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, 2002
[_] 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, 2002, the registrant had 25,114,410
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]
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This annual report contains or incorporates by reference statements which constitute forward-looking statements within the meaning of the U. S. Private Securities Litigation Reform Act of 1995 and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition that refer to expectations, projections or other characterizations of future events and circumstances. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including continued global economic, competitive and market uncertainty, capital spending in the telecommunications sector and our ability to execute successfully in these uncertain conditions; the effects of actions we have taken in response to such uncertainties; market acceptance of new products and upcoming new products; limited visibility of customer orders and the timing thereof; the competitive landscape; successful integration of our acquired and to-be-acquired companies. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed the factors discussed under "Risk Factors" set forth in Item 3D of this annual report. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure you that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document and shall not be revised or updated to reflect events after the date of this document.
PART I.
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 statements of earnings data for the years ended August 31, 1998 and 1999 and the consolidated balance sheets data as at August 31, 1998, 1999 and 2000 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, 2000, 2001 and 2002 and the consolidated balance sheets data as at August 31, 2001 and 2002 are derived from our audited consolidated financial statements 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 significant differences between Canadian 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 audited 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,
----------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(IN THOUSANDS OF US DOLLARS,
EXCEPT SHARE AND PER SHARE
DATA)
CONSOLIDATED STATEMENTS OF EARNINGS DATA:
AMOUNTS UNDER CANADIAN GAAP
Sales.................................................. $ 31,605 $ 42,166 $ 71,639 $ 146,013 $ 68,330
Cost of sales (1)...................................... 11,345 14,998 24,712 54,946 50,801
Gross margin........................................... 20,260 27,168 46,927 91,067 17,529
Operating expenses
Selling and administrative............................. 9,898 13,279 24,304 46,236 35,446
Net research and development........................... 3,014 4,315 6,402 13,601 12,782
Amortization of property, plant and equipment.......... 609 857 1,451 3,559 5,932
Amortization of intangible assets...................... 48 41 47 9,876 11,615
Write-down of intangible assets........................ -- -- -- -- 23,657
Restructuring and other charges........................ -- -- -- 3,288 2,880
Total operating expenses............................... 13,569 18,492 32,204 76,560 92,312
Earnings (loss) from operations........................ 6,691 8,676 14,723 14,507 (74,783)
Interest income - net.................................. 40 136 1,480 6,098 1,456
Foreign exchange gain (loss) .......................... 126 (506) (684) 3,327 (458)
Earnings (loss) before income taxes and amortization and
write-down of goodwill........................... 6,857 8,306 15,519 23,932 (73,785)
Income taxes........................................... 2,356 2,492 5,298 8,150 (25,451)
Earnings (loss) before amortization and write-down of
goodwill......................................... 4,501 5,814 10,221 15,782 (48,334)
Amortization of goodwill............................... -- -- 297 31,076 38,021
Write-down of goodwill................................. -- -- -- -- 222,169
Net earnings (loss) for the year....................... $ 4,501 $ 5,814 $ 9,924 $ (15,294) $ (308,524)
Basic and diluted net earnings (loss) per share........ $ 0.12 $ 0.14 $ 0.25 $ (0.2) $ (5.09)
Basic weighted average number of shares used in per
share calculations (000's)....................... 38,000 38,001 39,951 53,014 60,666
OTHER FINANCIAL DATA:
Gross research and development......................... $ 4,406 $ 6,390 $ 9,374 $ 17,601 $ 17,005
Net research and development........................... $ 3,014 $ 4,315 $ 6,402 $ 13,601 $ 12,782
Dividends per share
Class "A" shares................................. $ -- $ 0.08 $ 0.45 $ -- $ --
