of which 555,737 are exercisable as at February 29, 2008. 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. For a discussion of the risks, please refer to our Annual Information Form, dated February 13, 2008, and our 2007 Annual Report and other public filings. OUTLOOK Semiconductor industry analysts have revised their forecasted yearly growth rate from an average of 7% to approximately 3% for 2008. With our focus in optical, analog and mixed-signal, and IP areas, we address a unique, high-growth segment of the semiconductor industry. We remain confident that our company is well positioned to continue to outpace the industry's average growth rate in 2008. As we progress through 2008, we will continue to invest in new products to drive increased design wins and defend our position in our core markets and capitalize on new opportunities in adjacent markets. We remain committed to optimizing our overall sales, marketing and administration expenditures and investing in programs that are essential for our future growth and profitability. On a product line basis, AMS revenues in the first quarter were up year over year. We expect the video broadcast and data communications markets to remain robust and to benefit from new products introduced to the market. Optical revenue is expected to show good growth over 2007, but the rate of growth by quarter in 2008 is expected to be more variable. IP revenue is on track to meet our 2008 revenue expectations. Our gross margins are expected to remain strong. Our continued focus on driving operational efficiencies and increasing productivity is expected to help offset market price pressures. We are committed to meeting our operating margin target of greater than 20%. With our final divestiture completed in February 2008, we are now fully focused on investing in and growing our core portfolio. We believe that we are now better positioned to capitalize on the strong demand in our core markets. Additionally, by leveraging our product and IP portfolio to address adjacent high-growth markets, we can significantly increase the total available market for Gennum products. Our expanded global sales and distribution network provides the conduit through which these products will more efficiently reach existing and new customers in regions critical to our future growth. Management is confident the continued execution to its well-defined and focused growth plan will strengthen the Company and enhance shareholder value. March 26, 2008 GENNUM CORPORATION Unaudited Consolidated Financial Statements For the Three Months ended February 29, 2008 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 (U.S. dollars, amounts in thousands) As at February 29, November 30, 2008 2007 (unaudited) (audited) ------------------------------------------------------------------------- ASSETS Current Cash and cash equivalents 46,465 34,141 Instruments held for trading (note 10) 516 1,000 Accounts receivable, net 21,565 20,951 Inventories 13,485 12,131 Prepaid expenses and other assets 4,164 4,371 Promissory notes receivable (note 12) 1,367 1,051 Loan receivable (note 12) 1,344 - Income taxes receivable 1,256 3,054 Future income taxes 18,799 20,372 Assets held for sale (note 4) - 6,576 ------------------------------------------------------------------------- Total current assets 108,961 103,647 ------------------------------------------------------------------------- Capital assets, net (note 3) 27,184 26,037 Long-term investments (note 11) 2,236 3,079 Intangible assets, net (note 13) 7,171 7,467 Loan receivable (note 12) - 658 Promissory note receivable (note 12) 1,531 1,749 Goodwill (note 13) 20,920 19,393 Future income taxes 1,330 893 Assets held for sale (note 4) - 922 ------------------------------------------------------------------------- 169,333 163,845 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Accounts payable and accrued liabilities 11,859 17,678 Deferred revenue 546 733 Income taxes payable 338 214 Future income taxes 612 2,129 Liabilities related to assets held for sale (note 4) 100 1,740 ------------------------------------------------------------------------- Total current liabilities 13,455 22,494 ------------------------------------------------------------------------- Long-term payable (note 9) 2,559 2,504 Future income taxes 2,372 2,491 ------------------------------------------------------------------------- Shareholders' equity Capital stock (note 14) 8,629 8,680 Deferred compensation (2,894) (3,404) Retained earnings 105,054 93,200 Contributed surplus 1,347 1,078 Accumulated other comprehensive income 38,811 36,802 ------------------------------------------------------------------------- Total shareholders' equity 150,947 136,356 ------------------------------------------------------------------------- 169,333 163,845 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Commitments and contingencies (note 20) Gennum Corporation CONSOLIDATED STATEMENTS OF EARNINGS (unaudited) (U.S. dollars, amounts in thousands except per share data) Three Months Ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- Revenue (note 16) 30,101 22,831 Cost of goods sold 7,240 4,806 ------------------------------------------------------------------------- Gross margin 22,861 18,025 ------------------------------------------------------------------------- Sales, marketing and administration expense 8,205 5,209 Research and development expense 9,859 5,040 Less government assistance (1,704) (946) ------------------------------------------------------------------------- 16,360 9,303 ------------------------------------------------------------------------- Operating earnings 6,501 8,722 Investment income 305 410 Other income (note 17) 922 310 ------------------------------------------------------------------------- Earnings from continuing operations before income taxes 7,728 9,442 Provision for income taxes (note 18) 3,158 3,283 ------------------------------------------------------------------------- Net earnings for the period, from continuing operations 4,570 6,159 Earnings (loss) on discontinued operations, net of tax (note 4) 8,753 (2,492) ------------------------------------------------------------------------- Net earnings for the period 13,323 3,667 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share Continuing operations - basic and diluted $ 0.13 $ 0.17 Discontinued operations - basic and diluted $ 0.24 $ (0.07) ------------------------------------------------------------------------- Net earnings - basic and diluted $ 0.37 $ 0.10 ------------------------------------------------------------------------- Dividends declared per share $ 0.035 $ 0.035 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (Dividends declared per share - Cdn. $0.035 in both Q1 2008 and 2007). CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited) (U.S. dollars, amounts in thousands) Three Months Ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- Capital stock Balance at beginning of the period 8,680 8,431 