SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934; or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2001
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period ________ to ________
Commission File No. 0-30895
EXFO ELECTRO-OPTICAL ENGINEERING INC. /
EXFO INGENIERIE ELECTRO-OPTIQUE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CANADA
(JURISDICTION OF INCORPORATION OR ORGANIZATION)
465 GODIN AVENUE
VANIER, QUEBEC G1M 3G7, CANADA
(418) 683-0211
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Subordinate Voting Shares, no par value
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
As of December 31, 2001, the registrant had 23,525,810 Subordinate Voting Shares
outstanding.
Indicate by check mark whether EXFO (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that EXFO was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item EXFO has elected to follow:
Item 17 [_] Item 18 [X]
TABLE OF CONTENTS
Page
PART I. ...............................................................1
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Item 1. Identity of Directors, Senior Management and Advisors..........1
Item 2. Offer Statistics and Expected Timetable........................1
Item 3. Key Information................................................1
Item 4. Information on the Company....................................16
Item 5. Operating and Financial Review and Prospects..................38
Item 6. Directors, Senior Management and Employees....................52
Item 7. Major Shareholders and Related Party Transactions.............68
Item 8. Financial Information.........................................70
Item 9. The Offer and Listing.........................................71
Item 10. Additional Information........................................71
Item 11. Qualitative and Quantitative Disclosures about Risk...........81
Item 12. Description of Securities Other than Equity Securities........82
PART II. ..............................................................82
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Item 13. Defaults, Dividends Arrearages and Delinquencies..............82
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds...................................82
Item 15. [Reserved]....................................................82
Item 16. [Reserved]....................................................82
PART III. ..............................................................82
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Item 17. Financial Statements..........................................82
Item 18. Financial Statements..........................................82
Item 19. Exhibits......................................................83
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
Not Applicable
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not Applicable
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The consolidated balance sheet data as at August 31, 1997 is derived from our unaudited consolidated financial statements not included in this annual report. The consolidated statements of earnings data for the years ended August 31, 1997 and 1998 and the consolidated balance sheets data as at August 31, 1998 and 1999 are derived from our audited consolidated financial statements not included in this annual report. The consolidated statements of earnings data for each of the three years ended August 31, 1999, 2000 and 2001 and the consolidated balance sheets data as at August 31, 2000 and 2001 are derived from our consolidated financial statements that have been audited by PricewaterhouseCoopers LLP, independent auditors, that are included elsewhere in this annual report.
Our consolidated financial statements are prepared in accordance with Canadian GAAP, which differ in certain respects from U.S. GAAP. For a description of the material differences between Canadian GAAP and U.S. GAAP in regard to our consolidated financial statements, see note 19 to our consolidated financial statements. The historical results below are not necessarily indicative of the results to be expected for any future period.
The selected financial data should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report, and "Item 5. Operating and Financial Review and Prospects" of this annual report.
YEARS ENDED AUGUST 31,
-------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS OF US DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
AMOUNTS UNDER CANADIAN GAAP
Sales............................................... $ 24,475 $ 31,605 $ 42,166 $ 71,639 $ 146,013
Cost of sales....................................... 9,652 11,345 14,998 24,712 54,946
--------- --------- --------- --------- ---------
Gross margin........................................ 14,823 20,260 27,168 46,927 91,067
--------- --------- --------- --------- ---------
Operating expenses
Selling and administrative.......................... 7,827 9,898 13,279 24,304 46,236
Net research and development........................ 1,592 3,014 4,315 6,402 13,601
Amortization of property, plant and equipment....... 465 609 857 1,451 3,559
Amortization of intangible assets................... 14 48 41 47 9,876
Non-recurring expenses.............................. -- -- -- -- 3,288
--------- --------- --------- --------- ---------
Total operating expenses............................ 9,898 13,569 18,492 32,204 76,560
--------- --------- --------- --------- ---------
Earnings from operations............................ 4,925 6,691 8,676 14,723 14,507
Interest income (expense)-- net.................... (89) 40 136 1,480 6,098
Foreign exchange gain (loss) ....................... (184) 126 (506) (684) 3,327
--------- --------- --------- --------- ---------
Earnings before income taxes and
amortization of goodwill ..................... 4,652 6,857 8,306 15,519 23,932
Income taxes........................................ 1,582 2,356 2,492 5,298 8,150
--------- --------- --------- --------- ---------
Earnings before amortization of goodwill............ 3,070 4,501 5,814 10,221 15,782
Amortization of goodwill............................ $ -- $ -- $ -- $ 297 $ 31,076
--------- --------- --------- --------- ---------
Net earnings (loss) for the year.................... $ 3,070 $ 4,501 $ 5,814 $ 9,924 $ (15,294)
--------- --------- --------- --------- ---------
Basic and diluted net earnings (loss) per share..... $ 0.08 $ 0.12 $ 0.14 $ 0.25 $ (0.29)
Basic weighted average number of shares used in per
share calculations............................ 38,000 38,000 38,001 39,951 53,014
OTHER FINANCIAL DATA:
Gross research and development...................... $ 2,753 $ 4,406 $ 6,390 $ 9,374 $ 17,601
Net research and development........................ $ 1,592 $ 3,014 $ 4,315 $ 6,402 $ 13,601
Dividends per share
Class "A" shares.............................. $ -- $ -- $ 0.08 $ 0.45 $ --
Class "C" share............................... $ -- $ -- $ 340 $ -- $ --
Class "E" shares.............................. $ 0.005 $ 0.005 $ -- $ -- $ --
Class "F" shares.............................. $ -- $ -- $ -- $ 0.45 $ --
AMOUNTS UNDER U.S. GAAP
Sales............................................... $ 26,752 $ 32,853 $ 41,858 $ 71,639 $ 146,013
Net earnings (loss) for the year.................... $ 3,356 $ 4,538 $ 5,901 $ 7,922 $ (29,478)
Basic and diluted net earnings (loss) per share..... $ 0.09 $ 0.12 $ 0.15 $ 0.20 $ (0.56)
Basic weighted average number of shares used in per
share calculations.................................. 38,000 38,000 38,001 39,951 53,014
Dividends per share
Class "A" shares.............................. $ -- $ -- $ 0.08 $ 0.45 $ --
Class "C" share............................... $ -- $ -- $ 333 $ -- $ --
Class "E" shares.............................. $ 0.006 $ 0.005 $ -- $ -- $ --
Class "F" shares.............................. $ -- $ -- $ -- $ 0.45 $ --
AS AT AUGUST 31,
-------------------------------------------------------------
1997 1998 1999 2000 2001
---- ---- ---- ---- ----
(IN THOUSANDS OF US DOLLARS)
CONSOLIDATED BALANCE SHEETS DATA:
AMOUNTS UNDER CANADIAN GAAP
Cash and cash equivalents........................... $ 354 $ 1,262 $ 423 $ 729 $ 7,729
Working capital (1) ................................ 5,973 9,797 12,745 194,167 130,289
Total assets........................................ 13,238 17,643 22,840 219,723 442,577
Long-term debt (excluding current portion) ......... 20 -- -- 16 664
Shareholders' equity................................ $ 7,644 $ 12,045 $ 14,679 $ 206,994 $ 414,805
AMOUNTS UNDER U.S. GAAP
Cash and cash equivalents........................... $ -- $ 1,201 $ 423 $ 729 $ 7,729
Working capital (2) ................................ -- 9,179 12,781 194,204 129,987
Total assets........................................ -- 16,785 22,899 219,760 499,436
Long-term debt (excluding current portion) ......... -- -- -- -- 664
Shareholders' equity................................ $ -- $ 11,318 $ 14,715 $ 207,031 $ 471,117
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B. CAPITALIZATION AND INDEBTEDNESS
Not Applicable
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not Applicable
D. RISK FACTORS
RISKS RELATED TO OUR INDUSTRY AND BUSINESS
IF THE DOWNTURN IN THE TELECOMMUNICATIONS INDUSTRY PERSISTS OR WORSENS, DEMAND FOR OUR PRODUCTS WILL CONTINUE TO DROP AND, AS A RESULT, IT COULD CONTINUE TO HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Due to the downturn in the telecommunications industry and the uncertainty following the tragic events of September 11, 2001, several telecommunications carriers lowered their spending for network installations. Optical equipment manufacturers, in turn, were affected by the downturn and the subsequent buildup of inventories. These market forces on our customers contributed to a significant decline in our sales. If the downturn persists or worsens, demand for our products will drop and, as a result, it could have a material adverse effect on our business, results of operations and financial condition.
WE HAVE ADOPTED MEASURES AND MAY CONTINUE TO ADOPT MEASURES THAT ALIGN OUR COST STRUCTURE TO CHALLENGING MARKET CONDITIONS. IF THE CHALLENGING MARKET CONDITIONS ARE PROLONGED, IT COULD HAVE MATERIAL ADVERSE LONG-TERM EFFECTS ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We have been forced to re-align our cost structure to market conditions twice during the past year. On June 27, 2001, we announced the reduction of non-customer-related expenses, postponement of plans to build a new facility in the Quebec Metro High-Tech Park, termination of non-core operations at a subsidiary that specialized in manufacturing fiber-optic temperature sensors, and reduction of our workforce by 15%. On December 5, 2001, we announced the lowering of our operating expenses, freeze in employee salaries, and reduction of our workforce by 10%. These and, if needed, subsequent measures could have material adverse long-term effects on our business, results of operations and financial condition if we deplete our pool of highly qualified personnel; if we are unable to sustain research and development efforts for the launch of new products; if we are unable to meet the needs of our customers; and if we are not prepared to ramp up manufacturing when market conditions improve. In addition, if we fail to adopt and implement adequate and pertinent measures on a timely basis to align our cost structure to challenging market conditions, it could have a material adverse long-term effects on our business, results of operations and financial condition.
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 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;
o greater economies of scale for higher-volume competitors; and
o resale of used equipment.
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 production capacity results 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 increase the level of sales, continuously reduce our manufacturing costs or introduce new products with higher margins, our gross margins would decline.
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 the timing of introduction and market acceptance of new
products by us, our competitors or our suppliers;
o our ability to sustain product volumes and high levels of
quality across all product lines;
o the timing of shipments for large orders; and
o the effect of potential seasonality in sales.
Our operating results could also be affected by the following factors, some of which we have little or no control over:
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;
o the level of used test, measurement and automation equipment
available for resale;
o restructuring charges; 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 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 CUSTOMERS FAIL TO MEET THEIR FINANCIAL COMMITMENTS TO US, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The telecommunications industry is undergoing challenging times. Some companies are shutting down their operations or going bankrupt. On occasion, we have had customers who failed to meet their financial commitments to us. We attempt to reduce the possibility of large outstanding bills remaining unpaid by carrying out credit checks on customers and by having a diversified customer base. For example, no customer represented more than 6.4% of our sales in fiscal 2001. However, there is no assurance that such measures will reduce or eliminate our exposure to customer credits risks. If customers fail to meet their financial commitments to us, it could have a material adverse effect on our business, results of operations and financial condition.
AS OUR CUSTOMERS CONSOLIDATE OR ENCOUNTER FINANCIAL DIFFICULTIES, THEY MAY REDUCE OR HALT 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 been subject to consolidation or are encountering financial difficulty and are reducing their orders, renegotiating pricing and
obtaining products from a source other than us, which cause our sales to decline. In addition, as a result, some of our manufacturer customers may discontinue their relationships with us.
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 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.
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, EXPERIENCE MANUFACTURING DELAYS OR INVENTORY OBSOLESCENCE.
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 or increase the risk of inventory obsolescence for which eventual write-offs may become necessary. 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 may be 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.
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. Financial difficulties of suppliers could also affect our ability to obtain necessary parts in a timely manner. 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 MUST CONTINUE TO OVERCOME SIGNIFICANT AND INCREASING COMPETITION IN OUR INDUSTRY IN ORDER TO GAIN MARKET SHARE AND INCREASE OUR 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 new competitors to emerge or current competitors to consolidate as the market for fiber-optic test, measurement and automation equipment evolves in response to technical innovations and economic conditions. Both of these factors could intensify the competitive pressures that we face.
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 Acterna Corporation, Agilent Technologies Inc., ANDO Corporation, Anritsu Corporation, GN Nettest, Newport Corporation and Tektronix, Inc. 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.
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 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.
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 PRODUCTS MAY BE REQUIRED TO CONFORM TO NEW AND UNFORESEEN REGULATORY REQUIREMENTS THAT 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.
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 CANNOT ASSURE THAT WE WILL SUCCESSFULLY INTEGRATE THE BUSINESSES, PRODUCTS, TECHNOLOGIES OR PERSONNEL OF OUR RECENT AND FUTURE ACQUISITIONS, WHICH MAY HARM OUR BUSINESS.
For our past and future transaction to be successful, we must appropriately integrate the businesses, products, technologies and personnel of Burleigh Instruments, Inc. ("Burleigh"), EXFO Photonic Solutions Inc. ("EXFO Photonic", formerly EFOS Inc.) and EXFO Protocol Inc. ("EXFO Protocol", formerly Avantas Networks Corporation), and those of any future acquisitions, with our own business, products, technologies and personnel in a manner that anticipates or responds to new technological developments and customer requirements on a timely basis. In addition, we must coordinate the operations and technologies of newly acquired companies with our own operations and technologies and manage geographically dispersed operations. Integration requires 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 and there could be a material adverse effect on our business, financial condition and results of operations.
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 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 made strategic acquisitions, such as our acquisitions of Nortech Fibronic Inc. ("Nortech"), Burleigh, EXFO Photonic and EXFO Protocol. 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 and commitments;
o incur expenses related to in-process research and development
and amortization of other intangible assets; or
o incur significant impairment losses of goodwill related to such acquisitions.
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.
During the fiscal year ended August 31, 2001, 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 acquired or that we might acquire in the future, and further divestitures or closures could be necessary which may harm our business.
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, EXFO Photonic and EXFO Protocol and the acquisition by Burleigh Automation Inc. of the assets of Vanguard Technical Solutions, Inc. ("Vanguard"), 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.
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, 2001, customers outside of the United States and Canada accounted for 41.7 % of our sales and for the fifteen months ended November 30, 2001, these customers accounted for 41.8 % of our sales. We plan to increase our international sales and have 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. 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.
WE RECENTLY IMPLEMENTED AN ENTERPRISE RESOURCE PLANNING (ERP) SYSTEM, AND IF THIS INFORMATION TECHNOLOGY PROJECT PROVES TO BE UNWIELDY OR IF THE SOFTWARE TOOL TURNS OUT TO BE INEFFECTIVE, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We implemented an ERP system in early December 2001 to help increase the efficiency of our operations. This required a significant investment in money, time and resources. More than 400 employees were trained on the software tool and the smooth transition from one system to another has not yet been accomplished. If this information technology project proves to be unwieldy or if the software tool turns out to be ineffective, it could have a material adverse effect on our business, results of operations and financial condition.
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 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.
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 MAINTAIN OUR COMPETITIVE POSITION 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. The managerial, technical and other services of our senior management team 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.
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 out 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 18 U.S. and 7 Canadian issued patents and have 16 U.S. and 15 Canadian patent applications pending, along with 4 patent applications pending under the Patent Cooperation Treaty. 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, 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 of the challenged products.
OUR INSURANCE MAY NOT BE SUFFICIENT TO COVER ALL POTENTIAL LIABILITY. A SUCCESSFUL CLAIM EXCEEDING OUR POLICY LIMITS 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 insurance for product liability and take accounting reserves for warranty claims that we consider adequate in view of industry practice. In addition, we may face other types of claims by third parties in relation to the conduct of our business and a successful claim against us for an amount exceeding our policy limits 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.
WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION THAT MAY SUBSTANTIALLY INCREASE OUR COSTS AND HARM OUR BUSINESS.
We may from time to time become involved in various lawsuits and legal proceedings. For example, EXFO is a defendant in a putative securities class action filed in the United States District Court for the Southern District of New York. In addition, we have instituted a claim against a former employee of one of our subsidiaries, in relation to a breach of contractual confidentiality obligations. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters that may arise from time to time could have a material adverse effect on our business, results of operations or financial condition.
Any litigation to which we are subject could require significant involvement of our senior management and may divert management attention from our business and operations. For more information about current legal proceedings, see "Item 4B - Legal Proceedings".
FLUCTUATIONS IN THE EXCHANGE RATES BETWEEN THE CANADIAN DOLLAR AND THE US DOLLAR AND OTHER CURRENCIES 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 and other currencies. An increase in the value of the Canadian dollar relative to the US dollar could have a material adverse effect on our operating margins.
UNEXPECTED DECLINES IN OUR RESEARCH AND DEVELOPMENT TAX CREDITS AND GRANTS MAY HAVE AN ADVERSE EFFECT ON OUR BUSINESS.
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 22.7 % of our gross research and development expenses for the year ended August 31, 2001 and 23.2 % for the fifteen months ended November 30, 2001.
If unexpected changes in the laws or government policies terminate or adversely modify the Canadian and 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 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.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our legal name and commercial name is EXFO Electro-Optical Engineering Inc. /EXFO Ingenierie Electro-Optique Inc. Our head office is located at 465 Godin Avenue, Vanier, Quebec, Canada, G1M 3G7 and our telephone number is (418) 683-0211. Our e-mail address is info@exfo.com and our Web site is www.exfo.com. Information on our Web site is not incorporated by reference in this annual report. Our agent for service in the United States is CT Corporation System, 111 Eighth Avenue, New York, New York 10011. This annual report contains trademarks and registered trademarks of EXFO and other companies.
We were incorporated on September 18, 1985 pursuant to the CANADA BUSINESS CORPORATIONS ACT. Since that date, we have amended our articles on various occasions mainly to modify our corporate name and our share capital.
In 1996, GEXFO Investissements Technologiques inc. ("GEXFO"), a company controlled by Germain Lamonde, acquired a majority interest in GAP Optique S.A. ("GAP Optique"), a Swiss limited liability company carrying out activities in the field of fiber-optic testing and measurement technology. In 1996, GEXFO, EXFO, GAP Optique and the University of Geneva entered into agreements whereby GAP Optique, EXFO and GEXFO obtained worldwide exclusive rights to commercially develop, manufacture and market specified technologies relating to fiber-optic telecommunications testing and measurement instruments developed by the University of Geneva. In addition, GAP Optique, EXFO and GEXFO acquired priority rights over the marketing of fiber-optic telecommunication testing and measurement instruments prototypes designed by the University of Geneva. This agreement was renegotiated under similar terms and conditions in 1999 for a five-year term. On June 1, 2000, we acquired the 85% interest held by GEXFO in GAP Optique for a consideration equal to its book value of approximately $16,000 and GEXFO transferred all of its rights in the agreements to us.
In February 2000, we acquired all of the shares of Nortech Fibronic Inc., a company specializing in fiber-optic testing and temperature-sensing for a total consideration of $2.8 million of which $2.1 million was paid in cash. We also issued C$800,000 (approximately $553,000) of Class "G" shares, which were converted into 800,000 preferred shares series 1 in June 2000, and a debenture of $200,000 (approximately $138,000) bearing no interest and payable on November 30, 2000. In November 2000, the former shareholders of Nortech agreed with us to make a purchase price adjustment, as a result of which we received $104,000 in cash from a portion of the purchase price previously held in escrow and reduced the purchase price for the 800,000 preferred shares series 1 from C$800,000 ($543,000) to C$544,000 ($354,000), which were purchased by us on November 30, 2000 and subsequently cancelled. In June 2001, Nortech ceased operations. The majority of its assets were sold to a third party and we acquired the remaining assets.
In connection with and immediately prior to our initial public offering in July 2000, we modified our authorized share capital to its current status, which consists of:
o an unlimited number of subordinate voting shares without par
value;
o an unlimited number of multiple voting shares without par
value;
o an unlimited number of preferred shares without par value,
issuable in series; and proceeded with the following
exchanges:
o the 38,000,000 Class "A" shares outstanding at that time were
exchanged into 38,000,000 multiple voting shares;
o the 707,264 Class "F" shares outstanding at that time were
exchanged into 707,264 subordinate voting shares;
o the 800,000 Class "G" shares outstanding at that time were
exchanged into 800,000 preferred shares series 1.
The exchange of Class "A" shares into multiple voting shares, of Class "F" shares into subordinate voting shares and of Class "G" shares into preferred shares series 1 was part of our capital reorganization completed prior to our initial public offering and did not involve any disbursement of funds.
On July 6, 2000, we completed our initial public offering as a result of which we issued a total of 8,050,000 subordinate voting shares, including 1,050,000 subordinate voting shares pursuant to the exercise of the over-allotment by the underwriters. All the 8,050,000 subordinate voting shares were sold to the public at an offering price of $26.00.
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 30 years and had 91 employees as of December 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.
In March 2001, we acquired all of the shares of EFOS Inc., a privately held company in Toronto, Canada, for a total consideration of $111 million, of which $25 million was paid in cash. We also issued 3,700,000 of our subordinate voting shares. In September 2001, the name EFOS Inc. was changed to EXFO Photonic Solutions Inc.
EXFO Photonic, operating since 1984 and having 52 employees as of December 31, 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 and other non-telecom markets. 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. EXFO Photonic 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 11 patents pending.
Also in March 2001, our wholly owned subsidiary, Burleigh Automation Inc. ("Burleigh Automation"), acquired substantially all the assets of Vanguard, a wholly owned subsidiary of DT Industries, Inc. for a purchase price of approximately $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. This acquisition, which complements our acquisition of Burleigh fits with our overall strategy to provide customers with a comprehensive solution for the assembly, alignment and testing of optical components and subsystems. Since September 2001, Burleigh Automation has ceased operations and we have been in the process of transferring all material intellectual property assets and most of the physical assets of Burleigh Automation to Burleigh.
We were forced to re-align our cost structure to market conditions twice during the past year. On June 27, 2001, we announced the reduction of non-customer-related expenses, postponement of plans to build a new facility in the Quebec Metro High-Tech Park, termination of non-core operations of Nortech, a subsidiary that specialized in manufacturing fiber-optic temperature sensors, and reduction of our workforce by 15%. On December 5, 2001, we announced the lowering of our operating expenses, a freeze in employee salaries, and the reduction of our workforce by 10%.
In November 2001, we acquired all of the shares of Avantas Networks Corporation and simultaneously changed the name of that company to EXFO Protocol Inc. ("EXFO Protocol"). We paid a total consideration of approximately $65 million (or $93 million for the equity minus $28 million of cash in the hands of the acquired company) to acquire EXFO Protocol. Consideration paid consisted of 4,374,573 of our subordinate voting shares and $36 million in cash.
EXFO Protocol, a pre-revenue company based in Montreal, Canada operating since 1998 and having 116 employees as of December 31, 2001 is a supplier of fiber-optic testing and optical network performance management equipment that supports a wide range of protocols and data transmission rates.
B. BUSINESS OVERVIEW
We are a leading designer, manufacturer and marketer of fiber-optic test, measurement and automation solutions for the global telecommunications industry. More than 2,000 customers rely on our test instruments and systems in research and development laboratories and production environments and to enable the world's optical networks to perform impeccably during their complete lifecycles. We currently employ 1,099 employees and our products are distributed in more than 70 countries around the world.
EXFO was founded in 1985 in Quebec City. Our original products were focused primarily on the needs of installers and operators of fiber-optic networks. These products are marketed in what is known today as our Portable and Monitoring Division. This division markets its products mainly to telecommunications carriers and network service providers. These customers use Portable and Monitoring Division products for installation and maintenance, network monitoring and troubleshooting applications. In 1996, we supplemented our product portfolio with an extensive line of Industrial and Scientific products that are dedicated to the manufacturing as well as research and development markets in the fiber-optic industry. Our Industrial and Scientific products tend to be more complex and higher priced than our Portable and Monitoring products. Industrial and Scientific Division customers include optical component and system manufacturers as well and research and development laboratories. In 1999, we entered the market for remote fiber test systems ("RFTS"). RFTS, which are marketed through our Portable and Monitoring Division, allow carriers to deploy test equipment throughout their networks in order to monitor the integrity of their fiber-optic networks on a continuous basis.
In fiscal 2001, we launched more than 20 products. Key product launches included the FTB-400 Universal Test System, the successor to our highly successful FTB-300 that performs essential tests for DWDM long-haul, metro and access networks; the OWA-9500 Optical Waveguide Analyzer, the industry's first and only commercial refractive index profiler for market-winning planar and arrayed waveguides; the FR-3000 NanoRobot(R) Photonics Alignment System with multi-axis alignment and 0.1 nanometer resolution for automated component manufacturing applications; and the Novacure(R) IR, which uses infrared spot-curing on conventional heat-cured adhesives.
In fiscal 2001, we also opened new sales offices and service centers in Singapore and Beijing to better serve our customers in the Asia-Pacific region. The expansion into the Asia-Pacific market proved to be a winning strategy since sales almost tripled year-over-year in this area. Furthermore, we moved our Paris office to a more spacious location in order to strengthen sales, application engineering and marketing services throughout Europe.
We announced three strategic acquisitions in fiscal 2001 to penetrate new technological sectors and increase our addressable markets. We acquired Burleigh for its wavelength measurement instruments and nano-positioning alignment systems. For almost three decades, Burleigh has advanced the science of interferometric measurement techniques and developed a deep understanding of precision positioning technology. As a result, Burleigh's Wavemeter(TM) products offer one of the highest wavelength measurement accuracy in the industry, while its Inchworm(TM) motor-based precision positioning line enables unmatched position control for optical components and sub-components.
We acquired EXFO Photonic for its precision light-based, adhesive spot-curing technology. EXFO Photonic products deliver precise doses of the appropriate spectral light onto photosensitive and heat-cured adhesives to significantly reduce bonding time and increase repeatability in optical component manufacturing. Both Burleigh and EXFO Photonic will add to sales in our Industrial and Scientific Division.
We acquired EXFO Protocol (formerly Avantas Networks Corporation), a supplier of leading-edge, fiber-optic testing and optical network performance management equipment that supports a wide range of protocols and data transmission rates. EXFO Protocol should increase sales in both product divisions, but initially in our Portable and Monitoring Division.
This latest acquisition will enable us to enter the critical protocol-layer testing market and almost double our addressable market size to an estimated $3.3 billion, according to reports from Frost and Sullivan, a world-reknown market consulting firm on emerging high-technology and industrial markets. In lay terms, our products test the highway, or the fiber, optical components and value-added optical modules that make up the physical layer of an optical network. Our products also cover the numerous lanes along the highway, or the DWDM wavelengths carrying bandwidth within the optical layer of a network. With the acquisition of EXFO Protocol, our products will also test the traffic, or the bits and bytes running through the protocol layer of a network.
We have received more than 45 industry and commerce awards. In 2001, we were named one of the top 100 employers in Canada by Maclean's, a national current affairs magazine. In 2000, we were selected winners of the Outstanding Corporate Innovator Award by the U.S.-based Product Development and Management Association. Prior to becoming a public company in June 2000, we had been recognized as one of the 50 Best-Managed Private Companies in Canada by Arthur Andersen Consulting and the Financial Post for five consecutive years.
THE EXFO SOLUTION
We believe that we offer the most extensive range of products in the fiber-optic test, measurement, monitoring and automation industry. Our success has been largely predicated on our exclusive focus on fiber optics. Our solution is based on the following key attributes:
MODULAR SYSTEM DESIGN. In 1996, we introduced the first products designed around our modular system design. This system design consists of a Windows-based platform that can accommodate several data acquisition test modules. We have since developed products for each of our divisions based on the same modular design. Our modular design provides the following advantages:
o Unlike stand-alone units, new test modules can be rapidly developed to address the changing requirements of the industry.
o As customers' testing requirements change, they can purchase additional modules that are compatible with their previously purchased platforms, thus protecting their initial investments.
o Our standard graphical user interface reduces training costs because customers are familiar with previously acquired software products.
o The flexibility of our systems allows customers to develop customized and automated solutions directed at specific testing requirements.
HIGH DEGREE OF TECHNOLOGICAL INNOVATION. We continue to be at the forefront of fiber-optic test, measurement and automation technology. For example, in the past we were the first in our industry to develop and market a number of fiber-optic test and measurement products and we have continued to do so through recent product releases:
o PORTABLE OPTICAL SPECTRUM ANALYZER (OSA). In 2000, we supplied the market with the first OSA to provide lab-quality specifications for rugged, portable use in the field. This instrument is useful for measuring key parameters of each wavelength in a DWDM system.
o OPTICAL WAVEGUIDE ANALYZER. In 2001, we released our Optical Waveguide Analyzer, which represents the industry's first commercial refractive index profiler for planar and arrayed waveguides. The refractive index profile of next-generation optical devices like arrayed waveguides is a critical parameter to measure in order to control and optimize the manufacturing process.
PRODUCTS OF HIGH QUALITY. Product quality is an integral part of our solution. Our Quebec City-based operations have maintained ISO 9001 certification since 1994 and they are now certified to the new 2000 edition of the standard. Our subsidiaries in Montreal, Toronto and Victor, NY, have rigorous quality assurance programs, but they are not yet certified. Our products meet industry standards, such as those set by Telcordia, formerly Bellcore, IEC, and other industry-leading standards bodies. During manufacturing, each product has a related quality assurance plan, with rigorous checkpoints, to reduce defects to a minimum. Various tasks in the quality assurance process in all our facilities include quality control, conformity testing, product documentation, product improvement, regulatory compliance, metrology and calibration.
SUPERIOR CUSTOMER SUPPORT. We use highly qualified and specialized internal groups to offer pre-sales evaluation, installation, channel and customer training, communications and post-sales support. We believe that this approach provides us with an advantage over our competitors, who often outsource some of these functions. We have two Customer Service Groups, one being responsible for the North American market and the other for our international customers. Our Customer Service Groups are mainly responsible for supporting our sales force, recommending instruments that best match our customers' testing, measurement and automation needs, providing detailed quotations, order management, technical support and training as well as calibration and repair services. Our Communications and Marketing Group, which operates like an internal advertising agency, educates our customers and our sales force by providing detailed marketing and technical information. Literature includes specification sheets, application notes, Web content, product catalogues and a bi-monthly corporate newsletter. Finally, our Writing Services Group provides technical writing for product instruction manuals. Our documentation is available in several different languages.
OUR STRATEGY
We intend to expand our leadership position in the fiber-optic test, measurement and automation industry and to increase our market share through the following initiatives:
EXPAND TECHNOLOGICAL LEADERSHIP. We believe that our ultimate success will depend on our ability to introduce enhanced products that meet the changing needs of our customers. We, therefore, will continue to invest heavily in research and development. We increased gross research and development expenditures 88% to $17.6 million in fiscal 2001 from $9.4 million in 2000. Altogether, 46% of our sales in 2001 originated from products that have been on the market for two years or less. We dedicate more than 30% of our employees to research and development, including an advanced research group that carries out research activities, monitors technological trends in the industry and maintains links with numerous universities, industry associations and standards bodies.
INVEST IN STRATEGIC SECTORS. We have established an award-winning innovation process. Our product portfolio review process ensures that our research and development activities are aligned with our corporate strategy. This rigorous review process has led us to focus on the following growth vehicles for the upcoming year: new product rollouts, protocol-layer testing solutions and semi-automated manufacturing solutions.
o NEW PRODUCT ROLLOUTS. We will continue to roll out disruptive technologies and drive approval of international standards. This initiative has been demonstrated by the recent introduction of our Femtosecond PMD Analyzer, whose revolutionary technology has been accepted as a reference test method by international standards bodies. Our Femtosecond PMD Analyzer enables users to measure the smallest PMD values in narrowband DWDM channels and broadband components in the simplest, fastest and most repeatable manner. This latest breakthrough reflects our commitment to developing leading-edge technologies that have tremendous competitive advantages in high-growth nascent sectors.
o PROTOCOL-LAYER TESTING SOLUTIONS. We plan to combine newly acquired protocol-layer testing technologies from EXFO Protocol with our physical and optical-layer testing equipment and integrate them inside our FTB-400 UTS field-testing platform. Since the acquisition of EXFO Protocol, we released a Gigabit Ethernet module for our field-testing platform to support increasingly high-speed communications in metro and access areas. In 2002, we intend to launch a fully integrated solution that will enable field technicians to be far more efficient and cost-effective because they will seamlessly carry out physical-, optical- and protocol-layer tests with a single platform in their hands. As a result, we will be providing customers with the most complete and cost-effective DWDM field-testing solution on the market.
o SEMI-AUTOMATED MANUFACTURING SOLUTIONS. We will extend our involvement in automated component manufacturing by leveraging our expertise in automated test stations. With this vision in mind, we acquired Burleigh for its multi-axis, nano-positioning alignment robots and EXFO Photonic for its precision light-based, adhesive spot-curing systems. We plan to combine these technologies with our automated testing expertise to offer our customers stand-alone products and semi-automated manufacturing solutions that help them increase yields and reduce costs on the production floor. We also intend to seek strategic partnerships with leading system integrators in order to allow them to customize our semi-automated solutions
to the specific processes that continue to be unique and proprietary to each manufacturer.
LEVERAGE OUR MODULAR DESIGN. The modularity and compatibility of our Windows-based platforms enable us to offer the same instrument design to as many as three different market segments with a single research and development project. This practice lessens the number of different designs, including optical, mechanical, electronic and software, that we must develop and manufacture. We capitalize on the flexible architecture of our Windows-based systems to expand our solutions portfolio and to offer specialized products to specific markets. By being able to provide new functionality through the design of a new module rather than through the design of a completely new instrument, we can be quicker to market with new testing technologies and provide more specialized testing solutions.
PURSUE COMPLEMENTARY ACQUISITIONS. We believe that market fragmentation in the test, measurement and automation industry creates opportunities for consolidation. We plan to aggressively pursue strategic acquisitions that will provide us with additional key technologies, complement our product offerings, increase our sales channels and add to our overall level of expertise.
PRODUCTS
Our products are designed for the global fiber-optic test, measurement and automation industry. We have adapted our product divisions to meet the needs of two main markets. Our Portable and Monitoring Division serves telecommunications carriers, cable television companies, public utilities, private network operators, third-party installers and equipment rental companies. This market requires rugged, field-portable and easy-to-use equipment.
Our Industrial and Scientific Division supplies optical component and system manufacturers as well as university and government research laboratories. This market requires highly accurate and reliable instruments and systems that carry out testing in the shortest periods of time possible.
At the core of our test, measurement and automation equipment are our FTB-400 Universal Test System (UTS) and IQ-200 Optical Test System (OTS) platforms. Our FTB-400 UTS provides carriers with a simple, yet efficient way to perform multiple, advanced test operations for installation, maintenance and troubleshooting applications. Our IQ-200 OTS is a scalable unit that is suited for manufacturing, laboratory engineering and research applications. The added benefit of our IQ-200 OTS is that manufacturers can design their own automated test setup or we can customize a setup for them. Our FTB-400 UTS and IQ-200 OTS platforms are fully supported by integrated and highly intuitive graphical user interfaces, enabling the user to easily store, handle and retrieve a large amount of data.
The following table summarizes the principal types of instruments we provide, their typical applications and the format in which we offer them:
FORMAT
-------------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION PORTABLE SCIENTIFIC
--------------- ------------------- ---------------------- --------------------------
FTB 400 IQ200 BENCHTOP
UTS MODULES HANDHELD OTS MODULES INSTRUMENTS
----------- -------- ----------- -----------
Optical time Like a radar, it measures the time
domain of arrival of reflections of an
reflectometers optical signal to determine the X
(OTDRs) distance to the breaks or points of
excessive loss in a fiber network.
Optical spectrum Produces a graphical representation
analyzers of power versus wavelength for an
optical signal. Useful for measuring
the drift, power and signal-to-noise X X
ratio for each wavelength in a DWDM
system.
Optical power Measures the power of an optical
meters signal. It is the basic tool for
the verification of transmitters, X X X X
amplifiers and optical transmission
path integrity.
Widely tunable Can produce laser light across a
lasers broad range of wavelengths. Used to
test DWDM components and value-added X X
optical modules.
Narrowly tunable A laser that can be precisely tuned to
lasers simuate a DWDM light sources. Used
primarily in testing optical X
amplifiers.
Polarization mode Measures the dispersion of light that
dispersion is cause by polarization. Generally
analyzers used to determine the speed-distance X X
limitation of fiber and cables.
Femtosecond Measures very small levels of
polarization mode polarization mode dispersion in DWDM
dispersion and broadband components in the X
analyzer simplest, fastest and most
repeatable manner.
Multi-wavelength Measures the power and drift for
meters multiple wavelengths in a DWDM X X X
system.
Variable optical Used in network simulation setups to
attenuators provide calibrated variable
reduction of the strength of an X X X
optical signal.
Polarization Measures the difference in loss of
dependent loss power for the different states of X
meters polarization.
Loss test sets Integrates a power meter and a light
source to manually or automatically
measure the loss of optical signal X X X X
along a fiber.
Stable light Emitting diode or lasers used in
sources connection with a power meter to X X X X
measure signal loss.
Optical fiber Measures the geometric and light
parameter analyzer guiding properties of an optical
fiber. Used in new fiber research X
and development and quality control
applications.
Optical amplifier Boosts the power of laser sources.
Used for the testing and calibration X
of test systems.
|
FORMAT
-------------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION PORTABLE SCIENTIFIC
--------------- ------------------- ---------------------- --------------------------
FTB 400 IQ200 BENCHTOP
UTS MODULES HANDHELD OTS MODULES INSTRUMENTS
----------- -------- ----------- -----------
Optical switches Provides switching between fibers.
Used to provide flexible and
automated test setups such as the
measurement of multiple fibers or X X
components with multiple ports with
one instrument.
Optical power Provides a highly accurate and
reference module traceable measurement of power for
the calibration or verification of X
other power measurement instruments.
Broadband source Used for testing wavelength
dependent behavior of fiber cables X X
and DWDM optical components.
Talk sets A device which attaches to an
optical fiber and serves as a
temporary voice link facilitating X X
coordination of work among
installation crews.
Optical return Combines a laser and a power meter
loss meters to measure the amount of potentially X X X X
degrading back reflection.
Visual fault A visible laser that can be
locators connected to an optical fiber
network to help locate breaks or X X
points of excessive loss.
Live fiber Clips on to a fiber and is used to
detector detect the presence and direction of
a signal without interrupting the X
traffic.
Clip-on coupling Clips to an optical fiber and allows X
non-invasive testing.
Optical waveguide Provides the refractive index
analyzer profile of glass and fused
silica-based devices used in next X
generation networks.
Light-based Technology by which a dose of energy
curing instrument of a specific wavelength, bandwidth
and irradiance is used to cause an
adhesive, encapsulant or sealant to X
change from a liquid to a solid in a
small area. Used to bond optical
components and sub-components.
Passive component Characterizes passive wavelength-selective
analyzer devices, such as multiplexers, demultiplexers
and add/drop filters, with respect to X
absolute wavelength in order to guarantee
their performance within DWDM systems.
Gigabit Ethernet Measures data integrity for
tester high-speed internet protocol
communications in metro and edge X
networks.
SONET/ SDH Provide accurate bit-error rate and
Analyzers performance analysis of SONET/SDH
overhead format that reflect the X X
quality of a transmission system.
Nanorobot Offers multi-axis alignment and can
photonics position optical devices with a
alignment system nanometer resolution, which is
essential during the alignment of X
optical components in the
manufacturing process.
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PORTABLE AND MONITORING PRODUCTS
We offer an extensive range of products for fiber-optic testing, measurement and monitoring applications. Our test and measurement products are available as handheld test instruments or as field-portable platforms with related modules. Our handheld instruments are durable, compact and easy to use. Our second-generation field-testing platform, the FTB-400 UTS, is available in a two-slot configuration for basic OTDR and optical loss testing, or a seven-slot configuration for high-end DWDM testing, PMD characterization, high fiber-count testing as well as OTDR and optical loss testing. We also offer the FTB-100 Mini-OTDR with an integrated power meter option. This cost-effective platform provides field technicians with basic OTDR testing capabilities. Our portable platforms are rugged, Windows-based, battery-powered units. Their large environmentally robust touchscreens are very practical for field use.
Our network monitoring solution is better known as FiberVisor. FiberVisor consists of rack-mounted remote test units that are strategically deployed along a fiber-optic network, and a test system controller that retrieves information in real time from as many remote test units as required. The test system controller is typically located inside a network operations center. The information obtained from these remote test units is combined with data from a geographic information system in our FiberVisor system to pinpoint the exact location of a system failure and rapidly provide the required information to a restoration team. We were first-to-market with DWDM monitoring capabilities on our RFTS, which includes the physical and optical layer. We will further extend its capabilities to the protocol layer with EXFO Protocol's Network Guardian G2, an optical network performance management system that supports a wide range of protocols and data transmission rates.
EXFO Protocol, which is exclusively dedicated to fiber-optic protocol testing, offers the Service Test Gear (STG) Series and Network Guardian G2, a Gigabit Ethernet test module for the FTB-400.
Its portable STG Series supports multi-protocols like Asynchronous Transfer Mode (ATM), Synchronous Optical Network (SONET), Synchronous Digital Hierarchy (SDH), Gigabit Ethernet and Ethernet, as well as data transmission rates from OC-192 (10 Gb/s) down to DS0 (64 kb/s) for the North American standard, and STM-64 (10 Gb/s) down to E0 (64 kb/s) for the equivalent international standard. All of these functionalities are available on a single platform.
EXFO Protocol's remote optical network performance management system, Network Guardian G2, provides real-time surveillance 24 hours per day, seven days per week. A single administrator can simultaneously observe critical quality of service parameters at key locations along the network by relying on data from remote Network Guardians.
INDUSTRIAL AND SCIENTIFIC PRODUCTS
Our Industrial and Scientific product line is mainly built around our IQ-200 OTS platform and is available as modules or stand-alone benchtop instruments. The base platform is a Windows-based system, which includes a Pentium processor, liquid crystal screen and three slots to accept test modules. This base platform can be supplemented by as many as four expansion
platforms, each capable of housing six additional modules, which can be connected and controlled to provide additional functionality and capacity. These expansion platforms can also be controlled via a personal computer. Altogether, the IQ-200 OTS platform and expansion platforms can hold as many as 27 modules and test as many as 108 channels.
The modular nature of our IQ-200 OTS platform is adapted for complex applications involving the synchronized operation of several instruments.
Our Industrial and Scientific Division also addresses testing problems that cannot be handled by standard modules or stand-alone benchtop instruments. We have dedicated a team of engineers to develop custom-made, integrated test systems for customers with specific needs. Some of these integrated test systems, in turn, are modified and offered as off-the-shelf test systems to suit a wider range of customers. In addition, we have created a software development kit for developers who prefer writing their own programs for our instruments. We provide automated systems for assembly, calibration and environmental testing of optical components, value-added optical modules and optical networking systems such as:
o Multifiber test system Used for quality assurance testing of multifiber patchcords and interconnect assemblies. These devices, including hybrid and fan-out patchcords, are commonly used in fiber systems.
o Optical calibration test system Used to calibrate power meters, light sources, variable attenuators and optical time domain reflectometers.
o Environmental test system Allows users to perform long-term qualification testing of optical components and value-added optical modules under varying environmental conditions primarily to ensure compliance with industry standards.
o DWDM passive component test system Used to automatically characterize all critical specifications, including spectral insertion loss, polarization-dependent loss, and optical return loss, of a DWDM passive component with a high degree of accuracy, ease of use, and speed.
o Comb Controller Used to adjust the power of bank of DFB-ITU lasers in order to test loading conditions of optical amplifiers.
Burleigh and EXFO Photonic further enhance our Industrial and Scientific Division product portfolio by enabling customers to automate critical steps in the optical component manufacturing process. These critical steps include automated fiber alignment (Burleigh) and precision light-based, adhesive spot curing (EXFO Photonic).
Key products from Burleigh include the FR-3000 NanoRobot(R) Alignment System, which provides multi-axis alignment and can position optical devices with a 0.1 nanometer resolution. Burleigh also offers test and measurement instruments like Optical Channel Analyzers and Passive Component Analyzers.
EXFO Photonic provides precision light-based, adhesive spot-curing technologies as well as curing process control for the global optical component manufacturing market. Its products deliver precise doses of the appropriate spectral light onto photosensitive and heat-cured adhesives to significantly reduce bonding time and increase repeatability in optical component manufacturing. Key products include the Novacure(R) IR, which uses infrared spot-curing on conventional heat-cure adhesives, and Novacure(R), a bonding solution that delivers all the benefits of ultraviolet and visible spot-curing on photosensitive adhesives.
RESEARCH AND DEVELOPMENT
We believe that our future success largely depends on our ability to maintain and enhance our core technology and product functionality. To keep developing new products and enhancements, it is important that we recruit and retain highly skilled engineers, scientists and technicians. As of December 31, 2001, our research and development departments included 315 full-time engineers, scientists and technicians, of whom 46 hold post-graduate degrees. Gross research and development expenditures for fiscal 2001 reached $17.6 million compared to $9.4 million for fiscal 2000.
Through a market-oriented, product portfolio review process, we ensure that our investments in research and development are aligned with our customers' needs and strategies. This approach enables us to maximize our returns on research and development investments by focusing our resources on a limited number of prioritized projects. Quarterly product portfolio review meetings enable us to choose a realistic, balanced mix of new products and allocate the necessary resources for their development. All our projects, including those already underway, are reviewed, given a priority rating and allocated budgets and resources. Our existing projects can be stopped or substantially redefined if there have been significant changes in market conditions, or if the project development schedule or budget has been significantly exceeded.
To manage our research projects once they are underway, we use a structured management process known as the stage-gate approach. The stage-gate approach is based on a systematic review of a project's feasibility at various stages of its life cycle. The following are the key review stages of the stage-gate approach:
o market study and research feasibility;
o product definition;
o development feasibility;
o development;
o qualification; and
o transfer to production.
At each stage, we review our project risks, costs and estimated completion time. We compare our design to anticipated market needs and ensure that our project is synchronized with other internal departments and external industry events. The inter-related portfolio review and stage-gate processes enabled us to be named winners of the Outstanding Corporate Innovator Award in 2000 by the U.S.-based Product Development and Management Association.
CUSTOMERS
More than 2,000 customers in 70 countries around the world rely on our test instruments and systems in research and development laboratories and production environments and to enable optical networks to perform impeccably during their complete lifecycles. Our customers include telecommunications carriers, cable television companies, public utilities, private network operators, third-party installers, equipment rental companies as well as optical component and system manufacturers. Our top three customers in terms of sales for fiscal 2001 were Verizon Communications, Nortel Networks Corporation and TSH Tech Development, a Chinese-based distributor. During fiscal 2001, no single customer accounted for more than 6.4% of our sales. With regard to geographic distribution, North American customers represented 58.3% of our sales, while international customers accounted for 41.7%. Our international sales are largely handled by a network of distributors around the world.
SALES
We sell our fiber-optic test, measurement and automation products through direct and indirect sales networks in the United States and Canada as well as around the world. We also have two Customer Service Groups to meet the needs of existing and new customers in North America and on the international front. These groups are responsible for providing quotations to customers, supporting our sales force, managing demonstration units, order management, technical support and training as well as calibration and repair services.
UNITED STATES AND CANADA SALES
In the United States and Canada, our direct sales network consists of a vice-president supported by a 45-member team of regional sales managers, sales engineers and application engineers, who are located throughout major metropolitan areas. Our group of sales professionals has a minimum average of 12 years of experience in the fields of telecommunications, fiber optics, or test, measurement and monitoring.
In Canada, the direct to customer sales team addresses the carrier, manufacturing and research and development markets for our test, measurement and monitoring equipment and our manufacturing automation products. Sales personnel are located in metropolitan areas throughout the country.
In the United States, we have adopted a market-specific sales strategy. Different sales organizations have been created to maximize coverage and penetration of our main markets:
o CARRIER MARKET. This sales team targets customers who own, operate or install networks as their primary business. This market includes telecommunications
carriers, cable television companies, public utilities, private network operators, as well as third-party installers and equipment rental companies.
o MANUFACTURING/R&D MARKET. Two sales teams specializing respectively in our test, measurement and monitoring equipment and in our manufacturing automation products target customers who research, develop or manufacture optical networking products and components. In this market, some regional sales managers also have direct responsibility for serving our larger manufacturing customers. This organizational structure allows us to adequately cover the demands of a highly technical customer base and to identify and penetrate the large multi-function accounts, diverse and smaller customers, university researchers, military contractors, contract manufacturers and other evolving market segments.
Our main sales office in the United States is located in Richardson, Texas. We also maintain sales personnel in numerous metropolitan areas and rely on more than 20 sales representatives situated throughout the United States.
INTERNATIONAL SALES
Our international sales network includes a vice-president, a general manager in Europe and two sales directors covering Latin America and Asia, all supported by a team of 24 sales professionals. Our direct sales network in Europe is supported by a main office and service center in Paris, France, which maintains our head European sales operations and also provides repair and calibration services for our European, Middle East and African customers. Our main office for Asia is in Singapore and we have also established service centers in Singapore and Beijing to better serve our customer base in the Asia-Pacific region. In addition, we have other sales offices in strategic locations around the world to support our network of distributors and customers. Finally, we rely on more than 50 distributors to support our international sales. We feel that the local presence and cultural attributes of our distributors allow us to better serve our global markets.
MARKETING, COMMUNICATIONS AND CUSTOMER SUPPORT
MARKETING
Our Marketing Group consists of 30 product managers and marketing analysts who have various degrees in engineering, science and business administration. Product managers, with the assistance of marketing analysts, are responsible for all aspects of our marketing program including product strategy, new product introductions, definition of new features and functions, pricing, product launches and advertising campaigns. Marketing analysts help product managers develop marketing programs with tools such as our Web site, CD-ROMs, advertisements, mailouts and customer presentations. We follow up our marketing initiatives by attending industry trade shows. Furthermore, we have implemented a customer relationship management system to compile market and customer information including forecasts, leads and competitive data. We use this information to make strategic business decisions. Finally, our strategic marketing team analyses markets, market trends, compiles competitive information and identifies macro-trends in our sector.
COMMUNICATIONS
Our Communications Group, which mainly consists of commercial writers and graphic artists, supports our Marketing Group by producing marketing and corporate documentation. Literature includes specification sheets, application notes, product catalogues, advertising copy and a bi-monthly corporate newsletter. Our Communications Group is also responsible for maintaining and updating our Web site.
CUSTOMER SUPPORT
We have developed a Customer Support Group that serves customers and distributors around the world in English, French, Spanish and German. Our Customer Support Group consists of three distinct units: technical support, order management and a repair and calibration authorization service center. A frequently asked question database is also updated regularly on our Web site.
MANUFACTURING
Manufacturing operations consist mainly of material planning, procurement, sub-assembly, final assembly, testing, software loading, calibration, quality assurance and shipping and billing.
As of December 31, 2001, we had 354 employees involved in our manufacturing operations. Our manufacturing operations, which occupy approximately 139,900 square feet, are spread among four buildings in three cities. We have two buildings that occupy 113,900 square feet in Quebec City, Canada, one building that occupies 10,000 square feet in Victor, United States, and another building that occupies 16,000 square feet in Toronto, Canada. Our manufacturing operations in Quebec City are handled by three inter-related departments:
o PRODUCTION. Our production department is responsible for manufacturing high-quality products on time. Each cell consists of specialized technicians and has full responsibility over a product group. Technicians are versatile enough so that they can perform specific functions within a cell and they can be transferred to other cells when required to alleviate bottlenecks. Furthermore, this department is responsible for manufacturing schedules, finished goods warehousing, customs management, shipping and billing.
o PRODUCTION ENGINEERING AND QUALITY. This department, which supports our production cells, acts like a gatekeeper to ensure the quality of our products and the effectiveness of our manufacturing processes. It is responsible for the transfer of products from research and development to manufacturing, product improvement, documentation, metrology, repairs and the quality assurance and regulatory compliance process. Quality assurance represents a key element in our manufacturing operations. We meticulously verify our instruments to ensure that they meet stringent industry requirements and provide our customers with detailed product test sheets. Our quality assurance program in Quebec City has been certified ISO 9001 since 1994.
o SUPPLY-CHAIN MANAGEMENT. This department is responsible for parts procurement, raw materials and forecasting. Our products consist of optical, electronic and mechanical parts. Approximately one-third of our parts are manufactured to our specifications. Some parts are obtained from single-source suppliers. We manage risks associated with single-source suppliers, as well as parts that are subject to industry shortages or long delivery lead times, through a strategic forecasting process that involves procuring excess inventory where appropriate.
Manufacturing operations at Burleigh, EXFO Photonic and EXFO Protocol follow a similar process with the exception that some non-critical tasks, such as the stuffing of printed circuit boards, are outsourced.
COMPETITION
The fiber-optic test, measurement and automation industry is highly competitive and subject to rapid change as a result of technological developments and other factors. We compete with many different companies, depending on product family and geographical market. We believe that the main competitive factors in the industry include the following:
o product performance and reliability;
o level of technological innovation;
o product lead times;
o breadth of product offering;
o ease of use;
o customer service and technical support;
o strength of sales and distribution relationships; and
o price.
Generally, our competitors fall into two categories. The first category consists of global electronic test and measurement manufacturers, who complement their broad range of products with fiber-optic test, measurement and automation equipment. These companies include Acterna Corporation, Agilent Technologies, Inc., Ando Corporation, Anritsu Corporation, GN Nettest and Tektronix, Inc.
The second category refers to niche companies in the fiber-optic test, measurement and automation industry. These companies typically have limited product lines and in some cases may be geographically limited in their customer base. Such companies include Digital Lightwave, Inc., ILX Lightwave Corporation, JDS Uniphase Corporation, Kingfisher International PTY Ltd., Newport Corporation and Santec Corporation.
REGULATORY ENVIRONMENT
In most countries where our products are sold, our products must comply with the regulations of one or more governmental entities. These regulations often are complex and vary from country to country. Depending upon the country and the relevant product, the applicable regulations may require product testing, approval, registration, marking and unique design restrictions. Accordingly, we have appointed a team of engineers who are responsible for ensuring that our products comply with all applicable regulations.
In the United States, our products must comply with the regulations of several agencies of the U.S. federal government, including the Federal Communications Commission, or the FCC, the Food and Drug Administration, or the FDA and the Occupational Safety and Health Administration, or OSHA. Under the FCC's regulations, our products must comply with, among other things, rules concerning unintentional radio frequency emissions that interfere with protected radio communications systems. Depending upon the product, compliance with these rules may necessitate applying for and obtaining an FCC equipment authorization prior to importing into the United States, or marketing, any units of the relevant product. Additionally, some of our products must comply with the FDA's performance standards and related rules concerning light-emitting products, such as lasers. The FDA's regulations are intended to promote safety by limiting human exposure to harmful electromagnetic radiation. Similarly, our products must comply with OSHA's design safety standards for systems that utilize electricity. These rules are intended to reduce the risk of accidental human electrocution.
Similar regulations apply in other countries. For example, our products are subject to the safety standards of Industry Canada and the Canadian Standards Association with respect to electricity utilization and radio frequency emissions. Other countries in the world require equipment marking in accordance with the standards of the European Community, often referred to as CE marking, testing to ensure compliance with International Electrotechnical Commission standards and other international product approval. Other significant types of regulations not described in this annual report also may apply, depending upon the relevant product and country.
INTELLECTUAL PROPERTY
Our success and ability to compete are dependent in part on our ability to develop and protect our proprietary technology. We file U.S. and Canadian patent applications to protect technology, inventions and improvements important to the development of our business. We also rely on a combination of copyright, trademark, trade secret rights, licensing and confidentiality agreements.
We currently hold 18 U.S.-issued and seven Canadian-issued patents and we have 16 U.S., 15 Canadian and 4 Patent Cooperation Treaty patent applications pending. These issued and pending patents cover various aspects of our products and processes. The expiration dates of our issued patents range from January 16, 2010 to June 14, 2020.
We consider five of our inventions for which patents have either been granted or are pending to be material. These inventions are:
o the optical time domain reflectometer with internal reference reflector for which a patent was granted in the United States and is pending in Canada. This invention permits the control of the optical time domain reflectometer detector gain and the determination of the loss of the initial optical connector and is used in most of our optical time domain reflectometer-based products;
o the measurement of attenuation of optical fibers using bidirectional transmission of information via the fiber for which patents were granted in the United States and Canada. This invention forms the basis of our FOT-920 and FTB-3920 products;
o an adapter for interconnecting optical fiber connectors for which patents are pending in Canada and the United States. This invention permits a wide variety of connectors to be joined to our test and measurement instruments;
o the light cure system with closed loop control and work piece recording which is at the heart of the spot-curing systems manufactured by EXFO Photonic for which patents were granted in the United States and Canada; and
o the portable test gear for TDM and packet based communications for which patent applications have been filed in Canada, the United States and pursuant to the Patent Cooperation Treaty form the basis of the technology used by EXFO Protocol for its protocol testing products.
Confidentiality and proprietary information agreements with our senior management, employees and others generally stipulate that all confidential information developed or made known to these individuals by us during the course of their relationship is to be kept confidential and not disclosed to third parties, except in specific circumstances. The agreements also generally provide that all intellectual property developed by the individual in the course of rendering services to us belongs exclusively to us. These efforts afford only limited protection.
LEGAL PROCEEDINGS
On November 27, 2001, a class action suit was filed in the United States District Court for the Southern District of New York by John Williams, and others similarly situated, against us, four of the underwriters of our initial public offering (Merrill Lynch, Pierce, Fenner & Smith, Inc., RBC Dominion Securities Inc., Wit Soundview Corporation and CIBC World Markets Inc.) and Messrs. Germain Lamonde and Pierre Plamondon pursuant to the SECURITIES EXCHANGE ACT OF 1934 and Rule 106-5 promulgated thereunder and sections 11, 12 and 16 of the SECURITIES ACT OF 1933. This class action alleges that our registration statement and prospectus filed with the Securities and Exchange Commission on June 29, 2000 contained material misrepresentations and/or omissions resulting from (i) the underwriters allegedly soliciting and receiving additional, excessive and undisclosed commissions from certain investors in exchange for which they allocated material portions of our shares issued in connection with our initial public offering; and (ii) the underwriters allegedly entering into agreements with customers whereby our shares issued in connection with our initial public offering would be allocated to those customers in exchange for which such customers agreed to purchase additional amounts of our shares in the after market at pre-determined prices. The plaintiff in this suit seeks an unspecified amount for
damages suffered. We believe that our executive officers and we have fully complied with all applicable securities laws and that the claims against our officers and us are without merit. We have referred this matter to our insurers and plan to vigorously defend our position in this litigation. However, we are unable to predict the outcome of this case and if it is adversely determined, it could have certain adverse effects on our business, including potential monetary damages.