Class "C" share.................................. $ -- $ 340 $ -- $ -- $ --
Class "E" shares................................. $ 0.005 $ -- $ -- $ -- $ --
Class "F" shares................................. $ -- $ -- $ 0.45 $ -- $ --
AMOUNTS UNDER U.S. GAAP
Net earnings (loss) for the year....................... $ 4,538 $ 5,901 $ 7,922 $ (29,478) $ (385,201)
Basic and diluted net earnings (loss) per share........ $ 0.12 $ 0.15 $ 0.20 $ (0.56) $ (6.35)
Basic weighted average number of shares used in per
share calculations (000's)............................. 38,000 38,001 39,951 53,014 60,666
Dividends per share
Class "A" shares................................. $ -- $ 0.08 $ 0.45 $ -- $ --
Class "C" share.................................. $ -- $ 333 $ -- $ -- $ --
Class "E" shares................................. $ 0.005 $ -- $ -- $ -- $ --
Class "F" shares................................. $ -- $ -- $ 0.45 $ -- $ --
AS AT AUGUST 31,
----------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(IN THOUSANDS OF US DOLLARS)
CONSOLIDATED BALANCE SHEETS DATA:
AMOUNTS UNDER CANADIAN GAAP
Cash and cash equivalents.............................. $ 1,262 $ 423 $ 729 $ 7,729 $ 9,128
Short-term investments................................. 1,338 1,371 162,659 66,861 40,553
Working capital (2) ................................... 9,797 12,745 194,167 130,289 91,374
Total assets........................................... 17,643 22,840 219,723 442,577 177,926
Long-term debt (excluding current portion) ............ -- -- 16 664 564
Share capital.......................................... 1 87 198,459 429,995 489,611
Shareholders' equity................................... $ 12,045 $ 14,679 $ 206,994 $ 414,805 $ 165,406
AMOUNTS UNDER U.S. GAAP
Cash and cash equivalents.............................. $ 1,201 $ 423 $ 729 $ 7,729 $ 9,128
Short-term investments................................. 1,273 1,430 162,719 66,861 40,553
Working capital (2) ................................... 9,179 12,781 194,204 129,987 91,305
Total assets........................................... 16,785 22,899 219,760 499,436 161,314
Long-term debt (excluding current portion) ............ -- -- -- 664 564
Share capital.......................................... 1 132 201,151 498,121 560,943
Shareholders' equity................................... $ 11,318 $ 14,715 $ 207,031 $ 471,117 $ 148,691
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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 MAY DECREASE WHICH COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
The current downturn in the global telecommunications industry has resulted in significant bankruptcies, reduced purchasing and decreased capital expenditures in the markets that we serve worldwide. Our sales and orders have been affected by this downward cycle characterized by diminished product demand, excess manufacturing capacity and the erosion of average selling prices. Those conditions have also caused a lack of visibility, which reduces our capacity to plan. The ultimate severity of the current downturn and how long it will last is unknown. Continued weak economic conditions, additional bankruptcies and decreased capital expenditures would likely result in a further reduction in demand for our products and low visibility and could harm our consolidated financial position, results of operations, cash flows and stock price.
WE HAVE ADOPTED MEASURES AND MAY CONTINUE TO ADOPT MEASURES THAT ALIGN OUR COST STRUCTURE TO THE CONTINUING DIFFICULT MARKET CONDITIONS. IF CURRENT DEPRESSED MARKET CONDITIONS ARE PROLONGED, IT COULD HAVE MATERIAL ADVERSE LONG-TERM EFFECTS ON OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
In June 2001, we were forced to re-align our cost structure to market conditions by implementing various measures including 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%. Then, on December 5, 2001, we announced the lowering of our operating expenses, a freeze in employee salaries, and the further reduction of our workforce by 10%.
Again in May 2002, we reduced our global workforce by an additional 20% and definitively cancelled our plans to build the new facility. 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 or are unable to retain key personnel; if we are unable to sustain sufficient 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 capable of ramping 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 further declining market conditions, it could have a material adverse long-term effect on our business, results of operations and financial condition.
