As filed with the Securities and Exchange Commission on July 13, 2001
EXFO ELECTRO-OPTICAL ENGINEERING INC./
EXFO INGENIERIE ELECTRO-OPTIQUE INC.
(Exact name of Registrant as specified in its charter)
CANADA 98-0131231 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ---------------------- |
Approximate date of commencement of proposed sale to the public: From time to time after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_]
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_]
CALCULATION OF REGISTRATION FEE
=============================================================================================================================== PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE PRICE PER AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE(1) ------------------------------------------------------------------------------------------------------------------------------- Subordinate voting shares....... 6,488,816 shares $14.225 $92,303,407.60 $23,075.85 ------------------------------------------------------------------------------------------------------------------------------- |
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
The information in this prospectus is not complete and may be amended. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED JULY 13, 2001
6,488,816 SHARES
EXFO ELECTRO-OPTICAL ENGINEERING INC.
SUBORDINATE VOTING SHARES
This prospectus relates to the resale of up to an aggregate of 6,488,816 subordinate voting shares of EXFO Electro-Optical Engineering Inc. by Robert G. Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall, the former shareholders of Burleigh Instruments, Inc. The selling shareholders acquired our subordinate voting shares when Burleigh was acquired by us in December 2000. The selling shareholders may sell their subordinate voting shares from time to time in regular brokerage transactions, in transactions directly with market makers or in privately negotiated transactions at fixed prices that may be changed, at market prices prevailing at the time of sale or at negotiated prices.
We will not receive any proceeds from the sale of subordinate voting shares by the selling shareholders.
Our subordinate voting shares are listed and posted for trading on The Toronto Stock Exchange under the symbol "EXF" and are quoted on the Nasdaq National Market under the symbol "EXFO." On July 12, 2001, the closing sale price of our subordinate voting shares was C$24.39 on The Toronto Stock Exchange and was U.S.$15.87 on The Nasdaq National Market.
Investing in our subordinate voting shares involves risks. See "Risk Factors" beginning on page 3 of this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is July , 2001.
TABLE OF CONTENTS
Risk Factors...................................................................3 Cautionary Statement Regarding Forward-Looking Statements.....................13 EXFO..........................................................................14 Use of Proceeds...............................................................17 Determination of Offering Price...............................................17 Selling Shareholders..........................................................18 Plan of Distribution..........................................................18 Legal Matters.................................................................19 Experts.......................................................................19 Where You Can Find More Information...........................................20 Incorporation of Documents by Reference.......................................20 Index to Financial Statements................................................F-1 ---------------------- |
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS.
In this prospectus, "we," "us," "our" and "EXFO" refer to EXFO Electro-Optical Engineering Inc. and its subsidiaries.
Our head office is located at 465 Godin Avenue, Vanier, Quebec, Canada, G1M 3G7 and our telephone number is (418) 683-0211.
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS WELL AS THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS AND IN THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. IN PARTICULAR, YOU SHOULD REVIEW THE DISCUSSION UNDER "ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS" AND OUR AUDITED CONSOLIDATED
FINANCIAL STATEMENTS INCORPORATED BY REFERENCE INTO THIS PROSPECTUS FROM OUR
ANNUAL REPORT ON FORM 20-F BEFORE MAKING AN INVESTMENT IN THE SUBORDINATE VOTING
SHARES OFFERED BY THIS PROSPECTUS.
RISKS RELATED TO OUR INDUSTRY AND BUSINESS
IF WE ARE UNABLE TO APPROPRIATELY INTEGRATE THE TECHNOLOGIES OF OUR RECENT ACQUISITIONS WITH OUR OWN TECHNOLOGIES, WE MAY NOT BE ABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS, WHICH COULD PREVENT US FROM ACHIEVING OUR GROWTH STRATEGY AND ADVERSELY AFFECT OUR OPERATING RESULTS.
Any failure by us to appropriately integrate the technologies of Burleigh Instruments, Inc. ("Burleigh"), EFOS Inc. ("EFOS") and Vanguard Technical Solutions, Inc. ("Vanguard") with our own technologies in a manner that anticipates or responds to new technological developments and customer requirements on a timely basis could have a material adverse effect on our business, financial condition and results of operations.
WE CANNOT ASSURE THAT WE WILL BE ABLE TO SUCCESSFULLY INTEGRATE ANY BUSINESSES, PRODUCTS, TECHNOLOGIES OR PERSONNEL THAT WE MIGHT ACQUIRE IN THE FUTURE, WHICH MAY HARM OUR BUSINESS.
We may not be able to realize the potential benefits of our future acquisitions.
In order for our future transactions to be successful, we must coordinate the operations and technologies of our wholly owned subsidiaries with our own operations and technologies and manage the geographically dispersed operations. Integration will require the dedication of management resources that may distract their attention from our day-to-day business and operations. If we fail to integrate the companies quickly and efficiently, we may not be able to realize the benefits we expect from these transactions.
IF THE SUPPLY OF HIGH-BANDWIDTH TRANSMISSION NETWORKS SHOULD CONTINUE TO SURPASS DEMAND, OR IF OPTICAL FIBER IS REPLACED BY ANOTHER MEDIUM AS THE PRIMARY SOLUTION FOR BANDWIDTH-INTENSIVE APPLICATIONS, WE COULD EXPERIENCE A SIGNIFICANT LONG-TERM LOSS OF SALES.
Fiber-optic deployment and network capacity increases have slowed during recent months which has affected optical component and network equipment manufacturers and operators causing reduced demand for fiber-optic test, measurement and automation equipment. If such reduced demand should continue over the mid or long term, or if optical fiber is replaced by a higher performance medium, this could have a material adverse effect on our business, financial condition and results of operations.
IF WE ARE UNABLE TO ADAPT TO CURRENT AND FUTURE CHANGES IN TECHNOLOGY, OUR PRODUCTS MAY BECOME OBSOLETE.
Any failure by us to anticipate or respond to new technological developments and customer requirements could have a material adverse effect on our business, financial condition and results of operations. Moreover, the markets addressed by our current and planned products are rapidly evolving and are characterized by emerging standards and competing technological platforms. There can be no assurance that products destined by us for sale into these markets will adequately address the requirements dictated by evolving standards, or that we will be able to adapt our products to changes in
technology. Accordingly, we may invest in products and technologies that never gain market acceptance. Such investments could have a material adverse effect on our business, financial condition and results of operations.
WE MUST CONTINUE TO OVERCOME SIGNIFICANT AND INCREASING COMPETITION IN OUR INDUSTRY IN ORDER TO CONTINUE OUR GROWTH AND PRODUCTIVITY.
The market for fiber-optic test, measurement and automation equipment is rapidly evolving and is marked by intense competition and technical innovations. We expect the pace of change to accelerate in the future. We also expect many new competitors to emerge as the market for fiber-optic test, measurement and automation equipment expands and evolves in response to technical innovations.
Some of our current and potential competitors are global electronic test and measurement manufacturers who complement their broad range of products with fiber-optic test, measurement and monitoring equipment. Competitors, such as ANDO Corporation, Anritsu Corporation, Agilent Technologies Inc., GN Nettest and Acterna Corporation, may have greater financial, technical and marketing resources. Consequently, these competitors may be able to devote greater resources to the development, marketing, sale and support of their products. They may also be better positioned than we are to acquire companies and new technologies that may displace our products or make them obsolete.
WE DEVOTE CONSIDERABLE TIME AND RESOURCES TO SECURING NEW CUSTOMERS AND IMPROVING SALES TO EXISTING CUSTOMERS. IF WE ARE UNSUCCESSFUL, OUR FUTURE OPERATING RESULTS MAY SUFFER.
The long sales cycle for some of our products may cause our sales and operating results to vary significantly from period to period. The period of time between our initial contact with a customer and the receipt of a purchase order may span a year or more. In addition, customers perform and require us to perform, extensive product evaluation and testing of new instruments before purchasing them. If we are unable to satisfy customer demands, considerable resources would have been expended without deriving corresponding sales.
OUR INTELLECTUAL PROPERTY AND PROPRIETARY TECHNOLOGY ARE IMPORTANT TO THE CONTINUED SUCCESS OF OUR BUSINESS. OUR FAILURE TO PROTECT THIS PROPRIETARY TECHNOLOGY MAY SIGNIFICANTLY IMPAIR OUR COMPETITIVE POSITION.
Our success and ability to compete depend to a significant extent on our proprietary technology, since that is how we attempt to keep others from using the innovations that are central to our existing and future products. We currently hold five U.S. and two Canadian issued patents, one foreign issued patent and have seven U.S. and nine Canadian patent applications pending. In addition, Burleigh has five U.S. and one Canadian issued patents and has five U.S. patent applications pending and EFOS has seven U.S. and four Canadian issued patents and seven U.S., eight Canadian and one international patent pending. We also rely on a combination of copyright and trademark laws, trade secrets, confidentiality procedures, contractual provisions and license agreements to protect our proprietary technology. We may have to engage in litigation in order to protect our patents and other intellectual property rights, or to determine the validity or scope of the proprietary rights of others. This kind of litigation can be time-consuming and expensive, regardless of whether we win or lose. Because it is critical to our success that we are able to prevent competitors from copying our innovations, we intend to continue to seek patent and trade secret protection for our technologies. The process of seeking patent protection can be long and expensive and we cannot be certain that any currently pending or future applications will actually result in issued patents, or that, even if patents are issued, they will be of sufficient scope or strength to provide meaningful protection or any commercial advantage to us. Furthermore, others may develop technologies that are similar or superior to our technology, or design around the patents that we own. We also rely on
trade secret protection for our technology, in part through confidentiality agreements with our employees, consultants, distributors and third parties. However, these agreements may be breached or otherwise not effective and we may not have adequate remedies for any breach or shortfall of these agreements. In any case, others may come to know about our trade secrets through a variety of methods. In addition, our foreign issued patent only covers Japan, and the laws of some territories in which we sell our products may not protect our intellectual property rights to the same extent as do the laws of Canada and the United States.
Despite our efforts, our intellectual property rights, particularly our existing or future patents, may be invalidated, circumvented, challenged or required to be licensed to others. Furthermore, others may develop technologies that are similar or superior to our technology, duplicate or reverse engineer our technology, or design around the patents owned or licensed by us. We cannot be sure that the steps that we take to protect our technology will prevent misappropriation or infringement. If we fail to protect our technology so that others may copy or use it, we will be less able to differentiate our products and our sales will decline.
IF OTHERS CLAIM THAT OUR PRODUCTS INFRINGE UPON THEIR INTELLECTUAL PROPERTY RIGHTS, WE MAY BE FORCED TO SEEK EXPENSIVE LICENSES, RE-ENGINEER OUR PRODUCTS, ENGAGE IN EXPENSIVE AND TIME-CONSUMING LITIGATION OR STOP MARKETING THE CHALLENGED PRODUCTS, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO SELL OUR PRODUCTS AND COULD INCREASE OUR COSTS.
Litigation regarding intellectual property rights is common in the technology industry and, for this reason, we expect that third-party infringement claims involving technologies may increase. If an infringement claim is filed against us, we may be prevented from using some of our technologies and may incur significant costs to resolve the claim.
We could incur substantial costs in defending ourselves and our customers against infringement claims. Litigation could also adversely affect sales of the challenged product or technology and divert the efforts of our management and technical personnel. In the event of a claim of infringement, we may be required to obtain one or more licenses from third parties. We cannot assure you that we, or our customers, could obtain necessary licenses from third parties at a reasonable cost or at all. If we fail to obtain a license where one is required, we could incur substantial liabilities and be forced to suspend the marketing and sales of the challenged products.
WE REQUIRE EMPLOYEES WHO ARE KNOWLEDGEABLE ABOUT THE SPECIALIZED NATURE OF OUR BUSINESS. IF WE ARE UNABLE TO ATTRACT AND RETAIN SUFFICIENT NUMBERS OF HIGHLY SKILLED TECHNICAL, SALES AND MARKETING AND OTHER PERSONNEL, OUR OPERATIONS AND FINANCIAL RESULTS WOULD SUFFER.
Due to the specialized nature of our business, we are highly dependent on the continued service of and on the ability to attract and retain, qualified engineering, sales, marketing and senior management personnel in the area of fiber optics. The competition for such personnel is intense. The loss of key employees or management personnel could have a material adverse effect on our business and operating results. We may not be able to continue to attract and retain the qualified personnel necessary for the development of our business. In addition, if we are unable to hire additional qualified personnel as needed, we may not be able to adequately manage and complete our existing sales commitments and to bid for and execute additional sales.
We must provide significant training for our employee base due to the highly specialized nature of fiber-optic test, measurement and automation equipment. Our current engineering personnel may be inadequate and we may fail to assimilate and train new employees. Highly skilled employees with the
education and training that we require, especially employees with significant experience and expertise in fiber optics, are in high demand. Once trained, our employees may be hired by our competitors.
OUR BUSINESS STRATEGY AND OUR ABILITY TO OPERATE PROFITABLY DEPEND ON THE CONTINUED SERVICES OF OUR SENIOR MANAGEMENT TEAM LED BY GERMAIN LAMONDE, OUR CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER. THE LOSS OF ANY MEMBER OF THE SENIOR MANAGEMENT TEAM WOULD ADVERSELY AFFECT OUR BUSINESS.
Our ability to maintain our competitive position depends to a significant extent on the efforts and abilities of our senior management, particularly Germain Lamonde, our Chairman of the Board, President and Chief Executive Officer. Although we have entered into an employment agreement with Mr. Lamonde, Mario Larose, Vice President, Marketing, Bruce Bonini, Vice President, North American Sales, Juan-Felipe Gonzalez, Vice President, International Sales, Jean-Francois Boulet, Vice President, Human Resources and Stephen Bull, Vice President, Research and Development, we do not have employment agreements with our other key executives. Their managerial, technical and other services would be difficult to replace and if we lose the services of one or more of our executive officers, or if one of them decides to join a competitor or otherwise compete directly or indirectly against us, our business would be seriously harmed. The loss of their services would jeopardize our ability to maintain our competitive position. We do not have "key person" life insurance policies covering any of our employees.
IF WE ARE NOT ABLE TO MANAGE OUR GROWTH EFFECTIVELY AND TO ADAPT TO AN EVOLVING ECONOMY, WE MAY NOT BE ABLE TO MAINTAIN OR IMPROVE OUR CURRENT LEVEL OF PROFITABILITY.
We expect our business and the industry in which we compete to continue to undergo rapid change. We plan to continue to expand our distribution and marketing capabilities by opening additional international sales offices and service centers, by bolstering our key account management program, by hiring application engineers and by increasing our sales network worldwide. Finally, we have had a significant increase in our number of employees from 671 on May 31, 2000 to 1,243 on June 30, 2001. Our ability to be profitable depends on our ability to manage this growth and to adapt to an evolving economy. The failure of our management to respond effectively to and manage changing technological and business conditions could have a material adverse impact on our business, financial condition and results of operations.
WE MAY BE SUBJECT TO CERTAIN LIABILITIES ASSUMED IN CONNECTION WITH OUR ACQUISITIONS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
We conduct due diligence in connection with our acquisitions and incorporate indemnification provisions in our acquisition agreements. To the extent that prior owners of any acquired businesses failed to comply with or otherwise violated applicable laws, we may be financially responsible for these violations or otherwise be adversely affected. The discovery of any material liabilities after the closing of the transaction could have a material adverse effect on our financial condition and results of operations. In connection with our acquisition of Burleigh and EFOS, there may be liabilities that we failed to discover at the time of the acquisition or that we inadequately assessed in our due diligence efforts.
WE DEPEND ON A SINGLE SUPPLIER OR A LIMITED NUMBER OF SUPPLIERS FOR SOME OF THE KEY COMPONENTS AND MATERIALS IN OUR PRODUCTS, WHICH MAKES US SUSCEPTIBLE TO SUPPLY SHORTAGES OR PRICE FLUCTUATIONS THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS.
We depend on a limited number of suppliers for some of the parts used to manufacture our products. All our orders are placed through individual purchase orders and, therefore, our suppliers may stop supplying parts to us at any time. The reliance on a single source or limited number of suppliers
could result in delivery problems and reduced control over product pricing and quality. The process of qualifying a new contract manufacturer for complex products, designed to our specifications, such as our optical and mechanical parts, is lengthy and would consume a substantial amount of time of our technical personnel and management. If we sought to change manufacturers in a short period of time, our business would be disrupted. In addition, we may be unsuccessful in identifying a new manufacturer capable of and willing to meet our needs on terms that we would find acceptable.
WE EXPECT THE PRICE OF OUR EXISTING PRODUCTS TO DECLINE AND IF WE DO NOT REDUCE OUR MANUFACTURING COSTS OR INTRODUCE NEW PRODUCTS WITH HIGHER MARGINS, OUR GROSS MARGINS WILL DECLINE AND WE COULD INCUR OPERATING LOSSES.
Reduced demand for fiber-optic test, measurement and automation equipment, in addition to competitiveness in our industry will likely result in the decline of prices for fiber-optic test, measurement and automation equipment. These price declines result from factors such as:
o increased competition for business;
o reduced demand;
o a limited number of potential customers;
o competition from companies with lower labor and production costs;
o introduction of new products by competitors; and
o greater economies of scale for higher-volume manufacturers.
As prices of our existing products are expected to decline, we may have to increase our unit volume sold in order to maintain our existing sales level. Our increased capacity will result in an increase in fixed costs. As a result, we will have to increase the level of sales to maintain operating margins. If we are unable to continuously reduce our manufacturing costs or introduce new products with higher margins, our gross margins would decline.
IF WE FAIL TO ADAPT APPROPRIATELY TO THE CHALLENGES ASSOCIATED WITH OPERATING INTERNATIONALLY, THE GROWTH OF OUR BUSINESS MAY BE IMPEDED AND OUR OPERATING RESULTS MAY BE AFFECTED.
For the fiscal year ended August 31, 2000, customers outside of the United States and Canada accounted for 38.4% of our sales and for the nine months ended May 31, 2001, these customers accounted for 40.5% of our sales. We plan to increase our international sales activities and have recently opened offices in Great Britain, China, Japan, and Singapore. Our international sales will be limited if we cannot establish relationships with international distributors, establish additional foreign operations, expand international sales channel management, hire additional personnel and develop relationships with international service providers. Even if we are able to successfully continue our international operations, we may not be able to maintain or increase international market demand for our products. Our international operations are subject to a number of risks, including:
o unexpected changes in regulatory requirements, tax rates or tariffs that make our products and services more expensive and therefore less attractive to present and potential customers;
o challenges in staffing and managing foreign operations due to the limited number of qualified candidates, employment laws and practices in foreign countries, any of which could increase the cost and reduce the efficiency of operating in foreign countries;
o technology standards that differ from those on which our products are based, which could require expensive redesign and retention of personnel familiar with those standards;
o longer accounts receivable payment cycles and possible difficulties in collecting payments which may increase our operating costs and hurt our financial performance;
o political and economic instability; and
o certification requirements.
Any of these factors could harm our international operations and negatively affect our financial performance. For example, we currently face problems with increasing, and constantly changing, certification requirements. In addition, although the amounts involved were not material and substantial efforts were deployed for collection purposes, we have in the past encountered difficulties recovering accounts receivable in countries experiencing economic instability. The recurrence of weakness in these economies or of weakness in other foreign economies could have a significant negative effect on our future operating results.
OUR PRODUCTS MAY HAVE UNFORESEEN DEFECTS THAT COULD HARM OUR REPUTATION, IMPEDE MARKET ACCEPTANCE OF OUR PRODUCTS AND NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS.
As a result of their complexity, our products may contain undetected errors or compatibility problems or regulatory compliance issues, particularly when they are first introduced or when new versions are released. There can be no assurance that, despite our testing, errors will not be found in new products after they have been fully deployed and operated under peak stress conditions. If we are unable to fix defects or other problems, we could experience, among other things:
o loss of customers;
o damage to our brand reputation;
o failure to attract new customers or achieve market acceptance;
o diversion of development and engineering resources;
o legal actions by our customers, including claims for consequential damages and loss of profits; and
o legal actions by governmental entities, including actions to impose product recalls and/or forfeitures.
The occurrence of any one or more of the foregoing could seriously harm our business, financial condition and results of operations.
OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL PRODUCT LIABILITY AND WARRANTY CLAIMS. A SUCCESSFUL CLAIM EXCEEDING OUR POLICY LIMIT WILL REDUCE OUR WORKING CAPITAL, INCREASE OUR EXPENSES AND HAVE A NEGATIVE EFFECT ON OUR OPERATING RESULTS.
Our products are designed to help telecommunications carriers and manufacturers of optical components, value-added optical modules and optical networking systems ensure network reliability. The failure of our products to perform to client expectations could give rise to product liability and warranty claims. We carry product liability insurance and take accounting reserves that we consider adequate in view of industry practice. However, a successful claim against us for an amount exceeding our policy limit would force us to use our own resources to pay the claim, which could result in a reduction of our working capital available for other uses, increase our expenses and have a negative effect on our financial condition and results of operations.
AS OUR COMPETITORS CONSOLIDATE, THEY MAY OFFER PRODUCTS OR PRICING THAT WE CANNOT MEET, WHICH COULD CAUSE OUR SALES TO DECLINE.
Consolidation in the fiber-optic test, measurement and automation industry could intensify the competitive pressures that we face. Recently, some of our competitors have merged or have been acquired by larger companies. These combined companies could produce more high-performance products and offer them at more competitive prices.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND YOU SHOULD NOT RELY ON THEM AS AN INDICATION OF OUR FUTURE PERFORMANCE.
Our sales and operating results have fluctuated from quarter to quarter in the past and may fluctuate significantly in the future. In addition, our revenue and operating results generally depend on the volume and timing of the orders we receive from customers as well as our ability to fulfill the orders received. Our operating expenses, which include research and development, and selling and administrative expenses, are relatively fixed in the short term. If our revenue is lower than we expect because we sell fewer products than we anticipate or if there is a delay in the release of new products, we may not be able to quickly reduce our operating expenses in response. Factors that could affect the amount and timing of our revenue, and cause quarterly fluctuations in our operating results include:
o the length of our product sales cycle for certain products, especially those that are higher priced and more complex;
o our ability to sustain product volumes and high levels of quality across all product lines;
o the timing of shipments for large orders;
o the timing of introduction and market acceptance of new products by us, our competitors or our suppliers; and
o the effect of potential seasonality in sales.
Our operating results could also be affected by the following factors over which we have little or no control:
o demand for fiber-optic test, measurement and automation equipment;
o changes in the capital budgets of our customers, which may cause seasonal or other fluctuations in the product mix, volume, timing and number of orders we receive from our customers;
o difficulties in collecting accounts receivable; and
o general economic conditions.
Due to these factors, you should not rely on quarter-to-quarter comparisons of our results of operations as an indication of our future performance.
IF WE FAIL TO PREDICT OUR SUPPLY REQUIREMENTS ACCURATELY, WE WILL HAVE EXCESS INVENTORY OR INSUFFICIENT INVENTORY, EITHER OF WHICH COULD CAUSE US TO INCUR ADDITIONAL COSTS OR EXPERIENCE MANUFACTURING DELAYS.
We provide forecasts of our requirements to some of our suppliers up to six months prior to scheduled delivery of products to our customers. If we overestimate our requirements, we may have excess inventory, which could increase our costs and harm our relationships with our suppliers due to reduced future orders. If we underestimate our requirements, we may have an inadequate inventory of parts. Inadequate inventory could interrupt manufacturing of our products and result in delays in shipments. In addition, lead times for materials and parts that we order are long and depend on factors such as the procedures of, or supply terms with, a specific supplier and demand for each part at a given time. In the case of some parts in short supply, suppliers have imposed strict allocations that limit the number of these parts that they will supply to a given customer in a specified time period. Although to date suppliers have not made selective allocations that adversely affected us, these suppliers may choose, in the future, to increase allocations to larger, more established companies, which could reduce our allocations and harm our ability to manufacture our products.
WE MAY NOT BE ABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS, WHICH COULD PREVENT US FROM ACHIEVING OUR GROWTH STRATEGY AND ADVERSELY AFFECT OUR OPERATING RESULTS.
The development of proprietary technologies entails significant technical and business risks and requires substantial expenditures and lead time. If we experience product delays in the future, we may face:
o customer dissatisfaction;
o cancellation of orders;
o negative publicity;
o loss of sales;
o slower market acceptance of our products; and
o legal actions by customers.
In the future, our efforts to remedy product delays may not be successful and we may lose customers as a result. Delays in bringing to market new products or product enhancements could be exploited by our competitors. If we lose market share as a result of lapses in our product development, our business would suffer.
FLUCTUATIONS IN THE EXCHANGE RATES BETWEEN THE CANADIAN DOLLAR AND THE U.S. DOLLAR MAY ADVERSELY AFFECT OUR OPERATING MARGINS.
The majority of our sales is denominated in US dollars. However, a large portion of our operating expenses and capital expenditures are denominated in Canadian dollars. As a result, we are exposed to fluctuations in the exchange rates between the Canadian dollar and the US dollar. Even though we hold forward exchange contracts to partially hedge that risk, an increase in the value of the Canadian dollar relative to the US dollar could have a material adverse effect on our operating margins.
AS OUR CUSTOMERS CONSOLIDATE, THEY MAY REDUCE PURCHASES OF OUR PRODUCTS, WHICH WOULD CAUSE OUR SALES TO DECLINE.
Consolidation in the telecommunications industry could reduce the number of customers to whom our products could be sold. Some of our customers have merged. Although to date we have not experienced any adverse effects as a result of these mergers, these merged customers could, in the future, reduce their future orders, renegotiate pricing and obtain products from a source other than us, which would cause our sales to decline. In addition, some of our manufacturer customers may merge with or acquire our competitors and, as a result, discontinue their relationships with us.
OUR CUSTOMERS ARE NOT OBLIGATED TO BUY MATERIAL AMOUNTS OF OUR PRODUCTS AND MAY CANCEL OR DEFER PURCHASES ON SHORT NOTICE.
Our customers typically purchase our products under individual purchase orders and may cancel or defer purchases on short notice without significant penalty. Accordingly, sales in a particular period are difficult to predict. Decreases in purchases, cancellations of purchase orders, or deferrals of purchases may have a material adverse effect on our operating results, particularly if we do not anticipate them.
WE MAY NOT BE ABLE TO SUSTAIN OUR RESEARCH AND DEVELOPMENT ACTIVITIES AS OUR RESEARCH AND DEVELOPMENT CREDITS AND GRANTS DECLINE, CAUSING AN INCREASE OF THE EFFECTIVE COST OF OUR FUTURE RESEARCH AND DEVELOPMENT ACTIVITIES.
Our historical operating results reflect substantial benefits from programs sponsored by federal, provincial and state governments for the support of research and development. Research and development tax credits and grants represented 31.7% of our gross research and development expenses for the year ended August 31, 2000 and 25.8% for the nine months ended May 31, 2001. These tax credits and grants will decline as our assets grow and as grant programs expire. Accordingly, the effective cost of our future research and development activities will increase.
UNEXPECTED DECLINES IN OUR RESEARCH AND DEVELOPMENT CREDITS AND GRANTS MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
If unexpected changes in the laws or government policies terminate or adversely modify the Canadian or Quebec government programs under which we receive the major part of our research and development tax credits and grants, or if we unexpectedly become unable to participate in or take advantage of these programs, then our net research and development expenses will materially increase. To the extent that we increase our research and development activities outside Canada or Quebec, which could result from, among other things, future acquisitions, the increased activities may not be eligible for these programs. If we are required to decrease our research and development activities, we may be unable to compete effectively.
WE MAY NOT BE ABLE TO MAKE THE NECESSARY ACQUISITIONS NEEDED FOR THE DEVELOPMENT OF OUR BUSINESS AND ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL CONDITION.
We intend to aggressively seek acquisitions of businesses, products and technologies that are complementary to ours. There can be no assurance that we will ultimately make any such acquisition. The consolidation of our competitors may improve their capacity to acquire the same businesses, products and technologies that we wish to acquire.
We have in the past made strategic acquisitions, such as our acquisitions of GAP Optique S.A., Burleigh and EFOS. We anticipate that in the future, as part of our business strategy, we will continue to make strategic acquisitions of complementary companies, products and technologies. In the event of any future acquisition, we could:
o issue shares that would dilute individual shareholder percentage ownership;
o incur debt;
o assume liabilities; or
o incur expenses related to in-process research and development, amortization of goodwill and other intangible assets.
These acquisitions also involve numerous risks, including:
o problems combining the acquired operations, technologies or products;
o unanticipated costs or liabilities;
o diversion of management's attention from our core business;
o adverse effects on existing business relationships with suppliers and customers;
o risks associated with entering markets in which we have no or limited prior experience; and
o potential loss of key employees, particularly those of acquired organizations.
Recently, our subsidiary Nortech Fibronic Inc., acquired in February 2000, shut down its business operations, though the impact of this closure is not significant, we cannot assure that we will be able to successfully integrate the other businesses, products, technologies or personnel that we might acquire in the future and further divestitures or closures could be necessary, which may harm our business.
OUR SALES WOULD SUFFER IF A KEY SALES REPRESENTATIVE OR DISTRIBUTOR STOPPED SELLING OR REDUCED SALES OF OUR PRODUCTS.
We sell substantially all of our products through a network of independent sales representatives and distributors, the majority of whom have exclusive rights to sell our products in specific territories or markets. If we are unable to provide competitive sales commissions, maintain an appropriate sales volume, or offer sufficient channel-support, our independent sales representatives and distributors may discontinue sales of our products and switch to representing one or more of our competitors, which would result in reduced sales for us.
WE MAY NEED ADDITIONAL CAPITAL, AND MAY NOT BE ABLE TO RAISE ADDITIONAL CAPITAL ON FAVORABLE TERMS OR AT ALL, WHICH COULD LIMIT OUR ABILITY TO GROW AND COULD INCREASE OUR COSTS.
Our future liquidity and capital requirements are difficult to predict because they depend on numerous factors, including the success of our existing and new product offerings as well as competing technological and market developments. As a result, we may not be able to generate sufficient cash from our operations to meet additional working capital requirements, support additional capital expenditures or take advantage of acquisition opportunities. Accordingly, we may need to raise additional capital in the future.
Our ability to obtain additional financing will be subject to a number of factors, including market conditions and our operating performance. These factors may render the timing, amount, terms and conditions of additional financing unattractive for us. If we raise additional funds by selling equity securities, the relative ownership of our existing investors could be diluted or the new investors could obtain terms more favorable than previous investors. If we raise additional funds through debt financing, we could incur significant borrowing costs. If we are unable to raise additional funds when needed, our ability to operate and grow our business could be impeded.
OUR PRODUCTS MAY BE REQUIRED TO CONFORM TO NEW AND UNFORESEEN REGULATORY REQUIREMENTS WHICH COULD INCREASE OUR COSTS AND REDUCE OUR MARKET SHARE.
Our products are designed to conform to the regulatory requirements of the countries in which they are marketed. In the event that the technical regulations applicable in a given country are in any way changed, we may be required to modify, redesign or recall some or all of our products in order to continue participating in that market. These changes likely would increase manufacturing costs and could create technical advantages for products marketed by our competitors.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes or incorporates forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934. You can identify these forward-looking statements by our use of words such as "intend," "plan," "may," "will," "project," "estimate," "anticipate," "believe," "expect," "continue," "potential," "opportunity," and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. All statements regarding our expected financial position, business and financing plans are forward-looking statements.
Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important facts in various cautionary statements in this prospectus that we believe could cause our actual results to differ materially from the forward-looking statements that we make. These include, but are not limited to, those under the heading "Risk Factors" in this prospectus and the discussion under "Item 3.D. Risk Factors" in our Annual Report on Form 20-F.
The forward-looking statements do not reflect the potential impact of any future acquisitions, mergers or dispositions. We undertake no obligation to update or revise any forward-looking statements because of new information, future events or otherwise.
EXFO
We are a leading designer, manufacturer and marketer of fiber-optic test, measurement and automation solutions for the telecommunications industry. We believe that we are the largest manufacturer of test, measurement and automation equipment that is exclusively dedicated to fiber optics. Fiber-optic test, measurement and automation equipment is mainly used by telecommunications carriers, optical component and system manufacturers, as well as research and development laboratories to measure the physical characteristics of optical fiber and related hardware.
We were founded in 1985 in Quebec City. We have grown from a two-employee supplier of portable handheld test instruments to a leading designer, manufacturer and marketer of an extensive line of fiber-optic test, measurement and automation equipment. As of May 31, 2001, we had a workforce of 1,407 employees and our products are distributed in over 70 countries.
We, along with our wholly owned subsidiaries, develop products mainly for two markets. Our Portable and Monitoring Division provides handheld and modular instruments primarily to telecommunications carriers. Our Industrial and Scientific Division and our subsidiaries, Burleigh, Burleigh Automation and EFOS, design an extensive line of high-performance instruments and automated manufacturing equipment for optical component and system vendors as well as for research and development labs.
We have received more than 40 industry and commerce awards during our 16-year history. In March 2001, Burleigh was honored by Fiberoptic Product News. Burleigh's WA-7000 Multi-Line WAVEMETER(R) Optical Channel Analyzer was named a 2000 Technology Award winner by readers of the magazine.