On December 12, 2000, GAP Optique instituted legal proceedings with the Juridiction des Prud'hommes in Geneva, Switzerland against an ex-employee for breach of a confidentiality obligation as stipulated in his employment contract. GAP is claiming monetary damages only since Swiss law does not allow injunctive relief in this case. Mr. Patrick Stamp was hired by our subsidiary, GAP Optique on May 1, 1998. Mr. Stamp's employment contract contained a confidentiality clause that prohibits disclosure or use of any confidential information he may obtain during the course of his work. The contract provides that this obligation continues for a period of one year following termination of the employment agreement. Mr. Stamp left GAP Optique in February 2000 to create a start-up company called LUCIOL Instruments, S.A ("LUCIOL") with the help of two former employees of the University of Geneva. LUCIOL presently manufactures and sells fiber optic test instruments, of which two (a chromatic dispersion analyzer and a photon-counting OTDR) were developed jointly by GAP Optique and the University of Geneva. Mr. Stamp participated in the development of these instruments during employment with GAP Optique and the University. Therefore, it is the contention of GAP Optique that Mr. Stamp is now using illegally, through LUCIOL, the proprietary and confidential information he obtained during his employment in order to market the particular test instruments. A preliminary hearing was held on November 1, 2001 and the proceedings will resume in January 2002.
There are no other legal or arbitration proceedings pending or threatened of which we are aware which may have or have had a significant effect on our financial position.
C. ORGANIZATIONAL STRUCTURE
As of December 31, 2001, the following chart presents our corporate structure, the jurisdiction of incorporation of our subsidiaries and the percentage of shares that we hold in those subsidiaries.
[GRAPHIC OMITTED]
[ORGANIZATION CHART]
EXFO Electro-Optical
Engineering Inc.
18/09/85
(Canada)
Operating
100% 100% 100% 85% 100% 100% 100%
EXFO UK Limited EXFO Photonic GEXFO Distribution GAP Optique SA EXFO Asia Pacific Nortech Fibronic Inc. EXFO Protocol Inc.
27/02/01 Solutions Inc. Internationale Inc. 17/05/94 PTE Ltd. 14/08/91 (formerly Avantas)
(United Kingdom) (formerly Efos 17/12/92 (Switzerland) 18/01/01 (Canada) Networks
Operating Inc.) (Quebec) Operating (Singapore) Non-operating Corporation)
(Ontario) Holding Operating 02/11/2001
Operating (Canada)
Operating
GEXFO NORTECH
100% 100% 100% 100%
EXFO Europe EXFO International EXFO USA Inc. Nortech Fibronic Inc.
S.A.R.L. Services Management 07/12/00 (Texas)
08/02/94 LLC (Delaware) Dissolved 07/09/01
(France) 22/11/00 Holding
Operating (Hungary)-Operating
EXFO USA INC.
100% 100%
EXFO America Inc. Burleigh Instruments Inc.
15/12/92 25/08/72
(Delaware) (New York)
Operating Operating
BURLEIGH
100% 100% 100%
Burleigh Intruments Burleigh Instruments Burleigh
(UK) Ltd. GmbH Automation Inc.
(United Kingdom) (Germany) (Delaware)
Non-operating Non-operating Non-oeprating
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D. PROPERTY, PLANT AND EQUIPMENT
Our main offices and facilities are located near Quebec City, Canada where we occupy three buildings. These buildings house our executive and administrative offices, research and development facilities and production facilities. In addition, we maintain sales offices in Brazil, China, France, Germany, Great Britain, Japan, Singapore, Russia and the United States. Burleigh's facilities are located in Victor, in the state of New York, EXFO Photonic is located near Toronto, Canada and EXFO Protocol is located near Montreal, Canada.
During the fiscal year ended August 31, 2001, we increased our manufacturing operations in Quebec City and acquired parcels of adjoining land with a building that we use for warehouse purposes. These improvements were completed at a cost of $4,601,241, which was financed through our short-term investments. Our plans to build a new 150,000 square foot facility to house research and development, administration and marketing departments in the fall of 2001 were postponed indefinitely in order to align our cost structure to market conditions and mitigate the impact of the slowdown being felt in the telecommunications industry. In addition, during the fiscal year ended August 31, 2001, Burleigh completed expansion of its facilities in New York State that effectively doubled its square footage at a cost of $362,340 incurred from December 20, 2000, the date we acquired Burleigh, to August 31, 2001.
In addition, when our subsidiary, Nortech, ceased activities in June 2001, the lease for the premises situated at 500 St-Jean-Baptiste Street, Quebec City was cancelled upon payment of CDN$51,000 to the landlord.
The following table sets forth information with respect to the main facilities that we occupy as of December 31, 2001.
LOCATION USE OF SPACE SQUARE FOOTAGE TYPE OF INTEREST
-------- ------------ -------------- ----------------
436 Nolin Street Manufacturing 44,164 Leased
Vanier (Quebec)
400 Godin Avenue Research and Development, 128,800 Owned
Vanier (Quebec) Manufacturing and Administrative
465 Godin Avenue Executive and Administrative 24,000 Leased
Vanier (Quebec)
2260 Argentia Road Research and Development, 36,000 Leased
Mississauga (Ontario) Manufacturing and Administrative
2650 Marie-Curie Research and Development, 26,000 Leased
St-Laurent (Quebec) Manufacturing and Administrative
7647 Main Street Research and Development, 40,000 Owned
Fishers Victor (New Manufacturing and Administrative
York)
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion and analysis of the consolidated financial condition and results of operations of EXFO Electro-Optical Engineering Inc. (EXFO) for the fiscal years ended August 31, 2001, 2000 and 1999 should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. Our consolidated financial statements are reported in US dollars and have been prepared in accordance with accounting principles generally accepted in Canada, or Canadian GAAP. To the extent applicable to our consolidated financial statements included elsewhere in this annual report, these principles conform in all material respects with accounting principles generally accepted in the United States, or US GAAP, except as described in note 19 to our consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements that involve risks and uncertainties. These statements relate to our future plans, objectives, expectations and intentions. We have identified these statements by the use of words such as "may," "will," "expect," "anticipate," "intend," "plan," "estimate," "believe," "continue" or other similar expressions. These forward-looking statements reflect our current expectations and assumptions as to future events that may not prove to be accurate. Our actual results are subject to a number of risks and uncertainties and could differ materially from those discussed in these statements. Factors that could contribute to these differences include, but are not limited to, those discussed in "Item 3 - Risk Factors" of this annual report. In light of the many risks and uncertainties surrounding our business and operations, you should keep in mind that we cannot guarantee that the forward-looking statements described in this annual report will transpire. We undertake no obligation and do not intend to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as may be required under applicable law.
CORPORATE HIGHLIGHTS
EXFO REPORTS STRONG YEAR-END FINANCIAL RESULTS
EXFO announced in October 2001 it had increased sales by 104% to $146.0 million for the fiscal year ended August 31, 2001 from $71.6 million in 2000. Net earnings, excluding amortization of goodwill and the after-tax effect of amortization of intangible assets and non-recurring expenses, jumped 139% to $24.5 million, or $0.46 per share, for fiscal 2001 from $10.3 million, or $0.26 per share, for 2000. Including amortization of intangible assets and goodwill related to acquisitions as well as non-recurring expenses, EXFO's net loss for fiscal 2001 was $15.3 million, or $0.29 per share. In comparison, EXFO recorded net earnings of $9.9 million, or $0.25 per share, in fiscal 2000.
EXFO ACQUIRES AVANTAS NETWORKS
EXFO reported in August 2001 it had entered into an agreement to acquire Avantas Networks Corporation (now EXFO Protocol Inc.) for $68 million, or $96 million for the equity minus $28 million of cash on hand in that company. Consideration paid consisted of 4.4 million EXFO shares and $36 million in cash. EXFO Protocol Inc. is a supplier of leading-edge fiber-optic testing and optical network performance management equipment that supports a wide range of protocols and data transmission rates.
EXFO LAUNCHES MORE THAN 20 PRODUCTS IN 2001
EXFO announced in August 2001 it had launched more than 20 products in fiscal 2001. Key product launches included the FTB-400 Universal Test System, which is the industry's first modular platform that can perform essential physical layer tests for DWDM long-haul, metro and access networks; the OWA-9500 Optical Waveguide Analyzer, which represents the industry's first and only commercial refractive index profiler for all-important planar and arrayed waveguides; the FR-3000 NanoRobot(R) Alignment System with multi-axis alignment and 0.1-nanometer resolution for automated component manufacturing applications; and the Novacure(R) IR, which uses infrared spot-curing on conventional heat-cured adhesives.
EXFO OPENS SALES OFFICES AND SERVICE CENTERS IN ASIA
EXFO opened sales offices and service centers in Singapore and Beijing during fiscal 2001 to better serve its customers abroad. The expansion into the Asian market proved to be a winning strategy since sales almost tripled from fiscal 2000 to 2001 in this region. EXFO also relocated its Paris office to strengthen sales, application engineering and marketing services throughout Europe.
EXFO ACQUIRES EFOS
EXFO announced in March 2001 it had acquired EFOS Inc., now EXFO Photonic Solutions Inc., for 3.7 million shares valued at $85 million and $25 million in cash. EXFO Photonic Solutions is a leader in precision light-based adhesive spot curing technologies as well as curing process control for the global optical component manufacturing market.
EXFO JOINS TSE 300
EXFO announced in February 2001 it had been added to the Toronto Stock Exchange (TSE) 300 Composite Index as well as the TSE 300 Capped, S&P/TSE Canadian SmallCap and TSE 200 Indices. The TSE 300 Composite Index is a benchmark used to measure the price performance of the broad Canadian equity market.
EXFO ACQUIRES BURLEIGH INSTRUMENTS
EXFO announced in December 2000 it had acquired Burleigh Instruments, Inc. for $6.5 million shares valued at $147 million and $42 million in cash. Burleigh is a leading supplier of DWDM wavelength measurement instruments and precision positioning equipment.
INDUSTRY OVERVIEW
OPTICAL NETWORKING MARKET
The past decade has witnessed an explosive growth in the volume of data traffic largely due to the soaring popularity of the Internet and related bandwidth-intensive applications. According to information technology industry analysts, the number of Internet users around the world is expected to increase from 400 million in 2001 to nearly one billion, or 15% of the total population, by 2005. In addition, users are increasingly seeking applications that require a great deal of bandwidth such as video conferencing, video-on-demand, HDTV, e-commerce and rich media streaming.
The dramatic increase in Internet users and in bandwidth-intensive applications has created a tremendous need for high-capacity communication networks. To meet this increasing demand for bandwidth, many telecommunication carriers are designing and installing new networks based on optical fiber, deploying additional fiber within their existing networks or using advances in optical technology such as Dense Wavelength Division Multiplexing, or DWDM. DWDM involves combining beams of light of slightly different wavelengths through a single fiber, with each wavelength carrying its own stream of information. DWDM has wide market acceptance because it incorporates technologies that greatly reduce the cost of optical transmission over long distances and because it provides network flexibility in access and metropolitan areas. According to Kessler Marketing Intelligence (KMI), the global DWDM Transport Equipment Market is expected to increase from $7.1 billion in 2001 to $23.2 billion in 2005.
Although the long-term outlook for the telecommunications industry remains robust, 2001 was marked by a slowdown in the overall economy and reduced capital spending in the optical networking market. On the carrier side, we observed a trend towards maximizing existing networks by increasing transmission rates and adding DWDM channels, while delaying deployment of new fiber cables. For optical component and system manufacturers, the slowdown in the buildout of new networks resulted in excess inventories throughout the industry. Despite this over-supply of optical components, the most established component and system manufacturers did not significantly slash their R&D budgets in order to remain competitive in designing next-generation products. As a result, new production lines are still being rolled out in significant numbers.
OPTICAL TEST, MEASUREMENT AND AUTOMATION EQUIPMENT MARKET
Fiber-optic test, measurement and automation equipment is essential for research and development, manufacturing, network installation and maintenance as well as network monitoring.
Conventional test and measurement instruments used by telecommunication carriers and manufacturers of communications equipment were designed for electrical transmission systems and are unsuitable for optical networking. Unlike traditional electrical transmission systems, which transmit electrical signals along copper wires, fiber-optic transmission systems use pulses of light along glass or plastic fiber, referred to as optical fiber. When light travels along optical fiber and through the optical components and systems that link optical fibers together, it is subject to unwanted effects such as reflection, attenuation, noise and various types of dispersion, all of which degrade signal quality and reduce transmission performance. Fiber-optic test and measurement equipment is critical for measuring these effects and helping carriers and manufacturers of optical components, value-added optical modules and optical networking systems ensure network performance, efficiency and reliability.
Data sent along an optical network must respect transmission protocols, such as ATM, SONET, SDH, Ethernet and Gigabit Ethernet, and fall within accepted data transmission rates from 64 kb/s to 10 Gb/s. Otherwise, the information sent from a transmitter will not be understandable to the receiver. Fiber-optic test and measurement equipment like a bit-error rate tester is used to ensure data integrity.
Optical components and value-added optical modules, which make up an optical network, are typically assembled by hand on the production floor. Yields are inevitably low and costs are high. As a result, optical component vendors are increasingly looking for ways to increase efficiency and reduce costs by adopting automated manufacturing solutions. They either build these complex solutions in-house or turn to equipment manufacturers to help them automate critical steps in the manufacturing process such as alignment, curing and optical testing. The latter option enables optical component vendors to devote their scarce technical resources to developing next-generation products instead of manufacturing tools.
The fiber-optic test, measurement and automation market has not been immune to the challenging conditions in the optical networking sector. However, vendors with extensive product portfolios that include advanced optical test instruments were still able to market their products to carriers, who needed to upgrade their networks to higher transmission rates or add DWDM channels. Likewise, test, measurement and automation vendors, whose products increase efficiency and reduce costs on the production floor, still attracted the attention of optical component and system manufacturers, who kept investing in their R&D programs to stay ahead of the competition.
CORPORATE OVERVIEW
EXFO was incorporated on September 18, 1985. Our original products were focused primarily on the needs of installers and operators of fiber-optic networks. These products are marketed in what is known today as our Portable and Monitoring Division. This division markets its products mainly to telecommunication carriers and network service providers. These customers use Portable and Monitoring Division products for installation and maintenance, monitoring and troubleshooting applications. In 1996, we supplemented our product portfolio with an extensive line of Industrial and Scientific products that are dedicated to the research and development as well as manufacturing markets in the fiber-optic industry. Our Industrial
and Scientific products tend to be more complex and higher priced than our Portable and Monitoring products. Industrial and Scientific Division customers include optical component and system manufacturers as well and research and development laboratories. In fiscal 1999, we entered the market for remote fiber test systems. Remote fiber test systems, which are marketed through our Portable and Monitoring Division, allow carriers to deploy test equipment throughout their networks in order to monitor the integrity of their fiber-optic networks.
In fiscal 2001, we announced three strategic acquisitions to bolster growth in both of our product divisions. We acquired Burleigh Instruments for its wavelength measurement instruments and nano-positioning alignment systems. We added EFOS (renamed EXFO Photonic Solutions) for its precision light-based, adhesive spot-curing technology. Both of these companies are expected to accelerate growth in our Industrial and Scientific Division. Finally, we reached an agreement to acquire Avantas Networks, a supplier of leading-edge, fiber-optic testing and optical network performance management equipment that supports a wide range of protocols and data transmission rates. Avantas should increase sales in both product divisions, but initially in our Portable and Monitoring Division.
The Avantas acquisition will enable us to enter the critical protocol-layer testing market and, more importantly, almost double our addressable market size to an estimated $3.3 billion, according to reports from Frost and Sullivan. In layman's terms, EXFO products test the highway, or the fiber, optical components and value-added optical modules that make up the physical layer of an optical network. Our products also cover the numerous lanes along the highway, or the DWDM wavelengths carrying bandwidth within the optical layer of a network. With the Avantas acquisition, EXFO products will also test the traffic, or the bits and bytes, running through the protocol layer of a network.
We sell our products to more than 2000 customers through our direct sales force and indirectly through distribution channels. Cost of sales include raw materials, salaries and related expenses for direct and indirect manufacturing personnel and manufacturing overhead.
Selling and administrative expenses consist primarily of salaries and related expenses for personnel, sales commissions, travel expenses, marketing programs, professional services, management information systems, human resources and other corporate expenses.
Gross research and development expenses consist primarily of salaries and related expenses for engineers and other technical personnel as well as fees paid to third-party consultants. We are eligible to receive research and development (R&D) tax credits and government grants. Related R&D tax credits and government grants are recorded as a reduction of gross R&D expenses.
RESULTS OF OPERATIONS
The following table sets forth certain Canadian GAAP consolidated statements of earnings data in thousands of US dollars, except per share data, and as a percentage of sales for the years indicated:
$ %
YEARS ENDED AUGUST 31, 1999 2000 2001 1999 2000 2001
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Sales .................................... $ 42,166 $ 71,639 $ 146,013 100.0% 100.0% 100.0%
Cost of Sales ............................ 14,998 24,712 54,946 35.6 34.5 37.6
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Gross margin ............................. 27,168 46,297 91,067 64.4 65.5 62.4
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Operating expenses
Selling and administrative ............. 13,279 24,304 46,236 31.5 33.9 31.7
Net research and development ........... 4,315 6,402 13,601 10.2 8.9 9.3
Amortization of property, plant
and equipment .......................... 857 1,451 3,559 2.0 2.0 2.4
Amortization of intangible assets ...... 41 47 9,876 0.1 0.1 6.8
Non-recurring expenses ................. -- -- 3,288 -- -- 2.3
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Earnings from operations ................. 8,676 14,723 14,507 20.6 20.6 9.9
Interest income, net ..................... 136 1,480 6,098 0.3 2.1 4.2
Foreign exchange gain (loss) ............. (506) (684) 3,327 (1.2) (1.0) 2.3
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Earnings before income taxes and
amortization of goodwill ................. 8,306 15,519 23,932 19.7 21.7 16.4
Income taxes ............................. 2,492 5,298 8,150 5.9 7.4 5.6
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Earnings before amortization of
goodwill ................................. 5,814 10,221 15,782 13.8 14.3 10.8
Amortization of goodwill ................. -- 297 31,076 -- 0.4 21.3
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Net earnings (loss) for the year ......... $ 5,814 $ 9,924 $ (15,294) 13.8% 13.9% (10.5%)
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Basic and diluted net earnings
(loss) per share ......................... $ 0.14 $ 0.25 $ (0.29)
Research and development data:
Gross research and development ........... $ 6,390 $ 9,374 $ 17,601 15.2% 13.1% 12.1%
Net research and development ............. $ 4,315 $ 6,402 $ 13,601 10.2% 8.9% 9.3%
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Other data (unaudited):
Adjusted net earnings* ................... $ 5,843 $ 10,252 $ 24,463 13.9% 14.3% 16.8%
Basic and diluted adjusted net
earnings per share* ...................... $ 0.14 $ 0.26 $ 0.46
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* net earnings excluding amortization of goodwill and the after-tax effect of amortization of intangible assets and non-recurring expenses. This information may not be comparable to similarly titled measures reported by other companies because it is non-GAAP information.
SALES
Sales totalled $146.0 million, $71.6 million and $42.2 million in fiscal 2001, 2000 and 1999, respectively. Sales increased 104% in fiscal 2001 compared to 2000 due to increased demand for our Industrial and Scientific products as well as our Portable and Monitoring products, market acceptance of several products launched in 2001 and the impact of the Burleigh Instruments and EXFO Photonic Solutions acquisitions completed during the year. In addition, the increase in sales of our Industrial and Scientific products significantly affected our top line because these products have a higher average selling price than Portable and Monitoring products.
Altogether, Industrial and Scientific products accounted for almost 50% of our sales in fiscal 2001 compared to just over 30% in 2000. In fiscal 2002, we expect our Portable
and Monitoring products to regain a larger share of our total sales due to continued carrier spending and the impact of the Avantas acquisition in the second half of the year. Although telecommunication carriers have lowered their capital expenditures for network deployment, they are upgrading networks by adding DWDM channels and increasing data transmission rates. As a result, they still need to purchase test and measurement equipment to ensure network reliability. The Avantas acquisition will initially benefit the Portable and Monitoring Division, but it should eventually increase sales in the Industrial and Scientific Division.
Accepted orders increased 53% to $132.1 million in fiscal 2001 from $86.2 million for 2000. Our book-to-bill ratio, however, decreased 25% to 0.90 in fiscal 2001 compared to 1.20 in 2000. The decrease in our book-to-bill ratio reflects the downturn in the telecommunications industry, which began impacting our booking in the third quarter of 2001.
In fiscal 2000, sales increased 70% compared to 1999. Growth in sales was mainly due to increased demand for our Industrial and Scientific products as well as a general sales increase in our other products.
North American sales accounted for 58.3%, 61.6% and 56.3% of global sales in fiscal 2001, 2000 and 1999, respectively. International sales represented 41.7%, 38.4% and 43.7% of global sales in fiscal 2001, 2000 and 1999, respectively. The increase in international sales in fiscal 2001 compared to 2000 mainly reflects our sustained efforts to develop the Asian market. We almost tripled our sales in this region and added service centers in Beijing and Singapore to better serve our customers. The jump in North American sales in fiscal 2000 compared to 1999 was the result of our ability to exploit a robust economy in that region during that period.
We sell our products to a broad range of customers including telecommunication carriers, optical component and system manufacturers as well as research and development laboratories. No customer accounted for more than 6.4%, 5.8% and 6.8% of sales in fiscal 2001, 2000 and 1999, respectively.
GROSS MARGIN
Gross margin amounted to 62.4%, 65.5% and 64.4% of sales for fiscal 2001, 2000 and 1999, respectively. Despite the increase in sales of Industrial and Scientific products, which tend to be slightly higher-margin products, gross margin decreased in fiscal 2001 compared to 2000 due to a number of reasons. First of all, we significantly increased our manufacturing capacity as well as hired and trained related manufacturing employees to face current and future demand for our products. Secondly, we re-engineered our manufacturing processes to be more cost-effective and to better mitigate the impact of potential pricing pressure in the future. Thirdly, we acquired EXFO Photonic Solutions, which operates in a market that has relatively lower-margin products. Finally, the slowdown in the telecommunications industry, which affected us mostly in the last quarter of fiscal 2001, prevented us from a better absorption of our fixed costs.
The improvement in gross margin in fiscal 2000 compared to 1999 reflects the increase in government grants earned in 2000, increased sales of higher-margin products and our cost-reduction manufacturing programs.
Gross margin can be negatively affected by competitive pricing pressure, increases in component costs and obsolescence costs, shifts in product mix, reductions in government grants, under-absorption of manufacturing fixed costs and increases in product offerings by other suppliers in the fiber-optic test, measurement and automation industry.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses reached $46.2 million, $24.3 million and $13.3 million for fiscal 2001, 2000 and 1999, respectively. As a percentage of sales, selling and administrative expenses amounted to 31.7%, 33.9% and 31.5% for fiscal 2001, 2000 and 1999, respectively. The dollar increase for fiscal 2001 compared to 2000 is directly related to higher commissions resulting from increased sales activity, increased promotional and marketing expenses, expenses to consolidate our sales force in Asia, expenses related to running a public company and the impact of the Burleigh Instruments and EXFO Photonic Solutions acquisitions. The percentage decrease is mainly due to a better absorption of these expenses because sales are increasing at a faster rate than selling and administrative expenses.
The increase in selling and administrative expenses in fiscal 2000 compared to 1999 reflects increased personnel expenses for sales and marketing staff, increased expenses related to customer support, increased sales commissions related to higher sales, increased promotional and marketing expenses as well as the expenses related to running a public company since June 2000. Considering current market conditions, efforts will be undertaken to maintain our selling and administrative expenses at an acceptable level without impeding our efforts to strategically position our company, improve our sales, marketing and customer service teams, integrate our acquired companies and satisfy our customers.
RESEARCH AND DEVELOPMENT
Gross R&D expenses totalled $17.6 million, $9.4 million and $6.4 million for fiscal 2001, 2000 and 1999, respectively. As a percentage of sales, gross R&D expenses were 12.1%, 13.1% and 15.2% for fiscal 2001, 2000 and 1999, respectively. The increase in gross R&D dollars in fiscal 2001 compared to 2000 reflects our commitment to innovation by hiring additional R&D personnel as well as by the acquisitions of Burleigh Instruments and EXFO Photonic Solutions. Taking into account these acquisitions, we added 95 employees to our R&D departments in fiscal 2001, supporting our continued focus on innovative product development. Our sustained efforts in R&D allowed us to launch more than 20 new products in 2001. Altogether, 46% of our sales in fiscal 2001 originated from products that have been on the market for two years or less. This figure confirms our dedication to innovation and our anticipation of customers' needs and expectations.
The decrease, as percentage of sales, in fiscal 2001 compared to 2000 is mainly due to the fact that sales increased at a faster rate than R&D expenses during this period.
The increase in R&D dollars in fiscal 2000 compared to 1999 reflects the hiring of additional personnel to develop new products and enhance current ones. During fiscal 2000, we added 45 employees to our R&D Department.
Tax credits and grants from federal, provincial and state governments for R&D activities were $4.0 million, $3.0 million and $2.1 million for fiscal 2001, 2000 and 1999, respectively. The increase in tax credits and grants in fiscal 2001 compared to 2000 is directly related to the hiring of additional R&D personnel as well as the impact of the EXFO Photonic Solutions acquisition. The increase in tax credits and grants in fiscal 2000 compared to 1999 is the result of hiring additional R&D personnel.
Tax credits and grants, as a percentage of gross R&D expenses, were 22.7%, 31.7% and 32.5% for fiscal 2001, 2000 and 1999, respectively. The decrease in fiscal 2001 compared to 2000 is related to a reduction in the effective tax credit rate and grants on R&D carried out in Canada. It should be noted that R&D carried out by US-based Burleigh Instruments is not eligible for tax credits. As a result, the gross R&D percentage was further reduced in fiscal 2001.
In terms of net R&D expenses, they amounted to 9.3%, 8.9% and 10.2% of sales for fiscal 2001, 2000 and 1999, respectively. We expect to continue investing heavily in R&D in the upcoming year, reflecting our focus on innovation and our desire to exceed our customers' needs and expectations.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the acquisitions of Burleigh Instruments and EXFO Photonic Solutions, we recorded $54.7 million in intangible assets primarily consisting of core technology. These intangible assets, which are amortized over periods from five months to five years, resulted in an amortization expense of $9.9 million in fiscal 2001.
NON-RECURRING EXPENSES
In June 2001, we implemented a structured plan to reduce costs and increase efficiency in order to align our cost structure to market conditions and be better positioned amidst a challenging environment.
Under this plan, we incurred non-recurring expenses of $3.3 million, including $0.8 million in severance expenses for the 245 employees who were terminated and $2.5 million in unused facilities and assets. No such expenses were incurred in fiscal 2000 and 1999.
This plan should enable us to reduce our operating expenses by approximately $8 million in fiscal 2002.
INTEREST INCOME, NET
Interest income amounted to $6.1 million, $1.5 million and $0.1 million for fiscal 2001, 2000 and 1999, respectively. The increase in our interest income results solely from short-term investments of the remaining net proceeds of our Initial Public Offering on June 29, 2000. The increase in interest income is somewhat offset by interest expenses and bank charges related to borrowings under our lines of credit. Our interest income will decrease in fiscal 2002 because we used short-term investments to pay for cash considerations in recent acquisitions and because interest rates may continue to drop.
FOREIGN EXCHANGE GAIN (LOSS)
Foreign exchange gain amounted to $3.3 million in fiscal 2001 compared to foreign exchange losses of $0.7 million in 2000 and $0.5 million in 1999.
The foreign exchange gain in fiscal 2001 can be mostly attributed to the disposal of short-term investments denominated in US dollars and to the foreign exchange impact on operating activities of Canadian entities denominated in currencies other than the Canadian dollar. Foreign exchange losses incurred in fiscal 2000 and 1999 are solely due to the foreign exchange impact on operating activities of Canadian entities denominated in currencies other than the Canadian dollar.
INCOME TAXES
Our effective income tax rates were 34.1%, 34.1% and 30.0% for fiscal 2001, 2000 and 1999, respectively. Our effective income tax rate was flat in fiscal 2001 compared to 2000. The increase from fiscal 1999 to 2000 can be attributed to a decrease in our manufacturing and processing deduction.
AMORTIZATION OF GOODWILL
In conjunction with the acquisitions of Burleigh Instruments and EXFO Photonic Solutions, we recorded $248.5 million in goodwill. Goodwill, which is amortized over five years, resulted in an amortization expense of $31.1 million in fiscal 2001.
NET EARNINGS (LOSS)
Net loss amounted to $15.3 million in fiscal 2001 compared to net earnings of $9.9 million in 2000 and $5.8 million in 1999. In terms of per share amounts, we recorded a net loss of $0.29 in fiscal 2001 compared to net earnings of $0.25 in 2000 and $0.14 in 1999.
ADJUSTED NET EARNINGS
As a measure to assess financial performance, we use adjusted net earnings and adjusted net earnings per share. Adjusted net earnings represent net earnings excluding amortization of goodwill and the after-tax effect of amortization of intangible assets and non-recurring
expenses. Adjusted net earnings amounted to $24.5 million, $10.3 million and $5.8 million in fiscal 2001, 2000 and 1999, respectively. In terms of adjusted net earnings per share, it reached $0.46, $0.26 and $0.14 in fiscal 2001, 2000 and 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our Initial Public Offering, we had financed operations and met our capital expenditure requirements mainly through cash flows from operations, research and development tax credits and government grants. On June 29, 2000, we closed our Initial Public Offering of 8,050,000 subordinate voting shares at a price of US$26.00 per share in the United States and Cdn$38.55 per share in Canada. Total proceeds, including the over-allotment option exercised by the underwriters, were approximately US$209 million.
CASH POSITION AND SHORT-TERM INVESTMENTS
As at August 31, 2001, cash and cash equivalents as well as short-term investments consisted of $74.6 million. Our working capital was at $130.3 million. The announced acquisition of Avantas Networks Corporation will be partially financed with $8.0 million of cash on hand.
OPERATING ACTIVITIES
Cash flows provided by operating activities were $3.1 million in fiscal 2001 compared to cash flows used of $4.0 million in 2000 and cash flows provided of $3.7 million in 1999. Cash flows provided by operating activities in fiscal 2001 were primarily due to net earnings after items not affecting cash and cash equivalents of $24.5 million. This figure was mainly offset by an increase of $20.3 million in inventories required to ensure minimal manufacturing and delivery lead times.
Cash flows used in operating activities in fiscal 2000 were primarily due to net earnings after items not affecting cash and cash equivalents of $10.9 million. This figure was mainly offset by an increase of $10.5 million in accounts receivable, resulting from higher volumes of sales and $10.7 million in inventories that were required to ensure minimal manufacturing and delivery lead times.
The major items not affecting cash and cash equivalents consisted of net amortization expenses of $43.9 million for fiscal 2001 and $1.0 million for 2000.
FINANCING ACTIVITIES
Cash flows used in financing activities were $4.6 million in fiscal 2001 compared to cash flows provided of $172.9 million in 2000 and cash flows used of $3.3 million in 1999. Cash flows used in financing activities in fiscal 2001 were mainly due to the repayment of bank advances and long-term debt of $5.4 million. Considering these repayments, we have available credit facilities as at August 31, 2001 that provide for advances of up to $11.4 million under lines of credit. These lines of credit bear interest at prime rate.
Cash flows provided by financing activities in fiscal 2000 were the result of the net proceeds of our Initial Public Offering of $192.9 million less the dividends paid of $17.6 million. Cash flows used in financing activities in fiscal 1999 were due to the payment of $3.2 million in dividends that were declared that year. We do not foresee payments of additional dividends during the next three fiscal years.
INVESTING ACTIVITIES
Cash flows provided by investing activities were $9.2 million in fiscal 2001 compared to cash flows used of $169.0 million in 2000 and $1.2 million in 1999.
In fiscal 2001, we disposed of $93.4 million in short-term investments to finance the $15.9 million purchase of property, plant and equipment as well as to pay the cash consideration of $68.3 million for the Burleigh Instruments and EXFO Photonic Solutions acquisitions. Despite these investments, the disposal of short-term investments generated net cash flows of $9.2 million in fiscal 2001.
The purchases of $159.8 million in short-term investments from the net proceeds of our Initial Public Offering and of $7.2 million in property, plant and equipment explain the use of cash flows for investing activities in fiscal 2000. In fiscal 1999, the purchase of $1.2 million in property, plant and equipment explain the use of cash flows in investing activities. As at August 31, 2001, property, plant and equipment amounted to $27.1 million, while intangible assets and goodwill related to the acquisitions of Burleigh instruments and EXFO Photonic Solutions totalled $264.2 million, net of related accumulated amortization.
OUTLOOK
We believe that our existing cash balances and short-term investments, together with cash flows from operations and available credit facilities, will be sufficient to meet our expected liquidity and capital requirements for the upcoming year, taking into account the cash consideration to be paid for the previously announced acquisition of Avantas Networks. However, possible investments in or acquisitions of complementary businesses, products or technologies may require additional financing prior to such time. There can be no assurance that additional debt or equity financing will be available when required or, if available, it can be secured on terms satisfactory to us.
NEW ACCOUNTING STANDARDS
On August 1, 2001, the Canadian Institute of Chartered Accountants issued section 1581 "Business Combinations," which supersedes section 1580, and issued section 3062 "Goodwill and Other Intangible Assets." Section 1581 requires business combinations initiated after June 30, 2001 or business combinations accounted for by the purchase method with a date of acquisition after June 30, 2001, to be accounted for using the purchase method of accounting. This section also broadens criteria for recording intangible assets separately from goodwill. Upon the adoption of section 3062, recorded goodwill and intangible assets will be evaluated against these new criteria and may result in certain intangible assets being reclassified into
goodwill or, alternatively, amounts initially recorded as goodwill being
separately identified and recognized apart from goodwill as intangible assets.
Section 3062 requires the use of a non-amortization approach to account for
purchased goodwill and indefinite-lived intangibles. Under the non-amortization
approach, goodwill and indefinite-lived intangibles will not be amortized, but
instead they will be reviewed for impairment and written down and charged to
earnings only in the periods in which the recorded value of goodwill and
indefinite-lived intangibles exceed their fair value. This section will be
adopted on September 1, 2002.
The impact of adopting section 3062 will allow us to use the non-amortization approach for goodwill and will reduce annual goodwill amortization by approximately $50 million. Moreover, we will implement a new goodwill impairment methodology and any potential initial impairment losses on goodwill determined by this methodology will be charged to deficit. Any subsequent impairment losses on goodwill will be charged to earnings in the period in which it is incurred.
Under US GAAP, any potential initial impairment losses on goodwill determined by this methodology will be charged to earnings.
For more details on new US accounting standards, see note 19 to our consolidated financial statements.
RISKS AND UNCERTAINTIES
Over the past few years, we have been successful in maintaining a strong rate of growth by effectively managing our activities, by focusing on the research and development of new and innovative products, by penetrating international markets, by seeking and closing important strategic acquisitions and, finally, by attracting and retaining highly skilled employees. However, we operate in a highly competitive field that is in constant evolution and, as a result, we encounter various risks and uncertainties that must be given appropriate consideration in our strategic management policies.
The main risks and uncertainties related to the fiber-optic test, measurement and automation industry involve the quick development of new products that have short lifecycles and require extensive research and development; the difficulty of attracting and retaining highly skilled employees as well as offering them effective training programs; and the ability to quickly adapt our cost structure to changing market conditions in order to maintain or increase our growth.
In addition, given our strategic goals for growth and competitive positioning in our industry, we are expanding into international markets. This exposes us to certain risks and uncertainties related to changes in local laws and regulations, multiple technological standards, protective legislation and pricing pressure.
Furthermore, while the important strategic acquisitions we have made are essential to our long-term growth, they also expose us to certain risks and uncertainties related to the rapid
and effective integration of these companies as well as their products, technologies and personnel.
We are also exposed to currency risks as a result of the export of our products manufactured in Canada, substantially all of which are denominated in US dollars. These risks are partially hedged by the operating expenses of certain international subsidiaries, the purchase of raw materials in US dollars and forward exchange contracts. (See note 18 to our consolidated financial statements).
Also, an economic slowdown in our industry could result in some of our customers experiencing difficulties and, consequently, this could have a negative effect on our results. However, the sectorial and geographic diversity of our customer base provides us with a reasonable level of protection in this area. Finally, other financial instruments which potentially subject us to credit risks consist principally of cash and cash equivalents, short-term investments and forward exchange contracts. Our short-term investments consist of debt instruments issued by high-credit quality financial institutions and corporations and units of a low-risk mutual fund. Our cash and cash equivalents and forward exchange contracts are held with or issued by high-credit quality financial institutions; therefore, we consider the risk of non-performance on these instruments to be remote. (See Item 3 for a list of risk factors).
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth information about our executive officers, senior managers and directors as of December 31, 2001.
NAME AND
MUNICIPALITY OF RESIDENCE POSITIONS WITH EXFO
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GERMAIN LAMONDE Chairman of the Board, President and Chief
Cap-Rouge, Quebec Executive Officer
PIERRE PLAMONDON, CA Vice-President, Finance and Chief Financial
Quebec City, Quebec Officer
MARIO LAROSE Vice-President, Marketing
Laval, Quebec
STEPHEN BULL Vice-President, Research and Development
Lac-Beauport, Quebec
JEAN-FRANCOIS BOULET Vice-President, Human Resources
Montmagny, Quebec
BRUCE BONINI Vice-President, North American Sales
Fairview, Texas
JUAN-FELIPE GONZALEZ Vice-President, International Sales
Singapore
GREGORY SCHINN Chief Technology Officer
Quebec City, Quebec
PIERRE MARCOUILLER Director
Magog, Quebec
DAVID A. THOMPSON Director
Horseheads, New York
ANDRE TREMBLAY Director
Outremont, Quebec
MICHAEL UNGER Director
Woodbridge, Ontario
KIMBERLEY ANN OKELL Secretary and Legal Counsel
Quebec City, Quebec
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The address of each of our executive officers, senior managers and directors is c/o EXFO Electro-Optical Engineering Inc., 465 Godin Avenue, Vanier, Quebec, Canada. The following is a brief biography of each of our executive officers, senior managers and directors.
GERMAIN LAMONDE is one of our founders. Germain Lamonde has been our Chairman of the Board, President and Chief Executive Officer since our inception in 1985. Mr. Lamonde holds a bachelor's degree in Physics Engineering from Ecole Polytechnique, University of Montreal in Canada and a master's degree in Optics from Laval University in Canada.
PIERRE PLAMONDON has been our Vice-President, Finance and Chief Financial Officer since January 1996 and was a director from December 1999 to May 2000. Prior to joining us, Mr. Plamondon served as senior manager for Price Waterhouse, now PricewaterhouseCoopers LLP, from September 1981 to December 1995 in Canada and France. Mr. Plamondon holds a bachelor's degree in Business Administration and a license in Accounting, both from Laval
University in Canada. Mr. Plamondon has been a member of the Canadian Institute of Chartered Accountants since 1983.
MARIO LAROSE was appointed Vice-President, Marketing on June 7, 2000. Prior to joining us, Mr. Larose was Interim General Manager with C-MAC Corporation, a manufacturer of microelectronic products, from September 1999 to January 2000. Prior to the acquisition by C-MAC of L.G. Technologies Ltee, Mr. Larose held the position of Vice-President, Marketing and Sales with L.G. Technologies Ltee, a sub-contract electronic manufacturer from January 1998 to September 1999. Prior to that, Mr. Larose was Vice-President, Engineering with Unican Security Systems Limited, a public security systems manufacturer, from August 1995 to December 1997. Prior to joining Unican, Mr. Larose held various positions with Northern Telecom, now Nortel Networks Limited, a provider of telephony, data, wireless and wire-line solutions for the Internet. Mr. Larose is President and a shareholder of LAMA2 inc., a private management consulting company. Mr. Larose holds a bachelor's degree in Applied Sciences, Engineering Physics from Ecole Polytechnique, University of Montreal in Canada and a master's in Business Administration from Universite du Quebec a Montreal in Canada.
STEPHEN BULL was appointed our Vice-President, Research and Development in December 1999. He joined us in July 1995 and held the positions of Assistant Director-Engineering from September 1997 to December 1999 and Group Leader (Engineering Management) from July 1995 to September 1997. From June 1990 to March 1995, Mr. Bull held the position of General Manager and Managing Director for Space Research Corporation, a military engineering company in Belgium. Mr. Bull holds a bachelor's degree in Electrical Engineering from Laval University in Canada.
JEAN-FRANCOIS BOULET joined us in March 2000 as Vice-President, Human Resources. Mr. Boulet was formerly employed by Societe de portefeuille du Groupe Desjardins -- Assurances Generales since 1996 where he had been successively Senior Vice-President, Human Resources and Senior Vice-President, Human Resources and Corporate Communications. From 1992 to 1996, Mr. Boulet held different senior management positions related to human resources and organizational development for Inglis Limited, a leading manufacturer of home appliances. Mr. Boulet holds a bachelor's degree in Industrial Relations from Laval University in Canada.
BRUCE BONINI has been our Vice-President, North American Sales since December 1998. Prior to joining us, Mr. Bonini held the position of Vice-President Sales-Eastern Region for Wandel & Golterman, now Wavetek Wandel & Golterman, a company specializing in communications test solutions, from September 1997 to December 1998. Mr. Bonini was successively Sales Director and Vice-President of Sales for Digital Lightwave Inc., a synchronous optical network test equipment manufacturer, from August 1996 to January 1997. From August 1987 to August 1996, Mr. Bonini held different sales and senior management positions for Laser Precision Corporation, an optical test equipment manufacturer. Following the acquisition of Laser Precision by GN Nettest, Mr. Bonini was named Global Vice-President of Sales for GN Nettest/Fiber-Optics Division. Mr. Bonini holds a bachelor's degree in Business Administration (industrial marketing) from Western Michigan University in the United States.
JUAN-FELIPE GONZALEZ has been our Vice-President, International Sales since September 1998. From January 1997 to September 1998, he was our International Sales Director and, from September 1993 to January 1997, our Sales Manager for Latin America and the Caribbean. Prior to joining us in September 1993, Mr. Gonzalez was Marketing and Sales Director at Reyde, Barcelona, a plastics technical product corporation in Spain. Mr. Gonzalez holds a bachelor's degree in Industrial Chemistry from Complutense University of Madrid in Spain and a master's degree in Business Administration from the School of Industrial Organization in Spain.
GREGORY SCHINN was appointed our Chief Technology Officer in November 1999, after simultaneously holding the positions of Scientific Director and Head of the Research Group since joining us in April 1996. Prior to joining us, Dr. Schinn led the research and development team responsible for optical amplifier and fiber laser development at MPB Technologies, Inc., a diversified technology company, in Montreal from 1990 to 1996. Dr. Schinn holds a bachelor's degree in Engineering Science and a master's degree in Aerospace Engineering from the University of Toronto. He also holds a Ph.D. in Physics from the University of Colorado at Boulder and has spent two years as a post-doctoral research associate at the University of Virginia. Dr. Schinn has been published in numerous scientific journals and he has served on the technical organizing committees of several international scientific conferences. He is currently the Director of the Division of Applied Physics of the Canadian Association of Physicists.
PIERRE MARCOUILLER has served as our director since May 2000. Mr. Marcouiller is Chairman of the Board and Chief Executive Officer of Camoplast Inc., a supplier of components to the recreational and motorized vehicle and automotive parts markets. He is the founder and has been sole shareholder of Nexcap Inc., an investment company in the manufacturing sector, since December 1996. Mr. Marcouiller worked with Venmar Ventilation Inc., a private ventilation equipment manufacturer, from January 1983 to December 1996. Mr. Marcouiller was the controlling shareholder of Venmar from 1991 to 1996 and held the position of President and General Manager of Venmar from December 1986 to December 1996. Mr. Marcouiller is also a director of Heroux-Devtek Inc., a publicly traded company that manufactures aerospace and industrial turbines, and holds directorships in other privately held companies. Mr. Marcouiller holds a bachelor's degree in Business Administration from Universite du Quebec a Trois-Rivieres in Canada and a Master in Business Administration from Sherbrooke University in Canada.
DAVID A. THOMPSON has served as our director since June 2000. He has held various positions with Corning Inc., a manufacturer of optical fiber and other products for the telecommunications, television and other communications-related industries, since 1976. Mr. Thompson was the Director -- Technology and Strategy of Corning's Components Business-Photonic Technologies since March 1995, after which he acted as Director, Operations and Project Management for the Optical Physics Technology Directorate and in February 2001, he was named Division Vice President Strategy and Innovation. Mr. Thompson holds a bachelor's degree in Chemistry from the Ohio State University, in the United States, and a doctorate in Inorganic Chemistry from the University of Michigan, in the United States.
ANDRE TREMBLAY has served as our director since May 2000. He has been President and Chief Executive Officer of Microcell Telecommunications Inc., a wireless telecommunications
provider, since May 1995. Mr. Tremblay has been a member of the board of directors of Microcell since November 1995. In addition, Mr. Tremblay is a member of the executive committee and a member of the board of directors of Telesystem Ltd. and, since 1992, Executive Vice-President of Telesystem Ltd. Prior to joining Telesystem Ltd., a privately-held holding company, Mr. Tremblay was a tax partner and member of the management committee of Raymond, Chabot, Martin, Pare, a Canadian accounting firm. Mr. Tremblay is also a member of the Boards of Directors of Telesystem International Wireless Inc., a global mobile communications company; Boomerang Tracking Inc., a publicly traded company that assembles, markets and distributes a cellular-based asset tracking system; and SignalGene Inc., a genomics-based drug discovery company. Mr. Tremblay holds a bachelor's degree in Business Administration and a license in Accounting from Laval University in Canada, as well as a master's degree in taxation from Sherbrooke University in Canada. He also completed the Advanced Management Program offered by the Harvard Business School in the United States.
MICHAEL UNGER has served as our director since May 2000. He worked with Nortel Networks Limited, now Nortel Networks Corporation, from 1962 to 2000. Mr. Unger's most recent position was President of Nortel's Optical Networks Business Unit, a position he held from May 1998 to April 2000. Prior to this appointment, Mr. Unger was Nortel's Group Vice-President, Transport Networks from March 1990 to May 1998. Mr. Unger also serves on the board of Tundra Semiconductor Corporation a publicly traded company with its shares listed on The Toronto Stock Exchange that designs, develops and markets networking and network access technology for use by communications infrastructure equipment companies. He is also a member of the boards of a number of privately-held companies active in the areas of photonic and optical components, optical network systems and solutions for cable operators and other communications service providers. Mr. Unger holds a bachelor's degree in Science from Concordia University in Canada.
KIMBERLEY ANN OKELL has been our in-house legal counsel since February 2000 and our Secretary since May 2000. Prior to joining us, Ms. Okell was Vice-President Legal Affairs and Secretary with Groupe Equiconcept Inc. from October 1999 to February 2000 and Director of Legal Services and Secretary with Informission Group Inc., now nurun Inc., an information technology company, from December 1997 to October 1999. Prior to that, Ms. Okell was an associate with the law firm McCarthy Tetrault from August 1994 to December 1997. Ms. Okell has been a member of the Quebec Bar since September 1993. Ms. Okell holds a bachelor's degree in Civil Law from Laval University in Canada, a bachelor's degree in Common Law from The University of Western Ontario in Canada and an Honors bachelor of Arts degree from York University in Canada.
TERM OF EXECUTIVE OFFICERS
Executive officers are appointed annually by the board of directors and serve until their successors are appointed and qualified or until earlier resignation or removal.
B. COMPENSATION
DIRECTOR COMPENSATION
In the financial year terminated August 31, 2001, our directors who are not officers or employees received annual compensation of C$18,000 comprised of cash, the equivalent value of our subordinate voting shares under our directors' compensation plan or options to purchase some of our subordinate voting shares under our stock option plan. Directors who are also committee members received additional annual compensation of C$3,000 per committee and committee chairpersons received C$5,000 annually comprised of cash, the equivalent value of our subordinate voting shares under our directors' compensation plan or options to purchase some of our subordinate voting shares under our stock option plan. Fees of C$1,000 (US$655) for each meeting of the Board of Directors or of a Committee attended by them in person and fees of C$500 (US$327) if such participation was made by telephone were also paid. All directors will be reimbursed for traveling and other expenses incurred in connection with attendance at meetings.
As partial remuneration for the financial year ended August 31, 2001, a total of 20,359 options were granted under our Stock Option Plan in October 2001 to directors who are not employees.
For the financial year commencing September 1, 2001, the annual compensation of directors who are not officers or employees was increased to C$25,000 payable by way of cash, the equivalent value of our subordinate voting shares under our director's compensation plan or options to purchase some of our subordinate voting shares under our stock option plan. In addition, such directors each received 12,500 options under our stock option plan as partial compensation for the financial year commencing September 1, 2001.
EXECUTIVE COMPENSATION
The table below shows certain compensation information for Mr. Germain Lamonde, the President and Chief Executive Officer of the Corporation, and the four other most highly compensated executive officers of the Corporation and its subsidiaries during the financial year ended August 31, 2001 (collectively, the "Named Executive Officers"). This information includes the US dollar value of base salaries, bonus awards and long term incentive plan payments, the number of options granted, and certain other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
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OTHER ANNUAL SECURITIES ALL OTHER
NAME AND PRINCIPAL FINANCIAL SALARY BONUS(1) COMPENSATION UNDER COMPENSATION
POSITION YEAR (US$) (US$) (US$) OPTIONS(2)(#) (US$)(3)
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Germain Lamonde, President and 2001 180,044 99,024 - 5,080 -
Chief Executive Officer
2000 134,932 63,566 - 25,402 -
Bruce Bonini, 2001 272,678(4) 33,450 - 82,780 4,565
Vice-President,
North American Sales 2000 309,801 20,000 - 3,900 6,768
Juan-Felipe Gonzalez, 2001 204,781(5) 129,629(8) - 45,630 -
Vice-President,
International Sales 2000 153,502 15,879 - 6,900 -
David J. Farrell, 2001 184,500(6) 16,326(9) - 40,000 4,513(9)
President, Burleigh
Instruments, Inc.
William S. Gornall, 2001 135,000(7) 11,874(9) - 30,000 3,332(9)
Vice-President of
Technology, Burleigh
Instruments, Inc.
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(1) A portion of the bonus amounts is paid in cash in the year for which they are awarded and the balance is paid in cash in the year following the financial year for which they are awarded.
(2) Indicates the number of Subordinate Voting Shares underlying the options granted under the Stock Option Plan during the financial year indicated.
(3) Indicates the amount contributed by the Corporation during the financial year indicated to the Deferred Profit Sharing Plan or the 401K plans, as applicable, for the benefit of the Named Executive Officer. Mr. Lamonde is not eligible to participate in the Deferred Profit Sharing Plan and Mr. Gonzalez did not participate.
(4) This amount includes an amount of US$28,654 paid as a retroactive adjustment to salary for the financial year ended August 31, 2000.
(5) This amount includes an amount of US$4,935 paid as a retroactive adjustment to salary for the financial year ended August 31, 2000.
(6) This amount represents Mr. Farrell's base annual salary. Since he joined the Corporation on December 20, 2000, the base salary paid to him for the financial year ended August 31, 2001 amounted to US$134,097.
(7) This amount represents Mr. Gornall's base annual salary. Since he joined the Corporation on December 20, 2000, the base salary paid to him for the financial year ended August 31, 2001 amounted to US$99,193.
(8) This amount includes an amount of US$2,771 paid as a retroactive adjustment to bonus for the financial year ended August 31, 2000.
(9) These are the amounts paid or payable for the financial year ended August 31, 2001 to Messrs Farrell and Gornall, as applicable, since December 20, 2000, the date that they joined the Corporation.
The following table indicates additional information on the options granted to our Named Executive Officers during the 2001 fiscal year.
PERCENTAGE
OF NET
TOTAL OF MARKET VALUE OF
OPTIONS SECURITIES
SECURITIES GRANTED TO EXERCISE OR UNDERLYING
UNDER OPTIONS EMPLOYEES IN BASE OPTIONS ON THE
GRANTED(1) FINANCIAL YEAR PRICE(2) (US$/ DATE OF GRANT
NAME (#) (%) SECURITY) (US$/SECURITY)(3) EXPIRATION DATE
------------------------- ------------- -------------- -------------- ----------------- -------------------
Germain Lamonde 5,080 0.28 % $22.25 $23.56 January 10, 2011
Bruce Bonini 20,000 1.10 % $45.94 $48.19 September 13, 2010
30,000 1.67 % $34.07 $36.88 October 11, 2010
32,780 1.82 % $22.25 $23.56 January 10, 2011
Juan-Felipe Gonzalez 15,000 0.83 % $45.94 $48.19 September 13, 2010
15,000 0.83 % $34.07 $36.88 October 11, 2010
15,630 0.87 % $22.25 $23.56 January 10, 2011
David J. Farrell 40,000 2.22 % $22.62 $19.69 December 20, 2010
William S. Gornall 30,000 1.67 % $22.62 $19.69 December 20, 2010
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(1) Underlying securities: Subordinate Voting Shares.
(2) The exercise price of options granted is determined based on the highest of the closing prices of the Subordinate Voting Shares on The Toronto Stock Exchange and the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars, as required.
(3) Based on the closing price on the NASDAQ National Market on the date of the grant.
EMPLOYMENT AGREEMENTS
We have an employment agreement with Germain Lamonde. The agreement provides for Mr. Lamonde's employment as President and Chief Executive Officer at a base salary applicable from September 1, 2000 to August 31, 2001 of C$275,000 (approximately $180,044) per year. In addition, a bonus of C$137,500 (approximately $90,022) will be payable if performance-based objectives are met. If performance objectives are exceeded, such bonus will be greater in a proportional amount. The agreement is for an indeterminate period and the salary is reviewed annually. In the event of the termination of Mr. Lamonde's employment other than for cause, Mr. Lamonde will be entitled to severance payments (in no case exceeding 24 months of remuneration) and the vesting of all stock options. In addition, in the event that Mr. Lamonde's employment is terminated following a merger or an acquisition by a third party of substantially all of our assets or of the majority of our share capital or if Mr. Lamonde voluntarily resigns, he will be entitled to the vesting of all stock options.
We also have employment agreements with Mr. Bruce Bonini and Mr. Juan-Felipe Gonzalez, and Burleigh has employment agreements with David J. Farrell and William S. Gornall.
The agreement with Mr. Bonini provides for Mr. Bonini's employment as Vice-President, North American Sales at a base salary of $145,000, plus commissions of $100,000 if sales objectives are met, for the period from September 1, 2000 to August 31, 2001. If sales objectives are exceeded, commissions will be greater. The agreement is for an indeterminate period and
salary is reviewed annually. In addition, bonuses totaling $39,000 will be payable if various performance-based objectives are met. If performance objectives are exceeded, such bonus will be greater in a proportional amount. In the event Mr. Bonini's employment terminates for any reason whatsoever and he is unable to accept new employment due to his non-competition obligations to us, Mr. Bonini may receive compensation for a period of 18 months following the date of termination in amounts varying from 5% to 125% of his base monthly salary at the time of termination depending on the cause of the termination.
The agreement with Mr. Gonzalez provides for Mr. Gonzalez's employment as Vice-President International Sales at a base salary of $110,000, plus commissions on sales of $72,540, for the period from September 1, 2000 to August 31, 2001. If sales objectives are exceeded, commissions will be greater. Upon Mr. Gonzalez's move to Singapore, effective March 1, 2001, the agreement provides that the annual base salary is $120,753 to take into account cost of living differences. The agreement is for an indeterminate period and salary is reviewed annually. In addition, bonuses totaling $140,500 will be payable if various performance-based objectives are met. If performance objectives are exceeded, such bonus will be greater in a proportional amount. In addition, Mr. Gonzalez shall be paid a bonus of C$750,000 if he has not voluntarily resigned or been dismissed with cause prior to September 2003. In the event Mr. Gonzalez's employment terminates for any reason whatsoever and he is unable to accept new employment due to his non-competition obligations to us, Mr. Gonzalez may receive compensation for a period of 18 months following the date of termination in amounts varying from 5% to 50% of his base monthly salary at the time of termination depending on the cause of the termination.
The agreement between Burleigh and Mr. Farrell provides for Mr. Farrell's employment as President of Burleigh at an annual base salary of $184,500. In addition, a bonus of $16,326 was payable based on Burleigh's performance for the financial year ended August 31, 2001. The agreement is for an indeterminate period and salary is reviewed annually. In the event of termination of Mr. Farrell's employment other than for cause, Mr. Farrell will be entitled to severance payments equivalent to 6 months of remuneration. In the event of Mr. Farrell's termination due to a merger or acquisition by a third party of substantially all of Burleigh's assets or of the majority of its share capital, Mr. Farrell shall be entitled to severance benefits ranging from 6 to 12 months of remuneration, based on his length of service with Burleigh since such merger or acquisition.
The agreement between Burleigh and Mr. Gornall provides for Mr. Gornall's employment as Vice-President of Technology of Burleigh at an annual base salary of $135,000. In addition, a bonus of $11,874 was payable based on Burleigh's performance for the financial year ended August 31, 2001. The agreement is for an indeterminate period and salary is reviewed annually. In the event of termination of Mr. Gornall's employment other than for cause, Mr. Gornall will be entitled to severance payments equivalent to 6 months of remuneration. In the event of Mr. Gornall's termination due to a merger or acquisition by a third party of substantially all of Burleigh's assets or of the majority of its share capital, Mr. Gornall shall be entitled to severance benefits ranging from 6 to 12 months of remuneration, based on his length of service with Burleigh since such merger or acquisition.
STOCK OPTION PLAN
We have a stock option plan for our directors, executive officers, employees and consultants and those of our subsidiaries as determined by our board of directors, to attract and retain competent directors, executive officers, employees and consultants motivated to work toward ensuring our success and to encourage them to acquire our shares.
All of the options that will be granted under the plan must be exercised within a maximum period of ten years following the grant date of the options or they will be forfeited. The board of directors will designate the recipients of options and determine the number of subordinate voting shares covered by each of these options, the date of vesting of each option, the exercise price of each option, the expiry date and any other conditions relating to these options, in each case in accordance with the applicable legislation of the securities regulatory authorities. The price at which the subordinate voting shares may be purchased under the plan will not be lower than the highest of the closing prices of the subordinate voting shares on the stock exchanges where the subordinate voting shares are listed at the date preceding the date of grant.
The maximum number of subordinate voting shares that is issuable under the plan may not exceed 4,470,961 shares, which represents 7.3 % of our issued and outstanding share capital as at December 31, 2001. The maximum number of subordinate voting shares that may be granted to any individual may not exceed 5% of the outstanding subordinate voting shares. The board of directors may accelerate the vesting of any or all outstanding options of any or all options upon the occurrence of a change of control.