Proceeds from shares issued on exercise of options - 176 Shares repurchased under normal course issuer bid (51) - ------------------------------------------------------------------------- Balance at end of the period 8,629 8,607 ------------------------------------------------------------------------- Deferred compensation Balance at beginning of the period (3,404) (1,782) New awards (20) - Forfeitures 148 114 Amortization 382 225 ------------------------------------------------------------------------- Balance at end of the period (2,894) (1,443) ------------------------------------------------------------------------- Retained earnings Balance at beginning of the period 93,200 103,936 Net earnings 13,323 3,667 Dividends (1,252) (1,081) Repurchase of common shares (217) - ------------------------------------------------------------------------- Balance at end of the period 105,054 106,522 ------------------------------------------------------------------------- Contributed surplus Balance at beginning of the period 1,078 83 Stock option amortization 269 136 ------------------------------------------------------------------------- Balance at end of the period 1,347 219 ------------------------------------------------------------------------- Accumulated other comprehensive income (loss), net of income taxes Balance at beginning of the period 36,802 20,089 Transition adjustment on adoption of financial instruments standards - (675) Other comprehensive income (loss) for the period 2,009 (3,343) ------------------------------------------------------------------------- Balance at end of the period 38,811 16,071 ------------------------------------------------------------------------- Total shareholders' equity at end of the period 150,947 129,976 ------------------------------------------------------------------------- ------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) (U.S. dollars, amounts in thousands) Three Months Ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- Net earnings for the period 13,323 3,667 Other comprehensive income, net of income taxes Change in unrealized gains (losses) on translating financial statements to U.S. dollar reporting 2,868 (3,088) Change in gains on derivative instruments designated as cash flow hedges(1) (273) (321) Reclassification to earnings of gains on cash flow hedges(2) 305 21 Change in unrealized (losses) gains on available for sale financial assets (891) 45 ------------------------------------------------------------------------- Comprehensive income for the period 15,332 324 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (1) - Net of income taxes of $137 (2) - Net of income taxes of $154 Gennum Corporation CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (U.S. dollars, amounts in thousands) Three Months Ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- OPERATING ACTIVITIES Net earnings from continuing operations for the period 4,570 6,159 Items not affecting cash Depreciation and amortization 1,895 1,242 Deferred compensation & option amortization 704 362 Accrued interest on loan receivable (46) - Gain on financial instrument valuation (5) (21) Future income taxes (149) (471) ------------------------------------------------------------------------- 6,969 7,271 Net change in non-cash working capital balances related to continuing operations (5,104) (7,967) ------------------------------------------------------------------------- Cash provided by (used in) operating activities of continuing operations 1,865 (696) Cash (used in) provided by operating activities of discontinued operations (8,017) 374 ------------------------------------------------------------------------- Cash used by operating activities (6,152) (322) ------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of capital assets (2,181) (485) Acquisition, other than cash acquired (1,093) - Proceeds from sale of VXP 18,302 - Proceeds from sale of land and building 4,290 - Promissory notes receivable (652) - Sale of CellPoint investment 502 - ------------------------------------------------------------------------- Cash provided (used in) investing activities of continued operations 19,168 (485) Cash provided by (used in) investing activities of discontinued operations 105 (741) ------------------------------------------------------------------------- Cash provided by (used in) investing activities 19,273 (1,226) ------------------------------------------------------------------------- FINANCING ACTIVITIES Stock options exercised - 176 Deferred compensation awarded, net of forfeitures 55 113 Shares repurchased under normal course issuer bid (268) - Dividends paid (1,252) (1,081) ------------------------------------------------------------------------- Cash used in financing activities (1,465) (792) ------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 668 (967) ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents during the period 12,324 (3,307) Cash and cash equivalents, beginning of the period 34,141 41,540 ------------------------------------------------------------------------- Cash and cash equivalents, end of the period 46,465 38,233 ------------------------------------------------------------------------- ------------------------------------------------------------------------- During the first quarter of 2008, interest expense paid was nil (Q1 2007 - nil) and income taxes paid was $307 (Q1 2007 - $1,271). GENNUM CORPORATION Notes To Consolidated Financial Statements (U.S. 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, 2007. Changes in accounting policies Effective December 1, 2007, the Company adopted the following Canadian Institute of Chartered Accountants (CICA) Handbook Sections: Section 3862, Financial Instruments - Disclosures and Section 3863, Financial Instruments - Presentation, which modify the disclosure and presentation requirements for CICA Handbook Section 3861. These sections have been applied in accordance with the transitional provisions, which do not require restatement of prior periods. The CICA Handbook Section 3861 required disclosure that enables a user of the financial statements to evaluate the significance of the Company's financial instruments and the nature and extent of risks arising from those financial instruments. The CICA Handbook Section 3863 carries forward the presentation requirements of CICA Handbook Section 3861. The new disclosures are included in note 15. Section 1535, Capital Disclosures requires the Company to make new disclosures to enable users of the financial statements to evaluate the Company's objectives, policies and procedures for managing capital. These new disclosures are shown in note 19. (a) Asset Impairment The Company follows the guidance in the CICA Handbook Section 3063, "Impairment of Long-Lived Assets". When events or circumstances warrant a review, the Company evaluates the carrying value of long-lived and intangible assets for potential impairment. The carrying value of such assets are considered