In August 2000, we were named winner of the Outstanding Corporate Innovator Award by the U.S.-based Product Development and Management Association (PDMA). Prior to becoming a public company in June 2000, we were recognized as one of the 50 Best-Managed Private Companies in Canada by Arthur Andersen Consulting and the Financial Post for five consecutive years. We have maintained ISO 9001 certification since 1994.
ANNOUNCEMENT OF THIRD QUARTER RESULTS
On June 27, 2001, we announced our financial results for the third quarter ended May 31, 2001. Sales increased 136% to US$45.8 million in the third quarter of fiscal 2001 from US$19.4 million for the same period in fiscal 2000, and 26% from US$36.3 million in the second quarter of 2001. Net earnings, excluding after-tax effect of amortization of intangible assets and amortization of goodwill ("adjusted net earnings"), increased 115% to US$6.2 million, or $0.11 per share, for the third quarter from US$2.9 million, or $0.07 per share, for the same period in fiscal 2000. Compared to the second quarter of fiscal 2001, adjusted net earnings in the third quarter dropped 17% from US$7.5 million or $0.14 per share. Including amortization of intangible assets and goodwill, we recorded a net loss of US$8.6 million, or US$0.15 per share, in the third quarter of fiscal 2001, compared to net earnings of US$2.7 million, or $0.07 per share, for the same period in fiscal 2000 and net earnings of US$24,000, or $0.00 per share, in the second quarter of 2001. The non-cash charges related to acquisitions include US$4.2 million in amortization of intangible assets and US$12.0 million in amortization of goodwill in the third quarter of 2001. The financial results of our acquisition of EFOS were reflected in our financial results for the third quarter as the acquisition closed on March 15, 2001.
FURTHER ACTIONS
In light of current market conditions, a plan to reduce costs and increase efficiencies has been implemented. Among other things:
o we are reducing non-customer-related expenses;
o we are postponing plans to build a new facility in the Quebec Metro High-Tech Park;
o we are reducing our workforce by 15%, but continuing to recruit specific talent for strategic initiatives; and
o Nortech Fibronic Inc., a subsidiary that specialized in manufacturing fiber-optic temperature sensors, is discontinuing operations.
We expect to incur a one-time charge relating to this plan of approximately US$2.0 million in the quarter ending August 31, 2001.
RECENT ACQUISITIONS
VANGUARD TECHNICAL SOLUTIONS, INC.
On March 16, 2001, we purchased substantially all the assets of Vanguard, a wholly-owned subsidiary of DT Industries Inc. for a purchase price of approximately US$600,000 paid in cash. Vanguard, an automation equipment manufacturer in Tucson, Arizona, specializes in the design and manufacturing of ultra-precision assembly equipment for sensitive process and critical assembly challenges on the production floor.
EFOS INC.
On March 15, 2001, we acquired all of the issued and outstanding shares of EFOS at an aggregate purchase price of approximately US$110.1 million comprised of 3.7 million of our subordinate voting shares and US$25.2 million in cash.
EFOS, a privately held company in Toronto, Ontario operating since 1984 and having 118 employees as of June 30, 2001, is recognized as a leader in precision light-based adhesive spot curing as well as curing process control for the global optical component manufacturing market. Its products deliver precise doses of the appropriate spectral light into photo-sensitive and heat-cured adhesives to significantly reduce bonding time and increase repeatability in optical component manufacturing. EFOS' light-based curing technologies are supported by an extensive understanding of bonding and material sciences and by a broad intellectual property portfolio, including 11 patents and 16 patents pending.
BURLEIGH INSTRUMENTS, INC.
On December 20, 2000, we acquired all of the issued and outstanding shares of common stock of Burleigh, Burleigh Instruments GmBH and Burleigh Instruments (U.K.) Ltd. at an aggregate purchase price of approximately US$189.3 million, comprised of 6,488,816 of our subordinate voting shares and approximately US$42.5 million in cash pursuant to the terms of an Agreement of Merger and Plan of Reorganization among us, EXFO Sub, Inc. and the selling shareholders, dated November 4, 2000, as amended on December 20, 2000.
Burleigh, which has been in operation for 29 years and had 141 employees as of May 31, 2001, has received industry recognition for its high-performance optical wavelength meters and precision positioning equipment. Its Wavemeter(R) instruments offer one of the highest wavelength measurement accuracy in the industry. These products are able to determine the absolute wavelength of a laser under test within 0.3 picometers at 1500 nm. Its Inchworm(R) precision positioning equipment provides nanometer accuracy, which is critical for precision alignment in the optical component manufacturing process. Both of these product lines are supported by a broad proprietary intellectual property portfolio.
USE OF PROCEEDS
The selling shareholders are offering all of the subordinate voting shares covered by this prospectus. We will not receive any proceeds from the sale of these shares.
DETERMINATION OF OFFERING PRICE
The selling shareholders have advised us that they may sell these shares from time to time on the Nasdaq National Market or any other national securities exchange or automated interdealer quotation system on which our subordinate voting shares are listed or quoted, through negotiated transactions, through a combination of such methods of sale or otherwise, including private sales. They may also sell these shares, directly or through one or more underwriters, brokers, dealers or agents from time to time in one or more transactions in the open market. See "Plan of Distribution." Any of these transactions may be effected at market prices prevailing at the time of sale, at prices related to those prevailing market prices, at varying prices determined at the time of sale or at negotiated or fixed prices, in each case as determined by agreement between the selling shareholders and underwriters, brokers, dealers or agents, or purchasers.
SELLING SHAREHOLDERS
The 6,488,816 subordinate voting shares offered under this prospectus are being sold by Robert G. Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall, the former shareholders of Burleigh. The selling shareholders received their 6,488,816 subordinate voting shares as part of the merger consideration when we acquired Burleigh in December 2000, and hold such subordinate voting shares as of record.
To our knowledge, the selling shareholders do not own, directly or indirectly, any other of our shares other than the 6,488,816 subordinate voting shares. The following table sets forth the number of subordinate voting shares owned by the selling shareholders and offered under this prospectus:
Robert G. Klimasewski............................. 2,379,623 William G. May, Jr................................ 2,379,623 David J. Farrell.................................. 1,135,949 William S. Gornall................................ 593,621 --------- Total........................................ 6,488,816 ========= |
PLAN OF DISTRIBUTION
The selling shareholders will act independently of us in making decisions with respect to the timing, manner and size of each sale.
The selling shareholders may sell their subordinate voting shares covered by this prospectus from time to time in transactions, including block transactions, on the Nasdaq National Market, The Toronto Stock Exchange or any other securities exchange or automated interdealer quotation system on which our subordinate voting shares are listed or quoted, in negotiated transactions, through a combination of such methods of sale or otherwise, including private sales, at fixed prices that may be changed, at market prices prevailing at the time of sale at prices related to those prevailing market prices, at varying prices determined at the time of sale or at negotiated prices. The selling shareholders may effect those transactions by selling their subordinate voting shares directly to purchasers, through broker-dealers acting as agents of the selling shareholders, or to broker-dealers acting as agents for selling shareholders, or to broker-dealers acting as principals and thereafter sell the shares from time to time in transactions, including block transactions, on the Nasdaq National Market and The Toronto Stock Exchange, in negotiated transactions, through a combination of such methods of sale or otherwise. In effecting sales, broker-dealers engaged by the selling shareholders may arrange for other broker-dealers to participate. Such broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the selling shareholders and/or the purchasers of the shares for whom such broker-dealers may act as agents or to whom they may sell as principals, or both, which compensation as to particular broker-dealer might be in excess of customary commissions.
In connection with distributions of shares or otherwise, the selling shareholders may enter into hedging transactions with broker-dealers. In those transactions, broker-dealers may engage in short sales of our subordinate voting shares in the course of hedging the positions they assume with the selling shareholders. The selling shareholders also may sell our subordinate voting shares short and redeliver
shares to close out those short positions. The selling shareholders may enter into option, forward or other transactions with broker-dealers which require the delivery of subordinate voting shares to the broker-dealer. The broker-dealer may then resell or otherwise transfer those subordinate voting shares under this prospectus. The selling shareholders may also loan or pledge shares to the broker-dealer. The broker-dealer may sell the shares so loaned, or upon default the broker-dealer may sell the shares so pledged, under this prospectus.
The selling shareholders and any broker-dealers or agents that participate with the selling shareholders in the distribution of the subordinate voting shares may be deemed to be "underwriters" within the meaning of Section 2(11) of the U.S. Securities Act of 1933. Any commissions paid or any discounts or concessions allowed to any such persons, and any profits received on the resale of the subordinate voting shares purchased by them may be deemed to be underwriting commission or discounts under the U.S. Securities Act of 1933.
We have agreed to bear all expenses of registration of the shares other than legal fees and expenses, if any, of counsel or other advisors of the selling shareholders. The selling shareholders will bear any commissions, discounts, concessions or other fees, if any, payable to broker-dealers in connection with any sale of their subordinate voting shares.
Because each of the selling shareholders may be deemed to be an "underwriter" within the meaning of Section 2(11) of the U.S. Securities Act of 1933, the selling shareholders will be subject to the prospectus delivery requirements of the U.S. Securities Act of 1933. We have informed the selling shareholders that the anti-manipulative provisions of Regulation M under the U.S. Securities Exchange Act of 1934 may apply to its sales in the market.
In addition to sales of our subordinate voting shares under the registration statement of which this prospectus is a part, the selling shareholders may sell their subordinate voting shares in compliance with Rule 144 under the U.S. Securities Act of 1933.
LEGAL MATTERS
The validity of the subordinate voting shares will be passed upon for us by Fasken Martineau DuMoulin LLP, Montreal, Canada. Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York has acted as U.S. counsel for us in connection with the filing of the registration statement of which this prospectus forms a part.
EXPERTS
The consolidated financial statements incorporated in this prospectus by reference to the Annual Report on Form 20-F of EXFO Electro-Optical Engineering Inc. for the year ended August 31, 2000 have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
The combined consolidated financial statements of Burleigh Instruments, Inc. and subsidiaries as of December 19, 2000 and December 31, 1999 and 1998, and for the period from January 1, 2000 to December 19, 2000 and for the years ended December 31, 1999 and 1998, have been included herein and in the registration statement in reliance upon the report of KPMG, LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
The financial statements of EFOS, Inc. as at October 31, 2000 and 1999, and for each of the years in the three-year period ended October 31, 2000, appearing in this registration statement have been audited by Ernst & Young LLP, chartered accountants, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the informational requirements of the Securities
Exchange Act of 1934, and file reports and other information with the SEC. We
have also filed with the SEC a registration statement on Form F-3 to register
the securities offered in this prospectus. This prospectus, which forms part of
the registration statement, does not contain all of the information included in
that registration statement. For further information about us and the securities
offered in this prospectus, you should refer to the registration statement and
its exhibits. You may read and copy any document we file with the SEC at the
SEC's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the SEC's regional offices in New York (7 World Trade Center, 13th Floor, New
York, New York 10048) and Chicago (Citicorp Center, 14th Floor, 500 West Madison
Street, Chicago, Illinois 60661). Copies of these reports, proxy statements and
information may be obtained at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549. Please
call the SEC at 1-800-SEC-0330 for further information on the operation of the
Public Reference Room. In addition, the SEC maintains a web site that contains
reports, proxy statements and other information regarding registrants, such as
us, that file electronically with the SEC. The address of this web site is
http://www.sec.gov.
We are currently exempt from the rules under the Exchange Act that prescribe the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. We are not required under the Exchange Act to publish financial statements as frequently or as promptly as are United States companies subject to the Exchange Act. We will, however, continue to furnish our shareholders with annual reports containing audited financial statements and will issue quarterly press releases containing unaudited results of operations as well as such other reports as may from time to time be authorized by our board of directors or as may be otherwise required.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with the SEC into this prospectus. This means that we can disclose important information to you by referring you to another document filed by us with the SEC. Information incorporated by reference is deemed to be part of this prospectus. The following documents, filed with the SEC, are specifically incorporated by reference and form an integral part of this prospectus:
(a) our Annual Report on Form 20-F for the year ended August 31, 2000, dated January 18, 2001;
(b) pages 5 to 30 of our Report on Form 6-K, dated June 28, 2001, reporting certain information relating to our financial condition and results of operations for the third quarter ended May 31, 2001;
(c) pages 3 to 23 of our Report on Form 6-K, dated March 22, 2001, reporting certain information relating to our financial condition and results of operations for the second quarter ended February 28, 2001;
(d) our Report on Form 6-K, dated January 4, 2001, setting forth the Management Proxy Circular, dated December 1, 2000, for our annual general and special meeting of the shareholders held on January 17, 2001, excluding from such Management Proxy Circular the sections entitled "Report on Executive Compensation by the Human Resources Committee," "Performance Graph," "Modification of the Subscription Price of the Options Granted to Employees, Officers, Consultants and Directors in June, September and October 2000" and "Statement of Corporate Governance Practices"; and
(e) the description of our subordinate voting shares contained in our Form 8-A, dated June 26, 2000.
In addition, all subsequent annual reports on Form 20-F, Form 40-F or Form 10-K, and any subsequent filings on Form 10-Q and 8-K filed by us pursuant to the Exchange Act and, to the extent, if at all, designated therein, certain reports on Form 6-K furnished by us, after the date of this prospectus and before the termination of the offering shall be deemed to be incorporated by reference in this prospectus.
Any statement contained in a document incorporated or deemed to be incorporated by reference in this prospectus shall be deemed to be modified or superseded for the purposes of this prospectus to the extent that a statement contained in this prospectus or in any subsequently filed document which also is or is deemed to be incorporated by reference in this prospectus modifies or supersedes that statement. The modifying or superseding statement need not state that it has modified or superseded a prior statement or include any other information set forth in the document that it modifies or supersedes. The making of a modifying or superseding statement shall not be deemed an admission for any purposes that the modified or superseded statement, when made, constituted a misrepresentation, an untrue statement of a material fact or an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this prospectus.
You may request a copy of any of these documents, at no cost, by contacting us in writing or by telephone at our principal executive office:
465 Godin Avenue Vanier, Quebec G1M 3G7, Canada (418) 683-0211 Attention: Corporate Secretary
EXCEPT AS DESCRIBED ABOVE, NO OTHER INFORMATION IS INCORPORATED BY REFERENCE IN THIS PROSPECTUS (INCLUDING, WITHOUT LIMITATION, INFORMATION ON OUR WEBSITE).
INDEX TO FINANCIAL STATEMENTS
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
(in US dollars)
Auditors' Report.............................................................F-2 Combined consolidated balance sheets as of December 19, 2000 and December 31, 1999 and 1998 ..................................................F-3 Combined consolidated statements of income for the period from January 1, 2000 to December 19, 2000 and for the years ended December 31, 1999 and 1998 ..................................................F-4 Combined consolidated statements of stockholders' equity for the period from January 1, 2000 to December 19, 2000 and for the years ended December 31, 1999 and 1998 ............................................F-5 Combined consolidated statements of cash flows for the period from January 1, 2000 to December 19, 2000 and for the years ended December 31, 1999 and 1998 ..................................................F-6 Notes to the combined consolidated financial statements......................F-7 EFOS INC. (in Canadian dollars) Auditors' Report............................................................F-18 Balance sheets as at October 31, 2000 and 1999..............................F-19 Statements of income and retained earnings for the years ended October 31, 2000, 1999 and 1998 ............................................F-20 Statements of cash flows for the years ended October 31, 2000, 1999 and 1998 ..............................................................F-21 Notes to financial statements...............................................F-22 Unaudited interim balance sheets as at October 31, 2000 and January 31, 2001 .......................................................F-31 Unaudited comparative statement of earnings and retained earnings for the three months ended January 31, 2001 ................................F-32 Unaudited comparative statement of cash flows for the three months ended January 31, 2001 ..............................................F-33 Notes to unaudited interim financial statements.............................F-34 |
PRO-FORMA UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS
OF EXFO ELECTRO-OPTICAL ENGINEERING INC.
(in US dollars)
Pro-forma unaudited consolidated statement of earnings for the nine months ended May 31, 2001 .....................................PF-1 Pro-forma unaudited consolidated statement of earnings for the year ended August 31, 2000 .........................................PF-2 Notes to pro-forma consolidated statements of earnings......................PF-3 |
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Burleigh Instruments, Inc.:
We have audited the accompanying combined consolidated balance sheets of Burleigh Instruments, Inc. and subsidiaries as of December 19, 2000 and December 31, 1999 and 1998, and the related combined consolidated statements of income, stockholders' equity and cash flows for the period from January 1, 2000 to December 19, 2000 and for the years ended December 31, 1999 and 1998. These combined consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined consolidated financial statements referred to above present fairly, in all material respects, the financial position of Burleigh Instruments, Inc. and subsidiaries as of December 19, 2000 and December 31, 1999 and 1998, and the results of their operations and their cash flows for the period from January 1, 2000 to December 19, 2000 and for the years ended December 31, 1999 and 1998 in conformity with accounting principles generally accepted in the United States of America.
/s/KPMG LLP April 13, 2001 |
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
COMBINED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 19, 2000 AND DECEMBER 31, 1999 AND 1998
ASSETS 2000 1999 1998 ----------------- ----------------- ----------------- Current assets: Cash and cash equivalents $ 73,741 462,030 80,984 Trade receivables, less allowance for doubtful accounts of $70,000 in 2000, $4,261 in 1999 and $13,634 in 1998 3,776,123 2,795,232 2,145,497 Inventories (notes 2 and 6) 3,203,897 2,950,291 2,411,643 Current portion of notes receivable (notes 3 and 6) -- 19,859 18,291 Prepaid expenses 39,853 15,895 15,931 ----------------- ----------------- ----------------- Total current assets 7,093,614 6,243,307 4,672,346 Property, plant and equipment, net (notes 4 and 6) 4,366,287 1,720,997 1,792,650 Property held for sale -- -- 162,496 Notes receivable from stockholders and other long-term notes (notes 3 and 6) -- 17,585 445,862 Other assets 88,499 74,719 71,124 ----------------- ----------------- ----------------- $ 11,548,400 8,056,608 7,144,478 ================= ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Borrowings under line of credit (note 6) 990,750 1,174,600 550,000 Current portion of long-term debt (note 7) 187,991 -- 122,775 Current portion of capital lease obligations (note 5) 186,623 74,876 66,646 Accounts payable 2,888,447 1,304,909 714,459 Accrued expenses 818,448 777,818 385,956 Warranty reserve 160,000 65,000 110,000 ----------------- ----------------- ----------------- Total current liabilities 5,232,259 3,397,203 1,949,836 Obligations under capital leases, excluding current portion (note 5) 3,073,122 918,760 993,636 Long-term debt, excluding current portion (note 7) 751,964 -- -- Other liabilities 10,196 51,302 44,241 ----------------- ----------------- ----------------- Total liabilities 9,067,541 4,367,265 2,987,713 ----------------- ----------------- ----------------- Stockholders' equity: Common stock $.02 par value. Authorized 1,000,000 shares; issued and outstanding 50,000 shares in 2000, 1999 and 1998 1,000 1,000 1,000 Retained earnings 2,479,859 3,688,343 4,155,765 ----------------- ----------------- ----------------- Total stockholders' equity 2,480,859 3,689,343 4,156,765 ----------------- ----------------- ----------------- Commitments, concentrations and contingencies (notes 1, 5 and 11) $ 11,548,400 8,056,608 7,144,478 ================= ================= ================= |
See accompanying notes to combined consolidated financial statements.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES COMBINED CONSOLIDATED STATEMENTS OF INCOME PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000 AND YEARS ENDED DECEMBER 31, 1999 AND 1998
DECEMBER 19, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ---- ---- ---- Sales $ 20,713,876 14,214,099 11,373,212 Cost of sales 7,662,671 5,899,781 4,660,208 ------------- ------------ ------------ Gross profit 13,051,205 8,314,318 6,713,004 ------------- ------------ ------------ Selling expenses 3,351,772 2,981,055 2,312,382 General and administrative expenses 3,568,677 2,540,376 1,799,489 Research and development expenses 2,580,650 2,014,464 1,908,673 ------------- ------------ ------------ 9,501,099 7,535,895 6,020,544 ------------- ------------ ------------ Operating income 3,550,106 778,423 692,460 Interest expense (255,740) (198,343) (158,758) Interest income 121,842 56,156 20,942 Other income 54,566 32,854 32,572 ------------- ------------ ------------ Income before New York State franchise taxes 3,470,774 669,090 587,216 New York State franchise taxes 32,000 8,610 10,896 ------------- ------------ ------------ Net income $ 3,438,774 660,480 576,320 ============= ============ ============ Net income per share: Basic and diluted $ 68.78 13.21 11.53 ============= ============ ============ Weighted average shares used in calculating net income per share: Basic and diluted 50,000 50,000 50,000 ============= ============ ============ Pro forma data: Net income before income tax expense 3,438,774 660,480 576,320 Pro forma provision for income tax expense (unaudited) (1,321,000) (174,000) (136,000) ------------- ------------ ------------ Pro forma net income (unaudited) $ 2,117,774 486,480 440,320 ============= ============ ============ Pro forma net income per share (unaudited): Basic and diluted $ 42.35 9.73 8.81 ============= ============ ============ Weighted average shares outstanding in calculating pro forma basic and diluted net income per share 50,000 50,000 50,000 ============= ============ ============ |
See accompanying notes to combined consolidated financial statements.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
COMMON STOCK TOTAL ------------------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------ -------- ------ Balances at December 31, 1997 50,000 $ 1,000 3,847,786 3,848,786 Stockholders' distributions -- -- (268,341) (268,341) Net income for the year -- -- 576,320 576,320 --------- --------- --------- --------- Balances at December 31, 1998 50,000 1,000 4,155,765 4,156,765 Stockholders' distributions -- -- (1,127,902) (1,127,902) Net income for the year -- -- 660,480 660,480 --------- --------- --------- --------- Balances at December 31, 1999 50,000 1,000 3,688,343 3,689,343 Stockholders' distributions -- -- (4,647,258) (4,647,258) Net income for the period -- -- 3,438,774 3,438,774 --------- --------- --------- --------- Balances at December 19, 2000 50,000 $ 1,000 2,479,859 2,480,859 ========= ========= ========= ========= |
See accompanying notes to combined consolidated financial statements.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
DECEMBER 19, DECEMBER 31, DECEMBER 31, 2000 1999 1998 ---- ---- ---- Cash flows from operating activities: Net income $3,438,774 660,480 576,320 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 434,124 356,559 325,369 Gain on sale of property held for sale -- (10,142) -- Provision for obsolete inventory 510,000 141,000 20,000 Provision for warranty costs 233,356 230,380 296,551 Change in assets and liabilities: (Increase) decrease in: Trade receivables (980,891) (649,735) (524,728) Inventories (763,606) (679,648) 162,947 Prepaid expenses (23,958) 36 (2,025) Other assets (13,780) (3,595) (3,589) (Decrease) increase in: Accounts payable 1,583,538 590,450 363,851 Accrued expenses 40,630 391,862 (260,594) Warranty reserve (138,356) (275,380) (236,551) Other liabilities (41,106) 7,061 (31,721) ---------- ---------- ---------- Net cash provided by operating activities 4,278,725 759,328 685,830 ---------- ---------- ---------- Cash flows from investing activities: Capital expenditures, net of minor disposals (731,467) (284,906) (224,864) Proceeds from property held for sale -- 172,638 -- ---------- ---------- ---------- Net cash used in investing activities (731,467) (112,268) (224,864) ---------- ---------- ---------- Cash flows from financing activities: Borrowings under line of credit 9,301,389 902,700 1,450,000 Repayments under line of credit (9,485,239) (278,100) (1,700,000) Proceeds received from payments of notes receivable from stockholders and other long-term notes 37,444 426,709 302,742 Borrowings under long-term debt 939,955 -- -- Advances under notes receivable from stockholders -- -- (410,000) Net decrease in advances to unconsolidated affiliated company -- -- 45,280 Stockholders' distributions (4,647,258) (1,127,902) (268,341) Principal payments on long-term debt -- (122,775) (3,394) Principal payments on capital lease obligations (81,838) (66,646) (69,685) ---------- ---------- ---------- Net cash used in financing activities (3,935,547) (266,014) (653,398) ---------- ---------- ---------- Net increase (decrease) in cash (388,289) 381,046 (192,432) Cash balance at beginning of year 462,030 80,984 273,416 ---------- ---------- ---------- Cash balance at end of year/period $ 73,741 462,030 80,984 ========== ========== ========== Supplemental disclosure of cash flow information: Cash paid during the year/period for interest $ 259,370 189,542 158,758 Cash paid during the year/period for New York State franchise taxes 12,027 8,610 10,896 ========== ========== ========== Supplemental disclosure of non cash investing and financing activities: Capital lease obligation for office space $2,347,947 -- -- ========== ========== ========== Increase in capital lease obligation for office space due to extension of lease term and minimum monthly payment amounts -- -- 491,250 ========== ========== ========== |
See accompanying notes to combined consolidated financial statements.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
(1) DESCRIPTION OF THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE COMPANY
Burleigh Instruments, Inc. (the Company) was founded in 1972 and is a leading manufacturer of precision scientific instruments used in basic and applied research, engineering and production test applications in a variety of fields. The Company sells its products to domestic and international customers.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The combined consolidated financial statements include the accounts of
the Company's wholly-owned subsidiaries, Burleigh Instruments Ltd.
(Ltd.) and Burleigh Instruments GmbH (GmbH), as well as Burleigh DISC
Inc. (DISC), a Domestic International Sales Corporation which is under
common control and ownership. The subsidiaries, Ltd. and GmbH, were
established to sell Burleigh and third party manufactured products in
the United Kingdom and Germany. The DISC acts exclusively as an export
commission agent for the Company and is therefore combined with
Company's consolidated financial statements.
On December 31, 1995, the Company discontinued GmbH operations. On
December 31, 1996, the Company discontinued Ltd. operations. In
February 2000, in final liquidation of Burleigh Instruments, Ltd.
(Ltd.), receivables of $223,597 were transferred to Burleigh
Instruments, Inc. Additionally cash totalling $124,543 was distributed
to shareholders of Ltd. Although these subsidiaries have no continuing
operations, the Company has maintained the legal entities for future
opportunities.
In November 1999, the Company sold the Ltd. office building used prior to ceasing operations. Ltd.'s only source of income during 1999 and 1998 was rental income earned on the building. In 2000, 1999 and 1998, Burleigh Instruments Inc. continued to sell equipment in the United Kingdom through independent distributors.
All significant intercompany balances have been eliminated in consolidation and combination.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at lower of cost or market determined on a first-in, first-out (FIFO) basis.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUE RECOGNITION
Revenue is recognized upon transfer of title which occurs upon shipment.
DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is provided over the estimated useful lives of the respective assets computed under the straight-line method. Buildings, equipment and software under capital leases and leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the related asset.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code (the "Code"). Accordingly, the taxable income of the Company is reported on the individual income tax returns of the stockholders.
The Company distributed $1.8 million in cash on December 20, 2000 to its former shareholders, representing the estimated individual tax liability for each of the former shareholders for the period beginning January 1, 2000 and ending on the date of the sale of the Company (December 19, 2000).
PRO FORMA NET INCOME
The unaudited pro forma net income and per share amounts are presented in the combined consolidated statements of operations to reflect the pro forma effects for income taxes as if the Company had been a taxable entity for all periods presented.
BASIC NET INCOME PER SHARE
The Company has presented net income per share pursuant to SFAS No. 128, EARNINGS PER SHARE and the Securities and Exchange Commission Staff Accounting Bulletin No. 98.
Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for each period presented.
ROYALTIES
The Company licenses certain software and technology which is integrated into its proprietary products. Royalty costs associated with these arrangements are generally recognized as expense on a per unit sales basis when products are shipped.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
WARRANTY RESERVE
The Company accrues costs related to warranty obligations incurred in connection with the sale of goods. Management's estimate of the required warranty reserve is based upon historical experience and known or expected future obligations.
RESEARCH AND DEVELOPMENT
Expenditures for research and development are charged to earnings in the period incurred. The Company periodically receives government-sponsored research and development contracts. These contracts are for cost reimbursement only. It is the Company's policy to offset all such research and development cost incurred with the related reimbursement. Total costs reimbursed under the contracts for the period from January 1 to December 19, 2000 and the years ended December 31, 1999 and 1998 were $371,360, $344,000 and $70,000, respectively.
COMPREHENSIVE INCOME
There are no differences between the Company's reported net income and comprehensive income.
USE OF ESTIMATES
Management of the Company has made certain estimates and assumptions relating to the reporting of assets and liabilities and revenues and expenses to prepare these financial statements in conformity with accounting principles generally accepted in the United States of America. Such estimates primarily relate to allowance for excess/obsolete inventory, allowance for doubtful accounts receivable, and warranty reserves. Actual results could differ from these estimates.
LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
SFAS 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE DISPOSED OF establishes accounting standards to account for the impairment of long-lived assets, and certain identifiable intangibles. Under SFAS 121 the Company reviews assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
At December 31, 1996, the Company announced its decision to discontinue Ltd. operations and consequently wrote the building and associated leasehold improvements down to estimated fair value. On November 30, 1999, the Company sold the building and associated leasehold improvements for (pound)108,000, which approximated $172,638. The disposal resulted in a gain of $10,142. The Company used the proceeds from the sale of the building to repay the outstanding foreign bank term loan (see note 7).
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
ADVERTISING
Advertising costs are expensed as incurred and included within selling, general and administrative expenses. Total advertising expenses were $444,745, $430,808 and $382,213 for the period from January 1 to December 19, 2000 and the years ended December 31, 1999 and 1998, respectively.
RECLASSIFICATION
Certain accounts have been reclassified from the prior year to conform with the current year presentation.
(2) INVENTORIES
Components of inventories at December 19, 2000, December 31, 1999 and 1998 are as follows:
2000 1999 1998 ----------- ----------- ----------- Raw materials $ 2,694,697 2,355,262 2,106,122 Work-in process 1,032,665 766,630 432,281 Finished goods 243,645 212,618 195,516 ----------- ----------- ----------- 3,971,007 3,334,510 2,733,919 Allowance for excess/ obsolete inventory (767,110) (384,219) (322,276) ----------- ----------- ----------- $ 3,203,897 2,950,291 2,411,643 =========== =========== =========== |
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
(3) NOTES RECEIVABLE FROM STOCKHOLDERS AND OTHER LONG-TERM NOTES
Notes receivable from stockholders and other long-term notes at December 19, 2000, December 31, 1999 and 1998 consist of the following:
2000 1999 1998 ----------- ----------- ----------- Promissory notes receivable from stockholders, payable on demand and bearing interest at 9%. These notes were paid in full in 1999. $ -- -- 410,000 |
Note receivable associated
with the sale of assets of
Burleigh Northwest Optical
(BNWO) to a non-related party,
due in monthly installments
of $1,840 including interest
at 8.25%, through September 1,
2001. This receivable is secured
by the underlying assets sold.
This note was paid in full during 2000. -- 37,444 54,153 ----------- ----------- ----------- -- 37,444 464,153 Less current portion -- 19,859 18,291 ----------- ----------- ----------- Notes receivable - long-term $ -- 17,585 445,862 =========== =========== =========== |
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
(4) PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment at December 19, 2000, December 31, 1999 and 1998 is as follows:
DECEMBER 19, DECEMBER 31, DECEMBER 31, ESTIMATED 2000 1999 1998 USEFUL LIFE ---- ---- ---- ----------- Machinery and equipment $ 2,208,425 1,778,364 1,531,484 7 years Furniture and fixtures 139,240 137,520 135,384 7 years Transportation equipment 84,019 84,019 112,351 6 years Leased building 2,769,305 1,441,250 1,441,250 15 years Leased furniture/equipment 697,947 -- -- 7 years Leasehold improvements 824,129 524,443 487,101 10-20 years ----------- ----------- ----------- 6,723,065 3,965,596 3,707,570 Less accumulated depreciation and amortization (2,356,778) (2,244,599) (1,914,920) ----------- ----------- ----------- Net property, plant and equipment $ 4,366,287 1,720,997 1,792,650 =========== =========== =========== |
On September 30, 2000, the Company entered into a new capital lease agreement (note 5) with a related party for additional office and manufacturing space. The additional building space was capitalized in the amount of $1,650,000 which approximated the fair value of the building space.
On October 24, 2000 and December 11, 2000, the Company entered into lease agreements for furniture and equipment. The furniture and equipment was capitalized in the amount of $269,269 and $428,678, respectively, which approximates its fair value.
(5) LEASING ARRANGEMENTS
The Company has a lease agreement with a related party for its manufacturing plant and office complex. This lease is classified as a capital lease for financial statement purposes. Monthly payments under the lease are $15,600 through April 2008.
On September 30, 2000, the Company entered a new lease agreement, also with a related party, for an addition to its existing manufacturing plant and office complex. Monthly payments are $15,833 with a lease term through September 2020. The lease is classified as a capital lease for financial statement purposes.
On October 24, 2000 and December 11, 2000, the Company entered into new lease agreements for furniture and equipment. Monthly payments are $4,455 and $7,042, respectively. The lease terms extend through December 2007. Both leases are classified as capital leases for financial statement purposes.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
Future minimum capital lease payments at December 19, 2000 are as follows:
Year ending December 31: 2001 $ 515,175 2002 515,175 2003 515,175 2004 515,175 2005 515,175 Thereafter 3,506,339 ------------ 6,082,214 Less amounts representing effective interest and executory costs ranging from 9.92% to 11.7% (2,822,469) ------------ Present value of minimum capital lease payments 3,259,745 Less current portion of capital lease obligations (186,623) ------------ Capital lease obligations, excluding current portion $ 3,073,122 ============ |
The Company has several operating leases for vehicles and equipment. Future minimum lease payments are $12,342 for 2001 and $470 for 2002.