The aggregate number of subordinate voting shares covered by options granted during the financial year ended August 31, 2001 was 1,804,497 (net of cancelled options due to employment terminations) at a weighted average exercise price of $29.00 (C$44.29) per subordinate voting share. At the end of the financial year ended August 31, 2001, there were 2,414,231 subordinate voting shares covered by options granted and outstanding pursuant to the stock option plan. Following these grants, and net of cancelled options for departures, as of August 31, 2001, there were 2,056,730 options available for future grants under the plan. Since August 31, 2001 we have made the following grants to directors and employees: September 1, 2001: 60,980 options, October 10, 2001: 506,259 options, November 2, 2001: 250,000 options and December 3, 2001: 42,437 options.
Except for certain options granted to non-employee directors of the Corporation, options vest on a cumulative basis at a rate of 25 % annually commencing on the first anniversary date of their grant and may be exercised in whole or in part once vested. Some options granted to non-employee directors vest on the first anniversary date of their grant and may be exercised in whole or in part once vested.
In the financial year ended August 31, 2000 we had commenced a process to obtain approval for the re-pricing of options granted to employees and consultants on September 1, 2000, on September 13, 2000 and on October 11, 2000, in the respective amounts of 122,908, 313,835 and 75,000 to purchase the same amounts of subordinate voting shares at the price of
C$83.66, C$68.17 and C$51.25 respectively. Prior to obtaining shareholder approval and final approval from NASDAQ and The Toronto Stock Exchange, we learned that such re-pricing would have future negative tax implications for a large number of our employees. Management therefore withdrew its request for shareholder approval and aborted the re-pricing process.
SHARE PLAN
In September 1998, we established a stock purchase plan for officers, directors and key employees as amended in April 2000. A total of 707,264 subordinate voting shares were issued and fully paid under the 1998 Stock Purchase Plan, having a weighted average cash consideration of C$0.98 per share. The plan provides that all shares issued under the plan are restricted as to sale and transferability for a minimum period of five years upon the date of acquisition.
On April 3, 2000, we adopted a new share plan that replaced the 1998 Stock Purchase Plan. No additional shares will be issued under the new share plan. The new share plan established restrictions on the rights of the holders of subordinate voting shares who hold those shares as a result of the conversion of the Class "F" shares issued under the 1998 Stock Purchase Plan. The new share plan also requires the subordinate voting shares to be held in trust by a trustee until August 31, 2004, except for 256,017 subordinate voting shares that will be released between October 21, 2003 and January 20, 2004. The new share plan also provides for the earlier release of shares in the event that the employment of a holder of shares is terminated or upon the occurrence of a change of control. The new share plan does not permit any transfer, except within the trust to a registered retirement savings plan or a registered retirement income fund or to a trustee in bankruptcy. The new share plan also established the conditions pursuant to which the shares of a shareholder are to be sold by the trustee on the public market. As of August 31, 2001, 663,265 subordinate voting shares were being held in trust under the new share plan.
RESTRICTED STOCK AWARD PLAN
The EXFO Electrical-Optical Engineering Restricted Stock Award Plan (the "Plan") was established to provide a means through which employees of Burleigh can be granted awards of restricted shares ("Restricted Shares") of our subordinate voting shares to promote retention and foster identity of interest between our stockholders and employees of Burleigh.
The effective date of the Plan is December 20, 2000. The expiration date of the Plan is the business day next following the final grant of Restricted Shares under the Plan. However, the administration of the Plan shall continue until all awards of Restricted Shares have been forfeited or settled. The aggregate number of shares subject to the Plan is 360,000. Grants of Restricted Shares are to be made in accordance with a pre-determined schedule. The Plan is administered by the committee that is designated to administer our Stock Option Plan.
Awards of Restricted Shares are subject to forfeiture and restrictions on transfer until the Restricted Shares become vested at which point a stock certificate will be issued to a participant with respect to the number of vested shares, which are then freely transferable. Restricted Shares become vested, subject to a participant's continued employment with the Company or its
affiliates, on each of the first four anniversaries of the date of grant of an award of Restricted Shares. On December 20, 2001, we issued an aggregate of 83,657 subordinate voting shares in accordance with the vesting schedule under the Plan.
Upon a participant's termination of employment with us, or any of our affiliates due to the participant's death, disability or retirement on or after age 60, the participant's award of restricted shares becomes fully vested and is no longer subject to forfeiture. However, the transfer restrictions remain in place until the occurrence of the vesting dates originally contemplated by the award.
Upon the voluntary resignation of a participant, the termination of a participant's employment for cause, the termination of a participant who is not designated a member of Burleigh's "Management Team" without cause prior to a change in control of EXFO or a termination without cause of a participant who is designated a member of Burleigh's Management Team that is initiated by Burleigh prior to a change in control of EXFO, the unvested portion of the participant's award of Restricted Shares will be forfeited.
Upon the termination without cause of a participant who is designated a member of Burleigh's Management Team that is initiated by us or a termination of a participant's employment without cause following a change in control of EXFO, a participant's award of Restricted Stock will become fully vested and all restrictions will lapse.
In the event of a change in control, the committee administering the Plan may in its discretion remove restrictions on Restricted Shares or provide for the cancellation of awards in exchange for payment in respect of the Restricted Shares subject to an award.
STOCK APPRECIATION RIGHTS PLAN
On August 4, 2001, the Corporation established a Stock Appreciation Rights Plan ("SAR Plan") for the benefit of certain employees residing in countries where the granting of options under the Stock Option Plan is not feasible in the opinion of the Corporation. The Board has full and complete authority to interpret the SAR Plan and to establish the rules and regulations applying to it and to make all other determinations it deems necessary or useful for the administration of the SAR Plan.
Under the SAR Plan, eligible employees are entitled to receive a cash amount equivalent to the difference between the market price of the subordinate voting shares on the date of exercise and the exercise price determined on the date of grant. No subordinate voting shares are issuable under the SAR Plan.
The Board of Directors has delegated to Management the task of designating the recipients of stock appreciation rights, the date of vesting, the expiry date and other conditions. Under the terms of the SAR Plan, the exercise price of the stock appreciation rights may not be lower than the highest of the closing prices of the subordinate voting shares on The Toronto Stock Exchange and on the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant
date to convert the NASDAQ National Market closing price to Canadian dollars. Stock appreciation rights are non-transferable.
The stock appreciation rights vest over a four-year period, with 25% vesting annually commencing on the first anniversary date of the date of grant. Once vested, stock appreciation rights may be exercised between the second and the fifteenth business day following each release of the Corporation's quarterly financial results. All of the stock appreciation rights that are granted under the SAR Plan may be exercised within a maximum period of 10 years following the date of their grant. Any stock appreciation rights granted under the SAR Plan will lapse immediately upon the termination of the relationship with the Corporation or one of its subsidiaries for a good and sufficient cause or at the date on which an employee resigns or leaves his employment with the Corporation or one of its subsidiaries (or within 30 days if the holder is dismissed without cause). In the event of retirement or disability, any stock appreciation right held by an employee lapses 30 days after the date of any such disability or retirement. In the event of death, any stock appreciation right lapses 6 months after the date of death.
As of December 31, 2001, 22,400 SAR's had been granted.
DEFERRED PROFIT SHARING PLAN
Under the plan, we contribute an amount equal to 1% of each employee's gross salary to that employee's individual deferred profit sharing plan to the extent that such employee contributes at least 2% of his or her gross salary to his or her individual tax-deferred registered retirement savings plan. In the year ended August 31, 2001, the aggregate amount of contributions under the plan was $419,000 (C$642,000).
401(K) PLANS
We maintain 401(k) plans for eligible United States resident employees of our subsidiaries. Employees become eligible to participate in the 401(k) plans on the first day of the month following the completion of three months of continuous service. Employees may elect to defer their current compensation up to the lesser of 1% of eligible compensation or the statutorily prescribed annual limit and have the deferral contributed to the 401(k) plans. The 401(k) plans permit, but do not require, us to make additional matching contributions to the 401(k) plans on behalf of the eligible participants, subject to a maximum of 50% of the first 6% of the participant's current compensation subject to certain legislated maximum contribution limits. In the year ended August 31, 2001, we made an aggregate of $285,000 in matching contributions to the 401(k) plans. Contributions by employees or by us to the 401(k) plans and income earned on plan contributions are generally not taxable to the employees until withdrawn and contributions by us are generally deductible by us when made. At the direction of each participant, the trustees of the 401(k) plans invest the assets of the 401(k) plans in selected investment options.
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF LIABILITY
Our by-laws require us, subject to the limitations provided by law, to indemnify our present or former directors and officers or any persons who act or acted at our request as directors or officers of a body corporate of which we are or were a shareholder and for all costs,
losses, charges and expenses that arose or may arise by reason of their status as directors or officers of EXFO or such body corporate. A policy of directors' and officers' liability insurance is maintained by us which insures our directors and officers and those of our subsidiaries against liability incurred by, arising from or against them for certain of their acts, errors or omissions.
C. BOARD PRACTICES
BOARD OF DIRECTORS
Our directors are elected at the annual meeting of shareholders for one-year terms and serve until their successors are elected or appointed, unless they resign or are removed earlier. Our articles of incorporation provide for a board of directors of a minimum of three and a maximum of 12 directors. Our board presently consists of five directors. Under the CANADA BUSINESS CORPORATIONS ACT, twenty-five percent of the directors and of the members of any committee of the board of directors must be resident Canadians. We have no arrangements with any of our directors providing for the payment of benefits upon their termination of service as director.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has established an audit committee and a human resources committee.
Our audit committee will recommend a firm to be appointed as
independent auditors to audit financial statements and to perform services
related to the audit, review the scope and results of the audit with the
independent auditors, review with management and the independent auditors our
annual operating results and consider the adequacy of the internal accounting
procedures and the effect of the procedures relating to the auditors'
independence. The audit committee is composed of three independent directors:
Andre Tremblay, Michael Unger and Pierre Marcouiller. The chairperson of the
audit committee is Andre Tremblay.
Our human resources committee will evaluate, review and supervise our procedures with regards to human resources and will assess the performance of our executive officers and the chief executive officer. This committee will also review annually the remuneration of the directors and will recommend to the board of directors general remuneration policies regarding salaries, bonuses and other forms of remuneration for our directors, executive officers and employees as a whole. In addition, the human resources committee will monitor the board's corporate governance practices and generally review the functioning of the board and the powers, mandates and performance of the committees. Finally, the human resources committee will review our organizational structure annually and the development and maintenance of a succession plan. The human resources committee is composed of three independent directors: David A. Thompson, Michael Unger and Pierre Marcouiller. The chairperson of the human resources committee is Michael Unger.
D. EMPLOYEES
We have fostered a corporate culture where growth and change are strongly encouraged. In fact, employees are constantly evolving with the rapid pace of technology to meet new challenges and realities. We believe that we possess a good cross-section of experience and youth to handle these inevitable changes in the industry. The average age of our employees is around 33 years old.
As of December 31, 2001, we had 928 employees primarily based in Quebec, Canada, with 171 employees based outside of Canada. As of December 31, 2001, we employed 1,099 full-time employees. Three hundred and thirty-seven are involved in research and development, 354 in manufacturing, 198 in sales and marketing, 127 in general administrative positions and 83 in communications and customer support. Over the summer of 2001, we were forced to lay off a total of 245 employees as part of our efforts to reduce costs in response to a general slowdown in the telecommunications industry. In December 2001, we announced further layoffs totaling 10 % of our global workforce. Notwithstanding these layoffs, during the 12-month period ended December 31, 2001, we added 136 employees. We have agreements with almost all of our employees covering confidentiality and non-competition. Only manufacturing employees are represented by a collective bargaining agreement, which expires in 2004. We have never experienced a work stoppage. We believe that relations with our employees are good.
E. SHARE OWNERSHIP
The following table presents information regarding the beneficial ownership of our share capital as of December 31, 2001 by our directors, our Chief Executive Officer and our four highest compensated executive officers; and all of our directors and executive officers as a group.
Each multiple voting share is convertible at the option of the holder into one subordinate voting share. Holders of our subordinate voting shares are entitled to one vote per share and holders of our multiple voting shares are entitled to ten votes per share.
TOTAL
MULTIPLE VOTING SHARES SUBORDINATE VOTING SHARES PERCENTAGE OF
BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (1) VOTING POWER
---------------------------- --------------------------- ---------------
NAME NUMBER PERCENT NUMBER PERCENT PERCENT
----------------------------------- ------------- ------------ ------------ ------------ ---------------
Germain Lamonde (2)............. 37,900,000 100 6,351 * 94.16
Juan Felipe Gonzalez............ -- -- 60,677 * *
Bruce Bonini.................... -- -- 68,299 * *
David J. Farrell................ 768,549 3.17 *
William S. Gornall.............. -- -- 450,171 1.88 *
Pierre Marcouiller.............. -- -- 3,500 * *
David A. Thompson............... -- -- 2,600 * *
Andre Tremblay (3)............. -- -- 7,500 * *
Michael Unger................... -- -- 500 * *
---------- ---- ---------- --------- ----------
TOTAL........................... 37,900,000 100 1,368,147 5.69 94.5
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(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Options that are currently exercisable are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) The number of shares held by Germain Lamonde includes 1,900,000 multiple voting shares held of record by Fiducie Germain Lamonde and 36,000,000 multiple voting shares held of record by G. Lamonde Investissements Financiers inc.
(3) The number of subordinate voting shares held of record by Andre Tremblay includes 6,650 subordinate voting shares held of record by 9044-6451 Quebec Inc. and 350 subordinate voting shares held of record by 9089-3082 Quebec Inc., companies controlled by Mr. Tremblay.
The following table presents information regarding stock options held as of December 31, 2001 by our directors, our Chief Executive Officer and our four highest compensated executive officers.
SECURITIES UNDER OPTIONS EXERCISE PRICE (2)
NAME GRANTED (1) (#) (US$/SECURITY) EXPIRATION DATE
-------------------------------- ------------------------ ------------------ -----------------------
Germain Lamonde................. 25,402 $26.00 June 29, 2010
5,080 $22.25 January 10, 2011
70,000 $9.13 October 10, 2011
70,000
Juan Felipe Gonzalez............ 6,900 $26.00 June 29, 2010
15,000 $45.94 September 13, 2010
15,000 $34.07 October 11, 2010
15,630 $22.25 January 10, 2011
15,000 $9.13 October 10, 2011
Bruce Bonini.................... 3,900 $26.00 June 29, 2010
20,000 $45.94 September 13, 2010
30,000 $34.07 October 11, 2010
32,780 $22.25 January 10, 2011
15,000 $9.13 October 10, 2011
David J. Farrell................ 40,000 $22.62 December 20, 2010
10,000 $9.13 October 10, 2011
William S. Gornall.............. 30,000 $22.62 December 20, 2010
5,000 $9.13 October 10, 2011
Pierre Marcouiller.............. 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
17,966 $9.13 October 10, 2011
David A. Thompson............... 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
15,334 $9.13 October 10, 2011
Andre Tremblay.................. 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
17,291 $9.13 October 10, 2011
Michael Unger................... 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
18,168 $9.13 October 10, 2011
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(1) Underlying securities: subordinate voting shares
(2) The exercise price of options granted is determined based on the highest of the closing prices of the subordinate voting shares on the Toronto Stock Exchange and the NASDAQ National Market on the last trading day preceding the grant date, using the noon buying rate of the Federal Reserve Bank of New York on the grant date to convert the NASDAQ National Market closing price to Canadian dollars, as required.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table presents information regarding the beneficial ownership of our share capital as of December 31, 2001 by persons or groups of affiliated persons known by us to own more than 5% of our voting shares.
TOTAL PERCENTAGE OF
MULTIPLE VOTING SHARES SUBORDINATE VOTING SHARES ---------------------
BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (1) VOTING POWER
-------------------------- -------------------------- ---------------------
NAME NUMBER PERCENT NUMBER PERCENT PERCENT
--------------------------- ------------ ----------- ------------ ----------- ---------------------
Germain Lamonde (2) 37,900,000 100 % 6,351 * 94.16 %
Fiducie Germain Lamonde (3) 1,900,000 5 % Nil Nil 4.72 %
G. Lamonde Investissements
Financiers inc. (4) 36,000,000 95 % Nil Nil 89.44 %
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(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Options that are currently exercisable are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(2) The number of shares held by Germain Lamonde includes 1,900,000 multiple voting shares held of record by Fiducie Germain Lamonde and 36,000,000 multiple voting shares held of record by G. Lamonde Investissements Financiers inc.
(3) Fiducie Germain Lamonde is a family trust for the benefit of Mr. Lamonde and members of his family.
(4) G. Lamonde Investissements Financiers inc. is a company controlled by Mr.
Lamonde.
Each multiple voting share is convertible at the option of the holder into one subordinate voting share. Holders of our subordinate voting shares are entitled to one vote per share and holders of our multiple voting shares are entitled to ten votes per share.
Unless otherwise indicated, the address of each person who beneficially owns 5% or more of our subordinate voting shares or multiple voting shares is c/o EXFO Electro-Optical Engineering Inc., 465 Godin Avenue, Vanier, Quebec, Canada.
As of December 31, 2001, approximately 57.48% of our subordinate voting shares were held in bearer form and the remainder (10,003,174 subordinate voting shares) were held by 279 record holders. As of December 31, 2001, we believe approximately 46.62% of our outstanding subordinate voting shares were held in the United States.
B. RELATED PARTY TRANSACTIONS
INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND EMPLOYEES
We have guaranteed the repayment of loans granted to employees by a financial institution for the purchase of our Class "F" shares that were converted into subordinate voting shares immediately prior to our initial public offering. As of August 31, 2001, the total principal
amount guaranteed by us is C$130,899 (approximately $85,700) and $56,200. We have outstanding loans to some of our employees up to $8,840 to finance the acquisition of our Class "F" shares. These loans are to be reimbursed no later than five years from the date of the loans. These loans accrue interest at prime rate and are secured by a pledge of the employees' shares to us.
Except as disclosed in this section, none of our directors, executive officers, associates or affiliates had any material interest in any transaction with us during the past three years or in any proposed transaction which has materially affected or could materially affect us.
LEASES
We have entered into lease agreements with 9080-9823 Quebec inc., a company controlled by Mr. Germain Lamonde, for the manufacturing facilities located at 436 Nolin Street and the executive and administrative offices located at 465 Godin Avenue in Vanier, Quebec. These leases were renewed in December 2001, with all terms and conditions remaining the same. The table below sets forth the leased space and annual rent:
LOCATION SQUARE FOOTAGE ANNUAL RENT EXPIRY DATE
---------------------- -------------- ----------- -----------------
436 Nolin 43,000 C$220,820 November 30, 2006
465 Godin 24,000 C$144,000 November 30, 2006
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Based on third-party valuations of the property values, we believe these lease agreements are at prevailing market terms.
REGISTRATION RIGHTS AGREEMENTS
REGISTRATION RIGHTS AGREEMENT WITH MR. LAMONDE
In July 2000, we entered into a registration rights agreement with Germain Lamonde, under which Mr. Lamonde and entities affiliated with him were granted demand registration rights in the United States in respect of the subordinate voting shares, including the subordinate voting shares issued upon conversion of the multiple voting shares held by him or entities affiliated with him. With respect to the demand registration rights of Mr. Lamonde, subject to minimum dollar amounts, Mr. Lamonde may make a demand once every 12 consecutive month period. Mr. Lamonde also has an unlimited number of piggyback registration rights in respect of the subordinate voting shares issued upon conversion of the multiple voting shares held by him or entities affiliated with him. The piggyback registration rights generally will allow Mr. Lamonde to include all or a portion of the subordinate voting shares issuable upon conversion of the multiple voting shares under any registration statement filed by us.
We will pay all expenses, other than underwriting discounts and commissions and taxes, in connection with the exercise of any demand registration rights or piggyback registration rights. We also will agree to indemnify any sellers and underwriters against some liabilities, including liabilities arising under applicable securities laws. Mr. Lamonde agreed not to exercise his registration rights without the prior written consent of Merrill Lynch on behalf of the underwriters of the initial public offering for a period of 180 days following June 29, 2000.
REGISTRATION RIGHTS AGREEMENT WITH BURLEIGH SHAREHOLDERS
In December 2000 in connection with the acquisition of Burleigh, we issued registration rights to the former shareholders of Burleigh. In July 2001, we fulfilled our obligations to the former shareholders of Burleigh by filing a registration statement on Form F-3 relating to the resale of the subordinate voting shares held by the former shareholders of Burleigh. The Burleigh shareholders also have an unlimited number of piggyback registration rights in respect of their subordinate voting shares. The piggyback registration rights generally will allow the Burleigh shareholders to include all or a portion of their subordinate voting shares under any registration statement filed by us. The piggyback registration rights cease to apply on June 1, 2002.
We will pay all expenses, other than underwriting commissions or discounts, taxes and fees and expenses of counsel and advisors to the Burleigh shareholders, in connection with the preparation and filing of any of the foregoing registration statements. We also agreed to indemnify any sellers and underwriters against some liabilities, including liabilities arising under applicable securities laws, incurred in connection with the registration statement on Form F-3.
REGISTRATION RIGHTS AGREEMENT WITH AVANTAS SHAREHOLDERS
In November 2001, in connection with the acquisition of EXFO Protocol (formerly Avantas Networks Corporation), we issued registration rights to the former shareholders of EXFO Protocol. We agreed to file a registration statement on Form F-3 or Form F-10 in the United States prior to February 28, 2002 in order to register the resale of the shares issued to the former shareholders of EXFO Protocol.
We will pay all expenses, other than underwriting commissions or discounts, taxes and fees and expenses of counsel and advisors to the EXFO Protocol shareholders, in connection with the preparation and filing of any of the foregoing registration statements. We also agreed to indemnify any sellers against some liabilities, including liabilities arising under applicable securities laws, incurred in connection with any of the foregoing registration statements.
ITEM 8. FINANCIAL INFORMATION
Consolidated financial statements: pages F-1 to F-44
Valuation and qualifying accounts are as follows (in thousands of US dollars):
--------------------------------------
Allowance for doubtful accounts YEARS ENDED NOVEMBER 30,
--------------------------------------
1999 2000 2001
----------- ----------- -----------
Balance - Beginning of year $ 26 $ 30 $ 149
Addition charged to earnings 12 147 1,134
Write off of uncollectible accounts (8) (41) (184)
Reversal of collectible accounts - (3) (268)
Foreign currency translation adjustment - 16 62
----------- ----------- -----------
Balance - End of year $ 30 $ 149 $ 893
----------- ----------- -----------
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LEGAL PROCEEDINGS
A description of legal proceedings is set forth in Item 4 of this annual report.
DIVIDEND POLICY
We do not currently anticipate paying dividends for at least the three next years. Our current intention is to reinvest our earnings in our business long-term growth. Any future determination by us to pay dividends will be at the discretion of our board of directors and in accordance with the terms and conditions of any outstanding indebtedness and will depend on our financial condition, results of operations, capital requirements and such other functions as our board of directors considers relevant.
ITEM 9. THE OFFER AND LISTING
Not Applicable, except for Item 9A (4) and Item 9C.
Our subordinate voting shares have been quoted on the NASDAQ National Market under the symbol "EXFO" and listed on The Toronto Stock Exchange under the symbol "EXF" since our initial public offering on June 29, 2000. Prior to that time, there was no public market for our subordinate voting shares. The following table sets forth, for the periods indicated, the high and low closing sales prices per subordinate voting share as reported on the NASDAQ National Market and The Toronto Stock Exchange.
On January 16, 2002, the last reported sale price for our subordinate voting shares on the NASDAQ National Market was $10.32 per share and the last reported sale price for our subordinate voting shares on The Toronto Stock Exchange was C$16.55 per share.
NASDAQ | TSE
PERIOD HIGH LOW | HIGH LOW
--------------------------|-------------------------------------
June 29, 2000 to August 31, 2000 92.50 26.00 | 134.00 51.00
September 1, 2000 to August 31, 2001 57.75 11.80 | 85.00 17.82
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2001 1st Quarter 57.75 19.19 | 85.00 29.70
2001 2nd Quarter 50.44 17.63 | 76.00 27.50
2001 3rd Quarter 39.16 21.69 | 60.50 33.80
2001 4th Quarter 30.53 11.80 | 46.50 17.82
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2002 1st Quarter 15.00 9.00 | 23.80 13.49
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2001 July 16.55 14.13 | 25.10 21.45
2001 August 16.76 11.80 | 25.75 17.82
2001 September 11.71 9.00 | 18.59 14.36
2001 October 12.36 8.51 | 19.50 13.49
2001 November 15.00 10.60 | 23.80 16.95
2001 December 14.00 10.96 | 22.10 17.17
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ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not Applicable
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Incorporated by reference to our registration statement on Form F-1 (Reg. No. 333-38956).
C. MATERIAL CONTRACTS
Except as otherwise disclosed in this annual report and our financial statements and notes included elsewhere in this annual report, we have no other material contracts.
D. EXCHANGE CONTROLS
Subject to the following paragraph, there is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to non-resident holders of our subordinate voting shares, other than withholding tax requirements.
There is no limitation imposed by Canadian law or by our articles of incorporation or our other charter documents on the right of a non-resident to hold or vote subordinate voting shares, other than as provided by the INVESTMENT CANADA ACT, the NORTH AMERICAN FREE TRADE AGREEMENT IMPLEMENTATION ACT (Canada) and the WORLD TRADE ORGANIZATION AGREEMENT IMPLEMENTATION ACT. The INVESTMENT CANADA ACT requires notification and, in certain cases, advance review and approval by the Government of Canada of an investment to establish a new Canadian business by a non-Canadian or of the acquisition by a "non-Canadian" of "control" of a "Canadian business", all as defined in the INVESTMENT CANADA ACT. Generally, the threshold for review will be higher in monetary terms for a member of the World Trade Organization or North American Free Trade Agreement.
E. TAXATION
UNITED STATES TAXATION
The information set forth below under the caption "United States Taxation" is a summary of the material U.S. federal income tax consequences of the ownership and disposition of subordinate voting shares by a U.S. Holder, as defined below. These discussions are not a complete analysis or listing of all of the possible tax consequences of such transactions and do not address all tax considerations that may be relevant to particular holders in light of their personal circumstances or to persons that are subject to special tax rules. In particular, the information set forth under the caption "United States Taxation" deals only with U.S. Holders that will hold subordinate voting shares as capital assets within the meaning of the Internal
Revenue Code of 1986, as amended, and who do not at any time own individually, nor are treated as owning 10% or more of the total combined voting power of all classes of our stock entitled to vote. In addition, this description of U.S. tax consequences does not address the tax treatment of special classes of U.S. Holders, such as banks, tax-exempt entities, insurance companies, persons holding subordinate voting shares as part of a hedging or conversion transaction or as part of a "straddle," U.S. expatriates, persons subject to the alternative minimum tax, dealers or traders in securities or currencies and holders whose "functional currency" is not the U.S. dollar. This summary does not address estate and gift tax consequences or tax consequences under any foreign, state or local laws other than as provided in the section entitled "Canadian Federal Income Tax Considerations" provided below.
As used in this section, the term "U.S. Holder" means:
(a) an individual citizen or resident of the United States;
(b) a corporation created or organized under the laws of the United
States or any state thereof including the District of Columbia;
(c) an estate the income of which is subject to United States federal
income taxation regardless of its source;
(d) a trust if a court within the United States is able to exercise
primary jurisdiction over its administration and one or more U.S.
persons have authority to control all substantial decisions of the
trust; or
(e) a partnership to the extent the interests therein are owned by any
of the persons described in clauses (a), (b), (c) or (d) above.
Holders of subordinate voting shares who are not U.S. Holders, sometimes referred to as "Non-U.S. Holders", should also consult their own tax advisors, particularly as to the applicability of any tax treaty.
The following discussion is based upon:
o the Internal Revenue Code;
o U.S. judicial decisions;
o administrative pronouncements;
o existing and proposed Treasury regulations; and
o the Canada-- U.S. Income Tax Treaty.
Any of the above is subject to change, possibly with retroactive effect. We have not requested, and will not request, a ruling from the U.S. Internal Revenue Service with respect to any of the U.S. federal income tax consequences described below, and as a result, there can be no assurance that the U.S. Internal Revenue Service will not disagree with or challenge any of the conclusions we have reached and describe here.
HOLDERS OF SUBORDINATE VOTING SHARES ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO THE PARTICULAR CONSEQUENCES TO THEM UNDER U.S. FEDERAL, STATE, LOCAL AND APPLICABLE FOREIGN TAX LAWS OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SUBORDINATE VOTING SHARES.
DIVIDENDS
Subject to the discussion of passive foreign investment companies below, the gross amount of any distribution paid by us to a U.S. Holder will generally be subject to U.S. federal income tax as foreign source dividend income to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. The amount of any distribution of property other than cash will be the fair market value of such property on the date of the distribution. Dividends received by a U.S. Holder will not be eligible for the dividends received deduction allowed to corporations. To the extent that an amount received by a U.S. Holder exceeds such holder's allocable share of our current and accumulated earnings and profits, such excess will be applied first to reduce such U.S. Holder's tax basis in his subordinate voting shares, thereby increasing the amount of gain or decreasing the amount of loss recognized on a subsequent disposition of the subordinate voting shares. Then, to the extent such distribution exceeds such U.S. Holder's tax basis, it will be treated as capital gain. We do not currently maintain calculations of our earnings and profits for U.S. federal income tax purposes.
The gross amount of distributions paid in Canadian dollars, or any successor or other foreign currency, will be included in the income of such U.S. Holder in a dollar amount calculated by reference to the spot exchange rate in effect on the day the distributions are paid regardless of whether the payment is in fact converted into U.S. dollars. If the Canadian dollars, or any successor or other foreign currency, are converted into U.S. dollars on the date of the payment, the U.S. Holder should not be required to recognize any foreign currency gain or loss with respect to the receipt of Canadian dollars as distributions. If, instead, the Canadian dollars are converted at a later date, any currency gains or losses resulting from the conversion of the Canadian dollars will be treated as U.S. source ordinary income or loss. Any amounts recognized as dividends will generally constitute foreign source "passive income" or, in the case of certain U.S. Holders, "financial services income" for U.S. foreign tax credit purposes. A U.S. Holder will have a basis in any Canadian dollars distributed equal to their dollar value on the payment date.
A Non-U.S. Holder of subordinate voting shares generally will not be subject to U.S. federal income or withholding tax on dividends received on subordinate voting shares unless such income is effectively connected with the conduct by such Non-U.S. Holder of a trade or business in the United States.
SALE OR EXCHANGE
A U.S. Holder's initial tax basis in the subordinate voting shares will generally be cost to the holder. A U.S. Holder's adjusted tax basis in the subordinate voting shares will generally be the same as cost, but may differ for various reasons including the receipt by such holder of a distribution that was not made up wholly of earnings and profits as described above under the heading "Dividends." Subject to the discussion of passive foreign investment companies below, gain or loss realized by a U.S. Holder on the sale or other disposition of subordinate voting shares will be subject to U.S. federal income taxation as capital gain or loss in an amount equal to the difference between the U.S. Holder's adjusted tax basis in the subordinate voting shares
and the amount realized on the disposition. In the case of a non-corporate U.S. Holder, the federal tax rate applicable to capital gains will depend upon:
o the holder's holding period for the subordinate voting shares,
with a preferential rate available for subordinate voting shares
held for more than one year; and
o the holder's marginal tax rate for ordinary income.
Any gain realized will generally be treated as U.S. source gain and loss realized by a U.S. Holder generally also will be treated as from sources within the United States.
The ability of a U.S. Holder to utilize foreign taxes as a credit to offset U.S. taxes is subject to complex limitations and conditions. The consequences of the separate limitation calculation will depend upon the nature and sources of each U.S. Holder's income and the deductions allocable thereto. Alternatively, a U.S. Holder may elect to claim all foreign taxes paid as an itemized deduction in lieu of claiming a foreign tax credit. A deduction does not reduce U.S. tax on a dollar-for-dollar basis like a tax credit, but the availability of the deduction is not subject to the same conditions and limitations applicable to foreign tax credits.
If a U.S. Holder receives any foreign currency on the sale of subordinate voting shares, such U.S. Holder may recognize ordinary income or loss as a result of currency fluctuations between the date of the sale of subordinate voting shares and the date the sale proceeds are converted into U.S. dollars.
A Non-U.S. Holder of subordinate voting shares generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or exchange of such subordinate voting shares unless:
o such gain is effectively connected with the conduct by such
Non-U.S. Holder of a trade or business in the United States; or
o in the case of any gain realized by an individual Non-U.S. Holder,
such Non-U.S. Holder is present in the United States for 183 days
or more in the taxable year of such sale and certain other
conditions are met.
Personal Holding Company
We could be classified as a personal holding company for U.S. federal income tax purposes if both of the following tests are satisfied:
o if at any time during the last half of our taxable year, five or
fewer individuals own or are deemed to own more than 50% of the
total value of our shares; and
o we receive 60% or more of our U.S. related gross income from
specified passive sources, such as royalty payments.
A personal holding company is taxed on a portion of its undistributed U.S. source income, including specific types of foreign source income which are connected with the conduct of a U.S. trade or business, to the extent this income is not distributed to shareholders. We do not
believe we are a personal holding company presently and we do not expect to become one. However, we can not assure you that we will not qualify as a personal holding company in the future.
FOREIGN PERSONAL HOLDING COMPANY
We could be classified as a foreign personal holding company if in any taxable year both of the following tests are satisfied:
o five or fewer individuals who are United States citizens or
residents own or are deemed to own more than 50% of the total
voting power of all classes of our shares entitled to vote or the
total value of our shares; and
o at least 60%, 50% in some cases, of our gross income, as adjusted,
consists of "foreign personal holding company income", which
generally includes passive income such as dividends, interests,
gains from the sale or exchange of shares or securities, rent and
royalties.
If we are classified as a foreign personal holding company and if you hold shares in us, you may have to include in your gross income as a dividend your pro rata portion of our undistributed foreign personal holding company income. If you dispose of your shares prior to such date, you will not be subject to tax under these rules. We do not believe we are a foreign personal holding company presently and we do not expect to become one. However, we can not assure you that we will not qualify as a foreign personal holding company in the future.
PASSIVE FOREIGN INVESTMENT COMPANY
We believe that our subordinate voting shares should not currently be treated as stock of a passive foreign investment company for United States federal income tax purposes, but this conclusion is a factual determination made annually and thus may be subject to change based on future operations and composition and valuation of our assets. In general, we will be a passive foreign investment company with respect to a U.S. Holder if, for any taxable year in which the U.S. Holder holds our subordinate voting shares, either:
o at least 75% of our gross income for the taxable year is passive
income; or
o at least 50% of the average value of our assets is attributable to
assets that produce or are held for the production of passive
income.
For this purpose, passive income includes income such as:
o dividends;
o interest;
o rents or royalties, other than certain rents or royalties derived
from the active conduct of trade or business;
o annuities; or
o gains from assets that produce passive income.
If a foreign corporation owns at least 25% by value of the stock of another corporation, the foreign corporation is treated for purposes of the passive foreign investment company tests as owning its proportionate share of the assets of the other corporation and as receiving directly its proportionate share of the other corporation's income.
If we are treated as a passive foreign investment company, a U.S. Holder that did not make a qualified electing fund election or, if available, a mark-to-market election, as described below, would be subject to special rules with respect to:
o any gain realized on the sale or other disposition of subordinate
voting shares; and
o any "excess distribution" by us to the U.S. Holder.
Generally, "excess distributions" are any distributions to the U.S. Holder in respect of the subordinate voting shares during a single taxable year that are greater than 125% of the average annual distributions received by the U.S. Holder in respect of the subordinate voting shares during the three preceding taxable years or, if shorter, the U.S. Holder's holding period for the subordinate voting shares.
Under the passive foreign investment company rules,
o the gain or excess distribution would be allocated ratably over
the U.S. Holder's holding period for the subordinate voting
shares;
o the amount allocated to the taxable year in which the gain or
excess distribution was realized would be taxable as ordinary
income;
o the amount allocated to each prior year, with certain exceptions,
would be subject to tax at the highest tax rate in effect for that
year; and
o the interest charge generally applicable to underpayments of tax
would be imposed in respect of the tax attributable to each such
year.
A U.S. Holder owning actually or constructively "marketable stock" of a passive foreign investment company may be able to avoid the imposition of the passive foreign investment company tax rules described above by making a mark-to-market election. Generally, pursuant to this election, such holder would include in ordinary income, for each taxable year during which such stock is held, an amount equal to the increase in value of the stock, which increase will be determined by reference to the value of such stock at the end of the current taxable year compared with their value as of the end of the prior taxable year. Holders desiring to make the mark-to-market election should consult their tax advisors with respect to the application and effect of making such election.
In the case of a U.S. Holder who does not make a mark-to-market election, the special passive foreign investment company tax rules described above will not apply to such U.S. Holder if the U.S. Holder makes an election to have us treated as a qualified electing fund and we provide certain required information to holders. For a U.S. Holder to make a qualified electing fund election, we would have to satisfy certain reporting requirements. We have not determined whether we will undertake the necessary measures to be able to satisfy such requirements in the event that we were treated as a passive foreign investment company.
A U.S. Holder that makes a qualified electing fund election will be currently taxable on its pro rata share of our ordinary earnings and net capital gain, at ordinary income and capital gains rates, respectively, for each of our taxable years, regardless of whether or not distributions were received. The U.S. Holder's basis in the subordinate voting shares will be increased to reflect taxed but undistributed income. Distributions of income that had previously been taxed will result in a corresponding reduction of basis in the subordinate voting shares and will not be taxed again as a distribution to the U.S. Holder. U.S. Holders desiring to make a qualified electing fund election should consult their tax advisors with respect to the advisability of making such election.
UNITED STATES BACKUP WITHHOLDING AND INFORMATION REPORTING
A U.S. Holder will generally be subject to information reporting with respect to dividends paid on, or proceeds of the sale or other disposition of, our subordinate voting shares, unless the U.S. Holder is a corporation or comes within certain other categories of exempt recipients. A U.S. Holder that is not an exempt recipient will generally be subject to backup withholding with respect to the proceeds from the sale or the disposition of, or with respect to dividends on, subordinate voting shares unless the U.S. Holder provides a taxpayer identification number and otherwise complies with applicable requirements of the backup withholding rules. Any amount withheld under these rules will be creditable against the U.S. Holder's U.S. federal income tax liability or refundable to the extent that it exceeds such liability. A U.S Holder who does not provide a correct taxpayer identification number may be subject to penalties imposed by the United States Internal Revenue Service.
Non-U.S. Holders will generally be subject to information reporting and possible backup withholding with respect to the proceeds of the sale or other disposition of subordinate voting shares effected within the United States, unless the holder certifies to its foreign status or otherwise establishes an exemption if the broker does not have actual knowledge that the holder is a U.S. holder. Payments of dividends on or proceeds from the sale of subordinate voting shares within the United States by a payor within the United States to a non-exempt U.S. or Non-U.S. Holder will be subject to backup withholding if such holder fails to provide appropriate certification. In the case of such payments by a payor within the United States to a foreign partnership other than a foreign partnership that qualifies as a "withholding foreign partnership" within the meaning of such Treasury regulations, the partners of such partnership will be required to provide the certification discussed above in order to establish an exemption from backup withholding tax and information reporting requirements.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material Canadian federal income tax considerations generally applicable to a U.S. person who holds subordinate voting shares and who, for the purposes of the INCOME TAX ACT (Canada), or the ITA, and the CANADA-UNITED STATES INCOME TAX CONVENTION (1980), or the Convention, as applicable and at all relevant times:
o is resident in the United States and not resident in Canada,
o holds the subordinate voting shares as capital property,
o does not have a "permanent establishment" or "fixed base" in
Canada, as defined in the Convention; and
o deals at arm's length with us. Special rules, which are not
discussed below, may apply to "financial institutions", as defined
in the ITA, and to non-resident insurers carrying on an insurance
business in Canada and elsewhere.
This discussion is based on the current provisions of the ITA and the Convention and on the regulations promulgated under the ITA, all specific proposals to amend the ITA or the regulations promulgated under the ITA announced by or on behalf of the Canadian Minister of Finance prior to the date of this annual report and the current published administrative practices of the Canada Customs and Revenue Agency, or the Agency. It does not otherwise take into account or anticipate any changes in law or administrative practice nor any income tax laws or considerations of any province or territory of Canada or any jurisdiction other than Canada, which may differ from the Canadian federal income tax consequences described in this document.
Under the ITA and the Convention, dividends paid or credited, or deemed to be paid or credited, on the subordinate voting shares to a U.S. person who owns less than 10% of the voting shares will be subject to Canadian withholding tax at the rate of 15% of the gross amount of those dividends or deemed dividends. If a U.S. person is a corporation and owns 10% or more of the voting shares, the rate is reduced from 15% to 5%. As described above and subject to specified limitations, a U.S. person may be entitled to credit against U.S. federal income tax liability for the amount of tax withheld by Canada.
Under the Convention, dividends paid to specified religious, scientific, charitable and similar tax exempt organizations and specified organizations that are resident and exempt from tax in the United States and that have complied with specified administrative procedures are exempt from this Canadian withholding tax.
A capital gain realized by a U.S. person on a disposition or deemed disposition of the subordinate voting shares will not be subject to tax under the ITA unless the subordinate voting shares constitute taxable Canadian property within the meaning of the ITA at the time of the disposition or deemed disposition. In general, the subordinate voting shares will not be "taxable Canadian property" to a U.S. person if they are listed on a prescribed stock exchange, which includes The Toronto Stock Exchange, unless, at any time within the five-year period immediately preceding the dispositions, the U.S. person, persons with whom the U.S. person did not deal at arm's length, or the U.S. person together with those persons, owned or had an interest in or a right to acquire more than 25% of any class or series of our shares.
If the subordinate voting shares are taxable Canadian property to a U.S. person, any capital gain realized on a disposition or deemed disposition of those subordinate voting shares will generally be exempt from tax under the ITA by virtue of the Convention if the value of the subordinate voting shares at the time of the disposition or deemed disposition is not derived principally from real property, as defined by the Convention, situated in Canada. The determination as to whether Canadian tax would be applicable on a disposition or deemed
disposition of the subordinate voting shares must be made at the time of the disposition or deemed disposition.
HOLDERS OF SUBORDINATE VOTING SHARES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM, INCLUDING THE APPLICATION AND EFFECT OF ANY STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX LAWS, OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF SUBORDINATE VOTING SHARES.
F. DIVIDENDS AND PAYING AGENTS
Not Applicable
G. STATEMENT BY EXPERTS
Not Applicable
H. DOCUMENTS ON DISPLAY
Any statement in this annual report about any of our contracts or other documents is not necessarily complete. If the contract or document is filed as an exhibit to the registration statement, the contract or document is deemed to modify the description contained in this annual report. You must review the exhibits themselves for a complete description of the contract or document.
You may review a copy of our filings with the SEC, including exhibits and schedules filed with it, at the SEC's public reference facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at 233 Broadway, New York, New York 10279 and at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies of such materials from the Public Reference Section of the SEC, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You may call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC maintains a Web site (HTTP://WWW.SEC.GOV) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC . Although we make many of our filings with the SEC electronically as a foreign private issuer, we are not obligated to do so.
You may read and copy any reports, statements or other information that we file with the SEC at the addresses indicated above and you may also access them electronically at the Web site set forth above. These SEC filings are also available to the public from commercial document retrieval services.
WE ARE REQUIRED TO FILE REPORTS AND OTHER INFORMATION WITH THE SEC
UNDER THE SECURITIES EXCHANGE ACT OF 1934. REPORTS AND OTHER INFORMATION FILED
BY US WITH THE SEC MAY BE INSPECTED AND COPIED AT THE SEC'S PUBLIC REFERENCE
FACILITIES DESCRIBED ABOVE. AS A FOREIGN PRIVATE ISSUER, WE ARE EXEMPT FROM THE
RULES UNDER THE EXCHANGE ACT PRESCRIBING 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. UNDER THE EXCHANGE ACT, AS A FOREIGN PRIVATE
ISSUER, WE ARE NOT REQUIRED TO PUBLISH FINANCIAL STATEMENTS AS FREQUENTLY OR AS
PROMPTLY AS UNITED STATES COMPANIES.
I. SUBSIDIARY INFORMATION
See Item 4.C. of this annual report.
ITEM 11. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
CURRENCY RISK
We are exposed to currency risk as a result of our export sales of products manufactured in Canada, substantially all of which are denominated in US dollars. Our exposure to foreign exchange rate fluctuations is partially hedged by operating expenses and the portion of our raw materials purchased in US dollars. In addition, we frequently enter into forward exchange contracts to sell US dollars at fixed forward rates in exchange for Canadian dollars. We enter into such contracts to manage the risk of exchange rate fluctuations between the Canadian and US dollars on cash flows related to anticipated future revenue streams and firmly committed future sales transactions denominated in US dollars. We do not enter into forward exchange contracts for trading purposes.
The following table summarizes the forward exchange contracts in effect as at August 31, 2001, classified by expected transaction dates, none of which exceed two years. The table below presents the notional amounts of such contracts (in thousands of US dollars) along with the weighted average contractual forward rates under such contracts. The notional amounts of such contracts are used to calculate the contractual payments to be exchanged under these contracts.
2002 2003
-------- --------
Forward exchange contracts to sell US
dollars in exchange for Canadian dollars
Contractual amounts.................................... $ 15,200 $ 1,800
Weighted average contractual exchange rates............ 1.4969 1.5184
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FAIR VALUE
The fair value of these contracts as at August 31, 2001, based on the prevailing exchange rate at that date of $1.00 = C$1.5477, amounted to C$26,3 million compared to a contractual value of C$25,5 million, resulting in a deferred unrealized loss of C$825,000 (approximately $533,000).
INTEREST RATE RISK
We are exposed to the impact of interest rate changes and changes in
the market values of our available-for-sale securities. We do not use derivative
financial instruments for our available-for-sale securities. Our
available-for-sale securities consist of debt instruments issued by high-credit
quality financial institutions and corporations and units of a low-risk mutual
fund.
The debt instruments bear interest at fixed rate and may have their fair market
value adversely impacted due to a rise in interest rate. However, due to their
very short-term maturity, we consider this risk to be insignificant.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.
Not Applicable
ITEM 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES
Not Applicable
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS
Not Applicable
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 to F-44
ITEM 19. EXHIBITS
NUMBER EXHIBIT
-------------- --------------------------------------------------------------
1.1 Amended Articles of Incorporation of EXFO (incorporated by
reference to Exhibit 3.1 of EXFO's Registration Statement on
Form F-1, File No. 333-38956).
1.2 By-laws of EXFO (incorporated by reference to Exhibit 3.2 of
EXFO's Registration Statement on Form F-1, File No.
333-38956).
1.3 Amended and Restated Articles of Incorporation of EXFO
(incorporated by reference to Exhibit 1.3 of EXFO's annual
report on Form 20-F dated January 18, 2001).
2.1 Form of Subordinate Voting Share Certificate (incorporated by
reference to Exhibit 4.1 of EXFO's Registration Statement on
Form F-1, File No. 333-38956).
2.2 Form of Registration Rights Agreement between EXFO and Germain
Lamonde dated July 6, 2000 ) (incorporated by reference to
Exhibit 10.13 of EXFO's Registration Statement on Form F-1,
File No. 333-38956).
3.1 Form of Trust Agreement among EXFO, Germain Lamonde, GEXFO
Investissements Technologiques inc., Fiducie Germain Lamonde
and G. Lamonde Investissements Financiers inc. (incorporated
by reference to Exhibit 4.2 of EXFO's Registration Statement
on Form F-1, File No. 333-38956).
4.1 Agreement of Merger and Plan of Reorganization, dated as of
November 4, 2000, by and among EXFO, 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 EXFO's annual report on Form 20-F
dated January 18, 2001)
4.2 Amendment No. 1 to Agreement of Merger and Plan of Agreement,
dated as of December 20, 2000, by and among EXFO, 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 EXFO's annual
report on Form 20-F dated January 18, 2001).
4.3 Agreement of Merger, dated as of August 20, 2001, by and among
EXFO, Buyer Sub, and Avantas Networks Corporation and
Shareholders of Avantas Networks corporation.
4.4 Amendment No. 1 dated as of November 1, 2002 to Agreement of
Merger, dated as of August 20, 2001, by and among EXFO,
3905268 Canada Inc., Avantas Networks Corporation and
Shareholders of Avantas Networks.
4.5 Offer to purchase shares of Nortech Fibronic Inc., dated
February 6, 2000 among EXFO, 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 EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.6 Share Purchase Agreement, dated as of March 5, 2001, among
EXFO Electro-Optical Engineering, Inc., John Kennedy, Glenn
Harvey and EFOS Corporation (incorporated by reference to
Exhibit 4.1 of EXFO's Registration Statement on Form F-3, File
No. 333-65122).
4.7 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. (incorporated by reference to Exhibit
4.2 of EXFO's Registration Statement on Form F-3, File No.
333-65122).
4.8 Share Purchase Agreement, dated as of November 2, 2001 between
JDS Uniphase Inc. and 3905268 Canada Inc.
4.9 Intellectual Property Assignment and Sale Agreement between
EFOS Inc., EXFO Electro-Optical Engineering, Inc., John
Kennedy, Glenn Harvey and EFOS Corporation. (incorporated by
reference to Exhibit 4.3 of EXFO's Registration Statement on
Form F-3, File No. 333-65122).
4.10 Offer to acquire a building, dated February 23, 2000, between
EXFO and Groupe Mirabau inc. and as accepted by Groupe Mirabau
inc. on February 24, 2000 (including summary in English)
(incorporated by reference to Exhibit 10.3 of EXFO's
Registration Statement on Form F-1, File No. 333-38956).
4.11 Lease Agreement, dated December 1, 1996, between EXFO and
GEXFO Investissements Technologiques inc., as assigned to
9080-9823 Quebec inc. on September 1, 1999 (including
83
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summary in English) (incorporated by reference to Exhibit 10.4
of EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.12 Lease Agreement, dated March 1, 1996, between EXFO and GEXFO
Investissements Technologiques inc., as assigned to 9080-9823
Quebec inc. on September 1, 1999 (including summary in
English) (incorporated by reference to Exhibit10.5 of EXFO's
Registration Statement on Form F-1, File No. 333-38956).
4.13 Lease renewal of the existing leases between 9080-9823 Quebec
inc. and EXFO, dated November 30, 2001.
4.14 Loan Agreement between EXFO and GEXFO Investissements
Technologiques inc., dated May 11, 1993, as assigned to
9080-9823 Quebec inc. on September 1, 1999 (including summary
in English) (incorporated by reference to Exhibit 10.9 of
EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.15 Resolution of the board of directors of EXFO, dated September
1, 1999, authorizing EXFO to acquire GEXFO Distribution
Internationale inc. from GEXFO Investissements Technologiques
inc. (including summary in English) (incorporated by reference
to Exhibit 10.10 of EXFO's Registration Statement on Form F-1,
File No. 333-38956).
4.16 Form of Promissory Note of EXFO issued to GEXFO
Investissements Technologiques inc. dated June 27, 2000 )
(incorporated by reference to Exhibit 10.12 of EXFO's
Registration Statement on Form F-1, File No. 333-38956).
4.17 Credit Agreement, dated July 6, 1995, among EXFO, National
Bank of Canada and Banque Nationale de Paris(Canada), as
amended on December 22, 1999 and on March 28, 2000 (including
summary in English) (incorporated by reference to Exhibit 10.1
of EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.18 Term Loan Offer, dated March 28, 2000, among EXFO and National
Bank of Canada as accepted by EXFO on April 3, 2000 (including
summary in English) (incorporated by reference to Exhibit
10.11 of EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.119 Sale Agreement, dated September 1, 1999, between EXFO and
GEXFO Investissements Technologiques inc. (including summary
in English) (incorporated by reference to Exhibit 10.14 of
EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.120 Purchase Agreement to acquire a building dated June 7, 2000,
between EXFO and Groupe Mirabau inc. (incorporated by
reference to Exhibit 10.16 of EXFO's Registration Statement on
Form F-1, File No. 333-38956).
4.21 Employment Agreement of Germain Lamonde dated May 29, 2000
(incorporated by reference to Exhibit 10.15 of EXFO's
Registration Statement on Form F-1, File No. 333-38956).
4.22 Employment Agreement of Mario Larose dated as of May 30, 2000.
(incorporated by reference to Exhibit 4.15 of EXFO's annual
report on Form 20-F dated January 18, 2001)
4.23 First Amending Agreement to Employment Agreement of Mario
Larose dated as of September 1, 2000. (incorporated by
reference to Exhibit. 4.16 of EXFO's annual report on Form
20-F dated January 18, 2001)
4.24 Employment Agreement of Bruce Bonini dated as of September 1,
2000.
4.25 Employment Agreement of Juan-Felipe Gonzalez dated as of
September 1, 2000.
4.26 Employment Agreement of David J. Farrell dated as of December
20, 2000.
4.27 Employment Agreement of William S. Gornall dated as of
December 20, 2000.
4.28 Deferred Profit Sharing Plan, dated September 1, 1998
(incorporated by reference to Exhibit 10.6 of EXFO's
Registration Statement on Form F-1, File No. 333-38956).
4.29 Stock Option Plan, dated May 25, 2000 (incorporated by
Reference to Exhibit 10.7 of EXFO's Registration Statement on
Form F-1, File No. 333-38956).
4.30 Share Plan, dated April 3, 2000 (incorporated by reference to
Exhibit 10.8 of EXFO's Registration Statement on Form F-1,
File No. 333-38956).
4.31 Directors' Compensation Plan (incorporated by reference to
Exhibit 10.17 of EXFO's Registration Statement on Form F-1,
File No. 333-38956).
4.32 Restricted Stock Award Plan, dated December 20, 2000
(incorporated by reference to Exhibit 4.21 of EXFO's annual
report on Form 20-F dated January 18, 2001).
8.1 Subsidiaries of EXFO.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20 -F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
-------------------------------------
Name: Germain Lamonde
Title: Chairman of the Board, President
and Chief Executive Officer
Date: January 17, 2002.
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AUDITORS' REPORT
TO THE SHAREHOLDERS OF
EXFO ELECTRO-OPTICAL ENGINEERING INC.
We have audited the consolidated balance sheets of EXFO ELECTRO-OPTICAL ENGINEERING INC. as at August 31, 2000 and 2001 and the consolidated statements of earnings, retained earnings (deficit) and contributed surplus and cash flows for each of the years in the three-year period ended August 31, 2001. 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. 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 consolidated financial statements present fairly, in all material respects, the financial position of the company as at August 31, 2000 and 2001 and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2001 in accordance with Canadian generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule on the variation in the allowance for doubtful accounts included in Form 20-F presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/S/ PRICEWATERHOUSECOOPERS LLP CHARTERED ACCOUNTANTS Quebec, Quebec, Canada September 21, 2001 |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars)
2000 2001
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 729 $ 7,729
Short-term investments (notes 7 and 18) 162,659 66,861
Accounts receivable (notes 7 and 18)
Trade 18,272 24,531
Other 2,790 3,660
Income taxes receivable (note 7) 284 --
Inventories (notes 4 and 7) 18,868 44,345
Prepaid expenses 1,023 1,265
Future income taxes (note 15) 995 1,423
--------- ---------
205,620 149,814
PROPERTY, PLANT AND EQUIPMENT (notes 5 and 7) 8,694 27,140
INTANGIBLE ASSETS AND GOODWILL (notes 6 and 7) 2,320 264,242
FUTURE INCOME TAXES (note 15) 3,089 1,381
--------- ---------
$ 219,723 $ 442,577
========= =========
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LIABILITIES
CURRENT LIABILITIES
Bank advances (note 7) $ 10 $ --
Accounts payable and accrued liabilities (note 8) 10,353 16,180
Income taxes payable -- 2,623
Mandatorily redeemable preferred shares (note 9) 543 --
Deferred revenue 395 616
Current portion of long-term debt 152 106
--------- ---------
11,453 19,525
DEFERRED REVENUE 151 --
DEFERRED GRANTS (note 13) 1,109 1,002
LONG-TERM DEBT (note 10) 16 664
FUTURE INCOME TAXES (note 15) -- 6,581
--------- ---------
12,729 27,772
--------- ---------
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COMMITMENTS (note 11)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 12) 198,459 429,995
CONTRIBUTED SURPLUS -- 1,457
CUMULATIVE TRANSLATION ADJUSTMENT 1,555 (8,333)
RETAINED EARNINGS (DEFICIT) 6,980 (8,314)
--------- ---------
206,994 414,805
--------- ---------
$ 219,723 $ 442,577
========= =========
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ON BEHALF OF THE BOARD
/s/ GERMAIN LAMONDE /s/ ANDRE TREMBLAY ----------------------------- ---------------------------- GERMAIN LAMONDE ANDRE TREMBLAY Chairman, President and CEO Chairman, Audit Committee |
The accompanying notes are an integral part of these consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED BALANCE SHEET
(in thousands of US dollars, except share and per share data)
YEARS ENDED AUGUST 31,
-----------------------------------------
1999 2000 2001
--------- --------- ---------
SALES (note 16) $ 42,166 $ 71,639 $ 146,013
COST OF SALES 14,998 24,712 54,946
--------- --------- ---------
GROSS MARGIN 27,168 46,927 91,067
--------- --------- ---------
OPERATING EXPENSES
Selling and administrative 13,279 24,304 46,236
Net research and development (note 13) 4,315 6,402 13,601
Amortization of property, plant and equipment 857 1,451 3,559
Amortization of intangible assets 41 47 9,876
Non-recurring expenses (note 14) -- -- 3,288
--------- --------- ---------
TOTAL OPERATING EXPENSES 18,492 32,204 76,560
--------- --------- ---------
EARNINGS FROM OPERATIONS 8,676 14,723 14,507
Interest income, net 136 1,480 6,098
Foreign exchange gain (loss) (506) (684) 3,327
--------- --------- ---------
EARNINGS BEFORE INCOME TAXES AND AMORTIZATION OF GOODWILL 8,306 15,519 23,932
INCOME TAXES (note 15) 2,492 5,298 8,150
--------- --------- ---------
EARNINGS BEFORE AMORTIZATION OF GOODWILL 5,814 10,221 15,782
AMORTIZATION OF GOODWILL -- 297 31,076
--------- --------- ---------
NET EARNINGS (LOSS) FOR THE YEAR $ 5,814 $ 9,924 $ (15,294)
========= ========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Earnings before amortization of goodwill $ 0.14 $ 0.26 $ 0.30
Net earnings (loss) $ 0.14 $ 0.25 $ (0.29)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S) 38,001 39,951 53,014
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S) (note 17) 38,001 40,086 53,014
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The accompanying notes are an integral part of these consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED BALANCE SHEET
(in thousands of US dollars, except share and per share data)
RETAINED EARNINGS (DEFICIT)
YEARS ENDED AUGUST 31,
----------------------------------
1999 2000 2001
-------- -------- --------
BALANCE - BEGINNING OF YEAR $ 12,044 $ 14,592 $ 6,980
ADD
Net earnings (loss) for the year 5,814 9,924 (15,294)
-------- -------- --------
17,858 24,516 (8,314)
-------- -------- --------
DEDUCT
Dividends
Class A shares 2,926 17,216 --
Class C share (note 3) 340 -- --
Class F shares -- 320 --
-------- -------- --------
3,266 17,536 --
-------- -------- --------
BALANCE - END OF YEAR $ 14,592 $ 6,980 $ (8,314)
======== ======== ========
DIVIDENDS PER SHARE
Class A shares $ 0.08 $ 0.45 $ --
Class C share $ 340 $ -- $ --
Class F shares $ -- $ 0.45 $ --
CONTRIBUTED SURPLUS
YEARS ENDED AUGUST 31,
----------------------------------
1999 2000 2001
-------- -------- --------
BALANCE - BEGINNING OF YEAR $ -- $ -- $ --
ADD
Premium on resale of share capital -- -- 1,457
-------- -------- --------
BALANCE - END OF YEAR $ -- $ -- $ 1,457
======== ======== ========
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The accompanying notes are an integral part of these consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED BALANCE SHEET
(in thousands of US dollars)
YEARS ENDED AUGUST 31,
-------------------------------------------
1999 2000 2001
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the year $ 5,814 $ 9,924 $ (15,294)
Add (deduct) items not affecting cash and cash equivalents
Amortization of discount on short-term investments -- (807) (594)
Amortization of property, plant and equipment 857 1,451 3,559
Amortization of intangible assets 41 47 9,876
Foreign exchange gains on disposal of short-term investments -- -- (3,437)
Non-recurring expenses -- -- 1,083
Future income taxes (42) (33) (1,779)
Amortization of goodwill -- 297 31,076
Change in non-cash operating working capital items
Accounts receivable (3,875) (10,476) 447
Income taxes receivable (381) 2,149 (2,291)
Inventories (1,259) (10,732) (20,308)
Prepaid expenses (205) (519) (67)
Accounts payable and accrued liabilities 1,965 3,917 (3,736)
Income taxes payable (115) -- 4,528
Deferred revenue 327 215 100
Deferred grants 533 567 (57)
--------- --------- ---------
3,660 (4,000) 3,106
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances (136) (357) (2,046)
Repayment of mandatorily redeemable preferred shares -- -- (354)
Repayment of loan from a company under common control -- (1,349) --
Repayment of long-term debt (20) (812) (3,355)
Issuance of share capital 86 209,690 --
Resale of share capital -- -- 1,490
Redemption of share capital -- -- (33)
Share issue expenses -- (16,743) (331)
Dividends paid (3,215) (17,587) --
--------- --------- ---------
(3,285) 172,842 (4,629)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (33) (519,645) (772,808)
Proceeds from disposal of short-term investments -- 359,886 866,158
Additions to property, plant and equipment and intangible assets (1,181) (7,180) (15,911)
Business combinations (note 3) -- (2,108) (68,255)
--------- --------- ---------
(1,214) (169,047) 9,184
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (839) (205) 7,661
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS -- 511 (661)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 1,262 423 729
--------- --------- ---------
CASH AND CASH EQUIVALENTS- END OF YEAR $ 423 $ 729 $ 7,729
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid $ (148) $ (480) $ (377)
Interest received $ 98 $ 949 $ 6,046
Income taxes paid $ (2,801) $ (3,761) $ (8,171)
|
The accompanying notes are an integral part of these consolidated financial statements.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
1 INCORPORATION AND NATURE OF ACTIVITIES
The company, incorporated in 1985 under the Canada Business Corporations Act, designs, manufactures and markets a full line of fiber-optic test, measurement and automation solutions for the telecommunications industry to measure the physical characteristics of optical fiber and related hardware and to automate manufacturing processes. The company derives substantially all of its revenue from customers located in the United States, Canada, Europe, Asia and South America. The company's customers consist primarily of telecommunications carriers, optical component and system manufacturers, as well as research and development laboratories.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. These principles conform, in all material respects, with accounting principles generally accepted in the United States, except as described in note 19. The principal accounting policies of the company, which have been consistently applied, are summarized as follows:
ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
CONSOLIDATION
These consolidated financial statements include the accounts of the company and its domestic and international subsidiaries. Intercompany accounts and transactions have been eliminated.