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 FURTHER SIGNIFICANT LONG-TERM LOSS OF SALES.
Fiber-optic deployment and network capacity increases have slowed due to the current downturn in the telecommunications industry. This has affected optical component and network equipment manufacturers and operators causing reduced demand for fiber-optic test, measurement, monitoring and automation equipment and the erosion of average selling prices. Any further downturn in our markets or in general economic conditions, or if optical fiber is replaced by a higher performance medium, would likely result in further reduction in demand for our products, which would harm our business, results of operations and financial condition.
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.
With the continuing economic slowdown, some of our customers are experiencing, or may possibly experience, serious cash flow problems, As a result, we have had customers who delayed payment or were not able to meet their financial commitments to us. Furthermore, they may not order as many products from us as originally forecasted or any products at all. 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 10.2% of our sales in fiscal 2002. However, there is no assurance that such measures will reduce our exposure to customer credit 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 and the failure of our customers to order products will also result in decreased revenues.
WE MUST CONTINUE TO OVERCOME SIGNIFICANT COMPETITION IN OUR INDUSTRY IN ORDER TO GAIN MARKET SHARE AND ACHIEVE OUR GROWTH STRATEGY.
The market for fiber-optic test, measurement, monitoring 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 expect new competitors to emerge or current competitors to consolidate as the market for fiber-optic test, measurement, monitoring and automation equipment evolves in response to technical innovations and economic conditions, thereby accelerating the pace of change and the competitive pressures that we face. Our growth depends in part on our ability to increase our market share by increasing sales of current products, introducing new products and product enhancements and exploiting new markets.
In the financial year ended August 31, 2002, we acquired technologies allowing us to almost double our addressable market by expanding in to the protocol-layer testing market. This new market brings additional competition. Moreover, our competitors may have more experience operating in these markets and be better established with customers in this new market. 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, monitoring and automation equipment. Competitors, such as Acterna Corporation, Agilent Technologies Inc., ANDO Corporation, Anritsu Corporation, NetTest 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. We cannot predict whether our current or future competitors will develop or market products that offer higher performance or more features or are more cost-effective than our current or future products. To remain competitive and achieve our growth strategy, we must continue to increase our sales and develop cost-effective products and product enhancements in current and new markets, which offer higher performance and more functionality so that we can increase our market share. Our failure to do so may harm our business, results of operations and financial condition.
WE HAVE FACED PRICING PRESSURES ON OUR EXISTING PRODUCTS AND EXPECT THAT THIS PRESSURE WILL CONTINUE. IF WE DO NOT CONTROL OUR MANUFACTURING COSTS OR INTRODUCE NEW PRODUCTS WITH HIGHER MARGINS, OUR GROSS MARGINS WILL DECLINE AND OUR OPERATING RESULTS WILL BE ADVERSELY AFFECTED.
Reduced demand for fiber-optic test, measurement, monitoring and automation equipment, in addition to competitiveness in our industry will likely result in a continuing downward pressure on the prices for fiber-optic test, measurement, monitoring and automation equipment. These price declines result from factors such as:
o increased competition for business;
o reduced demand;
o limited number of potential customers;
o competition from companies with lower production costs;
o introduction of new products by competitors;
o greater economies of scale for higher-volume competitors;
o resale of used equipment; and
o equipment sales resulting from manufacturing and rental
companies bankruptcies.
As prices of our existing products may experience continuing downward pressure, we may have to increase our unit volume sold in order to maintain our existing sales level. If we are unable to increase the level of sales, continuously monitor our manufacturing costs or introduce new products with higher margins, our gross margins may decline and our operating results may suffer.