Rental expense for all operating leases charged against earnings amounted to $20,104, $19,634 and $15,049 for the period from January 1 to December 19, 2000 and the years ended December 31, 1999 and 1998, respectively.
(6) BANK LINE OF CREDIT
The Company has a $3,000,000 bank line of credit. Amounts borrowed are payable on demand, bear interest at the bank's prime rate (9.5%, 8.50% and 7.75% at December 19, 2000, December 31, 1999 and 1998) or LIBOR plus 1.77%, and are secured by accounts receivable, inventories and equipment. At December 19, 2000, December 31, 1999 and 1998, the Company had $990,750, $1,174,600 and $550,000, respectively, outstanding in borrowings on its bank line of credit. Maximum outstanding borrowings under the line of credit arrangement amounted to $2,855,000, $1,342,500 and $800,000 for the period from January 1 to December 19, 2000 and the years ended December 31, 1999 and 1998, respectively. The weighted average interest rates on outstanding borrowings for the period from January 1 to December 19, 2000 and the years ended December 31, 1999 and 1998 were 8.4%, 8.0% and 8.4%, respectively.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
(7) LONG-TERM DEBT
Long-term debt at December 19, 2000, December 31, 1999 and 1998 consists of the following:
2000 1999 1998 ---- ---- ---- Bank term loan, due in 60 monthly installments of $15,666, excluding interest at LIBOR plus 2.0%. Principal payments begin February 1, 2001. Subsequent to December 19, 2000, the Company paid the term loan in full with proceeds from EXFO (see note 13) $ 939,955 -- -- Foreign bank term loan, due in monthly installments of (pound)776 which approximated $1,288 at December 31, 1998, including interest at the bank's base rate plus 2.5%. Repayment of the debt was made in full in 1999 through proceeds from the sale of the building securing this loan (see note 13). -- -- 122,775 --------- --------- --------- 939,955 -- 122,775 Less current portion (187,991) -- (122,775) --------- --------- --------- $ 751,964 -- -- ========= ========= ========= |
(8) NEW YORK STATE FRANCHISE TAXES
The Company is subject to New York State franchise tax as an S corporation. The calculation of this tax rate is the difference between the total franchise tax rate and the highest personal income tax rate. Tax expense amounted to $32,000 for the period from January 1 to December 19, 2000, $8,610 for the year ended December 31, 1999 and $10,896, including taxes for Ltd., for the year ended December 31, 1998 (effective rates of 0.9%, 1.1% and 1.7%, respectively).
(9) PROFIT SHARING AND RETIREMENT SAVINGS PLAN
The Company has a non-contributory tax qualified profit sharing plan covering substantially all employees. Contributions to the plan are at the discretion of the Board of Directors. Plan contributions were $178,553, $142,199 and $115,392 for the period from January 1 to December 19, 2000 and for the years ended December 31, 1999 and 1998, respectively.
The Company's benefit plan includes a retirement savings option covering substantially all of its employees which allows participants to make contributions, via salary reduction, pursuant to
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
section 401(k) of the Internal Revenue Code. The plan also allows participants to contribute up to 15% of their compensation, with the employer matching a portion of this elective deferral. The current matching contribution rate is 50 cents for every dollar contributed, up to a limit of 3% of a participant's compensation. The Company's contribution was $154,135 for the period from January 1 to December 19, 2000, $105,050 for the year ended December 31, 1999 and $80,093 for the year ended December 31, 1998.
Participants vest in Company contributions at 20% after two years and 20% each year thereafter until fully vested. Employee contributions are fully vested.
(10) STOCKHOLDERS' EQUITY
In April 2000, the principal shareholders of the Company sold 11,066 shares of their own stock to certain officers of the Company for $504 a share, which approximated fair value at the date of sale based on an independent third party appraisal. Payment of the stock was in the form of a full recourse promissory note which is payable in various installments through 2010 at an annual interest rate of 6.42%. The stock also included a fair value put option beginning eighteen months after the issuance of the stock as a possible form of repaying the promissory note.
(11) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the ordinary course of business. If the plaintiff's claims are probable, the appropriate amount is accrued in the consolidated financial statements. In the opinion of management, the ultimate disposition of matters not accrued will not have a material adverse effect on the Company's combined consolidated financial position results of operations or liquidity.
(12) SEGMENTED INFORMATION
The Company has no reportable business segments, however, it does have reportable geographic segments for the period from January 1 to December 19, 2000, and the years ended December 31, 1999 and 1998. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000 ------------------------------------------------------------------------------ UNITED STATES JAPAN EUROPE OTHER TOTAL ------ ----- ------ ----- ----- Revenues from external customers $ 12,635,464 1,323,617 3,314,220 3,440,575 20,713,876 YEAR ENDED DECEMBER 31, 1999 ------------------------------------------------------------------------------ UNITED STATES JAPAN EUROPE OTHER TOTAL ------ ----- ------ ----- ----- Revenues from external customers $ 8,244,177 1,279,269 2,558,538 2,132,115 14,214,099 YEAR ENDED DECEMBER 31, 1998 ------------------------------------------------------------------------------ UNITED STATES JAPAN EUROPE OTHER TOTAL ------ ----- ------ ----- ----- Revenues from external customers $ 7,165,124 1,251,053 1,933,446 1,023,589 11,373,212 |
The Company's largest customers are located in the United Kingdom, Germany and Japan. These customers are distributors of Company products. The Company's assets in locations outside the United States were immaterial for all periods presented.
(13) SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to December 19, 2000, EXFO provided a $3.3 million intercompany loan to the Company for the repayment of its term loan (see note 7) and to purchase the Company's manufacturing plant and office complex (see note 4) leased from a related party.
On February 21, 2001, Burleigh Automation Inc., a newly created, wholly-owned subsidiary of Burleigh Instruments, Inc. entered into a definitive agreement to acquire Vanguard Technical Solutions Inc., a wholly-owned subsidiary of DT Industries, Inc. for approximately $600,000 in cash.
(14) FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, trade receivables, borrowings under line of credit, accounts payable and accrued expenses approximates fair value because of the short maturity of the financial instruments. The carrying value of long-term debt which has variable interest rates based on market rates approximates fair value of those financial instruments. The fair value of the Company's obligations under capital leases which was based on the amount of future cash flows associated with each instrument discounted using borrowing rates currently available for similar debt instruments of similar maturity approximated the carrying value.
BURLEIGH INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO THE COMBINED CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JANUARY 1 TO DECEMBER 19, 2000
AND YEARS ENDED DECEMBER 31, 1999 AND 1998
(15) NEW ACCOUNTING PRONOUNCEMENTS
In September 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 140, ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES ("SFAS No. 140"). SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001 and effective for recognition and reclassification of collateral for fiscal years ending after December 15, 2000. The Company does not believe that the adoption of SFAS No. 140 will have any impact on the Company's financial reporting.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("SFAS No. 133"). This statement establishes accounting and reporting standards for derivative instruments and requires recognition of all derivatives assets or liabilities in the statement of financial position and measurement of those instruments at fair value. This statement, as amended under SFAS 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES ("SFAS No. 138), is effective for the fiscal years beginning after June 15, 2000. The Company does not believe the adoption of SFAS No. 133 and SFAS No. 138 will have a significant impact on the Company's financial reporting.
(16) RECONCILIATION TO CANADIAN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The combined consolidated financial statements have been prepared according to United States generally accepted accounting principles. The combined consolidated financial statements comply, in all material respects, with Canadian generally accepted accounting principles.
AUDITORS' REPORT
To the Directors of
EFOS INC.
We have audited the balance sheets of EFOS INC. as at October 31, 2000 and 1999 and the statements of income and retained earnings and cash flows for each of the years in the three-year period ended October 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian and United States generally accepted auditing standards for the year ended October 31, 2000 and Canadian generally accepted auditing standards for each of the years in the three-year period ended October 31, 2000. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at October 31, 2000 and 1999 and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2000 in accordance with Canadian generally accepted accounting principles.
Toronto, Canada, /s/ Ernst & Young LLP November 29, 2000 Chartered Accountants [except as to Note 10 which is as of May 7, 2001]. |
EFOS INC.
Incorporated under the laws of Ontario
BALANCE SHEETS
As at October 31
(in Canadian dollars)
2000 1999 $ $ -------------------------------------------------------------------------------- ASSETS CURRENT Cash 169,104 -- Accounts receivable 4,738,892 2,680,677 Inventories [NOTE 2] 4,205,684 2,259,993 Investment tax credits recoverable [NOTE 4] 949,088 1,023,882 Prepaid expenses and deposits 174,076 220,198 Due from affiliated companies [NOTE 6] 183,506 177,335 Deferred income taxes -- 16,000 -------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 10,420,350 6,378,085 -------------------------------------------------------------------------------- Capital assets, net [NOTE 3] 1,311,056 615,495 -------------------------------------------------------------------------------- 11,731,406 6,993,580 ================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT Bank indebtedness [NOTE 8[C]] 75,000 -- Accounts payable and accrued liabilities 3,847,259 1,664,100 Income taxes payable 1,510,927 378,763 Deferred income taxes 100,000 -- Deferred leasehold inducements -- 52,866 -------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 5,533,186 2,095,729 -------------------------------------------------------------------------------- Due to affiliated companies [NOTE 6] 3,329,341 3,997,151 -------------------------------------------------------------------------------- TOTAL LIABILITIES 8,862,527 6,092,880 -------------------------------------------------------------------------------- COMMITMENTS [NOTE 8] SHAREHOLDERS' EQUITY Share capital 1,000 1,000 Authorized Unlimited common shares Issued and outstanding in 2000, 1999 and 1998 49 common shares 1,000 1,000 -------------------------------------------------------------------------------- Retained earnings 2,867,879 899,700 -------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 2,868,879 900,700 -------------------------------------------------------------------------------- 11,731,406 6,993,580 ================================================================================ |
SEE ACCOMPANYING NOTES
EFOS INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
For the years ended October 31
(in Canadian dollars)
2000 1999 1998 $ $ $ ------------------------------------------------------------------------------------------------------------ SALES 24,867,997 13,891,637 15,621,423 Cost of sales 11,855,892 7,373,326 9,781,975 ------------------------------------------------------------------------------------------------------------ GROSS PROFIT 13,012,105 6,518,311 5,839,448 ------------------------------------------------------------------------------------------------------------ EXPENSES General and administrative 2,952,481 2,310,947 2,566,452 Selling 4,330,895 2,424,964 1,701,075 Research and development, net of investment tax credits [NOTE 4] 1,871,087 959,970 843,232 Depreciation and amortization 428,411 423,479 490,664 Interest on loans from related parties [NOTE 6] 194,052 163,444 -- ------------------------------------------------------------------------------------------------------------ 9,776,926 6,282,804 5,601,423 ------------------------------------------------------------------------------------------------------------ Income before income taxes 3,235,179 235,507 238,025 ------------------------------------------------------------------------------------------------------------ Provision for income taxes [NOTE 5] Current 1,151,000 70,344 39,000 ------------------------------------------------------------------------------------------------------------ Deferred 116,000 8,000 7,000 ------------------------------------------------------------------------------------------------------------ 1,267,000 78,344 46,000 ------------------------------------------------------------------------------------------------------------ NET INCOME FOR THE YEAR 1,968,179 157,163 192,025 Retained earnings, beginning of year 899,700 742,537 550,512 ------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS, END OF YEAR 2,867,879 899,700 742,537 ============================================================================================================ |
SEE ACCOMPANYING NOTES
EFOS INC.
STATEMENTS OF CASH FLOWS
For the years ended October 31
(in Canadian dollars)
2000 1999 1998 $ $ $ ------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income for the year 1,968,179 157,163 192,025 Add items not involving cash Depreciation and amortization 428,411 423,479 490,664 Deferred income taxes 116,000 8,000 7,000 ------------------------------------------------------------------------------------------------------------ 2,512,590 588,642 689,689 Net change in non-cash working capital balances related to operations [NOTE 9] (626,704) (730,051) (164,803) ------------------------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,885,886 (141,409) 524,886 ------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Proceeds from disposal of capital assets -- 38,610 -- Purchase of capital assets (1,123,972) (295,482) (141,279) ------------------------------------------------------------------------------------------------------------ CASH USED IN INVESTING ACTIVITIES (1,123,972) (256,872) (141,279) ------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Increase in bank indebtedness 75,000 -- -- Loans from shareholders -- (2,813,424) 2,813,424 Due to affiliated companies (667,810) 1,780,886 1,051,575 ------------------------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (592,810) (1,032,538) 3,864,999 ------------------------------------------------------------------------------------------------------------ NET INCREASE (DECREASE) IN CASH DURING THE YEAR 169,104 (1,430,819) 4,248,606 Cash position, beginning of year __ 1,430,819 (2,817,787) ------------------------------------------------------------------------------------------------------------ CASH POSITION, END OF YEAR 169,104 -- 1,430,819 ============================================================================================================ |
SEE ACCOMPANYING NOTES
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared by management on the historical costs basis in accordance with Canadian generally accepted accounting principles applied on a consistent basis within the framework of the significant accounting policies summarized below. The significant differences between generally accepted accounting principles in Canada and the United States are disclosed in note 10.
INVENTORIES
Raw materials, which consist of components for assembly, and work-in-process are stated at the lower of cost and replacement cost, while finished goods are stated at the lower of cost and net realizable value. Cost is determined on a weighted average cost basis.
CAPITAL ASSETS
Capital assets are recorded at acquisition cost, net of any related investment
tax credits ["ITCs"] and accumulated depreciation and amortization. EFOS Inc.
[the "Company"] provides for depreciation and amortization at rates which are
expected to charge operations with the cost of the assets on a straight-line
basis over their estimated useful lives as follows:
Computer equipment 5 years Computer software 2 years Office furniture and equipment 5 years Production equipment 5 years Tooling 2 years |
Leasehold improvements over the term of the lease
REVENUE RECOGNITION
Revenue from sales of products is recognized upon shipment to customers.
FOREIGN CURRENCY TRANSLATION
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at the exchange rates prevailing at the balance sheet
dates. Revenue and expenses are translated at exchange rates prevailing on the
transaction dates. The Company enters into forward exchange contracts to hedge
anticipated sales. Foreign exchange gains (losses) are recorded on settlement of
these contracts. Exchange gains (losses) on translation are included in income
[2000 -- $ 148,431; 1999 -- ($ 74,172); 1998 -- $ 265,939].
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
INCOME TAXES
The deferral method is used in accounting for income taxes whereby timing differences between income reported in the financial statements and taxable income result in deferred income taxes. Deferred income taxes result primarily from timing differences relating to scientific research and development ["SRED"] expenditures and depreciation and amortization claimed for income tax purposes and recorded for accounting purposes.
The required implementation of the new accounting standard issued by The Canadian Institute of Chartered Accountants in respect of income taxes has been deferred for privately owned companies until fiscal years starting on or after January 1, 2002. The Company has not early adopted this new standard. The implementation of this standard is not expected to have a material impact on the Company's financial statements.
RESEARCH AND DEVELOPMENT
Research expenditures [except for capital assets] are charged to expenses as incurred. Development expenditures are expensed unless they meet generally accepted criteria for deferral and amortization. No development costs have been deferred to date. ITCs earned as a result of incurring eligible SRED expenditures are recorded as a reduction of the related current year's expense or as a reduction of the related capital asset.
2. INVENTORIES
Inventories consist of the following:
2000 1999 $ $ -------------------------------------------------------------------------------- Raw materials 1,852,791 952,200 Work-in-process 299,087 94,454 Finished goods 2,053,806 1,213,339 -------------------------------------------------------------------------------- 4,205,684 2,259,993 ================================================================================ |
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
3. CAPITAL ASSETS
Capital assets consist of the following:
2000 -------------------------------------------------------------------------------------------- ACCUMULATED DEPRECIATION/ NET BOOK COST AMORTIZATION VALUE $ $ $ -------------------------------------------------------------------------------------------- Computer hardware and software 1,066,651 876,162 190,489 Office furniture and equipment 989,561 653,346 336,215 Production equipment 927,315 654,480 272,835 Tooling 107,063 107,063 -- Leasehold improvements 1,410,505 898,988 511,517 -------------------------------------------------------------------------------------------- 4,501,095 3,190,039 1,311,056 ============================================================================================ 1999 -------------------------------------------------------------------------------------------- ACCUMULATED DEPRECIATION/ COST AMORTIZATION NET BOOK VALUE $ $ $ -------------------------------------------------------------------------------------------- Computer hardware and software 978,395 769,987 208,408 Office furniture and equipment 734,284 567,293 166,991 Production equipment 657,471 577,995 79,476 Tooling 107,063 107,063 -- Leasehold improvements 899,910 739,290 160,620 -------------------------------------------------------------------------------------------- 3,377,123 2,761,628 615,495 ============================================================================================ |
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
4. INVESTMENT TAX CREDITS
The Company is eligible for ITCs on its qualifying current and capital expenditures incurred in each year. These credits are recorded in the year that realization is reasonably assured.
The Company applies the cost reduction method of accounting for these ITCs. Research and development expenses during the year have been reduced by ITCs of approximately $631,000 [1999 - $648,000; 1998 - $592,259].
5. INCOME TAXES
The Company's effective income tax rate has been determined as follows:
2000 1999 1998 % % % ------------------------------------------------------------------------------------------------ Canadian statutory income tax rate 44.1 44.6 44.6 Small business deduction (1.4) (19.8) (14.3) Manufacturing and processing tax credit (4.7) -- -- Losses for which no tax benefit is recognized -- 29.9 6.3 Reduction for Ontario superallowance (3.1) (37.6) (12.3) Permanent difference - other 4.3 16.1 (5.0) ------------------------------------------------------------------------------------------------ EFFECTIVE INCOME TAX RATE 39.2 33.2 19.3 ================================================================================================ |
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
6. RELATED PARTY TRANSACTIONS
Related party transactions and balances include the following:
2000 1999 1998 $ $ $ -------------------------------------------------------------------------------- Purchases 29,295 39,188 347,895 ================================================================================ |
In the normal course of business, the Company engages various professional and consulting firms for professional and consulting services. During the year, approximately $31,000 [1999 - $50,000; 1998 - $124,000] was paid to a legal professional firm in which a partner was a director of the company. Terms of these transactions are the same as those with unrelated parties.
2000 1999 $ $ -------------------------------------------------------------------------------- Loans and advances from parent company 3,312,985 3,888,333 Interest payable 16,356 108,818 -------------------------------------------------------------------------------- Due to affiliated companies 3,329,341 3,997,151 ================================================================================ |
Advances from the parent company are not interest bearing. Loans to the parent company bear interest at approximately 8%. These advances and loans had no fixed terms of repayment as at October 31, 2000 and have been classified as long term.
2000 1999 $ $ -------------------------------------------------------------------------------- Due from EFOS International 102,008 98,577 Due from parent company 81,498 78,758 -------------------------------------------------------------------------------- 183,506 177,335 ================================================================================ |
Due from affiliated companies consist of amounts paid by the Company on behalf of affiliated companies in the normal course of business.
The above related party transactions are measured at the exchange amount, that is the actual amount of consideration given for the items transferred or the service provided.
7. FINANCIAL INSTRUMENTS
RISK MANAGEMENT ACTIVITIES
The Company manages credit risk in respect of trade accounts receivable by primarily dealing with large creditworthy customers. Management is of the view that the Company is not subject to a significant concentration of credit risk.
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
FAIR VALUES
The carrying values of cash, accounts receivable, investment tax credits recoverable, bank indebtedness, accounts payable and accrued liabilities and amounts due to and from affiliated companies approximate their fair values due to the relatively short periods to maturity of these instruments.
8. COMMITMENTS
[a] Future minimum annual lease payments under operating leases relating primarily to the Company's head office and plant facilities and equipment are as follows:
[as at October 31, 2000] $ -------------------------------------------------------------------------------- 2001 318,968 2002 316,107 2003 283,382 2004 268,244 2005 271,090 -------------------------------------------------------------------------------- Thereafter 565,046 ================================================================================ |
[b] The Company has net cash inflows denominated in U.S. dollars. The Company utilizes foreign exchange contracts to hedge these exposures. As at October 31, 2000, the Company has outstanding foreign exchange contracts representing a net commitment to sell approximately U.S.$14,000,000 [1999 - U.S.$6,800,000; 1998 - U.S.$3,400,000] at rates ranging from Cdn.$1.4415 to Cdn.$1.5465 [1999 rates ranging from Cdn.$1.4694 to Cdn.$1.5556; 1998 rates ranging from Cdn.$1.3292 to Cdn$1.5556]. These contracts mature on various dates through September 2002. The Company has provided the bank with an assignment of term deposits and credit balances, to a maximum of U.S.$887,500, as collateral for these contracts.
[c] The Company has an operating line of credit with a major Canadian chartered bank for up to $3,000,000, which bears interest at the bank's prime based loan rate of 7.5% at October 31, 2000 and is repayable on demand. As at October 31, 2000, the Company has drawn down the operating line of credit by $75,000 [1999 - nil] The line of credit is collateralized by a general security agreement, assignment of adequate fire insurance and an unlimited guarantee of advances from the Company. Under the terms of the credit agreement the Company has undertaken to maintain certain financial covenants. As at October 31, 2000, the Company was in compliance with these covenants.
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
9. STATEMENTS OF CASH FLOWS
The net change in non-cash working capital balances related to operations consists of the following:
2000 1999 1998 $ $ $ ---------------------------------------------------------------------------------------------------- DECREASE (INCREASE) IN CURRENT ASSETS Accounts receivable (2,058,215) (155,127) 1,896,493 Inventories (1,945,691) (818,096) 788,688 Investment tax credits recoverable 74,794 (96,949) 984,742 Prepaid expenses and deposits 46,122 (91,728) 236,550 Due from affiliated companies (6,171) (14,503) (87,043) ---------------------------------------------------------------------------------------------------- (3,889,161) (1,176,403) 3,819,430 ==================================================================================================== INCREASE (DECREASE) IN CURRENT LIABILITIES Accounts payable and accrued liabilities 2,183,159 460,310 (4,019,416) Income taxes payable 1,132,164 34,744 83,983 Deferred leasehold inducements (52,866) (48,702) (48,800) ---------------------------------------------------------------------------------------------------- 3,262,457 446,352 (3,984,233) ---------------------------------------------------------------------------------------------------- (626,704) (730,051) (164,803) ==================================================================================================== |
Cash interest paid was $243,000 [1999 - $127,000; 1998 - $231,599]. Cash income taxes paid were $848,000 [1999 - $ 35,000; 1998 - $27,000].
10. UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
The financial statements have been prepared in accordance with accounting principles generally accepted in Canada ["Canadian GAAP"] which differ in certain material respects from those applicable in the United States ["US GAAP"]. The material differences as they apply to the financial statements of the Company are as follows:
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
FORWARD EXCHANGE CONTRACTS
Under U.S. GAAP, in accordance with Statement of Financial Accounting Standard ("SFAS") 52, certain of the forward exchange contracts held for hedging and other purposes in 1998, 1999 and 2000, for which the underlying transactions are not firmly committed, have not been designated by management for hedge accounting. Consequently, unrealized exchange gains or losses on these contracts at each balance sheet date would be reflected in income for the corresponding year. Under Canadian GAAP, the Company's forward exchange contracts held for the purpose of hedging net cash inflows qualify for hedge accounting and any unrealized gains or losses are deferred and recognized in the statement of income upon settlement of the related transactions.
NEW ACCOUNTING STANDARDS
In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") 133, "Accounting for Derivative Instruments and Hedging Activities" and its subsequent amendments, SFAS 137 and 138. The standard, which must be applied prospectively, is effective for all fiscal quarters of all fiscal years beginning after June 30, 2000. The only derivatives held by the company are forward exchange contracts. The new standard is effective commencing with the Company's fiscal 2001 year end and will be applied prospectively, as required. The forward exchange contracts do not qualify as hedging instruments and the method of accounting for these derivatives will not change as a result of the application of SFAS 133.
On December 31, 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") 101, "Revenue Recognition". SAB 101, as amended by SAB 101B, is effective no later than the fourth fiscal quarter of the first fiscal year beginning after December 15, 1999. The implementation of this SAB is not expected to have any material effect on the Company's financial statements or revenue recognition policy in future years.
EFOS INC.
NOTES TO FINANCIAL STATEMENTS
October 31, 2000
(in Canadian dollars)
RECONCILIATION OF NET INCOME TO CONFORM TO U.S. GAAP
The following summary sets out the material adjustments to the Company's reported net income which would be made to conform to U.S. GAAP.
2000 1999 1998 $ $ $ ---------------------------------------------------------------------------------------------------------------------- Net income for the year in accordance with Canadian GAAP 1,968,179 157,163 192,025 Unrealized gains (losses) on forward exchange contracts (737,480) 389,410 85,470 Deferred income tax (expense) recovery on forward 170,000 (86,000) (19,000) exchange contracts ---------------------------------------------------------------------------------------------------------------------- Net income and comprehensive income for the year in accordance with U.S. GAAP 1,400,699 460,573 258,495 ====================================================================================================================== |
BALANCE SHEET ITEMS USING U.S. GAAP
2000 1999 ----------------------- ------------------------ CANADIAN U.S. GAAP CANADIAN U.S. GAAP GAAP $ GAAP $ $ $ ---------------------------------------------------------------------------------------------------------------------- Foreign exchange asset (liability) -- (42,100) -- 695,380 Deferred tax (liability) asset (100,000) (84,000) 16,000 (138,000) Shareholders' equity 2,868,879 2,842,779 900,700 1,442,080 ====================================================================================================================== |
EFOS INC.
Interim Balance Sheets -------------------------------------------------------------------------------- (expressed in Canadian dollars) AS AT AS AT OCTOBER 31, 2000 JANUARY 31, 2001 --------------------------------------------- $ $ (UNAUDITED) |
ASSETS
CURRENT ASSETS
Cash 169,104 -- Accounts receivable 4,738,892 7,209,881 Inventories 4,205,684 4,526,637 Investment tax credits recoverable 949,088 1,149,040 Prepaid expenses and deposits 174,076 328,588 Due from affiliated companies 183,506 100,707 --------------------------------------------- 10,420,350 13,314,853 CAPITAL ASSETS, net 1,311,056 1,472,800 --------------------------------------------- 11,731,406 14,787,653 ============================================= |
LIABILITIES
CURRENT LIABILITIES
Operating loan 75,000 2,662,920 Accounts payable and accrued liabilities 3,847,259 3,697,059 Due to affiliated companies (Note 5) -- 2,898,958 Income taxes payable 1,510,927 1,888,534 Future income taxes 100,000 100,000 --------------------------------------------- 5,533,186 11,247,471 Due to affiliated companies (Note 5) 3,329,341 -- --------------------------------------------- 8,862,527 11,247,471 ============================================= SHAREHOLDERS' EQUITY SHARE CAPITAL 1,000 1,000 RETAINED EARNINGS 2,867,879 3,539,182 --------------------------------------------- 2,868,879 3,540,182 --------------------------------------------- 11,731,406 14,787,653 ============================================= |
2000 2001 $ $ (UNAUDITED) (UNAUDITED) SALES 4,580,956 9,350,506 COST OF SALES 2,280,891 4,492,010 --------------------------------------- GROSS PROFIT 2,300,065 4,858,496 --------------------------------------- EXPENSES General and administrative 496,532 930,698 Selling 725,259 1,882,583 Research and development, net of investment tax credits 390,204 802,161 Depreciation and amortization 119,000 150,000 Interest on loans from related parties 38,187 44,144 --------------------------------------- 1,769,182 3,809,586 --------------------------------------- EARNINGS BEFORE INCOME TAXES 530,883 1,048,910 INCOME TAXES 212,350 377,607 --------------------------------------- NET EARNINGS FOR THE PERIOD 318,533 671,303 RETAINED EARNINGS - BEGINNING OF PERIOD 899,700 2,867,879 --------------------------------------- RETAINED EARNINGS - END OF PERIOD 1,218,233 3,539,182 ======================================= |
EFOS INC.
Interim Statements of Cash Flows -------------------------------------------------------------------------------- (expressed in Canadian dollars) THREE MONTHS ENDED JANUARY 31, --------------------------------------- 2000 2001 $ $ (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net earnings for the period 318,533 671,303 Depreciation and amortization not affecting cash 119,000 150,000 --------------------------------------- 437,533 821,303 --------------------------------------- Change in non-cash operating working capital items Increase in accounts receivable (124,909) (2,470,989) Increase in inventories (351,756) (320,953) Increase in investment tax credits recoverable (91,321) (199,952) Increase in prepaid expenses and deposits (24,056) (154,512) Decrease in due from affiliated companies 2,737 82,799 Decrease in accounts payable and accrued liabilities (97,213) (150,200) Increase in income taxes payable 212,350 377,607 |
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of capital assets (40,005) (311,744) --------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Variation in operating loan -- 2,587,920 Variation in due to affiliated companies 234,468 (430,383) --------------------------------------- 234,468 2,157,537 --------------------------------------- NET CHANGE IN CASH 145,530 (169,104) CASH - BEGINNING OF PERIOD -- 169,104 --------------------------------------- CASH - END OF PERIOD 145,530 -- ======================================= SUPPLEMENTARY INFORMATION Interest paid 4,167 25,613 Income taxes paid -- -- |
(expressed in Canadian dollars)
1. INCORPORATION AND NATURE OF ACTIVITIES
EFOS Inc. (EFOS) is incorporated under the laws of the Province of Ontario. EFOS' mandate is to research, develop and manufacture systems and equipment that make innovative use of light energy in applications such as light-based curing, precise area illumination and biomedical research.
2. INTERIM FINANCIAL INFORMATION
These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (Canadian GAAP) applicable to interim financial statements and do not include all of the information and note disclosures required in annual financial statements. Except as noted below, the principal accounting policies of the Company have been applied on a basis consistent with the Company's October 31, 2000 audited financial statements, which should be referred to for a description of the Company's significant accounting policies. The information presented as at January 31, 2001 and for the interim periods ended January 31, 2001 and 2000 is unaudited. In the opinion of management, all adjustments considered necessary for a fair presentation of results for the reported periods have been included.
3. NEW ACCOUNTING STANDARDS
Effective November 1, 2000, the Company implemented section 3465 of the Canadian Institute of Chartered Accountants (CICA) Handbook entitled "Income Taxes." Under these recommendations, income taxes are now accounted for using the liability method whereby future income taxes arise from differences between the book value of assets and liabilities and their respective tax bases, using income tax rates expected to be in effect for the periods in which the differences are expected to reverse. The implementation had no effect on the Company's prior period earnings or shareholders' equity.
On November 1, 2000, the Company adopted new standard 3461 "Employee Future Benefits" which is effective for fiscal years beginning on or after January 1, 2000. Adopting this standard has not had any effect on the Company's earnings or shareholders' equity.
4. DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP
These interim financial statements are prepared in accordance with Canadian GAAP which differ in certain respects from U.S. GAAP. Note 10 of the Company's most recent annual financial statements describes the material differences between Canadian and U.S. GAAP. This note describes additional changes occurring since the most recent annual financial statements and provides a quantitative analysis of the material differences. All disclosures required for annual financial statements under U.S. GAAP have not been included in these interim financial statements.
FORWARD EXCHANGE CONTRACTS
On November 1, 2000, the Company adopted Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities and its amendments (SFAS 138), which requires all derivatives to be carried on the balance sheet at fair value. The forward exchange contracts used by the Company have not qualified for hedging accounting treatment during the period ended January 31, 2001, accordingly changes in the fair value of the derivatives have been charged to earnings during the period. Under Canadian GAAP, these forward exchange contracts
(expressed in Canadian dollars)
have been designated as hedges of anticipated sales and the related accounts receivable and unrealized gains and losses are not reflected in the financial statements until the sale occurs.
(expressed in Canadian dollars)
RECONCILIATION OF NET EARNINGS TO CONFORM WITH U.S. GAAP
THREE MONTHS ENDED JANUARY 31, ----------------------------------------- 2000 2001 $ $ (UNAUDITED) (UNAUDITED) Net earnings for the period in accordance with Canadian GAAP 318,533 671,303 Unrealized gains (losses) on forward exchange contracts (1,008,010) 270,740 Future income taxes on forward exchange contracts 110,000 (68,700) ----------------------------------------- Net earnings (loss) for the period in accordance with U.S. GAAP (579,477) 873,343 ========================================= |
COMPREHENSIVE INCOME (LOSS)
For the three months ended January 31, 2000 and 2001, there are no differences between the Company's reported net earnings (loss) and comprehensive income (loss).
BALANCE SHEETS
The following table summarizes the material differences in balance sheet items between Canadian GAAP and U.S. GAAP:
AS AT OCTOBER 31, 2000 AS AT JANUARY 31, 2001 ---------------------------------------- ---------------------------------------- AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP $ $ $ $ (UNAUDITED) (UNAUDITED) Foreign exchange asset (liability) -- (42,100) -- 228,640 ============ ============ ============ ============ Future income tax liability 100,000 84,000 100,000 152,700 ============ ============ ============ ============ Shareholders' equity Retained earnings 2,867,879 2,841,779 3,539,182 3,715,122 ============ ============ ============ ============ |
STATEMENTS OF CASH FLOWS
For the three months ended January 31, 2000 and 2001, there are no material differences between the statements of cash flows under Canadian GAAP as compared to U.S. GAAP.