REPORTING CURRENCY
The consolidated financial statements of the company were presented in Canadian dollars up to August 31, 1999. Effective September 1, 1999, the US dollar has been adopted as the reporting currency. The functional currency continues to be the Canadian dollar. The financial statements for the year ended August 31, 1999 are presented in US dollars in accordance with a translation of convenience method using the representative exchange rate as at August 31, 1999 of US$1.00 = Cdn$1.4958. The translated amount for monetary and
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
non-monetary items as at August 31, 1999 became the historical basis for those items in subsequent years.
The financial statements as at August 31, 2000 and 2001 and for the years then ended have been translated using the current rate method. Under this method, the financial statements are translated into the reporting currency as follows: assets and liabilities are translated at the exchange rate in effect at the date of the balance sheet and revenues and expenses are translated at the average exchange rate for the year. All gains and losses resulting from the translation of the financial statements into the reporting currency are included in the cumulative translation adjustment in shareholders' equity.
FOREIGN CURRENCY TRANSLATION
Foreign currency transactions
Transactions denominated in currencies other than the functional currency are translated into the functional currency as follows: monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date and revenues and expenses are translated at the average rate for the year. Non-monetary assets and liabilities are translated at historical rates. Gains and losses arising from such translation are reflected in the statements of earnings.
Foreign subsidiaries
The financial statements of integrated foreign operations are remeasured into the functional currency using the temporal method. Under this method, monetary assets and liabilities are remeasured at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical rates. Revenues and expenses are remeasured at the average rate for the year. Gains and losses resulting from remeasurement are reflected in the statements of earnings.
The financial statements of self-sustaining operations with a functional currency other than the US dollar are remeasured into the functional currency using the current rate method. Under this method, assets and liabilities are remeasured at the exchange rates in effect at the balance sheet date and revenues and expenses are remeasured at the average rate for the year. Gains and losses resulting from remeasurement are reflected in the cumulative translation adjustment in shareholders' equity.
Forward exchange contracts
The company enters into forward exchange contracts in order to hedge against potential exchange rate fluctuations on cash flows related to anticipated future revenue streams denominated in foreign currencies. Unrealized gains and losses on these forward exchange contracts are deferred and recognized upon settlement of the related transactions.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Accordingly, cash flows resulting from forward exchange contract settlements are classified as cash flows from operating activities along with the corresponding cash flows being hedged.
In 2000, the company entered into forward exchange contracts to sell Canadian dollars in exchange for US dollars. These contracts, which were speculative in nature, were carried on at fair value as at August 31, 2000. The unrealized loss on these contracts as at August 31, 2000 has been included in earnings for that year. As at August 31, 2001, the company does not hold such forward exchange contracts.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and balances with banks and all highly liquid short-term investments with original maturities of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments are valued at the lower of cost and market value. Cost is composed of acquisition cost plus amortization of discount or less amortization of premium.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value. The cost of raw materials and work in progress is determined using the first-in, first-out method. The cost of finished goods is determined using the average cost method.
PROPERTY, PLANT AND EQUIPMENT AND AMORTIZATION
Property, plant and equipment are recorded at cost less related government grants and research and development tax credits. Amortization is provided on a straight-line basis over their estimated useful lives as follows:
TERM
Buildings 15 and 25 years
Equipment 2 to 7 years
Leasehold improvements Remaining lease term including
lease renewal option
|
The carrying value of property, plant and equipment is evaluated for impairment whenever significant events occur which may indicate an impairment in value, based upon a comparison of the carrying value to the net recoverable amount.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
INTANGIBLE ASSETS, GOODWILL AND AMORTIZATION
Intangible assets include the cost of acquired in process research and development, core technology, work force and trademark, net of accumulated amortization. Intangible assets are amortized on a straight-line basis over their estimated useful lives ranging from five to eight months for in process research and development, of five years for core technology, of one year for work force and of two years for trademark.
Goodwill, which represents the excess of the purchase price of acquired businesses over the estimated fair value of net identifiable assets acquired, is amortized on a straight-line basis over the estimated useful life of five years.
Intangible assets and goodwill are reviewed for impairment when events or circumstances indicate that costs may not be recoverable. Impairment exists when the carrying value of the asset is greater than the pre-tax undiscounted future cash flows expected to be provided by the asset. The amount of impairment loss, if any, is the excess of the carrying value over the estimated pre-tax undiscounted future cash flows. Intangible assets and goodwill are written down for any permanent impairment in value of the unamortized portion. As at August 31, 2001, there are no events or circumstances indicating that the carrying value may not be recoverable.
REVENUE RECOGNITION
For products where the software is incidental, the company recognizes revenue when the products are delivered, with provisions made for estimated returns, warranties and support obligations.
For products where software is not incidental, the revenues are separated into two categories, product and customer support revenues based upon vendor-specific objective evidence of fair value. The product revenues for these sales are recognized when the products are delivered with provisions made for estimated returns and warranties. The customer support revenues are deferred and recognized ratably over the years of the support arrangement, except where provided within one year of delivery, costs of providing this support are insignificant and accrued at the time of delivery and no upgrades of software are provided.
ADVERTISING COSTS
Advertising costs are expensed as incurred.
GOVERNMENT GRANTS
Government grants are accrued as a receivable when there is reasonable assurance that the company has complied and will continue to comply with all the conditions related to the
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
grant. Grants related to operating expenses are included in earnings when the related expenses are incurred. Grants related to capital expenditures are deducted from the related asset. Grants related to job creation and training programs for extended periods are deferred and amortized on a straight-line basis over the minimum period for which the created job must be maintained or training provided.
RESEARCH AND DEVELOPMENT EXPENSES
All expenses related to development activities, which do not meet generally accepted criteria for deferral, and research are expensed as incurred, net of related tax credits and government grants. Development expenses which meet generally accepted criteria for deferral are capitalized, net of related tax credits and government grants, and amortized against earnings over the estimated period of benefit.
As at August 31, 2001, the company had not deferred any development costs.
INCOME TAXES
The company provides for income taxes using the liability method of tax allocation. Under this method, future income tax assets and liabilities are determined based on deductible or taxable temporary differences between financial statement values and tax values of assets and liabilities using enacted income tax rates expected to be in effect for the years in which the differences are expected to reverse.
The company establishes a valuation allowance against future income tax assets if, based on available information, it is more likely than not that some or all of the future income tax assets will not be realized.
EARNINGS (LOSS) PER SHARE
During the year, the company adopted the Canadian Institute of Chartered Accountants (CICA) section 3500 "Earnings per Share", which requires the use of the treasury stock method in calculating diluted earnings per share and to apply the concept of contingently issuable shares. This standard has been applied retroactively and did not result in any material change to previously reported basic and diluted earnings per share.
Basic earnings (loss) and dividends per share are determined using the weighted average number of common shares outstanding during the year, as adjusted for the effects of reorganizations of share capital in prior years.
Diluted earnings (loss) per share are determined using the weighted average number of common shares outstanding during the year, plus the effects of dilutive potential common shares outstanding during the year. This method requires that diluted earnings (loss) per share be calculated, using the treasury stock method, as if all potential common shares had
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
been exercised at the later of the beginning of the year or the date of issuance, as the case may be, and that the funds obtained thereby be used to purchase common shares of the company at the average fair value of the common shares during the year.
STOCK-BASED COMPENSATION PLANS
The company maintains stock-based compensation plans, which are described in note 12. Under accounting principles generally accepted in Canada, no compensation cost is recognized when stocks, stock options or stock awards are issued to plan participants. Any consideration received from plan participants upon the purchase of stock or the exercise of stock options or stock awards is credited to share capital. Cash amounts paid upon the exercise of stock appreciation rights are charged to earnings.
NEW ACCOUNTING STANDARDS
On August 1, 2001, the CICA issued section 1581 "Business combinations", which supersedes section 1580, and issued section 3062 "Goodwill and Other Intangible Assets". Section 1581 requires business combinations initiated after June 30, 2001 or business combinations accounted for by the purchase method with a date of acquisition after June 30, 2001 to be accounted for using the purchase method of accounting. This section also broadens criteria for recording intangible assets separately from goodwill. Upon the adoption of section 3062, recorded goodwill and intangible assets will be evaluated against those new criteria and may result in certain intangible assets being reclassified into goodwill or, alternatively, amounts initially recorded as goodwill being separately identified and recognized apart from goodwill as intangible assets. Section 3062 requires the use of a non-amortization approach to account for purchased goodwill and indefinite-lived intangibles. Under non-amortization approach, goodwill and indefinite-lived intangibles will not be amortized, but instead they will be reviewed for impairment and written down and charged to earnings only in the periods in which the recorded value of goodwill and indefinite-lived intangibles exceeds their fair value. This section will be adopted on September 1, 2002.
The impact of adopting section 3062 will allow the company to use the non-amortization approach for goodwill and will reduce annual goodwill amortization by approximately $50,000,000. Moreover, the company will implement a new goodwill impairment methodology and any potential initial impairment losses on goodwill determined by this methodology will be charged to deficit. Any subsequent impairment losses on goodwill will be charged to earnings in the period in which it is incurred.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
3 BUSINESS COMBINATIONS
BUSINESS COMBINATIONS DURING 2001
BURLEIGH INSTRUMENTS, INC.
On December 20, 2000, the company acquired a 100% interest in Burleigh Instruments, Inc. ("Burleigh"), a U.S. company which manufactures precision scientific instruments used in basic and applied research, engineering and production test applications in a variety of fields, in exchange for a total consideration valued at US$189,270,000, including acquisition-related costs of US$2,461,000.
The consideration paid consisted of US$42,461,000 in cash and the issuance of 6,488,816 subordinate voting shares for an amount of US$146,809,000.
Furthermore, as part of this acquisition, the company established a restricted stock award plan for employees of Burleigh (note 12). This plan provides that in the event of an employee's departure, shares to be issued to this employee under the plan will be issued to Burleigh's former shareholders. In such circumstances, this issuance of shares will be recorded as additional goodwill.
EFOS INC. (RENAMED EXFO PHOTONIC SOLUTIONS INC.)
On March 15, 2001, the company acquired a 100% interest in EXFO Photonic Solutions Inc. ("EXFO Photonic"), a Canadian company specializing in precision light-based adhesive spot curing technologies as well as curing process control for the global optical component manufacturing market. This acquisition was settled for a total consideration valued at US$110,146,000, including acquisition-related costs of US$194,000. The consideration paid consisted of US$25,194,000 in cash and the issuance of 3,700,000 subordinate voting shares for an amount of US$84,952,000.
These acquisitions have been accounted for using the purchase method and consequently, the net earnings of Burleigh and EXFO Photonic have been included in the consolidated statement of earnings of the company from the date of acquisition of these subsidiaries, being December 20, 2000 for Burleigh and March 15, 2001 for EXFO Photonic.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The purchase price, including acquisition-related costs, has been allocated based on the estimated fair value of net assets at the dates of acquisition as follows:
EXFO
BURLEIGH PHOTONIC
--------- ----------
Assets acquired
Current assets $ 7,092 $ 9,195
Property, plant and equipment 4,457 1,054
In process research and development 1,800 972
Core technology 24,000 25,324
Work force 1,250 907
Trademark - 421
Liabilities assumed (9,068) (7,169)
Future income taxes (8,342) (983)
--------- ----------
Net identifiable assets acquired 21,189 29,721
Goodwill 168,081 80,425
--------- ----------
Purchase price 189,270 110,146
Less: Subordinate voting shares issued 146,809 84,952
--------- ----------
Cash paid $ 42,461 $ 25,194
========= ==========
|
The fair value allocated to intangible assets acquired from Burleigh and EXFO Photonic was based upon independent valuations performed in conjunction with these acquisitions.
The existing technology that has reached technological feasibility was classified as core technology.
Acquired in process research and development represents the existing technology that has not reached technological feasibility and has no future alternative use.
The fair value of subordinate voting shares issued as part of these business combinations was determined based on the market price of the shares over a reasonable period of time before and after the dates of acquisition of the subsidiaries.
VANGUARD TECHNICAL SOLUTIONS, INC.
On March 16, 2001, the company, through one of its subsidiaries, Burleigh Automation Inc., acquired substantially all the assets of Vanguard Technical Solutions, Inc., a U.S. company
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
specializing in the design and manufacturing of ultra-precision assembly equipment for sensitive process and critical assembly challenges on the production floor. This acquisition, which was settled for a total cash consideration of US$600,000 allocated to property and equipment, has been accounted for using the purchase method.
BUSINESS COMBINATIONS DURING 2000
NORTECH FIBRONIC INC.
On February 4, 2000, the company acquired a 100% interest in Nortech Fibronic Inc. ("Nortech"), a Canadian company specializing in fiber-optic testing and temperature sensing, in exchange for total consideration valued at US$2,799,000. The consideration paid consisted of US$2,108,000 in cash, the issuance of 800,000 Class G shares which were mandatorily redeemable, for cash or subordinate voting shares at the option of the company, for an amount of US$553,000 (note 9), and a non-interest-bearing debenture in the amount of US$138,000 (note 10).
This acquisition has been accounted for using the purchase method. The estimated fair value of assets and liabilities acquired amounted to US$2,488,000 and US$2,231,000 respectively, resulting in goodwill of US$2,542,000 related to the telecommunication core business.
The net earnings of Nortech have been included in the consolidated statement of earnings of the company from the date of acquisition, being February 4, 2000.
The mandatorily redeemable preferred shares were settled during the year for US$354,000, resulting in a purchase price adjustment of US$189,000 (note 9), which has been applied against goodwill.
GAP OPTIQUE S.A.
On June 1, 2000, the company acquired the 85% interest in GAP Optique S.A. held by its parent company for a cash consideration of US$16,000. The carrying value of the net assets of GAP Optique S.A. was US$19,000 as at December 31, 1999. Since the exchange occurred between entities under common control, the exchange has been accounted for in a manner similar to a pooling of interests. The assets, liabilities and shareholders' equity of the company and GAP Optique S.A. have been combined using their respective carrying amounts, and financial statements of prior years have been restated as if the companies had always been combined.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
BUSINESS COMBINATION DURING 1999
GEXFO DISTRIBUTION INTERNATIONALE INC.
On September 1, 1998, the company acquired, from its parent company, all the issued and outstanding shares of GEXFO Distribution Internationale Inc. in exchange for 1 Class C share of the company, which was redeemed at a price of US$340,000. This holding company had two wholly-owned subsidiaries, EXFO America Inc. and EXFO Europe S.A.R.L., which market the company's products for the American and European markets.
Since the exchange was between entities under common control, the exchange has been accounted for in a manner similar to a pooling of interests. The assets, liabilities and shareholders' equity of the company and these companies have been combined using their respective carrying amounts, and financial statements of prior years have been restated as if the companies had always been combined.
4 INVENTORIES
2000 2001
-------- --------
Raw materials $ 12,057 $ 29,891
Work in progress 2,910 3,507
Finished goods 3,901 10,947
-------- --------
$ 18,868 $ 44,345
======== ========
5 PROPERTY, PLANT AND EQUIPMENT
|
AS AT AUGUST 31, 2000
------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
-------- ------------ --------
Land $ 299 $ - $ 299
Building 3,442 32 3,410
Equipment 8,451 4,158 4,293
Leasehold improvements 1,373 681 692
-------- -------- --------
$ 13,565 $ 4,871 $ 8,694
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
AS AT AUGUST 31, 2001
------------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
-------- ------------ --------
Land $ 2,735 $ - $ 2,735
Buildings 9,077 326 8,751
Equipment 23,906 9,286 14,620
Leasehold improvements 2,390 1,356 1,034
-------- -------- --------
$ 38,108 $ 10,968 $ 27,140
======== ======== ========
|
6 INTANGIBLE ASSETS AND GOODWILL
AS AT
AUGUST 31,
2000 AS AT AUGUST 31, 2001
---------- -------------------------------------
ACCUMULATED
NET COST AMORTIZATION NET
---------- --------- ------------ ---------
In process research and development $ - $ 2,769 2,769 -
Core technology - 49,483 5,678 43,805
Work force - 2,155 1,281 874
Other assets 68 637 246 391
---------- --------- ---------- ---------
68 55,044 9,974 45,070
Goodwill 2,252 250,497 31,325 219,172
---------- --------- ---------- ---------
$ 2,320 $ 305,541 $ 41,299 $ 264,242
========== ========= ========== =========
|
7 CREDIT FACILITIES
The company has available credit facilities under lines of credit which provide for advances of up to Cdn$13,000,000 (US$8,400,000) and up to US$3,000,000. These facilities, which are renewable annually, bear interest at prime rate (prime rate in 2000). Accounts receivable, inventories and all tangible and intangible assets of the company have been pledged as security against these facilities. Amounts of Cdn$15,000 (US$10,000) and nil were drawn against these facilities as at August 31, 2000 and 2001, respectively.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
8 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
AS AT AUGUST 31,
------------------------
2000 2001
-------- --------
Trade $ 6,847 $ 7,732
Salaries and social benefits 1,698 3,917
Commissions 966 1,307
Non-recurring expenses (note 14) - 1,230
Warranty 392 901
Other 450 1,093
-------- --------
$ 10,353 $ 16,180
======== ========
9 MANDATORILY REDEEMABLE PREFERRED SHARES
|
Authorized - unlimited as to number, without par value Preferred, non-voting, ranking in priority to subordinate and multiple voting shares, each series ranking pari passu with the preferred shares of every other series, issuable in one or more series Preferred Series 1, non-voting, redeemed on November 30, 2000.
On February 7, 2000, the company filed articles of amendment pursuant to which the Class G shares were created.
Prior to June 29, 2000, the company's authorized mandatorily redeemable preferred shares consisted of Class B, C, E and G shares.
On June 29, 2000, the company filed articles of amendment pursuant to which preferred shares issuable in series and preferred shares Series 1 were created, the 800,000 issued and outstanding Class G shares were converted into 800,000 preferred shares Series 1 and Class B, C, E and G shares were cancelled.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following tables summarize the preferred share activity since August 31, 1998:
CLASS C SHARE CLASS E SHARES
------------------------- ------------------------ TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
Balance as at August 31, 1998 - $ - 19,000,000 $ - $ -
Business combination (note 3) 1 340 - - 340
Redemption (1) (340) - - (340)
Conversion of Class E shares
into Class A shares (note 12) - - (19,000,000) - -
--------- --------- ---------- ------- ---------
Balance as at August 31, 1999, 2000 and 2001 - $ - - $ - $ -
========= ========= ========== ======= =========
CLASS G SHARE PREFERRED SHARES SERIES 1
------------------------- -------------------------- TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
Balance as at August 31, 1998 and 1999 - $ - - $ - $ -
Business combination
(note 3) 800,000 555 - - 555
Conversion of Class G
shares into preferred
shares Series 1 (800,000) (555) 800,000 555 -
Foreign currency
translation adjustment - - - (12) (12)
--------- --------- ---------- ------- ---------
Balance as at August 31,
2000 - - 800,000 543 543
Redemption - - (800,000) (354) (354)
Purchase price adjustment
(note 3) - - - (189) (189)
--------- --------- ---------- ------- ---------
Balance as at August 31, 2001 - $ - - $ - $ -
========= ========= ========== ======= =========
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
10 LONG-TERM DEBT
AS AT AUGUST 31,
------------------
2000 2001
------ ------
Loans collateralized by equipment, bearing interest at
9.6%, repayable in monthly instalments of $13,000
including principal and interest, maturing in 2008 $ - $ 754
Unsecured non-interest-bearing debenture, repaid during
the year (note 3) 136 -
Unsecured non-interest-bearing loan repayable through
July 2002 32 16
------ -----
168 770
Less: Current portion 152 106
------ -----
$ 16 $ 664
====== =====
|
As at August 31, 2001, minimum principal repayments required in each of the next five years are $106,000 in 2002, $100,000 in 2003, $110,000 in 2004, $122,000 in 2005 and $134,000 in 2006.
11 COMMITMENTS
The company has entered into operating leases for its premises, which expire at various dates through to 2007. Minimum rentals payable under these operating leases amount to $3,170,000 as at August 31, 2001.
For the years ended August 31, 1999, 2000 and 2001, rental expense amounted to $344,000, $579,000 and $1,580,000, respectively.
12 SHARE CAPITAL
Authorized - unlimited as to number, without par value Subordinate voting and participating, bearing a non-cumulative dividend to be determined by the Board of Directors, ranking pari passu with multiple voting shares Multiple voting and participating, entitling to ten votes each, bearing a non-cumulative dividend to be determined by the Board of Directors, convertible at the holder's option into subordinate voting shares on a one-for-one basis, ranking pari passu with subordinate voting shares
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Prior to June 29, 2000, the company's authorized share capital consisted of Class A, D and F shares.
On September 2, 1998, the company filed articles of amendment pursuant to which the Class A shares were split on a 190,000-to-one basis. Pursuant to articles of amendment dated September 3, 1998, the 100 issued and outstanding Class E shares (note 9) were converted into Class A shares on a 190,000-to-one basis. All references to numbers of shares and per share amounts have been restated in order to reflect the share split and conversion noted above.
On June 29, 2000, the company filed articles of amendment pursuant to which subordinate and multiple voting shares were created, the 38,000,000 issued and outstanding Class A shares were converted into 38,000,000 multiple voting shares, the 707,264 issued and outstanding Class F shares were converted into 707,264 subordinate voting shares and the Class A, D and F shares were cancelled.
The following tables summarize the share capital activity since August 31, 1998:
CLASS A SHARES CLASS F SHARES
TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
Balance as at August 31, 1998 19,000,000 $ 1 -- $ -- $ --
Conversion of Class E shares
into Class A shares (note 9) 19,000,000 -- -- -- --
Issued for cash under stock purchase plan -- -- 197,588 86 86
---------- -------- ------- -------- ---------
Balance as at August 31, 1999 38,000,000 $ 1 197,588 $ 86 $ 87
Issued for cash under stock purchase plan -- -- 509,676 390 390
Conversion of Class F shares into
subordinate voting shares -- -- (707,264) (476) (476)
Conversion of Class A shares into multiple
voting shares (38,000,000) (1) -- -- (1)
Balance as at August 31, 2000 and 2001 -- $ -- --
========== ======== ======= ======== =========
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
MULTIPLE VOTING SHARES SUBORDINATE VOTING SHARES
---------------------- ------------------------- TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
Balance as at August 31, 1998 and 1999 - $ - - $ - $ -
Conversion of Class F shares into
subordinate voting shares - - 707,264 476 476
Conversion of Class A shares into
multiple voting shares 38,000,000 1 - - 1
Issued pursuant to the initial
public offering - - 8,050,000 209,300 209,300
Share issue expenses, net of
related income taxes of
$5,425,000 - - - (11,318) (11,318)
---------- ------- ---------- --------- ----------
Balance as at August 31, 2000 38,000,000 1 8,757,264 198,458 198,459
Business combinations (note 3) - - 10,188,816 231,761 231,761
Conversion of multiple voting
shares into subordinate
voting shares (100,000) - 100,000 - -
Redemption - - (43,999) (33) (33)
Resale - - 43,999 33 33
Share issue expenses, net of
related income taxes of
$106,000 - - - (225) (225)
---------- ------- ---------- --------- ----------
Balance as at August 31, 2001 37,900,000 $ 1 19,046,080 $ 429,994 $ 429,995
========== ======= ========== ========= ==========
|
STOCK PURCHASE PLAN
The company's stock purchase plan terminated at the time of the initial public offering, being June 29, 2000. In accordance with that plan, officers, directors and key employees could purchase Class F shares up to a maximum of 5% of all participating, issued and outstanding shares of the company. The purchase price of shares under that plan was determined as a multiple of the company's equity as at the end of the preceding fiscal year. Shares issued under that plan are restricted as to sale and transferability for a period of at least five years from the date of acquisition. Prior to its initial public offering, the company issued 707,264 Class F shares in exchange for a weighted average cash consideration of Cdn$0.98 (US$0.68) per share. As at August 31, 2001, the company has guaranteed the repayment of third party loans totalling Cdn$218,000 (US$141,000) obtained by certain employees with respect to the purchase of Class F shares.
STOCK OPTION PLAN
In May, 2000, the company established a stock option plan for directors, executive officers, employees and consultants and those of the company's subsidiaries, as determined by the Board of Directors.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The maximum number of subordinate voting shares issuable under the plan cannot exceed 4,470,961 shares. The maximum number of subordinate voting shares that may be granted to any individual cannot exceed 5% of the number of outstanding subordinate voting shares. The exercise price is the market price of the common shares on the date of grant. Options granted under the plan generally expire ten years from the date of grant. Options granted under the plan generally vest over a four-year period, with 25% vesting on an annual basis commencing on the first anniversary of the date of grant. Up to October 10, 2000, the number of options which ultimately would become exercisable in any given year, and in aggregate, was dependent on the degree to which the company's financial performance objectives were met. Nevertheless, on October 10, 2000, the Board of Directors of the company amended the vesting terms for options granted pursuant to the option plan to remove the financial performance criterion. Accordingly, options granted vest over the four-year period. The Board of Directors may accelerate the vesting of any or all outstanding options upon the occurrence of a change of control.
The following table summarizes the stock option activity since May 2000:
YEARS ENDED AUGUST 31,
-----------------------------------------------------------------
2000 2001
------------------------------ --------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
------------------------------ --------------------------------
Outstanding - Beginning of year - $ - 609,734 $ 26
Granted 609,734 26 2,153,352 29
Forfeited - - (348,855) (29)
-------- ----------- ---------- ----------
Outstanding - End of year 609,734 $ 26 2,414,231 $ 28
======== =========== ========== ==========
Exercisable - End of year - $ - 510,244 $ 26
======== =========== ========== ==========
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
The following table summarizes information about stock options as at August 31, 2001:
OPTIONS OUTSTANDING AS AT AUGUST OPTIONS EXERCISABLE AS AT AUGUST
31, 2001 31, 2001
------------------------------------- ---------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
REMAINING REMAINING
EXERCISE PRICE NUMBER CONTRACTUAL LIFE NUMBER CONTRACTUAL LIFE
$19.19 to $29.99 1,965,551 9.3 years 510,244 8.8 years
$30.00 to $39.99 72,500 9.1 years - -
$40.00 to $49.99 282,550 9 years - -
$50.00 to $56.75 93,630 9 years - -
------------------------------------- ---------------------------------------
2,414,231 9.2 years 510,244 8.8 years
===================================== =======================================
|
RESTRICTED STOCK AWARD PLAN
On December 20, 2000, the company established a restricted stock award plan for employees of Burleigh. A total of 359,781 stock awards entitle employees to receive an equal aggregate number of subordinate voting shares at a purchase price of nil. Stock awards granted under the plan vest over a four-year period, with 25% vesting on an annual basis commencing on the first anniversary of the date of grant. The plan will expire on December 20, 2004.
As at August 31, 2001, none of the 359,781 outstanding stock awards were exercisable.
STOCK APPRECIATION RIGHT PLAN
On August 4, 2001, the company established a stock appreciation right plan for certain of its employees. Under that plan, eligible employees are entitled to receive a cash amount equivalent to the difference between the market price of the common shares on the date of exercise and the exercise price determined on the date of grant.
Stock appreciation rights granted under the plan generally expire ten years from the date of grant.
Stock appreciation rights generally vest over a four-year period, with 25% vesting on an annual basis commencing on the first anniversary of the date of grant.
During the year, the company granted 22,400 stock appreciation rights with a weighted average exercise price of US$29.72 and none of them were exercisable as at August 31, 2001.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Considering the market price of the common shares of US$12.09 as at August 31, 2001, no compensation expense has been recorded in 2001 under that plan.
13 OTHER DISCLOSURES
NET RESEARCH AND DEVELOPMENT EXPENSES
Net research and development expenses comprise the following:
YEARS ENDED AUGUST 31,
---------------------------------------
1999 2000 2001
--------- --------- ---------
Gross research and development expenses $ 6,390 $ 9,374 $ 17,601
Research and development tax credits (1,935) (2,436) (3,369)
Government grants (140) (536) (631)
--------- --------- ---------
$ 4,315 $ 6,402 $ 13,601
========= ========= =========
|
OTHER GRANTS AND TAX CREDITS
During 1998, the company entered into an agreement with the Quebec Minister of Industry, Commerce, Science and Technology (the "Minister"). Pursuant to this agreement, the Minister agreed to contribute, in the form of grants, up to a maximum of Cdn$600,000 (US$388,000) towards interest costs incurred over the period from January 1, 1998 through December 31, 2002. In addition, the Minister agreed to provide grants up to a maximum of Cdn$2,220,000 (US$1,434,000) over the period from January 1, 1998 through December 31, 2002, payable based on the number of full-time jobs created during the period.
The above grants are subject to the condition that the company maintains its Canadian principal place of business within the Province of Quebec until at least December 31, 2002 and that jobs created pursuant to the agreement be maintained for a period of at least five years from the date of creation. Should these conditions not be met by the company, the Minister may enforce various recourse options, which include suspension or cancellation of the agreement or requiring the repayment of amounts received by the company. During the period from January 1, 1998 to August 31, 2001, the company recognized a total of Cdn$2,820,000 (US$1,822,000) under this program, of which Cdn$1,505,000 (US$972,000) has been credited to earnings with the balance of Cdn$1,315,000 (US$850,000) having been included in deferred grants in the balance sheet.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Furthermore, in 1999, the company entered into another agreement with the
Minister. Pursuant to this agreement, the Minister agreed to provide
grants up to a maximum of Cdn$3,756,000 (US$2,427,000) over the period
from February 1998 to June 2002, payable based on the number of jobs
created and certain specific training expenses related to such jobs. The
above grant is subject to the condition that 361 jobs be created pursuant
to the agreement and that the new employees continue to participate in the
specific training program for a period of at least ten consecutive months.
Should these conditions not be met by the company, the Minister may
enforce various recourse, which include suspension or cancellation of the
agreement or requiring the repayment of amounts received by the company.
Since 1998, the company has recognized a total of Cdn$2,552,000
(US$1,649,000) under this program, of which Cdn$2,317,000 (US$1,497,000)
has been credited to earnings with the balance of Cdn$235,000 (US$152,000)
having been included in deferred grants in the balance sheet.
Should any repayments of amounts received pursuant to these agreements be required, such repayments will be charged to earnings as the amounts of any repayments become known.
Finally, since 2000, companies operating in the Quebec City area are eligible for a refundable tax credit granted by the government of the Province of Quebec. This credit is earned on the increase of production and marketing salaries incurred in the Quebec City area at a rate of 40%. Since 2000, the company has recognized a total of Cdn$3,387,000 (US$2,188,000) under this program which has been credited to earnings.
The reduction in the company's work force described in note 14 had no effect on amounts recognized under these programs.
Following is a summary of the classification of these and certain other grants and tax credits (government grants) in the statements of earnings.
Interest income for the years ended August 31, 1999, 2000 and 2001 is net of related government grants of $126,000, $196,000 and $15,000, respectively.
Cost of sales for the years ended August 31, 1999, 2000 and 2001 is net of government grants of $33,000, $915,000 and $1,742,000, respectively.
Selling and administrative expenses for the years ended August 31, 1999, 2000 and 2001 are net of government grants of $21,000, $386,000 and $260,000, respectively.
Research and development expenses for the years ended August 31, 1999, 2000 and 2001 are net of government grants of $140,000, $536,000 and $631,000, respectively.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
DEFINED CONTRIBUTION PLANS
The company maintains separate defined contribution plans for certain eligible employees. These plans, which are accounted for on an accrual basis, are summarized as follows:
o Deferred profit sharing plan
The company maintains a plan for eligible Canadian resident employees, that requires the company to contribute an amount equal to 1% of an employee's gross salary, provided that the employee has contributed at least 2% of gross salary to a tax-deferred registered retirement savings plan. Contributions to this plan during the years ended August 31, 1999, 2000 and 2001 amounted to Cdn$156,000 (US$104,000), Cdn$202,000 (US$137,000) and Cdn$642,000 (US$419,000), respectively.
o 401K plans
The company maintains 401K plans for eligible U.S. resident employees. Under these plans, the company may elect to contribute an amount of up to 50% of the first 6% of an employee's current compensation, subject to certain legislated maximum contribution limits. During the years ended August 31, 1999, 2000 and 2001, the company recorded contributions totalling $21,000, $23,000 and $285,000, respectively.
14 NON-RECURRING EXPENSES
During 2001, the company implemented a structured plan to reduce costs and increase efficiency.
Under that plan, the company recorded non-recurring expenses of $3,288,000, including $844,000 in severance expenses for the 245 employees who were terminated, $1,476,000 for unused assets and $968,000 for future payments on exit leased facilities. These expenses are recorded as non-recurring expenses in the statement of earnings. As at August 31, 2001, the accrued liabilities related to this structured plan are $1,230,000, including $372,000 for severance expenses and $858,000 for future payments on exit leased facilities.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
15 INCOME TAXES
The reconciliation of the income tax provision calculated using the combined Canadian federal and provincial statutory income tax rate to the provision for income taxes per the financial statements is as follows:
YEARS ENDED AUGUST 31,
----------------------------------
1999 2000 2001
--------- -------- ---------
Income taxes at combined Canadian federal and
provincial statutory tax rate (38% in 1999
and 2000 and 37% in 2001) $ 3,156 $ 5,897 $ 8,855
Increase (decrease) due to:
Manufacturing and processing deduction (519) (645) (1,201)
Non-taxable income - - (144)
Non-deductible expenses 40 57 274
Higher rate on interest income - 133 480
Lower rate on foreign exchange gain - - (283)
Difference between combined Canadian federal
and provincial statutory tax rate and
foreign subsidiaries statutory tax rates - - 60
Effect of consolidation of subsidiaries - - (276)
Tax deductions - - (136)
Other (185) (144) 159
Change in valuation allowance - - 362
--------- -------- ---------
$ 2,492 $ 5,298 $ 8,150
========= ======== =========
Income taxes consist of the following:
Current $ 2,534 $ 5,331 $ 9,929
Future (42) (33) (1,779)
--------- -------- ---------
$ 2,492 $ 5,298 $ 8,150
========= ======== =========
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Significant components of the company's future tax assets and liabilities are as follows:
AS AT AUGUST 31,
----------------------
2000 2001
-------- --------
Future tax assets
Property, plant and equipment
and intangible assets $ - $ 107
Provisions and accruals 266 1,208
Government grants - 247
Deferred revenue 175 198
Share issue expenses 4,358 3,128
Non-recurring expenses - 930
Research and development expenses 94 86
Losses carried forward 105 272
Other (6) 39
-------- --------
4,992 6,215
Valuation allowance - (362)
-------- --------
$ 4,992 $ 5,853
======== ========
Future tax liabilities
Property, plant and equipment
and intangible assets $ (419) $ (8,640)
Research and development tax credits (474) (680)
Government grants (15) (310)
-------- --------
(908) (9,630)
-------- --------
Future tax assets (liabilities), net $ 4,084 $ (3,777)
======== ========
|
As at August 31, 2001, a company's subsidiary has accumulated losses for income tax purposes of approximately $902,000 and research and development expenses of approximately $961,000 at the provincial level for which a valuation allowance of $362,000 has been established. These losses can be carried forward against the subsidiary's future years' taxable income until 2008. These accumulated research and development expenses can be carried forward indefinitely against the subsidiary's future years' provincial taxable income.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Significant components of the company's future tax assets and liabilities are as follows:
16 SEGMENT INFORMATION
Management has organized the company under one operating segment, that being the development, manufacture and marketing of fiber-optic test, measurement and automation solutions.
Sales to external customers by geographic region are detailed as follows:
1999 2000 2001
--------- --------- ---------
United States $ 20,755 $ 36,139 $ 72,604
Canada 2,973 8,006 12,531
Europe 8,721 14,503 30,568
Asia 3,199 6,486 19,059
South America 2,271 2,221 5,838
Other 4,247 4,284 5,413
--------- --------- ---------
$ 42,166 $ 71,639 $ 146,013
========= ========= =========
|
Sales have been allocated to geographic regions based on the country of residence of the related customers.
During all years presented above, there were no customers from which 10% or more of total sales were derived.
Long-lived assets by geographic region are detailed as follows:
2000 2001
--------- ----------
United States $ - $ 171,450
Canada 11,014 119,932
--------- ----------
$ 11,014 $ 291,382
========= ==========
|
Long-lived assets consist of property, plant and equipment, intangible assets and goodwill.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
17 EARNINGS PER SHARE
The following table summarizes the reconciliation of the basic weighted average number of shares outstanding and the diluted weighted average number of shares outstanding used in the diluted earnings per share calculations:
YEARS ENDED AUGUST 31,
---------------------------------
1999 2000 2001
------- ------- -------
Basic weighted average number of shares
outstanding (000's) 38,001 39,951 53,014
Conversion of preferred shares Series I - 26 -
Exercise of stock options - 109 -
------- ------- -------
Diluted weighted average number of shares
outstanding (000's) 38,001 40,086 53,014
======= ======= =======
|
UNAUDITED SUPPLEMENTARY PER SHARE INFORMATION
The following supplementary per share information is calculated from net earnings before the amortization of goodwill of $31,076,000 ($297,000 in 2000 and nil in 1999), the after-tax effect of amortization of intangible assets of $6,513,000 ($31,000 in 2000 and $28,700 in 1999) and the after-tax effect of non-recurring expenses of $2,168,000 (nil in 2000 and 1999). The unaudited supplementary information may not be comparable to similarly titled measures reported by other companies because it is non-GAAP information.
YEARS ENDED AUGUST 31,
-------------------------------------
1999 2000 2001
-------- -------- --------
Net earnings before amortization of goodwill
and after-tax effect of amortization of
intangible assets and non-recurring
expenses $ 5,843 $ 10,252 $ 24,463
Basic and diluted per share net earnings
before amortization of goodwill and
after-tax effect of amortization of
intangible assets and non-recurring
expenses $ 0.14 $ 0.26 $ 0.46
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
18 FINANCIAL INSTRUMENTS
SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
AS AT AUGUST 31,
-------------------------------
2000 2001
---------- ----------
Mutual fund denominated in Canadian dollars $ - $ 14,861
Commercial paper denominated in Canadian dollars,
bearing interest at annual rates of 5.77% to
5.98% in 2000 and 4.35% to 4.60% in 2001,
maturing on different dates between November
2000 and February 2001 in 2000 and September
2001 and November 2001 in 2001 41,872 52,000
Commercial paper denominated in US dollars,
bearing interest at annual rates of 6.51%
to 6.79%, matured in 2001 120,787 -
---------- ----------
$ 162,659 $ 66,861
========== ==========
|
FAIR VALUE
Cash and cash equivalents, accounts receivable, bank advances, accounts payable and accrued liabilities and long-term debt are financial instruments whose fair values approximate their carrying values.
The fair value of short-term investments, determined based on market value, amounted to $162,719,000 and $66,861,000 as at August 31, 2000 and 2001, respectively.
CREDIT RISK
Financial instruments which potentially subject the company to credit risk consist principally of cash and cash equivalents, short-term investments, accounts receivable and forward exchange contracts. The company's short-term investments consist of debt instruments issued by high-credit quality financial institutions and corporations and units of a low-risk mutual fund. The company's cash and cash equivalents and forward exchange contracts are held with or issued by high-credit quality financial institutions; therefore the company considers the risk of non-performance on these instruments to be remote.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Due to the North American, European, Asian and South American distribution of the company's customers, there is no particular concentration of credit risk. Generally, the company does not require collateral or other security from customers for trade accounts receivable; however, credit is extended to customers following an evaluation of creditworthiness. In addition, the company performs ongoing credit reviews of all its customers and establishes an allowance for doubtful accounts receivable when accounts are determined to be uncollectible. Allowance for doubtful accounts amounted to $149,000 and $893,000 as at August 31, 2000 and 2001, respectively.
INTEREST RATE RISK
As at August 31, 2001, the company's exposure to interest rate risk is summarized as follows:
Cash and cash equivalents Non-interest bearing Short-term investments As described above Accounts receivable Non-interest bearing Bank advances Prime rate Accounts payable and accrued liabilities Non-interest bearing Long-term debt As described in note 10 |
FORWARD EXCHANGE CONTRACTS
The company is exposed to currency risks as a result of its export sales of products manufactured in Canada, substantially all of which are denominated in US dollars. These risks are partially hedged by forward exchange contracts and certain operating expenses. As at August 31, 2000 and 2001, the company held contracts to sell US dollars at various forward rates, which are summarized as follows:
CONTRACTUAL WEIGHTED AVERAGE CONTRACTUAL
AMOUNTS FORWARD RATES
------------- ----------------------------
As at August 31, 2000
September 2000 to August 2001 $ 5,400 1.4871
September 2001 to April 2002 1,200 1.4602
As at August 31, 2001
September 2001 to August 2002 $ 15,200 1.4969
September 2002 to February 2003 1,800 1.5184
|
As at August 31, 2000 and 2001, these contracts resulted in deferred unrealized losses of US$45,000 and US$533,000, respectively, which have not been reflected in the statements of earnings.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
As at August 31, 2000, the company held forward exchange contracts to buy US dollars at various forward rates, which are summarized as follows:
CONTRACTUAL WEIGHTED AVERAGE CONTRACTUAL
AMOUNTS FORWARD RATES
------------- ----------------------------
Maturing between November 2000 and January 2001 $ 40,500 1.4777
|
As at August 31, 2000, these contracts resulted in an unrealized loss of US$24,000 which has been reflected in the statement of earnings for that year.
19 UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
As a registrant with the Securities and Exchange Commission in the United States, the company is required to reconcile its financial results for significant differences between generally accepted accounting principles as applied in Canada (Canadian GAAP) and those applied in the United States (U.S. GAAP).
Additional significant disclosures required under U.S. GAAP have also been provided in the accompanying financial statements and notes. The following summarizes the significant differences between Canadian and U.S. GAAP and other required disclosures under U.S. GAAP not already disclosed in the accompanying financial statements.
RECONCILIATION OF NET EARNINGS (LOSS) TO CONFORM WITH U.S. GAAP
The following summary sets out the significant differences to the company's reported net earnings (loss) and net earnings (loss) per share which would be made to conform with U.S. GAAP:
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
YEARS ENDED AUGUST 31,
-----------------------------------------
1999 2000 2001
-------- ------- --------
Net earnings (loss) for the year in accordance
with Canadian GAAP $ 5,814 $ 9,924 $(15,294)
Non-cash stock-based compensation costs
related to stock option plan a) - (1,464) (954)
Non-cash stock-based compensation costs
related to stock purchase plan a) (10) (538) (477)
Non-cash stock-based compensation costs
related to restricted stock award plan a) - - (3,481)
Change in reporting currency b) (44) - -
Unrealized gains on forward exchange contracts c) 208 - 97
Future income taxes on forward exchange
contracts c) (67) - 20
Future income taxes on acquired in process
research and development d) - - (936)
Amortization of goodwill d) - - (8,453)
-------- ------- --------
Net earnings (loss) for the year in accordance
with U.S. GAAP 5,901 7,922 (29,478)
Other comprehensive income (loss)
Foreign currency translation adjustments b) 606 1,555 (9,888)
Unrealized holding gains on available-for-sale
securities, net of related future income
taxes e) 36 37 -
Reclassification of holding gains on
available-for-sale securities included in
net earnings (loss), net of related
future income taxes e) - (36) (37)
-------- ------- --------
Comprehensive income (loss) 6,543 $ 9,478 $(39,403)
======== ======= ========
Basic and diluted net earnings (loss) per
share in accordance with U.S. GAAP f) $ 0.15 $ 0.20 (0.56)
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
As a result of the aforementioned adjustments to net earnings (loss), significant differences with respect to shareholders' equity under U.S. GAAP are as follows:
SHARE CAPITAL
AS AT AUGUST 31,
--------------------------------------------
1999 2000 2001
--------- --------- ---------
Share capital in accordance with Canadian GAAP $ 87 $ 198,459 $ 429,995
Stock-based compensation costs related to
stock purchase plan a), g)
Current year 45 2,647 (150)
Cumulative effect of prior years - 45 2,692
Shares issued upon business combinations d) - - 65,584
--------- --------- ---------
Share capital in accordance with U.S. GAAP $ 132 $ 201,151 $ 498,121
========= ========= =========
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AUGUST 31,
--------------------------------------------
1999 2000 2001
--------- --------- ---------
Deferred stock-based compensation costs in
accordance with Canadian GAAP $ 87 $ 198,459 $ 429,995
Stock-based compensation costs related to
stock-based compensation plans a), g)
Current year (45) (21,396) (8,145)
Cumulative effect of prior years - (35) (19,429)
Amortization for the year 10 2,002 4,912
Reduction of stock-based compensation costs - - 14,694
--------- --------- ---------
Deferred stock-based compensation costs in
accordance with U.S. GAAP $ (35) $ (19,429) $ (7,968)
========= ========= =========
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
OTHER CAPITAL
AS AT AUGUST 31,
----------------------------------------
1999 2000 2001
---------- --------- ----------
Other capital in accordance with Canadian GAAP $ - $ - $ -
Stock-based compensation costs related to
stock-based compensation plans a)
Current year - 18,749 8,145
Cumulative effect of prior years - - 18,749
Reduction of stock-based compensation costs - - (14,544)
---------- --------- ----------
Other capital in accordance with U.S. GAAP $ - $ 18,749 $ 12,350
========== ========= ==========
RETAINED EARNINGS (DEFICIT)
AS AT AUGUST 31,
----------------------------------------
1999 2000 2001
---------- --------- ----------
Retained earnings (deficit) in accordance with
Canadian GAAP $ 14,592 $ 6,980 $ (8,314)
Stock-based compensation costs related to a)
stock-based compensation plans
Current year (10) (2,002) (4,912)
Cumulative effect of prior years - (10) (2,012)
Unrealized gains on forward exchange contracts, c)
net of related future income taxes
Current year - - 117
Future income taxes on acquired in process research d)
and development
Current year - - (936)
Amortization of goodwill d)
Current year - - (8,453)
Change in reporting currency b)
Current year
Net earnings (44) - -
Dividends 24 - -
Cumulative effect of prior years 1,036 1,016 1,016
---------- --------- ----------
Retained earnings (deficit) in accordance
with U.S. GAAP $ 15,598 $ 5,984 $ (23,494)
========== ========= ==========
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
AS AT AUGUST 31,
----------------------------------------
1999 2000 2001
---------- --------- ----------
Foreign currency translation adjustments b)
Balance - Beginning of year $ (1,622) $ (1,016) $ 539
Change during the year 606 1,555 (9,888)
---------- --------- ----------
Balance - End of year (1,016) 539 (9,349)
---------- --------- ----------
Unrealized holding gains on available-for-sale
securities, net of future income taxes e)
Balance - Beginning of year - 36 37
Unrealized gains arising during the year, net
of related future income taxes 36 37 -
Reclassification adjustment for amounts
included in net earnings (loss), net of
related future income taxes - (36) (37)
---------- --------- ----------
Balance - End of year 36 37 -
---------- --------- ----------
Accumulated other comprehensive income (loss) $ (980) $ 576 $ (9,349)
========== ========= ==========
|
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
BALANCE SHEETS
The following table summarizes the significant differences in balance sheet items between Canadian GAAP and U.S. GAAP:
AS AT AUGUST 31, 2000 AS AT AUGUST 31, 2001
---------------------------- --------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
Goodwill d)
Cost $ 2,549 $ 2,549 $ 250,497 $ 315,547
Accumulated amortization (297) (297) (31,125) (39,762)
---------- ---------- ---------- ----------
$ 2,252 $ 2,252 $ 219,172 $ 275,785
========== ========== ========== ==========
Shareholders' equity
Share capital a), d)
g), $ 198,459 $ 201,151 $ 429,995 $ 498,121
Contributed surplus - - 1,457 1,457
Cumulative translation
adjustment b) 1,555 - (8,333) -
Deferred stock-based
compensation costs a), g) - (19,429) - (7,968)
Other capital a) - 18,749 - 12,350
Retained earnings (deficit) a), b)
c), d) 6,980 5,984 (8,314) (23,494)
Accumulated other
comprehensive income
(loss) b), e) - 576 - (9,349)
---------- ---------- ---------- ----------
$ 206,994 $ 207,031 $ 414,805 $ 471,117
========== ========== ========== ==========
|
STATEMENTS OF CASH FLOWS
For the years ended August 31, 1999, 2000 and 2001, there are no significant differences between the statements of cash flows under Canadian GAAP as compared to U.S. GAAP.
RECONCILIATION ITEMS
A) ACCOUNTING FOR STOCK-BASED COMPENSATION
To conform with U.S. GAAP, the company measures stock-based compensation costs using the intrinsic value method (APB 25 "Accounting for Stock Issued to Employees").
Stock purchase plan
Under APB 25, compensation cost related to the stock purchase plan is measured as the difference between the fair value of the purchased stock and the purchase price paid by
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
plan participants. Compensation cost is amortized to expense over a period of five years, being the restriction period. This plan terminated at the time of the Initial Public Offering on June 29, 2000.
During the years ended August 31, 1999 and 2000, the weighted average fair value per share under the stock purchase plan amounted to $0.68 and $10.80, respectively. The fair value per share since inception of the plan to June 29, 2000 ranged between $0.68 and $18.00.
Stock option plan
In accordance with APB 25, the company's stock option plan was considered to be a variable plan until October 10, 2000. As a result of the amendment to the stock option plan described in note 12, the performance criterion was removed and the number of shares to be issued under the plan was fixed. Aggregate compensation cost for the period from the date of grant to August 31, 2001 amounts to $2,418,000. Accordingly, the current year reflects a net reduction of the compensation cost and deferred compensation cost previously recognized of $467,000 and $14,544,000, respectively. Compensation cost under this plan is measured as the difference between the fair value of the underlying stock at the date of grant and the exercise price of the option. Compensation cost is amortized to expense over the estimated vesting period up to a maximum of four years.
Restricted stock award plan
Under APB 25, compensation cost related to the restricted stock award plan is measured as the difference between the fair value of the underlying stock at the date of grant and the exercise price which is nil. Compensation cost is amortized to expense over the estimated vesting period up to a maximum of four years, being the acquisition period.
Under Canadian GAAP, no compensation cost is recognized for these stock-based compensation plans.
B) CHANGE IN REPORTING CURRENCY
As mentioned in note 2, on September 1, 1999, the company adopted the US dollar as its reporting currency. Under U.S. GAAP, the financial statements, including prior years, are translated according to the current rate method. Under Canadian GAAP, at the time of change in reporting currency, the historical financial statements are presented using a translation of convenience.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
Under Canadian GAAP, the statement of earnings for the year ended August 31, 1999 was translated into US dollars using an exchange rate of US$1.00 = Cdn$1.4958. Under U.S. GAAP, revenues and expenses would be translated at exchange rates prevailing at the respective transaction dates. Average exchange rate for the year ended August 31, 1999 was US$1.00 = Cdn$1.5068. The exchange rate as at August 31, 1999 was US$1.00 = Cdn$1.4958.
C) FORWARD EXCHANGE CONTRACTS
On September 1, 2000, the company prospectively adopted Statement of Financial Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) 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 year ended August 31, 2001 and accordingly, changes in the fair value of the derivatives have been charged to earnings during the year.
Prior to the adoption of SFAS 133, forward exchange contracts held by the company were accounted for in accordance with SFAS 52 under U.S. GAAP. Accordingly, certain of the forward exchange contracts held for hedging and other purposes in 1998 and 1999, for which the underlying transactions were not firmly committed, did not qualify for hedge accounting. Consequently, unrealized gains or losses on these contracts at each balance sheet date were reflected in earnings for the corresponding year.
Under Canadian GAAP, the company's forward exchange contracts held for the purpose of hedging anticipated sales qualified for hedge accounting and any unrealized gains or losses were deferred and recognized in the statement of earnings upon settlement of the related transactions.
D) BUSINESS COMBINATIONS
Under U.S. GAAP, the value of shares issued upon a business combination should be determined based on the market price of the shares over a reasonable period of time before and after the companies have reached an agreement on the purchase price, the significant terms of the agreement are known and the proposed transaction is announced.
Consequently, the measurement dates of the acquisitions of Burleigh and EXFO Photonic occurred on December 14, 2000 and March 6, 2001, respectively, the dates on which all significant terms of the agreements were known. The average market price of the shares a few days before and after those dates was $31.09 and $25.84, respectively. Considering the number of shares issued upon those acquisitions, the total consideration for U.S. GAAP purposes amounts to $244,198,000 ($189,270,000 under Canadian
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
GAAP) for Burleigh and $120,802,000 ($110,146,000 under Canadian GAAP) for EXFO Photonic, thus increasing share capital and goodwill under U.S. GAAP.
Furthermore, under U.S. GAAP, in process research and development acquired in a business combination is written off at the time of acquisition and no future income taxes are recognized on this asset in the purchase price allocation process. Under Canadian GAAP, in process research and development acquired in a business combination is capitalized and amortized over its estimated useful life. Future income taxes are recognized on the acquisition date on that asset in the purchase price allocation process. As at August 31, 2001, in process research and development recorded under Canadian GAAP was fully amortized.
E) SHORT-TERM INVESTMENTS
Under U.S. GAAP, the short-term investments would be classified as "available-for-sale" securities. Consequently, these securities would be carried at fair value, with any unrealized holding gains or losses at each balance sheet date being reflected in other comprehensive income (loss) on a net-of-tax basis. Under Canadian GAAP, short-term investments are carried at the lower of cost and market value and cost is composed of acquisition cost plus amortization of discount or less amortization of premium.
F) EARNINGS (LOSS) PER SHARE
Under U.S. GAAP, the presentation of per share figures for earnings before amortization of goodwill and of any other unaudited supplementary per share non-GAAP information is not permitted. In addition, under U.S. GAAP, amortization of goodwill would be included in the computation of earnings from operations.
G) SHARE CAPITAL
Under Canadian GAAP, restricted shares reacquired from employees under the stock purchase plan are treated as arm's length repurchases of shares whereas under U.S. GAAP, the reacquisition of shares would be accounted for as a forfeiture by the employee, resulting in any difference between the amount originally credited to share capital and the remaining deferred compensation cost being credited to compensation expense in the current period. The subsequent resale of the shares would be treated as an issuance of shares for the proceeds received.
H) NEW ACCOUNTING STANDARDS
On June 15, 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligation", which is effective for fiscal years beginning on or after June 15, 2002. This standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
incurred if a reasonable estimate of fair value can be made. The company has not yet assessed the impact of the adoption of this new standard.