impaired when the anticipated net recoverable amount of the asset is less than its carrying value. In that event, the carrying value of the asset is adjusted to fair value and an impairment loss is recorded. (b) Held for Sale and Discontinued operations The Company follows the guidance in the CICA Handbook Section 3475, "Disposal of long-lived assets and discontinued operations" in classifying certain of its operations as held for sale and discontinued operations. Assets classified as held for sale other than long-lived assets were reviewed for impairment in accordance with their specific CICA Handbook Sections. Long-lived assets were then recorded at the lower of carrying amount or fair value less cost to sell. 2. CHANGE OF REPORTING CURRENCY Effective December 1, 2007, the Company adopted the U.S. dollar as its reporting currency, but has retained the Canadian dollar as its functional currency. Management believes that reporting in U.S. dollars will improve the comparability of the Company's financial position and results of operations to others in its industry. As a result of adopting the U.S. dollar as its reporting currency for both the current and prior periods, the cumulative translation adjustment effect of prior periods have been reflected in the opening balances in accumulated other comprehensive income. In accordance with Canadian GAAP, the Company uses the current rate method to translate all amounts presented to U.S. dollars. Under the current rate method, all assets and liabilities of the Company's operations are translated from their Canadian dollar functional currency into U.S. dollars using exchange rates in effect at the end of the reporting period; revenue, expenses and cash flows are translated at the average rates during the reporting period; and any associated translation gains or losses are recorded as a separate component of shareholders' equity in accumulated other comprehensive income. All comparative figures presented have been translated using the same method. For the first quarter ended February 29, 2008, revenue, expenses and cash flows have been translated from Canadian dollars to U.S. dollars at the average rate of $1.0034 (February 28, 2007 - $0.8627) Canadian dollars per one U.S. dollar and assets and liabilities have been translated at the period end rate of $1.0206 (November 30, 2007 - $0.9992) Canadian dollars per one U.S. dollar. References to fiscal year 2007 figures in the notes to the consolidated financial statements have been translated using the respective quarterly average historical rates, except for balance sheet figures, which have been translated using the respective ending balance sheet rates. 3. CAPITAL ASSETS February 29, November 30, 2008 2007 ------------------------------------------------------------------------- Land 2,106 2,062 Buildings 7,886 7,995 Equipment and furniture 15,919 13,511 Computer software and hardware 1,273 2,469 ------------------------------------------------------------------------- 27,184 26,037 ------------------------------------------------------------------------- The depreciation expense for buildings, equipment and furniture and computer software and hardware in the first quarter of 2008 was $153, $1,040 and $254, respectively (Q1 2007 - $129, $763 and $280). The 2007 carrying value of capital assets associated the Company's divestiture activities have been reclassified to assets held for sale (see note 4). 4. RECONCILIATION OF ASSETS AND LIABILITIES HELD FOR SALE AND DISCONTINUED OPERATIONS As part of the Company's 2007 and future strategic initiatives to focus and deliver on innovative optical, analog and mixed signal solutions to the world, management conducted a detailed assessment and prioritization of the entire portfolio of businesses and technologies. As a result of the assessment, key strategic activities included the divestiture activities of our non-core businesses that included Consumer Headsets (see note 5), Hearing and Manufacturing operations (see note 6), VXP(R) Image Processing (see note 7) and Falcon(TM) wireless technology (see note 8). As a result of the aforementioned divestitures, certain figures for 2007 and 2008 for assets and liabilities and operating results have been re- classified to assets and liabilities held for sale, and operating results to discontinued operations in accordance with CICA Handbook Section 3475 - Disposal of Long-Lived Assets and Discontinued Operations. The following table summarizes these reclassifications: Discontinued Operations ------------------------------------------------------------------------- Three months ended February 29, 2008 ------------------------------------------------------------------------- Falcon Headset Hearing/ VXP(R) TOTAL (TM) Mfg (1) ------------------------------------------------------------------------- Revenue - - - 1,290 1,290 Operating loss, before tax - - (443) (3,240) (4,582) Gain (loss) on sale - - (456) 13,796 13,340 ------------------------------------------------------------------------- - - (899) 10,556 9,657 Income tax (expense) recovery - - 301 (1,205)(2) (904) ------------------------------------------------------------------------- Earnings (loss) from discontinued operations, net of tax - - (598) 9,351 8,753 ------------------------------------------------------------------------- (1) The liabilities of $100 associated with assets held for sale as at February 29, 2008 is related to the VXP(R) severance costs that will be paid out over the remaining months in 2008 as part of certain employer's severance agreements. (2) The gain on sale is considered a capital gain and is therefore only 50% taxable. In addition, the use of loss carryforwards also reduced the income tax expense. Assets and Liabilities Held for Sale ------------------------------------------------------------------------- As at November 30, 2007 ------------------------------------------------------------------------- Headset Hearing/ VXP(R) TOTAL Mfg ------------------------------------------------------------------------- ASSETS Current Accounts receivable, net - - 673 673 Inventories - - 804 804 Prepaid expenses - - 153 153 Capital assets, net - 4,946 - 4,946 Intangible assets, net - - - - ------------------------------------------------------------------------- Total current assets held for sale - 4,946 1,630 6,576 ------------------------------------------------------------------------- Long-Term Capital assets, net - - 540 540 Intangible assets, net - - 382 382 ------------------------------------------------------------------------- Total long-term assets held for sale - - 922 922 ------------------------------------------------------------------------- LIABILITIES Current Accounts payable and accrued liabilities - 675 1,065 1,740 ------------------------------------------------------------------------- Total current liabilities held for sale - 675 1,065 1,740 ------------------------------------------------------------------------- Discontinued Operations ------------------------------------------------------------------------- Three months ended February 28, 2007 ------------------------------------------------------------------------- Falcon Headset Hearing/ VXP(R) TOTAL (TM) Mfg ------------------------------------------------------------------------- Revenue - 186 5,632 1,443 7,261 Operating (loss) profit, before tax (825) (933) 237 (2,262) (3,783) Income tax recovery (expense) 282 318 (81) 772 1,291 ------------------------------------------------------------------------- (Loss) earnings on discontinued operations, net of tax (543) (615) 156 (1,490) (2,492) ------------------------------------------------------------------------- 5. SALE OF CONSUMER HEADSET BUSINESS On August 24, 2007, the Company sold its Consumer Headset product line to CellPoint Connect (Canada) Inc. ("CellPoint") in exchange for $1,877 in shares of CellPoint's parent company, CellPoint Connect AB ("CellPoint Connect"), a publicly traded company on the Aktie Torget stock exchange in Sweden, (see note 10) and a $281 promissory note, due September 30, 2008. The promissory note was discounted to $270 using the effective interest method, resulting in interest income of $11 that will be recognized as income from continuing operations over the term of the note (see note 12). The Company is also entitled to performance-based payments of up to $938 payable on or before March 15, 2009. The Company agreed to extend a loan to CellPoint in two separate advances of $610, the second advance conditional upon the repurchase of CellPoint Connect shares by CellPoint which have at least a value of $469. The advances are non-revolving and interest bearing at 5%, compounded quarterly. The initial repurchase of CellPoint Connect shares occurred in February 2008, and the second repurchase is expected to occur in the second quarter of 2008. The advances, including accrued interest, are due February 26, 2009. The sale of the Consumer Headset product line resulted in a loss of $367, net of transaction costs, and was part of the Company's Audio & Wireless business unit. The loss was calculated as follows: Accounts receivable 451 Inventories 1,775 Capital assets, net 141 Transaction costs 235 Accounts payable and accrued liabilities (88) ------------------------------------------------------------------------- 2,514 ------------------------------------------------------------------------- Promissory note 270 CellPoint shares 1,877 ------------------------------------------------------------------------- 2,147 ------------------------------------------------------------------------- Loss on sale 367 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The first quarter 2007 operating results related to the Company's Consumer Headset product line have been re-classified as discontinued operations in accordance with the CICA Handbook Section 3475 - Disposal of Long-Lived Assets and Discontinued Operations (see note 4). 6. SALE OF HEARING INSTRUMENT AND MANUFACTURING OPERATIONS On October 19, 2007, the Company completed the sale of its Hearing Instrument and Manufacturing Operations, excluding the manufacturing land and building, to Sound Design Technologies Ltd (Sound Design), a Gores Equity, LLC portfolio company for $5,055 in cash and a $2,503 interest bearing promissory note. The promissory note bears interest at 5% per annum with scheduled quarterly principal payments of $250 beginning in April 2008, and the remaining balance plus accrued interest due in April 2010. An advance of $676 was also made by Sound Design on the manufacturing land and building that were sold subsequent to year-end to a third party for an additional $4,290, who in turn leased the manufacturing land and building to Sound Design. In addition, following the close of the disposal transaction, we are receiving fees from Sound Design to provide certain administrative functions for a limited period of time and for the lease of office space. We do not have any significant continuing involvement in or retain any ownership interest in these operations and, therefore, the continuing cash flows are not considered direct cash flows of the disposal group. During 2007, an initial non-cash impairment charge totaling $8,398 was taken on the manufacturing group of assets with an additional impairment charge of $664 taken in the fourth quarter of 2007 as it was determined that the fair value was less than carrying value. The impairment charge has been included as part of the loss on discontinued operations. The sale of the Hearing Instrument and Manufacturing Operations, excluding the manufacturing land and building, resulted in a loss of $7,756, and was part of the Company's Audio & Wireless business unit. The loss on the sale was calculated as follows: Accounts and other receivables 3,631 Inventories 10,389 Prepaid and other assets 288 Capital assets, net 342 Intangible assets 115 Transaction costs 1,823 Accounts payable and accrued liabilities (1,274) ------------------------------------------------------------------------- 15,314 ------------------------------------------------------------------------- Cash 5,055 Promissory note 2,503 ------------------------------------------------------------------------- 7,558 ------------------------------------------------------------------------- Loss on sale 7,756 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The November 30, 2007 assets and liabilities and the first quarter 2008 and 2007 operating results related to the Company's Hearing Instrument and Manufacturing operations have been reclassified as assets held for sale and discontinued operations in accordance with the CICA Handbook Section 3475 - Disposal of Long-Lived Assets and Discontinued Operations (see note 4). 7. SALE OF VXP(R) IMAGE PROCESSING BUSINESS On February 8, 2008, the Company completed the sale of its VXP(R) Image Processing business to Sigma Designs for $18,302. The sale of the VXP(R) Image Processing business has also resulted in the termination of approximately 30 employees in January 2008. The cost of severing these employees was approximately $1,275 and was accrued for in the fourth quarter of 2007. In addition, following the close of the disposal transaction, we are receiving fees from Sigma Designs to provide certain administrative functions for a limited period of time and for the lease of office space. We do not have any significant continuing involvement in or retain any ownership interest in these operations and, therefore, the continuing cash flows are not considered direct cash flows of the disposal group. The sale of the VXP(R) Image Processing business resulted in a gain of $13,873 and was calculated as follows: Accounts receivable 882 Inventories 1,293 Prepaid and other assets 136 Capital assets, net 550 Intangible assets 384 Transaction costs 1,407 Accounts payable and accrued liabilities (223) ------------------------------------------------------------------------- 4,429 ------------------------------------------------------------------------- Cash 18,302 ------------------------------------------------------------------------- Gain on sale 13,873 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The November 30, 2007 assets and liabilities and the first quarter 2008 and 2007 operating results related to the Company's VXP(R) Image Processing business have been reclassified as assets held for sale and discontinued operations in accordance with the CICA Handbook Section 3475 - Disposal of Long-Lived Assets and Discontinued Operations (see note 4). 