5. SUBSEQUENT EVENTS
On March 14, 2001, the Company sold some of its intellectual properties to EXFO Electro-Optical Engineering Inc. (EXFO) for gross cash consideration of $38,832,500 (US$25,000,000), the net proceeds of which were immediately paid by dividend to the existing shareholders.
On March 15, 2001, EXFO purchased all of the issued and outstanding shares of the Company for a total consideration of $131,391,000 (US$85,146,000).
(expressed in Canadian dollars)
Accordingly, the sale of the Company's intellectual properties will be accounted for as a related party transaction at the original carrying value of $nil, and the related difference between fair value and carrying value will be credited directly to retained earnings, net of related income taxes.
On May 15, 2001, the Company repaid its due to affiliated companies with the proceeds of a non-interest-bearing demand loan received from EXFO. Consequently, the due to affiliated companies has been reclassified to current liabilities as at January 31, 2001.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Pro-forma Unaudited Consolidated Statement of Earnings
FOR THE NINE MONTHS ENDED MAY 31, 2001
(in thousands of US dollars, except share and per share data)
EXFO ELECTRO-OPTICAL BURLEIGH ENGINEERING INSTRUMENTS, PRO-FORMA INC. INC. EFOS INC. ADJUSTMENTS NOTE PRO-FORMA ------------------------------------------------------------------------------------- (UNAUDITED) (UNAUDITED) (UNAUDITED) (NOTE 1b)) (NOTE 1e)) (NOTE 1f)) (UNAUDITED) (UNAUDITED) SALES $ 110,593 $ 7,440 $ 12,826 $ (525) 2 d) $ 130,334 COST OF SALES 40,513 2,529 5,552 (525) 2 d) 48,069 --------------------------------------------------------- --------------- GROSS MARGIN 70,080 4,911 7,274 - 82,265 --------------------------------------------------------- --------------- OPERATING EXPENSES Selling and administrative 34,159 2,687 3,822 - 40,668 Net research and development 9,747 885 1,196 - 11,828 Amortization of capital assets 2,263 154 158 - 2,575 Amortization of intangible assets 5,873 - - 3,606 2a)and 2 b) 9,479 --------------------------------------------------------- --------------- TOTAL OPERATING EXPENSES 52,042 3,726 5,176 3,606 64,550 --------------------------------------------------------- --------------- EARNINGS FROM OPERATIONS 18,038 1,185 2,098 (3,606) 17,715 Interest expense (income), net (5,371) (75) 27 1,618 2c) (3,801) Foreign exchange loss (gain) (3,018) - (130) 1,090 2c) (2,058) --------------------------------------------------------- --------------- EARNINGS BEFORE INCOME TAXES AND AMORTIZATION OF GOODWILL 26,427 1,260 2,201 (6,314) 23,574 2a), 2b), 2c) INCOME TAXES 8,972 - 786 (11,602) and 2e) 8,156 --------------------------------------------------------- --------------- EARNINGS BEFORE AMORTIZATION OF GOODWILL 17,455 1,260 1,415 (712) 15,418 AMORTIZATION OF GOODWILL 18,556 - - 18,985 2a) and 2b) 37,541 --------------------------------------------------------- --------------- NET EARNINGS (LOSS) FOR THE PERIOD $ (1,101) $ 1,260 $ 1,415 $(23,697) $ (22,123) ========================================================= =============== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE Earnings before amortization of goodwill $ 0.34 2f) $ 0.27 Net loss $ (0.02) 2f) $ (0.39) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's) Basic 51,689 2f) 56,946 Diluted 52,023 2f) 57,551 |
PF-1
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Pro-forma Unaudited Consolidated Statement of Earnings
FOR THE YEAR ENDED AUGUST 31, 2000
(in thousands of US dollars, except share and per share data)
EXFO ELECTRO-OPTICAL BURLEIGH ENGINEERING INSTRUMENTS, PRO-FORMA INC. INC. EFOS INC. ADJUSTMENTS NOTE PRO-FORMA ------------------------------------------------------------------------------------- (AUDITED) (UNAUDITED) UNAUDITED) UNAUDITED) (UNAUDITED) (NOTE 1a)) (NOTE 1c)) ( (NOTE 1d)) SALES $ 71,639 $ 19,652 $ 15,490 $ (904) 2 d) $ 105,877 COST OF SALES 24,712 7,645 7,602 (904) 2 d) 39,055 --------------------------------------------------------- --------------- GROSS MARGIN 46,927 12,007 7,888 - 66,822 --------------------------------------------------------- --------------- OPERATING EXPENSES Selling and administrative 24,304 6,635 4,607 - 35,546 Net research and development 6,402 2,231 1,149 - 9,782 Amortization of capital assets 1,451 364 265 - 2,080 Amortization of intangible assets 47 - - 15,125 2a) and 2 b) 15,172 --------------------------------------------------------- --------------- TOTAL OPERATING EXPENSES 32,204 9,230 6,021 15,125 62,580 --------------------------------------------------------- --------------- EARNINGS FROM OPERATIONS 14,723 2,777 1,867 (15,125) 4,242 Interest expense (income), net (1,480) 177 160 5,073 2c) 3,930 Foreign exchange loss (gain) 684 - (81) (951) 2c) (348) --------------------------------------------------------- --------------- EARNINGS BEFORE INCOME TAXES AND AMORTIZATION OF GOODWILL 15,519 2,600 1,788 (19,247) 660 2a), 2b), 2c) INCOME TAXES 5,298 - 709 (5,740) and 2e) 267 --------------------------------------------------------- --------------- EARNINGS BEFORE AMORTIZATION OF GOODWILL 10,221 2,600 1,079 (13,507) 393 AMORTIZATION OF GOODWILL 297 - - 50,573 2a) and 2b) 50,870 --------------------------------------------------------- --------------- NET EARNINGS (LOSS) FOR THE YEAR $ 9,924 $ 2,600 $ 1,079 $ (64,080) $ (50,477) ========================================================= =============== BASIC AND DILUTED EARNINGS (LOSS) PER SHARE Earnings before amortization of goodwill $ 0.26 2f) $ (0.01) Net earnings (loss) $ 0.25 2f) $ (1.01) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000's) Basic 39,951 2f) 50,140 Diluted 40,086 2f) 50,525 |
PF-2
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Notes to Pro-forma Consolidated Statements of Earnings
(Unaudited)
FOR THE NINE MONTHS ENDED MAY 31, 2001 AND FOR THE YEAR ENDED AUGUST 31, 2000
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted) 1 BASIS OF PRESENTATION On December 20, 2000, the company acquired a 100% interest in Burleigh Instruments, Inc. ("Burleigh") for a cash consideration of US$42,461,000 and the issuance of 6,488,816 subordinate voting shares valued at US$146,809,000. Furthermore, on March 15, 2001, the company acquired a 100% interest in EFOS Inc. ("EFOS") for a cash consideration of US$25,194,000 and the issuance of 3,700,000 subordinate voting shares valued at CAN$131,100,000 (US$84,952,000). |
The accompanying pro-forma consolidated statements of earnings for the nine months ended May 31, 2001 and for the year ended August 31, 2000 were prepared by management to give effect to the acquisitions of Burleigh and EFOS as if the acquisitions had occurred on September 1, 1999 and on the basis of the assumptions described in note 2 hereinafter.
The pro-forma consolidated statements of earnings have been prepared from the following:
a) The audited consolidated statement of earnings of the company for the year ended August 31, 2000, prepared in accordance with Canadian generally accepted accounting principles ("GAAP");
b) The unaudited consolidated statement of earnings of the company for the nine months ended May 31, 2001, prepared in accordance with Canadian GAAP;
c) The unaudited statement of earnings of Burleigh for the twelve months ended August 31, 2000, prepared in accordance with Canadian GAAP;
d) The unaudited statement of earnings of EFOS for twelve months ended August 31, 2000, prepared in accordance with Canadian GAAP;
e) The unaudited statement of earnings of Burleigh for the 110 days ended December 19, 2000, prepared in accordance with Canadian GAAP;
f) The unaudited statement of earnings of EFOS for the 195 days ended March 14, 2001, prepared in accordance with Canadian GAAP.
The pro-forma consolidated statements of earnings are not intended to reflect the results of operations of the company which would actually resulted had the acquisitions and pro-forma adjustments been effected on the dates indicated. Furthermore, the pro-forma consolidated statements of earnings are not necessarily indicative of results which may be attained in the future.
PF-3
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Notes to Pro-forma Consolidated Statements of Earnings
(Unaudited)
FOR THE NINE MONTHS ENDED MAY 31, 2001 AND FOR THE YEAR ENDED AUGUST 31, 2000
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
2 PRO-FORMA ASSUMPTIONS
a) Acquisition of Burleigh
The acquisition of Burleigh has been accounted for using the purchase method in the accompanying pro-forma consolidated statements of earnings. For the purposes of these pro-forma consolidated statements of earnings, the purchase price has been allocated as follows:
$ Purchase price 189,270 Net tangible assets acquired (6,446) Intangible assets acquired 27,050 Goodwill 168,666 |
As part of the acquisition of Burleigh, the company established a restricted stock award plan for employees of Burleigh. Under that plan, stock awards entitling employees to receive subordinate voting shares at a purchase price of nil have been granted. In accordance with Canadian GAAP, no compensation cost has been recognized for this stock-based compensation plan.
The intangible assets acquired are amortized on a straight-line basis over periods varying from eight months to five years. Goodwill is amortized on a straight-line basis over a five-year period.
The pro-forma consolidated statements of earnings for the nine months ended May 31, 2001 and for the year ended August 31, 2000 reflect adjustments in order to provide for additional amortization of intangible assets and goodwill during the period from September 1, 1999 to December 19, 2000.
For the nine months ended May 31, 2001, the adjustments for additional amortization of intangible assets and goodwill were $732,000 and $10,259,000 respectively. For the year ended August 31, 2000, the adjustments for additional amortization of intangible assets and goodwill were $7,850,000 and $33,717,000 respectively.
b) Acquisition of EFOS
The acquisition of EFOS has been accounted for using the purchase method in the accompanying pro-forma consolidated statements of earnings. For the purposes of these pro-forma consolidated statements of earnings, the purchase price has been allocated as follows:
$ Purchase price 110,146 Net tangible assets acquired 2,097 Intangible assets acquired 27,624 Goodwill 80,425 |
PF-4
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Notes to Pro-forma Consolidated Statements of Earnings
(Unaudited)
FOR THE NINE MONTHS ENDED MAY 31, 2001 AND FOR THE YEAR ENDED AUGUST 31, 2000
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The purchase price and net identifiable assets acquired have been translated at the exchange rate prevailing on March 15, 2001 of CAN$1.00 = US$0.648. The intangible assets acquired are amortized on a straight-line basis over periods varying from five months to five years. Goodwill is amortized on a straight-line basis over a five-year period.
The pro-forma consolidated statements of earnings for the nine months ended May 31, 2001 and for the year ended August 31, 2000 reflect adjustments in order to provide for additional amortization of intangible assets and goodwill during the period from September 1, 1999 to March 14, 2001.
For the nine months ended May 31, 2001, the adjustments for additional amortization of intangible assets and goodwill were $2,874,000 and $8,726,000 respectively. For the year ended August 31, 2000, the adjustments for additional amortization of intangible assets and goodwill were $7,275,000 and $16,856,000 respectively.
(c) Interest expense (income), net and foreign exchange loss
(gain)
Interest expense (income), net has been adjusted to reflect the financing costs related to the cash payments of the acquisitions totaling US$67,461,000 since the company did not have sufficient cash on hand for such cash payments as at September 1, 1999. For the period from September 1, 1999 to June 29, 2000, an interest rate of the average prime rate plus 0.75% (7.77%) has been used to compute the interest expense, which represents the expected interest rate at which the company would have been able obtain short-term financing. For the period from June 30, 2000 to March 14, 2001, an interest rate of 6.15% has been used to compute interest expense. This rate represents the average interest rate on short-term investments denominated in US dollars which would have been used to repay the short-term financing after the company's initial public offering on June 29, 2000.
Furthermore, foreign exchange loss (gain) for the nine months ended May 31, 2001 and for the year ended August 31, 2000 has been adjusted to reflect the use of short-term financing in US dollars and the use of short-term investments denominated in US dollars to repay the short-term financing.
d) Elimination of intercompany transactions
For the purposes of the pro-forma consolidated statements of earnings, adjustments have been effected to the results of the company and Burleigh in order to eliminate the effect of the transactions entered into between the two companies during the year ended August 31, 2000 and the 110 days ended December 19, 2000.
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EXFO ELECTRO-OPTICAL ENGINEERING INC.
Notes to Pro-forma Consolidated Statements of Earnings
(Unaudited)
FOR THE NINE MONTHS ENDED MAY 31, 2001 AND FOR THE YEAR ENDED AUGUST 31, 2000
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
e) Income taxes
Adjustments have been made to reflect the income tax effects
of the adjustments described above in notes 2a), 2b), 2c) and
2d). Also, adjustments have been effected to the results of
Burleigh for the 110 days ended December 19, 2000 and for the
year ended August 31, 2000 in order to reflect the new tax
status of the subsidiary which is, since December 20, 2000, a
taxable entity in the United States. The effective income tax
rate used is 33% and has been applied to the net earnings of
Burleigh for the said periods.
f) Earnings (loss) per share
The basic weighted average number of shares outstanding used for the computation of basic and diluted earnings (loss) and adjusted net earnings per share has been adjusted to reflect the issuance of the subordinate voting shares in connection with the acquisitions described above, as if these transactions had occurred on September 1, 1999. Basic and diluted earnings (loss) and adjusted net earnings per share have been adjusted accordingly. Adjusted net earnings exclude the after-tax effect of the amortization of intangible assets and the amortization of goodwill.
The following table summarizes the adjusted net earnings and the basic and diluted adjusted net earnings per share:
NINE MONTHS ENDED YEAR ENDED MAY 31, 2001 AUGUST 31, 2000 -------------------------------------- -------------------------------------- EXFO EXFO Electro-Optical Electro-Optical Engineering Inc. Pro forma Engineering Inc. Pro forma ---------------- --------- ---------------- --------- (unaudited) (unaudited) Adjusted net earnings $ 21,331 $ 21,674 $ 10,252 $ 10,407 Basic and diluted adjusted net earnings per share $ 0.41 $ 0.38 $ 0.26 $ 0.21 |
3 PRO-FORMA RECONCILIATION OF THE NET LOSS TO CONFORM WITH U.S. GAAP The pro-forma reconciliation of the net loss for the nine months ended May 31, 2001 and the year ended August 31, 2000 has been prepared from the pro-forma consolidated statements of earnings for the nine months ended May 31, 2001 and for the year ended August 31, 2000 prepared in accordance with Canadian GAAP, the reconciliation items in the unaudited consolidated statement of earnings for the nine months ended May 31, 2001 and the audited consolidated statement of earnings for the |
year ended August 31, 2000 and also from the following assumptions:
PF-6
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Notes to Pro-forma Consolidated Statements of Earnings
(Unaudited)
FOR THE NINE MONTHS ENDED MAY 31, 2001 AND FOR THE YEAR ENDED AUGUST 31, 2000
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
a) Stock-based compensation costs related to stock-based compensation plans
Stock-based compensation costs have been adjusted in order to provide for additional compensation costs related to the restricted stock award plan starting from September 1, 1999.
b) Future income taxes on acquired in process research and development
The future income tax expense has been adjusted to eliminate future income taxes on acquired in process research and development since no future income taxes are recognized for this asset upon the purchase price allocation process for U.S. GAAP purposes. Under Canadian GAAP, acquired in-process research and development has been fully amortized during the year ended August 31, 2000.
c) Amortization of goodwill
The amortization of goodwill has been adjusted to provide for additional amortization during the period from September 1, 1999 to March 14, 2001.
PF-7
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Notes to Pro-forma Consolidated Statements of Earnings
(Unaudited)
FOR THE NINE MONTHS ENDED MAY 31, 2001 AND FOR THE YEAR ENDED AUGUST 31, 2000
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
PRO-FORMA RECONCILIATION OF THE NET LOSS TO CONFORM WITH U.S. GAAP
NINE MONTHS ENDED YEAR ENDED MAY 31, AUGUST 31, 2001 NOTE 2000 NOTE ----------------- ----------------- ----------------- ------------ (UNAUDITED) (UNAUDITED) Pro-forma net loss for the period in accordance with Canadian GAAP $ (22,123) $ (50,477) Stock-based compensation costs related to stock-based compensation plans Under U.S. GAAP (2,603) (2,002) Pro-forma adjustment (5) 3a) (4,385) 3a) Unrealized gains on forward exchange contracts, net of related future income taxes, under U.S. GAAP 62 -- Pro-forma adjustment for future income taxes on acquired in process research and development -- (951) 3b) Amortization of goodwill Under U.S. GAAP (5,161) -- Pro-forma adjustment (4,493) 3c) (12,944) 3c) ------------- ------------- Pro-forma net loss for the period in accordance with U.S. GAAP $ (34,323) $ (70,759) ============= ============= Basic and diluted net loss per share in accordance with U.S. GAAP $ (0.60) $ (1.41) ============= ============= |
PF-8
6,488,816 SHARES
EXFO ELECTRO-OPTICAL ENGINEERING INC.
SUBORDINATE VOTING SHARES
Prospectus
July 2001
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14 - OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth expenses, other than underwriting fees and commissions, expected to be borne by the Registrant in connection with the distribution of the securities being registered:
Securities and Exchange Commission registration fee.......... $ 23,076 Legal fees and expenses (1).................................. 35,000 Accounting fees and expenses (1)............................. 50,000 Miscellaneous expenses (1)................................... 100,000 --------- Total (1)............................................... $ 208,076 ------------------------ |
(1) Estimated.
All amounts listed above, except for the SEC registration fee, are estimates. All expenses of the distribution, other than selling discounts, commissions and legal fees and expenses incurred separately by the selling shareholders, will be paid by the Registrant.
ITEM 15 - INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's by-laws provide that the Registrant will indemnify any of its directors, former directors, officers and former officers and other parties specified by the by-laws, against all costs reasonably incurred by them for any civil, criminal or administrative action or proceeding to which they are or may be made a party by reason of having been a director or officer. The indemnity covers amounts paid to settle actions or to satisfy judgments. However, the Registrant may only indemnify these persons, if such person acted honestly and in good faith with a view to the Registrant's best interests and, in the case of a criminal or administrative action or proceeding, if such person has reasonable grounds for believing that his or her conduct was lawful. The CANADA BUSINESS CORPORATIONS ACT provides that court approval is required for the payment of any indemnity in connection with an action brought by or on the Registrant's behalf.
A policy of directors' and officers' liability insurance is maintained by the Registrant which insures directors and officers of the Registrant and its subsidiaries against liability incurred by, arising from or against them for certain of their acts, errors or omissions.
Reference is made to Item 17 for the undertakings of the Registrant with respect to indemnification for liabilities arising under the U.S. Securities Act of 1933.
ITEM 16 - EXHIBITS
4.1 Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation.
4.2 Amendment Number One, dated as of March 15, 2001, to Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation.
4.3 Intellectual Property Assignment and Sale Agreement between EFOS Inc., EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation.
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4.4 Agreement of Merger and Plan of Reorganization, dated as of November 4, 2000, by and among EXFO Electro-Optical Engineering, Inc., EXFO Sub, Inc., Burleigh Instruments, Inc., Robert G. Klimasewki, William G. May, Jr., David J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 20-F, dated January 18, 2001). 4.5 Amendment No. 1 to Agreement of Merger and Plan of Agreement, dated as of December 20, 2000, by and among EXFO Electro-Optical Engineering, Inc., EXFO Sub, Inc., Burleigh Instruments, Inc., Robert G. Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.2 of the Registrant's Annual Report on Form 20-F, dated January 18, 2001). 4.6 Offer to purchase shares of Nortech Fibronic Inc., dated February 6, 2000 among EXFO Electro-Optical Engineering, Inc., Claude Adrien Noel, 9086-9314 Quebec inc., Michel Bedard, Christine Bergeron and Societe en Commandite Capidem Quebec Enr. and Certificate of Closing, dated February 7, 2000 among the same parties (including summary in English) (incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form F-1, File No. 333-38956). 5.1 Opinion of Fasken Martineau DuMoulin LLP regarding the legality of the securities. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of KPMG. 23.3 Consent of Ernst & Young. 23.4 Consent of Fasken Martineau DuMoulin LLP (contained in Exhibit 5.1). 24.1 Powers of Attorney (included on page II-4). |
ITEM 17 - UNDERTAKINGS
The Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) to reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of a prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and
(iii) to include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Exchange Act that are incorporated by
reference in this Registration Statement;
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2. That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering;
4. That, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof;
5. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions or otherwise, the Registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by them is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
6. (i) That for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.
(ii) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein and this offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-3 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Vanier, Province of Quebec, Canada, on July 13, 2001.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde --------------------------------------- Name: Germain Lamonde Title: Chairman of the Board, President and Chief Executive Officer |
POWER OF ATTORNEY
Each of the undersigned officers and directors of EXFO Electro-Optical Engineering Inc. constitutes and appoints Germain Lamonde and Pierre Plamondon and each or any of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and any subsequent registration statement for the same offering which may be filed under Rule 462(b) increasing the number of securities for which registration is sought, and to file the same, with all exhibits thereto and other documents in connection therewith, with the United States Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to enable the registrant to comply with the Securities Act and all requirements of the United States Securities and Exchange Commission, as fully to all intents and purposes as he might or could do in person, thereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURES TITLE DATE ---------- ----- ---- /s/ Germain Lamonde Chairman of the Board, President July 13, 2001 ------------------------------------ and Chief Executive Officer Germain Lamonde (Principal Executive Officer) /s/ Pierre Plamondon Vice President, Finance July 13, 2001 ------------------------------------ and Chief Financial Officer Pierre Plamondon (Principal Financial and Accounting Officer) /s/ Pierre Marcouiller Director July 4, 2001 ------------------------------------ Pierre Marcouiller /s/ David A. Thompson Director July 5, 2001 ------------------------------------ David A. Thompson |
II-4
/s/ Andre Tremblay Director July 5, 2001 ------------------------------------ Andre Tremblay Director ------------------------------------ Michael Unger |
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, the undersigned certifies that it is the duly authorized United States representative of EXFO Electro-Optical Engineering Inc. and has duly caused this Registration Statement to be signed on behalf of each of them by the undersigned, thereunto duly authorized, in the City of Vanier, Province of Quebec, Canada, on July 13, 2001.
EXFO AMERICA INC.
(Authorized United States Representative)
By: /s/ Germain Lamonde --------------------------------------- Name: Germain Lamonde Title: Director |
II-5
EXHIBIT INDEX
4.1 Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation. 4.2 Amendment Number One, dated as of March 15, 2001, to Share Purchase Agreement, dated as of March 5, 2001, among EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation. 4.3 Intellectual Property Assignment and Sale Agreement between EFOS Inc., EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn Harvey and EFOS Corporation. 4.4 Agreement of Merger and Plan of Reorganization, dated as of November 4, 2000, by and among EXFO Electro-Optical Engineering, Inc., EXFO Sub, Inc., Burleigh Instruments, Inc., Robert G. Klimasewki, William G. May, Jr., David J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.1 of the Registrant's Annual Report on Form 20-F, dated January 18, 2001). 4.5 Amendment No. 1 to Agreement of Merger and Plan of Agreement, dated as of December 20, 2000, by and among EXFO Electro-Optical Engineering, Inc., EXFO Sub, Inc., Burleigh Instruments, Inc., Robert G. Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall (incorporated by reference to Exhibit 4.2 of the Registrant's Annual Report on Form 20-F, dated January 18, 2001). 4.6 Offer to purchase shares of Nortech Fibronic Inc., dated February 6, 2000 among EXFO Electro-Optical Engineering, Inc., Claude Adrien Noel, 9086-9314 Quebec inc., Michel Bedard, Christine Bergeron and Societe en Commandite Capidem Quebec Enr. and Certificate of Closing, dated February 7, 2000 among the same parties (including summary in English) (incorporated by reference to Exhibit 10.2 of the Registrant's Registration Statement on Form F-1, File No. 333-38956). 5.1 Opinion of Fasken Martineau DuMoulin LLP regarding the legality of the securities. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of KPMG. 23.3 Consent of Ernst & Young. 23.4 Consent of Fasken Martineau DuMoulin LLP (contained in Exhibit 5.1). 24.1 Powers of Attorney (included on page II-4). |
EXHIBIT 4.1
SHARE PURCHASE AGREEMENT
DATED AS OF MARCH 5, 2001,
AMONG
EXFO ELECTRO-OPTICAL ENGINEERING, INC.,
JOHN KENNEDY
GLENN HARVEY
AND
EFOS CORPORATION
SHARE PURCHASE AGREEMENT
SHARE PURCHASE AGREEMENT (this "AGREEMENT") dated as of March 5, 2001
AMONG: EXFO ELECTRO-OPTICAL ENGINEERING INC., a corporation governed by the laws of Canada; (the "PURCHASER") AND: JOHN KENNEDY, domiciled and resident at _________ -----------------------------------------------; AND: GLENN HARVEY, domiciled and resident at _________ -----------------------------------------------; AND: EFOS CORPORATION, a corporation governed under the laws of Ontario; (the "VENDOR") |
WHEREAS, subject to the terms and conditions set forth in this Agreement, the Vendor desires to sell to the Purchaser, and Purchaser desires to purchase from the Vendor, all of the issued and outstanding shares of Efos Inc. ("OPCO") (the "OPCO SHARES").
NOW THEREFORE, in consideration of the mutual covenants contained in this Agreement, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS.
Whenever used in this Agreement, the following words and terms shall have the meanings set out below:
(a) "ACCOUNTS PAYABLE" means all amounts due and owing by Opco to traders, suppliers and other persons in the ordinary course of business;
(b) "ACCOUNTS RECEIVABLE" means any and all accounts receivable, bills receivable, trade accounts, book debts and insurance claims recorded as receivable in the Books and Records and any other amount due to Opco including any refunds and rebates, and the benefit of all security (including cash deposits), guarantees and other collateral held by Opco;
(c) "ACCRUED LIABILITIES" means any and all accrued liabilities of Opco incurred in the ordinary course of business, including accruals for vacation pay and customer rebates;
(d) "AFFILIATE" and "ASSOCIATE" have the respective meaning given to such terms in the CBCA;
(e) "AGREEMENT" means this Share Purchase Agreement, including all schedules, and all instruments supplementing or amending or confirming this Agreement and references to "ARTICLE" or "SECTION" mean and refer to the specified Article or Section of this Agreement;
(f) "ARM'S LENGTH" means arm's length as defined in the INCOME TAX ACT (Canada);
(g) "ASSET CONSIDERATION" has the meaning ascribed to it in
Section 1.1(hhh) (a);
(h) "AUDITED FINANCIAL STATEMENTS" has the meaning ascribed to it in Section 3.8;
(i) "BENEFIT PLANS" means all plans, arrangements, agreements, programs, policies, practices or undertakings, whether oral or written, formal or informal, funded or unfunded, registered or unregistered to which Opco is a party or by which it is bound or under which Opco has, or will have, any liability or contingent liability, relating to Pension Plans, Insurance Plans or Compensation Plans, with respect to any of its Employees or former employees (or any dependents or beneficiaries of any such Employees or former employees), individuals working on contract with Opco or other individuals providing services to it of a kind normally provided by employees or eligible dependents of such persons;
(j) "BOOKS AND RECORDS" means all books and records of Opco including financial, corporate, operations and sales books, records, books of account, sales and purchase records, lists of suppliers and customers, formulae, business reports, plans and projections and all other documents, surveys, plans, files, records, correspondence, and other data and information, financial or otherwise, including all data and information stored on computer-related or other electronic media;
(k) "BUSINESS" means the research, development, manufacturing, marketing and servicing of light-based systems used to photopolymerize or photoactivate materials such as adhesives coatings, sealants and drugs used in industry and medicine;
(l) "BUSINESS DAY" means a day, other than a Saturday or Sunday, on which the principal commercial banks located in the City of Toronto, Ontario are open for business during normal banking hours;
(m) "CANADIAN DOCUMENTS" has the meaning ascribed to it in Section 5.8;
(n) "CASH CONSIDERATION" has the meaning ascribed to it in Section 2.2;
(o) "CBCA" means the CANADA BUSINESS CORPORATIONS ACT;
(p) "CLAIMS" means any claim, demand, action, cause of action, damage, loss, cost, liability or expense, including reasonable professional fees and all costs incurred in investigating or pursuing any of the foregoing or any proceeding relating to any of the foregoing;
(q) "CLOSING" means the completion of the sale to and purchase by the Purchaser of the Opco Shares under this Agreement;
(r) "CLOSING BALANCE SHEET" means the audited financial statements of Opco at the Closing Date prepared in accordance with GAAP except as otherwise provided for in this Agreement;
(s) "CLOSING DATE" has the meaning ascribed to it in Section 2.3;
(t) "COMPENSATION PLANS" means any and all employment benefits of Opco relating to bonus, incentive pay or compensation, performance compensation, deferred compensation, profit sharing or deferred profit sharing, share purchase, share option, stock appreciation, phantom stock, vacation or vacation pay, sick pay, severance or termination pay, employee loans or separation from service benefits, or any other type of arrangement providing for compensation or benefits additional to base pay or salary;
(u) "CONTAMINANT" means any substance or material that is prohibited, controlled or regulated under any Environmental Laws;
(v) "CONTRACTS" means all contracts, licences, leases, agreements, commitments, undertakings, letters of intent, entitlements and engagements of Opco, as the case may be, and includes all quotations, orders or tenders for contracts which remain open for acceptance and any manufacturers' or suppliers' warranty, guarantee or commitment (express or implied);
(w) "DUE DILIGENCE INVESTIGATION" has the meaning ascribed to it in Section 7.4;
(x) "EMPLOYEE BENEFIT PLAN" means any plan, program, agreement or arrangement of Opco involving direct or indirect compensation, including without limitation, insurance coverage, severance benefits, disability, life or health benefits, pension, deferred compensation, bonuses, stock options, stock or other forms of incentive compensation or post-retirement compensation covering employees of Opco;
(y) "EMPLOYEES" means all persons employed or retained by Opco, as the case may be, including those employees on long-term disability leave or other absence;
(z) "ENCUMBRANCES" means any pledge, lien, charge, security interest, lease, title retention agreement, mortgage, restriction, development or similar agreement, easement, right-of-way, title defect, option or adverse claim, hypothec, privilege, transfer of property in stock, servitude, conditional sales contract or encumbrance of any kind or character whatsoever;
(aa) "ENVIRONMENTAL LAWS" means all common, civil, federal, provincial, territorial, regional, municipal or local laws applicable in Canada which relate to the protection of the environment, health and safety, or Hazardous Substances contained in statutes or regulations or in written policies, guidelines, orders, directives or notices which have the force of law or permits, approvals or court or other tribunal orders having jurisdiction in Canada over Opco, its assets and the Business;
(bb) "ESCROW AGREEMENT" has the meaning ascribed to it in Section 2.6;
(cc) "ESCROW FUND" has the meaning ascribed to it in Section 2.6;
(dd) "FINANCIAL STATEMENTS" has the meaning ascribed to it in
Section 3.8;
(ee) "GAAP" means Canadian generally accepted accounting principles as recommended from time to time in the Handbook of the Canadian Institute of Chartered Accountants;
(ff) "GUARANTORS" means John Kennedy and Glenn Harvey;
(gg) "GOODWILL" means the goodwill of Opco, and information and documents relevant thereto including lists of customers and suppliers, credit information and research materials;
(hh) "GOVERNMENTAL AUTHORITY" means any governmental or regulatory authority, body, agency or department, whether foreign or domestic federal, provincial or municipal;
(ii) "HAZARDOUS SUBSTANCES" means any Contaminant or pollutant or any substance that when released to the natural environment is likely to cause at some immediate or future time, material harm or degradation to the natural environment or material risk to human health and, without restricting the generality of the foregoing, Hazardous Substances includes any pollutant, contaminant, hazardous waste or dangerous goods as defined by the Environmental Laws;
(jj) "INDEMNITEE" has the meaning ascribed to it in Section 6.4(a);
(kk) "INDEMNITOR" has the meaning ascribed to it in Section 6.4(a);
(ll) "INSURANCE PLANS" means any and all employment benefits relating to disability or wage continuation during periods of absence from work (including short term disability, long term disability and workers compensation), hospitalization, health, medical or dental treatments or expenses, life insurance, death or survivor's benefits and supplementary employment insurance, in each case regardless of whether or not such benefits are insured or self-insured;
(mm) "INTERIM FINANCIAL STATEMENTS" has the meaning ascribed to it in Section 3.8;
(nn) "INVENTORIES" means all inventories of goods of every kind and nature and wheresoever situated owned by Opco on the Closing Date relating to the Business including without limitation, raw materials, work in process, finished goods and all other materials and supplies on hand or in transit to be used or consumed in the production of goods or services by the Business.