On July 20, 2001, the Financial Accounting Standards Board issued SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets". SFAS 141 requires business combinations initiated after June 30, 2001 or business combinations accounted for by the purchase method with a date of acquisition after June 30, 2001 to be accounted for using the purchase method of accounting. This section also broadens criteria for recording intangible assets separately from goodwill. Upon the adoption of SFAS 142, recorded goodwill and intangible assets will be evaluated against those new criteria and may result in certain intangible assets being reclassified into goodwill, or alternatively, amounts initially recorded as goodwill being separately identified and recognized apart from goodwill as intangible assets. SFAS 142 requires the use of a non-amortization approach to account for purchased goodwill and indefinite-lived intangibles. Under non-amortization approach, goodwill and indefinite-lived intangibles will not be amortized, but instead would be reviewed for impairment and written down and charged to earnings only in the periods in which the recorded value of goodwill and indefinite-lived intangibles exceeds their fair value. This section will be adopted on September 1, 2002.
The impact of adopting SFAS 142 will allow the company to use the non-amortization approach for goodwill and will reduce annual goodwill amortization by approximately $63,000,000. Moreover, the company will implement a new goodwill impairment methodology and any potential initial impairment losses on goodwill determined by this methodology will be charged to earnings.
UNAUDITED PRO FORMA INFORMATION ON BUSINESS COMBINATIONS
Under U.S. GAAP, pro forma information must be provided as though the business combinations had occurred at the beginning of the reported periods.
The following unaudited pro forma information reflects the results of operations as if the 2001 acquisitions had been completed on September 1, 2000 and 1999, the 2000 acquisitions had been completed on September 1, 1999 and 1998, and the 1999 acquisition had been completed on September 1, 1998.
Such information is not necessarily indicative of the actual results which would have been achieved, nor is it necessarily indicative of future consolidated results of the company.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
YEARS ENDED AUGUST 31,
---------------------------------------------
1999 2000 2001
-------- ---------- ----------
Sales $ 44,948 $ 107,262 $ 165,754
Net earnings (loss) $ 5,689 (71,143) $ (56,498)
Basic and diluted net earnings (loss)
per share $ 0.14 $ (1.42) $ (0.99)
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ACCOUNTING FOR STOCK-BASED COMPENSATION
Under U.S. GAAP, the company has elected to measure compensation cost related to grants of stock options and stock awards using the intrinsic value method of accounting. In this instance, however, under SFAS 123, Accounting for Stock-Based Compensation, the company is required to make pro forma disclosures of net earnings (loss), basic and diluted net earnings (loss) per share as if the fair value based method of accounting had been applied.
The fair value of options or awards granted was estimated using the Black-Scholes options pricing model with the following weighted average assumptions:
2000 2001
----------- -----------
Risk-free interest rate 6.04% 5.36%
Expected volatility 75% 75%
Dividend yield Nil Nil
Weighted average expected life 32 months 33 months
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The Black-Scholes options valuation model was developed for use in estimating the fair value of traded options and awards which have no vesting restrictions, and are fully transferable. In addition, option and award valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the company's employee stock options and stock awards have characteristics significantly different from those of traded options and awards, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options and stock awards.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars, except share and per share data and as otherwise noted)
If the fair value based method had been used to account for stock-based compensation costs related to stock options and stock awards issued to employees, directors and executive officers, the net earnings (loss) and related net earnings (loss) per share figures under U.S. GAAP would be as follows:
2000 2001
---------- ----------
Pro forma net earnings (loss)
for the year $ 8,939 $ (39,109)
Pro forma basic and diluted net
earnings (loss) per share $ 0.22 $ (0.74)
20 SUBSEQUENT EVENT
ACQUISITION OF AVANTAS NETWORKS CORPORATION
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On August 20, 2001, the company entered into an agreement to acquire a 100% interest in Avantas Networks Corporation, a Canadian company specializing in fiber-optic protocol testing. This acquisition is expected to be settled for a total consideration of approximately US$95,625,000, less cash acquired of US$28,000,000. The consideration paid will consist of US$36,000,000 in cash and the issuance of approximately 4,400,000 subordinate voting shares. The fair value of subordinate voting shares to be issued was determined based on the market price of the shares over a reasonable period of time before and after the terms of the acquisition were agreed to and announced. This acquisition will be accounted for using the purchase method according to the new CICA section 1581. The goodwill resulting from this acquisition will not be amortized according to CICA section 3062 but will be subject to an impairment test.
This acquisition is expected to be closed in the first quarter of 2002.
EXHIBIT 4.3
AGREEMENT OF MERGER
DATED AS OF AUGUST 20, 2001,
BY AND AMONG
EXFO ELECTRO-OPTICAL ENGINEERING INC.
BUYER SUB
AND
AVANTAS NETWORKS CORPORATION
AND
SHAREHOLDERS OF AVANTAS NETWORKS CORPORATION
TABLE OF CONTENTS
PAGE
Article I MERGER.......................................................2
1.1 The Merger...................................................2
1.2 Taking of Necessary Action...................................2
1.3 Effect of Merger.............................................2
1.4 Effective Time...............................................2
1.5 Prior Investments............................................2
1.6 The Closing..................................................3
1.7 Merger Consideration, Conversion of Securities...............4
1.8 Escrow Arrangements..........................................4
1.9 Appointment of Shareholder Representatives...................5
1.10 Adjustment to Purchase Price.................................5
Article II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE FOUNDING SHAREHOLDERS....................................5
2.1 Organization and Authority...................................5
2.2 Capitalization...............................................6
2.3 No Breach....................................................7
2.4 Share Ownership..............................................7
2.5 Consents and Approvals.......................................7
2.6 Litigation; Proceedings......................................8
2.7 Financial Statements.........................................8
2.8 No Undisclosed Liabilities...................................9
2.9 Absence of Certain Changes or Events.........................9
2.10 Compliance with Laws.........................................9
2.11 Taxes........................................................9
2.12 Intellectual Property.......................................10
2.13 Title to and Condition of Properties........................11
2.14 Contracts and Agreements....................................11
2.15 Insurance...................................................12
2.16 Employees...................................................13
2.17 Employee Benefits...........................................13
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TABLE OF CONTENTS
(continued)
PAGE
2.18 Facilities..................................................14
2.19 Environmental Matters.......................................14
2.20 Transactions with the Shareholders..........................15
2.21 Capital Expenditures........................................15
2.22 Use of Name.................................................15
2.23 Brokers, Finders or Financial Advisors......................16
2.24 Exclusivity of Representations..............................16
2.25 Full Disclosure.............................................16
Article III REPRESENTATION AND WARRANTY OF THE SHAREHOLDERS AS
TO SECURITIES MATTERS.......................................16
3.1 Securities Matters..........................................16
Article IV REPRESENTATIONS AND WARRANTY OF THE OTHER SHAREHOLDERS......18
4.1 Authorisation...............................................19
4.2 Ownership of Company Shares.................................19
4.3 Consents and Approvals......................................19
Article V REPRESENTATIONS AND WARRANTY OF THE BUYER AND BUYER SUB.....19
5.1 Organization and Qualifications.............................20
5.2 Capitalization..............................................20
5.3 Authorization...............................................20
5.4 Noncontravention............................................21
5.5 Consents and Approvals......................................21
5.6 Litigation; Proceedings.....................................22
5.7 Authorization for Buyer Shares..............................22
5.8 Canadian Documents..........................................22
5.9 No Undisclosed Liabilities..................................22
5.10 Absence of Certain Changes or Events........................23
5.11 Form F-3....................................................23
5.12 Investment Intent...........................................23
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TABLE OF CONTENTS
(continued)
PAGE
5.13 Experience of the Buyer.....................................23
5.14 Financial Ability...........................................23
5.15 Brokers, Finders or Financial Advisors......................23
5.16 Reporting Issuer Status.....................................23
Article VI COVENANTS OF THE PARTIES....................................23
6.1 Conduct of Business by the Company..........................23
6.2 Public Announcements........................................25
6.3 Access to Information, Due Diligence Investigation;
Confidentiality.............................................25
6.4 Regulatory Requirements.....................................26
6.5 Shareholder Approvals.......................................27
6.6 Modification of Disclosure Schedules........................27
6.7 Contact with Customers and Suppliers........................28
6.8 Other Actions...............................................28
6.9 Securities Law and Stock Exchange Requirements..............28
6.10 Idemnification of Directors and Officers of the Company.....28
Article VII CONDITIONS TO CLOSING.......................................29
7.1 Conditions to Each Party's Obligations......................29
7.2 Conditions to Obligations of the Buyer......................29
7.3 Conditions to Obligations of the Shareholders and
the Company.................................................32
Article VIII OTHER AGREEMENTS............................................34
8.1 Confidentiality.............................................34
8.2 Expenses....................................................34
8.3 Non-Competition.............................................34
8.4 Support Obligation..........................................35
8.5 Employees...................................................36
8.6 Covenants Reasonable........................................37
8.7 Registration of Buyer Shares................................37
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TABLE OF CONTENTS
(continued)
PAGE
Article IX SURVIVAL AND INDEMNIFICATION................................43
9.1 Survival Notwithstanding Investigation......................43
9.2 General Indemnification by the Shareholders.................43
9.3 Indemnification by the Buyer................................44
9.4 Tax Indemnification.........................................44
9.5 Indemnification to be after Tax, Insurance, Etc.............45
9.6 Expiry and Limits of Liability of Shareholders..............45
9.7 Expiry and Limits of Liability of Buyer.....................46
9.8 Procedure...................................................47
9.9 Special Indemnity/Anritsu...................................48
Article X TERMINATION, AMENDMENT AND WAIVER...........................48
10.1 Termination.................................................48
10.2 Effect of Termination.......................................49
10.3 Waiver......................................................49
Article XI MISCELLANEOUS...............................................49
11.1 Entire Agreement; Amendments................................49
11.2 Notices.....................................................49
11.3 Amendments; Waivers.........................................51
11.4 Headings....................................................51
11.5 Successors and Assigns......................................51
11.6 No Third-Party Beneficiaries................................51
11.7 Governing Law; Consent to Jurisdiction; Language............51
11.8 Execution...................................................52
11.9 Severability................................................52
11.10 Interpretation; Currency....................................52
11.11 Effectiveness...............................................52
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INDEX OF DEFINED TERMS
AGREEMENT......................................................................1 AMALCO.........................................................................1 ANRITSU CLAIM.................................................................49 ARTICLES OF AMALGAMATION.......................................................2 AUDITED FINANCIAL STATEMENTS...................................................9 BUYER..........................................................................1 BUYER BALANCE SHEET DATE......................................................23 BUYER FINANCIAL STATEMENTS....................................................23 BUYER INDEMNIFIED PERSON......................................................44 BUYER INDEMNIFIED PERSONS.....................................................44 BUYER MATERIAL ADVERSE EFFECT.................................................20 BUYER SHARES...................................................................4 BUYER STOCK PLANS.............................................................21 BUYER SUB......................................................................1 CANADIAN DOCUMENTS............................................................22 CASH CONSIDERATION.............................................................3 CBCA...........................................................................1 CLAIM.........................................................................53 CLOSING........................................................................3 CLOSING PRICE..................................................................4 COMPANY........................................................................1 COMPANY CONTRACTS.............................................................12 COMPANY INTELLECTUAL PROPERTY.................................................10 COMPANY MATERIAL ADVERSE EFFECT................................................6 COMPANY PLANS.................................................................13 COMPANY SHARES.................................................................1 COPYRIGHTS....................................................................11 DIRECTOR.......................................................................2 DISCHARGE.....................................................................15 DUE DILIGENCE INVESTIGATIONS..................................................26 EFFECTIVE TIME.................................................................2 ENVIRONMENT...................................................................15 ENVIRONMENTAL LAW.............................................................15 ENVIRONMENTAL PERMITS.........................................................15 ESCROW AGREEMENT...............................................................4 ESCROW FUND....................................................................4 ESCROW SHARES..................................................................3 EXPENSES......................................................................35 FACILITIES....................................................................14 FINANCIAL STATEMENTS...........................................................9 FOUNDING SHAREHOLDERS..........................................................1 GAAP...........................................................................9 GOVERNMENTAL ENTITY............................................................8 INCONSISTENT TRANSACTION......................................................35 |
INDEMNIFIED PARTY.............................................................48 INTERIM FINANCIAL STATEMENTS...................................................9 KNOWLEDGE.....................................................................53 LIENS.........................................................................11 MERGER.........................................................................1 MERGER CONSIDERATION...........................................................4 NON-COMPETE PERIOD............................................................35 ORDER.........................................................................27 OTHER SHAREHOLDERS............................................................19 PATENTS.......................................................................10 PERMITS........................................................................9 PERSON.........................................................................8 PRIOR INVESTMENTS..............................................................1 PROSPECTUS....................................................................40 PWC...........................................................................32 REGISTRATION STATEMENT........................................................37 RESTRICTED SECURITIES.........................................................39 SEC FINANCIAL STATEMENTS......................................................32 SECURITIES ACT................................................................17 SHAREHOLDER AFFILIATE......................................................16,40 SHAREHOLDER REPRESENTATIVE.....................................................5 SHAREHOLDER'S AGREEMENT........................................................7 SHAREHOLDERS...................................................................2 SHAREHOLDERS INDEMNIFIED PERSON...............................................44 SHAREHOLDERS INDEMNIFIED PERSONS..............................................44 SOFTWARE......................................................................11 SPECIAL MEETING...............................................................27 STRADDLE PERIOD...............................................................45 SUBSTANCE.....................................................................15 TAX CLAIMS....................................................................45 TAX LOSSES....................................................................45 TAX RETURNS...................................................................10 TAXES.........................................................................10 TECHNOLOGY....................................................................11 TOTAL CONSIDERATION............................................................4 TRADEMARKS....................................................................11 WITHDRAWN SHARES...............................................................5 |
LIST OF EXHIBITS
Exhibit A Company Shares
Exhibit B Buyer Shares
Exhibit C Proportionate Total Consideration Payable and
Exchange Ratios for Buyer Shares
Exhibit D Form of Escrow Agreement
Exhibit E Intentionally Deleted
Exhibit F Form of Employment Agreements
Exhibit G Form of Lock-up Agreement
Exhibit H Intentionally Deleted
Exhibit I Stock Option Plan
Exhibit J Shareholders covered by Non-Competition
Exhibit K Intentionally Deleted
Exhibit L "In the money" options
Exhibit M Intentionally Deleted
Exhibit N Intervention by Other Shareholders
Exhibit O Shareholders' Resolution
Exhibit P Special Indemnification
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LIST OF SCHEDULES
Schedule 2.1 Organizational Authority
Schedule 2.2 Capitalization
Schedule 2.3 No Breach
Schedule 2.4 Share Ownership
Schedule 2.5 Consents and Approvals
Schedule 2.6 Litigation; Proceedings
Schedule 2.7 Financial Statements
Schedule 2.8 No Undisclosed Liabilities
Schedule 2.9 Absence of Certain Changes or Events
Schedule 2.10 Compliance with Laws
Schedule 2.11 Taxes
Schedule 2.12(a) Patents, trademarks, copyrights and software
Schedule 2.12(b) Material Licences
Schedule 2.13 Title to and Condition of Properties
Schedule 2.14 Contracts and Agreements
Schedule 2.15 Insurance
Schedule 2.16 Employees
Schedule 2.17 Employee Benefits
Schedule 2.18 Facilities
Schedule 2.19 Environmental Matters
Schedule 2.20 Transaction with the Shareholders
Schedule 2.21 Capital Expenditures
Schedule 2.22 Use of Name
Schedule 4.2 Proxies
Schedule 6.1 Conduct of Business by the Company
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AGREEMENT OF MERGER
THIS AGREEMENT OF MERGER (this "AGREEMENT") is dated as of August 20, 2001 by and among EXFO Electro-Optical Engineering Inc., a corporation organized under the laws of Canada (the "BUYER"), a corporation to be incorporated under the laws of Canada ("BUYER SUB"), Avantas Networks Corporation, a corporation incorporated under the laws of Canada (the "COMPANY"), Sami Yazdi, Giovanni Forte, Nando Digiambattista, Sergio Prestipino, Patrick Ostiguy, Stephane Bonenfant, Claude Richer and Jocelyn Ouellet (together, the "FOUNDING SHAREHOLDERS") and the Other Shareholders who have executed an intervention in the form of Exhibit N.
RECITALS
WHEREAS, the respective Board of Directors of Buyer Sub and the Company, and Buyer, as the sole shareholder of Buyer Sub have determined that it is advisable and in the best interests of the respective corporations and their shareholders that Buyer Sub be amalgamated with the Company in accordance with the CANADA BUSINESS CORPORATIONS ACT ("CBCA") and Section 87(9) of the INCOME TAX ACT (Canada) and the terms of this Agreement (the "MERGER");
WHEREAS, in furtherance thereof, the parties hereto wish to proceed to an amalgamation pursuant to which Buyer shall become the owner of all of the issued and outstanding shares of the amalgamated corporation ("Amalco") and issue Buyer Shares to former holders of Company Shares in exchange for the shares they will hold in the Company immediately prior to the Effective Time;
WHEREAS, it is intended that following the Merger, the Company will be a wholly-owned subsidiary of the Buyer;
WHEREAS, prior to the Effective Time, Buyer Sub will have subscribed to shares in the share capital of the Company and will have acquired some of the shares held by JDS Uniphase Inc. in the share capital of the Company all for a total amount of $36 million (the "PRIOR INVESTMENTS");
WHEREAS, 100% of the issued and outstanding shares of the Company, consisting of common shares, Series A Preferred Shares, Series B1 Voting Preferred Shares and Series B2 Non-Voting Preferred Shares (the "COMPANY Shares") are held by the shareholders of the Company in the respective numbers set forth on Exhibit A;
WHEREAS, the Company will agree to acquire certain of the "in the money" options held by option-holders in the respective numbers set forth in Exhibit L, prior to the Effective Time for a value equal to the difference between the exercise price of such options and the per share consideration paid under this Agreement;
WHEREAS the remaining "in the money" options held by option holders in the respective numbers set forth in Exhibit L shall be vested and become immediately exercisable and the Company will permit the cashless exercise of the remaining "in the money" options;
WHEREAS, in consideration of the mutual covenants contained in this Agreement, and for good and valuable consideration the receipt and adequacy of which are hereby acknowledged the parties agree as follows:
NOW THEREFORE, in consideration of the representations, warranties, covenants and agreements set forth in this Agreement, the parties hereto hereby agree as follows:
ARTICLE I
MERGER
1.1 THE MERGER. At the Closing, subject to the terms and conditions of this Agreement, the Company Shares shall be acquired by the Buyer Sub from the Founding Shareholders and the Other Shareholders (collectively, the "SHAREHOLDERS").
1.2 TAKING OF NECESSARY ACTION. Buyer, Buyer Sub, the Company and the Founding Shareholders, respectively, shall each use all commercially reasonable efforts to take all such action as may be necessary or appropriate to effectuate the Merger.
1.3 EFFECT OF MERGER. The effect of the Merger shall be as set forth in Section 186 of the CBCA, and Amalco shall succeed to and, without limiting the generality of the foregoing, shall possess all the properties, rights, privileges, immunities, powers, franchises and purposes, and be subject to all the duties, liabilities, debts, obligations, restrictions and disabilities, of the Company, all without further act or deed.
1.4 EFFECTIVE TIME. The consummation of the Merger shall be effected as promptly as practicable, but in no event more than three business days after the satisfaction or waiver of the conditions set forth in Article VII of this Agreement (other than those conditions which by their nature are to be satisfied at the Closing, but subject to satisfaction of those conditions), and the parties hereto will cause a copy of the articles of amalgamation and an amalgamation agreement in compliance with section 182 of the CBCA (the "ARTICLES OF AMALGAMATION") to be executed, delivered and filed with Industry Canada in accordance with the CBCA along with all other documents required thereunder. The Merger shall become effective on the date the director appointed pursuant to section 260 of the CBCA (the "DIRECTOR") receives the Articles of Amalgamation. The date and time on which the Merger shall become effective is referred to herein as the "EFFECTIVE TIME".
1.5 PRIOR INVESTMENTS.
(i) Prior to the Effective Time, the Company shall acquire for a consideration payable in cash only, certain of the "in the money" options from their respective holders as set forth in Exhibit L which have exercised the election, using funds obtained from the Prior Investments, representing the difference between the exercise price of such options and $2.79 and the Company will permit the cashless exercise of certain of the "in the money" options from the respective holders as set forth in Exhibit L. In order to give effect to the foregoing, the stock option plan of the Company shall be amended in order to permit the option holders to elect to receive the cash consideration and the
Company Shares, as set forth in Exhibit L and such option-holders shall agree to so elect the cash consideration or to effect the cashless options in conformity with Exhibit L. In addition the stock option plan of the Company shall be amended to ensure that in the case of a "take-over" or change in the control of the Company, to the extent that such shareholders have not so elected, as above, the Company shall have the right to purchase any option for its respective "in the money amount". In this respect, the Buyer agrees to provide sufficient funds by a subscription of shares so that the Company may acquire the aforesaid options.
(ii) Prior to the Effective Time, the Buyer Sub, by way of the Prior Investments, shall also acquire Company Shares from JDS Uniphase Inc. which shall execute a separate share purchase and sale agreement containing representations, warranties, indemnifications and covenants in favour of the Buyer equivalent to, and not more onerous than those being provided by the Other Shareholders herein.
The aggregate consideration payable under sections 1.5(i) and 1.5(ii) is $36 million (the "CASH CONSIDERATION"), subject to the payment of the Expenses by Buyer on behalf of the Shareholders as provided under Section 8.2 hereof.
1.6 THE CLOSING.
(a) The closing of the transactions contemplated by this Agreement (the "CLOSING") will take place at the offices of Fasken Martineau DuMoulin LLP, Stock Exchange Tower, Suite 3400, 800 Place Victoria, Montreal, Quebec.
(b) At the Closing, the parties shall deliver or shall cause to be delivered to each other the documents required to be delivered pursuant to this Agreement, including the following:
(i) Buyer shall deliver to each Shareholder: (i) stock certificates representing the Buyer Shares (other than Escrow Shares) registered in each Shareholder's name and in such denominations as set forth on Exhibit C; and (ii) all documents, instruments and writings required to have been delivered at or prior to the Closing by the Buyer pursuant to this Agreement;
(ii) Buyer shall deliver to the Escrow Agent stock certificates representing the Buyer Shares as contemplated in Section 1.8 to be held in escrow by the Escrow Agent which Buyer Shares shall not include any Buyer Shares registered in the name of JDS Uniphase Inc. (the "ESCROW SHARES");
(iii) Each shareholder of the Company shall deliver and surrender to the Buyer his certificate or certificates representing Company Shares, and the Company and the Shareholders shall deliver to the Buyer all other documents, instruments and writings required to have been delivered at or prior to the Closing by the Company or the Shareholders pursuant to this Agreement.
1.7 MERGER CONSIDERATION, CONVERSION OF SECURITIES. The consideration to be paid by Buyer to all shareholders of the Company listed in Exhibit A, including the Shareholders, (other than the Cash Consideration paid under Section 1.5) (the "MERGER CONSIDERATION"), shall be $64 million, payable in the form of subordinate voting shares of the Buyer (the "BUYER SHARES"). The aggregate number of Buyer Shares payable shall be determined by dividing the Merger Consideration by the Closing Price. The "CLOSING PRICE" shall be $14.63, representing the closing price of the Buyer Shares, as reported by the Nasdaq National Market on July 20, 2001. If, prior to the Closing, there is any stock dividend, stock split or other change in the character or amount of the outstanding Buyer Shares, then in such event any and all new, substituted or additional securities to which the Shareholders would have been entitled by reason of their ownership of the Buyer Shares had the Closing occurred prior to such event shall be considered Buyer Shares for purposes of this Agreement and the consideration to be received by each Shareholder shall be adjusted accordingly. At the Effective Time, the Merger shall effect an amalgamation pursuant to the terms of which the holders of Company Shares, will receive Buyer Shares for each of the Company Shares held by each of them immediately prior to the Effective Date based on the respective exchange ratios set forth in Exhibit C. The number of Company Shares held by each shareholder of the Company listed in Exhibit A, including the Shareholders, and the number of Buyer Shares issued under the Merger Consideration is set forth opposite each such shareholder's name on Exhibit C, subject to the escrow provisions of Section 1.8. No fraction of a Buyer Share shall be issued, and each fractional share thereof shall be rounded up to the nearest whole number. Buyer shall be authorized to pay Merger Consideration attributable to any certificate theretofore issued which has been lost or destroyed, upon receipt of satisfactory evidence of ownership of the shares of Company Shares represented thereby and of appropriate indemnification.
1.8 ESCROW ARRANGEMENTS. Simultaneously with and at the Closing
10% of the sum of the Cash Consideration and the Merger Consideration namely,
$100 million (the "TOTAL CONSIDERATION") will be delivered to the Escrow Agent
(as such term is defined in the Escrow Agreement attached hereto as Exhibit D a
separate version of which will be signed by each Shareholder) in the form of
Buyer Shares and an amount of $300,000 in cash from the Expenses as provided in
Section 8.2 hereof (the "ESCROW AGREEMENT"). For greater certainty, no Buyer
Shares to be registered in the name of JDS Uniphase Inc. shall be required to be
delivered in escrow. Such Buyer Shares and cash shall constitute an escrow fund
(the "ESCROW FUND") to be governed by the terms set forth in the Escrow
Agreement. The portion of the Escrow Fund contributed on behalf of each of the
Shareholders, except JDS Uniphase Inc., shall be in proportion to the Total
Consideration to which such holder would otherwise be entitled under Section
1.8. The Escrow Fund shall terminate 24 months after the Closing with 50% of the
Escrow Fund being released after 12 months of Closing, except to the extent that
any timely made claims of any Buyer Indemnified Parties pursuant to Section 9.2
hereof remain unsatisfied at such time. The provisions of the Escrow Agreement
shall govern in the event of any conflict between the Escrow Agreement and this
Section 1.8. Any Shareholder may withdraw a number of Buyer Shares deposited by
him (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 product of (i) the Closing Price, and (ii) the number of Withdrawn
Shares.
1.9 APPOINTMENT OF SHAREHOLDER REPRESENTATIVES. Each Shareholder
other than JDS Uniphase Inc., Business Development Bank of Canada, Societe
Innovatech du Grand Montreal, Ventures West VI Limited Partnership, Ventures
West 7 Limited Partnership, Venture West 7 U.S. Limited Partnership, Bank of
Montreal Capital Corporation, Skypoint Capital Corporation and such Other
Shareholder which at law or pursuant to any corporate policy may not grant such
appointment, hereby appoints Sami Yazdi (the "SHAREHOLDER REPRESENTATIVE") the
attorney-in-fact of such Shareholder, with full power and authority, including
power of substitution, acting in the name of and for and on behalf of such
Shareholder to, in his sole discretion: (i) amend or waive any provision of this
Agreement; (ii) terminate this Agreement pursuant to the provisions of Article
X; (iii) do all other things and take all other action under or related to this
Agreement which he may consider necessary or proper to effectuate the
transactions contemplated by this Agreement; (iv) resolve any dispute with Buyer
over any aspect of this Agreement or any instrument or document delivered
hereunder; (v) execute and take any actions under the Escrow Agreement; and (vi)
on behalf of such Shareholder to enter into any agreement to effectuate any of
the foregoing items (i)-(vi) which shall have the effect of binding such
Shareholder as if such Shareholder had personally entered into such
agreement(s), taken such actions or refrained from taking such actions described
in Sections (i)-(vi) above. Notwithstanding the foregoing, all actions taken or
decisions made by the Shareholder Representative on behalf of the Shareholders
shall be taken or made in a manner which is ratable and equitable among all
Shareholders. This appointment and power of attorney shall be deemed as coupled
with an interest and all authority conferred hereby shall be irrevocable and
shall not be subject to termination by operation of law, whether by the death or
incapacity or liquidation or dissolution of any Shareholder or the occurrence of
any other event or events and the Shareholder Representative may not terminate
this power of attorney with respect to any Shareholder or such Shareholder's
successors or assigns without the consent of Buyer. Each Shareholder agrees to
hold the Shareholder Representative harmless and indemnify the Shareholder
Representative, for itself and not for the other Shareholders in accordance with
the Total Consideration received by such indemnifying Shareholder with respect
to any and all loss, damage or liability and expenses (including legal fees)
which such Shareholder may sustain as a result of any action taken in good faith
by the Shareholder Representative.
1.10 ADJUSTMENT TO PURCHASE PRICE. It is agreed that the portion of the Total Consideration received by Sami Yazdi shall be reduced by the amount of $750,000, payable in cash, in the event that Sami Yazdi terminates his employment agreement with the Company prior to the third anniversary of Closing and without the prior written consent of Buyer.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
FOUNDING SHAREHOLDERS
The Founding Shareholders and the Company hereby solidarily represent and warrant to Buyer, as of the date hereof (except as to any representation or warranty which specifically relates to an earlier date) as follows and which shall be true on the date hereof and, except as contemplated herein, on the Closing Date:
2.1 ORGANIZATION AND AUTHORITY. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of Canada. The Company has the requisite
corporate power and authority: (a) to carry on its business as currently conducted; (b) to own and use the properties owned and used by it; and (c) to execute and deliver this Agreement and to consummate the transactions contemplated hereby. Except as set forth in Schedule 2.1, the Company is duly qualified to do business as a foreign corporation and in good standing in each jurisdiction where the nature of its business or the ownership or leasing of its properties makes such qualification necessary, except where the failure to be so qualified or in good standing could not reasonably be expected to have a Company Material Adverse Effect. For purposes of this Agreement, "COMPANY MATERIAL ADVERSE EFFECT" 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 Company, taken as a whole, PROVIDED, HOWEVER, any adverse change, effect or circumstance (a) primarily arising out of or resulting primarily from actions contemplated by the parties hereto in connection with this Agreement, (b) that is primarily attributable to the announcement or performance of this Agreement or the transactions contemplated hereby, (c) resulting from economic factors affecting the economy as a whole or (d) resulting from factors generally affecting the specific markets in which the Company competes 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 Company Material Adverse Effect. The execution and delivery by the Company of this Agreement and the consummation by the Company of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action on the part of the Company and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate the transactions so contemplated by this Agreement. This Agreement has been duly and validly executed and delivered by the Company and the Founding Shareholders, and assuming this Agreement constitutes a valid and binding obligation of the Buyer and Buyer Sub, this Agreement constitutes a valid and binding agreement of the Company and the Founding Shareholders enforceable against the Company and the Founding Shareholders in accordance with its terms, subject, however, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, 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 Company is not in violation of any of the provisions of its articles of incorporation or bylaws, except for violations which could not reasonably be expected to have a Company Material Adverse Effect.
2.2 CAPITALIZATION. The authorized, issued and outstanding shares of capital stock of the Company are as set forth on Schedule 2.2. The outstanding Company Shares are duly and validly authorized and issued, represent 100% of the issued and outstanding share capital of the Company, are paid and nonassessable and are owned of record by the shareholders as set forth on Exhibit A. Except as set forth on Schedule 2.2, the Company does not have outstanding any options, warrants or other rights to acquire, directly or indirectly, capital stock from the Company, and the Company does not have any obligation to repurchase or redeem any capital stock of the Company. The Company has no Subsidiaries. Except as set forth in the Shareholders' Agreement, the Company is not party to any agreement and to the Founding Shareholders' 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 security or by a director of the Company.
2.3 NO BREACH. Except as set forth on Schedule 2.3, 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 result in the creation of any Lien upon any of the properties or assets of the Company pursuant to, any provision of: (i) the articles of incorporation or by-laws of the Company; (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Company or its properties or assets or (iii) subject to the governmental filings and other matters referred to in Section 2.5, any statute, law, rule, regulation, judgment, order or decree applicable to the Company or its properties or assets, other than, with respect to any of the matters described above, any such conflicts, violations, defaults, rights or Liens that individually or in the aggregate would not reasonably be expected to have a Company Material Adverse Effect, or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement.
2.4 SHARE OWNERSHIP. Except as set forth on Schedule 2.4, each Founding Shareholder has full right, power and authority to sell, transfer, assign, vote and deliver the Shares being sold by such Shareholder hereunder. Immediately prior to the delivery of the Company Shares, each shareholder of the Company listed in Exhibit A was the sole registered and, to the Founding Shareholders' Knowledge, beneficial owner of the Company Shares listed opposite his name on Exhibit A. Except as set forth on Schedule 2.4, each Founding Shareholder had good and valid title to such Company Shares and is the beneficial owner thereof, free and clear of all Liens and restrictions on transfer (other than restrictions on transfer imposed by applicable securities laws). Except for the shareholder's agreement dated as of December 21, 2000 (the "SHAREHOLDER'S AGREEMENT") and to the Founding Shareholders' Knowledge, there are no outstanding options, warrants, convertible securities, calls, rights, commitments, preemptive rights or agreements or instruments or understandings of any character to which any shareholder of the Company is a party, obligating such shareholder to deliver or sell, or cause to be delivered or sold, contingently or otherwise, such Company Shares. Except as set forth in Schedule 2.4 and except for the Shareholder's Agreement, there are no voting trust agreements or other contracts, agreements, arrangements, commitments, plans or understandings to which any shareholder of the Company is a party restricting or otherwise relating to voting, dividend or other rights with respect to such Company Shares.
2.5 CONSENTS AND APPROVALS. Except as set forth in Schedule 2.5, no consent, approval, order or authorization of, or registration, declaration or filing with, any federal, provincial or local government or any court, administrative agency, commission or other governmental authority or agency, domestic or foreign (each, a "GOVERNMENTAL ENTITY"), is required by or with respect to the Company in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated by this Agreement, except for (a) the filing of a premerger notification under the COMPETITION ACT (Canada), (b) such filings as may be required under applicable Canadian provincial securities laws, (c) such filings, consents, approvals, orders, registrations and declarations as
may be required under the laws of any foreign country in which the Company conducts any business or owns any assets, (d) such filings, consents, approvals, orders, registrations and declarations as may be necessary as a result of the facts or circumstances relating solely to the Buyer, and (e) such other consents, approvals, orders, authorizations, 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 Company Material Adverse Effect or prevent or materially delay the consummation of any of the transactions contemplated by this Agreement. Neither the execution and delivery of this Agreement by any Founding Shareholder or the Company nor the consummation of the transactions contemplated hereby by any Founding Shareholder or the Company 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 any Founding Shareholder or the Company is a party or by which any Founding Shareholder or the Company is bound, or (2) require such Founding Shareholder or the Company to obtain any authorization, consent, approval or waiver from, give notification to, or make any filing with, any Governmental Entity, or to obtain the approval or consent of any other Person, except for such conflicts, breaches, violations or defaults, or any authorization, consent, approval, waiver, notification or filing the failure of which to obtain or make, will not (x) impair in any material respect the ability of such Founding Shareholder or the Company to perform their respective obligations under this Agreement or (y) prevent or materially delay the consummation of any of the transactions contemplated by this Agreement. For purposes of this Agreement, "PERSON" means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
2.6 LITIGATION; PROCEEDINGS. Except as set forth in Schedule 2.6, there is no action, suit or proceeding, governmental or otherwise, pending or, to the Company's Knowledge, overtly threatened against the Company or any of its properties or business that, individually or in the aggregate, would reasonably be expected to have a Company Material Adverse Effect. There is no judgment, decree, injunction, rule or order of any Governmental Entity outstanding against the Company having or reasonably likely to have, in the future, any such effect.
2.7 FINANCIAL STATEMENTS. The Company has delivered to the Buyer
(a) complete and correct copies of the Company's audited balance sheet as of
December 31, 2000, and the related statements of loss, deficit and cash flows
(together with the auditors' report thereon) for the year ended December 31,
2000, together with notes to such financial statements, (b) complete and correct
copies of the Company's balance sheet as of December 31, 1999, and the related
statements of loss, deficit and cash flows for the year ended December 31, 1999,
together with notes to such financial statements, (the "AUDITED FINANCIAL
STATEMENTS"), and (c) complete and correct copies of the Company's unaudited
balance sheet as at June 30, 2001, and the related statements of loss, deficit
and cash flows for the six month period ended June 30, 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 the
Company and have been prepared in accordance with generally accepted accounting
principles in Canada ("GAAP") consistently applied throughout the periods
covered thereby and except as set forth in Schedule 2.7 present fairly in all
material respects, as of their respective dates, the financial condition and
results of operations of the Company (subject, in the case of Interim Financial
Statements, to normal, recurring year-end adjustments that may be required upon audit). It being agreed that the Interim Financial Statements for the seven (7) month period ended July 31, 2001 shall be provided to Buyer prior to Closing and shall be subject to the representations set forth herein as applicable.
2.8 NO UNDISCLOSED LIABILITIES. Except as set forth in Schedule 2.8, to the Knowledge of the Company and the Founding Shareholders, the Company does not have any liability (whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due) which is material to the Company, taken as a whole, except for: (a) liabilities shown in the latest Financial Statements; (b) liabilities which have arisen in the ordinary course of business since the date of the latest balance sheet included in the Financial Statements; or (c) contractual liabilities incurred in the ordinary course of business which are not required by GAAP to be reflected in the Financial Statements.
2.9 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Schedule 2.9, since May 31, 2001, the Company has conducted its business only in the ordinary course and (a) there has not occurred any events or changes that have had, or would reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect and (b) there has not been any change in the accounting principles, policies, practices or procedures of the Company or their application to the Company and (c) the Company has not taken any action that would have been prohibited under Section 6.1 hereof.
2.10 COMPLIANCE WITH LAWS. Except as set forth in Schedule 2.10, the Company is in compliance with all applicable statutes, laws, ordinances, regulations, rules, judgments, decrees and orders of any Governmental Entity applicable to its business or operations, except for matters which, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. The Company has in effect all federal, provincial, local and foreign governmental approvals, authorizations, certificates, filings, franchises, licenses, notices, permits and rights ("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, except for the lack of any Permits and for defaults under Permits which, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect.
2.11 TAXES. Except as set forth in Schedule 2.11, the Company has timely filed all Tax Returns required to be filed by it, or requests for extensions to file such Tax Returns have been timely filed and granted and have not expired, and all such filed Tax Returns are complete and accurate in all respects, except to the extent that any failures to (a) file, (b) have extensions granted that remain in effect or (c) be complete and accurate in all respects, as applicable, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. Except as set forth in Schedule 2.11, the Company has paid all Taxes required to be paid by it, except to the extent that a failure to pay all Taxes required to be paid by it, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. Except as set forth in Schedule 2.11, the most recent financial statements contained in the Financial Statements reflect an adequate reserve for all Taxes payable by the Company for all taxable periods and portions thereof accrued through the date of such financial statements, except to the extent that any failures to reflect such reserves, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. No
deficiencies for any Taxes have been proposed, asserted or assessed against the Company that are not adequately reserved for on the Company's financial statements in accordance with GAAP except to the extent that such Taxes, individually or in the aggregate, would not reasonably be expected to have a Company Material Adverse Effect. To the Company's Knowledge, there is no pending dispute with any taxing authority relating to any of the Company's Tax Returns and there is no tax audit, assessment or reassessment of any Tax Return of the Company pending or currently in process. All Taxes that the Company is or was required by law to withhold or collect have been duly withheld or collected and, to the extent required, have been paid to the proper Governmental Entity except for any such Taxes with respect to which the failure to withhold, collect or pay would not reasonably be expected to have a Company Material Adverse Effect. There are no Liens for Taxes upon any of the assets of the Company, except Liens for current Taxes not yet due and payable. For purposes of this Agreement, "TAXES" means all taxes, including without limitation income, gross receipts, goods and services, ad valorem, value-added, excise, real property, personal property, sales, use, transfer, withholding, employment, payroll and franchise taxes imposed by Canada or any provincial, local or foreign government, or any agency thereof, or any such government, and any interest, fines, penalties, assessments or additions to tax resulting from, attributable to or incurred in connection with any tax or any contest or dispute thereof. For purposes of this Agreement, "TAX RETURNS" means all reports, returns, declarations, statements or other information required to be supplied to a taxing authority in connection with Taxes.
2.12 INTELLECTUAL PROPERTY.
(a) Schedule 2.12(a) includes a list of all patents, trademarks, copyrights and software owned or licensed by the Company. "COMPANY INTELLECTUAL PROPERTY" shall mean all (i) Canadian and foreign patents, patent applications, and other patent rights ("PATENTS"); (ii) Canadian and foreign trademarks, service marks, trade dress, trade names, brand names, Internet domain names, designs, logos, or corporate names, whether registered or unregistered, and all registrations and applications for registration thereof ("TRADEMARKS"); (iii) Canadian and foreign copyrights, including all renewals and extensions thereof, copyright registrations and applications for registration thereof, and non-registered copyrights ("COPYRIGHTS"); (iv) trade secrets, concepts, ideas, designs, research, processes, procedures, techniques, methods, know-how, data, mask works, discoveries, inventions, modifications, extensions, improvements, and other proprietary rights (whether or not patentable or subject to copyright, mask work, or trade secret protection) ("TECHNOLOGY"); and (v) computer software programs, including, without limitation, all source code, object code, and documentation related thereto ("SOFTWARE"), but not including mass-marketed software with a price of less than $1,000 per copy. The Company owns or is licensed or otherwise possesses legally enforceable rights to use, sell, and license, free and clear of any and all Liens or material restrictions, any and all Company Intellectual Property, except where any failure to own, license or otherwise possess legally enforceable rights to use such Company Intellectual Property would not reasonably be expected to have a Company Material Adverse Effect.
(b) Schedule 2.12(b) sets forth all material licenses, sublicenses, and other agreements or permissions under which the Company is a licensor of Company Intellectual Property.
(c) The Company has not been named in any suit, action or proceeding which involves a claim of infringement of any Patents, except as may be evidenced by third-party patents issued after the date hereof, Trademarks, Copyrights, Technology or Software of any third party. To the Company's Knowledge, the manufacturing, marketing, licensing or sale of the products of the Company as presently conducted do not infringe any valid Patents, Trademarks, Copyrights, Technology or Software of any third party, except for any such infringement that would not reasonably be expected to have a Company Material Adverse Effect. The Company has taken all necessary and reasonable action to maintain and protect each item of Company Intellectual Property.
(d) All material Software used, sold, or licensed by the Company is free from any material software defect, performs materially in conformance with its technical user documentation, and does not contain any code or mechanism that could be used to interfere with the operation of the Software.
(e) The Company is not nor, as a result of the execution and delivery of this Agreement or the performance of its obligations hereunder, will be, in violation of any agreement relating to any Company Intellectual Property.
2.13 TITLE TO AND CONDITION OF PROPERTIES. Except as set forth on Schedule 2.13, the Company has good and marketable title to or a valid leasehold interest under a capitalized lease in all assets recorded on the Company's balance sheet as of May 31, 2001, free and clear of all pledges, claims, liens, charges, encumbrances or security interests of any kind or nature whatsoever (collectively, "LIENS"), except for (a) assets no longer used or useful in the conduct of the business or disposed of in the ordinary course of business since such date, (b) Liens disclosed in the Financial Statements, (c) Liens 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 (d) Liens for current Taxes not yet due and payable. The Company has a valid leasehold or other interest in all other assets used by it in its business, other than exceptions that would not reasonably be expected to have a Company Material Adverse Effect. All of the machinery, equipment and other tangible personal property and assets owned or used by the Company are in good condition and repair, except for ordinary wear and tear, and are usable in the ordinary course of business, except for any matter otherwise covered by this sentence which would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.
2.14 CONTRACTS AND AGREEMENTS. Schedule 2.14 sets forth a list of:
(a) each contract, agreement or commitment of the Company which requires total payments to or by the Company of at least $50,000 annually;
(b) each contract, agreement or commitment of the Company which has a remaining term longer than one (1) year, which requires total payments to or by the Company of at least $100,000 during the remaining term and which is not terminable on thirty (30) or fewer days' notice without penalty;
(c) each contract, agreement or commitment to which the Company is a party or by which any of its assets are bound relating to indebtedness for borrowed money, including capital leases and security agreements relating thereto;
(d) each lease of real property by the Company;
(e) any collective bargaining agreement, union agreement, employment agreement, consulting agreement, management service agreement or substantially similar type of contract or agreement to which the Company is a party;
(f) any consent decree and other judgment, decree or order, settlement agreement or other agreement limiting the ability of the Company to compete in any line of business or with any Person in any geographic areas;
(g) any joint venture agreement or other contract, agreement or commitment to which the Company is a party involving a sharing of profits or expenses; and
(h) any outstanding loan or advance by the Company to, or investment by the Company in, any Person, or any agreement, contract, commitment or understanding relating to the making of any such loan, advance or investment.
All of the contracts, agreements, leases, licenses, arrangements, commitments and documents listed on Schedule 2.14 (collectively, the "COMPANY CONTRACTS") are valid obligations of the Company and, to the Company's Knowledge, each other party thereto, and are binding and in full force and effect in accordance with their terms and conditions. Except as would not, individually or in the aggregate, reasonably be expected to have a Company Material Adverse Effect, to the Company's Knowledge there is no existing default thereunder or breach thereof by the Company or by any other party thereto, or any conditions which, with the passage of time or the giving of notice or both, might reasonably constitute such a default by the Company, or by any other party to a Company Contract. There are no pending or, to the Company's Knowledge, threatened disputes with respect to the Company Contracts.
2.15 INSURANCE. Schedule 2.15 sets forth a list of all policies of fire, extended coverage, liability and all other kinds of insurance held by the Company in connection with the conduct of its business and operations (other than policies relating to Company Plans). Such policies are in full force and effect and, to the Company's Knowledge, the Company is not in default with respect to its obligations under any of such insurance policies, except for any failures to be in full force and effect or defaults that would not reasonably be expected to have a Company Material Adverse Effect. The Company maintains the type and amount of insurance which the Company believes is adequate in coverage and amount to insure fully against the risks to which the Company and its employees, business, properties and other assets would reasonably be expected to be exposed in the operation of its business.
2.16 EMPLOYEES. Schedule 2.16 sets forth the names, the rate of compensation (and the portions thereof attributable to salary and bonuses, respectively), accrued vacation and location of all current employees of the Company. To the Company's Knowledge, no key employee or group of employees has any plans to terminate employment with the Company. The Company is not a party to or bound by any collective bargaining agreement, nor has it experienced any strikes, grievances, claims of unfair labor practices or other collective bargaining disputes. To the Company's Knowledge, no organizational effort has been made or threatened, either currently or within the past two years, by or on behalf of any labor union or trade union with respect to employees of the Company.
2.17 EMPLOYEE BENEFITS.
(a) Schedule 2.17 lists all material employee benefit plans and collective bargaining, employment or severance agreements or other similar arrangements which the Company, sponsors, maintains, or to which contributions are made, for the benefit of employees of the Company or any Subsidiary, including, without limitation, any profit-sharing, deferred compensation, bonus, stock option, stock purchase, pension, retainer, consulting, retirement, severance, welfare or incentive plan, agreement or arrangement, and (2) any plan, agreement or arrangement providing for "fringe benefits." The plans, agreements and arrangements described in this Section 2.17 are referred to herein as the "COMPANY Plans".
(b) The Company has delivered or made available to Buyer true and complete copies of all documents and summary plan descriptions of the Company Plans or summary descriptions of any such Company Plan not otherwise in writing.
(c) Each Company Plan has been administered in accordance with its terms, except for any failure to so administer that would not reasonably be expected to have a Company Material Adverse Effect.
(d) All reports, returns and similar documents with respect to each Company Plan required to be filed with any Governmental Entity or distributed to any participant of each Company Plan have been duly and timely filed or distributed.
(e) No actions, suits, disputes or claims (other than routine claims for benefits in the ordinary course) are pending or, to the Company's Knowledge, threatened with respect to any Company Plan. To the Company's Knowledge, no audits, inquiries, reviews, proceedings, claims, or demands are pending with any Governmental Entity with respect to any Company Plan.
(f) No Company Plan provides for or continues medical or health benefits, or life insurance or other death benefits (through insurance or otherwise) for any employee or any dependent or beneficiary of any employee after such employee's retirement or other termination of employment except as required by applicable provincial law, and there has been no communication to any employee that could reasonably be expected to promise or guarantee any such benefits.
(g) Except as set forth in the Company Plans, the consummation of the transactions contemplated by this Agreement will not entitle any individual to severance pay, and will not accelerate the time of payment or vesting, or increase the amount of compensation due to any individual.
(h) With respect to any Company Plan, all required or discretionary (in accordance with historical practices) payments, premiums, contributions, reimbursements, or accruals for all periods ending prior to or as of Closing shall have been made or properly accrued on the current balance sheets or will be properly accrued on the books and records of the Company as of the Closing Date. None of the Company Plans has any unfunded liabilities which are not reflected on the current balance sheet or the books and records of the Company.
2.18 FACILITIES. The Company does not own any real property. Schedule 2.18 sets forth a list of all real property currently leased or occupied by the Company or leased or occupied by the Company since its inception (collectively, the "FACILITIES"). Except as set forth on Schedule 2.18, the Facilities are not subject to any encumbrances, encroachments, building or use restrictions, exceptions, reservations or limitations, except those which do not, taken as a whole, result in a Company Material Adverse Effect or which prevent any continued use thereof in the usual and normal conduct of the Company's business. There are no pending or, to the Company's Knowledge, threatened condemnation proceedings relating to any of the Facilities.
2.19 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 2.19,
(a) to the Company's Knowledge, the business of the Company is and has been operated in compliance with Environmental Law. The Company has not received any notice of non-compliance with Environmental Law;
(b) the Company has not Discharged or caused or permitted to be Discharged, any Substances on, to or from the Facilities, or in connection with the operation of the Company's businesses, except in compliance with Environmental Law;
(c) to the Company's Knowledge, the Company has not permitted the Facilities to be used for the disposal of any Substance;
(d) the Company has obtained all Environmental Permits necessary for the lawful operation of the business, except where the failure to have any such Environmental Permit would not have a Company Material Adverse Effect.
(e) there are no claims, actions, proceedings or demands against or involving the Company either in progress, pending or, to the Company's Knowledge, threatened which allege the violation of, or non-compliance with, any Environmental Law; and
(f) copies of all environmental reports or audits performed or prepared since its inception within the possession of the Company with respect to the Facilities have been made available to the Buyer.
For purposes of this Section 2.19, the following defined terms have the meanings set forth below:
"DISCHARGE" means any discharge, emission, release, deposit, issuance, spray, escape, spill, leak and shall also have the various meanings attributed to such term in Environmental Law.
"ENVIRONMENT" means soil, surface waters, ground waters, land, stream sediments, surface or subsurface strata, ambient air and any environmental medium.
"ENVIRONMENTAL LAW" means all federal, provincial or municipal statutes, regulations order or rules, and any policies or guidelines of any governmental or regulatory body or agency, relating to the Environment, the transportation of dangerous goods and occupational health and safety.
"ENVIRONMENTAL PERMITS" means any and all federal, provincial and foreign governmental permits, licenses and other authorizations and approvals issued by or provided to, as the case may be, any governmental, governmental or regulatory body or agency pursuant to an Environmental Law.
"SUBSTANCE" means any substance or material which is regulated under any Environmental Law, including any substance defined under Environmental Law to be "hazardous", "toxic", "deleterious", "caustic", "dangerous", a "contaminant", a "dangerous good", a "waste", a "source of contamination" or a "pollutant".
2.20 TRANSACTIONS WITH THE SHAREHOLDERS. Except as set forth in Schedule 2.20, the Company does not owe any amount to any of its shareholders or the Shareholder Affiliates for money loaned to the Company and none of the shareholders of the Company nor the Shareholder Affiliates owe any amount to the Company for money loaned to any of the shareholders of the Company or the Shareholder Affiliates. Except as set forth in Schedule 2.20, the Company, the shareholders of the Company and the Shareholder Affiliates have not entered into and do not have any obligation, directly or indirectly, to enter into any transaction, including, without limitation, the purchase from, sale to or exchange of property with, or the rendering of any service by or for the Company, the shareholders of the Company or the Shareholder Affiliates, as the case may be. For purposes hereof, the term "SHAREHOLDER AFFILIATE" shall mean any officer, director, trustee or other person who controls any shareholder of the Company or any affiliate of the shareholder of the Company within the meaning of section 2 of the CBCA or any associate of any shareholder of the Company within the meaning of section 5 of the SECURITIES ACT (Quebec).
2.21 CAPITAL EXPENDITURES. Schedule 2.21 sets forth all of the completed and planned capital expenditures.
2.22 USE OF NAME. Except as set forth in Schedule 2.22, the Company has full exclusive right and title to use its corporate name as set forth in its certificate of incorporation.
2.23 BROKERS, FINDERS OR FINANCIAL ADVISORS. No broker, investment banker, financial advisor or other person, other than Wit SoundView Corporation, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company or any shareholder of the Company.
2.24 EXCLUSIVITY OF REPRESENTATIONS. THE REPRESENTATIONS AND WARRANTIES MADE BY THE COMPANY AND THE FOUNDING SHAREHOLDERS IN THIS AGREEMENT ARE IN LIEU OF AND ARE EXCLUSIVE OF ALL OTHER REPRESENTATIONS AND WARRANTIES, INCLUDING WITHOUT LIMITATION ANY IMPLIED WARRANTIES. THE COMPANY AND THE FOUNDING SHAREHOLDERS HEREBY DISCLAIM ANY SUCH OTHER OR IMPLIED REPRESENTATIONS OR WARRANTIES, NOTWITHSTANDING THE DELIVERY OR DISCLOSURE TO THE BUYER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR REPRESENTATIVES OF ANY DOCUMENTATION OR OTHER INFORMATION, INCLUDING ANY FINANCIAL PROJECTIONS OR OTHER SUPPLEMENTAL DATA.
2.25 FULL DISCLOSURE. Each of the Founding Shareholders has made or caused to be made due enquiry with respect to each of the representations, warranties and statements contained in this Agreement and in each of the schedules, certificates, documents and other writings referred to herein or furnished to the Buyer hereunder, and none of the same contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained therein not misleading, and all such statements, taken as a whole, together with this Agreement, do not contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained herein and therein not misleading. Save and except for those matters disclosed herein, the Founding Shareholders have no knowledge of any facts which should reasonably be made known to the Buyer relating to the Company not herein disclosed which would be likely to affect the value of the Company Shares.
ARTICLE III
REPRESENTATION AND WARRANTY OF THE SHAREHOLDERS AS TO
SECURITIES MATTERS
Each of the Shareholders jointly (where such term is used herein it has the meaning given to it in section 1518 of the Civil Code of Quebec) represents, for itself and not for any other Shareholders or the Company, to the Buyer as of the date hereof as follows:
3.1 SECURITIES MATTERS.
(a) Each Shareholder 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 Buyer as to be capable of evaluating the merits and risks of an investment in the Buyer Shares. Such Shareholder has the financial ability to bear the economic risk of his investment in the Buyer Shares being acquired hereunder, has adequate means for providing for his current needs and contingencies and has no need for liquidity with respect to his investment in Buyer.
(b) Each Shareholder is acquiring the Buyer Shares for its own account, for investment purposes only, and not with the view to, or for resale in connection with, any distribution thereof. Such Shareholder understands that the Buyer 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 of the United States, by reason of a specified exemption from the registration provisions thereunder which depends upon, among other things, the bona fide nature of such Shareholder's investment intent as expressed herein. Such Shareholder acknowledges that his representations and warranties contained herein are being relied upon by Buyer as a basis for the exemption of the issuance of the Buyer Shares hereunder from the registration requirements of the Securities Act and any applicable state securities laws.
(c) Each Shareholder acknowledges, with respect to the sale of its Buyer Shares in the United States, that the Buyer Shares must be held indefinitely until they are subsequently registered under the Securities Act and under applicable state securities laws or an exemption from such registration is available. Such Shareholder has been advised or is aware of 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 Buyer and compliance with applicable requirements regarding the holding period and the amount of securities to be sold and the manner of sale. Each Shareholder understands that only Buyer can take action to register the Buyer Shares under the SECURITIES ACT.
(d) Each Shareholder or its representative has had an opportunity to discuss the Buyer's business, management, financial affairs and acquisition plans with its management, to review the Buyer's facilities, and to obtain such additional information concerning such Shareholder's investment in the Buyer Shares in order for such Shareholder to evaluate its merits and risks, and such Shareholder has determined that the Buyer Shares are a suitable investment for such Shareholder and that at this time such Shareholder could bear a complete loss of his investment.
(e) Each Shareholder is aware that no U.S., Canadian, 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 of the disclosure of the exhibits and schedules hereto or thereto.
(f) Each Shareholder understands that all certificates for the Buyer Shares issued to such Shareholder shall bear a legend in substantially the following form:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE 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 SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES LAWS.
A NEW CERTIFICATE BEARING NO LEGEND MAY BE OBTAINED FROM THE TRANSFER AGENT UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE TRANSFER AGENT AND THE ISSUER, TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT OF 1933."
provided that if the Buyer Shares are being sold in compliance with the requirements of Rule 904 of Regulation S of the Securities Act, the legend may be removed by providing a declaration to the transfer agent or the Buyer to the following effect:
"The undersigned (a) acknowledges that the sale of the
securities to which this declaration relates is being made in reliance
on Rule 904 of Regulation S under the U.S. Securities Act of 1933, as
amended (the "Securities Act"), and (b) certifies that (1) it is not an
"affiliate" (as defined in Rule 405 under the Securities Act) of EXFO
Electro-Optical Engineering Inc., (2) the offer of such securities was
not made to a person in the United States and either (a) at the time
the buy order was originated, the buyer was outside the United States,
or the seller and any person acting on its behalf reasonably believe
that the buyer was outside the United States or (b) the transaction was
executed on or through the facilities of The Toronto Stock Exchange and
neither the seller nor any person acting on its behalf knows that the
transaction has been prearranged with a buyer in the United States and
(3) neither the seller nor any person acting on its behalf engaged in
any directed selling efforts in connection with the offer and sale of
such securities. Terms used herein have the meanings given to them by
Regulation S."
(g) Each Shareholder understands that the Buyer Shares will not be registered at the time of their issuance under the Securities Act for the reason that the sale provided for in this Agreement is exempt pursuant to Section 4(2) of the Securities Act and that the reliance of the Buyer on such exemption is predicated in part on the Shareholders' representations set forth herein.