OUR QUARTERLY REVENUES AND 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 significant fluctuations may occur 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, selling and administrative and amortization expenses, are relatively fixed in the short term. If our revenue is lower than we expect because we sell fewer products than we anticipate, if there is a delay in the release of new products or if prices for our products decline, 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 revenue and operating results include:
o the length of the product sales cycle for certain of our 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 revenue and operating results could also be affected by the following factors, some of which we have little or no control over:
o fluctuating demand for fiber-optic test, measurement,
monitoring 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 order cancellations or rescheduled delivery dates; o pricing
changes by our competitors or suppliers;
o customer bankruptcies and 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.
In addition, we may in the future choose to reduce prices, increase spending, or add or eliminate products in response to actions by competitors or as an effort to pursue new market opportunities. These actions may also adversely affect our business and operating results and may cause our quarterly results to be lower than the results of previous quarters. 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.
AS OUR CUSTOMERS CONSOLIDATE, 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 and could reduce their orders, demanding more favorable terms and conditions and obtaining products from a source other than us, which could cause our sales to decline. 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. Many of our products are complex, and customers for these products may require substantial time to make purchase decisions. 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. In addition, some of our customers and potential customers require that a bidding
process be followed or that our products be pre-approved. Both of these situations involve inherent risks over which we have little control, for example, missing the approval opportunity or unsuccessful pricing.
OUR CUSTOMERS ARE NOT OBLIGATED TO BUY MATERIAL AMOUNTS OF OUR PRODUCTS AND MAY CANCEL OR DEFER PURCHASES ON SHORT NOTICE.
Our customers typically purchase our products under individual purchase orders and may cancel or defer purchases on short notice without significant penalty. Accordingly, sales in a particular period are difficult to predict. Decreases in purchases, cancellations of purchase orders, or deferrals of purchases may have a material adverse effect on our operating results, particularly if we do not anticipate them.
WE CANNOT ASSURE THAT WE WILL SUCCESSFULLY INTEGRATE THE BUSINESSES, PRODUCTS, TECHNOLOGIES OR PERSONNEL OF OUR RECENT AND FUTURE ACQUISITIONS, WHICH MAY HARM OUR BUSINESS.
We have historically achieved growth through a combination of internally developed new products and acquisitions. Since December 2000, we have made four major acquisitions, and as part of our strategy to sustain growth, we expect to continue to pursue acquisitions of other companies, technologies and complementary product lines in the future.
However, mergers and acquisitions of high technology businesses are inherently risky. For our past and future transactions to be successful, we must appropriately integrate the businesses, products, technologies and personnel already acquired, as well as those of any future acquisitions, with our own business, product portfolios 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 product portfolios of newly acquired companies with our own operations and product portfolios and manage all aspects of 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.
We cannot assure that any business of our recent or future acquisitions will achieve anticipated net sales and profits. In May 2002, as part of our review of financial results and due to the continued downturn in the telecommunications industry, the persisting unfavourable market conditions affecting our subsidiaries' industries and the decline in technology valuations, we performed an assessment of the carrying value of goodwill and intangible assets recorded in conjunction with the acquisitions of EXFO Burleigh, EXFO Photonic and EXFO Protocol. As a result, we concluded that the carrying value of goodwill and certain acquired intangible assets was impaired and we recorded a US$222.2 million write-down of goodwill and a US$23.7 million write-down of intangible assets, which had a negative impact on our reported earnings. This type of assessment is completed annually and further write-downs may become necessary in the future if market conditions worsen.
All of these factors could materially harm our business, results of operations and financial condition.
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 or that will increase our markets. 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. In addition, our fluctuating stock price or our cash position at the time of the acquisition may affect our ability to complete an acquisition.
We have made strategic acquisitions in the past and we intend that in the future, as part of our growth strategy, we will continue to make strategic acquisitions of complementary business, 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 amortization of other intangible
assets; or
o incur significant impairment losses of goodwill and intangible
assets related to such acquisitions.
These acquisitions also involve numerous risks, including:
o problems combining the acquired operations, technologies,
products and personnel;
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.
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 the acquisitions we have completed since December 2000, 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 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 EXCESS OR OBSOLETE INVENTORY.