8. FALCON(TM) BUSINESS ABANDONMENT Subsequent to the strategic alternative review for the Audio & Wireless division and with the Company's ongoing strategy to focus on its core products, management was unable to find a bona-fide buyer for the Falcon(TM) product line and it was abandoned in the fourth quarter of 2007. The abandonment resulted in writing off all assets related to the Falcon(TM) product line in the fourth quarter of 2007, including the balance of $1,273 against the long-term prepaid royalty and $441 on the remaining balances related to accounts receivable, prepaids, inventory and capital assets; severance costs associated with the abandonment were approximately $130. The first quarter of 2007 operating results associated with the Falcon(TM) product line have been reclassified to discontinued operations (see note 4). 9. ACQUISITION On October 30, 2007, the Company acquired 100% of the shares of Zeptonics Corp., the holding company of Snowbush Microelectronics Inc., for a total initial consideration of $25,349 including transaction costs of $631. The initial consideration was comprised of cash of $17,325, the assumption of accounts payable of $263 and the following future cash outlays: (a) Deferred cash payments totaling $3,764 with one third of the total due each subsequent year following the anniversary date of the acquisition; $2,509 has been classified as a long-term payable. The deferred cash payments have been discounted at 6% using the effective interest rate method, resulting in a discount that will be amortized as expense from continuing operations over the three-year period. (b) Estimated deferred equity payment of $3,779. The deferred equity relates to the deliverance of 386,085 of the Company's common shares and occurred in February 2008. To hedge against the price risk associated with the purchase of the deferred equity, the Company entered into a cash-settled share forward transaction with a major financial institution, whereby the financial institution purchased the 386,085 common shares in the open market for $4,199, plus $75 of deal-related costs. The difference between the estimated deferred equity payment and actual cost of the common share purchase and deal-related costs has been accounted for as a purchase price adjustment to goodwill in the first quarter of 2008. (c) Estimated deferred WIP contract payment of $2,451. The deferred WIP contract relates to payments on post acquisition proceeds received, less costs incurred to complete, for certain contracts that existed on the acquisition date over a period of six quarters, with the first quarter ending January 31, 2008. The WIP contract payment accrual associated with the first quarter was $573 and has resulted in a purchase price adjustment to goodwill. The estimated remaining WIP contract payments will be accounted for as a purchase price adjustment in subsequent periods. In the first quarter of 2008, the purchase price was adjusted for the actual cost associated with the purchase of the deferred equity, accrual for the first quarter WIP contract payment and deal-related costs, totaling $1,177, resulting in an adjusted total consideration of $26,526. The acquisition was accounted for under the purchase method and the operating results have been included in the Company's operating results from the acquisition date. The purchase price allocation was assigned to the net identifiable assets acquired based on their fair values as follows: Cash 3,056 Accounts receivable 2,563 Prepaids and other assets 223 Income taxes recoverable 746 Capital assets 613 Future income taxes 424 Identifiable intangible assets subject to amortization Technology 4,104 Supplier relationships 1,301 In process development 701 Customer value 110 Contracts in process 140 ------------------------------------------------------------------------- 13,981 ------------------------------------------------------------------------- Accounts payable and accrued liabilities (644) Deferred revenue (615) Income taxes payable (155) Dividends payable (1,602) Future income taxes (2,511) ------------------------------------------------------------------------- (5,527) ------------------------------------------------------------------------- Excess of adjusted purchase price over fair value of identifiable net assets acquired (goodwill) (note 13) 18,072 ------------------------------------------------------------------------- Total adjusted purchase price, including transaction costs 26,526 ------------------------------------------------------------------------- 10. INSTRUMENTS HELD FOR TRADING On August 24, 2007, the Company received a 9% interest, or $1,877 in shares of CellPoint Connect (2.3 million shares), as partial consideration for the sale of its Consumer Headset product line (see note 5). The agreement with CellPoint required them to repurchase $939 of the shares based on the price at which the shares were issued in two installments of $469 each; the first repurchase occurred in February 2008. The shares related to the second repurchase have been classified as held for trading and are recorded on the balance sheet at $516 at its fair value as at February 29, 2008. The portion of the shares which are not designated for repurchase by CellPoint are recorded on the balance sheet at their market value of $532 and are classified as available for sale under long-term investments. In the first quarter of 2008, an unrealized increase in market value of $6 was recorded to Other Comprehensive Income. 11. LONG TERM INVESTMENTS In November 2005, the Company received a 6% interest, or $2,734 in shares of 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 $1,704 as at February 29, 2008 (November 30, 2007 - $2,563). This investment has been classified as available for sale and is therefore recorded on the balance sheet at its fair value with changes in the fair value of $897 recorded in Other Comprehensive Income. Fair value is based on the trading price of the shares and the impact of currency fluctuations. As described in note 10, half of the investment in CellPoint Connect shares with a fair market value of $532 has been classified as available for sale under long-term investments. 