(oo) "INTELLECTUAL PROPERTY RIGHTS" shall mean all proprietary rights in and to (a) trademarks, service marks, brand names, certification marks, trade dress, assumed names, trade names and other indications of origin; (b) patents and invention disclosures; (c) trade secrets and other confidential or non-public business information, including ideas, formulas, compositions, discoveries and improvements, know-how, manufacturing and production processes and techniques, and research and development information (whether patentable or not); drawings, specifications, designs, plans, proposals and technical data; business and marketing plans and customers and supplier lists and information; (d) writings and other copyrightable works of authorship, including computer programs, data bases and documentation therefor, and all copyrights to any of the foregoing; (e) mask works; (f) moral rights; (g) any similar intellectual property or proprietary rights; (h) registrations of, and applications to register, any of the foregoing with any governmental authority and any renewals or extensions thereof; and (i) any claims or causes of action arising out of or related to any infringement or misappropriation of any of the foregoing, in each case in any jurisdiction;
(pp) "IRS" has the meaning ascribed to it in Section 6.6(c);
(qq) "KNOWLEDGE" has the meaning ascribed to it in Section 11.11;
(rr) "LAWS" means all applicable laws, by-laws, rules, regulations, orders, ordinances, protocols, codes, guidelines, policies, notices, directions and judgments or other requirements of any Governmental Authorities;
(ss) "LOCK-UP AGREEMENT" means the lock-up agreement annexed hereto as Schedule 8.2(j);
(tt) "MATERIAL ADVERSE EFFECT" means the effect of a Material Adverse Change;
(uu) "MATERIAL ADVERSE CHANGE" in respect of any Person means any change, effect, event, occurrence or state of facts (or any development that has had or is reasonably likely to have any change or effect) that is materially adverse to the business, financial condition or results of operations of the Person and its Subsidiaries, taken as a whole, PROVIDED, HOWEVER, any adverse change, effect or circumstance (i) primarily arising out of or resulting primarily from actions contemplated by the parties hereto in connection with this Agreement, (ii) resulting from economic factors affecting the economy as a whole or (iii) resulting from factors generally affecting the specific markets in which the Person and its Subsidiaries compete shall not be deemed in themselves, either alone or in combination, to constitute, and shall not be taken into account in determining whether there has been, a Material Adverse Effect of the Person;
(vv) "MATERIAL CLIENTS" means those clients identified by the Purchaser as important clients of Opco, as set forth in Schedule 1.1(vv);
(ww) "NEWCO" has the meaning ascribed to in Schedule 1.1(iii);
(xx) "NET WORTH OF THE BUSINESS" means shareholders' equity of Opco as set forth in the Closing Balance Sheet;
(yy) "NON-COMPETE PERIOD" has the meaning ascribed to it in Section 9.3;
(zz) "OPCO" means Efos Inc., the company currently carrying on the Business and any predecessor and successor thereof;
(aaa) "OPCO CONTRACTS" has the meaning ascribed to it in Section 3.16;
(bbb) "OPCO INTELLECTUAL PROPERTY" has the meaning ascribed to it in
Section 3.12;
(ccc) "OPCO SHARES" means collectively 100% of the issued and outstanding shares of Efos Inc.;
(ddd) "PENSION PLANS" means any and all benefits relating to retirement or retirement savings including, without limitation, pension plans, pensions or supplemental pensions, registered retirement savings plans, "registered pension plans" (as defined in the Tax Act) and "retirement compensation arrangements" (as defined in the Tax Act);
(eee) "PERMITS" means all permits, licenses, certificates, approvals, authorizations, registrations or the like attainable from or required by any Governmental Authorities which are material and are, under applicable law, necessary for the conduct of the Business or the utilization by Opco of its assets;
(fff) "PERMITTED ENCUMBRANCES" means the Encumbrances listed in Schedule 1.1(fff);
(ggg) "PERSON" means any individual, sole proprietorship, corporation, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, Governmental Authorities, and a natural person in such person's capacity as trustee, executor, administrator or other legal representative;
(hhh) "PRIOR ASSET TRANSACTIONS" means collectively the transactions which shall occur prior to the Closing:
(a) the execution of an asset purchase agreement pursuant to which the Purchaser will purchase some or all of the Opco Intellectual Property for a total amount to be agreed to by the Purchaser and the Vendor not exceeding US$25,000,000 (the "ASSET CONSIDERATION") payable in cash by Purchaser to Opco. Such agreement shall be satisfactory to the Purchaser and the Vendor and shall contain the usual representations and warranties found in agreements to acquire intellectual property; and
(b) the declaration and payment of dividends (regular dividends and capital dividends) by Opco to the Vendor in the amount equal to the after tax amount of the Asset Consideration. For the purposes hereof "the after tax amount" shall be equal to the Asset Consideration multiplied by one (1) minus the effective corporate combined federal and Ontario tax rate in respect of the non-refundable taxes applicable to the Prior Asset Transactions. The Asset Consideration shall not be reduced by any depreciation, losses or any other deduction. The taxable dividend paid will include an amount equal to any refundable dividend tax on-hand (as defined in the INCOME TAX ACT (Canada)) refundable to Opco resulting from such dividend (which taxable dividend should be equal to the after tax amount less the capital dividend paid out of the proceeds of the Prior Asset Transactions).
(iii) "PRIOR CORPORATE TRANSACTIONS" means the transactions which shall occur prior to the Closing as described in Schedule 1.1(iii);
(jjj) "PUBLIC OFFERING" has the meaning ascribed to it in Section 9.4;
(kkk) "PURCHASE PRICE" has the meaning ascribed to it in Section 2.1;
(lll) "PURCHASER AUDITED FINANCIAL STATEMENTS" has the meaning ascribed to it in Section 5.8;
(mmm) "PURCHASER DISCLOSURE" has the meaning ascribed to it in ARTICLE 5;
(nnn) "PURCHASER FINANCIAL STATEMENTS" has the meaning ascribed to it in Section 5.8;
(ooo) "PURCHASER INDEMNIFIED PERSONS" has the meaning ascribed to it in Section 6.2;
(ppp) "PURCHASER INTERIM FINANCIAL STATEMENTS" has the meaning ascribed to it in Section 5.8;
(qqq) "PURCHASER SHARES" has the meaning ascribed to it in Section 2.2;
(rrr) "PURCHASER'S SOLICITORS" means Fasken Martineau DuMoulin LLP;
(sss) "REGULATORY APPROVALS" means all necessary approvals, permits, sanctions, rulings, orders or consents form any Governmental Authority or self-regulatory organization within or outside of Canada with respect to the transactions contemplated in this Agreement;
(ttt) "SECURITIES ACT" has the meaning ascribed to it in Section 3.37;
(uuu) "SENIOR EXECUTIVES" means John Kennedy, Glenn Harvey, Ruben Burga, Britt Christoffersson, Allan Firhoj, Manfred Hubert, John Kuta and Brian Thiessen;
(vvv) "SHARE CONSIDERATION" has the meaning ascribed to it in
Section 2.2;
(www) "STOCK OPTION PLAN" has the meaning ascribed to it in Section 5.2;
(xxx) "SUBSIDIARIES" has the meaning ascribed in the CBCA;
(yyy) "TAX ACT" means the INCOME TAX ACT (Canada);
(zzz) "TAXES" means all taxes, duties, fees, premiums, assessments, imposts, levies, (including US sales and use taxes) and other charges of any kind whatsoever imposed by any Governmental Authorities, together with all interest, penalties, fines, additions to tax or other additional amounts imposed in respect thereof, including those levied on, or measured by, or referred to as income, gross receipts, profits, capital, transfer, land transfer, sales, goods and services, harmonized sales, use, value-added, excise, stamp, withholding, business, franchising, property, employer health, payroll, employment, health, social services, education and social security taxes, all surtaxes, all customs duties and import and export taxes, all license, franchise and registration fees and all employment insurance, health insurance and Canada, Quebec and other government pension plan premiums or contributions;
(aaaa) "TAX RETURNS" means all returns, reports, declarations, elections, notices, filings, information returns and statements filed or required to be filed in
respect of Taxes including without limiting the foregoing all of the foregoing required to be filed with any Government Authority in the United States;
(bbbb) "THIRD PARTY CLAIM" has the meaning ascribed to it in Section 6.4(a);
(cccc) "TIME OF CLOSING" means 10:00 o'clock in the forenoon on the Closing Date;
(dddd) "U.S. GAAP" has the meaning ascribed to it in Section 3.8;
(eeee) "VENDOR" means Efos Corporation;
(ffff) "VENDOR INDEMNIFIED PERSON(S)" has the meaning ascribed to it in Section 6.3;
(gggg) "VENDOR PARTIES" means collectively the Vendor and the Guarantors and all other Subsidiaries who hold or may hold Opco Shares resulting from Prior Corporate Transactions;
(hhhh) "WITHDRAWN SHARES" has the meaning ascribed to it in Section 2.6.
1.2 CERTAIN RULES OF INTERPRETATION.
In this Agreement and the Schedules:
(a) TIME - time is of the essence in the performance of the Parties' respective obligations;
(b) CURRENCY - unless otherwise specified, all references to dollar amounts are to Canadian dollars;
(c) HEADINGS - descriptive headings of Articles and Sections are inserted solely for convenience of reference and are not intended as complete or accurate descriptions of the content of such Articles or Sections;
(d) SINGULAR, ETC. - use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such person or persons or circumstances as the context otherwise permits;
(e) CONSENT - whenever a provision of this Agreement requires an approval or consent by a Party to this Agreement and notification of such approval or consent is not delivered within the applicable time limit, then, unless otherwise specified, the Party whose consent or approval is required shall be conclusively deemed to have withheld its approval or consent;
(f) CALCULATION OF TIME - unless otherwise specified, time periods within or following which any payment is to be made or act is to be done shall be
calculated by excluding the day on which the period commences and including the day on which the period ends and by extending the period to the next Business Day following if the last day of the period is not a Business Day;
(g) BUSINESS DAY - whenever any payment is to be made or action to be taken under this Agreement is required to be made or taken on a day other than a Business Day, such payment shall be made or action taken on the next Business Day following such day;
(h) INCLUSION - where the words "including" or "includes" appear in this Agreement, they mean "including (or includes) without limitation".
1.3 ENTIRE AGREEMENT. This Agreement together with the agreements and other documents to be delivered pursuant to this Agreement, constitutes the entire agreement between the Parties, pertaining to the subject matter of this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether verbal or written, of the Parties. There are no warranties, representations or other agreements, express or implied, between the Parties in connection with the subject matter of this Agreement except as specifically set forth in this Agreement and any document delivered pursuant to this Agreement. No supplement, modification or waiver or termination of this Agreement shall be binding unless executed in writing by the Party to be bound thereby.
1.4 ACCOUNTING PRINCIPLES. Unless otherwise specified, all references to generally accepted accounting principles means the principles recommended, from time to time, in the Handbook of the Canadian Institute of Chartered Accountants and all accounting terms not otherwise defined in this Agreement have the meanings assigned to them in accordance with Canadian generally accepted accounting principles.
1.5 SCHEDULES.
The Schedules to this Agreement, as listed below, are an integral part of this Agreement:
SCHEDULE DESCRIPTION -------- ----------- Schedule 1.1(vv) Material Clients Schedule 1.1(fff) Permitted Encumbrances Schedule 1.1(iii) Prior Corporate Transactions Schedule 3.4 Articles and By-Laws of Opco and Opco Shares Schedule 3.6 Consents and Approvals Schedule 3.8 Financial Statements Schedule 3.9 Undisclosed Liabilities Schedule 3.12(a) Taxes Due |
12 SCHEDULE DESCRIPTION -------- ----------- Schedule 3.12(b) Tax Returns Filed Outside of Canada Schedule 3.13 Opco Intellectual Property Schedule 3.15 Inventories Schedule 3.16 Opco Contracts Schedule 3.17 Non-Arm's Length Transactions Schedule 3.18 Insurance Schedule 3.19 Employment Matters Schedule 3.20 Benefit Plans Schedule 3.22 Joint Venture Interests Schedule 3.25 Third Party Consents Schedule 3.26 Bank Accounts Schedule 3.27 Guarantees Schedule 3.28 Collectibility of Accounts Receivable Schedule 3.35 Distributions Schedule 3.38 Capital Expenditures Schedule 4.1 Articles and By-laws of Vendor Schedule 8.2(h) Term sheet for employment agreements Schedule 8.2(i) Escrow Agreement Schedule 8.2(j) Lock-Up Agreement Schedule 9.3 Non-Competition |
ARTICLE 2
PURCHASE AND SALE OF SHARES
2.1 PURCHASE AND SALE. Subject to the terms and conditions set forth in this Agreement, the Vendor agrees to sell to Purchaser all of the outstanding shares of Opco. The total purchase price of the Opco Shares shall be US$25,000,000 less the Asset Consideration to be paid by the Purchaser to Opco pursuant to the Prior Asset Transactions and 3,700,000 subordinate voting shares of the Purchaser as set out below (collectively the "PURCHASE PRICE").
2.2 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be payable at Closing by way of a cash consideration in the amount of US$25,000,000 less the Asset Consideration to be
paid by the Purchaser to Opco pursuant to the Prior Asset Transactions (the "CASH CONSIDERATION") by wire transfer or certified cheque to the Vendor and, subject to Section 2.6, by way of issue by Purchaser to the Vendor of 3,700,000 subordinate voting shares (the "SHARE CONSIDERATION") of Purchaser (the "PURCHASER SHARES"). If, prior to the Closing, there is any stock dividend, stock split or other change in the character or amount of the outstanding shares of Purchaser, then in such event any and all new, substituted or additional securities to which the Vendor would have been entitled by reason of their ownership of the Opco Shares had the Closing occurred prior to such event shall be considered Opco Shares for purposes of this Agreement and the consideration to be received by the Vendor shall be amended accordingly.
The Share Consideration shall be payable as follows: (i) 2,000,000 Opco Shares shall be delivered at Closing to the Vendor and (ii) 1,700,000 shall be subject to the terms of a Lock-Up Agreement (as defined herein), including an amount of 283,325 Purchaser Shares to be placed into escrow in accordance with terms of the Escrow Agreement. The Lock-Up Agreement shall provide for, among others, covenants by the Vendor not to sell, transfer or assign the Opco Shares during the period they are subject to the Lock-Up Agreement. The Lock-Up Agreement shall also provide for the release of the Opco Shares in equal tranches every six months during the three-year period of the Lock-Up Agreement.
2.3 CLOSING. The Closing of the purchase and sale of the Opco Shares shall take place on the third business day after satisfaction or waiver (subject to applicable law) of the conditions set forth in ARTICLE 8 hereof (other than those conditions that by their nature are to be satisfied at the Closing, but subject to the satisfaction or waiver of those conditions) at the offices of Fasken Martineau DuMoulin LLP, Tour de la Bourse, 800 Place Victoria, Montreal, Quebec, or on such other date as the parties may agree in writing, but no later than March 30, 2001. The date of the Closing is hereinafter referred to as the "CLOSING DATE". The Purchaser shall send a notice to Vendor Parties as to the satisfaction or waiver of the conditions set forth in ARTICLE 8 at least three business days prior to proposed Closing.
2.4 CLOSING DELIVERIES. At the Closing, the parties shall deliver or shall cause to be delivered such items as are required to be delivered by them in accordance with the terms of this Agreement, including the following:
(a) The Purchaser shall deliver to Vendor, subject to Section 2.6
(1) share certificates representing the Purchaser Shares
registered in the Vendor's name (2) the Cash Consideration by
way of certified cheque or wire transfer, and (3) all
documents, instruments and writings required to have been
delivered at or prior to the Closing Date by the Purchaser
pursuant to this Agreement;
(b) The Vendor shall deliver to the Purchaser (1) certificates representing the Opco Shares endorsed in blank or together with a power of attorney or on such form as to permit the transfer of the Opco Shares, and (2) all other
documents, instruments and writings required to have been delivered at or prior to the Closing Date by the Vendor pursuant to this Agreement; and
(c) The Vendor and Opco shall deliver or cause to be delivered to the Purchaser all other documents, instruments and writings required to have been delivered at or prior to the Closing Date by Opco pursuant to this Agreement.
2.5 ROLLOVER. After the Closing, the Purchaser, the Vendor and the Newcos shall, within the prescribed time periods, separately execute and deliver joint elections in the prescribed forms to have the provisions of Section 85 of the INCOME TAX ACT (Canada) and any other relevant provisions thereof and the provisions of Section 518 of the TAXATION ACT (Quebec) and any other relevant provisions thereof apply to the sale and transfer of all the Opco Shares to the Purchaser.
For the purposes of such elections:
(a) the parties shall elect each of the Vendor's and the Newco's adjusted cost base of the Opco Shares for tax purposes as the Vendor's and the Newco's proceeds of disposition and the Purchaser's cost of acquisition of the Opco Shares for each of the Vendor and the Newcos that have not sold by February 22, 2002 all the Purchaser Shares received as consideration for the Opco Shares purchased pursuant to this Agreement;
(b) for each of the Vendor and the Newcos that have sold prior to February 22, 2002 all the Purchaser Shares received as consideration for the Opco Shares purchased pursuant to this Agreement, the parties shall elect the fair market value of the Opco Shares at the Closing Date as the Vendor's or, as applicable, each Newco's proceeds of disposition and the Purchaser's cost of acquisition of the Opco Shares.
2.6 ESCROW ARRANGEMENTS. Simultaneously with the Closing, an aggregate 283,325 Purchaser Shares of the Share Consideration will be delivered to the Escrow Agent (as such term is defined in the Escrow Agreement attached hereto as Schedule 2.6 (the "ESCROW AGREEMENT") in order to ensure indemnification by the Vendor Parties in accordance with this Agreement. Such shares of Purchaser shall constitute an escrow fund (the "ESCROW FUND") to be governed by the terms set forth in the Escrow Agreement. The Escrow Fund shall terminate in accordance with the terms of the Escrow Agreement. The provisions of the Escrow Agreement shall govern in the event of any conflict between the Escrow Agreement and this Section 2.6. The Vendor may withdraw Opco Shares (the "WITHDRAWN SHARES") and substitute cash in lieu thereof at any time, provided that the amount deposited in substitution for the Withdrawn Shares is equal to the Closing Price of the Opco Shares on The Toronto Stock Exchange on the date prior to such withdrawal.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE VENDOR AND JOHN KENNEDY
AND GLENN HARVEY (THE "GUARANTORS")
ON A JOINT AND SEVERAL BASIS REGARDING OPCO
In order to induce the Purchaser to enter into this Agreement, the Vendor and the Guarantors, on a joint and several basis, represent and warrant to Purchaser the matters set forth below, which shall be true on the date of execution hereof and on the Closing Date. Disclosure of any information in one schedule shall be deemed to be disclosed in other schedules to the extent that such disclosure is consistent in subject matter and the context of such other schedule.
3.1 ORGANISATION AND AUTHORITY RELATIVE TO THIS AGREEMENT. Opco is a corporation duly organised and validly existing under the laws of Ontario. Opco has the requisite corporate power and authority (i) to carry on the Business as currently conducted, and (ii) to own and use the properties owned and used by it. Opco is duly qualified to do business and is in good standing in each jurisdiction where the nature of its business or the ownership or leasing of its properties makes such qualification necessary and where the failure to be so qualified would not have a Material Adverse Effect on Opco. Opco is not in violation of any of the provisions of its articles, bylaws or other organisational documents or laws applicable to it.
3.2 SUBSIDIARIES. Opco has no Subsidiaries.
3.3 OWNERSHIP OF OPCO SHARES. The Vendor has the right, power and authority to sell, transfer, assign and deliver the Opco Shares being sold by the Vendor hereunder. Immediately prior to the delivery of the Opco Shares, the Vendor will be the sole registered and beneficial owner of the Opco Shares and had good and valid title to such Opco Shares, free and clear of all Encumbrances and restrictions on transfer other than those in the articles of Opco and which shall have been complied with at Closing. There are no outstanding options, warrants, convertible securities, calls, rights, commitments, preemptive rights or agreements or instruments or understandings of any character to which the Vendor is a party, obligating the Vendor to deliver or sell, or cause to be delivered or sold, contingently or otherwise, such Opco Shares. There are no voting trust agreements or other contracts, agreements, arrangements, commitments, plans or understandings to which the Vendor is a party restricting or otherwise relating to voting, dividend or other rights with respect to the Opco Shares.
3.4 CAPITALISATION AND RECORDS. The Vendor is the registered and beneficial owner of 49 common shares of Opco, representing 100% of the issued and outstanding share capital of Opco. As a result of the Prior Corporate Transactions, the issued and outstanding share capital of Opco will be held as set forth in Schedule 3.4 on the Closing Date. The outstanding shares of Opco are duly and validly authorised and issued as fully paid and non-assessable and are owned of record by Vendor as set forth on Schedule 3.4 and represent 100% of the issued and outstanding share capital of Opco. Other than outstanding options to purchase shares of Opco granted to employees, directors and/or
consultants, as set forth in Schedule 3.4, of which none shall be outstanding as at the Closing, Opco does not have outstanding any options, warrants or other rights to acquire, directly or indirectly, capital stock from Opco, and Opco does not have any obligation to repurchase or redeem any capital stock of Opco. Opco is not party to any agreement, and, to the Vendor Parties' Knowledge, there is no agreement between any Persons, which grants any rights of first refusal or preemptive rights or relates to the voting or giving of written consents with respect to any security of Opco.
The corporate records and minute books of Opco contain complete and accurate minutes in all material respects of all meetings of the directors and any committees thereof and shareholders, and all written consents in lieu of meetings, of Opco held since its date of incorporation, all such meetings were duly called and held, all such written consents in lieu of meeting were duly executed and the share certificate books, registers of shareholders, registers of transfers and registers of the directors of Opco are complete and accurate in all material respects.
3.5 NON-CONTRAVENTION. Subject to any regulatory approval under applicable
securities laws and regulations, including those of any stock exchanges
and of any other Governmental Authority, the execution and delivery of
this Agreement does not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions of
this Agreement will not, conflict with, or result in any violation of
or default (with or without notice or lapse of time, or both) under, or
give rise to a right of termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the
creation of any Encumbrance upon any of the properties or assets of
Opco pursuant to, any provision of (i) the articles or By-laws of Opco,
(ii) except as disclosed in Schedule 3.6, any loan or credit agreement,
note, bond, mortgage, indenture, lease or other agreement, instrument,
Permit, concession, franchise or license applicable to Opco or its
properties or assets or (iii) subject to the governmental filings and
other matters referred to in Section 3.6 below, any statute, law, rule,
regulation, judgment, order or decree applicable to Opco or its
properties or assets.
3.6 CONSENTS AND APPROVALS. No consent, approval, order or authorisation of, or registration, declaration or filing with, any Governmental Authority, is required by or with respect to Opco in connection with the execution and delivery of this Agreement by the Vendor Parties or the consummation by them of the transactions contemplated by this Agreement, except for (i) such filings, consents, approvals, orders, registrations and declarations as may be required under the laws of any foreign country in which Opco conducts any business or owns any assets and (ii) such other consents, approvals, orders, authorisations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, reasonably be expected to have an Opco Material Adverse Effect or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement. The consents and approvals required are set forth in Schedule 3.6 hereof.
3.7 LITIGATION; PROCEEDINGS. There is no action, suit or proceeding, governmental or otherwise, pending or, to the Vendor Parties Knowledge, threatened against Opco or any
of its properties or business. There is no judgment, decree, injunction, rule or order of any Governmental Authority threatened or outstanding against Opco having, or which, insofar as reasonably can be foreseen, in the future would question the validity of this Agreement or the consummation of the transactions contemplated hereby.
3.8 FINANCIAL STATEMENTS. The Vendor has delivered to the Purchaser (i) complete and correct copies of Opco's audited balance sheets as of October 31, 2000, October 31, 1999 and October 1998 and the related statements of operations, shareholders' equity and cash flows (together with the auditors' report thereon) for the years then ended together with notes to such financial statements (the "AUDITED FINANCIAL STATEMENTS"), and (ii) complete and correct copies of Opco's unaudited balance sheet as at month-end and the related statements of operations, shareholders' equity and cash flows for each month period following October 31, 2000, up to and including January 31, 2001 (the "INTERIM FINANCIAL STATEMENTS"). The Audited Financial Statements, and Interim Financial Statements are herein collectively referred to as the "FINANCIAL STATEMENTS". The Financial Statements are in accordance with the books and records of Opco and have been prepared in accordance with GAAP consistently applied throughout the periods covered thereby. In addition, such Financial Statements contain written discussion of the material variations in the accounting principles, practices and methods used in preparing the Financial Statements from the principles, practices and methods accepted in Canada and in the United States ("U.S. GAAP"). Each material variation is described and reconciled to U.S. GAAP, as required by the Securities and Exchange Commission (U.S.) and the Canadian securities authorities. The balance sheets included in the Financial Statements present fairly in all material respects as of their respective dates the financial condition of Opco (subject, in the case of Interim Financial Statements, to normal, recurring year-end adjustments that may be required upon audit). All material liabilities and obligations, whether absolute, accrued or contingent, whether direct or indirect, and whether due or to become due, which existed at the date of such Financial Statements have been disclosed in the balance sheets included in the Financial Statements or in notes to the Financial Statements to the extent such liabilities were required, under GAAP, to be so disclosed. The statements of operations, shareholders' equity and cash flows included in the Financial Statements present fairly in all material respects the results of operations, shareholders' equity and cash flows of Opco for the periods indicated (subject, in the case of Interim Financial Statements, to normal, recurring year-end adjustments that may be required upon audit), and the notes included in the Financial Statements present fairly in all material respects the information purported to be shown thereby. The Financial Statements are attached hereto as Schedule 3.8. No information has become available to Opco that would render the Financial Statements materially and adversely incomplete or inaccurate.
3.9 ABSENCE OF UNDISCLOSED LIABILITIES. Opco is not now subject to any material liabilities or obligations, direct or indirect, absolute or, to the Vendor Parties' Knowledge, contingent, other than the liabilities or obligations set forth in the Financial Statements and Schedule 3.9, and those arising since the date of the Financial Statements in the ordinary course of business, none of which is materially adverse to Opco and all of which in the aggregate are not materially adverse to Opco. To the Vendor Parties' Knowledge, there
are no facts or circumstances which might reasonably serve as the basis for, or give rise to, any material liabilities or obligations on the part of Opco other than liabilities or obligations disclosed in the Financial Statements and Schedule 3.9, or arising thereafter in the ordinary course of business (none of which is materially adverse to Opco). 3.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since October 31, 2000, Opco has conducted its business only in the ordinary course and has used its best efforts to preserve its business and assets and (a) there has not occurred any event or change that had, or would reasonably be expected to have, individually or in the aggregate, an Opco Material Adverse Effect and (b) there has not been any change in the accounting principles, policies, practices or procedures of Opco or their application to Opco and (c) Opco has not taken any action that would have been prohibited (without the Purchaser's consent) under Section 7.1 hereof. 3.11 COMPLIANCE WITH LAWS. Opco is in compliance in all material respects with all applicable Laws applicable to it and its businesses or operations. Opco has in effect all Permits necessary for it to own, lease or operate its properties and assets and to carry on its business as now conducted, and there has occurred no default under any such Permit. 3.12 TAXES. (a) Save and except as set forth in Schedule 3.12(a) or the Financial Statements, Opco has paid all Taxes due and payable or has made adequate provision in the Financial Statements for any Taxes due and unpaid at the date of the Financial Statements or for the payment of any Tax installments due in respect of the current taxation year of Opco. Except to the extent reflected or reserved against in the Financial Statements, Opco is not liable for any Taxes. No Canadian, foreign, federal and provincial income tax assessments or reassessments have been received by Opco. There are no notices of objection or appeals outstanding with respect to any assessment, reassessment or determination of Opco, by any tax Authority. There are no actions, suits, audits, investigations, claims or other proceedings pending or, to the Vendor Parties' Knowledge, threatened against Opco, in respect of any Taxes and there are no facts or circumstances known to the Vendor Parties, or acts, omissions, events, transactions or series of transactions (including the entering into of this Agreement or the consummation of the transactions contemplated hereby) occurring wholly or partly on or before the Closing, which could give rise to any such actions, suits, proceedings, investigations or claims. There are no agreements, waivers or other arrangements providing for an extension of time with respect to the filing of any Tax return or the payment of any Taxes by Opco. (b) Opco has, or will have prior to the Closing Date, filed all Tax returns, information returns, elections or designations in respect of any Taxes required to be filed by it in respect of any Tax legislation as of the date of this Agreement. To the Vendor Parties Knowledge, no such filing has contained |
19 any material misstatement or omitted any statement of any material fact that should have been included therein. Except as set forth in Schedule 3.12(b), Opco has never been required to file any Tax returns, information returns, or designations in any jurisdiction outside Canada. True copies of all such returns have been provided to Purchaser. (c) Opco has withheld and remitted to the proper Authority or, where permitted by law, provided security for, on a timely basis and in a form required under the appropriate Tax legislation, all amounts in respect of all Taxes, including Canadian Pension Plan contributions and Employment Insurance premiums and any other deductions required to be withheld and remitted by it. Opco has charged, collected and remitted on a timely basis all Taxes required by law on any sale, supply or delivery made by Opco. (d) There is no deductible outlay or expense owing by Opco to a Person with whom it was not dealing at arm's length at the time the outlay or expense was incurred which is unpaid and which will be included in the income of Opco for any taxation year ending on or after the Closing Date. (e) Opco has not, either directly or indirectly, transferred property or assets to or acquired property or assets from a Person with which it was not dealing at Arm's length for consideration other than consideration equal to the fair market value of the property or assets at the time of the disposition or acquisition thereof (unless pursuant to and in accordance with a so called rollover provision of the Tax Act), except for transfers that are not material in amount. (f) There are no Encumbrances for Taxes upon any of the assets of Opco. (g) All research and development tax credits which have duly arisen out of the activities of Opco have been claimed for the period up to October 31, 2000 and to the Vendors Parties' knowledge, none have been or will be reduced or refused by the appropriate tax Authority. (h) The Vendor is not a non-resident of Canada, as defined in the Tax Act. Opco is a Canadian-controlled private corporation, as defined in the Tax Act, and has been one since February 28, 1984. Opco is a registrant for the purposes of the goods and services tax provided for under the EXCISE TAX ACT and its registration number is 10158 7582 RT001. 3.13 INTELLECTUAL PROPERTY. Schedule 3.13 lists all Intellectual Property Rights that are currently used in the Business of Opco and which are material to the Business of Opco (collectively, the "OPCO INTELLECTUAL PROPERTY"). Opco owns, or is licensed or otherwise possesses valid rights to use, the Opco Intellectual Property, to enable it to operate its Business, and Opco has not granted any licence, permit or right to use the Opco Intellectual Property other than as listed in Schedule 3.13. The Opco Intellectual |
20 Property are held by Opco and all rights thereto have been assigned to Opco by all developers who had been involved in the creation or development of such Opco Intellectual Property. Neither the Vendor Parties nor Opco has knowledge of any material infringement of, material passing-off related to, or other material interference with the Opco Intellectual Property by third parties or any claim by any Person that any of the Opco Intellectual Property are, or may be, invalid or unenforceable. Opco is not a party to any claim, or subject to any liability, contingent or otherwise, for trademark, trade name, industrial design, patent or copyright infringements as to any product manufactured, produced, used or sold by Opco either as plaintiff or as defendant or any other claim or liability relating to Opco Intellectual Property owned or licensed by Opco. To the Vendor Parties' Knowledge, Opco has not infringed or misappropriated the rights of third parties with respect to the Opco Intellectual Property. All rights or fees due and payable to maintain the validity or existence of the Opco Intellectual Property have been duly paid. To the Vendor Parties' Knowledge, there are no facts or circumstances (including past or current disclosure) that could affect or result in the cancellation of any rights in respect of such Opco Intellectual Property, including pending patents in any jurisdiction. There has been continuous use of the trademarks which are included in the Opco Intellectual Property. Neither the Vendor nor Opco has knowledge of any facts or circumstances, situation or problems, of any nature that could interfere with the development, the manufacture, the marketing or the sale of the products or services of Opco in the operation of its Business. 3.14 TITLE AND CONDITION OF PROPERTIES. Except for the encumbrances described in Schedule 1.1(fff), the Company has: (a) good and marketable title to all assets recorded on Opco's balance sheet as of December 31, 2000, free and clear of all Encumbrances, except for (i) assets no longer used or useful in the conduct of the Business or disposed of in the ordinary course of business since such date, (ii) Encumbrances disclosed in the Financial Statements, (iii) Encumbrances or imperfections of title which are not, individually or in the aggregate, material in character, amount or extent and which do not materially detract from the value or materially interfere with the present or presently contemplated use of the assets subject thereto or affected thereby, and (iv) Encumbrances for current Taxes not yet due and payable and (b) a valid leasehold or other interest in all other assets used by it in its Business. All of the machinery, equipment and other tangible personal property and assets owned or used by Opco are in good condition and repair, except for ordinary wear and tear not caused by neglect, and are fit for their present use and usable in the ordinary course of Business. Opco owns no real property. 3.15 INVENTORIES. As of the Closing Date, the Inventories at Closing Date will consist of items of a quantity usable or saleable in the normal course of the Business. Except for the Inventories described on Schedule 3.15 hereto, the value of obsolete materials and of materials of below standard quality will have been written down to net realizable value, or adequate reserves have been provided, all in accordance with GAAP. The inventory level of the Business has been maintained at the level required for the operation of the Business as currently conducted and such level is adequate thereto. |
21 3.16 CONTRACTS AND AGREEMENTS. Schedule 3.16 contains a list of: (a) each contract, agreement or commitment of Opco which requires total payments to or by Opco of at least $50,000 annually other than Accounts Receivable or Accounts Payable occurring in the ordinary course of business; (b) each contract, agreement or commitment of Opco which has a remaining term longer than one hundred and eighty (180) days, which requires total payments to or by the Company of at least $100,000 during the remaining term and which is not terminable by Opco on thirty (30) or fewer days' notice without penalty; (c) each contract, agreement or commitment to which Opco is a party or by which any of its assets are bound relating to indebtedness for borrowed money, including capital leases, security agreements relating thereto and any amendment or waiver thereof; |
(d) each lease of real property by Opco;
(e) any collective bargaining agreement, union agreement, employment agreement, consulting agreement, management service agreement or any other similar type of contract or agreement to which Opco is a party;
(f) any consent, decree and other judgment, decree or order, settlement agreement or other agreement limiting the freedom of Opco to compete in any line of Business or with any Person in any geographical areas;
(g) any joint venture agreement or other contract, agreement or commitment to which Opco is a party involving a sharing of profits or expenses; and
(h) any outstanding loan or advance by Opco to, or investment by Opco in, any Person, or any agreement, contract, commitment or understanding relating to the making of any such loan, advance or investment (excluding trade receivables).