ARTICLE IV
REPRESENTATIONS AND WARRANTY OF THE OTHER SHAREHOLDERS
In order to induce the Buyer to enter into this Agreement, each shareholder of the Company signing the intervention attached hereto as Exhibit N (the "OTHER SHAREHOLDERS"),
jointly represents and warrants, for itself and not for the other Shareholders, to Buyer the matters set forth below, which shall be true on the date of execution hereof and on the Closing Date:
4.1 AUTHORISATION. Each Other Shareholder has the requisite corporate (where applicable) 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 each Other Shareholder and the consummation by it of the transactions contemplated hereby have been duly authorised by all necessary action on the part of such Other Shareholder, and no further action is required by such Other Shareholder. This Agreement has been duly executed by each Other Shareholder and, assuming this Agreement constitutes a valid and binding obligation of the Buyer, Buyer Sub, the Company and the other Shareholders, this Agreement constitutes a valid and binding agreement of the Other Shareholder enforceable against the Other Shareholder 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. Each Other Shareholder, as a result of executing this Agreement and performing its obligations hereunder, is not in violation of any of the provisions of its certificate or incorporation, bylaws or other organisational documents.
4.2 OWNERSHIP OF COMPANY SHARES. Such Other Shareholder has the right, power and authority to sell, transfer, assign, vote and deliver the Company Shares being sold by it hereunder. Immediately prior to the delivery of the Company Shares to the Buyer, each Other Shareholder will be the sole registered and beneficial owner of the Company Shares it holds respectively and have good and valid title to such Company Shares, free and clear of all Liens and restrictions on transfer other than those in the articles of the Company and which shall have been complied with at Closing. Except for the Shareholders' Agreement, there are no outstanding options, warrants, convertible securities, calls, rights, commitments, preemptive rights or agreements or instruments or understandings of any character to which each Other Shareholder is a party, obligating the Other Shareholder to deliver or sell, or cause to be delivered or sold, contingently or otherwise, such Company Shares. Except for the Shareholders' Agreement and as set forth in Schedule 4.2, there are no voting trust agreements or other contracts, agreements, arrangements, commitments, plans or understandings to which the Other Shareholder is a party restricting or otherwise relating to voting, dividend or other rights with respect to the Company Shares.
4.3 CONSENTS AND APPROVALS. No consent, approval, order or authorisation of, or registration, declaration or filing, is required by or with respect to the Other Shareholder in connection with the execution and delivery of this Agreement by the Other Shareholder or the consummation by it of the transactions contemplated by this Agreement.
ARTICLE V
REPRESENTATIONS AND WARRANTY OF THE BUYER AND BUYER SUB
Buyer and Buyer Sub hereby solidarily represent and warrant to the Company and the Shareholders, as of the date hereof (except as to any representation or warranty which specifically relates to an earlier date), as follows:
5.1 ORGANIZATION AND QUALIFICATIONS. Each of Buyer and its
subsidiaries, including Buyer Sub is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation, with the requisite corporate power and authority to own and use
its properties and assets and to carry on its business as currently conducted.
Each of Buyer and Buyer Sub is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which the nature of
their respective businesses conducted or property owned by each 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 Buyer
Material Adverse Effect. For purposes of this Agreement, "BUYER MATERIAL ADVERSE
EFFECT" 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 Buyer and its subsidiaries, taken as a whole, PROVIDED,
HOWEVER, any adverse change, effect or circumstance (a) primarily arising out of
or resulting primarily from actions contemplated by the parties hereto in
connection with this Agreement; (b) that is primarily attributable to the
announcement or performance of this Agreement or the transactions contemplated
hereby; (c) resulting from economic factors affecting the economy as a whole;
(d) resulting in changes from the market price or trading volume of the Buyer
Shares; or (e) resulting from factors generally affecting the specific markets
in which the Buyer 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 Buyer Material
Adverse Effect.
5.2 CAPITALIZATION. The authorized, issued and outstanding shares of each class of capital stock of Buyer and Buyer Sub are as set forth in Exhibit B. Exhibit B also sets forth the number of shares reserved for issuance pursuant to each of the Buyer's duly approved stock plans (collectively, the "BUYER STOCK PLANS"), and the total number of shares reserved for issuance under Buyer Stock Plans or otherwise. All of the issued and outstanding shares of capital stock of Buyer and Buyer Sub have been duly authorized and validly issued and are fully paid and nonassessable. Except as provided in this Agreement and pursuant to the Buyer Stock Plans: (a) no subscription, warrant, option, convertible security or other right (contingent or otherwise) to purchase or acquire any shares of capital stock of Buyer or Buyer Sub is authorized or outstanding; (b) Buyer and Buyer Sub have 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 their capital stock any evidences of indebtedness or assets of Buyer; and (c) Buyer and Buyer Sub have no obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of their 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 Buyer have been offered, issued and sold by Buyer in compliance with applicable federal, provincial and United States securities laws or pursuant to valid exemptions therefrom.
5.3 AUTHORIZATION. Each of Buyer and Buyer Sub 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 Buyer and Buyer Sub and the consummation by them of the transactions contemplated hereby have been duly authorized by all necessary action on the part of the Buyer and Buyer Sub
and no further action is required by the Buyer or Buyer Sub, subject to regulatory approval under applicable securities laws and regulations. This Agreement has been duly executed by the Buyer and Buyer Sub and, assuming this Agreement constitutes a valid and binding obligation of the Company and the Shareholders, this Agreement constitutes a valid and binding agreement of the Buyer and Buyer Sub enforceable against them in accordance with its terms, subject, however, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general principles of equity, regardless of whether such enforceability is considered in equity or at law. Neither Buyer nor Buyer Sub is in violation of any of the provisions of its Certificate of Incorporation, bylaws or other organizational documents except for violations which could not reasonably be expected to have a Buyer Material Adverse Effect.
5.4 NONCONTRAVENTION. Subject to regulatory approval under applicable securities laws and regulations, including those of any stock exchanges, 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 the loss of a material benefit under, or result in the creation of any Lien upon any of the properties or assets of the Buyer or any of its subsidiaries pursuant to, any provision of: (a) the articles of incorporation or by-laws of the Buyer or any provision of the comparable organizational documents of Buyer or any of its subsidiaries; (b) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Buyer or any of its subsidiaries or their respective properties or assets; or (c) subject to the governmental filings and other matters referred to in Section 5.5, any statute, law, rule, regulation, judgment, order or decree applicable to the Buyer or any of its subsidiaries or their respective properties or assets, other than with respect to any of the matters described in this Section 5.4, any such conflicts, violations, defaults, rights or Liens that individually or in the aggregate would not reasonably be expected to have a Buyer Material Adverse Effect 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 authorization of, or registration, declaration or filing with, any Governmental Entity is required by or with respect to the Buyer or any of its subsidiaries in connection with the execution and delivery of this Agreement by the Buyer or the consummation by the Buyer of the transactions contemplated by this Agreement, except for: (a) the filing of a premerger notification and report form under the COMPETITION ACT (Canada); (b) approval for the listing of the shares to be issued in furtherance of the transactions set forth herein on The Toronto Stock Exchange and for a quotation on the Nasdaq National Market; (c) such filings, consents, exemptions, approvals, orders, registrations and declarations as may be required under the laws of any foreign country in which the Buyer or any of its subsidiaries conducts any business or owns any assets; (d) such filings, consents, approvals, orders, registrations and declarations as may be necessary as a result of the issuance of the Buyer Shares including any orders pursuant to any applicable securities law or any facts or circumstances relating solely to the Company; and (e) such other consents, approvals, orders, authorizations, 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 Buyer Material
Adverse Effect 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 Buyer's Knowledge, overtly threatened against the Buyer, any of its subsidiaries or any of their respective properties or business, that, individually or in the aggregate, would reasonably be expected to have a Buyer Material Adverse Effect. There is no judgment, decree, injunction, rule or order of any Governmental Entity outstanding against the Buyer or any of its subsidiaries having, or which, insofar as reasonably can be foreseen, in the future would have, any such effect.
5.7 AUTHORIZATION FOR BUYER SHARES. Buyer has taken all necessary action to issue the Buyer Shares. The Buyer Shares have been duly authorized and, when issued and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable and free and clear of all Liens (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.
5.8 CANADIAN DOCUMENTS. The Company and each Shareholder has been made aware by the Buyer that each statement and report, as may be required to have been filed as of the date hereof under Canadian securities laws (the "CANADIAN DOCUMENTS") is available through the Internet on the System for Electronic Document Analysis and Retrieval (or SEDAR) which can be accessed at www.sedar.com. 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 financial statements of Buyer, being the audited consolidated balance sheets as at August 31, 2000 and 1999 and the audited consolidated statements of earnings, retained earnings and cash flows for each of the years in the three-year period ended August 31, 2000, and the unaudited interim consolidated balance sheet as at May 31, 2001 and the unaudited interim consolidated statements of earnings, retained earnings and cash flows of the Buyer for the nine months ended May 31, 2001 and May 31, 2000, including the notes thereto (the "BUYER 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 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 Buyer's interim reports). The balance sheets included in the Buyer Financial Statements present fairly in all material respects as of their respective dates the financial condition of the Buyer (subject, in the case of interim financial statements, to normal, recurring year-end adjustments that may be required upon audit).
5.9 NO UNDISCLOSED LIABILITIES. To the Knowledge of the Buyer, none of the Buyer and its subsidiaries has any liability (whether absolute or contingent, whether liquidated or unliquidated and whether due or to become due) which is material to the Buyer and its subsidiaries, taken as a whole, except for: (a) liabilities shown on the Buyer Financial Statements
included in the Canadian Documents filed with the Canadian securities regulators prior to the date of this Agreement (the "BUYER BALANCE SHEET DATE"); (b) liabilities which have arisen in the ordinary course of business since the Buyer Balance Sheet Date; and (c) contractual liabilities incurred in the ordinary course of business which are not required by GAAP to be reflected on the Buyer Financial Statements.
5.10 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since the Buyer Balance Sheet Date, the Buyer has conducted its business only in the ordinary course and there has not occurred any events or changes that have had, or would reasonably be expected to have, individually or in the aggregate, a Buyer Material Adverse Effect.
5.11 FORM F-3. Buyer is a registrant qualified and entitled to use a registration statement on Form F-3 pursuant to the Securities Act.
5.12 INVESTMENT INTENT. The Buyer is acquiring the Company Shares for its own account for investment purposes only and not with a view to or for distributing or reselling such Company Shares or any part thereof or interest therein.
5.13 EXPERIENCE OF THE BUYER. The Buyer, through its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Company Shares and has so evaluated the merits and risks of such investment.
5.14 FINANCIAL ABILITY. The Buyer has cash or has existing borrowing facilities or unconditional, binding firm commitments that are sufficient to enable it to consummate the transactions contemplated by this Agreement.
5.15 BROKERS, FINDERS OR FINANCIAL ADVISORS. Other than CIBC World Markets Inc., no broker, investment broker, financial advisor or other person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission from Buyer in connection with the transactions contemplated by this Agreement.
5.16 REPORTING ISSUER STATUS. The Buyer is a reporting issuer in the Province of Ontario (as such term is defined in Rule 45-501 under the SECURITIES ACT (Ontario)) and of equivalent status under the securities laws of all other Canadian provinces, and has been of such status for at least 12 months prior to the date hereof.
ARTICLE VI
COVENANTS OF THE PARTIES
6.1 CONDUCT OF BUSINESS BY THE COMPANY. Except as set forth on Schedule 6.1, and except to the extent consented to in writing by Buyer or as expressly permitted or contemplated by this Agreement, during the period from the date of this Agreement to the Closing, the Company shall 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 organizations, 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. Without limiting the generality of the foregoing, without Buyer's written consent (which consent shall not be unreasonably withheld), during the period from the date of this Agreement to the Closing, the Company shall not:
(a) (i) 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
authorize 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, 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;
(c) amend its articles of incorporation or by-laws;
(d) acquire or agree to acquire (i) by 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 organization or division thereof, or (ii) any assets that are material, individually or in the aggregate, to the Company, except purchases in the ordinary course of business consistent with past practice;
(e) sell, lease, license, mortgage or otherwise encumber or subject to any Lien (other than Liens pursuant to its existing credit facilities) or otherwise dispose of any of its properties or assets, 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 guarantee any debt securities of another person, except for borrowings under its existing credit facilities for working capital purposes, in an aggregate amount of less than $250,000, 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;
(g) except for the items currently contracted for by the Company, make or agree to make any new capital expenditure or expenditures which, individually, is in excess of $50,000 or, in the aggregate, are in excess of $250,000;
(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 Company Contract, 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 Company Plan, (ii) increase in any material manner the compensation or fringe benefits of, or pay any bonus to, any director, officer or employee of the Company or (iii) grant any awards under any Company 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 Company 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) authorize any of, or commit or agree to take any of, the foregoing actions.
6.2 PUBLIC ANNOUNCEMENTS. From the date of this Agreement until the earlier of the Closing or the termination of this Agreement, no party hereto 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 Buyer (in the case of the Shareholders or the Company) or the Shareholder Representative (in the case of Buyer), which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that: (a) 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 reasonably determines such action to be required by law, or the regulations of any government agency or the exchanges or markets on which Buyer Shares are traded, in which case the party making such determination will, to the greatest extent practicable in light of the circumstances, use best efforts to allow the other party reasonable time to comment on such release or announcement in advance of its issuance; and (b) Buyer, the Company and the Shareholders 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. 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 Buyer and the Company.
6.3 ACCESS TO INFORMATION, DUE DILIGENCE INVESTIGATION; CONFIDENTIALITY. The Founding Shareholders shall afford to the officers, employees, accountants, counsel, financial advisors and other representatives of Buyer access during the period prior to the Closing, to such of the properties, books, contracts, commitments, records, officers and employees as Buyer may
reasonably request for the purpose of conducting a full and complete due diligence investigation (the "DUE DILIGENCE INVESTIGATIONS") of all aspects of the Company, including, without limitation, financial, legal and accounting and, during such period, the Founding Shareholders shall furnish promptly to Buyer and its representatives all information concerning the Company and its business, properties and personnel as Buyer may request. Buyer shall hold any such information which is non-public in confidence. Buyer shall make all reasonable best efforts to minimize disruption to the business of the Company 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 the Buyer shall not affect the representations and warranties of any of the Shareholders.
6.4 REGULATORY REQUIREMENTS.
(a) Each of the Company and the Buyer shall (i) prepare and file as promptly as practicable any filings with, or submissions to the Director or other representative of the Competition Tribunal (Canada), and any antitrust, competition, investment or other similar authority in any foreign jurisdiction where such filing is required in connection with the transactions contemplated hereby, and (ii) respond promptly to inquiries, if any, from the Competition Tribunal (Canada) or the antitrust, competition, investment or comparable Governmental Entity of any foreign jurisdiction in connection with such filing. The Buyer will be responsible for all filing fees in connection with the filings required by the antitrust, competition or comparable laws of any foreign jurisdiction and each party shall bear the expenses for the preparation of their documentation for the filing.
(b) Without limiting the generality of the foregoing, the Company and the Buyer each agree to cooperate and to use their respective commercially reasonable efforts to obtain any government clearances required to consummate the transactions contemplated by this Agreement (including through the COMPETITION ACT (Canada)), to respond to any requests for information from Governmental Entities, and to contest and resist any action, including any legislative, administrative or judicial action, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent (an "ORDER")) that restricts, prevents or prohibits the consummation of the transactions contemplated by this Agreement, including, without limitation, by vigorously pursuing all available avenues of administrative and judicial appeal and all available legislative action. The parties also agree to take any and all of the following actions to the extent commercially reasonable in the entire discretion of the respective party to obtain the approval of any Governmental Entity with jurisdiction over the enforcement of any applicable laws regarding the transactions contemplated by this Agreement: entering into negotiations; providing information; substantially complying with any second request for information pursuant to the COMPETITION ACT (Canada); making proposals; entering into and performing agreements or submitting to judicial or administrative orders; selling or otherwise disposing of, or holding separate (through the establishment of a trust or otherwise) particular assets or categories of assets, or businesses of the Company or the Buyer; and withdrawing from doing business in a particular jurisdiction. The parties hereto will, to the extent permitted
by applicable law, consult and cooperate with one another, and consider in good faith the views of one another, in connection with any analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any party hereto in connection with proceedings under or relating to the COMPETITION ACT (Canada) or any other federal, provincial, state or foreign antitrust or fair trade law. Notwithstanding anything to the contrary in this section, neither the Company nor the Buyer shall be required to take any action that would reasonably be expected to impair the overall benefits expected, as of the date hereof, to be realized from the consummation of the transactions contemplated by this Agreement.
6.5 SHAREHOLDER APPROVALS.
(a) The Company and the Founding Shareholders will use their best efforts to cause all of the shareholders of the Company listed in Exhibit A to execute an intervention in the form of Exhibit N, and the written resolution approving the transactions set forth herein in the form attached hereto as Exhibit O shall have also been executed by all shareholders of the Company within 15 days, or such longer period as the Buyer may agree, from the execution of this Agreement by the Founding Shareholders;
(b) Should the Agreement and the resolution set forth in paragraph (a) not be executed within the delay set forth therein, then the Company shall convene and hold a special meeting of the shareholders of the Company (the "SPECIAL MEETING") to consider and, if deemed advisable, to approve the Merger and to prepare, at its costs, the notice of the Special Meeting and the accompanying management proxy circular, including all schedules thereto, to be sent to the Shareholders in connection with the Special Meeting. The Buyer shall cooperate in the preparation of such management proxy circular by making available to the Company information reasonably required to be incorporated therein in relation to Buyer and Buyer Sub. Notwithstanding that a Special Meeting is called and held this Agreement shall continue to be in full force and effect and shall survive such Special Meeting, in accordance with its terms;
(c) Should a Special Meeting be held, any shareholder of the Company (other than a shareholder of the Company exercising dissent rights under the CBCA) who has not executed this Agreement or the intervention in the form of Exhibit N shall be required to deposit the Company Shares it holds with the Buyer and shall be required to be bound by all the terms and conditions, representations, warranties and covenants of this Agreement, including those set forth in Article III, Article IV and Article IX.
6.6 MODIFICATION OF DISCLOSURE SCHEDULES. At any time prior to four business days before the Closing, the Company and the Founding Shareholders may amend or supplement the Disclosure Schedules attached to this Agreement with respect to any matter that, if existing or occurring at or prior to the Closing, would have been required to be set forth or described in the Disclosure Schedules or that is necessary to complete or correct any information in any representation or warranty contained in Article II. If such amendment or supplement is considered by the Buyer, acting reasonably, as a Company Material Adverse Effect, then the Buyer shall have the right to terminate this Agreement as described in Section 10.1. The Buyer shall have two business days to object in writing to such amendment or supplement. If the Buyer
does not object within such two business day period, then such amendment or supplement shall be given effect for all purposes of this Agreement.
6.7 CONTACT WITH CUSTOMERS AND SUPPLIERS. The Buyer (and all of its agents and affiliates and any employees, directors or officers thereof) will not contact and communicate with the employees, customers, suppliers and licensors of the Company in connection with the transactions contemplated hereby unless it has received the prior written consent of the Company, which consent shall not be unreasonably withheld but may be conditioned in any reasonable manner.
6.8 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: (a) any of its representations and warranties set forth in this Agreement that are qualified as to materiality being or becoming untrue; (b) any of such representations and warranties that are not so qualified becoming untrue in any manner having a Company Material Adverse Effect or Buyer Material Adverse Effect, as the case may be; (c) any of the conditions set forth in this Agreement not being satisfied or in a violation of any provision of this Agreement; or (d) 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.
6.9 SECURITIES LAW AND STOCK EXCHANGE REQUIREMENTS. The Buyer shall do all things as are required to ensure that, as of the time of Closing, the Buyer Shares are listed on The Toronto Stock Exchange and that the holders of the Buyer Shares may resell the Buyer Shares in compliance with exemptions from the prospectus and registration requirements of the securities laws of each of the Provinces of Canada in which the Buyer is a reporting issuer or of equivalent status, subject to: (i) the holders of Buyer Shares fulfilling the requirements of Section 6.6 of Rule 45-501 of the Ontario Securities Commission and similar requirements of other securities commissions in Canada, as the case may be, applicable to such holders of Buyer shares and (ii) in the case of holders of Buyer Shares resident in British Columbia, the obtaining of an appropriate exemption order from the British Columbia Securities Commission.
6.10 IDEMNIFICATION OF DIRECTORS AND OFFICERS OF THE COMPANY.
(a) From and after the Effective Time, the Buyer will, and will cause the Buyer Sub to, fulfill and honour in all respects the obligations of the Company pursuant to any indemnification provisions under the Company's articles of incorporation or by-laws as in effect on the date hereof for the benefit of its present and former directors and officers in effect on the date hereof (the "Insured Parties") and pursuant to the indemnification agreements between the Company and such Insured Parties, copies of which have been delivered to the Buyer prior to the date hereof. The articles of incorporation and by-laws of the Buyer Sub will contain provisions with respect to exculpation and indemnification that are at least as favourable to the Insured Parties as those contained in the articles of incorporation or by-laws of the Company as in effect on the date hereof, which provisions will not be amended, repealed or otherwise modified for a period of six years from the Closing Date in any manner that would adversely affect the rights thereunder of individuals who, immediately prior to the Closing Date, were directors or officers of the Company, unless such modification is required by law.
(b) For a period of six years after the Closing Date, the Buyer will, or will cause the Buyer Sub to, use all commercially reasonable efforts to maintain in effect, if available at a premium which is not more than twice the premium currently paid by the Company, directors' and officers' liability insurance covering those persons who are currently covered by the Company's directors' and officers' liability insurance policy on terms substantially similar to those applicable to the current directors and officers of the Company, and if such premium during the six years equals or exceeds twice the premium currently paid by the Company, the Buyer will, or will cause the Buyer Sub to maintain such insurance as is available for such maximum premium as Buyer is obligated to pay hereunder.
(c) The provisions of this section are intended to be in addition to the rights otherwise available to the Insured Parties by law, charter, statute, bylaw, resolution of the Board of Directors of the Company, and shall operate for the benefit of, and shall be enforceable by, each of the Insured Parties, their heirs and their representatives.
ARTICLE VII
CONDITIONS TO CLOSING
7.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective obligations of each party to consummate the transactions contemplated hereby at the Closing are subject to the fulfillment to each party's reasonable satisfaction on or prior to the Closing Date of each of the following conditions:
(a) COMPETITION ACT (CANADA). The waiting period (and any extension thereof) applicable to the Merger under the COMPETITION ACT (Canada) and any other applicable antitrust and competition laws shall have been terminated or shall have expired.
(b) PRIOR INVESTMENTS. The Prior Investments described in
Section 1.5 hereof shall have been completed in accordance with the
provisions of this Agreement, all to the satisfaction of the parties.
(c) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order, preliminary or permanent injunction or other judgment or order issued by any Government Entity, 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.
7.2 CONDITIONS TO OBLIGATIONS OF THE BUYER. The obligation of Buyer to consummate the transactions contemplated by this Agreement at the Closing is subject to the fulfillment to the Buyer's reasonable satisfaction on or prior to the Closing of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each representation and warranty of the Company, and of each of the Shareholders, as applicable, contained in this Agreement shall be true and correct in all respects as of the date of this Agreement and as of the Closing as though made as of the Closing, except to the extent such representations and warranties expressly relate to an earlier date, in which case as of such earlier date. Buyer shall have received a certificate signed by a duly authorized officer of the Company and
by each Founding Shareholder to such effect with respect to the representations and warranties set forth in Article II.
(b) PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Company and each Shareholder, as applicable, at or prior to the Closing shall have been performed or complied with by the Company and each Shareholder, as applicable, in all material respects. Buyer shall have received a certificate signed by a duly authorized officer of the Company and by each Founding Shareholder to such effect.
(c) SECURITIES REGULATORY APPROVALS. The regulatory approval required under United States and Canadian securities laws and under the by-laws, regulations or policies of the United States and Canadian securities regulatory authorities and stock exchanges and if such regulatory authorities or stock exchanges require so, any approval of the Buyer's shareholders, shall have been obtained. (d) CONSENTS. All consents, the absence of which, in the aggregate, would be reasonably likely to have a Company Material Adverse Effect, shall have been obtained. The articles of amalgamation and all supporting documents have been filed with the Director under the CBCA.
(e) RESIGNATIONS. Buyer shall have received the resignations, effective as of the Closing, of each director of the Company specified by the Buyer in writing at least five business days prior to the Closing, along with a release of all claims against the Company.
(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 a Company Material Adverse Effect. Buyer shall have received a certificate signed by a duly authorized officer of the Company to such effect.
(g) DELIVERY OF SHARE CERTIFICATES. Each Shareholder shall have delivered to Buyer for cancellation share certificates representing the shares of the Company Shares duly endorsed for transfer.
(h) LEGAL OPINION. The Buyer shall have received an opinion of McCarthy Tetrault LLP, the Company's counsel, reasonably satisfactory to Buyer's counsel containing the customary opinions and qualifications.
(i) CERTIFICATES AND DOCUMENTS. The Company shall have delivered at or prior to the Closing:
(i) A copy of the Company's Certificate of Incorporation, with all amendments to date, certified by the Director appointed under the CBCA as of a
date within three business days prior to the Closing, together with Bylaws of the Company, certified by its secretary as of Closing;
(ii) resolutions of the Board of Directors of the Company authorizing and approving all matters in connection with this Agreement and the transactions contemplated herein, certified by a duly authorized officer of the Company as of the Closing; and
(iii) such other documents relating to the transactions contemplated in this Agreement as the Buyer may reasonably request.
(j) EMPLOYMENT AGREEMENTS. Each of the Persons listed on Exhibit F shall have entered into and delivered to the Buyer an employment agreement in the form of Exhibit F hereof.
(k) ESCROW AGREEMENT. The Buyer and each of the Shareholders, except for JDS Uniphase Inc., shall have entered into and delivered to the Buyer the Escrow Agreement.
(l) LOCK-UP AGREEMENT. Each of the Founding Shareholders, the Yazdi Family Trust and J.F. Plouffe shall have entered into and delivered to the Buyer a lock-up agreement in the form of Exhibit G hereto.
(m) SHAREHOLDERS' AGREEMENT. The Buyer shall have received evidence satisfactory to it that the Shareholders' Agreement referred to in Schedule 2.4 has been terminated and all rights of all parties thereto have been expressly waived.
(n) STOCK OPTION PLAN. Options which are "not in the money" shall be cancelled and new options of the Buyer under the stock option plan of the Buyer will be issued to such Persons and in such amounts as set forth in Exhibit I, all in accordance with Buyer's policies.
(o) SEC FINANCIAL STATEMENTS. The Company shall have delivered (i) audited balance sheets of the Company as of the end of the two most recent fiscal years, (ii) an unaudited balance sheet as of the end of the most recent quarter preceding the Closing, (iii) audited statements of loss, deficit and cash flows for each of the two fiscal years preceding the Closing, and (iv) unaudited comparative statements of loss, deficit and cash flows for the interim period between the latest audited balance sheet date and the date of the interim balance sheet being provided pursuant to clause (ii), in each case meeting the requirements of the SEC that would be applicable to the Company as if its securities were registered under Section 12 of the SECURITIES AND EXCHANGE ACT OF 1934, as amended (collectively, the "SEC FINANCIAL STATEMENTS") or as if the SEC Financial Statements were being incorporated into a registration statement, annual report or other publicly filed document with the SEC.
(p) ACCOUNTANTS. The Buyer shall have received confirmation that PricewaterhouseCoopers LLP ("PWC"), the Company's auditors, are independent certified public accountants qualified to deliver the accountant's report on the SEC
Financial Statements as required by the SEC. In addition, the Company shall have entered into an agreement on terms satisfactory to the Buyer with PWC pursuant to which PWC shall (A) deliver to the Buyer any consents with respect to the Buyer's use of the SEC Financial Statements and the use of PWC's name in connection with the Buyer's filings with the SEC and (B) deliver customary "comfort letters" with respect to the SEC Financial Statements and required reconciliations, as may be reasonably requested by the Buyer.
(q) APPROVAL BY SHAREHOLDERS. All shareholders of the Company shall have (a) approved the Merger by way of a signed resolution in the form attached hereto as Exhibit O or by way of a special resolution of the holders of Company Shares adopted at the Special Meeting; and (b) waived their statutory, and contractual (if any), right of dissent pursuant to the transactions contemplated herein, the whole to the satisfaction of Buyer, or the Buyer shall be otherwise satisfied that no dissent rights under the CBCA are to be exercised, it being agreed that should a Special Meeting be required and if such holders of Company Shares exercise dissent rights under the CBCA, the Buyer shall not be required to file the articles of amalgamation required under the CBCA to be sent to the Director under the CBCA. In such an event, the Buyer shall have a delay of 30 days from the date of the Special Meeting to negotiate and settle with any such holders of Company Shares exercising dissent rights under the CBCA. Upon the expiration of said 30 day delay, the Buyer, at its sole discretion, shall have the right to either file the articles of amalgamation with the Director or to terminate this Agreement.
(r) RELEASE FROM WIT SOUNDVIEW CORPORATION. The Company shall have received a letter from Wit Soundview Corporation releasing and discharging the Company and the Buyer from any claim Wit Soundview Corporation may have against them.
7.3 CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY. Each Shareholder's and the Company's obligation to consummate the transactions contemplated by this Agreement at the Closing is subject to the fulfillment to its reasonable satisfaction or waiver on or prior to the Closing of each of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each representation and warranty of Buyer and Buyer Sub contained in this Agreement shall be true and correct in all respects as of the date of this Agreement and as of the Closing as though made as of the Closing, except to the extent such representations and warranties expressly relate to an earlier date, in which case as of such earlier date. Each Shareholder and the Company shall have received a certificate signed on behalf of Buyer and Buyer Sub by duly authorized executive officers of Buyer and Buyer Sub to such effect.
(b) PERFORMANCE. All covenants, agreements and conditions contained in this Agreement to be performed or complied with by the Buyer or Buyer Sub on or prior to the Closing shall have been performed or complied with by the Buyer in all material respects. Each Shareholder and the Company shall have received a certificate signed on behalf of Buyer by duly authorized executive officers of Buyer to such effect.
(c) PAYMENT OF MERGER CONSIDERATION. Buyer shall have delivered to each Shareholder certificates representing the Buyer Shares other than Escrow Shares in payment of the Merger Consideration to be received by such Shareholder for its shares of Company Shares. Buyer shall have delivered certificates representing the Escrow Shares to the Escrow Agent.
(d) CONSENTS. All consents, the absence of which, in the aggregate, would be reasonably likely to have a Buyer Material Adverse Effect, shall have been obtained.
(e) 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 a Buyer Material Adverse Effect. The Company and each Shareholder shall have received a certificate signed on behalf of Buyer by duly authorized officers of Buyer to such effect.
(f) LEGAL OPINION. The Company and the Shareholders shall have received an opinion of Fasken Martineau DuMoulin LLP, the Buyer's counsel, reasonably satisfactory to the Company's counsel containing the customary opinions and qualifications.
(g) CERTIFICATES AND DOCUMENTS. Buyer shall have delivered at or prior to the Closing to the Company and each of the Shareholders:
(i) A copy of Buyer's and Buyer Sub's respective Certificate of Incorporation, with all amendments to date, together with Bylaws of the Buyer, certified by the Secretary as of the Closing;
(ii) resolutions of the Board of Directors of Buyer and Buyer Sub, authorizing and approving all matters in connection with this Agreement and the transactions contemplated herein, certified by the Secretary of Buyer and Buyer Sub as of the Closing; and
(iii) such other documents relating to the transactions contemplated in this Agreement as the Company and/or any Shareholder may reasonably request.
(h) AUTHORIZATIONS. All authorizations, approvals or
permits, if any, of any Governmental Entity or regulatory body that are
required in connection with the lawful issuance and sale of the Buyer
Shares pursuant to this Agreement, including the matters set forth in
Section 6.9 hereof, shall have been duly obtained and shall be
effective on and as of the Closing.
ARTICLE VIII
OTHER AGREEMENTS
8.1 CONFIDENTIALITY. After the Closing, and for a period of 5 years after Closing, Buyer and each Shareholder shall strictly maintain the confidentiality of all information, documents and materials relating to the Company or the transactions contemplated by this Agreement, including without limitation the terms hereof, except to the extent disclosure of any such information is reasonably believed by the disclosing party to be required by law or authorized by the other party, or otherwise made publicly available by the other party, or reasonably occurs in connection with disputes over the terms of this Agreement. In the event that any party hereto reasonably believes after consultation with counsel that it is required by law to disclose any confidential information described in this Section 8.1, such disclosing party will (a) provide the other party with prompt notice before such disclosure prior to the expiry of such 5 year period in order that the other party may attempt to obtain a protective order or other assurance that confidential treatment will be accorded to confidential information, and (b) cooperate with the other party in attempting to obtain such order or assurance. The provisions of this Section 8.1 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 the disclosing party of this Agreement or becomes known in the industry through no wrongful act on the part of such disclosing party.
8.2 EXPENSES. Except as otherwise expressly provided herein, each party hereto will pay its own expenses incurred in connection with the negotiation of this Agreement, the performance of their respective obligations hereunder and the consummation of the transactions contemplated hereby, whether or not consummated. At the Closing, the Buyer agrees to pay directly, on behalf of the Shareholders, Wit Soundview Corporation's investment banking fees, in the amount of $3 million, incurred by or on behalf of the Shareholders in connection with the transactions contemplated hereby (the "EXPENSES"). At the Closing, the Buyer shall pay the Expenses in cash by wire transfer of immediately available funds as to 90% to Wit Soundview Corporation and as to 10% to the Escrow Fund for the proportionate benefit of each Shareholder other than JDS Uniphase Inc.. Such payment of Expenses made by the Buyer shall be deducted from the Cash Consideration. The Shareholders shall, at least two business days prior to the Closing Date, provide to the Buyer, in writing, wire transfer instructions for such payment.
8.3 NON-COMPETITION. Each Shareholder listed in Exhibit J shall not, for a period of three years from Closing ("NON-COMPETE PERIOD"), within Canada, the United States and the European Union and in any country in which the Buyer or the Company presently conducts or may conduct business during the Non-Compete Period, without the prior written consent of the Buyer, 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 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 of any business which develops, manufactures and sells high-performance test, measurement and automation instruments that are used in a variety of applications in the telecommunications and data communications networking industries and includes any other technologies and/or
applications which are directly competitive with the business of the Company as the business of the Company may change from time to time during the Non-Compete Period.
8.4 SUPPORT OBLIGATION.
(a) COMMITMENT IN FAVOUR OF THE AGREEMENT OF MERGER.
(i) Each Shareholder and the Company irrevocably covenant and agree in favour of Buyer and Buyer Sub that they will use commercially reasonable efforts, in the case of each Shareholder without incurring any out-of-pocket expenses, to and they will use commercially reasonable efforts to cause their representatives, agents or employees acting on their behalf to assist Buyer and Buyer Sub to complete successfully the transactions contemplated hereby.
(ii) Each Shareholder and the Company shall not, directly or indirectly, solicit, initiate, assist, negotiate, discuss or encourage (including by way of furnishing information or entering into any form of agreement or arrangement) any inquiries, proposals or offers regarding any merger, amalgamation, exchange offer, business combination, take-over bid, sale of material assets (or any lease, long-term supply agreement or other arrangement having the same economic effect as a sale) or material sale of shares of the Company, or a proposal to do so, other than with Buyer and Buyer Sub (each, an "INCONSISTENT TRANSACTION").
(iii) Each Shareholder and the Company shall promptly notify Buyer in writing of any contact, inquiry, submission, proposal or offer of which it becomes aware for an Inconsistent Transaction and of any request in connection with such a proposal for non-public information relating to the Company and of the relevant details relating to such a proposal (including the identity of any prospective party and the proposed terms and conditions) known at such time.
(iv) Each Shareholder and the Company shall promptly advise Buyer in writing of any breach by the Shareholder or the Company of any covenant or agreement contained herein.
(v) Subject to the terms and conditions herein, each of the Shareholders, the Buyer and Buyer Sub hereto agrees to use all commercially reasonable efforts to take, or cause to be taken, all action, and to do, or cause to be done as promptly as practicable, all things necessary, proper and advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including without limitation, fulfillment of the conditions to closing set forth herein. If at any time after the Closing any further action is necessary or desirable to carry out the purposes of this Agreement, including, without limitation, the execution of additional instruments, the proper officers and directors of the Buyer and the Company, and the Shareholder Representative, on behalf of the Shareholders, and the proper
officers and directors of Shareholders not represented by the Shareholder Representative, if any, shall take all such necessary action.
(vi) From the date of this Agreement until the earlier of the Closing or the termination of this Agreement, each of the Shareholders, the Buyer and Buyer Sub covenants and agrees that it shall take no action which would: (a) materially adversely affect the ability of any party to this Agreement to obtain any consents required for the transactions contemplated hereby; or (b) materially adversely affect the ability of any party to perform its covenants and agreements under this Agreement.
(b) VOTING.
(i) Each Shareholder irrevocably covenants and agrees in favour of Buyer and Buyer Sub to vote or to cause to be voted the shares of the Company owned by it, including any shares acquired by or issued to it after the date hereof, in favour of the transactions contemplated herein, at any Special Meeting(s) or, as the case may be, to sign a resolution in lieu of a meeting, including in connection with any separate vote of any sub-group of shareholders that may be required to be taken and of which sub-group that Shareholder forms a part.
(ii) Each Shareholder irrevocably covenants and agrees that it will not exercise any rights of dissent provided under section 190 of the CBCA or under any order granted relating to the transactions contemplated in this Agreement or otherwise in connection with the transactions contemplated in this Agreement.
(c) TRANSFER OF SHARES. Each Shareholder irrevocably covenants and agrees in favour of Buyer and Buyer Sub that it will not, except under the transactions contemplated in this Agreement, directly or indirectly, sell, transfer or assign any of the shares of the Company or any interest therein, whether pursuant to an Inconsistent Transaction or otherwise, without the prior consent of Buyer prior to the earlier of (i) completion of the transactions contemplated herein and (ii) termination of this Agreement in accordance with its terms.
8.5 EMPLOYEES. Each Shareholder listed in Exhibit J agrees with the Buyer that:
(a) they shall not during the Non-Compete Period, directly or indirectly, induce any employee to leave or hire any employee of the Company or of the Buyer, except in the cases of a response of such employee to a general solicitation by the Shareholder or of an unsolicited hire of such employee;
(b) they shall not ever, directly or indirectly, use or divulge to any Person any information which is confidential information of the Company or of the Buyer or relating to the customers, processes or products or services or intended processes or intended products and services of the Company or of the Buyer, including those relating to research, development, manufacturing, purchasing or selling of products and services, provided that this obligation of confidentiality shall not apply to information that is or
becomes generally available to the public other than as a result of a disclosure in breach of the Agreement.
8.6 COVENANTS REASONABLE. Each Shareholder listed in Exhibit J
acknowledges and agrees with the Buyer that the covenants set forth in Section
8.3 and Section 8.5 are reasonable in the circumstances and are necessary to
protect the Buyer and the Company and the value of the business described in
Section 8.3 and that the breach by them of any of the provisions of this
Agreement would cause serious and irreparable harm to the Buyer which could not
be adequately be compensated for in damages. Such Shareholder consents to an
order specifically enforcing the provisions of this Agreement, or an order of
injunction being issued against it restraining them from any further breach of
such provisions. The provisions of this section shall not derogate from any
other remedy which Buyer may have in the event of such a breach.
8.7 REGISTRATION OF BUYER SHARES.
(a) SHELF PROSPECTUS. The Buyer shall:
(i) prior to February 28, 2002, prepare and file with the SEC a registration statement on Form F-3 or F-10 or any comparable registration form then in effect (the "REGISTRATION STATEMENT") relating to the resale of the Buyer Shares by the Shareholders from time to time on the Nasdaq National Market or the facilities of any U.S. national securities exchange or market on which the Buyer Shares (issued pursuant to this Agreement) are then traded or in privately-negotiated transactions in the United States;
(ii) use its reasonable efforts, subject to receipt of necessary information from the Shareholders, to cause the SEC to declare the Registration Statement effective within 60 days after the Registration Statement is filed by the Buyer;
(iii) promptly prepare and file with the SEC (and provide notice to the Shareholders of any such filing) such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Registration Statement effective until the earlier of (i) two years after the effective date of the Registration Statement, or (ii) the date on which the Buyer Shares may be resold by the Shareholders without registration by reason of Rule 144(k) under the Securities Act or any other rule of similar effect;
(iv) furnish to each Shareholder with respect to the Buyer Shares registered under the Registration Statement (and to each underwriter, if any, of such Buyer Shares) such number of copies of prospectuses and such other documents as the Shareholder may reasonably request, in order to facilitate the public sale or other disposition of all or any of the Buyer Shares by the Shareholder;
(v) file documents required of the Buyer for normal "blue sky" clearance in states specified in writing by the Shareholders; provided, however,
that the Buyer shall not be required to qualify to do business or consent to service of process in any jurisdiction in which it is not now so qualified or has not so consented;
(vi) notify each holder of Buyer Shares covered by such Registration Statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. The Buyer will use reasonable best efforts to amend or supplement such prospectus in order to cause such prospectus not to include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing;
(vii) use its reasonable best efforts to furnish,
on the date that such Buyer Shares are delivered to the
underwriters for sale, if such securities are being sold
through underwriters selected by the Buyer, (i) an opinion,
dated as of such date, of the counsel representing the Buyer
for the purposes of such registration, in form and substance
as is customarily given to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and
(ii) a letter dated as of such date, from the independent
certified public accountants of the Buyer, in form and
substance as is customarily given by independent certified
public accountants to underwriters in an underwritten public
offering addressed to the underwriters;
(viii) bear all expenses in connection with the procedures in paragraphs (i) through (ix) of this Section, and the registration of the Buyer Shares pursuant to the Registration Statement, other than fees and expenses, if any, of counsel and other advisers to the Shareholders or underwriting discounts, brokerage fees, Taxes payable and commissions incurred by the Shareholders, if any; and
(ix) in the event of any underwritten public offering with an underwriter selected by the Buyer, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Shareholder participating in such underwriting shall also enter into and perform its obligations under such an agreement.
The Buyer understands that the Shareholders disclaim being underwriters, and that the Shareholders being deemed an underwriter shall not relieve the Buyer of any obligations it has hereunder.
(b) DISPOSITION. Notwithstanding the generality of
Section 8.7(a), each Shareholder agrees that upon notice from Buyer at
any time or from time to time during the time the prospectus relating
to the securities proposed to be sold by such Shareholder
is required to be delivered under the Securities Act of the happening of any event as a result of which, in Buyer's opinion, the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing, such Shareholder will forthwith discontinue such Shareholder's disposition of such securities pursuant to the Registration Statement until the time of such Shareholder's receipt of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such prospectus shall not include, in Buyer's opinion, an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. It is understood and agreed that, after the Registration Statement has been declared effective, its effectiveness may be suspended on or one more occasions for up to an aggregate of 90 days in a twelve-month period, provided that no single suspension of such effectiveness shall be in effect for more than 30 consecutive days.
(c) PUBLIC INFORMATION. For so long as Buyer is subject to the reporting requirements of Section 13 or 15 of the Exchange Act and any of the Buyer Shares are deemed "RESTRICTED SECURITIES" under Rule 144 promulgated under the Securities Act, Buyer will file the reports required to be filed by it under the Securities Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the SEC thereunder, or, if it ceases to be so required to file such reports, it will, upon the request of the Shareholders (i) make publicly available such information as is necessary to permit sales of Buyer Shares pursuant to Rule 144 under the Securities Act, and (ii) take such further action that is reasonable in the circumstances, in each case to the extent required from time to time to enable the Shareholders to sell their Buyer Shares without registration under the Securities Act within the limitation of the exemptions provided by Rule 144 under the Securities Act, as such rule may be amended from time to time, or any similar rules or regulations hereafter adopted by the SEC.
(d) LISTING. Buyer will use its reasonable best efforts to cause the Buyer Shares to be sold pursuant to the Registration Statement to be listed on the Nasdaq National Market or any other securities exchanges or markets on which Buyer Shares are then listed.
(e) INDEMNIFICATION AND CONTRIBUTION.
(i) In the event of a registration of any of the Buyer Shares under the Securities Act pursuant to this Section 8.7, Buyer will indemnify and hold harmless each Shareholder and each Shareholder Affiliate against any losses, claims, damages or liabilities, joint or solidary, to which such Shareholder or Shareholder Affiliate may become subject under the Securities Act, the Exchange Act, or any other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Buyer), insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the
Registration Statement, including the prospectus, financial statements and schedules, and all other documents filed as a part thereof, as amended at the time of effectiveness of the Registration Statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of SEC Rule 430A, or pursuant to SEC Rule 434, or the prospectus, in the form first filed with the SEC pursuant to SEC Rule 424(b), or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) filing is required (the "PROSPECTUS"), or any amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse each such Shareholder and each such Shareholder Affiliate for any legal or other expenses reasonably incurred by such Shareholder or Shareholder Affiliate in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability or action; provided, however, that Buyer will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in connection with the business financial information relating to the Company prior to the Closing or so made in conformity with information furnished by such Shareholder specifically for use in such Registration Statement. For purposes of this Section 8.7 only, the term "SHAREHOLDER AFFILIATE" shall mean any affiliates of the Shareholder and any officer, director, trustee or other person who controls the Shareholder or any affiliate of the Shareholder within the meaning of Section 15 of the SECURITIES ACT or Section 20 of the EXCHANGE ACT, and the term "Registration Statement" shall include any final prospectus, exhibit, supplement or amendment included in or relating to, and any document incorporated by reference in, the Registration Statement.
(ii) In the event of a registration of any of the Buyer Shares under the Securities Act pursuant to this Section 8.7, each Shareholder having Buyer Shares registered thereunder, jointly, for itself and not for the other Shareholders, will indemnify and hold harmless Buyer and each affiliate of Buyer, each underwriter and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or solidary, to which Buyer or such Buyer Affiliate, underwriter or person may become subject under the Securities Act or otherwise, insofar as such loses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse Buyer and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that such Shareholder will be liable under the Section 8.7(e)(ii) in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact made in reliance upon and in conformity with information pertaining to such Shareholder furnished in writing to Buyer by such Shareholder specifically for use in the Registration Statement; and provided further, however, that the liability of each Shareholder hereunder shall not in any event exceed the net proceeds received from the sale of his, her or its Buyer Shares covered by such Registration Statement.
(iii) Promptly after receipt by an indemnified
party under this Section 8.7(e) of notice of the threat or
commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying
party under this Section 8.7(e), promptly notify the
indemnifying party in writing thereof; but the omission to so
notify the indemnifying party will not relieve it from any
liability which it may have to any indemnified party for
contribution or otherwise under the indemnity agreement
contained in this Section 8.7(e) to the extent it is not
prejudiced as a result of such failure. In case any such
action is brought against any indemnified party and such
indemnified party seeks or intends to seek indemnity from an
indemnifying party, the indemnifying party will be entitled to
participate in, and, to the extent that it may wish, jointly
with all other indemnifying parties similarly notified, to
assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; provided, however, if
the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party
shall have reasonably concluded that there may be a conflict
between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such action
or that there may be legal defenses available to it and/or
other indemnified parties which are different from or
additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select
separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf
of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of its
election so to assume the defense of such action and approval
by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this
Section 8.7(e) for any legal or other expenses subsequently
incurred by such indemnified party in connection with the
defense thereof unless (1) the indemnified party shall have
employed such counsel in connection with the assumption of
legal defenses in accordance with the proviso to the preceding
sentence (it being understood, however, that the indemnifying
party shall not be liable for the expenses of more than one
separate counsel, approved by such indemnifying party in the
case of paragraph (i), representing all of the indemnified
parties who are parties to such action) or (2) the indemnified
party shall not have employed counsel reasonably satisfactory
to the indemnifying party to represent the indemnified party
within a reasonable time after notice of commencement of
action, in each of which cases the reasonable fees and
expenses of counsel shall be at the expense of the
indemnifying party.
(iv) In order to provide for just and equitable
contribution to joint liability under the Securities Act in
any case in which either (1) any indemnified party exercising
rights under this Agreement makes a claim for indemnification
pursuant to this Section 8.7(e) but it is judicially
determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case
notwithstanding the fact that this Section 8.7(e) provides for
indemnification in such case, (2) contribution under the
Securities Act may be required on the part of any such
Shareholder in circumstances for which indemnification is
provided under this Section 8.7, or (3) the indemnification
provided for by this Section 8.7 is insufficient to hold
harmless an indemnified party, other than by reason of the
exceptions provided therein, then, and in each such case,
Buyer and the Shareholders will contribute to the aggregate
losses, claims, damages or liabilities to which they may be
subject (after contribution from others) (x) in such
proportion as is appropriate to reflect the relative fault of
the indemnifying party on the one hand and the indemnified
party on the other or (y) if the allocation provided by clause
(x) above is not permitted by applicable law, or provides a
lesser sum to the indemnified party than the amount
hereinafter calculated, in such proportion as is appropriate
to reflect not only the relative fault referred to in clause
(x) above but also the relative benefits received by the
indemnifying party and the indemnified party from the
registration of the securities as well as the statements or
omissions which resulted in such losses, claims, damages or
liabilities and any other relevant equitable considerations.
No Shareholder will be required to contribute any amount in
excess of the net proceeds received from the sale of his, her
or its Buyer Shares covered by such Registration Statement and
no person or entity guilty of fraudulent misrepresentation
(within the meaning of Section 12 of the Securities Act) will
be entitled to contribution from any person or entity who was
not guilty of such fraudulent misrepresentation.
(v) The obligations of the Buyer and the Shareholders under this Section 8.7(e) shall survive completion of any offering of Buyer Shares pursuant to a Registration Statement and the termination of Buyer's obligations under Section 8.7(a). No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation.
(f) INFORMATION AVAILABLE. So long as the Registration Statement is effective covering the resale of Buyer Shares owned by the Shareholders, the Buyer will furnish to each Shareholder:
(i) as soon as practicable after (A) its Annual
Report on Form 10-K, 20-F or 40-F, (B) its interim reports,
(C) its material change reports, (D) its proxy
statement, (E) a full copy of the particular Registration Statement covering the Buyer Shares, and (F) a copy of each other registration statement covering Buyer Subordinate Voting Shares filed with the SEC (the foregoing, in each case, excluding exhibits unless requested by such Shareholder); and
(ii) a reasonable number of copies of the prospectuses to supply to any other party requiring such prospectuses; and the Buyer, upon the reasonable request of the Shareholder, will meet with the Shareholder or a representative thereof at the Buyer's headquarters to discuss information relevant for disclosure in the Registration Statement covering the Buyer Shares and will otherwise cooperate with any Shareholder conducting an investigation for the purpose of reducing or eliminating such Shareholder's exposure to liability under the Securities Act, including the reasonable production of information at the Buyer's headquarters, subject to appropriate confidentiality limitations.
ARTICLE IX
SURVIVAL AND INDEMNIFICATION
9.1 SURVIVAL NOTWITHSTANDING INVESTIGATION. Notwithstanding any investigation conducted before the Closing 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 and shall continue in full force and effect in accordance with and subject to the terms of this Article IX.
9.2 GENERAL INDEMNIFICATION BY THE SHAREHOLDERS. Subject to the provisions contained herein, each of the Shareholders shall be liable to the Buyer and their respective directors, officers and employees (collectively, the "BUYER INDEMNIFIED PERSONS" and each a "BUYER INDEMNIFIED PERSON") and shall defend, indemnify and hold harmless all of the Buyer Indemnified Persons against any and all Claims incurred or suffered by or imposed upon any of the Buyer Indemnified Persons arising directly or indirectly out of:
(a) the breach of any agreement, covenant, representation or warranty of any of the Shareholders or the Company contained in or contemplated by this Agreement or in any other agreement or document required to be furnished by any of the Shareholders or the Company to the Buyer hereunder; and
(b) the non-fulfilment of any agreement, covenant or obligation of any of the Shareholders or the Company contained in this Agreement or in any other agreement or document required to be entered into by any of the Shareholders or the Company pursuant hereto to the extent not waived in writing by the Buyer.
The obligation of indemnification of the Founding Shareholders hereunder shall be solidary and the obligation of indemnification of the Other Shareholders shall be joint and not solidary and each Other Shareholder shall only be liable hereunder with respect to the agreements, covenants, representations and warranties made by such Other Shareholder in this Agreement. For greater certainty, the Buyer shall have recourse to the
Escrow Shares of an Other Shareholder only for Claims against such Other Shareholder for a breach or failure of agreements, covenants, representations and warranties made by such Other Shareholder in this Agreement.
9.3 INDEMNIFICATION BY THE BUYER. The Buyer shall be liable to each of the Shareholders and their respective heirs and assigns (collectively the "SHAREHOLDERS INDEMNIFIED PERSONS" and each a "SHAREHOLDERS INDEMNIFIED PERSON") and shall defend, indemnify and hold harmless all of the Shareholders Indemnified Persons against any and all Claims incurred or suffered by or imposed upon any of the Shareholders Indemnified Persons arising directly or indirectly out of:
(a) the breach of any agreement, covenant, representation or warranty of the Buyer contained in or contemplated by this Agreement or in any other agreement or document required to be furnished by the Buyer to the Shareholders hereunder; and
(b) the non-fulfilment of any agreement, covenant or obligation of the Buyer contained in this Agreement or in any agreement or document required to be entered into by the Buyer pursuant hereto, to the extent not waived in writing by the Shareholders;
provided that the amount of indemnification in relation to such Claims to be made by the Shareholder Indemnified Person pursuant to the provisions hereof shall be limited to a fraction of the total Claims resulting from the applicable breach determined by dividing the number of Buyer Shares of the share capital of the Buyer held by such Shareholder immediately after the Closing divided by the total number of Buyer Shares issued pursuant to this Agreement.
9.4 TAX INDEMNIFICATION.
(a) The Founding Shareholders agree, solidarily, to indemnify and hold harmless the Buyer Indemnified Parties against any Losses incurred or paid by a Buyer Indemnified Party, which arise as a result of (i) any liability for any Taxes imposed on the Company pursuant to federal, state, local or foreign law attributable to any periods ending on or before the date of the Closing, (ii) with respect to any Straddle Period, the portion of Taxes payable by or assessed against the Company which are properly allocable to the part of such Straddle Period ending on the date of the Closing, pursuant to Section 9.4(b) and (iii) any breach of the representations or warranties made by the Company and the Founding Shareholders in Section 2.11 (all such Losses being "TAX LOSSES"). Any indemnity payments to or from the Shareholders or to or from the Buyer pursuant to this Agreement, whether under this Section 9.4 or otherwise, shall be treated by the Buyer and the Shareholders as purchase price adjustments for all tax purposes. All indemnification obligations set forth in this Section 9.4(a) shall be treated as "TAX CLAIMS" for purposes of this Agreement.
(b) For purposes of this Section 9.4, with respect to any taxable year or period beginning before and ending after the date of the Closing (a "STRADDLE PERIOD"), an allocation of Taxes shall be made to the part of such Straddle Period which ends on the date of the Closing based on (i) the closing of the books method, in the case of income or any similar Taxes, (ii) the number of days elapsed between the beginning of such
Straddle Period to and including the date of the Closing in the case of property Taxes, and (iii) when the relevant transaction occurs, in the case of sales and gross receipts Taxes.
9.5 INDEMNIFICATION TO BE AFTER TAX, INSURANCE, ETC. The amount of the indemnification for any Claim which the Buyer Indemnified Persons and the Shareholder 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.
9.6 EXPIRY AND LIMITS OF LIABILITY OF SHAREHOLDERS.
(a) The representations and warranties of the Shareholders herein (other than those of the Shareholders with respect to the matters set forth in Section 9.6(b)), shall terminate on the date which is 90 days after the date the Buyer has publicly released its audited financial statements for the year ended August 31, 2003 except to the extent that, during such period, any Buyer Indemnified Person shall have given detailed notice (to the extent feasible) to the Shareholders 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 Section 9.6(a):
(i) representations and warranties herein of the Founding Shareholders with respect to the share capital and the share ownership of the Company as set forth in Sections 2.1, 2.2. and 2.4 and of the Other Shareholders under Article IV shall survive indefinitely;
(ii) representations and warranties herein of the Founding Shareholders relating to any liability of the Company 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 any Shareholder relating to any matter in the case of fraud, gross negligence, voluntary omission or bad faith on the part of that Shareholder.
(c) Notwithstanding the other provisions of this Article IX, no Claims with respect to breaches or failure of representations and warranties contemplated by Sections 9.6(b)(i) and 9.6(b)(iii) or contained in Article III may be made against the Founding Shareholders hereunder unless and until the aggregate amount of all Claims which may be made pursuant to this Agreement exceeds $250,000, in which event the Founding Shareholders shall become liable for the full amount of all Claims on a dollar for dollar basis, up to a maximum amount equal to:
(i) the Total Consideration received by such Founding Shareholders in the event of a Claim or Claims arising from a breach of a representation and warranty with respect to the matters set forth in Sections 2.1, 2.2 and 2.4 or Article III;
(ii) $10,000,000, in the event of a Claim or Claims arising from a breach of any representation and warranty set forth in Sections 2.3, 2.5, 2.7, 2.9, 2.10, 2.11, 2.13, 2.14, 2.15, 2.16, 2.17, 2.18, 2.19, 2.21 2.22 and 2.23; or
(iii) $21,102,432 in the event of a Claim or Claims arising from a breach of any representation and warranty set forth in Sections 2.6, 2.8, 2.12 (but subject to the provisions of Exhibit P), 2.20 and 2.25;
provided that in no event shall such liability exceed the Total Consideration received by such Founding Shareholders.
(d) Notwithstanding the other provision of this Article IX, no Claims with respect to breaches or failure of representations and warranties made by such Other Shareholder contemplated by Section 9.6(b)(i) and 9.6(b)(iii) or contained in Article III may be made against any Other Shareholder hereunder unless and until the aggregate amount of all Claims which may be made pursuant to this Agreement against such Other Shareholder exceeds $50,000, in which event such Other Shareholder shall become liable for the full amount of all Claims on a dollar for dollar basis, up to a maximum amount equal to the Total Consideration received by such Other Shareholder in the event of a Claim or Claims arising from a breach of a representation and warranty made by such Other Shareholder with respect to the matters set forth in Article III or Article IV.
(e) Any claims for which the Shareholders shall become liable shall be payable to the Buyer from the Escrow Fund on a dollar for dollar basis. In the event the Claims exceed the amount contained in the Escrow Fund, the Shareholders shall become liable for such further amount on a dollar for dollar basis, subject to Section 9.6(c) or (d), as the case may be. Without prejudice to the solidary obligations of the Founding Shareholders, to the extent that any Claims can be satisfied from the Escrow Funds, the Buyer will prorate its notices of Claim to the Escrow Agent in respect of the Founding Shareholders proportionally to their Escrowed Shares.