12. PROMISSORY NOTES AND LOAN RECEIVABLE On August 24, 2007, the Company sold its Consumer Headset product line to CellPoint (see note 5). The proceeds included a $281 non-interest bearing promissory note, due September 30, 2008. The promissory note has been discounted to $270 using the effective interest method, resulting in interest income of $11 that will be recognized as income from continuing operations over the term of the note. In addition, the Company extended a $1,220 loan to CellPoint, bearing interest at 5%, compounded quarterly. The loan, including accrued interest, of $1,344 is due February 26, 2009. On October 19, 2007, the Company received $2,503 in an interest bearing promissory note as part of the consideration received from the sale of the Hearing and Manufacturing Operations to Sound Design Technologies Ltd. The promissory note bears interest at 5% per annum with scheduled quarterly principal payments of $250 beginning in April 2008, and the remaining balance plus accrued interest due in April 2010 (see note 6). $1,067 including accrued interest has been classified as short-term, and $1,531 as long-term. 13. GOODWILL AND INTANGIBLE ASSETS (i) Goodwill Goodwill of $1,889 was acquired in the purchase of SiGe Semiconductor Inc.'s LightCharger(TM) optical networking business in May 2004. In October 2007, additional goodwill of $16,895 was acquired through the purchase of 100% of the shares of Zeptonics (see note 9). As discussed in note 9, there ws an adjustment to goodwill of $1,177 in the first quarter of 2008, and there will be continuing adjustments for the remainder of 2008. Goodwill is reviewed annually for impairment. There were no impairment issues relating to goodwill in the first quarter of 2008 or 2007. (ii) Intangible Assets February 29, November 30, 2008 2007 ------------------------------------------------------------------------- Licence fees 183 179 Technology - SiGe 2,267 2,219 Technology - Snowbush 4,184 4,097 Supplier relationships 1,327 1,299 In process development 714 699 Customer value 112 110 Contracts in process 144 140 ------------------------------------------------------------------------- 8,931 8,743 Less accumulated amortization (1,760) (1,276) ------------------------------------------------------------------------- 7,171 7,467 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Licence fees are amortized using the straight-line method over the estimated useful lives ranging from three to five years. Technology - SiGe represents 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. Technology - Snowbush represents supplier relationships, in process development, customer value and contracts in process assets resulting from the Snowbush acquisition in October 2007 (see note 9). These identifiable intangible assets are amortized using the straight-line method over the estimated useful lives ranging from one to five years. No intangible assets were written off in the first quarter of 2008 and 2007. Amortization expense for the first quarter of 2008 was $448 (Q1 2007 - $70). The 2007 carrying value of intangible assets associated with the Company's divestiture activities have been reclassified to assets held for sale (see note 4). 14. CAPITAL STOCK The Company has authorized an unlimited number of common shares with no par value, of which 35,618,486 common shares of the Company (November 30, 2007 - 35,775,086) were issued and outstanding as at February 29, 2008 with a stated value of $11,357 (November 30, 2007 - $11,408). An unlimited number of preferred shares have also been authorized, none of which have been issued. Reconciliation of shares outstanding No. of shares Stated Value ------------------------------------------------------------------------- Number of shares outstanding, November 30, 2007 35,775,086 $ 11,408 Stock options exercised - - Shares repurchased under normal course issuer bid (*) (156,600) (51) ------------------------------------------------------------------------- Number of shares outstanding, February 29, 2008 35,618,486 11,357 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (*) Shares repurchased of 131,800 in the fourth quarter of 2007 for approximately $1,407 are included in the shares repurchased under the normal course issuer bid as the shares were cancelled in the first quarter of 2008. During 2007, the Company announced a normal course issuer bid to acquire up to 3.5 million of its common shares. The normal course issuer bid commenced on July 3, 2007 and will terminate on July 2, 2008. During the first quarter of 2008, the Company repurchased 24,800 common shares (Q1 2007 - nil) under the bid for approximately $268 (Q1 2007 - nil). The net excess of the repurchase price over the issue price is allocated to shareholders' equity. Stock option plan The Company has an incentive stock option plan, which provides for the granting of options for the benefit of employees and officers. The total number of Company shares that may be issued under this plan is 2,700,000 of which 1,296,528 remain available for new grants. No stock options were issued outside the plan to new officers upon hiring in the first quarter of 2008. Options issued outside the plan are governed by the same conditions as applicable to the employee stock option plan. Subsequent to February 29, 2008, 2500 stock options were granted. All options are granted for a term of seven years from the grant date with vesting of 25% at the end of the first, second, third and fourth years from the date of grant, respectively. All options allow the holder to purchase common shares at a price equal to the market price of such shares at the date of grant. A summary of the plan and changes during the first quarter of 2008 and 2007 are as follows: 2008 2007 ------------------------------------------------------------------------- Weighted Weighted average average Number exercise Number exercise of shares price (Cdn$) of shares price (Cdn$) ------------------------------------------------------------------------- Outstanding, beginning of year 2,065,885 11.65 1,428,965 11.53 Granted 80,000 10.98 460,000 13.05 Forfeited (170,375) 12.31 (36,300) 12.29 Exercised - - (17,650) 11.54 ------------------------------------------------------------------------- Outstanding, end of first quarter 1,975,510 11.57 1,835,015 11.88 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options exercisable at February 29, 2008 555,737 11.82 611,538 12.40 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The following table summarizes information about options outstanding at February 29, 2008: Options outstanding Options Exercisable ------------------------------------------------------------------------- Weighted Weighted Weighted average average average Range of remaining exercise exercise exercise Number contractual price Number price prices (Cdn$) outstanding life (Cdn$) exercisable (Cdn$) ------------------------------------------------------------------------- $9.59 - $12.00 1,095,808 5.2 years 10.38 355,438 10.90 ------------------------------------------------------------------------- $12.01 - $14.25 861,702 6.0 years 12.97 182,299 13.17 ------------------------------------------------------------------------- $14.26 - $16.50 18,000 0.4 years 16.25 18,000 16.25 