All of the contracts, agreements, leases, licenses, plans, arrangements, commitments and documents listed in Schedule 3.16 (collectively, the "OPCO CONTRACTS") are valid obligations of Opco and, to the Vendor Parties' Knowledge, are binding and in full force and effect in accordance with their terms and conditions on all parties thereto. To the Vendor Parties' Knowledge, there is no existing default thereunder or breach thereof by Opco or by any other party to an Opco Contract, or any conditions which, with the passage of time or the giving of notice or both, might reasonably constitute such a default by Opco or by any other party to an Opco Contract, and none of the Opco Contracts will be breached by or give any other party a right of termination as a result of the transactions contemplated by this Agreement. There are no pending or, to the Vendor Parties' Knowledge, threatened disputes with respect to the Opco Contracts. None of the Material Clients has indicated or expressed an intent or desire to terminate its relationship
with or reduce the level of business it conducts with Opco, nor do the Vendor Parties' have any reason to believe that any such client intends to terminate its relationship with Opco or reduce the level of business it conducts with Opco, whether as a result of the consummation of the transactions set forth in this Agreement or for any other reason. Opco, pursuant to any contract, agreement, franchise, licence or permit, does not hold, possess, use or have access to, or have the right to hold, possess, use or have access to, any property or right of any nature belonging to any other person upon which the conduct of the business of Opco as it is being customarily conducted is dependent. Other than as disclosed in Schedule 3.16, Opco is not bound by any contract or agreement purporting to materially constrain or limit Opco in the conduct of its business or affairs. Opco is not bound by any non-competition, affirmative or restrictive covenant limiting the nature of the business that any such corporation can carry on, or the time or territory in which the business of Opco can be operated. Opco knows of no bid or contract proposal made by Opco that, if accepted and entered into, might result in a material loss to Opco. To the Vendor Parties' Knowledge, neither Opco nor any of the Vendor Parties, officers, directors or employees, on behalf of Opco, has ever offered or given a bribe (whether of money or property or any other benefit) to any official of a Governmental Entity or committed any other offence pursuant to the laws of Canada in attempting to secure or securing an Opco Contract. 3.17 NON-ARM'S LENGTH TRANSACTIONS. Since October 31, 2000 and except as disclosed in Schedule 3.17 or in the Financial Statements, no payments have been made or authorized by Opco to, and Opco has not entered into any transactions with, its officers, directors, shareholders or employees, any of the Associates or Affiliates of such Persons, except to employees in the ordinary course of business and at the regular rates of salary or remuneration, including bonuses payable to such Persons. 3.18 INSURANCE. Schedule 3.18 sets forth a list of all policies of fire, extended coverage, liability, directors and officers and all other kinds of insurance held by Opco in connection with the conduct of the Business and its operations (other than policies relating to Employee Benefit Plans). Such policies are in full force and effect and Opco is not in default with respect to its obligations under any of such insurance policies. Opco maintains the type and amount of insurance which Opco believes is adequate in coverage and amount to insure fully against the risks to which Opco and its employees, directors, business, properties and other assets would reasonably be expected to be exposed in the operation of their respective business and as customarily carried and insured against by owners of comparable businesses. 3.19 EMPLOYMENT MATTERS. (a) Schedule 3.19 sets forth the names, date of hire, position, rate of compensation and vacation pay or rate they are expected to receive (and the portions thereof attributable to salary and bonuses, respectively), amounts payable to former employees, and location of all current officers, employees |
23 and consultants of Opco for the year ended October 31, 2000 and during the year ending October 31, 2000. (b) No key employee or group of employees has given notice to terminate or has any plans to terminate employment with Opco. Opco has not experienced any strikes, grievances, claims of unfair labour practices or other labour disputes. (c) The Vendor Parties have no Knowledge of any organisational effort made or threatened, either currently or within the past two years, by or on behalf of any labour union with respect to employees of Opco. (d) The employees of Opco are not unionized and there is no collective bargaining agreement relating to Opco, or its employees. (e) All salaries, commissions, bonuses, other payments and repayments and payment of expenses and generally all sums due to all employees of Opco have been duly and fully paid or a provision has been duly made in respect thereof. Opco is not liable for any notice of termination, severance pay or other payments to any Employee or former employee arising from the termination of employment, nor in respect of any right of reinstatement. (f) Opco has at all times, up to and including the Closing Date, complied with all Canada Pension Plan and unemployment insurance contributions. Opco is up to date in the payment of their contributions relating to health and security in the workplace (workmen's compensation), and the various organisations dealing with retirement and unemployment and, more generally, with all other contributions, instalments and/or payments connected therewith and any applicable default interest. Opco is not a party to or otherwise bound by, any consent decree with, a citation by, any Governmental Authority relating to Employees or employment practices, wages, hours and terms and conditions of employment. As of the date hereof, no claim, investigation or dispute exists with any such organisation that has not been fully resolved. (g) Opco has complied with all of its obligations under applicable "pay equity" legislation and is not required to and has not filed or published any "pay equity" with any governmental or regulatory authorities or with its employees. 3.20 EMPLOYEE BENEFITS. (a) Schedule 3.20 contains a complete and accurate list of all Employee Benefit Plans maintained, or contributed to, by Opco. Complete and accurate copies of (i) all Employee Benefit Plans and amendments thereto and (ii) all related trust agreements, insurance contracts and summary plan descriptions have been provided to the Purchaser. Each Employee Benefit Plan has been administered in accordance with its terms, and Opco and the Employee Benefit Plans are in compliance with the current applicable laws, in all material respects. |
(b) There are no claims (except claims for benefits payable in the normal operation of the Employee Benefit Plans), suits or proceedings against or involving any Employee Benefit Plan, or, to the Vendor Parties' Knowledge, investigations by any Governmental Authority. (c) With respect to each Employee Benefit Plan contributed to, or maintained by Opco, (a) all payments due from Opco have been made when due and all amounts properly accrued as liabilities of Opco which have not been paid have been properly recorded on the books of Opco and, as of the most recent valuation date, the fair value of the assets of each Employee Benefit Plan equals or exceeds the liabilities of such Employee Benefit Plan on a termination basis (i.e. on an accumulated benefit obligation basis) and on an ongoing basis (i.e. on a projected benefit obligation basis) based on the assumptions used to fund such Employee Benefit Plan, which assumptions are reasonable. (d) There are no non-current unfunded obligations under any Employee Benefit Plan, providing benefits after termination of employment to any employee of Opco (or to any beneficiary of any such employee), including but not limited to retiree health coverage and deferred compensation, but excluding continuation of health coverage required to be continued under applicable law and obligations. (e) The execution and delivery of this Agreement, and the performance of the transactions contemplated hereby, will not constitute an event under any Employee Benefit Plan that would reasonably be expected to result in any payment (whether of severance pay or otherwise), acceleration of, forgiveness of indebtedness owing from, vesting of, or increase in any benefits with respect to any current or former employee of Opco. (f) There is no announced plan or legally binding commitment to create any additional Employee Benefit Plans or to amend or modify any existing Employee Benefit Plan, except as required by existing law. (g) Opco does not maintain a Pension Plan in favour of its Employees. 3.21 BOOKS AND RECORDS. All Books and Records material to the operation of the Business have been delivered or made available to the Purchaser. Such Books and Records fairly and correctly set out and disclose in all material respects the financial position of Opco and all material financial transactions relating to its Business have been accurately recorded in such Books and Records. All transactions involving Opco have been accurately recorded in such Books and Records. All vacation pay, bonuses, commissions and other emoluments relating to each of the employees of Opco have been accrued (on a basis consistent with prior practice) to date in such books. |
25 3.22 NO JOINT VENTURE INTERESTS, ETC.: Except as disclosed in Schedule 3.22, Opco is not a partner, beneficiary, trustee, co-tenant, joint-venturer or otherwise a participant in any partnership, trust, joint venture, co-tenancy or similar jointly owned business undertaking and Opco has no significant investment interests in any business owned or controlled by any third party. 3.23 RESERVES AND ACCRUALS. The reserves and Accrued Liabilities disclosed on or reflected in the Financial Statements are sufficient in all material respects to provide for the liabilities in respect of which they have been established. 3.24 ARTICLES AND BY-LAWS. The articles and by-laws of Opco, including any and all amendments have been delivered or made available to the Purchaser and such articles and by-laws as so amended are in full force and effect and no amendments are being made to same. 3.25 THIRD PARTY CONSENTS. Schedule 3.25 sets out a complete list of all notifications, approvals and consents required to be obtained by Opco in connection with the execution, delivery and performance of this Agreement or any other documents and agreements to be delivered under this Agreement. 3.26 BANK ACCOUNTS, ETC. Schedule 3.26 sets forth a complete list of every financial institution in which Opco maintains any depository account, trust account or safety deposit box and the names of all persons authorized to draw on or who have access to such accounts or safety deposit box as well as a complete list and brief description of any powers of attorney currently in force and given by Opco. 3.27 ABSENCE OF GUARANTEES. Except as disclosed in Schedule 3.27, Opco has not given or agreed to give, nor is it a party to or bound by, any guarantee or indemnity in respect of indebtedness, or other obligations, of any Person, or any other commitment by which Opco is, or is contingently, liable for such indebtedness or other obligations. 3.28 COLLECTIBILITY OF ACCOUNTS RECEIVABLE. The Accounts Receivable reflected in the Financial Statements and all Accounts Receivable arising thereafter up to and until the date hereof have arisen from bona fide transactions in the ordinary course of the Business. Schedule 3.28 includes a true and complete schedule of the Accounts Receivable of Opco as at Closing Date including the aging thereof and any allowances made for doubtful accounts and any claims of set-off in connection therewith. Except as disclosed in Schedule 3.28, since October 31, 2000, Opco has not increased the allowance for doubtful accounts. The Accounts Receivable as shown in the Closing Balance Sheet shall be collectible in full in 90 days, other than those Accounts Receivable which are doubtful accounts and in respect of which an adequate allowance has been made and are not subject to any set-off or counter-claim. 3.29 NO BROKER. The Vendor Parties have carried on all negotiations relating to this Agreement and the transactions contemplated in this Agreement directly and without intervention on their behalf of any other party in such manner so as to give rise to any |
26 valid claim for a brokerage commission, finder's fee or other like payment against the Purchaser or Opco. 3.30 NO BANKRUPTCY/INSOLVENCY. Opco is not insolvent, has not committed an act of bankruptcy, has not proposed a compromise or arrangement to its creditors generally, has not had any petition for a receiving order in bankruptcy filed against it, has not taken any proceeding with respect to a compromise or arrangement, has not taken any proceeding to have itself declared bankrupt or wound-up, has not taken any proceeding to have a receiver appointed on any part of its assets, has not had any encumbrancer take possession of any of its property, nor has it had any execution or distress become enforceable or become levied upon any of its property. 3.31 SOLICITATION OF EMPLOYEES. Neither Opco nor Vendor has entered into any agreement or made any arrangements with any of the Employees of Opco which would have the effect of depriving the Purchaser or Opco of the continued services of any such employees following the Closing. 3.32 FORWARD COMMITMENTS. All forward commitments by or to Opco for inventories, supplies or services for use in connection with the Business (whether or not there are any contracts in writing with respect thereto) which are in existence as of the date of this Agreement have been entered into by it in the ordinary course of business and upon terms and conditions consistent with the Opco's usual past practices. 3.33 ENVIRONMENTAL. (a) Opco and its Business are currently in compliance, in all material respects, with all Environmental Laws. Further, Opco has not received any notice of non-compliance which has not been fully complied with or satisfied. (b) There are no Permits required under Environmental Laws for the operation of the Business as it is presently being conducted. (c) Opco has not received a notice that has not been fully resolved that Opco is a party potentially responsible to commence clean-up or remedial action or to prepare studies, action plans or clean-up strategies in respect to the environmental condition of its Business facilities or properties. Opco has not received any request for information in connection with any inquiry or investigation by any Authority concerning environmental matters that had not been fully resolved. 3.34 CLIENT RELATIONS. There has not been any Material Adverse Change in relations with clients or suppliers of the Business since October 31, 2000 and, to Vendor Parties' Knowledge, no such change is anticipated including, without limitation, as a result of the transactions contemplated herein. Opco has not had a significant problem in obtaining in a timely manner and at reasonable cost any and all services used or to be used in the Business, nor do the Vendor Parties have any reason to believe Opco will have any significant problem in obtaining such services in the future. Opco has not received |
27 written notice of intent to terminate any Opco Contracts or agreements for the purchase of the products or services of Opco, nor do they have actual knowledge without enquiry of any circumstances which are likely to result in the five largest customers of Opco (based upon sales in the fiscal year ending October 31, 2000), materially decreasing their purchases of products or services during the 12 months immediately after the Closing. 3.35 DISTRIBUTIONS. Except as disclosed in Schedule 3.35 and as permitted under this Agreement, no directors fees and no dividends or other distributions (in cash or other property) on any of the Shares of Opco have been authorized, declared, paid or proposed since October 31, 2000. 3.36 COMPUTER SYSTEMS. To the Vendor Parties' Knowledge, the computer systems of Opco, including but not limited to, mainframes, mini-computers, personal computers and special purpose systems are fully operational and have adequate documentation describing, among other things, the operation of the hardware, required maintenance, daily/weekly/monthly/quarterly/annual "run books" or other operational procedures, all operating systems, applications and utilities. The documentation matches the implementation of the hardware and software in use as of the date thereof. To the best of its knowledge, Opco is in material compliance with all legal obligations with respect to all software used by it and has license to use all software currently used by it which it does not own. Further, Opco has a copy of all source codes, fully annotated, for all custom software and all other software not generally available to the public, used by Opco in connection with the Business. 3.37 SECURITIES MATTERS. (a) Vendor alone, or through its personal representative, has such knowledge and experience in financial and business matters and such experience in evaluating and investing in companies such as the Purchaser as to be capable of evaluating the merits and risks of an investment in the Purchaser Shares. Vendor has the financial ability to bear the economic risk of its investment in the Purchaser Shares being acquired hereunder, has adequate means for providing for its current needs and contingencies and has no need for liquidity with respect to its investment in the Purchaser Shares. (b) Vendor is acquiring the Purchaser Shares for its own account, for investment purposes only, and not with the view to, or for resale in connection with, any distribution thereof except in compliance with applicable securities laws. Vendor understands that the Purchaser Shares have not been registered under the UNITED STATES SECURITIES ACT OF 1933, as amended (the "SECURITIES ACT") or under the securities laws of various states, by reason of a specified exemption from the registration or prospectus provisions thereunder which depends upon, among other things, the bona fide nature of the Vendor's investment intent as expressed herein. Vendor acknowledges that its representations and warranties contained herein are being relied upon by the Purchaser as a basis |
28 for the exemption of the issuance of the Purchaser Shares hereunder from the registration requirements of the Securities Act. (c) Vendor acknowledges that the Purchaser Shares must be held indefinitely unless they are subsequently registered under the Securities Act or unless an exemption is available under the Securities Act, Vendor has been advised or is aware of: (A) the provisions of Rule 144 promulgated under the Securities Act which permits limited resale of the securities purchased in a private placement subject to the satisfaction of certain conditions including, among other things, the availability of certain current public information about Purchaser and compliance with applicable requirements regarding the holding period and the amount of securities to be sold and the manner of sale and (B) Regulation S promulgated under the Securities Act or other applicable legislation which permits resale of the purchased securities in the United States or Canada subject to certain restrictions. Vendor understands that only the Purchaser can take action to register the Purchaser Shares. (d) Vendor acknowledges that the Purchaser Shares must also be held in accordance with applicable securities laws in Canada and the Vendor undertakes not to sell, transfer or assign the Purchaser Shares in contravention of the applicable laws in force in Canada. (e) Vendor has, among other things, carefully reviewed each Canadian Document provided to it prior to the date hereof, and will carefully review each Canadian Document (as defined in this Agreement) provided to it between the date hereof and the Closing Date. Vendor acknowledges that in connection with the transactions contemplated hereby, neither Purchaser nor anyone acting on its behalf or any other person has made, and such Vendor is not relying upon, any representations, statements or projections concerning Purchaser, its present or projected results of operations, financial condition, prospects, present or future plans, acquisition plans, products and services, or the value of the Purchaser Shares, Purchaser's business or any other matter in relation to Purchaser's business or affairs, except as otherwise set forth in ARTICLE 5 hereof and as disclosed in this Agreement and the Canadian Documents. Vendor or its representative has had an opportunity to discuss Purchaser's business, management, financial affairs and acquisition plans with its management, to review Purchaser's facilities, and to obtain such additional information concerning the Vendor's investment in the Purchaser Shares in order for such Shareholder to evaluate its merits and risks, and the Vendor has determined that the Purchaser Shares are a suitable investment for such Vendor and that at this time such Vendor could bear a complete loss of his or her investment. (f) Vendor is aware that no US or Canada federal, state, provincial or other agency has passed upon or made any finding or determination concerning the fairness of the transactions contemplated by this Agreement or the adequacy |
29 of the disclosure of the exhibits and schedules hereto or thereto and such Vendor must forego the security, if any, that such a review would provide. (g) Vendor understands that all certificates for the Purchaser Shares issued to Vendor shall bear a legend in substantially the following form: "THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF WITHOUT SUCH REGISTRATION OR THE DELIVERY TO THE ISSUER OF AN OPINION OF COUNSEL, OR SUCH OTHER DOCUMENTATION REASONABLY SATISFACTORY TO THE ISSUER, THAT SUCH DISPOSITION WILL NOT REQUIRE REGISTRATION OF SUCH SECURITIES UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS." 3.38 CAPITAL EXPENDITURES. Except as disclosed in Schedule 3.38, no capital expenditures or leasehold improvements have been made by Opco in excess of $1,000 or in connection with the Business since October 31, 2000 and there are no commitments for same. 3.39 ASSETS AND REVENUES. The Vendor, together with its Affiliates, does not have gross assets in Canada or gross revenues from sales in or from Canada, for the 12 month period ending October 31, 2000, in excess of Cdn$35,000,000. 3.40 FULL DISCLOSURE. The Vendor Parties have made available to the Purchaser, all information, including the financial, marketing, sales and operational information on a historical basis relating to Opco which would be material to a purchaser of Opco. All information contained in this Agreement, or in any Schedule hereto or which has been provided to the Purchaser is true and correct in all material respects and no material fact or facts have been omitted therefrom which would make such information, taken as a whole, false or misleading in light of the circumstances in which such statement was made. Without limiting the generality of the foregoing, the Vendor Parties have not failed to disclose to the Purchaser any fact or information which would reasonably be considered to be material to a purchaser of Opco or which might reasonably be expected to deter the Purchaser from completing the transactions contemplated herein. |
ARTICLE 4
ADDITIONAL REPRESENTATIONS AND WARRANTIES
OF THE VENDOR AND THE GUARANTORS
The Vendor and the Guarantors, on a several basis, represent and warrant to the Purchaser as follows, which representations and warranties shall be true on the date of execution hereof and on the Closing Date (and acknowledges that the Purchaser is relying on such representations and warranties in completing the transactions contemplated hereby) that:
4.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Each Vendor Party has full power, capacity and authority to execute and deliver this Agreement and to perform its obligations hereunder. Each Vendor Party has duly executed this Agreement and, assuming this Agreement constitutes a valid and binding obligation of the Purchaser, this Agreement constitutes a legal, valid and binding obligation of such Vendor Party, enforceable against such Vendor Party in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, moratorium and similar laws of general applicability relating to or affecting creditor's rights and to general principles of equity, regardless of whether such enforceability is considered in equity or at law.
4.2 NON-CONTRAVENTION; CONSENTS AND APPROVALS. Neither the execution and delivery of this Agreement by such Vendor Party nor the consummation of the transactions contemplated hereby by such Vendor Party will (1) conflict with, result in a breach or violation of or constitute (or with notice or lapse of time or both constitute) a default under any law, statute, regulation, order, judgment or decree or any instrument, contract or other agreement to which Vendor Party is a party or by which such Vendor Party (or the Opco Shares held by the Vendor) is bound, or, if such Vendor Party is not an individual, its organisational documents, or (2) require such Vendor Party to obtain any authorisation, consent, approval or waiver from, give notification to, or make any filing with, any Governmental Authority, or to obtain the approval or consent of any other Person, except for such conflicts, breaches, violations or defaults, or any authorisation, consent, approval, waiver, notification or filing the failure of which to obtain or make, will not (a) impair in any material respect the ability of such Vendor Party to perform such Vendor Party's obligations under this Agreement or (b) prevent or materially delay the consummation of any of the transactions contemplated by this Agreement.
4.3 EXCLUSIVITY OF REPRESENTATIONS. The representations and warranties made by the Vendor Parties in this Agreement are in lieu of and are exclusive of all other representations and warranties, including without limitation any implied warranties. The Vendor Parties hereby disclaim any such other or implied representations or warranties, notwithstanding the delivery or disclosure to the Purchaser or its officers, directors, employees, agents or representatives of any documentation or other information (including any financial projections or other supplemental data).
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Except as set forth on the disclosure memorandum (the "PURCHASER DISCLOSURE MEMORANDUM"), Purchaser represents and warrants to the Vendor and the Shareholders as follows:
5.1 ORGANISATION AND QUALIFICATIONS. Purchaser is a corporation duly organised, validly existing and in good standing under the laws of its jurisdiction of incorporation, with the requisite corporate power and authority (i) to own and use its properties and assets and (ii) to carry on its business as currently conducted. Purchaser is duly qualified to do business and is in good standing in each jurisdiction in which the nature of the Business conducted or property owned or leased by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, would not reasonably be expected to have a Material Adverse Effect.
5.2 CAPITALISATION. The authorised, issued and outstanding capital stock of Purchaser is as set forth in the Purchaser Disclosure Memorandum. The Purchaser Disclosure Memorandum sets forth the number of shares reserved for issuance pursuant to the duly approved stock option plans (collectively, the "STOCK OPTION PLANS"), and the number of options outstanding. All of the issued and outstanding shares of Common Stock have been duly authorised and validly issued and are fully paid and non-assessable. Except as provided in this Agreement and pursuant to the Stock Option Plans and in the Purchaser Disclosure Memorandum: (i) no subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of Purchaser is authorised or outstanding; (ii) Purchaser has no obligation (contingent or otherwise) to issue any subscription, warrant, option, convertible security or other such right or to issue or distribute to holders of any shares of its capital stock any evidences of indebtedness or assets of Purchaser; and (iii) Purchaser has no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. All of the issued and outstanding shares of capital stock of Purchaser have been offered, issued and sold by Purchaser in compliance with applicable US and Canadian federal, provincial and state securities laws or pursuant to valid exemptions therefrom. Purchaser is not a party to any Agreement, and, to the Purchaser's Knowledge, there is no agreement between any Persons, which grants any rights of first refusal or pre-emptive rights or relates to the voting or giving of written consents with respect to any written security of Opco.
5.3 AUTHORISATION. Purchaser has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder. The execution and delivery of this Agreement by the Purchaser and the consummation by it of the transactions contemplated hereby have been duly authorised by all necessary action on the part of the Purchaser, and no further action is required by the Purchaser. This Agreement has been duly executed by the Purchaser
and, assuming this Agreement constitutes a valid and binding obligation of the Vendor and the Vendor Parties, this Agreement constitutes a valid and binding agreement of the Purchaser enforceable against the Purchaser in accordance with its terms, subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganisation, moratorium and similar laws of general applicability relating to or affecting creditor's rights and to general principles of equity, regardless of whether such enforceability is considered in equity or at law. The Purchaser is not in violation of any of the provisions of its certificate of incorporation, bylaws or other organisational documents.
5.4 NON-CONTRAVENTION. Subject to any regulatory approval under applicable securities laws and regulations, including those of any stock exchanges and of any other Governmental Authority, the execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and compliance with the provisions of this Agreement will not, conflict with, or result in any violation of or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration of any obligation or to loss of a material benefit under, or result in the creation of any Encumbrance upon any of the properties or assets of Purchaser or any of its Subsidiaries pursuant to, any provision of (i) the Certificate of Incorporation or By-laws of the Purchaser or any provision of the comparable organisational documents of any of its Subsidiaries, or (ii) subject to the governmental filings and other matters referred to in Section 5.5 below, any statute, law, rule, regulation, judgment, order or decree applicable to the Purchaser or any of its Subsidiaries or their respective properties or assets, other than any such conflicts, violations, defaults, rights or Encumbrances that individually or in the aggregate would not reasonably be expected to have a Material Adverse Effect of the Purchaser or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement.
5.5 CONSENTS AND APPROVALS. No consent, approval, order or authorisation of, or registration, declaration or filing with, any Governmental Authority is required by or with respect to the Purchaser or any of its Subsidiaries in connection with the execution and delivery of this Agreement by the Purchaser or the consummation by the Purchaser of the transactions contemplated by this Agreement, except for (i) approvals for listing of the Purchaser Shares on The Toronto Stock Exchange and for quotation on NASDAQ and any shareholder's approval, and (ii) such other consents, approvals, orders, authorisations, registrations, declarations and filings the failure of which to be obtained or made would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect of the Purchaser or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement.
5.6 LITIGATION; PROCEEDINGS. There is no action, suit or proceeding, governmental or otherwise, pending or, to the Purchaser's Knowledge, threatened against the Purchaser, any of its Subsidiaries or any of their respective properties or business that questions the validity of this Agreement, the right of the Purchaser to enter into this Agreement or to consummate the transactions contemplated hereby, or that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect. There is no
judgment, decree, injunction, rule or order of any Governmental Entity outstanding against the Purchaser or any of its Subsidiaries having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect.
5.7 AUTHORISATION FOR PURCHASER SHARES. Purchaser shall have taken all necessary action to issue the Purchaser Shares on the Closing Date. The Purchaser Shares shall have been duly authorised and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and non-assessable and free and clear of all Encumbrances (other than restrictions on transfer imposed by applicable securities laws) and will not be issued in violation of any preemptive rights, rights of first refusal or similar rights. On the Closing Date, the Purchaser Shares will be listed for trading on The Toronto Stock Exchange and on the NASDAQ.
5.8 CANADIAN DOCUMENTS. Purchaser has provided to the Vendor documents, as
may be required under Canadian securities laws to have been filed by
the date hereof (the "CANADIAN DOCUMENTS"). As of their respective
filing dates, the Canadian Documents complied in all material respects
with the requirements of the securities laws in force in Canada, and
none of the Canadian Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements made therein, in light of
the circumstances in which they were made, not misleading, except to
the extent corrected by a subsequently filed Canadian Document. The
Purchaser has delivered to the Vendor complete and correct copies of
the financial statements of Purchaser being the consolidated audited
balance sheets of the Purchaser as at August 31, 2000 and 1999
(together with the auditors' report thereon) and the statements of
earnings, retained earnings and cash flows for each of the years in the
three years ended August 31, 2000, including the notes thereto (the
"PURCHASER AUDITED FINANCIAL STATEMENTS") and the interim unaudited
consolidated balance sheets as at November 30, 2000 and the related
interim unaudited consolidated statements of earnings, the interim
unaudited consolidated statements of retained earnings and contributed
surplus and the interim unaudited consolidated statements of cash flows
(the "PURCHASER'S INTERIM FINANCIAL STATEMENTS"). The Purchaser's
Audited Financial Statements and the Purchaser's Interim Financial
Statements, collectively referred to as the "PURCHASER FINANCIAL
STATEMENTS". The Purchaser Financial Statements were complete and
correct in all material respects as of their respective dates, complied
as to form in all material respects with applicable accounting
requirements with respect thereto as of their respective dates, and
have been prepared in accordance with Canadian GAAP applied on a basis
consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto or, in the case
of unaudited statements included in the Purchaser's interim reports.
The balance sheets included in the Purchaser Financial Statements
present fairly in all material respects as of their respective dates
the financial condition of the Purchaser (subject, in the case of the
Purchaser's Interim Financial Statements, to normal, recurring year-end
adjustments that may be required upon audit). All material liabilities
and obligations, whether absolute, accrued or contingent, whether
direct or indirect, and whether due or to become due, which existed at
the date of such Purchaser Financial Statements have been disclosed in
the balance sheets included in the Purchaser Financial Statements or in
notes to the Purchaser
Financial Statements to the extent such liabilities were required, under Canadian GAAP, to be so disclosed. The statements of operations, shareholders' equity and cash flows included in the Purchaser Financial Statements present fairly in all material respects the results of operations, shareholders' equity and cash flows of the Purchaser for the periods indicated (subject, in the case of the Purchaser's Interim Financial Statements, to normal, recurring year-end adjustments that may be required upon audit), and the notes included in the Purchaser Financial Statements present fairly in all material respects the information purported to be shown thereby. 5.9 REPORTING ISSUER. The Purchaser has been a reporting issuer (as such term is defined in the SECURITIES ACT (Ontario) since June 29, 2000 and is not on the list of defaulting issuers established by the Ontario Securities Commission. 5.10 SECURITIES LAW EXEMPTION. The Purchaser is issuing the Purchaser Shares to the Vendor in reliance on the exemption in section 72(l)(j) of the SECURITIES ACT (Ontario). 5.11 HOLD PERIOD. The Purchaser Shares will be "freely tradeable" in Ontario by the Vendor, after June 29, 2001, pursuant to section 72(5) of the SECURITIES ACT (Ontario), provided it complies with such section and the sale by the Vendor is not a "control person distribution" (as that term is defined in Rule 14-501). ARTICLE 6 SURVIVAL AND RELIANCE ON REPRESENTATIONS & WARRANTIES AND INDEMNIFICATION 6.1 SURVIVAL NOTWITHSTANDING INVESTIGATION. Notwithstanding any investigation conducted before the Closing Date, including for greater certainty, the Due Diligence Investigation, and notwithstanding implied knowledge or notice of any fact or circumstance which any Person may have as a result of such investigation or otherwise, the parties hereto shall be entitled to rely upon the representations and warranties set forth herein and the obligations of the parties hereto with respect thereto shall survive the Closing Date and shall continue in full force and effect in accordance with and subject to the terms of this ARTICLE 6. 6.2 GENERAL INDEMNIFICATION BY VENDOR PARTIES. Subject to the provisions contained herein, the Vendor Parties shall be liable to the Purchaser and its directors, officers and employees (collectively, the "PURCHASER INDEMNIFIED PERSONS" and singly a "Purchaser Indemnified Person") and shall defend, indemnify and hold harmless all of the Purchaser Indemnified Persons against any and all Claims incurred or suffered by or imposed upon any of the Purchaser Indemnified Persons arising directly or indirectly out of: (a) the breach of any representation or warranty contained or contemplated by this Agreement or in any other agreement or document required to be furnished by a Vendor Party to the Purchaser hereunder; and |
(b) the breach or non-fulfilment of any agreement, covenant or obligation of any of Vendor Parties contained in this Agreement or in any other agreement or document required to be entered into by any of the Vendor Parties pursuant hereto to the extent not waived in writing by the Purchaser.
The obligation of indemnification of such Vendor Parties hereunder shall be joint and several.
6.3 INDEMNIFICATION BY THE PURCHASER. The Purchaser shall be liable to Vendor and its officers, directors and employees (collectively the "VENDOR INDEMNIFIED PERSONS" and singly a "VENDOR INDEMNIFIED PERSON") and shall defend, indemnify and hold harmless all of the Vendor Indemnified Persons against any and all Claims incurred or suffered by or imposed upon any of the Vendor Indemnified Persons arising directly or indirectly out of:
(a) the breach of any agreement, covenant, representation or warranty of the Purchaser contained in or contemplated by this Agreement or in any other agreement or document required to be furnished by the Purchaser to Vendor hereunder; and
(b) the breach or non-fulfilment of any agreement, covenant or obligation of the Purchaser contained in this Agreement or in any agreement or document required to be entered into by the Purchaser pursuant hereto, to the extent not waived in writing by Vendor;
6.4 INDEMNIFICATION AGAINST THIRD PARTY CLAIMS.
(a) Promptly upon receipt by any of the Purchaser Indemnified Persons or the Vendor Indemnified Persons (in this Section referred to as the "INDEMNITEE") of a notice of any third party Claim (a "THIRD PARTY CLAIM") in respect of which the Indemnitee proposes to demand indemnification from the Purchaser or Vendor Parties (in this Section referred to as the "INDEMNITOR") pursuant to the provisions hereof, the Indemnitee shall give written notice to that effect to the Indemnitor with reasonable promptness.