9.7 EXPIRY AND LIMITS OF LIABILITY OF BUYER.
(a) The representations and warranties of the Buyer shall terminate on the date which is 90 days after the date on which the Buyer has publicly released its audited financial statements for the year ended August 31, 2003 except to the extent that, during such period any Shareholders Indemnified Person shall have given detailed notice to the Buyer 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.
(b) Notwithstanding the foregoing provisions of Section 9.7(a):
(i) representations and warranties herein of the Buyer and Buyer Sub with respect to the Buyer Shares and the share capital of the Buyer shall survive in accordance with the applicable statute of limitations under the securities laws in Canada and the United States; and
(ii) notwithstanding the foregoing, there shall be no limit of time on the representations and warranties of the Buyer relating to any matter in the case of fraud, gross negligence, voluntary omission or bad faith on the part of the Buyer and Buyer Sub.
(c) Notwithstanding the other provisions of this Section 9.7, no Claims with respect to breaches or failure of representations and warranties contemplated by Section 9.6(b) may be made against the Buyer and Buyer Sub hereunder unless and until the aggregate amount of all Claims which may be made pursuant to this Agreement exceed $250,000, in which event the Buyer and Buyer Sub shall become liable for the full amount of all Claims on a dollar for dollar basis, up to a maximum amount equal to:
(i) the Total Consideration, in the event of a Claim or Claims arising from a breach of a representation and warranty with respect to the matters set forth in Sections 5.1, 5.2, 5.7 and 5.10, and;
(ii) $10,000,000 in the event of a Claim or Claims arising from a breach of any other representation and warranty set forth in this Agreement.
9.8 PROCEDURE. Promptly (but in no event more than 15 days) after receipt by a Buyer Indemnified Person or a Shareholder Indemnified Person (an "INDEMNIFIED PARTY") as the case may require) of notice of the commencement of any action, such Indemnified Party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 9.8, notify in writing the indemnifying party of the commencement thereof. In case any such action is brought against any Indemnified Party, and such Indemnified Party notifies the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, subject to the provisions hereof, with counsel reasonably satisfactory to such Indemnified Party. Following notification to the Indemnified Party of its election so to assume the defense thereof, the indemnifying party shall not be liable to such Indemnified Party under this Section 9.8 for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense there, other than reasonable costs of investigation. The Indemnified Party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action, within a reasonable time after notice of commencement of the action, with counsel reasonably satisfactory to the Indemnified Party; PROVIDED HOWEVER, that the indemnifying party shall be required to pay for Indemnified Party's counsel, if, such Indemnified Party shall have reasonably concluded, on reliance of the written opinion of counsel experienced in such matters, that there may be defenses available to it or him which are different from or additional to those
available to the indemnifying party (in which case indemnifying parties shall not have the right to direct the defense of action). No settlement of any action against an Indemnified Party shall be made without the consent of the Indemnifying Party, which shall not be unreasonably withheld. In the event that any Indemnified Party should have a direct claim against any indemnifying party hereunder that does not involve any third-party claim or claims asserted against the Indemnified Party, the Indemnified Party shall transmit to the indemnifying party a written notice describing in reasonable detail the nature of the claim, an estimate of the amount of damages attributable to such claim to the extent feasible (which estimate shall not be conclusive of the final amount of such claim) and the basis of the Indemnified Party's request for indemnification under this Article IX. If the indemnifying party does not notify the Indemnified Party within 90 days from its receipt of such notice that the indemnifying party disputes such claim, the claim specified by the Indemnified Party in the indemnity notice shall be deemed a liability of the indemnifying party hereunder. If the indemnifying party has timely disputed such claim, as provided above, such dispute shall be resolved by litigation in an appropriate court of competent jurisdiction. The parties agree that the sole and exclusive remedy which any party hereto shall have against any other party hereto under this Agreement shall be the right to proceed for indemnification in the manner and only to the extent provided in this Article IX.
ARTICLE X
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 (b) below):
(a) by the mutual written consent of the Buyer and the Shareholder Representative;
(b) by the Buyer or the Shareholder Representative, if the Closing shall not have occurred prior to the 90th day following the date hereof; PROVIDED, HOWEVER, that the right to terminate this Agreement under this Section 10.1(b) shall not be available to any party if such party's failure to fulfill 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;
(c) by the Shareholder Representative in the event a condition set forth in Section 7.1 or 7.3 becomes incapable of being fulfilled;
(d) by the Buyer in the event a condition set forth in
Section 7.1 or 7.2 becomes incapable of being fulfilled and in
particular by the Buyer pursuant to Section 7.2(q);
(e) by the Buyer in the event that a schedule of disclosure is amended or supplemented by the Company and which amendment or supplement is considered by the Buyer, acting reasonably, to have a Company Material Adverse Effect; or
(f) by the Shareholder Representative in the event that a schedule of disclosure is amended or supplemented by the Buyer and which amendment or supplement is considered by the Shareholder Representative, acting reasonably, to have a Buyer Material Adverse Effect.
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 Shareholders or the Buyer from liability for any breach of this Agreement or failure to perform hereunder. If this Agreement is terminated as provided herein, upon request therefore, each party will re-deliver all documents, workpapers and other material of any other party relating to the transactions contemplated hereby, whether obtained before or after the execution hereof, to the party furnishing the same.
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 XI
MISCELLANEOUS
11.1 ENTIRE AGREEMENT; AMENDMENTS. This Agreement, together with the Exhibits and Schedules hereto, 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 Exhibits and 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 facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (c) three business days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) two business days after deposit with recognized overnight courier, specifying next day delivery, with written verification of receipt. The address for all notices, requests, consents and other communications hereunder to the parties to this Agreement shall be delivered or sent to the following:
The Company:
Avantas Networks Corporation
2650 Marie-Curie
St. Laurent, Quebec
H4S 2C3
ATTENTION: SAMI YAZDI, PRESIDENT
Telephone: (514) 856-2222
Facsimile: (514) 856-2232
With a copy (which shall not constitute notice) to:
McCarthy Tetrault 1400-40 Elgin St.
Ottawa, Ontario
K1P 5K6
ATTENTION: ROBERT D. CHAPMAN
Telephone: (613) 238-2111
Facsimile: (613) 563-9386
The Buyer:
EXFO Electro-Optical Engineering Inc.
465 Godin Avenue
Vanier, Quebec
G1T 2M5
ATTENTION: GERMAIN LAMONDE, PRESIDENT
Telephone: (418) 683-0211
Facsimile: (418) 683-9839
With a copy (which shall not constitute notice) to:
Fasken Martineau DuMoulin LLP
Stock Exchange Tower
800 Place Victoria, 34th Floor
Montreal, Quebec
H4Z 1E9
ATTENTION: ROBERT PARE
Telephone: (514) 397-7517
Facsimile: (514) 397-7600
If to any of the Shareholders:
Sami Yazdi, as Shareholder and Shareholder
Representative
c/o Avantas Networks Corporation
2650 Marie-Curie
St. Laurent, Quebec
H4S 2C3
Telephone: (514) 856-2222
Facsimile: (514) 856-2232
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. The Company and the Shareholders may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Buyer. The Buyer may not assign this Agreement or any of the rights or obligations hereunder without the prior written consent of the Company and the Shareholder Representative.
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; CONSENT TO JURISDICTION; LANGUAGE. This Agreement shall be governed by and construed and enforced in accordance with the internal laws the Province of Quebec without regard to the principles of conflicts of law thereof. Each party hereby irrevocably consents to the jurisdiction of the courts located in the Province of Quebec, to adjudicate any dispute arising pursuant to this Agreement or the transactions contemplated hereby, and waives any objections thereto. Les parties ont expressement exige que cette convention ainsi que tous documents y afferents soient rediges en anglais. The parties have expressly requested that this Agreement and all notices related thereto be drafted in English only.
11.8 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.
11.9 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.
11.10 INTERPRETATION; CURRENCY. 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 the Company or the Company's "KNOWLEDGE" or any similar formulation shall mean the actual knowledge of Sami Yazdi, the Company's Chief Executive Officer and/or any officer of the Company. Any references to the "KNOWLEDGE" of the Buyer or the Buyer's "KNOWLEDGE" or any similar formulation shall mean the actual knowledge of the officers (as defined in Rule 16a-1(f) of the Exchange Act) of Buyer. Any references to "CLAIM" or "CLAIM" shall mean 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. The disclosure of any matter in any portion of the Disclosure Schedules hereto shall be deemed to be a disclosure for all purposes of this Agreement to which such matter could reasonably be likely to be pertinent, but shall expressly not be deemed to constitute an admission by the Company, the Shareholders or the Buyer, as the case may be, or to otherwise imply, that any such matter is material for the purposes of this Agreement. All currency amounts herein are expressed in United States dollars unless otherwise specified.
11.11 EFFECTIVENESS. This Agreement shall become effective on the
date at which Buyer shall have received a counterpart of this Agreement or an
intervention in the form of Exhibit N executed by the Founding Shareholders and
Other Shareholders of the Company holding in the aggregate at least two-thirds
of the issued and outstanding shares of each of (i) Series A Preferred Shares,
(ii) Series B1 Voting Preferred Shares, (iii) Series B2 Non-Voting Preferred
Shares and (iv) common shares of the Company including for purposes of
calculating such level of two thirds of the common shares of the Company, all
common shares issuable upon the exercise of the in the money options as
described in Section 1.5(i).
IN WITNESS WHEREOF, the parties hereto have caused this Agreement of Merger to be duly executed by their respective authorized signatories as of the date first indicated above.
AVANTAS NETWORKS CORPORATION
By: /s/ Sami Yazdi
---------------------------------------
Name: Sami Yazdi
---------------------------------------
Title: President and Chief Executive Officer
---------------------------------------
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EXFO ELECTRO-OPTICAL ENGINEERING INC.
By: /s/ Germain Lamonde
---------------------------------------
Name: Germain Lamonde
---------------------------------------
Title: President
---------------------------------------
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EXFO ELECTRO-OPTICAL ENGINEERING INC. FOR A WHOLLY-OWNED CORPORATION TO BE INCORPORATED UNDER THE LAWS OF CANADA
By: /s/ Germain Lamonde
---------------------------------------
Name: Germain Lamonde
---------------------------------------
Title: President
---------------------------------------
/s/ Sami Yazdi
-----------------------------------------------
SAMI YAZDI
/s/ Giovanni Forte
-----------------------------------------------
GIOVANNI FORTE
/s/ Nando DiGiambattista
-----------------------------------------------
NANDO DIGIAMBATTISTA
/s/ Sergio Prestipino
-----------------------------------------------
SERGIO PRESTIPINO
/s/ Patric Ostiguy
-----------------------------------------------
PATRIC OSTIGUY
/s/ Stephane Bonenfant
-----------------------------------------------
STEPHANE BONENFANT
/s/ Claude Richer
-----------------------------------------------
CLAUDE RICHER
/s/ Jocelyn Ouellet
-----------------------------------------------
JOCELYN OUELLET
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EXHIBIT 4.4
AMENDMENT NUMBER ONE
DATED AS OF NOVEMBER 1, 2001
TO
AGREEMENT OF MERGER
DATED AS OF AUGUST 20, 2001
BY AND AMONG
EXFO ELECTRO-OPTICAL ENGINEERING INC.,
3905268 CANADA INC.
AVANTAS NETWORKS CORPORATION
AND
SHAREHOLDERS OF AVANTAS NETWORKS CORPORATION
AMENDMENT NUMBER ONE TO
AGREEMENT OF MERGER
This AMENDMENT NUMBER ONE (this "AMENDMENT") dated as of November 1, 2001 amends that certain AGREEMENT OF MERGER (the "AGREEMENT") dated as of August 20, 2001 among EXFO Electro-Optical Engineering Inc., incorporated pursuant to the CANADA BUSINESS CORPORATIONS ACT (the "BUYER"), EXFO Electro-Optical Engineering Inc., for a corporation to be incorporated (the "BUYER SUB"), AVANTAS NETWORKS CORPORATION, a corporation incorporated pursuant to the CANADA BUSINESS CORPORATIONS ACT (the "COMPANY") and all of the Shareholders of the Company (the "SHAREHOLDERS"). Defined terms not otherwise defined herein shall have the meaning ascribed to them in the Agreement.
WHEREAS the parties wish to amend the Agrement in order to ensure the proper tax treatment of the Prior Investments and to reflect certain amendments made to the articles of the Company after the signature of the Agreement.
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 fourth paragraph under the title "RECITALS" of the Agreement is hereby amended by deleting it in its entirety and shall be replaced with the following so as to read as follows:
"WHEREAS, prior to the Effective Time, Buyer Sub will have acquired some of the shares held by JDS Uniphase Inc. in the share capital of the Company for a total amount of $31,054,980.54 (the "PRIOR INVESTMENTS")."
2. The last paragraph of Section 1.5 of the Agreement is hereby amended by deleting the reference to "$36 million" and replacing same with the symbol and number "$34,054,980.54".
3. The fifth paragraph under the title "RECITALS" of the Agreement is hereby amended by adding the words "and Series C Preferred Shares" immediately after the words "Series B2 Non-Voting Preferred Shares".
4. The identification of the parties to the Agreement is amended as follows:
The reference to "a corporation to be incorporated under the laws of Canada" is replaced by "3905268 Canada Inc.".
5. Section 1.5(i) of the Agreement is amended by deleting it in its entirety and shall be replaced by the following so as to read as follows:
"1.5 PRIOR INVESTMENTS
(i) Prior to the Effective Time, the Company shall acquire for a consideration payable in cash only, certain of the "in the money" options from their respective holders as set forth in Exhibit L which have exercised the election, representing the difference between the exercise price of such options and $2.79 and the Company will permit the cashless exercise of certain of the "in the money" options from the respective holders as set forth in Exhibit L. In order to give effect to the foregoing, the stock option plan of the Company shall be amended in order to permit the option holders to elect to receive the cash consideration and the Company Shares, as set forth in Exhibit L and such option-holders shall agree to so elect the cash consideration or to effect the cashless options in conformity with Exhibit L."
6. Exhibit A of the Agreement is deleted in its entirety and replaced by Exhibit A attached hereto.
7. Exhibit C of the Agreement is deleted in its entirety and replaced by Exhibit C attached hereto.
8. Exhibit L of the Agreement is deleted in its entirety and replaced by Exhibit L attached hereto.
9. 3905268 Canada Inc. agrees to be bound by each representation, warranty and covenant made by Buyer Sub in the Agreement as if it 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
---------------------------------------
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AVANTAS NETWORKS CORPORATION
By: /s/ Sami Yazdi
---------------------------------------
Name: Sami Yazdi
---------------------------------------
Title: President and Chief Executive Officer
---------------------------------------
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3905268 CANADA INC.
By: /s/ Germain Lamonde
---------------------------------------
Name: Germain Lamonde
---------------------------------------
Title: President
---------------------------------------
/s/ Sami Yazdi
---------------------------------------
SAMI YAZDI, on his behalf and on behalf
of all of the Shareholders listed in
Schedule A hereto
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JDS UNIPHASE INC.
By: /s/ Ken Scott
---------------------------------------
Name: Ken Scott
---------------------------------------
Title: Vice President
---------------------------------------
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BUSINESS DEVELOPMENT BANK OF CANADA
By: /s/ G.R. Cornwall
---------------------------------------
Name: G.R. Cornwall
---------------------------------------
Title: Managing Director
---------------------------------------
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SOCIETE INNOVATECH DU GRAND MONTREAL
By: /s/ Hubert Manseau
---------------------------------------
Name: Hubert Manseau
---------------------------------------
Title: President
---------------------------------------
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VENTURES WEST VI LIMITED PARTNERSHIP
By: Ventures West Management VI Ltd.,
its general partner
By: /s/ David Berkowitz
---------------------------------------
Name: David Berkowitz
---------------------------------------
Title: Vice President
---------------------------------------
By: /s/ Howard Riback
---------------------------------------
Name: Howard Riback
---------------------------------------
Title: Authorized Signatory
---------------------------------------
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VENTURES WEST 7 LIMITED PARTNERSHIP
By: Ventures West 7 Management Ltd.,
its general partner
By: /s/ David Berkowitz
---------------------------------------
Name: David Berkowitz
---------------------------------------
Title: Vice President
---------------------------------------
By: /s/ Howard Riback
---------------------------------------
Name: Howard Riback
---------------------------------------
Title: Authorized Signatory
---------------------------------------
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VENTURES WEST 7 U.S. LIMITED PARTNERSHIP
By: Ventures West 7 Management
(International), Inc.,
its manager
By: /s/ David Berkowitz
---------------------------------------
Name: David Berkowitz
---------------------------------------
Title: Vice President
---------------------------------------
By: /s/ Howard Riback
---------------------------------------
Name: Howard Riback
---------------------------------------
Title: Authorized Signatory
---------------------------------------
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BANK OF MONTREAL CAPITAL CORPORATION
By: Ventures West Management TIP, Inc.,
its manager
By: /s/ David Berkowitz
---------------------------------------
Name: David Berkowitz
---------------------------------------
Title: Vice President
---------------------------------------
By: /s/ Howard Riback
---------------------------------------
Name: Howard Riback
---------------------------------------
Title: Authorized Signatory
---------------------------------------
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SKYPOINT CAPITAL CORPORATION
By: /s/ Andrew Kate
---------------------------------------
Name: Andrew Kate
---------------------------------------
Title: President
---------------------------------------
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EXHIBIT 4.8
THIS AGREEMENT is made as of November 2, 2001
BETWEEN: JDS UNIPHASE INC., a corporation
incorporated under the laws of Canada,
having its offices at 570 West Hunt Club
Road Nepean, Ontario, K2G 5W8,
(hereinafter, the "SELLER"); AND:
3905268 CANADA INC., a corporation
incorporated under the laws of Canada,
having its head office at 465 Godin
Ave., Vanier, Quebec, GIM 3G7,
(hereinafter, the "BUYER");
WHEREAS EXFO Electro-Optical Engineering Inc., the Buyer, the Company,
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Sami Yazdi, Giovanni Forte, Nando Digiambattista, Sergio Prestipino, Patrick Ostiguy, Stephane Bonenfant, Claude Richer and Jocelyn Ouellet have entered into an agreement of merger dated as of August 20, 2001, as amended, (the "AGREEMENT OF MERGER") to which the Seller has intervened on August 20, 2001;
WHEREAS the Agreement of Merger provides for the purchase by the Buyer from the Seller of certain shares of the Company held by the Seller, prior to the closing of the transactions contemplated therein;
WHEREAS the Buyer wishes to purchase the Shares and the Seller has agreed to sell the Shares to the Buyer, the whole on the terms and conditions herein set forth;
IN CONSIDERATION of the mutual covenants, agreements, representations and warranties contained in this Agreement, and of other good and valuable consideration (the receipt and sufficiency of which are acknowledged by each Party), the Parties agree as follows:
ARTICLE 1
INTERPRETATION
1.1 DEFINITIONS. In this Agreement,
"AGREEMENT" means this share purchase agreement including all attached schedules, as the same may be supplemented, amended, restated or replaced from time to time;
"APPLICABLE LAW" means any domestic statute, law, ordinance, regulation, by-law (zoning or otherwise) or any order, judgment, injunction, decree, award or writ of any court, tribunal, arbitrator, Governmental Authority, or other Person having jurisdiction, that applies to the Seller, the Buyer or the Company;
"ARTICLES" means the articles of incorporation, amendment, continuance and amalgamation, as the case may be, of the Company;
"BUSINESS DAY" means a day other than a Saturday or Sunday on which Canadian chartered banks are open for the transaction of domestic business in Montreal, Quebec;
"CLAIMS" means any demand, action, cause of action, damage, loss, cost, liability, expense or requirements, governmental or otherwise, including the cost of legal representation in respect thereof and any interest or penalty arising in connection therewith;
"CLOSING" means the completion of the sale to, and purchase by, the Buyer of, the Shares and the completion of all other transactions contemplated by this Agreement which are to occur contemporaneously with the purchase and sale of the Shares;
"CLOSING DATE" means the date of execution of this Agreement, which will take place at the offices of Fasken Martineau DuMoulin LLP, Stock Exchange Tower, Suite 3400, 800 Place Victoria, Montreal, Quebec.
"CLOSING DOCUMENT" means any document delivered at or subsequent to the Closing Date as provided in or pursuant to this Agreement;
"COMPANY" means Avantas Networks Corporation;
"ENCUMBRANCE" means any security interest, mortgage, lien, hypothec, pledge, hypothecation, assignment, charge, deemed trust, voting trust or pooling agreement with respect to securities, an adverse claim or any other right or option, affecting the Shares;
"GOVERNMENTAL AUTHORITY" means any domestic government whether federal, provincial or municipal and any governmental agency, governmental authority, governmental tribunal, governmental commission or regulatory authority of any kind whatever;
"INCLUDING" means "including without limitation" and the term "including" shall not be construed to limit any general statement which it follows to the specific or similar items or matters immediately following it;
"LIABILITIES" means all costs, expenses, charges, debts, liabilities claims, demands and obligations, whether primary or secondary, direct or indirect, fixed, contingent, absolute
or otherwise, under or in respect of any contract, agreement, arrangement, lease, commitment or undertaking, applicable laws and taxes;
"PARTIES" means the Buyer and the Seller collectively, and "Party" means any one of them;
"PERSON" shall be broadly interpreted and includes an individual, body corporate, partnership, joint venture, trust, association, unincorporated organization, the Crown, any Governmental Authority or any other entity recognized by law;
"PURCHASE PRICE" means the purchase price to be paid by the Buyer to the Seller as provided in Section 2.2;
"SHAREHOLDER'S AGREEMENT" means the shareholder's agreement among the shareholders of the Company dated as of December 21, 2000;
"SHARES" means [4,678,875 series B1 Voting Preferred Shares and 584,859 series B2 Non Voting Preferred Shares] in the share capital of the Company;
1.2 HEADINGS. The division of this Agreement into articles, sections, subsections and schedules and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. The article, section, subsection and schedule headings in this Agreement are not intended to be full or precise descriptions of the text to which they refer and are not to be considered part of this Agreement. All uses of the words "hereto", "herein", "hereof", "hereby" and "hereunder" and similar expressions refer to this Agreement and not to any particular section or portion of it. References to an Article, Section, Subsection or Schedule refer to the applicable article, section, subsection or schedule of this Agreement.
1.3 NUMBER AND GENDER. In this Agreement, words in the singular include the plural and vice-versa and words in one gender include all genders.
1.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all prior agreements, negotiations, discussions and understandings, written or oral, between the Parties with the exception of applicable terms of the Agreement of Merger. There are no representations, warranties, conditions, other agreements or acknowledgements, whether direct or collateral, express or implied, that form part of or affect this Agreement, or which induced any Party to enter into this Agreement or on which reliance is placed by any Party, except as specifically set forth in this Agreement, in the Closing Documents or in the Agreement of Merger.
1.5 AMENDMENT. This Agreement may be amended, modified or supplemented only by a written agreement signed by all Parties.
1.6 WAIVER OF RIGHTS. Any waiver of, or consent to depart from the requirements of any provision of this Agreement shall be effective only if it is in writing and signed by the Party giving it, and only in the specific instance and for the specific purpose for which it has been given. No failure on the part of any Party to exercise, and no delay in exercising, any right under this Agreement shall operate as a waiver of such right. No single or partial exercise of any such right shall preclude any other or further exercise of such right or the exercise of any other right.
1.7 APPLICABLE LAW. This Agreement shall be governed by, and interpreted and enforced in accordance with the laws in force in the Province of Quebec (excluding any conflict of laws, rule or principle which might refer such interpretation to the laws of another jurisdiction).
1.8 CURRENCY. Unless specified otherwise, all statements of or references to dollar amounts in this Agreement are to lawful money of the United States of America.
1.9 PERFORMANCE ON HOLIDAYS. If any action is required to be taken pursuant to this Agreement on or by a specified date which is not a Business Day, then such action shall be valid if taken on or by the next succeeding Business Day.
ARTICLE 2
PURCHASE AND SALE OF SHARES AND PROMISSORY NOTE
2.1 PURCHASE AND SALE OF SHARES. The Buyer hereby purchases the Shares and the Seller hereby irrevocably and unconditionally sells, assigns, transfers and conveys the Shares to the Buyer all as provided in this Agreement.
2.2 PURCHASE PRICE. The Purchase Price for the Shares is US$31,054,980.54, payable at Closing by way of a non-interest bearing promissory note (the "NOTE"), which Note shall be paid in full upon the completion of the transactions set forth in the Agreement of Merger.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE SELLER
In order to induce the Buyer to enter into this Agreement, the Seller represents and warrants to Buyer the matters set forth below, which shall be true on the date of execution hereof and on the Closing Date:
3.1 AUTHORISATION. The Seller 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 Seller and the consummation by it of the transactions contemplated hereby have been
duly authorised by all necessary action on its part, and no further action is required by the Seller. This Agreement has been duly executed by the Seller and, assuming this Agreement constitutes a valid and binding obligation of the Buyer, this Agreement constitutes a valid and binding agreement of the Seller enforceable against the Seller 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 Seller, as a result of executing this Agreement and performing its obligations hereunder, is not in violation of any of the provisions of its certificate or incorporation, bylaws or other organisational documents.
3.2 OWNERSHIP OF COMPANY SHARES. The Seller has the right, power and authority to sell, transfer, assign, vote and deliver the Shares being sold by it hereunder. Immediately prior to the delivery of the Shares to the Buyer, the Seller will be the sole registered and beneficial owner of the Shares it holds and have good and valid title to such Shares, free and clear of all Encumbrances and restrictions on transfer other than those in the articles of the Company and which shall have been complied with at Closing. Except for the Shareholders' Agreement, 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 Seller is a party, obligating the Seller to deliver or sell, or cause to be delivered or sold, contingently or otherwise, such Shares. Except for the Shareholders' Agreement, there are no voting trust agreements or other contracts, agreements, arrangements, commitments, plans or understandings to which the Seller is a party restricting or otherwise relating to voting, dividend or other rights with respect to the Shares.
3.3 CONSENTS AND APPROVALS. No consent, approval, order or authorisation of, or registration, declaration or filing, is required by or with respect to the Seller in connection with the execution and delivery of this Agreement by the Seller or the consummation by it of the transactions contemplated by this Agreement.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE BUYER
Buyer hereby represents and warrants to the Seller, as of the date hereof, as follows:
4.1 AUTHORIZATION. The Buyer 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 Buyer and the consummation by it of the transactions contemplated hereby have been duly authorized by all necessary action on its part and no further action is required by the Buyer. This Agreement has been duly executed by the Buyer and, assuming this
Agreement constitutes a valid and binding obligation of the Seller, this Agreement constitutes a valid and binding agreement of the Buyer enforceable against the Buyer in accordance with its terms, subject, however, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general principles of equity, regardless of whether such enforceability is considered in equity or at law.
4.2 CONSENTS AND APPROVALS. No consent, approval, order or authorization of, or registration, declaration or filing with respect to the Buyer in connection with the execution and delivery of this Agreement by the Buyer or the consummation by the Buyer of the transactions contemplated by this Agreement.
ARTICLE 5
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
5.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations and warranties made by the Seller or the Buyer in this Agreement shall terminate on the date which is 90 days after the date EXFO Electro-Optical Engineering Inc. has publicly released its audited financial statements for the year ended August 31, 2003 except to the extent that, during such period, any Party shall have given detailed notice (to the extent feasible) to the other Party 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.
ARTICLE 6
INDEMNIFICATION
6.1 INDEMNIFICATION BY THE SELLER. The Seller shall be liable to the Buyer and shall defend, indemnify and hold harmless the Buyer against any and all Claims incurred or suffered by or imposed upon the Buyer or the Company arising directly or indirectly out of:
6.1.1 the breach of any representation or warranty of the Seller
contained in or contemplated by this Agreement or in any other
agreement or document required to be furnished by the Seller
to the Buyer hereunder,; and;
6.1.2 the breach or non-fulfilment of any agreement, covenant,
undertaking or obligation of the Seller contained in this
Agreement.
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6.2 INDEMNIFICATION BY THE BUYER. The Buyer shall be liable to the Seller and shall defend, indemnify and hold harmless the Seller against any and all Claims incurred or suffered by or imposed upon any of the Seller arising directly or indirectly out of:
6.2.1 the breach of any representation or warranty of the Buyer
contained in or contemplated by this Agreement or in any other
agreement or document required to be furnished by the Buyer to
the Seller hereunder; and
6.2.2 the breach or non-fulfilment of any agreement, covenant,
undertaking or obligation of the Buyer contained in this
Agreement.
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6.3 THIRD PARTY CLAIMS. With respect to third party claims, the following indemnification procedures shall apply:
6.3.1 promptly upon receipt by the Buyer or the Company or the
Seller (in this paragraph referred to as the "INDEMNITEE"), as
the case may be, of notice of any demand or statement by or on
behalf of any person or entity other than the Buyer or the
Seller which, if maintained or enforced, will or might result
in any Claim of the nature described in Section 6.1 or 6.2
("THIRD-PARTY CLAIM") in respect of which the Indemnitee
proposes to demand indemnification from the Buyer or the
Seller (in this section referred to as the "INDEMNITOR"), as
the case may be, pursuant to the provisions hereof, the
Indemnitee shall give written notice to that effect to the
Indemnitor with reasonable promptness;
6.3.2 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 6.3.1 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;
6.3.3 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 the retention of
counsel, and, in connection therewith, the Indemnitee shall
cooperate 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;
6.3.4 the final determination of any such Third-Party Claim,
including all related costs and expenses, shall be binding and
conclusive upon the Parties hereto, 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 6.3, 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 consent of the Indemnitee;
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-8-
6.3.5 should the Indemnitor fail to give notice to the Indemnitee as
provided in Subsection 6.3.2, 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.
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6.4 EXCLUSIVE REMEDY FOR DAMAGES. The rights of indemnity set forth in this Article 6 are the sole and exclusive remedy of each Party in respect of a Claim by any Party hereunder or under any Closing Document, provided however that nothing herein shall limit a Party's recourse to any equitable remedies. Article 6 shall remain in full force and effect in all circumstances and shall not be terminated by any breach (fundamental, negligent or otherwise) by any Party of its representations, warranties or covenants hereunder or under any Closing Document or by any termination or rescission of this Agreement or any Closing Document or any part hereof or thereof.
ARTICLE 7
CLOSING DOCUMENTS
7.1 CLOSING DOCUMENTS. In addition to any agreements or deeds required to give effect to the transfer of the Shares in favour of the Buyer, the Parties agree to enter into or to deliver the following agreements and documents at the Closing Date, which agreements and documents shall be satisfactory to the Buyer and the Seller and their respective counsel, acting reasonably:
7.1.1 the Note representing the amount of the Purchase Price;
7.1.2 share certificates representing the Shares duly endorsed by
the Seller in blank for transfer to the Buyer;
7.1.3 legal opinion of counsel of each of the Company and the Seller
satisfactory to the Buyer, acting reasonably.
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ARTICLE 8
POST-CLOSING DOCUMENTS
8.1 The Parties agree to enter into or deliver the following agreements and documents upon the completion of the transactions set forth in the Agreement of Merger: certified cheques or bank drafts drawn by the Buyer, or on its behalf, and payable to the order of the Seller in payment of the Note at Closing, and a receipt and release therefor.
ARTICLE 9
GENERAL
9.1 EXPENSES. Each Party shall pay all expenses it incurs in authorizing, preparing, executing and performing this Agreement and the transactions contemplated hereunder, whether or not the Closing occurs, including all fees and expenses of its legal counsel, accountants or other representatives or consultants.
9.2 COMMISSION. Each Party represents and warrants to the other Party that such other Party will not be liable for any brokerage commission, finder's fee or other similar payment in connection with the transactions contemplated hereby because of any action taken by, or agreement or understanding reached by, the first Party.
9.3 TIME. Time is of the essence of each provision of this Agreement.
9.4 NOTICES. Any demand, notice or other communication to be given in connection with this Agreement will be given in writing and will be given by personal delivery, by registered mail or by electronic means of communication addressed to the recipient as follows:
To the Seller:
JDS UNIPHASE INC. INC.
570 West Hunt Club Road
Nepean, Ontario
K2G 5W8
Attention: Ken Scott
Fax No.: (613) 727-1852
To the Buyer:
3905268 CANADA INC.
465 Godin Avenue
Vanier, Quebec
G1M 3G7
ATTENTION: GERMAIN LAMONDE, PRESIDENT
Fax No.: (418) 683-9839
With a copy to:
Robert Pare
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FASKEN MARTINEAU DUMOULIN
Stock Exchange Tower
Suite 3400
800 Place-Victoria
Montreal, Quebec
H4Z 1E9
or to such other address, individual or electronic communication number as may be designated by notice given by either party to the other. Any demand, notice or other communication given by personal delivery will be conclusively deemed to have been given on the day of actual delivery thereof and, if given by registered mail, on the fifth Business Day following the deposit thereof in the mail, and, if given by electronic communication, on the day of transmittal thereof if given during the normal business hours of the recipient and on the Business Day during which such normal business hours next occur if not given during such hours on any day. If the party giving any demand, notice or other communication knows or ought reasonably to know of any difficulties with the postal system that might affect the delivery of mail, any such demand, notice or other communication may not be mailed but must be given by personal delivery or by electronic communication.
9.5 PUBLIC ANNOUNCEMENTS. From the date of this Agreement until the earlier of the Closing or the termination of this Agreement, no party hereto 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 Buyer (in the case of the Seller) or the Seller (in the case of Buyer), which consent shall not be unreasonably withheld; PROVIDED, HOWEVER, that: (a) 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 reasonably determines such action to be required by law, or the regulations of any government agency or the exchanges or markets on which shares of the Seller of the Buyer are traded, in which case the party making such determination will, to the greatest extent practicable in light of the circumstances, use best efforts to allow the other party reasonable time to comment on such release or announcement in advance of its issuance; and (b) Buyer and the Seller 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.
9.6 ASSIGNMENT. Neither Party may assign any rights or benefits under this Agreement, including the benefit of any representation or warranty, to any Person. Each Party agrees to perform its obligations under this Agreement itself, and not to arrange in any way for any other Person to perform those obligations. No assignment of benefits or arrangement for substituted performance by one Party shall be of any effect against the other Party except to the extent that other Party has consented to it in writing. Subject to the foregoing, 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).
9.7 FURTHER ASSURANCES. Each Party shall do such acts and shall execute such further documents, conveyances, deeds, assignments, transfers and the like, and will cause the doing of such acts and will cause the execution of such further documents as are within its power as any other Party may in writing at any time and from time to time reasonably request be done and or executed, in order to give full effect to the provisions of each Closing Document.
9.8 COUNTERPARTS. This Agreement may be executed in any number of counterparts. Each executed counterpart shall be deemed to be an original. All executed counterparts taken together shall constitute one agreement.
TO WITNESS their agreement, the Parties have duly executed this Agreement at Montreal, Quebec, as of the date indicated hereinabove.
JDS UNIPHASE INC.
By: /s/ Ken Scott
---------------------------------------
Name: Ken Scott
---------------------------------------
Title: Vice President
---------------------------------------
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3905268 CANADA INC.
By: /s/ Germain Lamonde
---------------------------------------
Name: Germain Lamonde
---------------------------------------
Title: President
---------------------------------------
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EXHIBIT 4.13
November 30, 2001
Mr. Pierre Plamondon
EXFO
465 Godin Avenue
Vanier, Quebec
G1M 3G7
RE: RENEWAL OF LEASES
Dear Sir:
We hereby advise you that we are hereby exercising our right to renew the existing leases between 9080-9823 Quebec inc. and EXFO, on the same terms and conditions, for the buildings situated at 465 Godin Avenue and 436 Nolin Avenue in Vanier.
Hoping everything to your entire satisfaction.
9080-9823 QUEBEC INC.
PER: /s/ Germain Lamonde
-------------------
GERMAIN LAMONDE
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EXHIBIT 4.24
[GRAPHIC OMITTED]
[LOGO - EXFO]
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") dated as of September 1, 2000, is entered into by and between EXFO Electro-Optical Engineering Inc., a corporation having its principal place of business at 465 Godin Avenue, Vanier, Quebec, G1M 3G7, Canada (the "Corporation") and Bruce Bonini (the "Employee").
In consideration of this Agreement and the continued employment of the Employee by the Corporation, the parties agree as follows :
The Corporation hereby agrees to continue to employ Employee, on a full-time basis commencing on or about September 1, 2000 to act as Vice-President, North American Sales of EXFO America Inc., the Corporation's wholly owned subsidiary, and to perform such acts and duties and furnish such services to the Corporation in connection with and related to that position as is customary for persons with similar positions in like companies. Employee hereby accepts said employment. Employee shall use his best and most diligent efforts to promote the interests of the Corporation; shall discharge his duties in a highly competent manner; and shall devote his full business time and his best business judgement, skill and knowledge to the performance of his duties and responsibilities hereunder. This Agreement shall not be interpreted to prohibit Employee from making passive personal investments or conducting private business affairs if such activities do not materially interfere with the services required under this Agreement. Employee shall report to the President and Chief Executive Officer of the Corporation.
The Employee shall carry out his duties in the Corporation's office indicated in Schedule A.
2.1 SALARY
During the term of this Agreement, the Corporation shall pay Employee the remuneration indicated in Schedule A. The Employee's remuneration may be adjusted in accordance with the Corporation's policies and procedures.
2.2 DISCRETIONARY BONUS
During the term of this Agreement, the Employee may participate in such bonus plan or plans of the Corporation as the Board of Directors or its Human Resources Committee may approve for the Employee. Nothing contained in this Section 2.2 shall be construed to require the Board of Directors to approve a bonus plan or in any way grant to Employee the right to receive bonuses not otherwise approved.
2.3 BENEFITS
During the term of this Agreement, the Employee shall receive such benefits as customarily provided to other officers and employees of the Corporation. Details of such benefits as of the date hereof are set forth in Schedule B of this Agreement.
2.4 VACATION
Employee may take paid vacation during each year as set forth in Schedule A at such times as shall be consistent with the Corporation's vacation policies and (in the Corporation's judgement) with the Corporation's vacation schedule for officers and other employees.
2.5 EXPENSES
Pursuant to the Corporation's customary policies in force at the time of payment, Employee shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorised expenses properly incurred by him on the Corporation's behalf in the performance of his duties hereunder.
3.1 DISABILITY
If during the term of this Agreement, Employee becomes ill,
disabled or otherwise incapacitated so as to be unable to
perform his usual duties (a) for a period in excess of one
hundred and eighty (180) consecutive days, or (b) for more
than one hundred eighty (180) days in any consecutive twelve
(12) month period and this incapacity has not been remedied by
the end of the twelfth (12th) month of such consecutive twelve
(12) month period, then the Corporation shall have the right
to terminate this Agreement, subject only to applicable laws,
on thirty (30) day's notice to Employee. Termination pursuant
to this Section 3.1 shall not affect any rights Employee may
otherwise have under any disability insurance policies in
effect at the time of such termination.
3.2 DISCHARGE FOR CAUSE
The Corporation may discharge Employee and terminate his employment under this Agreement for cause without further liability to the Corporation. As used in this Section 3.2, "cause" shall mean any or all of the following;
(a) gross or wilful misconduct of Employee during the course of his employment;
(b) conviction of any criminal offence involving dishonesty, breach of trust or moral turpitude during the term of this Agreement; or
(c) Employee's breach of any of the material terms of this Agreement.
3.3 TERMINATION WITHOUT CAUSE
Upon thirty (30) days prior written notice, the Corporation
may terminate this Agreement without cause by a majority vote
of the Board of Directors of the Corporation except that the
Employee, if a Director, shall not be entitled to vote
thereon. The Corporation shall incur no liability in this
regard except that it shall continue to pay Employee the
remuneration set forth in Schedule A at his then current base
salary and commission (such commission being based on the
amount paid to the Employee as commission over the twelve (12)
month period preceding the termination) as set forth in
Schedule A for a twelve (12) month period after termination if
such termination shall occur prior to the events mentioned in
Section 3.4, otherwise the terms of Section 3.4 shall apply.
3.4 TERMINATION FOLLOWING MERGER OR ACQUISITION
If the Corporation merges or consolidates with another corporation, if substantially all of the assets of the Corporation are sold, or if a majority of the outstanding stock of the Corporation is acquired by another person and Employee's employment is subsequently terminated by the Corporation or surviving entity other than for cause as described in 3.2, Employee shall be entitled to severance benefits as described below based on length of service with the Corporation:
LENGTH OF SERVICE SEVERANCE BENEFITS
0 to 5 years 12 months' remuneration plus health
benefits;
more than 5 years 18 months' remuneration plus health
benefits.
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In addition to the foregoing, any outstanding stock options
(including substituted stock options of the acquiring or
surviving corporation in such merger or acquisition) which
have not vested in accordance with their terms will become
fully vested and the Employee may choose to exercise such
stock options at the time of such termination, otherwise these
stock options shall be automatically terminated immediately
following the termination of Employee's employment. For
purposes of this Section 3.4, Employee shall be entitled to
treat a material demotion in title or function as termination
under this Section 3.4, but only if Employee expressly so
notifies the Corporation and terminates his employment
hereunder within thirty (30) days of such demotion or
relocation. If Employee is offered a substantially similar
position with the surviving entity, Employee's refusal to
accept such position shall not be treated as subject to this
Section 3.4, but rather shall be treated as a voluntary
termination by Employee under Section 3.5.
3.5 VOLUNTARY TERMINATION BY EMPLOYEE
In the event of voluntary termination by Employee, Employee shall be entitled only to those amounts that have accrued to the date of termination in accordance with the terms hereof or are expressly payable under the terms of the Corporation applicable benefit plans or are required by applicable law. The Corporation may, in its sole and absolute discretion, confer such other benefits or payments as it determines, but Employee shall have no entitlement thereto.
4.1 INSURANCE
The Corporation hereby represents that it is presently the holder of directors and officers insurance in an amount and having a coverage that is recommended by its legal advisors and insurance broker as adequate taking into account the status of the Corporation, its size and the nature of its activities. The Corporation undertakes to ensure that such insurance shall remain in force throughout the term of this Agreement and in the event such insurance is cancelled, the Corporation shall immediately advise the Employee in writing.
4.2 ADDITIONAL AGREEMENTS
Upon execution of this Agreement, the Employee shall execute and deliver to the Corporation, unless previously delivered, an Exclusivity, Confidentiality, Assignment of Work Product, Non-Competition and Non-Solicitation Agreement, a copy of which is joined hereto as Annexe C.
4.3 NOTICES
Any notice or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by certified mail, return receipt requested, postage prepaid, to the addresses provided above. All notices shall be deemed given when actually received. Any person entitled to receive notice (or a copy thereof) may designate in writing, by notice to the others, such other address to which notices to such person shall thereafter be sent.
4.4 ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes all prior agreements and understandings between the parties with respect to such subject matter, provided, however that nothing in this Agreement shall affect the Employee's obligations under the Exclusivity, Confidentiality, Assignment Of Work Product, Non-Competition And Non-Solicitation Agreement signed by the Employee.
4.5 AMENDMENT WAIVER
This Agreement may not be amended, supplemented, cancelled or discharged, except by written instrument executed by the party affected thereby. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any breach of any provision of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision.
4.6 BINDING EFFECT, ASSIGNMENT
Employee's rights or obligations under this Agreement may not be assigned by Employee. The rights and obligations set forth in this Agreement shall bind and inure to the benefit of the Corporation and its successors and assigns. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it as if no such event had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as herein before defined any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
4.7 HEADINGS
The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
4.8 GOVERNING LAW, INTERPRETATION
This Agreement shall be construed in accordance with and governed for all purposes by the laws applicable in the state of Texas, U.S.A. Service of process in any dispute shall be effective (a) upon the Corporation, if service is made on any officer of the Corporation other than the Employee; (b) upon the Employee, if served at Employee's residence last known to the Corporation with an information copy to the Employee at any other residence, or care of a subsequent employer, of which the Corporation may be aware.
4.9 FURTHER ASSURANCES
Each of the parties agrees to execute, acknowledge, deliver and perform, or cause to be executed, acknowledged, delivered and performed at any time, or from time to time, as the case may be, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be necessary or proper to carry out the provisions or intent of this Agreement.
4.10 LANGUAGE
This Agreement has been written in English at the express request of the parties. Cette entente a ete redigee en anglais a demande expresse des parties.
4.11 SEVERABILITY
If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
EXFO ELECTRO-OPTICAL
ENGINEERING INC.
BY: /s/ Germain Lamonde /s/ Bruce Bonini
------------------- ----------------
GERMAIN LAMONDE BRUCE BONINI
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SCHEDULE A
TO
BRUCE BONINI EMPLOYMENT AGREEMENT
1. REMUNERATION
From September 1, 2000 to August 31, 2001:
(i) Base salary of US$145,000 per annum.
(ii) A variable portion of remuneration of US$14,500 per annum upon attainment by the Corporation of 100% of the Health Indicator established by the Board of Directors of the Corporation for that financial year. In the event the Corporation does not fully attain the Health Indicator for the year in question or surpasses the Health Indicator, the variable portion of the remuneration shall be paid in the same proportion as the attainment of the Health Indicator. The variable portion shall be paid twice yearly, after the end of the Corporation's second quarter and after the end of the financial year.
In the event the Employee's employment is terminated by the Corporation with cause or the Employee voluntarily terminates his employment, the variable portion of the remuneration shall not be payable for the half of the financial year during which the employment terminated for such reasons.
(ii) Commission on Total Bookings (as defined in Schedule 4 hereof):
During the period from September 1, 2000 to February 28, 2001, commissions will be payable to Employee on a monthly basis in amounts equal to the following percentages of Total Bookings made by the North American Sales department in the territory covered by such department:
For Total Bookings from US$0 to US$49,875,000 - 0.1395% of the Total Bookings figure is payable;
For Total Bookings exceeding US$49,875,000 and up to US$66,500,000 - 0.2791% of the Total Bookings figure is payable; and
For Total Bookings exceeding US$66,500,000 - 0.4186% of the Total Bookings figure is payable.
During the period from March 1, 2001 to August 31, 2001,
commissions will be payable to Employee on a monthly basis in
amounts equal to the following percentages of Total Bookings
made by the North American Sales department in the territory
covered by such department including all sales of products of
Burleigh Instruments, Inc. ("BII") with the exception of : (a)
the products not included in BII's Instrument Division and
Nano-Positioning Division; (b) sales to Newport Corporation;
(c) sales from BII to the Corporation; and (d) sales of
products of Burleigh Automation Inc. (still to be determined):
For Total Bookings from US$0 to US$56,250,000 - 0.1237% of the Total Bookings figure is payable;
For Total Bookings exceeding US$56,250,000 and up to US$75,000,000 - 0.2475% of the Total Bookings figure is payable; and
For Total Bookings exceeding US$75,000,000 - 0.3712% of the Total Bookings figure is payable.
(iii) Bonus for improvement of gross margin: (DETAILS TO COME - MAXIMUM OF US$14,500)
(iv) Quarterly bonus: After the end of each of the Corporation's financial quarters, the Employee shall be paid a bonus of US$2,500 if the following Total Bookings objectives by the North American Sales department for each such quarter are
attained: 1st Quarter: US$14,500,000 3rd Quarter: US$17,000,000 2nd Quarter: US$16,000,000 4th Quarter: US$19,000,000. |
In the event the annual Total Bookings objective for the North American Sales department of US$66,500,000 for the financial year ending August 31, 2001 (the "Annual Objective") is attained, notwithstanding the non-attainment of some of the above-noted quarterly objectives, the Employee shall be paid a bonus for the year totalling US$10,000, taking into account any quarterly payments that may have been made for attainment of the quarterly objectives.
In the event the Annual Objective is exceeded by 10% or more, an additional bonus of US$10,000 shall be paid to Employee and if the Annual Objective is exceeded by 20% or more, a further additional bonus of US$10,000 shall be paid to Employee.
(v) Options: The following stock options will be issued to the Employee in accordance with the terms of the Corporation's Stock Option Plan and the terms set forth herein:
o On September 1, 2001, additional stock options, as indicated below, will be issued to Employee in relation to the percentage of attainment of the Annual Objective:
- more than 110% of Annual Objective attained: 10,000
stock options;
- more than 125% of Annual Objective attained : 20,000
stock options;
- more than 140% of Annual Objective attained: 30,000
stock options.
The subscription price of such options shall the closing price of the Corporation's shares the day preceding the grant; one-quarter of these options will vest on the second day following the disclosure of the Corporation's financial results for each of the financial years ended August 31, 2002, 2003, 2004 and 2005; these options will remain in force until the 10th anniversary of the date of grant.
(vi) The Annual Objective will be increased by an amount of US$9,487,500 in the territory covered by the North American Sales department for the six (6) month period commencing March 1, 2001.
(vii) The Employee shall receive a monthly car expense allowance of US$700.00.
(viii) The provisions governing the payment of commission and the reimbursement of expenses are set forth in Schedule D hereof.
(ix) Annual reviews of remuneration shall occur on or about every September 1, commencing with September 1, 2001.
2. PLACE OF WORK
The Employee shall exercise his functions out of the office of EXFO America Inc. located in Richardson, Texas, U.S.A.
3. VACATION
Four (4) weeks of paid vacation annually.
4. DEFINITIONS
For the purposes of this Agreement, the meaning of the term "Corporation" shall be deemed to include EXFO America Inc.
SCHEDULE B
TO
BRUCE BONINI EMPLOYMENT AGREEMENT
The Employee shall receive all benefits as set forth in the EXFO America Inc. benefit package.
SCHEDULE C
TO
BRUCE BONINI EMPLOYMENT AGREEMENT
See attached.
EXCLUSIVITY, CONFIDENTIALITY, ASSIGNMENT OF WORK PRODUCT,
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
FOR SALES PERSONNEL
The undersigned, Bruce Bonini, as Employee of EXFO Electro-Optical Engineering Inc. (hereinafter "EXFO"), expressly agrees to comply with all of the commitments set out below. For the purposes hereof "EXFO" includes any entity controlled by EXFO.
LOYALTY
The Employee agrees to use all of his best efforts and diligence in the performance of his duties; he furthermore agrees to loyally promote the interests of EXFO and to devote all of his time and energy to the exclusive service thereof.
CONFIDENTIALITY
2.1 The Employee acknowledges that, throughout the term of his employment with EXFO, he may, by reason of such employment and his duties, have access to certain confidential information specifically relating to the operation and activities of EXFO, its clients, other employees, management, finances, transactions, marketing of products and services offered by EXFO or, generally, to the business thereof.
2.2 Consequently, the Employee agrees, throughout the term of his employment and at all times following the termination thereof for any reason whatsoever, to neither disclose, use, communicate, reveal nor make available to any person whomsoever in any manner whatsoever, any Confidential Information produced or held by EXFO, its suppliers or clients unless it is in the performance of his work with, and to the exclusive benefit of, EXFO.
2.3 If the employee is required by applicable law, stock exchange regulations or court order to disclose any Confidential Information, he shall first notify EXFO in writing sufficiently in advance so as to provide EXFO with reasonable opportunity to seek to prevent such disclosure or to seek to obtain a protective order for such Confidential Information.
2.4 Without limiting the generality of the foregoing, any information relating to any secret, invention, licence, manufacturing process, know-how, supply source, sales condition of a supplier, components of a product, technique, production and marketing method, price list, client list, discount policy and detail respecting the specific needs of EXFO clients shall be deemed "Confidential Information".
OWNERSHIP OF CREATIONS
3.1 The Employee hereby assigns to EXFO, which accepts, without restriction as to territory, duration or otherwise, any right which is or may be granted to him or acknowledged as his pursuant to any Canadian or foreign legislation regarding patents, copyrights, trade-marks, industrial designs, integrated circuitry topography, protection of know-how, trade secrets, or confidential information, and any other provision of a statute, principle of common law or civil law respecting intellectual property, whether or not such rights are registered, including the right to obtain any protection afforded by law by filing an application for registration or otherwise, with respect to any of the foregoing rights (the "Intellectual Property Rights") with respect to any work (including computer software), invention, trade-mark, industrial design, integrated circuit topography, know-how, trade secret, confidential information or other matter that is or may be protected by an Intellectual Property Right ("Intellectual Property") directly or indirectly developed, carried out or improved by the Employee, either alone or with another person, throughout the term of his employment with EXFO, whether or not during regular business hours, on the work premises or using the property or services of EXFO, and whether such Intellectual Property Rights relate to any product, service, method, or procedure used or operated, or the use or operation of which is contemplated by EXFO or its subsidiaries, as part of the operations and activities of EXFO or its subsidiaries. To the extent that the employee holds any Intellectual Property Rights with respect to any of the Intellectual Property described above, he hereby assigns to EXFO, which accepts, all such Intellectual Property Rights without restriction as to territory, duration or otherwise.
3.2 Moreover, the Employee waives all of his moral rights with respect to any work protected by copyright in favour of EXFO and any third party authorized by EXFO to use such work.
3.3 The Employee undertakes to immediately notify EXFO of any Intellectual Property he may develop, carry out or improve and, upon request by EXFO to that effect, undertakes to cooperate, diligently and in good faith, with any patent agent or other professional EXFO may designate for the purposes of identifying said Intellectual Property Rights and, as the case may be, to take any action and prepare or execute any document EXFO may deem necessary or useful to ensure that EXFO may obtain, protect or exercise Intellectual Property Rights relating thereto, or to acknowledge or give full effect to this Agreement; to that end, the Employee appoints EXFO as his exclusive and irrevocable agent to execute, on his behalf, any document the purpose of which is to acknowledge or give full effect to such assignment, including as part, or for the purposes, of any application to obtain, amend or maintain a patent.
3.4 The Employee acknowledges that any Intellectual Property constitutes confidential information belonging to EXFO, subject to Section 2 hereof.
3.5 The Employee undertakes, throughout the term of his employment with EXFO, to neither develop, carry out, nor improve, for his own benefit or that of a third party, either alone, jointly or in collaboration with a third party, whether during regular working hours, on the work premises or using the property or services of EXFO, any Intellectual Property regarding any product, service, method or procedure used or operated, or the use or operation of which is contemplated by EXFO or its subsidiaries, as part of the operations or activities of EXFO or its subsidiaries.
NON-COMPETITION AND NON-SOLICITATION
4.1 The Employee acknowledges that the operation of the business of EXFO represents the carrying on of a business in a specific sector requiring highly specialized expertise. As a result, the Employee undertakes not to compete with EXFO or solicit its clients and employees in accordance with the following terms and parameters set forth herein.
4.2 The Employee agrees, throughout his employment with EXFO, and for a period of eighteen (18) months following termination of his employment with EXFO for any reason whatsoever, to neither directly nor indirectly perform, for his own benefit or that of another person, in any capacity whatsoever, including, but not limited to, as shareholder, employer, employee, principal, representative, agent, franchisee, franchiser, distributor or advisor, any duty or activity in the field of operations of EXFO, namely research, development and the manufacture and sale of fibre optic testing and measuring devices in the territory of North America, given that EXFO services a clientele spread throughout such territory, in which the Employee carries out his activities and work.
4.3 The Employee agrees, throughout his employment with EXFO, and for a period of eighteen (18) months following termination of his employment with EXFO for any reason whatsoever, to neither directly nor indirectly, for his own benefit or that of another person, in any capacity whatsoever, including, but not limited to, as shareholder, employer, employee, principal, representative, franchiser, franchisee, distributor or advisor, solicit the clients of EXFO and its employees, nor to authorize the use of his name to solicit said clients or employees and to do no thing that would incite or convince any person to terminate its business relation with EXFO.
4.4 The Employee acknowledges that the obligations assumed pursuant to this Section 4 are reasonably limited in light of the international nature of competition in the fibre optic field and the clientele and international market which EXFO serves. Moreover, the Employee acknowledges that the obligations set out in this Section are required to protect the legitimate interests of EXFO.
COMPENSATION AS FORMER EMPLOYEE
5.1 If, during the eighteen (18) month period following the end of the Employee's employment by EXFO, the Employee receives a valid offer of employment that he is unable to accept due solely to the non-competition undertaking set forth in Section 4 hereof, and not because of any restrictions otherwise imposed by law, the Employee shall notify EXFO in writing of such firm employment offer, providing a copy of the offer and giving full information as to the identity of the prospective employer and the nature of the proposed duties of the Employee. EXFO shall within ten (10) days after receipt of each such notice either give its written permission for the Employee to accept such employment or advise the Employee of its unwillingness in this regard. During the eighteen (18) month period following the end of his employment with EXFO, the Employee shall not accept any part time or full time employment that would contravene Section 4 hereof without previously obtaining EXFO's written consent or release from the non-competition undertaking set forth in Section 4 hereof.
5.2 Beginning with the day upon which EXFO shall receive the first of any such written notices from the Employee, if EXFO does not give written permission for the Employee to accept said offered employment, and thereafter until the expiration of the eighteen (18) month period following the end of employment, EXFO shall either:
a) give written permission for the Employee to accept a
specific offered employment;
b) give to the Employee a written release from the
non-competition undertaking set forth in article 4 of
this Attachment "A"; or
c) compensate the Employee in the following manner :
i) if Employee's employment ended for causes of
fraud or refusal to operate in good faith in
the best interests of EXFO, compensation
shall be equivalent to 5% of Employee's base
annual salary;
ii) if Employee's employment ended for cause of
serious lack of performance, compensation
shall be equivalent to 25% of Employee's
base annual salary;
iii) if Employee no longer works for EXFO for any
reason other than the reasons set forth in
paragraphs i) and ii) above, compensation
shall be equivalent to 125% of Employee's
base annual salary;
iv) if Employee no longer works for EXFO due to
his voluntary departure, compensation shall
be equivalent to 75% of Employee's base
annual salary.
5.3 Compensation paid to the Employee under this Section 5 shall be paid monthly based on the annual base salary (exclusive of extra compensation of any kind) that was in force at the time of the termination of the Employee's employment. Each such payment shall be forwarded to the Employee not later than the last day of each calendar month.
5.4 Once EXFO has commenced remuneration payments in accordance with this Section 5, the Employee shall at all times conscientiously seek suitable employment consistent
herewith and shall, within ten (10) days after the receipt of each payment from EXFO, advise EXFO in writing regarding his efforts to obtain employment. Failure by the Employee to so advise EXFO shall relieve EXFO of the obligation to send any further payments to the Employee until such information is supplied.
5.5 Once the period of eighteen (18) months following the end of the employment has expired, EXFO shall have no further obligation to compensate the Employee hereunder and the Employee shall no longer be bound by the non-competition undertaking set forth herein and shall be free to accept any offer of employment that he wishes to accept.
REMEDIES
The Employee acknowledges that failure to comply with Sections 2 and 4 hereof shall result in serious or irreparable damage which a final judgement will be insufficient to remedy. Consequently, the Employee acknowledges that, in the event of a breach of any one of these Sections, EXFO may immediately resort to appropriate proceedings so as to obtain an interim, interlocutory and permanent injunction order as soon as possible without prejudice to any cause of action for damages.