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The estimated weighted average fair value of stock options granted during the first quarter of 2008 was Cdn $3.21 (Q1 2007 - Cdn $4.21) per share using the Black-Scholes option-pricing model with the following weighted average assumptions: Three months ended ------------------------------------------------------------------------- February 29, February 28, 2008 2007 ------------------------------------------------------------------------- Risk-free interest rate 3.71% 4.15% Expected dividend yield 1.28% 1.07% Expected volatility 28.7% 30.7% Expected time until exercise 5.5 years 5.5 years ------------------------------------------------------------------------- ------------------------------------------------------------------------- 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: Three months ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- Net earnings from continuing operations 4,570 6,159 Net earnings (loss) from discontinued operations 8,753 (2,492) ------------------------------------------------------------------------- Net earnings for the period 13,323 3,667 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Weighted average shares outstanding (numbers in thousands) 35,503 35,791 Effect of dilutive stock options 68 71 ------------------------------------------------------------------------- Diluted weighted average shares outstanding 35,571 35,862 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share Earnings per share from continuing operations - basic and diluted $0.13 $0.17 Earnings (loss) per share from discontinued operations - basic and diluted $0.24 $(0.07) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Earnings per share - basic and diluted $0.37 $0.10 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Options to purchase 1,328,202 common shares were not included in the computation of diluted earnings per share for the quarter ended February 29, 2008 because the option exercise prices and unamortized compensation costs were greater than the average market price of the common shares. 15. FINANCIAL INSTRUMENTS The company, through its financial assets and liabilities, is exposed to various risks. The following analysis provides a measure of risks as at February 29, 2008: (a) Fair Value The carrying amounts for cash and cash equivalents, accounts receivable, other assets, loan receivable, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. Promissory notes receivable are accounted for at amortized cost using the effective interest rate method. The long-term payable resulting from the Snowbush acquisition (note 9) was recorded at its fair value with the resulting discount being amortized as expense into continuing operations using the effective interest rate method. (b) Foreign Exchange Rate Risk Adoption of U.S. Dollar Reporting As described in note 2, the Company adopted the U.S. dollar as its reporting currency, but has retained its functional currencies. Management believes that reporting in U.S. dollars will improve the comparability of the Company's financial position and results of operations to others in its industry. In accordance with Canadian GAAP, the Company uses the current rate method to translate all amounts presented from Canadian to U.S. dollars. Under the current rate method, all assets and liabilities of the Company's operations are translated from their Canadian dollar functional currency into U.S. dollars using exchange rates in effect at the end of the reporting period; revenue, expenses and cash flows are translated at the average rates during the reporting period; and any associated translation gains or losses are recorded as a separate component of shareholders' equity. All comparative figures presented have been translated using the same method. For the first quarter ended February 29, 2008, revenue, expenses and cash flows have been translated from Canadian dollars to U.S. dollars at the average rate of $1.0034 (February 28, 2007 - $0.8627) Canadian dollars per one U.S. dollar and assets and liabilities have been translated at the period end rate of $1.0206 (November 30, 2007 - $0.9992) Canadian dollars per one U.S. dollar. References to fiscal year 2007 figures in the notes to the consolidated financial statements have been translated using the respective quarterly average historical rates, except for balance sheet figures, which have been translated using the respective ending balance sheet rates. Canadian Dollar Functional Currency Reporting Transactions and balances denominated in currencies other than Canadian dollars are translated on the following basis. Current asset and 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 $20,300 and yen 1,058,000 as at February 29, 2008. These contracts mature at the latest on February 24, 2009 at exchange rates varying between Canadian $0.9870 and Canadian $1.0712 against the US dollar, and between Canadian $0.00884 and Canadian $0.00969 against the Japanese yen. Management estimates that a gain of $49 would be realized if the contracts were terminated on February 29, 2008. The fair values of the foreign exchange forward contracts are based on market information from major financial institutions. These forward contracts are considered cash flow hedges and therefore a gain of $33, net of future income tax liability, has been included in Other Comprehensive Income. This gain is expected to be reclassified to net income over the next twelve months as the forward contracts mature. During the quarter, there were no firm commitments that no longer qualified as hedges and no forecasted transactions that failed to occur. Realized gains on foreign exchange forward and spot contracts were $636 for the quarter (Q1 2007 - realized losses of $147). In the first quarter of 2008, management estimates that revenue net of purchases, royalty payments and operating expenses resulted in currency exposures of about US $18.0 and 0.8 billion yen. Before hedging, our sensitivity to a change of (+/-) one cent in the US to Canadian dollar exchange rate and (+/-) one yen to the Canadian dollar exchange was approximately $0.2 million and $0.1 million respectively, on a pre-tax basis, in Canadian Dollars. (c) Credit Risk The Company is exposed to commercial credit risk from its customers in the normal course of business, which is mitigated by the Company's credit management policies. The Company is exposed to credit risk from potential default by any of its counterparties on its foreign exchange contracts and manages this credit risk by dealing with major financial institutions with high credit ratings. Credit risks associated with holders of promissory notes are managed through regular communication with those holders. As at February 29, 2008, no one customer accounted for more than 10% of revenue or 10% of receivables. The aging of trade receivable balances as of February 29, 2008 was as follows: February 29, 2008 ------------------------------------------------------------------------- Not past due 