(b) The Indemnitor shall have the right by written notice to the Indemnitee not later than 30 days after giving of the notice described in subsection 6.4(a) to assume the control of the defence, compromise or settlement of the Third Party Claim, provided that such assumption shall, by its terms, be without cost to the Indemnitee and shall not limit in any way the Indemnitee's right to indemnification pursuant to the provisions hereof.
(c) Upon the assumption of control by the Indemnitor as aforesaid, the Indemnitor shall, at its expense, diligently proceed with the defence, compromise or settlement of the Third Party Claim at Indemnitor's sole expense, including retention of counsel reasonably satisfactory to the Indemnitee and, in connection therewith, the Indemnitee shall co-operate fully, but at the
sole
expense of the Indemnitor, to make available to the Indemnitor all pertinent information and witnesses under the Indemnitee's control, make such assignments and take such other steps as in the opinion of counsel for the Indemnitor are necessary to enable the Indemnitor to conduct such defence, provided always that the Indemnitee shall be entitled to reasonable security from the Indemnitor for any expense, costs or other liabilities to which it may be or may become exposed by reason of such co-operation.
(d) The final determination of any such Third Party Claim, including all related costs, attorneys' fees and expenses, shall be binding and conclusive upon the Indemnitor and the Indemnitee as to the validity or invalidity, as the case may be, of such Third Party Claim against the Indemnitor hereunder.
Notwithstanding any provision of this Section 6.4, the Indemnitor may not consent to any settlement of a Third Party Claim if the terms of such settlement require the Indemnitee to act or refrain from acting, without the prior written consent of the Indemnitee.
(e) Should the Indemnitor fail to give notice to the Indemnitee as provided in subsection 6.4(b), the Indemnitee shall be entitled to make such settlement of the Third Party Claim as in its sole discretion may appear advisable, and such settlement or any other final determination of the Third Party Claim shall be binding upon the Indemnitor.
6.5 INDEMNIFICATION TO BE AFTER TAX, INSURANCE, ETC. The amount of the indemnification for any Claim which the Purchaser Indemnified Persons and the Vendor Indemnified Persons shall be entitled to receive pursuant to this Agreement shall be payable on demand and shall be determined after giving effect to any insurance recoveries, tax savings and recoveries from third parties and of any interest, fines, penalties, expenses and disbursements of any nature whatsoever incurred by Opco.
6.6 EXPIRY AND LIMITS OF LIABILITY
(a) The representations and warranties of the Vendor Parties herein (other than those of the Vendor Parties with respect to the matters set forth in subsection 6.6(b)), shall terminate on the date which is 180 days after the date the Purchaser has publicly released the audited financial statements for the year ended August 31, 2003 except to the extent that, during such period, any Purchaser Indemnified Person shall have given detailed notice (to the extent feasible) to the Vendor of a specified Claim in respect of any representation or warranty in which case such representation and warranty with respect to such Claim shall continue in full force and effect until the final determination of such Claim.
(b) Notwithstanding the foregoing provisions of subsection 6.6(a):
(i) representations and warranties herein of Vendor Parties with respect to the Opco Shares and the share capital of Opco as set forth in Sections 3.3 and 3.4 shall survive indefinitely;
(ii) representations and warranties herein of Vendor Parties relating to any liability of the Opco for the payment of Taxes shall survive so long as any claim may be made in respect of such matters under any applicable statute of limitations; and
(iii) notwithstanding the foregoing, there shall be no limit of time on the representations and warranties of Vendor Parties relating to any matter in the case of fraud, gross negligence, voluntary omission or bad faith on the part of Vendor Parties.
(c) Notwithstanding the other provisions of this Section 6.6, no Claims with respect to breaches or failure of representations and warranties may be made against the Vendor Parties hereunder unless and until the aggregate amount of all Claims which may be made pursuant to this Agreement exceed $100,000, in which event the Vendor Parties shall become liable for the full amount of all Claims on a dollar for dollar basis, up to a maximum amount equal to the Purchase Price, which for the purposes of this ARTICLE 6 shall be determined as the closing price of the Purchaser Shares on date preceding the Closing Date on The Toronto Stock Exchange.
It is agreed that any liability for the payment of Taxes by
Opco shall not be subject to any maximum amount set forth in
Section 6.6(c) and shall indemnify the Purchaser on a dollar
for dollar basis including, without limiting the generality of
the foregoing, the Vendor Parties shall indemnify the
Purchaser and hold same harmless for any amounts payable by
Opco as a result of the following: (i) audit by the Internal
Revenue Service ("IRS") of the dental division of EFOS USA,
including all Taxes payable and fees and disbursements of the
advisors of Purchaser and the time of Purchaser's employees in
respect of any new assessment made by the IRS relating to
Taxes; (ii) any Taxes, penalties, professional fees and
employees time payable and resulting from any adjustment of
the capital dividend account of Opco; (iii) any unremitted
sales taxes and fees and disbursements of the advisors of the
Purchaser and the time of Purchaser's employees in respect of
any new assessment issued by the State of California or any
other Governmental Authority in the United States, regarding a
default to collect sales tax on sales in any jurisdiction
including penalties and interest; (iv) any penalties, taxes
and interest regarding the failure to file forms 1120F and
8833 with the IRS and regarding unpaid United States state
Income Taxes and (v) denial or reduction of the deductibility
of management fees paid in 1997 to the Vendor by Opco,
including penalties and interest.
(d) The representations and warranties of the Purchaser shall terminate on the date which is 180 days after the date on which the Purchaser has publicly released the audited financial statements for the year ended August 31, 2003 except to the extent that, during such period any Vendor Indemnified Person shall have given detailed notice to the Purchaser of a specified Claim in respect of any representation or warranty in which case such representation and warranty shall continue in full force and effect until the final determination of such Claim.
(e) Notwithstanding the foregoing provisions of subsection 6.6(d):
(i) representations and warranties herein of the
Purchaser with respect to the Purchaser Shares and
the share capital of the Purchaser set forth in
Section 5.2 shall survive indefinitely;
(ii) notwithstanding the foregoing, there shall be no limit of time on the representations and warranties of the Purchaser relating to any matter in the case of fraud, gross negligence, voluntary omission or bad faith on the part of the Purchaser.
(f) Notwithstanding the other provisions of this Section 6.6, no Claims with respect to breaches or failure of representations and warranties may be made against the Purchaser hereunder unless and until the aggregate amount of all Claims which may be made pursuant to this Agreement exceed $500,000, in which event the Purchaser shall become liable for the full amount of all Claims on a dollar for dollar basis, up to a maximum amount equal to the Purchase Price.
6.7 INDEMNIFICATION SOLE REMEDY. The provisions of this ARTICLE 6 shall constitute the sole remedy of the Purchaser, Vendor and Guarantors (in contract, tort or otherwise) for or in respect of the transactions contemplated by the Agreement, including any misrepresentation or breach of any warranty, obligation, covenant or agreement contained in this Agreement or in any agreement, certificate or other document delivered or given pursuant to this Agreement.
ARTICLE 7
COVENANTS OF THE PARTIES
7.1 CONDUCT OF BUSINESS OF OPCO. During the period from the date of this Agreement to the Closing Date, each Vendor Party shall cause Opco to carry on its Business in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and, to the extent consistent therewith, use reasonable efforts to preserve intact its current business organisations, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers, licensors, licensees, distributors and others having business dealings with it to the end that its goodwill and ongoing
businesses shall be unimpaired in any material respect at the Closing Date. Without limiting the generality of the foregoing, without Purchaser's consent (which consent shall not be unreasonably withheld or delayed), during the period from the date of this Agreement to the Closing Date, the Vendor Parties shall cause and shall ensure that Opco does not:
(a) (i) except as permitted under this Agreement, declare, set aside or pay any dividends on, or make any other distributions in respect of, any of its capital stock, (ii) split, combine or reclassify any of its capital stock or issue or authorise the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iii) purchase, redeem or otherwise acquire any shares of its capital stock or any other securities thereof or any rights, warrants or options to acquire any such shares or other securities;
(b) issue, deliver, sell, pledge or otherwise encumber any shares of its capital stock, any other voting securities or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting securities or convertible securities (other than the issuance of shares upon the exercise of options outstanding on the date of this Agreement and in accordance with their present terms);
(c) except as permitted under this Agreement, amend its articles, by-laws or other comparable organisational documents;
(d) acquire or agree to acquire (i) by amalgamating, merging or consolidating with, or by purchasing a substantial portion of the assets of, or by any other manner, any business or any corporation, partnership, joint venture, association or other business organisation or division thereof or (ii) any assets that are material, individually or in the aggregate, to Opco, except purchases in the ordinary course of business consistent with past practice;
(e) sell, lease, license, mortgage or otherwise encumber or subject to any Encumbrance (other than Encumbrances pursuant to its existing credit facilities) or otherwise dispose of any of their properties or assets which are material, individually or in the aggregate, to Opco, except in the ordinary course of business consistent with past practice;
(f) (i) incur any indebtedness for borrowed money or guarantee any such indebtedness of another person, issue or sell any debt securities or warrants or other rights to acquire any debt securities, or guarantees any debt securities of another person, except for borrowings under their existing credit facilities for working capital purposes and up to the borrowing limits set forth therein, the endorsement of checks in the normal course of business and the extension of credit in the normal course of business, or (ii) make any loans, advances or
capital contributions to, or investments in, any other Person, other than advances to employees in accordance with past practice;
(g) except for the items currently contracted for by Opco, make or agree to make any new capital expenditure or expenditures which, individually, is in excess of $20,000 or, in the aggregate, are in excess of $100,000;
(h) make any material Tax election or settle or compromise any material income Tax liability;
(i) pay, discharge, settle or satisfy any Claims, liabilities or obligations (absolute, accrued or contingent, asserted or unasserted), other than the payment, discharge or satisfaction, in the ordinary course of business consistent with past practice or in accordance with their terms, of liabilities reflected or reserved against in, or contemplated by, the most recent consolidated financial statements (or the notes thereto) included in the Financial Statements or incurred in the ordinary course of business consistent with past practice;
(j) except in the ordinary course of business, modify, amend or terminate any material contract or agreement to which Opco is a party, or waive, release or assign any material rights or claims;
(k) except as required to comply with applicable Law, (i) adopt, enter into or amend any Employee Benefit Plan, (ii) increase in any manner the compensation or fringe benefits of, or pay any bonus to, any director, officer or employee of Opco (except for normal increases or bonuses in the ordinary course of business consistent with past practice), or (iii) except as permitted in clause (ii) above, grant any awards under any Employee Benefit Plan (including the grant of stock options, stock appreciation rights, stock based or stock related awards, performance units or restricted stock, or the removal of existing restrictions in any Employee Benefit Plan or agreement or awards made thereunder);
(l) other than as required by law or GAAP, make any material change to its accounting policies or procedures; or
(m) authorise any of, or commit or agree to take any of, the foregoing actions.
7.2 ADDITIONAL COVENANTS. In addition to any agreements or deeds required to give effect to the transfer of the Opco Shares in favour of the Purchaser, the Vendor Parties agree to ensure that prior to the Closing Date to the satisfaction of the Purchaser, acting reasonably Glenn Harvey shall have repaid in full the sum of $80,000 owed by "Bright Buys" to Opco.
7.3 PUBLIC ANNOUNCEMENTS. From the date of this Agreement until the earlier of the Closing Date or the termination of this Agreement, none of the Vendor Parties, Purchaser nor Opco will issue or cause the publication of any press release or other public
announcement with respect to this Agreement or the transactions contemplated hereby without the prior consent of Purchaser (in the case of the Vendor Parties) or the Vendor Parties (in the case of Purchaser), which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that (i) nothing herein will prohibit either party from issuing or causing publication of any such press release or public announcement to the extent that such party's counsel determines such action to be required by law, or the regulations of any government agency or the stock exchange on which Purchaser Shares is traded, in which case the party making such determination will, if practicable in the circumstances, use reasonable efforts to allow the other party reasonable time to comment on such release or announcement in advance of its issuance; (ii) Opco may disclose this Agreement and the transactions contemplated hereby to third parties in connection with securing consents of such third parties and in connection with any permits, approvals, filings or consents required by law to be obtained; and (iii) Purchaser may disclose this Agreement and the transactions contemplated hereby to third parties in connection with securing consents of third parties and in connection with any permits, approvals, filings or consents required by law to be obtained. To the extent feasible, prior to the Closing, all press releases or other announcements or notices regarding the transactions contemplated by this Agreement shall be made jointly by Purchaser and Opco.
7.4 ACCESS TO INFORMATION; DUE DILIGENCE INVESTIGATION; CONFIDENTIALITY. The Vendor Parties shall afford to the officers, employees, accountants, counsel, financial advisors and other representatives of Purchaser access during the period prior to the Closing Date, to such of the properties, books, contracts, commitments, records, officers and employees as Purchaser may reasonably request for the purpose of conducting a full and complete due diligence investigation (the "DUE DILIGENCE INVESTIGATION") of all aspects of Opco and the Vendor Parties, including, without limitation, financial, legal and accounting and, during such period, the Vendors Parties shall furnish promptly to Purchaser and its representatives all information concerning it and its business, properties and personnel as such other party may request. Purchaser shall hold any such information which is non-public in confidence. Purchaser shall make all reasonable best efforts to minimize disruption to the business of Opco which may result from the requests for data and information hereunder. All requests for access and information shall be co-ordinated through senior executives of the parties to be designated. Any investigation by Purchaser shall not affect the representations and warranties of the Vendor Parties.
7.5 NON-NEGOTIATION. In consideration of the substantial expenditure of time, effort and expense undertaken by Purchaser in connection with its Due Diligence Investigation and the preparation and execution of this Agreement, each of the Vendor Parties and Opco agrees that, after the execution of this Agreement until the earlier of (i) the termination of this Agreement or (ii) the Closing Date, it shall not, directly or indirectly, solicit, encourage, initiate, negotiate or discuss with any third party (including by way of furnishing any information concerning Opco) or permit the consummation of any acquisition proposal relating to or affecting Opco, or any direct or indirect interests in Opco, whether by purchase of assets or stock, purchase of interests, business combination, amalgamation, merger or other transaction, and that it will promptly advise
Purchaser of the terms of any communications it may receive relating to any bid for all or any part of any such interest in Opco. 7.6 COMMERCIALLY REASONABLE BEST EFFORTS. Subject to the terms and conditions of this Agreement, each of Purchaser and the Vendor Parties agree to use its commercially reasonable best efforts between the date hereof and the Closing to secure fulfilment of all of the conditions precedent to the obligations of Purchaser hereunder (in the case of the Vendor Parties) and of the Vendor Parties hereunder (in the case of Purchaser). 7.7 COVENANTS OF PARTIES. From the date of this Agreement until the earlier of the Closing Date or the termination of this Agreement, each of the parties to this Agreement covenants and agrees that it shall take no action which would (i) materially adversely affect the ability of any party to this Agreement to obtain any consents required for the transactions contemplated hereby or (ii) materially adversely affect the ability of any party to perform its covenants and agreements under this Agreement. 7.8 CONTACT WITH CUSTOMERS AND SUPPLIERS. The Purchaser (and all of its agents and affiliates and any employees, directors or officers thereof) shall not contact or communicate with the employees, customers, suppliers and licensors of Opco in connection with the transactions contemplated hereby except with the prior written consent of Opco, which consent shall not be unreasonably withheld but may be conditioned upon an officer of Opco being present. 7.9 LISTING OF PURCHASER SHARES. The Purchaser shall ensure, on a best efforts basis, that its subordinate voting shares continue to be listed on The Toronto Stock Exchange and NASDAQ. 7.10 OTHER ACTIONS. No party shall take any action, except in every case as may be required by applicable law, that would or is intended to result in (i) any of its representations and warranties set forth in this Agreement that are qualified as to materiality being or becoming untrue, (ii) any of such representations and warranties that are not so qualified becoming untrue in any material manner having an Opco Material Adverse Effect or Material Adverse Effect of Purchaser, as the case may be, (iii) any of the conditions set forth in this Agreement not being satisfied or in a violation of any provision of this Agreement, or (iv) adversely affecting the ability of any of them to obtain any of the consents or approvals required from any Governmental Entity as a condition to Closing. |
ARTICLE 8
CONDITIONS TO CLOSING
8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each party to consummate the transactions contemplated hereby at the Closing is subject to the fulfilment to each party's satisfaction on or prior to the Closing Date of each of the following conditions:
(a) SECURITIES MATTERS. The regulatory approval required under Canadian and U.S. securities laws and under the by-laws, regulations or policies of the Canadian and U.S. securities regulatory authorities and stock exchanges and any approval of the Purchaser's shareholders as may be required by any securities regulatory authority.
(b) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other judgment or order issued by any court of competent jurisdiction or other statute, law, rule, legal restraint or prohibition shall be in effect preventing the consummation of the transactions contemplated hereby.
(c) PRIOR TRANSACTIONS. The Prior Corporate Transactions and the Prior Asset Transactions shall have been completed in accordance with the provisions of this Agreement all to the satisfaction of the parties.
(d) AMENDMENT OF THE AGREEMENT. This Agreement shall be amended, after completion of the Prior Corporate Transactions in order to reflect the impact of the Prior Corporate Transactions on the ownership of Opco Shares. The Newcos which will acquire Opco Shares pursuant to the Prior Corporate Transactions shall all be made parties to this Agreement.
8.2 CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The obligation of Purchaser to purchase the Opco Shares at the Closing is subject to the fulfilment to the Purchaser's satisfaction on or prior to the Closing Date of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each representation and warranty of Vendor Parties contained in this Agreement shall be true and correct in all respects, in each case as of the date of this Agreement and as of the Closing Date as though made on the Closing Date, except to the extent such representations and warranties expressly relate to an earlier date, in which case as of such earlier date. Purchaser shall have received a certificate signed on behalf of each of the relevant Vendor Parties of same to such effect.
(b) PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Vendor Parties on or prior to the Closing Date shall have been performed or complied with by the Vendor Parties and the Vendor in all material respects.
(c) OPINION ADDRESSED TO PURCHASER. The Purchaser shall have received a favourable opinion of counsel to the Vendor and each of the Vendor Parties, addressed to the Purchaser dated the Closing Date, as to such matters as Purchaser and its counsel may reasonably request including (i) the incorporation, organisation and existence of the Vendor and Opco, (ii) the authority of each of the Vendor Parties to execute the agreement; (iii) the valid and binding effect of the Agreement on each of the Vendor Parties,
(iv) the authorised and the issued and outstanding capital stock of Opco, (v) the due execution and authorisation of the transfer of the Opco Shares, (vi) the absence of litigation and all other matters as may be reasonably requested by Purchaser.
(d) CONSENTS. All necessary consents set forth in Schedule 3.6 shall have been obtained including prior approval of the Board of Directors of the Purchaser.
(e) RESIGNATIONS. The Purchaser shall have received the resignations, effective as of the Closing Date, of each director and officer of Opco specified by the Purchaser in writing at least five business days prior to the Closing, along with a release of all claims against Opco.
(f) NO MATERIAL ADVERSE EFFECT. No fact or development shall have occurred since the date of this Agreement and be continuing which has had or would be reasonably likely to result in any change, effect, event, occurrence or state of facts (or any development that has had or is reasonably likely to have any change or effect) that, individually or in the aggregate, has had or would reasonably be expected to have an Opco Material Adverse Effect. Purchaser shall have received a certificate signed on behalf of Opco by the President of Opco to such effect.
(g) DELIVERY OF SHARE CERTIFICATES. Vendor shall have executed and delivered to Purchaser the Opco Shares duly executed in blank for transfer.
(h) EMPLOYMENT AGREEMENTS. The Senior Executives shall have entered into the form of employment agreement attached as Schedule 8.2(h) which form of employment agreement shall include non-competition and non-solicitation agreements.
(i) CONTRACTUAL ESCROW. The Vendor and CIBC Mellon Trust Company shall have entered into and delivered to the Purchaser the Escrow Agreement.
(j) LOCK-UP AGREEMENT. The Vendor and CIBC Mellon Trust Company shall have entered into and executed the Lock-Up Agreement.
(k) CERTIFICATES AND DOCUMENTS. Opco shall have delivered at or prior to the Closing to the Purchaser or their counsel:
(i) the articles and by-laws of the Vendors, certified by its President as of the Closing Date;
(ii) resolutions of the Board of Directors and, as necessary, of the shareholders, of the Vendor, authorising and approving all matters in connection with this Agreement and the transactions contemplated herein, certified by the President of Opco as of the Closing Date; and
(iii) such other documents relating to the transactions contemplated in this Agreement as the Purchaser may reasonably request.
(l) FINANCIAL STATEMENTS. The Vendor Parties shall have delivered
the Audited Financial Statements and (i) an unaudited balance
sheet as of the end of the most recent quarter preceding the
Closing, (ii) audited statements of income and cash flows for
each of the three fiscal years preceding the Closing, and
(iii) unaudited statements of income and cash flows for the
interim period between the latest audited balance sheet date
and the date of the balance sheet being provided pursuant to
clause (iv) in each case meeting the applicable requirements
under Canadian securities regulations assuming Opco was a
publicly traded company during such periods. In addition, the
Vendor Parties shall have delivered to the Purchaser a written
discussion of the material variations in the accounting
principles, practices and methods used in preparing each of
the Financial Statements and other financial documents
referred to in this Section 8.2(l) from the principles,
practices and methods generally accepted in Canada and in the
United States and in Regulation S-X. Each material variation
shall be described and reconciled to U.S. GAAP, as required by
the SEC and the Canadian securities authorities.
(m) EMPLOYEES. The Purchaser shall have received satisfactory evidence, acting reasonably, that at least 90% of all Employees currently employed by Opco continue to be employed by Opco on the Closing Date.
(n) ACCOUNTANTS. The Purchaser shall have received confirmation that Ernst & Young, Opco's auditors, are independent certified public accountants qualified to deliver the accountant's report on the SEC Financial Statements as required by the Canadian securities commissions and the SEC. In addition, Opco shall have entered into an agreement on terms satisfactory to the Purchaser with Ernst & Young pursuant to which Ernst & Young shall (A) deliver to the Purchaser any consents with respect to the Purchaser's use of the SEC Financial Statements (and required reconciliations thereof to U.S. GAAP) and the use of Ernst & Young's name in connection with the Purchaser's filings with the Canadian securities commissions and the SEC and (B) deliver customary "comfort letters" with respect to the Financial Statements and required reconciliations, as may be reasonably requested by the Purchaser.
8.3 CONDITIONS TO OBLIGATIONS OF THE VENDOR. The Vendor's obligation to sell the Opco Shares at the Closing is subject to the fulfilment to its satisfaction on or prior to the Closing Date of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each representation and warranty of Purchaser contained in this Agreement shall be true and correct in all respects in each case as of the date of this Agreement and as of the Closing Date as though made on the Closing Date, except to the extent such representations
and warranties expressly relate to an earlier date, in which case as of such earlier date. The Vendor shall have received a certificate signed on behalf of Purchaser by an executive officer of Purchaser to such effect.
(b) PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Purchaser on or prior to the Closing Date shall have been performed or complied with by the Purchaser in all material respects.
(c) PAYMENT OF PURCHASE PRICE. Purchaser shall have delivered to the Vendor certificates representing Cash Consideration and the Purchaser Shares in payment of the Purchase Price to be received by such Vendor for the Opco Shares.
(d) CERTIFICATES AND DOCUMENTS. Purchaser shall have delivered at or prior to the Closing to Vendor resolutions of the Board of Directors of Purchaser, authorising and approving all matters in connection with this Agreement and the transactions contemplated herein, certified by the Secretary of Purchaser as of the Closing Date.
(e) AUTHORISATIONS. All authorisations, approvals or permits, if any, of any Governmental Authority regulatory body or stock exchanges that are required in connection with the lawful issuance and sale of the Purchaser Shares pursuant to this Agreement shall have been duly obtained and shall be effective on and as of the Closing.
(f) LISTING. The Purchaser Shares shall have been conditionally authorised for listing on The Toronto Stock Exchange and on NASDAQ.
(g) OPINION ADDRESSED TO VENDOR. The Vendor and each Guarantor
shall have received a favourable opinion of counsel to the
Purchaser, addressed to the Vendor and the Guarantors dated
the Closing Date, as to such matters as Vendor and the
Guarantors and their counsel may reasonably request including
(i) the incorporation, organization and existence of the
Purchaser; (ii) the authority of the Purchaser to execute the
Agreement; (iii) the valid and binding effect of the Agreement
on the Purchaser; (iv) the due issuance of the Purchaser
Shares as fully paid and non-assessable shares; (v) the
listing of the Purchaser Shares on the Toronto Stock Exchange;
(vi) the SECURITIES ACT (Ontario) exemption under which the
Purchaser Shares are being issued and the hold period
applicable to the Purchaser Shares to the same effect as
Sections 5.10 and 5.11 and all other matters as may be
reasonably requested by the Vendor.
ARTICLE 9
OTHER AGREEMENTS
9.1 CONFIDENTIALITY. From the date hereof and after the Closing, each
Vendor Party shall strictly maintain the confidentiality of all
information, documents and materials relating to the Vendor Parties or
the transactions contemplated by this Agreement, including without
limitation the existence of this Agreement and the terms thereof,
except to the extent disclosure of any such information is required by
law or authorised by Purchaser, or otherwise made publicly available by
Purchaser, or reasonably occurs in connection with disputes over the
terms of this Agreement. In the event that such Vendor Party reasonably
believes after consultation with counsel that it is required by law to
disclose any confidential information described in this Section 9.1,
such Vendor Party will (i) provide Purchaser with prompt notice before
such disclosure in order that Purchaser may attempt to obtain a
protective order or other assurance that confidential treatment will be
accorded to confidential information, and (ii) cooperate with Purchaser
in attempting to obtain such order or assurance. The provisions of this
Section 9.1 shall not apply to any information, documents or materials
which are in the public domain or shall come into the public domain,
other than by reason of default by such Vendor Party of this Agreement
or becomes known in the industry through no wrongful act on the part of
such Vendor Party.
9.2 COOPERATION AFTER THE CLOSING. The Vendor Parties will, at any time, and from time to time, after the Closing Date, execute and deliver such further instruments of conveyance and transfer and take such additional action as may be reasonably necessary to effect, consummate, confirm or evidence the transactions contemplated by this Agreement. Without limiting the other obligations of the Vendor Parties and the Purchaser, as the case may be hereunder, each Vendor Party agrees that, after the Closing, it shall provide reasonable cooperation and assistance to the other, as the case may be, with respect to any matters, disputes, suits or claims by or against any person not a party to this Agreement.
9.3 NON-COMPETITION. The Vendor Parties listed in Schedule 9.3 shall not, for a period of five (5) years from the Closing Date ("NON-COMPETE PERIOD"), within Canada, the United States and the European Union and in any country in which the Purchaser or Opco presently conducts or may conduct the Business in the future, without the prior written consent of the Purchaser, directly or indirectly, in any manner whatsoever, including, without limitation, either individually or in partnership or jointly or in conjunction with any other person, as employee, principal, agent, shareholder or in any other manner whatsoever, carry on or be engaged in or be concerned with or lend money to, guarantee the debts or obligations of, or permit their names to be used or employed by any person or entity engaged or concerned with or interested in the Business.
9.4 SECONDARY OFFERING. Purchaser shall use its best efforts, taking into account the then prevailing market conditions, to proceed with a public offering of its securities pursuant to a prospectus, registration statement or a similar document under the relevant
jurisdiction (the "PUBLIC OFFERING"). Purchaser agrees to give Vendor notice of its intention with respect to the Public Offering no later than ten (10) days prior to the intended date for filing of the preliminary prospectus, offering memorandum or similar document with the securities commission or relevant authority having jurisdiction in the matter. The notice shall provide, subject to the terms hereof, Vendor with the possibility to qualify the Purchaser Shares held by Vendor, so as to permit the resale of such Purchaser Shares pursuant to the terms of the said prospectus or otherwise as the underwriters agree or where the board of directors of the Purchaser in its good faith judgment, acting reasonably, determines that to qualify the Purchaser Shares should not be made or continued.
In the event that the Purchaser enters into an underwriting agreement or other agreement relating to said Public Offering, the Vendor shall permit Vendor to sell up to 2,000,000 Purchaser Shares to the underwriter on the terms and conditions set forth in the said agreement so long as the underwriters agree and subject to the following conditions:
(a) the Public Offering shall be in an amount such that at least 50% of the proceeds of the Public Offering shall be for the Purchaser's use;
(b) the order of priority for the sale of the Purchaser Shares to be sold pursuant to such Public Offering shall be as follows:
(i) first, such number of shares to satisfy other registration rights previously entered into by the Purchaser (other than for Mr. Germain Lamonde);
(ii) second, 1,000,000 Purchaser Shares for Mr. Germain Lamonde; and
(iii) third, the balance, to the extent that such Purchaser Shares may be sold under the Public Offering up to a maximum of 2,000,000 Purchaser Shares (or such lesser number as have been released from the provisions of the Lock-Up Agreement) for the Vendor.
The Vendor shall pay on a pro-rata basis in accordance with the portion of the proceeds of the offering received by it, all selling expenses incurred in connection with any distribution of its Shares, including the fees and expenses of any investment dealer and all transfer taxes applicable to the sale of the Purchaser Shares.
ARTICLE 10
TERMINATION, AMENDMENT AND WAIVER
10.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing (except as limited as to time in paragraph 10.1(b) below):
(a) by the mutual written consent of the Vendor and the Purchaser;
(b) by the Vendor or the Purchaser, if the Closing shall not have occurred prior to the 45th day following the date hereof; PROVIDED, HOWEVER, that the right to terminate this Agreement under this subsection 10.1(b) shall not be available to either party if such party's failure to fulfil any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur prior to such date; or (c) by the Purchaser in the event a condition set forth in Section 8.1 or 8.2 becomes incapable of being fulfilled or by the Vendor in the event a condition set forth in Section 8.1 or 8.3 becomes incapable of being fulfilled. 10.2 EFFECT OF TERMINATION. In the event of the termination of this Agreement as provided in Section 10.1, this Agreement shall forthwith become void and there shall be no liability on the part of any party hereto; PROVIDED, HOWEVER, that nothing herein shall relieve either the Vendor or the Purchaser from liability for any breach of this Agreement or failure to perform hereunder. 10.3 WAIVER. At any time prior to Closing, any party may (a) extend the time for the performance of any of the obligations or other acts of any other party hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid only if set forth in an instrument in writing signed by the party to be bound thereby. |
ARTICLE 11
MISCELLANEOUS
11.1 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Schedules hereto and the Purchaser Disclosure Memorandum contain the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into this Agreement and the Schedules hereto. 11.2 NOTICES. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) five days after having been sent by registered or certified airmail, return receipt requested, postage prepaid, or (d) two business days after deposit with an internationally recognised overnight courier, specifying next day delivery, with written verification of receipt. The address for all notices, requests, consents and other communications hereunder to be delivered or sent to any party shall be to such party's address as set forth on Schedule A. The address for all notices, requests, consents and other communications hereunder to the Vendors' Parties and Purchaser shall be delivered or sent to the following: |
50 THE VENDOR PARTIES: Efos Corporation 2260 Argenta Road Mississauga (Ontario) L5N 6H7 Telephone (905) 812-4300 Facsimile (905) 812-4314 ATTENTION: MR. JOHN KENNEDY, PRESIDENT AND CEO |
THE PURCHASER:
EXFO Electro-Optical Engineering, Inc.