We provide non-binding 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
forecasted requirements, we may have excess inventory, which could harm our relationships with our suppliers due to reduced future orders, increase our costs and require inventory write-offs. In the financial year ended August 31, 2002, we recorded inventory write-offs totaling $18.5 million for excess and obsolete inventory. If we underestimate our requirements, we may have an inadequate inventory of parts, which 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 for which alternative sources may not be readily available. In addition, 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 increased costs, 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. Any interruptions or delays in the supply of any of these parts could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Furthermore, the process of qualifying a new 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 were required 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. Consolidation involving suppliers could further reduce the number of alternatives available to us and affect the cost of parts, which make our products less competitive and result in lower margins.
IF WE ARE UNABLE TO ADAPT TO CURRENT AND FUTURE CHANGES IN TECHNOLOGY OR IF WE ARE NOT ABLE TO INTRODUCE NEW AND ENHANCED PRODUCTS ON A TIMELY BASIS, OUR PRODUCTS MAY BECOME OBSOLETE, WHICH COULD PREVENT US FROM ACHIEVING OUR GROWTH STRATEGY AND ADVERSELY AFFECT OUR OPERATING RESULTS.
The telecommunications industry is characterized by rapidly evolving technology and industry standards that result in frequent new product introductions. Any failure by us to anticipate or respond to new technological developments, customer requirements and evolving standards could have a material adverse effect on our business, results of operations and financial condition. The development of proprietary technologies entails significant technical and business risks and requires substantial expenditures and lead-time. The success of our new product offerings will depend on several factors, including our ability to:
o properly identify customer needs;
o innovate and develop new products;
o gain timely market acceptance for new products;
o manufacture and deliver our new products on time and in
sufficient volume;
o price our products competitively; and
o anticipate competitor's announcements of new products.
In addition, failure to do so 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 software or hardware defects 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, defects 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 costly repairs
o product returns or recalls;
o damage to our brand reputation;
o loss of customers, 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, results of operations and financial condition.
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 may prove costly and time consuming and could create technical advantages for products marketed by our competitors. We cannot assure that our products will continue to meet evolving standards in the future. In addition, failure to comply, or delays in compliance with such regulatory requirements or delays in receipt of certifications could delay the introduction of new products or cause our existing products to become obsolete.
OUR SALES WOULD SUFFER IF A KEY SALES REPRESENTATIVE OR DISTRIBUTOR STOPPED SELLING OR REDUCED SALES OF OUR PRODUCTS.
We sell a large portion 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. Our sales representatives and distributors may not market our products effectively or 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.
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, 2002, customers outside of the United States and Canada accounted for 43% of our sales and for the fifteen months ended November 30, 2002, these customers accounted for 42% of our sales. 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, develop relationships with international service providers and operate adequate after sales support internationally. 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 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; 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.
ECONOMIC, POLITICAL AND OTHER RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We maintain operations in three major geographic areas: the Americas, Europe and Asia. During the last financial year, approximately half of our revenues were from international sales. As a result, the business is subject to the worldwide economic and market conditions risks generally associated with doing business globally, such as fluctuating exchange rates, the instability of international monetary conditions, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest, wars and other acts of terrorism and changes in other economic or political conditions. These factors, among others, could influence our ability to succeed in global markets. A significant downturn in the global economy could adversely affect our results of business, results of operations and financial condition.
WE ARE SUBJECT TO LAWS AND REGULATIONS APPLYING TO GOVERNMENT CONTRACTS, AND OUR FAILURE TO ADDRESS THESE LAWS AND REGULATIONS OR COMPLY WITH GOVERNMENT CONTRACTS COULD HARM OUR BUSINESS.
We have agreements relating to the sale of our products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws applicable to government contracts differ from those
governing private contracts. For example, many government contracts contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations applying to government contracts. Any failure to comply with these laws and regulations could harm our business.