13,081 ------------------------------------------------------------------------- Past due 0-30 days 6,430 ------------------------------------------------------------------------- Past due 31-60 days 1,047 ------------------------------------------------------------------------- Past due over 61 days 1,178 ------------------------------------------------------------------------- Trade receivables 21,736 Less allowance for doubtful accounts (171) ------------------------------------------------------------------------- 21,565 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (d) Liquidity Risk Liquidity risk is the risk that the Company will not be able to meet its obligations as they fall due. The Company manages its liquidity risk by forecasting cash flows from operations and anticipated investing and financing activities. The following are the undiscounted contractual maturities of financial liabilities as at February 29, 2008: ------------------------------------------------------------------------- Less than 1 year 1 to 2 years After 2 years ------------------------------------------------------------------------- Accounts payable and accrued liabilities 11,859 - - Long-term payable(*) - 1,279 1,279 ------------------------------------------------------------------------- 11,859 1,279 1,279 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (*) The short term portion has been included in accounts payable and accrued liabilities. 16. SEGMENTED INFORMATION As a result of the Company's leadership and product portfolio realignment at the end of 2007, the Company began operating and tracking its results in one reportable segment, consisting of numerous product areas, effective December 1, 2007. The Company's chief operating decision maker is considered to be the Chief Executive Officer. The chief operating decision maker allocates resources and assesses performance of the business and other activities at the operating segment level. The revenue by product portfolio within the single reportable segment, and revenue by geographic area are as follows: Revenue by product portfolio is as follows: Three Months Ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- Analog Mixed Signal 22,561 20,888 Optical 5,269 1,943 IP Licensing 2,271 - ------------------------------------------------------------------------- 30,101 22,831 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue by principal markets is as follows: Three Months Ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- United States 9,798 7,647 Europe 3,362 3,390 Pacific Rim 13,025 7,720 Canada 3,916 4,074 ------------------------------------------------------------------------- 30,101 22,831 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Revenue is attributable to countries based upon the location of customers. Capital assets and goodwill per country are as follows: February 29, November 30, 2008 2007 ------------------------------------------------------------------------- Canada(*) 46,935 44,390 UK 1,152 1,028 Japan 17 12 ------------------------------------------------------------------------- 48,104 45,430 ------------------------------------------------------------------------- ------------------------------------------------------------------------- (*) Goodwill of $20,920 (November 30, 2007 - $ 19,393) is located in Canada. 17. OTHER INCOME (EXPENSE) Three Months Ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- Realized gains (losses) on foreign exchange hedge contracts 636 (147) Unrealized foreign exchange losses on other contracts - (76) Foreign exchange gains on translation 380 587 ------------------------------------------------------------------------- Gain on foreign exchange, net 1,016 364 Other expense (94) (54) ------------------------------------------------------------------------- 922 310 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 18. INCOME TAXES Three Months Ended February 29, February 28, 2008 2007 ------------------------------------------------------------------------- Expected income tax expense using statutory tax rates 2,589 3,222 Permanent differences 125 64 Different income tax rates on earnings of foreign subsidiaries (54) 22 Changes in tax rates and other 498 (25) ------------------------------------------------------------------------- Provision for income taxes 3,158 3,283 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Effective tax rate 40.9% 34.8% ------------------------------------------------------------------------- ------------------------------------------------------------------------- On December 13, 2007, the Government of Canada enacted a 1% decrease in the general federal corporate income tax rate for the calendar year 2008 from 20.5% to 19.5%, which resulted in a reduction in net future income tax assets and an increase in income tax expense of approximately $663 in the first quarter of 2008. 19. CAPITAL RISK MANAGEMENT The Company's objectives when managing capital are to safeguard the Company's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain a conservative capital structure. The Company's capital is composed of shareholders' equity, and is not subject to any capital requirements imposed by a regulator. The Company manages the capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue or re-acquire shares, acquire or dispose of assets, and adjust the amount of cash and cash equivalents balances. 20. COMMITMENTS AND CONTINGENCIES The Company is committed to future minimum lease payments under operating leases for software design tools and buildings as at February 29, 2008 as follows: ------------------------------------------------------------------------- Buildings and Design Tools Equipment Total ------------------------------------------------------------------------- 2008 2,100 1,031 3,131 2009 3,057 892 3,949 2010 2,475 618 3,093 2011 - 358 358 2012 and beyond - 2,174 2,174 ------------------------------------------------------------------------- 7,632 5,073 12,705 ------------------------------------------------------------------------- ------------------------------------------------------------------------- The Company has committed to approximately $19.2 million in purchase obligations as at February 29, 2008, of which $6.2 million is related to authorized capital projects including the implementation of the Company's new ERP system. The remaining purchase obligations relate primarily to inventory, product development and general operating costs. 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. 21. 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: Gennum Media Contact, Robin Vaitonis, Director
of Corporate Communications, Gennum Corporation, Tel: (905) 632-2999 ext.
2110, E-mail: vaitonis@gennum.com; Gennum Investor Relations Contact, Gordon
Currie, Senior Vice-President, Finance & Administration and Chief Financial
Officer, Gennum Corporation, Tel: (905) 632-2999 ext. 3060, E-mail:
gcurrie@gennum.com

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