465 Godin Avenue
Vanier (Quebec)
G1T 2M5
Telephone (418) 683-0211 Facsimile (418) 683-9839 ATTENTION: MR. GERMAIN LAMONDE, PRESIDENT Or such other address as may be designated in writing hereafter, in the same manner, by such Person. 11.3 AMENDMENTS; WAIVERS. No provision of this Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by each party to this Agreement, or, in the case of a waiver, by the party against whom enforcement of any such waiver is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of either party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. 11.4 HEADINGS. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof. 11.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. Neither the Purchaser nor the Vendor Parties may assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchaser or the Vendor, as the case may be. 11.6 NO THIRD-PARTY BENEFICIARIES. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns, and is not for the benefit of, nor may any provision hereof be enforced by, any other Person. 11.7 GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the laws of the Province of Ontario without regard to the principles of conflicts of law thereof and the federal laws of Canada applicable therein. |
51 11.8 CURRENCY. Unless otherwise stated, all amounts set forth herein are in the legal currency of Canada. 11.9 EXECUTION. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to the other parties, it being understood that all parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) the same with the same force and effect as if such facsimile signature page were an original thereof. 11.10 SEVERABILITY. In case any one or more of the provisions of this Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Agreement shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision which shall be a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Agreement. 11.11 INTERPRETATION. The Section headings in this Agreement are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provision hereof. The language used in this Agreement will be deemed to be the language chosen by the parties hereto to express their mutual intent, and no rule of strict construction will be applied against any party hereto. Any references to the "KNOWLEDGE" of Opco or the "OPCO'S KNOWLEDGE" or "VENDOR PARTIES' KNOWLEDGE" or to the "KNOWLEDGE" of Vendor Parties or any similar formulation shall mean the actual knowledge of the officers of Opco. Any references to the "KNOWLEDGE" of the Purchaser or the "PURCHASER'S KNOWLEDGE" or any similar formulation shall mean the actual knowledge of the officers of Purchaser. This Agreement and the rights and obligations thereunder shall enure to be and binding on the heirs, administrators or assigns of the Shareholders. 11.12 REMEDIES. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Purchaser and the Vendor will be entitled to specific performance of the obligations of each under this Agreement. Each of the Vendor Parties and the Purchaser agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of its obligations described in the foregoing sentence and hereby agrees to waive, in any action for specific performance of any such obligation, the defence that a remedy at law would be adequate. 11.13 LANGUAGE. The Parties have requested that this Agreement and all contracts, documents, or notices relating thereto be drafted in the English language. Les parties ont exige que cette convention soit redigee en langue anglaise. 11.14 FEES AND DISBURSEMENTS. Unless otherwise expressly provided for in this Agreement, each party to this Agreement shall assume its own expenses and costs relating to this |
52 transaction and to the execution of what is contained herein and, without limiting the generality of the foregoing, the fees and disbursements of its own legal counsel, accountants, financiers and consultants. It is specifically agreed that Opco shall not assume any of the expenses or costs of the Vendor or the Vendor Parties relating to this transaction. |
IN WITNESS WHEREOF, the parties hereto have caused this Share Purchase Agreement to be duly executed by their respective authorised signatories as of the date first indicated above.
EFOS CORPORATION EXFO ELECTRO-OPTICAL
ENGINEERING INC.
By: /s/ John Kennedy By: /s/ Germain Lamonde ----------------------------- ----------------------------- Name: John Kennedy Name: Germain Lamonde Title: President Title: President and Chief Executive Officer By: /s/ Glenn Harvey By: /s/ John Kennedy ----------------------------- ----------------------------- Glenn Harvey John Kennedy |
SCHEDULE 1.1(FFF)
PERMITTED ENCUMBRANCES
TD Bank General Security Agreement
- end -
SCHEDULE 1.1(III)
The Vendor will carry out the following steps prior to the Closing:
1. The Vendor will cause Opco to amend its articles to change its 49 issued and outstanding common shares into 3,700,000 common shares.
2. The Vendor will incorporate, as wholly owned, single-purpose subsidiaries, [three] new corporations under the BUSINESS CORPORATIONS ACT (Ontario) ("Newcos"). The tax and fiscal year-end of each Newco shall be later than August 31st.
3. The Vendor will transfer to the Newcos 2,000,000 of the Opco Shares in exchange for common shares of the Newcos under section 85 of the TAX ACT. Other than those Opco Shares, the Newcos will not have any assets or liabilities.
4. The number of Opco Shares to be held by each Newco will be as follows: Newco 1 1,000,000 Newco 2 500,000 Newco 3 500,000 |
5. At the Closing, the Vendor will cause the Newcos to sell their Opco Shares to the Purchaser with the Purchase Price to be allocated as follows:
Purchaser Shares Newco 1 1,000,000 Newco 2 500,000 Newco 3 500,000 - end - |
SCHEDULE 1.1(VV)
ITF Technologies Optiques Inc.
Newport Corporation
JDS Uniphase Corporation
Avanex Corporation
Corning Incorporated
Lucent Technologies Inc.
Oplink Communications, Inc.
Zenastra Photonics Inc.
- end -
SCHEDULE 3.4
NAME AND ADDRESS OPCO SHARES HELD OPCO SHARES TO BE RECEIVED -------------------------------------------------------------------------------- Efos Corp. 1,700,000 1,700,000 Corp. sub 1 1,000,000 1,000,000 Corp. sub 2 500,000 500,000 Corp. sub 3 500,000 500,000 --------- --------- 3,700,000 3,700,000 |
See the attached articles and by-laws of Efos Inc.
- end -
SCHEDULE 3.6
Toronto Dominion Bank
20 Milverton Drive
Mississauga, Ontario
Approval by shareholders of Vendor by way of special resolution.
- end -
SCHEDULE 3.8
Attached are audited financial statements for the years-ended 1998, 1999 and 2000.
US GAAP reconciliation to be available on closing as per discussions.
Attached are the January 31st, 2001 first Quarter un-audited financial statements.
- end -
SCHEDULE 3.9
None
- end -
SCHEDULE 3.12(A)
SCHEDULE 3.12(B)
None
- end -
SCHEDULE 3.13
Patent summary lists attached as well as assignments and licence of dental patents to DENTSPLY International Inc.
- end -
SCHEDULE 3.15
SCHEDULE 3.16
As requested per section 3.16:
(a) None
(b) None
(c) TD Bank Banking Agreement; also see Schedule 3.6.
(d) Great West Life Lease
(e) None
(f) DENTSPLY IP licenses and non-comp in dentistry
(g) IRAPS [Dr. Manfred Hubert]
(h) None
- end -
SCHEDULE 3.17
None
- end -
SCHEDULE 3.18
As requested see attached:
Chubb Insurance Co. of Canada
Commercial Package - Policy No. 3532-37-22
Umbrella Liability - Policy No. 79732947
Automobile Policy - Policy No. C03375874
- end -
SCHEDULE 3.19
See attached:
Position Listing
- end -
SCHEDULE 3.20
See attached:
Group Benefit Plan - EFOS Inc.
- end -
SCHEDULE 3.22
None
- end -
SCHEDULE 3.25
1/ Great West Life regarding property lease.
2/ Toronto Dominion Bank re: Operating Agreement and Guarantees [Note: as
per prior discussions it is EXFO's intention to repay the operating
loan]
- end -
SCHEDULE 3.26
Toronto Dominion Bank
20 Milverton Drive
Mississauga, Ontario
Canadian funds Acct: 1275 0646 0457500 US funds Acct: 1275 0646 7304160 - end - |
SCHEDULE 3.27
None
- end -
SCHEDULE 3.28
Accounts Receivable list to be provided at time of closing as per clause 3.28.
- end -
SCHEDULE 3.35
None
- end -
SCHEDULE 3.38
See attached table.
- end -
SCHEDULE 4.1
See the attached Articles and by-laws of EFOS Corporation.
- end -
SCHEDULE 8.2(H)
SCHEDULE 8.2(I)
SCHEDULE 8.2(J)
SCHEDULE 9.3
1/ John Kennedy
2/ Glenn Harvey
2/ EFOS Corporation and Newcos
- end -
EXHIBIT 4.2
AMENDMENT NUMBER ONE
DATED AS OF MARCH 15, 2001
TO
SHARE PURCHASE AGREEMENT
DATED AS OF MARCH 5, 2001
BY AND AMONG
EXFO ELECTRO-OPTICAL ENGINEERING INC.,
EFOS CORPORATION
JOHN KENNEDY
AND
GLENN HARVEY
AMENDMENT NUMBER ONE TO
SHARE PURCHASE AGREEMENT
This AMENDMENT NUMBER ONE (this "AMENDMENT") dated as of March 15, 2001 amends that certain SHARE PURCHASE AGREEMENT (the "AGREEMENT") dated as of March 5, 2001 among EXFO Electro-Optical Engineering Inc., incorporated pursuant to the CANADA BUSINESS CORPORATIONS ACT (the "PURCHASER"), John Kennedy, Glenn Harvey and EFOS CORPORATION, a corporation incorporated under the laws of the Province of Ontario (the "VENDOR"). Defined terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement.
RECITALS
WHEREAS the Vendor, the Purchaser, John Kennedy and Glenn Harvey wish to amend the Agreement in order to re-allocate the Cash Consideration and the Share Consideration in order to take into account the Prior Asset Transactions and the Prior Corporate Transactions.
NOW, THEREFORE, in consideration of the representations, warranties, covenants and agreements set forth in the Agreement and in this Amendment, the parties hereto hereby agree as follows:
1. The identification of the parties to the Agreement is hereby amended to add the following parties to the agreement:
"1466716 Ontario Limited, 1466717 Ontario Limited and 1466718 Ontario Limited."
2. Section 1.1(eeee) is hereby amended in its entirety to read as follows:
"(eeee) "VENDORS" means collectively EFOS Corporation, 1466716 Ontario Limited, 1466717 Ontario Limited and 1466718 Ontario Limited and "VENDOR" means any one of them."
3. Section 1.1 (gggg) of the Agreement is hereby amended in is entirety to read as follows:
"(gggg) "Vendor PARTIES" means, collectively, the Vendor, the Guarantors and each of 1466716 Ontario Limited, 1466717 Ontario Limited and 1466718 Ontario Limited."
4. Unless the context suggests otherwise, the reference to "VENDOR" wherever it appears in the Agreement shall be modified to read as "VENDORS".
5. Section 2.1 of the Agreement is amended in its entirety and shall read as follows:
"2.1 Purchase AND SALE. Subject to the terms and conditions set forth in this Agreement, the Vendors agree to sell to Purchaser all of the outstanding shares of Opco. The total purchase price of the Opco Shares
shall be an amount equal to 3,700,000 subordinate voting shares of the Purchaser as set out below (collectively the "PURCHASE PRICE")."
6. Section 2.2 of the Agreement is amended in its entirety and shall read as follows:
"2.2 PAYMENT OF PURCHASE PRICE. The Purchase Price shall be payable at Closing by way of issue by Purchaser to the Vendors of 3,700,000 subordinate voting shares (the "SHARE CONSIDERATION") of Purchaser (the "PURCHASER SHARES") allocated as follows: EFOS Corporation: 1,700,000 Purchaser Shares; 1466716 Ontario Limited: 1,000,000 Purchaser Shares; 1466717 Ontario Limited: 500,000 Purchaser Shares and 1466718 Ontario Limited: 500,000 Purchaser Shares. If, prior to the Closing, there is any stock dividend, stock split or other change in the character or amount of the outstanding shares of Purchaser, then in such event any and all new, substituted or additional securities to which the Vendors would have been entitled by reason of their ownership of the Opco Shares had the Closing occurred prior to such event shall be considered Opco Shares for purposes of this Agreement and the consideration to be received by the Vendors shall be amended accordingly.
The Share Consideration shall be delivered as follows: (i) 2,000,000 Purchaser Shares shall be delivered at Closing to the Vendors and (ii) 1,700,000 Purchaser Shares shall be subject to the terms of a Lock-Up Agreement (as defined herein), including an amount of 283,325 Purchaser Shares to be placed into escrow in accordance with terms of the Escrow Agreement. The Lock-Up Agreement shall provide for, among others, covenants by the Vendors not to sell, transfer or assign the Purchaser Shares during the period such Purchaser Shares are subject to the Lock-Up Agreement. The Lock-Up Agreement shall also provide for the release of the Purchaser Shares in equal tranches every six months during the three-year term of the Lock-Up Agreement."
7. Section 2.5 of the Agreement is amended in its entirety to read as follows:
"2.5 ROLLOVER. After the Closing, the Purchaser and the Vendors shall, within the prescribed time periods, separately execute and deliver joint elections in the prescribed forms to have the provisions of Section 85 of the INCOME TAX ACT (Canada) and any other relevant provisions thereof and the provisions of Section 518 of the TAXATION ACT (Quebec) and any other relevant provisions thereof apply to the sale and transfer of all the Opco Shares to the Purchaser.
For the purposes of such elections:
(a) the parties shall elect each of the Vendors' adjusted cost base of the Opco Shares for tax purposes as the Vendors' proceeds of disposition and the Purchaser's cost of acquisition of the Opco Shares for each of the
Vendors that have not sold by February 22, 2002 all the Purchaser Shares received as consideration for the Opco Shares purchased pursuant to this Agreement;
(b) for each of the Vendors that have sold prior to February 22, 2002 all the Purchaser Shares received as consideration for the Opco Shares purchased pursuant to this Agreement, the parties shall elect the fair market value of the Opco Shares at the Closing Date as each Vendor's proceeds of disposition and the Purchaser's cost of acquisition of the Opco Shares."
8. Section 3.4 of the Agreement is hereby amended by deleting the first three sentences of said section 3.4 and replacing same with the following:
"The Vendors are registered and beneficial owners of 3,700,000 common shares of Opco, representing 100% of the issued and outstanding share capital of Opco. The outstanding shares of Opco are duly and validly authorized and issued as fully paid and non-assessable and are owned of record by Vendors as set forth on Schedule 3.4 and represent 100% of the issued and outstanding share capital of Opco."
9. Each of 1466716 Ontario Limited, 1466717 Ontario Limited and 1466718 Ontario Limited agree to be bound by each representation, warranty and covenant made by EFOS Corporation, Glenn Harvey and John Kennedy in the Agreement as if they each had been an original signatory to the Agreement.
10. This Amendment and the Agreement shall be considered one and the same agreement.
11. The parties to this Amendment agree to take all actions, including the execution of additional documents, as may be reasonably requested by the other parties hereto to effect the intent or purposes of this Amendment.
12. This Amendment shall be governed in all respects by the provisions of the Agreement, which shall remain in full force and effect, as modified by this Amendment.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized signatories as of the date first indicated above.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde -------------------------------------------- Name: Germain Lamonde Title: President and Chief Executive Officer /s/ John Kennedy -------------------------------------------- John Kennedy /s/ Glenn Harvey -------------------------------------------- Glenn Harvey |
EFOS CORPORATION
By: /s/ John Kennedy -------------------------------------------- Name: John Kennedy Title: President |
1466716 ONTARIO LIMITED
By: /s/ John Kennedy -------------------------------------------- Name: John Kennedy Title: Director |
1466717 ONTARIO LIMITED
By: /s/ John Kennedy -------------------------------------------- Name: John Kennedy Title: Director |
1466718 ONTARIO LIMITED
By: /s/ John Kennedy -------------------------------------------- Name: John Kennedy Title: Director |
EXHIBIT 4.3
INTELLECTUAL PROPERTY ASSIGNMENT AND SALE AGREEMENT
BETWEEN : EFOS INC., a corporation duly incorporated under the laws of Ontario, having its head office at 2260 Argentia Road, Mississauga, Ontario, L5N 6H7; (hereinafter referred to as "Opco") AND : EXFO ELECTRO-OPTICAL ENGINEERING INC., a corporation duly incorporated under the laws of Canada, having its head office at 465 Godin Avenue, Vanier, Quebec, G1T 2M5; (hereinafter referred to as "EXFO") |
AND: JOHN KENNEDY, resident and domiciled at -----------------------------;
AND GLENN HARVEY, resident and domiciled at -----------------------------;
AND: EFOS CORPORATION, a corporation duly incorporated under the laws of Ontario, having its head office at 2260 Argentia Road, Mississauga, Ontario, L5N 6H7; (hereinafter referred to as the "Shareholder") |
(Opco, EXFO, the Shareholder, John Kennedy and Glenn Harvey being hereinafter sometimes collectively referred to as the "Parties" and individually as a "Party")
(the Shareholder, John Kennedy and Glenn Harvey being sometimes hereinafter collectively referred to
as the "Guarantors" and individually as a
"Guarantor")
PREAMBLE
WHEREAS Opco owns all rights in a patent registered on May 28, 1996 with the United States Patent Office as registration number 5521392, serial number 08-235621, entitled "Light Cure System With Closed Loop Control and Workpiece Recording" (the "Patent");
WHEREAS Opco wishes to assign all rights and title in and to the Patent to EXFO;
WHEREAS the Parties wish to enter into this Agreement on the terms and conditions more particularly provided herein.
NOW, THEREFORE, in consideration of the above premises and agreements herein contained, the preamble forming an integral part hereof, the Parties agree as follows:
1. DEFINITIONS
In this Agreement, except where the context or subject matter is inconsistent therewith, the following terms shall have the following meanings:
1.1 "Affiliates" means, with respect to a Party to this Agreement, any person which, directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with such Party. The term "control" means possession, direct or indirect, of the powers to direct or cause the direction of the management or policies of a person, whether through ownership of equity participation, voting securities, or beneficial interests, by contract, by agreement or otherwise.
1.2 "Agreement" shall mean this document, the annexed schedules, which are incorporated herein, together with any future written and executed amendments agreed to by the Parties.
1.3 "Assigned Rights" shall mean all rights and title in the Patent and all Intellectual Property Rights in the technology described in the Patent, in all countries.
1.4 "Improvements" means innovations, inventions, ideas, designs, concepts, discoveries, techniques, works, processes, formulas, new derived material and modifications related to the Patent, whether or not patentable, copyrightable, or otherwise protectable as trade secrets or under any other intellectual property, conceived, brought to practice or developed by either Party after the date of this Agreement.
1.5 "Intellectual Property Rights" includes all patents, trade marks, service marks, registered designs, integrated circuits topographies, including applications for any of the foregoing, and includes all copyrights, design rights, know-how, confidential information, trade secrets and any other similar rights in Canada and in any other countries.
1.6 "Patent" shall mean the patent described in recitals hereof and its counterpart applications in any country, now or thereafter owned by Opco or to which Opco otherwise acquires rights, including any patent application, divisional, continuation, provisional, reissue, re-examination, extension certificate, registration, renewal, confirmation and national phase entry application related to such Patent.
2. ASSIGNMENT OF PATENT
2.1 Subject to the terms and conditions contained in this Agreement, Opco hereby irrevocably assigns to EXFO all rights and title to the Patent as well as all Intellectual Property Rights in the technology described in the Patent, in all countries.
2.2 The Parties hereby recognise and agree that any and all Intellectual Property Rights in any Improvements shall be held by EXFO.
2.3 The Parties hereby recognise and agree that no Intellectual Property Rights are assigned, licensed or otherwise granted under this Agreement, save and except as explicitly stated in this Section 2.
3. COMPENSATION
3.1 In consideration of the Assigned Rights, EXFO agrees to pay Opco the sum of twenty five million dollars in United States Currency (US$25,000,000) (the "Purchase Price") payable upon the execution of this Agreement by all of the Parties hereto, plus all applicable taxes.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Guarantors represent and warrant on a joint and several basis to EXFO that:
4.1.1 the Patent does not, to the best knowledge of the Guarantors, infringe upon any patent, or any trademark, copyright, trade secret or other Intellectual Property Rights or proprietary right of any third party, and that there is currently no actual or threatened suit against Opco by any third party |
-4- based on an alleged violation of such right, and the Guarantors do not know of any basis for any such action; 4.1.2 there are no outstanding assignments, grants, licenses, liens, encumbrances, obligations or agreements (whether written, oral or implied) regarding the Patent other than the license agreement entered into between Opco and Dentsply International Inc. as of July 3, 1997; 4.1.3 Opco has all rights, power and authority required in order to grant the Assigned Rights free and clear of all encumbrances or legal restrictions, in accordance with this Agreement; 4.1.4 Opco has good and marketable title to the Patent and is the sole owner of the Patent; 4.1.5 all registrations in respect of the Intellectual Property Rights in the technology described in the Patent (the "Registrations") are in good standing and Opco has paid all required fees to date in respect of any such Registrations in accordance with the applicable time frames; 4.1.6 to the Guarantor's knowledge, there are no facts or circumstances that could affect or result in the cancellation of any of the Registrations; 4.1.7 notwithstanding any investigation conducted prior to the execution of this Agreement and notwithstanding implied knowledge or notice of any fact or circumstance which any Party may have as a result of such investigation or otherwise, the parties hereto shall be entitled to rely upon the representations and warranties set forth herein and shall survive the execution of this Agreement in accordance with and subject to Section 4.2 hereof; and 4.1.8 there is no requirement for Opco to obtain any other authorisation, consent or approval from any third party as a condition to the enforceability of any provision of this Agreement or the lawful conclusion of the transactions contemplated by this Agreement. |
4.2 The representations and warranties of the Guarantors shall terminate on the date which is 180 days after the date EXFO has publicly released its audited financial statements for the year ended August 31, 2003, except to the extent that, during such period EXFO shall have given notice to the Guarantors, to the extent feasible, of any claim, demand, action or other proceedings ("Claim") made or notified by any third party against EXFO and arising out of the breach of any obligation or any representation and warranty under this Agreement, in
which
case such representation and warranty with respect to such Claim shall continue in full force and effect until the final determination of such Claim.
4.3 The Guarantors, on a joint and several basis, shall defend, indemnify and hold EXFO harmless against all Claims incurred or suffered by EXFO arising directly or indirectly out of (a) the breach of any representation or warranty contained or contemplated by this Agreement; and (b) the breach or non-fulfilment of any agreement, covenant or obligation of Opco or the Guarantors contained in this Agreement or in any other agreement or document required to be entered into by any of the Guarantors or Opco pursuant hereto, to the extent not waived in writing by EXFO.
4.4 No claims with respect to breaches or failure of representations and warranties may be made against the Guarantors hereunder unless and until the aggregate amount of all claims which may be made pursuant to this Agreement exceed $100,000, in which event the Guarantors shall become liable for the full amount of all claims on a dollar for dollar basis, up to a maximum amount equal to the Purchase Price.
4.5 The provisions of Sections 4.2 through 4.4 shall constitute the sole remedy of EXFO (in contract, torts of otherwise) for or in respect of the transactions contemplated by this Agreement.
5. TERM
5.1 This Agreement shall take effect upon the execution hereof by the Parties hereto.
6. NOTICE
6.1 Any notice provided for or permitted in this Agreement shall be in writing and will be deemed to have been given seven (7) days after having been mailed, postage pre-paid, by certified or registered mail or by recognised overnight delivery services, except in the case of a postal or other strike affecting the service used whereupon notice will be deemed to have been given seven (7) days after normal service resumes.
6.2 Where personal service is made, any notice provided for or permitted in this Agreement will be deemed to have been given when received by the intended recipient. The intended recipient must be an individual whose personal name appears on the address set out in the notice.
6.3 Addressing and delivery is to be made as follows:
6.3.1 If to Opco and/or the Guarantors:
2260 Argentia Road Mississauga, Ontario L5N 6H7 Facsimile: (905) 812-4300 ATTENTION: MR. GLENN T. HARVEY 6.3.2 If to EXFO: EXFO ELECTRO-OPTICAL ENGINEERING INC. 465 Godin Avenue Vanier, Quebec G1T 2M5 Facsimile: (418) 683-9839 ATTENTION: MR. GERMAIN LAMONDE, PRESIDENT |
as the case may be. The Parties may communicate other addresses where notice must be sent from time to time. Such communication shall be in writing and shall have the effect of replacing the address under this Section.
7. LIMITATION OF LIABILITY
7.1 Except for liability under the indemnity set forth in Section 4.3, in no event shall any Party be responsible for any indirect damages including, but not limited to, damages resulting from lost profits, lost business revenue, lost opportunity or third party damages. These limitations on any Party's liability shall survive the termination of this Agreement irrespective of the manner or method in which it is terminated.
8. LEGAL RELATIONSHIP
8.1 In giving effect to this Agreement, no Party shall be or be deemed to be an agent or employee of any other for any purpose. Nothing in this Agreement shall constitute a partnership or a joint venture between or among any of the Parties. No Party shall have the right to enter into contracts or pledge the credit of or incur expenses or liabilities on behalf of any Party.
9. CONFIDENTIALITY
9.1 Each Party shall use reasonable efforts, no less than the protection given its own confidential information, to maintain in confidence all information of the any other Party disclosed by any other Party (each an "Owner") and identified as, or
acknowledged to be, confidential at the time of the disclosure as well as the terms and conditions hereof (collectively, the "Confidential Information"), and shall not use, disclose or grant the use of the Confidential Information except on a need-to-know basis to those directors, officers, Affiliates, employees, licensees, sublicensees, permitted assignees and agents, consultants, or representatives, to the extent such disclosure is reasonably necessary in connection with such Party's activities as expressly authorized by the Agreement. Each Party shall notify the other Parties promptly upon discovery of any unauthorized use or disclosure of any Party's Confidential Information.
9.2 The confidentiality obligations contained in Section 9.1 above
shall not apply to the extent that (a) any receiving Party
(the "Recipient") is required (i) to disclose information by
law, order or regulation of a governmental agency or a court
of competent jurisdiction, or (ii) to disclose information to
any governmental agency for purposes of obtaining approval to
test or market a product or service, provided in either case
that the Recipient shall provide written notice thereof to the
Owner and reasonable opportunity to object to any such
disclosure or to request confidential treatment thereof; or
(b) the Recipient can demonstrate that (i) the disclosed
information was public knowledge at the time of such
disclosure to the Recipient, or thereafter became public
knowledge, other than as a result of actions of the Recipient
in violation hereof; (ii) the disclosed information was
rightfully known by or in the possession of the Recipient (as
shown by its written records) prior to the date of disclosure
to the Recipient by the Owner hereunder; or (iii) the
disclosed information was disclosed to the Recipient on an
unrestricted basis from a source unrelated to any Party to the
Agreement and not under a duty of confidentiality to the
Owner.
10. SALE OF SHARES
10.1 This Agreement and the assignment of the Patent hereunder are executed and delivered in contemplation that, EXFO and John Kennedy, Glenn Harvey, the Shareholder, 1466716 Ontario Limited, 1466717 Ontario Limited and 1466718 Ontario Limited will complete the transactions contemplated by the Share Purchase Agreement dated as of March 5, 2001, with respect to the purchase all of the issued and outstanding shares of Opco under specific conditions. Completion of the transactions contemplated by the Share Purchase Agreement and any amendments thereto is a condition subsequent to the completion of the transaction contemplated in this present Agreement.
11. FURTHER ASSURANCES
11.1 Each Party agrees that upon the written request of any other Party, it will do all such acts and execute all such further documents, conveyances, deeds,
assignments, registrations, transfers and the like, including the execution of any licence agreements between Opco and EXFO and will cause the doing of all such acts and will cause the execution of all such further documents as are within its power to cause the doing or execution of, as any other Party hereto may from time to time reasonably request be done and/or executed as may be necessary or desirable to give effect to this Agreement and the obligations hereunder.
12. REMEDIES
12.1 Opco acknowledges that any violation of the terms of this Agreement would result in irreparable harm to EXFO which could not be adequately compensated by monetary award alone. In the event of any violation by Opco of the terms of this Agreement, including, without limitation, of any confidentiality provisions, and in addition to all other remedies available at law and at equity, EXFO shall be entitled as a matter of right to apply to a court of competent equitable jurisdiction for relief, waiver, restraining order, injunction, decree or other remedy as may be appropriate to ensure compliance of Opco with the terms of this Agreement.
13. MISCELLANEOUS PROVISIONS
13.1 This Agreement shall be governed by the laws of the Province of Ontario (without regard to the principles of conflict of law thereof) and the laws of Canada applicable therein. The Parties agree to be governed by the jurisdiction of the courts of the Province of Ontario in the event that any proceeding is brought under the terms of this Agreement.
13.2 In case of ambiguity, inconsistency or incompatibility between any provisions contained in this Agreement, the provision which is more specific shall prevail over the provision which is more general to the extent of any such ambiguity, inconsistency, incompatibility, as the case may be.
13.3 Time is of the essence with respect to each provision of this Agreement.
13.4 The titles of the articles and paragraphs of this Agreement are inserted solely for convenience, are not a part of this Agreement, and do not in any way limit or amplify the terms of this Agreement.
13.5 This Agreement constitutes the entire agreement between the Parties and supersedes all prior agreements, understandings, negotiations and discussions between and/or among the Parties, whether oral or written pertaining to the subject matter hereof. No supplement, modification or termination of this Agreement shall be binding, unless executed in writing by the Parties.
13.6 No provisions of this Agreement shall be deemed waived and no breach excused, unless such waiver or consent excusing the breach is in writing and signed by the Party to be charged with such waiver or consent. A waiver by a Party of any provision of this Agreement shall not be construed as a waiver of a further breach of the same covenant or condition. 13.7 This Agreement shall enure to the benefit of and be binding upon the Parties and their respective successors (including any successor by reason of amalgamation or statutory arrangement of any Party) and permitted assigns. 13.8 Except as expressly provided otherwise in this Agreement, dates and times by which any Party is required to perform any obligation under this Agreement shall be postponed automatically to the extent, and for the period of time, that that Party is prevented from doing so by circumstances beyond its reasonable control. Such circumstances shall include acts of nature, strikes, lockouts, riots, acts of war, epidemics, government regulations imposed after the fact, fire, communications line failures, power failures, earthquakes or other disasters. The Party prevented from rendering performance must notify all other Parties immediately and in detail of the commencement and nature of such circumstance and the probable consequences of it. Each Party whose performance is delayed must use reasonable efforts to perform its obligations in a timely manner, must employ all resources reasonably required in the circumstances and must obtain supplies or services from other sources if reasonably available. 13.9 Unless otherwise stipulated herein, all references to money under this Agreement shall be in Canadian currency. 13.10 Should any Section or term contained in this Agreement be declared invalid by a court of law, it shall be severed from this Agreement without affecting any other terms which will continue to remain in full force. 13.11 This Agreement has been drawn up in the English language at specific request of the Parties hereto. Cette convention a ete redigee en langue anglaise a la demande expresse des Parties aux presentes. |
IN WITNESS THEREOF, the Parties have executed this Agreement as of the date last written below.
EFOS INC.
Per: /s/ John Kennedy --------------------------------------- Title: President Date: March 14, 2001 |
EXFO ELECTO-OPTICAL ENGINEERING INC.
Per: /s/ Germain Lamonde --------------------------------------- Title: President and Chief Executive Officer Date: March 14, 2001 |
EFOS CORPORATION
Per: /s/ John Kennedy --------------------------------------- Title: President Date: March 14, 2001 |
/s/ Michael Barrett /s/ John Kennedy ----------------------------- ----------------------------- Witness: Michael Barrett John Kennedy /s/ Michael Barrett /s/ Glenn Harvey ----------------------------- ----------------------------- Witness: Michael Barrett Glenn Harvey |
EXHIBIT 5.1
July 13, 2001
EXFO ELECTRO-OPTICAL ENGINEERING INC./
EXFO INGENIERIE ELECTRO-OPTIQUE INC.
465 Godin Avenue
Vanier (Quebec) Canada
G1M 3G7
Ladies and Gentlemen:
We have acted as counsel for the Corporation in connection with the preparation and filing of a registration statement on Form F-3 dated on July 13, 2001 ("Registration Statement") under the SECURITIES ACT of 1933, as amended ("SECURITIES Act"), which the Corporation is filing with the Securities and Exchange Commission with respect to 6,488,816 Subordinate Voting Shares issued by the Corporation to Robert G. Klimasewski, William G. May, Jr., David J. Farrell and William S. Gornall on December 20, 2000 (the "Shares").
We have examined the Registration Statement and such documents and records of the Corporation and other documents as we have deemed necessary for the purpose of this opinion. We have assumed, with your permission and without independent investigation, (i) the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as photostatic or facsimile copies, and the authenticity of the originals of such copies, (ii) the accuracy of the factual representations made to us by officers and other representatives of the Corporation, whether evidenced by certificates or otherwise, (iii) the identity and capacity of all individuals acting or purporting to act as public officials, and (iv) that all actions contemplated by the Registration Statement have been and will be carried out only in the manner described therein.
Based upon the foregoing, it is our opinion that, pursuant to the CANADA BUSINESS CORPORATIONS ACT, the Shares constitute Subordinate Voting Shares, without nominal value, of the share capital of the Corporation validly issued and outstanding as fully paid and non assessable.
In rendering this opinion we express no opinion as to the laws of any jurisdiction other than the laws of the Province of Quebec and the federal laws of Canada applicable therein. This opinion is provided exclusively for your benefit and may not be relied on by any other person without our express written consent.
We hereby consent to the filing or this opinion as an exhibit to the Registration Statement and to the reference to our name under the caption "Legal Matter" in the prospectus made part of the Registration Statement. In giving such consent, we do not admit that we are "Experts" under the SECURITIES ACT.
Very truly yours,
/s/ Fasken Martineau DuMoulin LLP FASKEN MARTINEAU DUMOULIN LLP |
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in this Registration Statement on Form F-3 of our report dated September 20, 2000 relating to the financial statements, which appears in the 2000 Annual Report to Shareholders, which is incorporated by reference in EXFO Electro-Optical Engineering Inc.'s Annual Report on Form 20-F for the year ended August 31, 2000. We also consent to the reference to us under the headings "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP QUEBEC, QUEBEC, CANADA JULY 13, 2001 |
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP and other members of the worldwide PricewaterhouseCoopers organization.
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Burleigh Instruments, Inc.:
We consent to the inclusion of our report dated April 13, 2001, with respect to the combined consolidated balance sheets of Burleigh Instruments, Inc. and subsidiaries as of December 19, 2000 and December 31, 1999 and 1998, and the related combined consolidated statements of income, stockholders' equity, and cash flows for the period from January 1, 2000 to December 19, 2000 and for the years ended December 31, 1999 and 1998, which report appears herein and to the reference to our firm under the heading "Experts".
/s/ KPMG LLP Rochester, New York July 2, 2001 |
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated November 29, 2000 (except as to note 10 which is as of May 7, 2001), with respect to the financial statements of EFOS Inc. included in the Registration Statement (Form F-3) and related Prospectus of EXFO Electro-Optical Engineering Inc. dated July 13, 2001 for the registration of 6,488,816 shares of its Subordinate Voting Shares.
/s/ Ernst & Young LLP Chartered Accountants Toronto, Canada July 13, 2001 |