DISPUTES AND ARBITRATION
The parties hereto agree that any dispute which arises in the course of or following the performance of this Agreement will be definitely settled under the auspices of the Quebec National and International Commercial Arbitration Centre through arbitration and to the exclusion of courts of law, in accordance with its Arbitration Rules in force at the time this Agreement is signed and to which the parties declare to have adhered.
ACKNOWLEDGEMENT BY EMPLOYEE
The Employee acknowledges having had sufficient time to examine this Agreement and to ask any question he deemed pertinent, including to his legal counsel, and is thus aware of the scope of his rights and obligations.
SEVERABILITY
Should any section, phrase, paragraph or part of this Agreement be deemed unenforceable for any reason by any court of competent jurisdiction, such decision shall neither amend the remainder of this Agreement nor render it void.
LANGUAGE OF AGREEMENT
This Agreement has been drawn up in the English language at the request of the parties hereto. La presente convention a ete redigee en langue anglaise a la demande des parties aux presentes.
SIGNED IN RICHARDSON, TEXAS ON THIS 10TH DAY OF APRIL 2001.
/s/ Bruce Bonini ---------------- BRUCE BONINI |
ACCEPTED IN VANIER QUEBEC THIS 10TH DAY OF APRIL 2001.
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Per: /s/ Germain Lamonde
-------------------
Germain Lamonde
|
SCHEDULE D
TO
BRUCE BONINI EMPLOYMENT AGREEMENT
1. DEFINITIONS
In this Schedule D, the following terms shall have the meanings set forth hereinbelow:
"Total Bookings" shall mean the total amount of Orders received from any defined territory, as calculated using the Net Invoice Price, to the extent that the Order is accepted by the Corporation in accordance with the terms of paragraph 4 of this Schedule D.
"Net Invoice Price" shall mean the total price at which an Order is invoiced to the customer including any increase or decrease in the amount of the Order, but excluding commissions payable to distributors, shipping costs, mailing costs, taxes, custom duties, transportation, insurance, duties and any allowances or discounts granted to the customer by the Corporation.
"Order" shall mean any commitment received from the defined territory to purchase products that the Corporation is in a position to manufacture or which is subject to split commission in accordance with paragraph 3 of this Schedule D.
2. COMPUTATION AND PAYMENT OF COMMISSION
Commission is payable at the end of the month following the month in which the Order is accepted, except in case of termination of this Agreement, in which case the Corporation may withhold payment of commission in accordance with the terms set forth in paragraph 5 of this Schedule D.
At the time of payment of commission to Employee, the Corporation will provide to Employee a monthly commission statement showing commissions earned during the month, with invoice numbers, copy of invoices, customer names and commission to be paid on invoices where commission applies to sales achieved in the applicable quarter.
Commission is not payable on amounts received in payment for compliance testing, repairs and reworks, research and development, engineering, special tooling and non-recurring start-up costs.
The following amounts shall be deducted from any amounts of commission due to Employee:
i) an amount equal to commission previously paid or credited on sales of the Corporation's products which have since been returned by the customer or on allowances credited to the customer for any reason by the Corporation; and
ii) an amount equal to commission previously paid or credited on a sale for which the Corporation shall not have been fully paid by the customer whether by reason of the customer's bankruptcy, insolvency, or any other reason which, in the Corporation's judgement, renders the account uncollectible at anytime. If any such uncollectible accounts were eventually collected by the Corporation, the Corporation shall pay Employee the percentage of commission applicable at the time of the original sale upon the net proceeds of such collection.
3. COMMISSION SPLIT
When engineering, the execution of an Order, or a shipment involves both territories not part of the territory covered by the North American Sales department and the territory covered by the North American Sales department, the Corporation will split the amount of the Order accounted in the Total Bookings between the territories involved as follows:
(i) 40% of the amount of the Order shall be credited to the department or employee, as applicable, in whose territory the products were engineered or specifications were prepared;
(ii) 40% of the amount of the Order shall be credited to the department or employee, as applicable, to whose territory the product is shipped;
(iii) 20% of the amount of the Order shall be credited to the department or employee, as applicable, in whose territory the Order is executed.
The Corporation will make this determination and advise the interested parties, usually at the time the Order is accepted by the Corporation. The amount payable as commission in such a case shall never exceed the amount of commission which would have been payable if only one territory had been involved.
4. ACCEPTANCE OF ORDER
The following conditions shall be fulfilled before acceptance by the Corporation of an Order: (i) all Orders shall be confirmed to the Corporation by the purchaser/buyer with a purchase order number, (ii) the Corporation shall have received confirmation of the "ship to" and "bill to" addresses and the telephone number of the purchaser/buyer and of the end user, (iii) an authorized officer of the Corporation at its principal shall have accepted the Order, and (iv) the credit department of the Corporation shall have accepted the Order.
The Employee shall provide the Corporation with all information which may be necessary to pay commission due to the local sales representatives, collect amounts due from purchasers/buyers, maintain customers in its data base, etc.
5. PAYMENT OF COMMISSION AND EXPENSES IN CASE OF TERMINATION
In the event of the termination of this Agreement, payment of commission and reimbursement of expenses will be made by the Corporation as follows:
(i) COMMISSION: any commission that may be payable for Orders received before the date of termination shall be withheld by the Corporation until the occurrence of the latest of the following events:
(a) all samples or demonstrators of products and all documentation and equipment, including hardware and software, belonging to the Corporation that may be in the Employee's possession have been returned to the Corporation;
(b) the expiration of a 90 day period following the date of termination.
(ii) REIMBURSEMENT OF EXPENSES: any reimbursement of expenses incurred before the date of the termination that may be payable shall be withheld by the Corporation until the occurrence of the latest of the following events:
(a) all samples or demonstrators of products and all documentation and equipment, including hardware and software, belonging to the Corporation that may be in the Employee's possession have been returned to the Corporation;
(b) the expiration of a 90 day period following the date of termination.
It is understood that reimbursement of expenses is not payable by the Corporation until it has received a duly completed expense report and full supporting documents and has had a reasonable period of time to review the expense report and the supporting documents.
EXHIBIT 4.25
[GRAPHIC OMITTED]
[LOGO - EXFO]
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") dated as of September 1, 2000, is entered into by and between EXFO Electro-Optical Engineering Inc., a corporation having its principal place of business at 465 Godin Avenue, Vanier, Quebec, G1M 3G7, Canada (the "Corporation") and Juan-Felipe Gonzalez (the "Employee").
TERMS OF AGREEMENT
In consideration of this Agreement and the continued employment of the Employee by the Corporation, the parties agree as follows :
The Corporation hereby agrees to continue to employ Employee, on a full-time basis commencing on or about September 1, 2000 to act as Vice-President, International Sales of the Corporation and to perform such acts and duties and furnish such services to the Corporation in connection with and related to that position as is customary for persons with similar positions in like companies. Employee hereby accepts said employment. Employee shall use his best and most diligent efforts to promote the interests of the Corporation; shall discharge his duties in a highly competent manner; and shall devote his full business time and his best business judgement, skill and knowledge to the performance of his duties and responsibilities hereunder. This Agreement shall not be interpreted to prohibit Employee from making passive personal investments or conducting private business affairs if such activities do not materially interfere with the services required under this Agreement. Employee shall continue to report to the President and Chief Executive Officer of the Corporation.
The Employee shall carry out his duties in the Corporation's office indicated in Schedule A.
2.1 SALARY
During the term of this Agreement, the Corporation shall pay Employee the remuneration indicated in Schedule A.
2.2 DISCRETIONARY BONUS
During the term of this Agreement, the Employee may participate in such bonus plan or plans of the Corporation as the Board of Directors or its Human Resources Committee may approve for the Employee in addition to the bonuses set forth in Schedule A hereof. Nothing contained in this Section 2.2 shall be construed to require the Board of Directors to approve a bonus plan or in any way grant to Employee the right to receive bonuses not otherwise approved.
2.3 BENEFITS
During the term of this Agreement, the Employee shall receive such benefits as customarily provided to other officers and employees of the Corporation. Details of such benefits as of the date hereof are set forth in Schedule B of this Agreement.
2.4 VACATION
Employee may take paid vacation during each year as set forth in Schedule A at such times as shall be consistent with the Corporation's vacation policies and (in the Corporation's judgement) with the Corporation's vacation schedule for officers and other employees.
2.5 EXPENSES
Pursuant to the Corporation's customary policies in force at the time of payment, Employee shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all reasonable expenses properly incurred by him on the Corporation's behalf in the performance of his duties hereunder.
3.1 DISABILITY
If during the term of this Agreement, Employee becomes ill,
disabled or otherwise incapacitated so as to be unable to
perform his usual duties (a) for a period in excess of one
hundred and eighty (180) consecutive days, or (b) for more
than one hundred eighty (180) days in any consecutive twelve
(12) month period and this incapacity has not been remedied by
the end of the twelfth (12th) month of such consecutive twelve
(12) month period, then the Corporation shall have the right
to terminate this Agreement, subject only to the terms of this
Agreement and applicable laws, on thirty (30) day's notice to
Employee. Termination pursuant to this Section 3.1 shall not
affect any rights Employee may otherwise have under any
disability insurance policies in effect at the time of such
termination.
3.2 DISCHARGE FOR CAUSE
The Corporation may discharge Employee and terminate his employment under this Agreement for cause without further liability to the Corporation. As used in this Section 3.2, "cause" shall mean any or all of the following;
(a) gross or wilful misconduct of Employee during the course of his employment;
(b) conviction of any criminal offence involving dishonesty, breach of trust or moral turpitude during the term of this Agreement; or
(c) Employee's breach of any of the material terms of this Agreement.
3.3 TERMINATION WITHOUT CAUSE
Upon thirty (30) days prior written notice, the Corporation
may terminate this Agreement without cause by a majority vote
of the Board of Directors of the Corporation except that the
Employee, if a Director, shall not be entitled to vote
thereon. The Corporation shall incur no liability in this
regard except as specifically set forth in Schedule A and that
it shall continue to pay Employee the then current base salary
and commission (such commission being based on the amount paid
to the Employee as commission over the twelve (12) month
period preceding the termination) as set forth in Schedule A
for a twelve (12) month period after termination if such
termination shall occur prior to the events mentioned in
Section 3.4, otherwise the terms of Section 3.4 shall apply.
3.4 TERMINATION FOLLOWING MERGER OR ACQUISITION
If the Corporation merges or consolidates with another corporation, if substantially all of the assets of the Corporation are sold, or if a majority of the outstanding stock of the Corporation is acquired by another person and Employee's employment is subsequently terminated by the Corporation or surviving entity other than for cause as described in 3.2, Employee shall be entitled to severance benefits as described below based on length of service with the Corporation:
LENGTH OF SERVICE SEVERANCE BENEFITS
0 to 5 years 12 months' remuneration plus health
benefits;
more than 5 years 18 months' remuneration plus health
benefits.
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In addition to the foregoing, any outstanding stock options (including substituted stock options of the acquiring or surviving corporation in such merger or acquisition) which have not vested in accordance with their terms will become fully vested and the Employee may choose to exercise such stock options at the time of such termination, otherwise these stock options shall be automatically terminated immediately following the termination of Employee's employment. For purposes of
this Section 3.4, Employee shall be entitled to treat a (i)
material demotion in title or function; (ii) a decrease in
salary (taking into account both base salary and commission);
(iii) a net decrease in the benefit package; or (iv) a change
of location as termination under this Section 3.4, but only if
Employee expressly so notifies the Corporation and terminates
his employment hereunder within thirty (30) days of such
demotion or relocation. If Employee is offered a substantially
similar position with the surviving entity on the same or
better conditions, Employee's refusal to accept such position
shall not be treated as subject to this Section 3.4, but
rather shall be treated as a voluntary termination by Employee
under Section 3.5.
3.5 VOLUNTARY TERMINATION BY EMPLOYEE
In the event of voluntary termination by Employee, Employee shall be entitled only to those amounts that have accrued to the date of termination in accordance with the terms hereof or are expressly payable under the terms of the Corporation applicable benefit plans or are required by applicable law. The Corporation may, in its sole and absolute discretion, confer such other benefits or payments as it determines, but Employee shall have no entitlement thereto.
4.1 INSURANCE
The Corporation hereby represents that it is presently the holder of directors and officers insurance in an amount and having a coverage that is recommended by its legal advisors and insurance broker as adequate taking into account the status of the Corporation, its size and the nature of its activities. The Corporation undertakes to ensure that such insurance shall remain in force throughout the term of this Agreement and in the event such insurance is cancelled, the Corporation shall immediately advise the Employee in writing.
4.2 ADDITIONAL AGREEMENTS
Upon execution of this Agreement, the Employee shall execute and deliver to the Corporation, unless previously delivered, an Exclusivity, Confidentiality, Assignment of Work Product, Non-Competition and Non-Solicitation Agreement, a copy of which is joined hereto as Annexe C.
4.3 NOTICES
Any notice or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by certified mail, return receipt requested, postage prepaid, to the addresses provided above. All notices shall be deemed given when actually received. Any person entitled to receive notice (or a copy thereof) may designate in writing, by notice to the others, such other address to which notices to such person shall thereafter be sent.
4.4 ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes all prior agreements and understandings between the parties with respect to such subject matter, provided, however that nothing in this Agreement shall affect the Employee's obligations under the Exclusivity, Confidentiality, Assignment Of Work Product, Non-Competition And Non-Solicitation Agreement signed by the Employee.
4.5 AMENDMENT WAIVER
This Agreement may not be amended, supplemented, cancelled or discharged, except by written instrument executed by the party affected thereby. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any breach of any provision of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision.
4.6 BINDING EFFECT, ASSIGNMENT
Employee's rights or obligations under this Agreement may not be assigned by Employee. The rights and obligations set forth in this Agreement shall bind and inure to the benefit of the Corporation and its successors and assigns. The Corporation will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it as if no such event had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as herein before defined any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
4.7 HEADINGS
The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
4.8 GOVERNING LAW, INTERPRETATION
This Agreement shall be construed in accordance with and governed for all purposes by the laws applicable in the province of Quebec. Service of process in any dispute shall be effective (a) upon the Corporation, if service is made on any officer of the Corporation other than the Employee; (b) upon the Employee, if served at Employee's residence last known to the Corporation with an information copy to the
Employee at any other residence, or care of a subsequent employer, of which the Corporation may be aware.
4.9 FURTHER ASSURANCES
Each of the parties agrees to execute, acknowledge, deliver and perform, or cause to be executed, acknowledged, delivered and performed at any time, or from time to time, as the case may be, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be necessary or proper to carry out the provisions or intent of this Agreement.
4.10 LANGUAGE
This Agreement has been written in English at the express request of the parties. Cette entente a ete redigee en anglais a demande expresse des parties.
4.11 SEVERABILITY
If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
EXFO ELECTRO-OPTICAL
ENGINEERING INC.
BY: /s/ Germain Lamonde /s/ Juan-Felipe Gonzalez
------------------- ------------------------
GERMAIN LAMONDE JUAN-FELIPE GONZALEZ
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SCHEDULE A
TO
JUAN-FELIPE GONZALEZ EMPLOYMENT AGREEMENT
1. REMUNERATION
From September 1, 2000 to August 31, 2001:
(i) Base salary of US$110,000 per annum.
(ii) A variable portion of remuneration of US$8,500 per annum upon attainment by the Corporation of 100% of the Health Indicator established by the Board of Directors of the Corporation for that financial year. In the event the Corporation does not fully attain the Health Indicator for the year in question or surpasses the Health Indicator, the variable portion of the remuneration shall be paid in the same proportion as the attainment of the Health Indicator. The variable portion shall be paid twice yearly, after the end of the Corporation's second quarter and after the end of the financial year.
In the event the Employee's employment is terminated by the Corporation with cause or the Employee voluntarily terminates his employment, the variable portion of the remuneration shall not be payable for the financial year during which the employment terminated for such reasons.
(ii) Commission on Total Bookings (as defined in Schedule 4 hereof):
During the period from September 1, 2000 to February 28, 2001, commissions will be payable to Employee on a monthly basis in amounts equal to the following percentages of Total Bookings made by the International Sales department in the territory covered by such department:
For Total Bookings from US$0 to US$27,900,000 - 0.104% of the Total Bookings figure is payable;
For Total Bookings exceeding US$27,900,000 and up to US$46,500,000 - 0.156% of the Total Bookings figure is payable; and
For Total Bookings exceeding US$46,500,000 - 0.234% of the Total Bookings figure is payable.
During the period from March 1, 2001 to August 31, 2001, commissions will be payable to Employee on a monthly basis in amounts equal to the following percentages of Total Bookings made by the International Sales department in the territory covered by such department including all sales of products of Burleigh Instruments, Inc. ("BII") with the exception of : (a) the products not included in BII's Instrument Division and Nano-Positioning Division; (b) sales from BII to the Corporation; and (c) sales of products of Burleigh Automation Inc. (still to be determined):
For Total Bookings from US$0 to US$30,429,000 - 0.095% of the Total Bookings figure is payable;
For Total Bookings exceeding US$30,429,000 and up to US$50,715,000 - 0.143% of the Total Bookings figure is payable; and
For Total Bookings exceeding US$50,715,000 - 0.214% of the Total Bookings figure is payable.
(iii) Bonus for improvement of gross margin: (DETAILS TO COME - MAXIMUM OF US$8,500)
(iv) Quarterly bonus: After the end of each of the Corporation's financial quarters, the Employee shall be paid a bonus of US$2,500 if the following Total Bookings objectives by the International Sales department for each such quarter are
attained: 1st Quarter: US$8,500,000 3rd Quarter: US$13,100,000 2nd Quarter: US$12,000,000 4th Quarter: US$15,250,000. |
In the event the annual Total Bookings objective for the International Sales department of US$50,715,000 for the financial year ending August 31, 2001 (the "Annual Objective") is attained, notwithstanding the non-attainment of some quarterly objectives, the Employee shall be paid a bonus for the year totalling US$15,000, taking into account any quarterly payments that may have been made for attainment of the quarterly objectives.
(v) Supplemental bonus: In the event the Total Bookings for the International Sales department for the period from February 1, 2001 to August 31, 2001 attain US$20,000,000, a bonus in the amount of US$100,000 shall be payable to Employee and shall be paid prior to October 31, 2001.
(vi) Options: The following stock options will be issued to the Employee in accordance with the terms of the Corporation's Stock Option Plan and the terms set forth herein:
o 30,000 stock options will be issued to Employee during the financial year ending August 31, 2001 at the closing price of the Corporation's shares the day preceding the grant; one-quarter of these options will vest on the second day following the disclosure of the Corporation's financial results for each of the
financial years ended August 31, 2002, 2003, 2004 and 2005; these options will remain in force until the 10th anniversary of the date of grant;
o On September 1, 2001, additional stock options, as indicated below, will be issued to Employee in relation to the percentage of attainment of the Annual Objective:
- 100% of Annual Objective attained: 10,000 stock
options;
- from 101% to 120% of Annual Objective Attained :
15,000 stock options;
- more than 120% of Annual Objective attained: 20,000 stock options.
(vii) The provisions governing the payment of commission and the reimbursement of expenses are set forth in Schedule D hereof.
(viii) Annual reviews of remuneration shall occur on or about every September 1, commencing with September 1, 2001.
2. LONG TERM BONUS
If the Employee does not terminate his employment with the Corporation prior to September 25, 2003, he shall receive a bonus in the amount of CDN$750,000 which shall be payable on or before November 15, 2003. For the purposes of this paragraph 2 of Schedule A, the expression "terminate his employment" shall be defined as :
(i) a very serious or very substantial refusal or neglect, without a valid reason, to execute the functions that the Employee has undertaken to fulfil in the employ of the Corporation and that is not remedied by the Employee after three (3) written notices outlining such default given at lease ten (10) days apart, the Corporation having the burden of proof;
(ii) the Employee being guilty of theft, fraud or misappropriation of funds from the Corporation;
(iii) the Employee violating any applicable non-competition obligations;
(iv) the Employee holding a second employment; or
(v) the Employee resigning from the Corporation.
For the purposes of this paragraph 2 of Schedule A, termination of employment under the terms of Sections 3.1, 3.3 and 3.4 of this Agreement are expressly excluded from the definition of the expression "terminate his employment".
3. PLACE OF WORK
At some time during the twelve (12) month period commencing on September 1, 2000, the Employee shall relocate to the Corporation's newly established office in Singapore and shall continue to perform his duties in the same manner.
The Corporation shall pay the Employee's reasonable moving expenses to Singapore. In the event the Employee voluntarily terminates his employment or leaves Singapore against the wishes of the Corporation within twenty-four (24) months from the date of moving to Singapore, the Employee shall reimburse the expenses incurred by Employee in moving to Singapore that were paid by the Corporation on a pro rata basis in relation to the percentage of time left in the 24 month period.
Upon the Employee's move to Singapore, in order to take into account the difference in the cost of living in Singapore, the Employee's annual base salary set forth in paragraph 1 of this Schedule A shall be US$120,752.80, payable 50% in US dollars and 50% in Singapore dollars. Based on the exchange rate of US$1.00 = S$1.7493, the annual base salary payable upon Employee's presence in Singapore shall be US$60,376.40 and S$105,616.99.
4. VACATION
Four weeks of paid vacation annually.
SCHEDULE B
TO
JUAN-FELIPE GONZALEZ EMPLOYMENT AGREEMENT
The description below is a summary of the Corporation's present benefit package. It is expected that this package will evolve in the future. Upon the Employee's move to Singapore, these benefits shall be adapted to the context of such country.
1. The Corporation offers to management a long-term disability plan.
2. Management is covered by collective insurance that is paid by the Corporation in the following proportions : 40%, 60%, 80% and 100% in years 1, 2, 3 and 4 respectively. This insurance covers vision correction, chiropractor, etc. but excludes dental coverage. It also includes life insurance.
3. As concerns the deferred profit-sharing plan, the Corporation automatically contributes 1% of the Employee's salary if the Employee has contributed 2% of his salary.
4. Commencing on the date of residence in Singapore, the Employee shall receive an annual allocation in the amount of US$3,000 for the payment of health insurance.
SCHEDULE C
TO
JUAN-FELIPE GONZALEZ EMPLOYMENT AGREEMENT
See attached.
EXCLUSIVITY, CONFIDENTIALITY, ASSIGNMENT OF WORK PRODUCT,
NON-COMPETITION AND NON-SOLICITATION AGREEMENT
FOR SALES PERSONNEL
The undersigned, Juan Felipe Gonzalez, as Employee of EXFO Electro-Optical Engineering Inc. (hereinafter "EXFO"), expressly agrees to comply with all of the commitments set out below. For the purposes hereof, "EXFO" includes any entities controlled by EXFO.
LOYALTY
The Employee agrees to use all of his best efforts and diligence in the performance of his duties; he furthermore agrees to loyally promote the interests of EXFO and to devote all of his time and energy to the exclusive service thereof.
CONFIDENTIALITY
2.1 The Employee acknowledges that, throughout the term of his employment with EXFO, he may, by reason of such employment and his duties, have access to certain confidential information specifically relating to the operation and activities of EXFO, its clients, other employees, management, finances, transactions, marketing of products and services offered by EXFO or, generally, to the business thereof.
2.2 Consequently, the Employee agrees, throughout the term of his employment and at all times following the termination thereof for any reason whatsoever, to neither disclose, use, communicate, reveal nor make available to any person whomsoever in any manner whatsoever, any Confidential Information produced or held by EXFO, its suppliers or clients unless it is in the performance of his work with, and to the exclusive benefit of, EXFO.
2.3 If the employee is required by applicable law, stock exchange regulations or court order to disclose any Confidential Information, he shall first notify EXFO in writing sufficiently in advance so as to provide EXFO with reasonable opportunity to seek to prevent such disclosure or to seek to obtain a protective order for such Confidential Information.
2.4 Without limiting the generality of the foregoing, any information relating to any secret, invention, licence, manufacturing process, know-how, supply source, sales condition of a supplier, components of a product, technique, production and marketing method, price list, client list, discount policy and detail respecting the specific needs of EXFO clients shall be deemed "Confidential Information".
OWNERSHIP OF CREATIONS
3.1 The Employee hereby assigns to EXFO, which accepts, without restriction as to territory, duration or otherwise, any right which is or may be granted to him or acknowledged as his pursuant to any Canadian or foreign legislation regarding patents, copyrights, trade-marks, industrial designs, integrated circuitry topography, protection of know-how, trade secrets, or confidential information, and any other provision of a statute, principle of common law or civil law respecting intellectual property, whether or not such rights are registered, including the right to obtain any protection afforded by law by filing an application for registration or otherwise, with respect to any of the foregoing rights (the "Intellectual Property Rights") with respect to any work (including computer software), invention, trade-mark, industrial design, integrated circuit topography, know-how, trade secret, confidential information or other matter that is or may be protected by an Intellectual Property Right ("Intellectual Property") directly or indirectly developed, carried out or improved by the Employee, either alone or with another person, throughout the term of his employment with EXFO, whether or not during regular business hours, on the work premises or using the property or services of EXFO, and whether such Intellectual Property Rights relate to any product, service, method, or procedure used or operated, or the use or operation of which is contemplated by EXFO or its subsidiaries, as part of the operations and activities of EXFO or its subsidiaries. To the extent that the employee holds any Intellectual Property Rights with respect to any of the Intellectual Property described above, he hereby assigns to EXFO, which accepts, all such Intellectual Property Rights without restriction as to territory, duration or otherwise.
3.2 Moreover, the Employee waives all of his moral rights with respect to any work protected by copyright in favour of EXFO and any third party authorized by EXFO to use such work.
3.3 The Employee undertakes to immediately notify EXFO of any Intellectual Property he may develop, carry out or improve and, upon request by EXFO to that effect, undertakes to cooperate, diligently and in good faith, with any patent agent or other professional EXFO may designate for the purposes of identifying said Intellectual Property Rights and, as the case may be, to take any action and prepare or execute any document EXFO may deem necessary or useful to ensure that EXFO may obtain, protect or exercise Intellectual Property Rights relating thereto, or to acknowledge or give full effect to this Agreement; to that end, the Employee appoints EXFO as his exclusive and irrevocable agent to execute, on his behalf, any document the purpose of which is to acknowledge or give full effect to such assignment, including as part, or for the purposes, of any application to obtain, amend or maintain a patent.
3.4 The Employee acknowledges that any Intellectual Property constitutes confidential information belonging to EXFO, subject to Section 2 hereof.
3.5 The Employee undertakes, throughout the term of his employment with EXFO, to neither develop, carry out, nor improve, for his own benefit or that of a third party, either alone, jointly or in collaboration with a third party, whether during regular working hours, on the work premises or using the property or services of EXFO, any Intellectual Property regarding any product, service, method or procedure used or operated, or the use or operation of which is contemplated by EXFO or its subsidiaries, as part of the operations or activities of EXFO or its subsidiaries.
NON-COMPETITION AND NON-SOLICITATION
4.1 The Employee acknowledges that the operation of the business of EXFO represents the carrying on of a business in a specific sector requiring highly specialized expertise. As a result, the Employee undertakes not to compete with EXFO or solicit its clients and employees in accordance with the following terms and parameters set forth herein.
4.2 The Employee agrees, throughout his employment with EXFO, and for a period of eighteen (18) months following termination of his employment with EXFO for any reason whatsoever, to neither directly nor indirectly perform, for his own benefit or that of another person, in any capacity whatsoever, including, but not limited to, as shareholder, employer, employee, principal, representative, agent, franchisee, franchiser, distributor or advisor, any duty or activity in the field of operations of EXFO, namely research, development and the manufacture and sale of fibre optic testing and measuring devices throughout the world, with the exception of Canada and the United States of America, given that EXFO services a clientele spread throughout such territory, in which the Employee carries out his activities and work.
4.3 The Employee agrees, throughout his employment with EXFO, and for a period of eighteen (18) months following termination of his employment with EXFO for any reason whatsoever, to neither directly nor indirectly, for his own benefit or that of another person, in any capacity whatsoever, including, but not limited to, as shareholder, employer, employee, principal, representative, franchiser, franchisee, distributor or advisor, solicit the clients of EXFO and its employees, nor to authorize the use of his name to solicit said clients or employees and to do no thing that would incite or convince any person to terminate its business relation with EXFO.
4.4 The Employee acknowledges that the obligations assumed pursuant to this Section 4 are reasonably limited in light of the international nature of competition in the fibre optic field and the clientele and international market which EXFO serves. Moreover, the Employee acknowledges that the obligations set out in this Section are required to protect the legitimate interests of EXFO.
COMPENSATION AS FORMER EMPLOYEE
5.1 If, during the eighteen (18) month period following the end of the Employee's employment by EXFO, the Employee receives a valid offer of employment that he is
unable to accept due solely to the non-competition undertaking
set forth in Section 4 hereof, and not because of any
restrictions otherwise imposed by law, the Employee shall
notify EXFO in writing of such firm employment offer,
providing a copy of the offer and giving full information as
to the identity of the prospective employer and the nature of
the proposed duties of the Employee. EXFO shall within ten
(10) days after receipt of each such notice either give its
written permission for the Employee to accept such employment
or advise the Employee of its unwillingness in this regard.
During the eighteen (18) month period following the end of his
employment with EXFO, the Employee shall not accept any part
time or full time employment that would contravene Section 4
hereof without previously obtaining EXFO's written consent or
release from the non-competition undertaking set forth in
Section 4 hereof.
5.2 Beginning with the day upon which EXFO shall receive the first
of any such written notices from the Employee, if EXFO does
not give written permission for the Employee to accept said
offered employment, and thereafter until the expiration of the
eighteen (18) month period following the end of employment,
EXFO shall either:
a) give written permission for the Employee to accept a
specific offered employment;
b) give to the Employee a written release from the
non-competition undertaking set forth in article 3 of
this Attachment "A"; or
c) compensate the Employee in the following manner :
i) if Employee's employment ended for causes of
fraud or refusal to operate in good faith in
the best interests of EXFO, compensation
shall be equivalent to 5% of Employee's base
annual salary;
ii) if Employee's employment ended for cause of
serious lack of performance, compensation
shall be equivalent to 25% of Employee's
base annual salary;
iii) if Employee no longer works for EXFO for any
reason other than the reasons set forth in
paragraphs i) and ii) above, compensation
shall be equivalent to 75% of Employee's
base annual salary.
5.3 Compensation paid to the Employee under this Section 5 shall be paid monthly based on the annual base salary (exclusive of extra compensation of any kind) that was in force at the time of the termination of the Employee's employment. Each such payment shall be forwarded to the Employee not later than the last day of each calendar month.
5.4 Once EXFO has commenced remuneration payments in accordance with this Section 5, the Employee shall at all times conscientiously seek suitable employment consistent herewith and shall, within five (5) days after the receipt of each payment from EXFO, advise EXFO in writing regarding his efforts to obtain employment. Failure by the Employee to so advise EXFO shall relieve EXFO of the obligation to send any further payments to the Employee until such information is supplied.
5.5 Once the period of eighteen (18) months following the end of the employment has expired, EXFO shall have no further obligation to compensate the Employee
hereunder and the Employee shall no longer be bound by the non-competition undertaking set forth herein and shall be free to accept any offer of employment that he wishes to accept.
REMEDIES
The Employee acknowledges that failure to comply with Sections 2 and 4 hereof shall result in serious or irreparable damage which a final judgement will be insufficient to remedy. Consequently, the Employee acknowledges that, in the event of a breach of any one of these Sections, EXFO may immediately resort to appropriate proceedings so as to obtain an interim, interlocutory and permanent injunction order as soon as possible without prejudice to any cause of action for damages.
COMPLETE AGREEMENT
This is the entire agreement between the parties as concerns the subject matter hereof and supersedes and replaces any previous agreement, understanding, undertaking, discussion or representations regarding the subject matter hereof.
ACKNOWLEDGEMENT BY EMPLOYEE
The Employee acknowledges having had sufficient time to examine this Agreement and to ask any question he deemed pertinent, including to his legal counsel, and is thus aware of the scope of his rights and obligations.
SEVERABILITY
Should any section, phrase, paragraph or part of this Agreement be deemed unenforceable for any reason by any court of competent jurisdiction, such decision shall neither amend the remainder of this Agreement nor render it void.
GOVERNING LAW
This Agreement shall be governed and interpreted in accordance with legislation in effect in the territory of the Province of Quebec and with any law of Canada applicable therein.
LANGUAGE OF AGREEMENT
This Agreement has been drawn up in the English language at the request of the parties hereto. La presente convention a ete redigee en langue anglaise a la demande des parties aux presentes.
SIGNED AT ANAHEIM, CALIFORNIA, USA ON THIS 22ND DAY OF MARCH 2000.
/s/ Juan-Felipe Gonzalez ------------------------ |
SCHEDULE D
TO
JUAN-FELIPE GONZALEZ EMPLOYMENT AGREEMENT
1. DEFINITIONS
In this Schedule D, the following terms shall have the meanings set forth hereinbelow:
"Total Bookings" shall mean the total amount of Orders received from any defined territory, as calculated using the Net Invoice Price, to the extent that the Order is accepted by the Corporation in accordance with the terms of paragraph 4 of this Schedule D.
"Net Invoice Price" shall mean the total price at which an Order is invoiced to the customer including any increase or decrease in the amount of the Order, but excluding commissions payable to distributors, shipping costs, mailing costs, taxes, custom duties, transportation, insurance, duties and any allowances or discounts granted to the customer by the Corporation.
"Order" shall mean any commitment received from the defined territory to purchase products that the Corporation is in a position to manufacture or which is subject to split commission in accordance with paragraph 3 of this Schedule D.
2. COMPUTATION AND PAYMENT OF COMMISSION
Commission is payable at the end of the month following the month in which the Order is accepted, except in case of termination of this Agreement, in which case the Corporation may withhold payment of commission in accordance with the terms set forth in paragraph 5 of this Schedule D.
At the time of payment of commission to Employee, the Corporation will provide to Employee a monthly commission statement showing commissions earned during the month, with invoice numbers, copy of invoices, customer names and commission to be paid on invoices where commission applies to sales achieved in the applicable quarter.
Commission is not payable on amounts received in payment for compliance testing, repairs and reworks, research and development, engineering, special tooling and non-recurring start-up costs.
The following amounts shall be deducted from any amounts of commission due to Employee:
i) an amount equal to commission previously paid or credited on sales of the Corporation's products which have since been returned by the customer or on allowances credited to the customer for any reason by the Corporation; and
ii) an amount equal to commission previously paid or credited on a sale for which the Corporation shall not have been fully paid by the customer whether by reason of the customer's bankruptcy, insolvency, or any other reason which, in the Corporation's judgement, renders the account uncollectible at anytime. If any such uncollectible accounts were eventually collected by the Corporation, the Corporation shall pay Employee the percentage of commission applicable at the time of the original sale upon the net proceeds of such collection.
3. COMMISSION SPLIT
When engineering, the execution of an Order, or a shipment involves both territories not part of the territory covered by the International Sales department and the territory covered by the International Sales department, the Corporation will split the amount of the Order accounted in the Total Bookings between the territories involved as follows:
(i) 40% of the amount of the Order shall be credited to the department or employee, as applicable, in whose territory the products were engineered or specifications were prepared;
(ii) 40% of the amount of the Order shall be credited to the department or employee, as applicable, to whose territory the product is shipped;
(iii) 20% of the amount of the Order shall be credited to the department or employee, as applicable, in whose territory the Order is executed.
The Corporation will make this determination and advise the interested parties, usually at the time the Order is accepted by the Corporation. The amount payable as commission in such a case shall never exceed the amount of commission which would have been payable if only one territory had been involved.
4. ACCEPTANCE OF ORDER
The following conditions shall be fulfilled before acceptance by the Corporation of an Order: (i) all Orders shall be confirmed to the Corporation by the purchaser/buyer with a purchase order number, (ii) the Corporation shall have received confirmation of the "ship to" and "bill to" addresses and the telephone number of the purchaser/buyer and of the end user, (iii) an authorized officer of the Corporation at its principal shall have accepted the Order, and (iv) the credit department of the Corporation shall have accepted the Order.
The Employee shall provide the Corporation with all information which may be necessary to pay commission due to the local sales representatives, collect amounts due from purchasers/buyers, maintain customers in its data base, etc.
5. PAYMENT OF COMMISSION AND EXPENSES IN CASE OF TERMINATION
In the event of the termination of this Agreement, payment of commission and reimbursement of expenses will be made by the Corporation as follows:
(i) COMMISSION: any commission that may be payable for Orders received before the date of termination shall be withheld by the Corporation until the occurrence of the latest of the following events:
(a) all samples or demonstrators of products and all documentation and equipment, including hardware and software, belonging to the Corporation that may be in the Employee's possession have been returned to the Corporation;
(b) the expiration of a 90 day period following the date of termination.
(ii) REIMBURSEMENT OF EXPENSES: any reimbursement of expenses incurred before the date of the termination that may be payable shall be withheld by the Corporation until the occurrence of the latest of the following events:
(a) all samples or demonstrators of products and all documentation and equipment, including hardware and software, belonging to the Corporation that may be in the Employee's possession have been returned to the Corporation;
(b) the expiration of a 90 day period following the date of termination.
It is understood that reimbursement of expenses is not payable by the Corporation until it has received a duly completed expense report and full supporting documents and has had a reasonable period of time to review the expense report and the supporting documents.
EXHIBIT 4.26
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") dated as of December 20, 2000, is entered into by and between Burleigh Instruments, Inc., a corporation having its principal place of business at 7647 Main Street, Fishers, New York 14453-0755, U.S.A., Fishers, New York, U.S.A. (the "Corporation") and David J. Farrell (the "Employee").
TERMS OF AGREEMENT
In consideration of this Agreement and the continued employment of the Employee by the Corporation, the parties agree as follows :
The Corporation hereby agrees to continue to employ Employee, on a full-time basis commencing on or about December 20, 2000, to act as President of the Corporation and to perform such acts and duties and furnish such services to the Corporation in connection with and related to that position as is customary for persons with similar positions in like companies, as the Board of Directors of the Corporation shall from time to time reasonably direct. Employee hereby accepts said employment. Employee shall use his best and most diligent efforts to promote the interests of the Corporation; shall discharge his duties in a highly competent manner; and shall devote his full business time and his best business judgement, skill and knowledge to the performance of his duties and responsibilities hereunder. This Agreement shall not be interpreted to prohibit Employee from making passive personal investments or conducting private business affairs if such activities do not materially interfere with the services required under this Agreement. Employee shall report to the President of EXFO Electro-Optical Engineering Inc., the Corporation's holding body corporate.
2.1 SALARY
During the term of this Agreement, the Corporation shall pay Employee the remuneration indicated in Schedule A. The Employee's remuneration may be adjusted upwards in accordance with the Corporation's policies and procedures.
2.2 DISCRETIONARY BONUS
During the term of this Agreement, the Employee may participate in such bonus plan or plans of the Corporation as the Board of Directors of the Corporation may approve for the Employee. Nothing contained in this Section 2.2 shall be construed to require the Board of Directors to approve a bonus plan or in any way grant to Employee the right to receive bonuses not otherwise approved.
2.3 BENEFITS
During the term of this Agreement, the Employee shall receive such benefits as customarily provided to other officers and employees of the Corporation. Details of such benefits as of the date hereof are set forth in Schedule B of this Agreement.
2.4 VACATION
Employee may take paid vacation during each year as set forth in Schedule A at such times as shall be consistent with the Corporation's vacation policies and (in the Corporation's judgement) with the Corporation's vacation schedule for officers and other employees.
2.5 EXPENSES
Pursuant to the Corporation's customary policies in force at the time of payment, Employee shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorised expenses properly incurred by him on the Corporation's behalf in the performance of his duties hereunder.
3.1 UNDERTAKING BY EMPLOYEE
The Employee hereby undertakes not to voluntarily terminate his employment with the Corporation for a period of two (2) years from the date hereof and acknowledges that in the event that he does so terminate this Agreement, certain penalties shall be payable by him, as set forth in the Agreement of Merger and Plan of Reorganization, entered into by the Employee, the Corporation and certain other parties on November 4, 2000.
3.2 DISABILITY
If during the term of this Agreement, Employee becomes ill,
disabled or otherwise incapacitated so as to be unable to
perform his usual duties (a) for a period in excess of one
hundred and eighty (180) consecutive days, or (b) for more
than one hundred eighty (180) days in any consecutive twelve
(12) month period and this incapacity has not been remedied by
the end of the twelfth (12th) month of such consecutive
twelve (12) month period, then the Corporation shall have the right to terminate this Agreement, subject only to applicable laws, on thirty (30) day's notice to Employee. Termination pursuant to this Section 3.1 shall not affect any rights Employee may otherwise have under any disability insurance policies in effect at the time of such termination.
3.3 DISCHARGE FOR CAUSE
The Corporation may discharge Employee and terminate his employment under this Agreement for cause without further liability to the Corporation by a majority vote of the Board of Directors of the Corporation except that the Employee, if a Director, shall not be entitled to vote thereon. As used in this Section 3.2, "cause" shall mean any or all of the following;
(a) gross or wilful misconduct of Employee during the course of his employment;
(b) conviction of any criminal offence involving dishonesty, breach of trust or moral turpitude during the term of this Agreement; or
(c) Employee's breach of any of the material terms of this Agreement.
3.4 TERMINATION WITHOUT CAUSE
Upon thirty (30) days prior written notice, the Corporation may terminate this Agreement without cause by a majority vote of the Board of Directors of the Corporation except that the Employee, if a Director, shall not be entitled to vote thereon. The Corporation shall incur no liability in this regard except that it shall continue to pay Employee the remuneration set forth in Schedule A at his then current rate for a six (6) month period after termination if termination shall occur prior to the events mentioned in Section 3.4.
3.5 TERMINATION FOLLOWING MERGER OR ACQUISITION
Notwithstanding Section 3.4, if the Corporation merges or consolidates with another corporation, if substantially all of the assets of the Corporation are sold, if a majority of the outstanding stock of the Corporation is acquired by another person, or if the control of the Corporation's majority shareholder changes (a "Triggering Event") and Employee's employment is subsequently terminated by the Corporation or surviving entity other than for cause as described in 3.2, Employee shall be entitled to severance benefits as described below based on the length of service with the Corporation
since the Triggering Event:
LENGTH OF SERVICE SINCE THE SEVERANCE BENEFITS
TRIGGERING EVENT
0 to 12 months 12 months' remuneration plus
health benefits;
more than 12 months 6 months' remuneration plus
health benefits;
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For purposes of this Section 3.5, Employee shall be entitled
to treat a material demotion in title or function as
termination under this Section 3.5, but only if Employee
expressly so notifies the Corporation and terminates his
employment hereunder within thirty (30) days of such demotion
or relocation. If Employee is offered a substantially similar
position with the surviving entity, Employee's refusal to
accept such position shall not be treated as subject to this
Section 3.5, but rather shall be treated as a voluntary
termination by Employee under Section 3.6.
3.6 VOLUNTARY TERMINATION BY EMPLOYEE
In the event of voluntary termination by Employee after a period of two (2) years from the date hereof, Employee shall be entitled only to those amounts that have accrued to the date of termination in accordance with the terms hereof or are expressly payable under the terms of the Corporation's applicable benefit plans or are required by applicable law. The Corporation may, in its sole and absolute discretion, confer such other benefits or payments as it determines, but Employee shall have no entitlement thereto
4.1 INSURANCE
The Corporation hereby represents that it is presently the holder of directors and officers insurance in an amount and having a coverage that is recommended by its legal advisors and insurance broker as adequate taking into account the status of the Corporation, its size and the nature of its activities. The Corporation undertakes to ensure that such insurance shall remain in force throughout the term of this Agreement and in the event such insurance is cancelled, the Corporation shall immediately advise the Employee in writing.
4.2 ADDITIONAL AGREEMENTS
Upon execution of this Agreement, the Employee shall execute and deliver to the Corporation, unless previously delivered, an Exclusivity, Confidentiality, Assignment of Work Product, Non-Competition and Non-Solicitation Agreement.
4.3 NOTICES
Any notice or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by certified mail, return receipt requested, postage prepaid, to the addresses provided above. All notices shall be deemed given when actually received. Any person entitled to receive notice (or a copy thereof) may designate in writing, by notice to the others, such other address to which notices to such person shall thereafter be sent.
4.4 ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes all prior agreements and understandings between the parties with respect to such subject matter, provided, however that nothing in this Agreement shall affect the Employee's obligations under the Exclusivity, Confidentiality, Assignment Of Work Product, Non-Competition And Non-Solicitation Agreement signed by the Employee.
4.5 AMENDMENT WAIVER
This Agreement may not be amended, supplemented, cancelled or discharged, except by written instrument executed by the party affected thereby. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any breach of any provision of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision.
4.6 BINDING EFFECT, ASSIGNMENT
Employee's rights or obligations under this Agreement may not be assigned by Employee. The rights and obligations set forth in this Agreement shall bind and inure to the benefit of the Corporation and its successors and assigns. The Corporation will use its best efforts to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it as if no such event had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as herein before defined any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
4.7 HEADINGS
The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
4.8 GOVERNING LAW, INTERPRETATION
This Agreement shall be construed in accordance with and governed for all purposes by the laws applicable in the State of New York. Service of process in any dispute shall be effective (a) upon the Corporation, if service is made on any officer of the Corporation other than the Employee; (b) upon the Employee, if served at Employee's residence last known to the Corporation with an information copy to the Employee at any other residence, or care of a subsequent employer, of which the Corporation may be aware.
4.9 FURTHER ASSURANCES
Each of the parties agrees to execute, acknowledge, deliver and perform, or cause to be executed, acknowledged, delivered and performed at any time, or from time to time, as the case may be, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be necessary or proper to carry out the provisions or intent of this Agreement.
4.10 SEVERABILITY
If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
BURLEIGH INSTRUMENTS, INC.
BY: /s/ Germain Lamonde /s/ David J. Farrell
------------------- --------------------
GERMAIN LAMONDE, DAVID J. FARRELL
CHAIRMAN OF THE BOARD
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SCHEDULE A
TO
DAVID J. FARRELL EMPLOYMENT AGREEMENT
1. REMUNERATION
Base Salary: US$184,500 annually.
Variable Remuneration: The parties will agree on a plan for variable remuneration on or before February 1, 2001 that is reasonably consistent with plans utilized for employees of the Corporation's parent company with similar positions or responsibilities.
On the date of this Agreement, Employee will be granted 40,000 stock options under the Stock Option Plan of EXFO Electro-Optical Engineering Inc.
2. VACATION
Five (5) weeks of paid vacation annually.
SCHEDULE B
TO
DAVID J. FARRELL EMPLOYMENT AGREEMENT
The Employee shall be entitled to the following benefits, in addition to those that the Corporation presently offers to all of its employees.
o A monthly allocation of $US650.00for automobile expenses.
o Reimbursement of legal expenses incurred for tax returns, tax planning, wills, house closings, etc. related to the Corporation's status as an "S" corporation.
o Payment of the premiums of an executive life insurance policy in the amount of US$511,000.
o Medical reimbursement in accordance with the same terms that applied prior to the acquisition by EXFO Electro-Optical Engineering Inc.
o Reimbursement of the cost of a yearly physical examination.
o Disability insurance in amounts presently maintained by the Corporation for the Employee.
o Sick pay benefits in accordance with the Corporation's procedures for a term of up to one (1) year.
EXHIBIT 4.27
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") dated as of December 20, 2000, is entered into by and between Burleigh Instruments, Inc., a corporation having its principal place of business at 7647 Main Street, Fishers, New York 14453-0755, U.S.A. (the "Corporation") and William S. Gornall (the "Employee").
TERMS OF AGREEMENT
In consideration of this Agreement and the continued employment of the Employee by the Corporation, the parties agree as follows :
The Corporation hereby agrees to continue to employ Employee, on a full-time basis commencing on or about December 20, 2000, to act as Vice President, Technology, of the Corporation and to perform such acts and duties and furnish such services to the Corporation in connection with and related to that position as is customary for persons with similar positions in like companies, as the President of the Corporation shall from time to time reasonably direct. Employee hereby accepts said employment. Employee shall use his best and most diligent efforts to promote the interests of the Corporation; shall discharge his duties in a highly competent manner; and shall devote his full business time and his best business judgement, skill and knowledge to the performance of his duties and responsibilities hereunder. This Agreement shall not be interpreted to prohibit Employee from making passive personal investments or conducting private business affairs if such activities do not materially interfere with the services required under this Agreement. Employee shall report to the President of the Corporation.
2.1 SALARY
During the term of this Agreement, the Corporation shall pay Employee the remuneration indicated in Schedule A. The Employee's remuneration may be adjusted upwards in accordance with the Corporation's policies and procedures.
2.2 DISCRETIONARY BONUS
During the term of this Agreement, the Employee may participate in such bonus plan or plans of the Corporation as the Board of Directors of the Corporation may approve for the Employee. Nothing contained in this Section 2.2 shall be construed to require the Board of Directors to approve a bonus plan or in any way grant to Employee the right to receive bonuses not otherwise approved.
2.3 BENEFITS
During the term of this Agreement, the Employee shall receive such benefits as customarily provided to other officers and employees of the Corporation. Details of such benefits as of the date hereof are set forth in Schedule B of this Agreement.
2.4 VACATION
Employee may take paid vacation during each year as set forth in Schedule A at such times as shall be consistent with the Corporation's vacation policies and (in the Corporation's judgement) with the Corporation's vacation schedule for officers and other employees.
2.5 EXPENSES
Pursuant to the Corporation's customary policies in force at the time of payment, Employee shall be promptly reimbursed, against presentation of vouchers or receipts therefor, for all authorised expenses properly incurred by him on the Corporation's behalf in the performance of his duties hereunder.
3.1 UNDERTAKING BY EMPLOYEE
The Employee hereby undertakes not to voluntarily terminate his employment with the Corporation for a period of two (2) years from the date hereof and acknowledges that in the event that he does so terminate this Agreement, certain penalties shall be payable by him, as set forth in the Agreement of Merger and Plan of Reorganization, entered into by the Employee, the Corporation and certain other parties on November 4, 2000.
3.2 DISABILITY
If during the term of this Agreement, Employee becomes ill,
disabled or otherwise incapacitated so as to be unable to
perform his usual duties (a) for a period in excess of one
hundred and eighty (180) consecutive days, or (b) for more
than one hundred eighty (180) days in any consecutive twelve
(12) month period and this incapacity has not been remedied by
the end of the twelfth (12th) month of such consecutive
twelve (12) month period, then the Corporation shall have the right to terminate this Agreement, subject only to applicable laws, on thirty (30) day's notice to Employee. Termination pursuant to this Section 3.1 shall not affect any rights Employee may otherwise have under any disability insurance policies in effect at the time of such termination.
3.3 DISCHARGE FOR CAUSE
The Corporation may discharge Employee and terminate his employment under this Agreement for cause without further liability to the Corporation by a majority vote of the Board of Directors of the Corporation except that the Employee, if a Director, shall not be entitled to vote thereon. As used in this Section 3.2, "cause" shall mean any or all of the following;
(a) gross or wilful misconduct of Employee during the course of his employment;
(b) conviction of any criminal offence involving dishonesty, breach of trust or moral turpitude during the term of this Agreement; or
(c) Employee's breach of any of the material terms of this Agreement.
3.4 TERMINATION WITHOUT CAUSE
Upon thirty (30) days prior written notice, the Corporation may terminate this Agreement without cause by a majority vote of the Board of Directors of the Corporation except that the Employee, if a Director, shall not be entitled to vote thereon. The Corporation shall incur no liability in this regard except that it shall continue to pay Employee the remuneration set forth in Schedule A at his then current rate for a six (6) month period after termination if termination shall occur prior to the events mentioned in Section 3.4.
3.5 TERMINATION FOLLOWING MERGER OR ACQUISITION
Notwithstanding Section 3.4, if the Corporation merges or consolidates with another corporation, if substantially all of the assets of the Corporation are sold, if a majority of the outstanding stock of the Corporation is acquired by another person, or if the control of the Corporation's majority shareholder changes (a "Triggering Event") and Employee's employment is subsequently terminated by the Corporation or surviving entity other than for cause as described in 3.2, Employee shall be entitled to severance benefits as described below based on the length of service with the Corporation
since the Triggering Event:
LENGTH OF SERVICE SINCE THE SEVERANCE BENEFITS
TRIGGERING EVENT
0 to 12 months 12 months' remuneration plus
health benefits;
more than 12 months 6 months' remuneration plus
health benefits;
|
For purposes of this Section 3.5, Employee shall be entitled
to treat a material demotion in title or function as
termination under this Section 3.5, but only if Employee
expressly so notifies the Corporation and terminates his
employment hereunder within thirty (30) days of such demotion
or relocation. If Employee is offered a substantially similar
position with the surviving entity, Employee's refusal to
accept such position shall not be treated as subject to this
Section 3.5, but rather shall be treated as a voluntary
termination by Employee under Section 3.6.
3.6 VOLUNTARY TERMINATION BY EMPLOYEE
In the event of voluntary termination by Employee after a period of two (2) years from the date hereof, Employee shall be entitled only to those amounts that have accrued to the date of termination in accordance with the terms hereof or are expressly payable under the terms of the Corporation's applicable benefit plans or are required by applicable law. The Corporation may, in its sole and absolute discretion, confer such other benefits or payments as it determines, but Employee shall have no entitlement thereto
4.1 INSURANCE
The Corporation hereby represents that it is presently the holder of directors and officers insurance in an amount and having a coverage that is recommended by its legal advisors and insurance broker as adequate taking into account the status of the Corporation, its size and the nature of its activities. The Corporation undertakes to ensure that such insurance shall remain in force throughout the term of this Agreement and in the event such insurance is cancelled, the Corporation shall immediately advise the Employee in writing.
4.2 ADDITIONAL AGREEMENTS
Upon execution of this Agreement, the Employee shall execute and deliver to the Corporation, unless previously delivered, an Exclusivity, Confidentiality, Assignment of Work Product, Non-Competition and Non-Solicitation Agreement.
4.3 NOTICES
Any notice or communication given by any party hereto to the other party shall be in writing and personally delivered or mailed by certified mail, return receipt requested, postage prepaid, to the addresses provided above. All notices shall be deemed given when actually received. Any person entitled to receive notice (or a copy thereof) may designate in writing, by notice to the others, such other address to which notices to such person shall thereafter be sent.
4.4 ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties in respect of its subject matter and supersedes all prior agreements and understandings between the parties with respect to such subject matter, provided, however that nothing in this Agreement shall affect the Employee's obligations under the Exclusivity, Confidentiality, Assignment Of Work Product, Non-Competition And Non-Solicitation Agreement signed by the Employee.
4.5 AMENDMENT WAIVER
This Agreement may not be amended, supplemented, cancelled or discharged, except by written instrument executed by the party affected thereby. No failure to exercise, and no delay in exercising, any right, power or privilege hereunder shall operate as a waiver thereof. No waiver of any breach of any provision of this Agreement shall be deemed to be a waiver of any preceding or succeeding breach of the same or any other provision.
4.6 BINDING EFFECT, ASSIGNMENT
Employee's rights or obligations under this Agreement may not be assigned by Employee. The rights and obligations set forth in this Agreement shall bind and inure to the benefit of the Corporation and its successors and assigns. The Corporation will use its best efforts to require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Corporation to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Corporation would be required to perform it as if no such event had taken place. As used in this Agreement, "Corporation" shall mean the Corporation as herein before defined any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise.
4.7 HEADINGS
The headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement.
4.8 GOVERNING LAW, INTERPRETATION
This Agreement shall be construed in accordance with and governed for all purposes by the laws applicable in the State of New York. Service of process in any dispute shall be effective (a) upon the Corporation, if service is made on any officer of the Corporation other than the Employee; (b) upon the Employee, if served at Employee's residence last known to the Corporation with an information copy to the Employee at any other residence, or care of a subsequent employer, of which the Corporation may be aware.
4.9 FURTHER ASSURANCES
Each of the parties agrees to execute, acknowledge, deliver and perform, or cause to be executed, acknowledged, delivered and performed at any time, or from time to time, as the case may be, all such further acts, deeds, assignments, transfers, conveyances, powers of attorney and assurances as may be necessary or proper to carry out the provisions or intent of this Agreement.
4.10 SEVERABILITY
If any one or more of the terms, provisions, covenants or restrictions of this Agreement shall be determined by a court of competent jurisdiction to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
BURLEIGH INSTRUMENTS, INC.
BY: /s/ Germain Lamonde /s/ William S. Gornall
------------------- ----------------------
GERMAIN LAMONDE, WILLIAM S. GORNALL
CHAIRMAN OF THE BOARD
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SCHEDULE A
TO
WILLIAM S. GORNALL EMPLOYMENT AGREEMENT
1. REMUNERATION
Base Salary: US$135,000 annually.
Variable Remuneration: The parties will agree on a plan for variable remuneration on or before February 1, 2001 that is reasonably consistent with plans utilized for employees of the Corporation's parent company with similar positions or responsibilities.
On the date of this Agreement, Employee will be granted 30,000 stock options under the Stock Option Plan of EXFO Electro-Optical Engineering Inc.
2. VACATION
Five (5) weeks of paid vacation annually.
SCHEDULE B
TO
WILLIAM S. GORNALL EMPLOYMENT AGREEMENT
The Employee shall be entitled to the following benefits, in addition to those that the Corporation presently offers to all of its employees.
o A monthly allocation of US$650.00 for automobile expenses.
o Reimbursement of legal expenses incurred for tax returns, tax planning, wills, house closings, etc. related to the Corporation's status as an "S" corporation.
o Payment of the premiums of an executive life insurance policy in the amount of US$511,000.
o Medical reimbursement in accordance with the same terms that applied prior to the acquisition by EXFO Electro-Optical Engineering Inc.
o Reimbursement of the cost of a yearly physical examination.
o Disability insurance in amounts presently maintained by the Corporation for the Employee.
o Sick pay benefits in accordance with the Corporation's procedures for a term of up to one (1) year.
EXHIBIT 8.1
SUBSIDIARIES OF EXFO
NAME JURISDICTION ---- ------------ EXFO UK Limited United Kingdom EXFO Photonic Solutions Inc. Ontario, Canada GEXFO Distribution Internationale Inc. Quebec, Canada GAP Optique SA Switzerland EXFO Asia Pacific PTE Ltd. Singapore Nortech Fibronic Inc. Canada EXFO Protocol Inc. Canada EXFO Europe SARL France EXFO International Services Management LLC Hungary EXFO USA Inc. Delaware EXFO America Inc. Delaware Burleigh Instruments, Inc. New York Burleigh Instruments (UK) Ltd. United Kingdom Burleigh Instruments GmbH Germany Burleigh Automation Inc. Delaware |