THE PRICE OF OUR SECURITIES IS VOLATILE AND MAY DECLINE.
The market price of our securities has been, and is likely in the future to be, subject to wide, rapid fluctuations. Such fluctuations may be due to factors specific to us, such as changes in operating results, new product introductions by us or our competitors, competitive activities, changes in analysts' ratings, or the liquidity of our stock. Fluctuations in stock price may also be due to factors relating to the global telecommunications industry or the securities markets in general. These fluctuations have often been unrelated or disproportionate to the operating performance of the specific companies whose stocks are traded. These broad market and industry factors may have a material adverse effect on the market price of our securities, regardless of our actual operating performance. Shareholders should be willing to incur the risk of such fluctuations.
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. 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, international business development and product management, may be difficult to find. 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 MAY 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 could 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 could be seriously harmed. Though members of our senior management team have signed non-competition clauses that we believe are binding, they may not turn out to be effective in all situations and the loss of such
personnel could 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 22 U.S. and 7 Canadian issued patents and have 28 U.S. and 22 Canadian patent applications pending, along with 5 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.
OTHERS MAY CLAIM THAT OUR PRODUCTS INFRINGE UPON THEIR INTELLECTUAL PROPERTY RIGHTS, OR THEY MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY EXPEND SIGNIFICANT RESOURCES ENFORCING OR DEFENDING OUR RIGHTS OR SUFFER COMPETITIVE INJURY.
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. Conversely, we may be required to spend significant resources to monitor and police our intellectual property rights.
We could incur substantial costs in defending ourselves and our customers against infringement claims or in bringing infringement claims against others. 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 business, results of operations and financial condition.
THIS YEAR, WE IMPLEMENTED AN ENTERPRISE RESOURCE PLANNING (ERP) SYSTEM AT OUR QUEBEC CITY LOCATION, AND IF THIS INFORMATION MANAGEMENT TOOL PROVES TO BE UNWIELDY, IF THE SOFTWARE TOOL TURNS OUT TO BE INEFFICIENT OR IF TECHNICAL OR SECURITY PROBLEMS ARISE, 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 though we have completed the transition from one system to another, this information technology project may still prove to be unwieldy or turn out to be ineffective. If this occurs it could have a material adverse effect on our business, results of operations and financial condition.
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 involving approximately 300 other issuing companies. 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 OTHER CURRENCIES MAY ADVERSELY AFFECT OUR OPERATING MARGINS.
The majority of our sales is denominated in currencies other than the Canadian dollar (principally US dollars and Euros). However, a large portion of our operating expenses and capital expenditures is denominated in Canadian dollars. As a result, we are exposed to fluctuations in the exchange rates between the Canadian dollar on the one hand and the U.S. dollar and the Euro on the other. An increase in the value of the Canadian dollar relative to either of these currencies could have a material adverse effect on our operating margins.
UNEXPECTED DECLINES IN OUR RESEARCH AND DEVELOPMENT AND OTHER 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 activities, as well as in relation to other activities. For example, research and development tax credits and grants represented 25% of our gross research and development expenses for the year ended August 31, 2002 and 24% for the fifteen months ended November 30, 2002.
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 and other 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 and other expenses will materially increase or we may decrease our research and development activities. In addition, 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 were required to decrease our research and development activities, or were unable to benefit from other tax credits and grants, this could have a material adverse effect on our business, results of operations and financial condition.
OUR CURRENT PRINCIPAL STOCKHOLDER HAS EFFECTIVE CONTROL OVER OUR BUSINESS.
As of November 30, 2002, Germain Lamonde, our Chairman of the Board, President and Chief Executive Officer, held approximately 94% of the voting rights in our stock. By virtue of such stock ownership, Mr. Lamonde has effective control over all matters submitted to our stockholders, including the election of our directors, and exercises significant control over our policies and affairs. Such concentration of voting power could have the effect of delaying, deterring or preventing a change in control or other business combinations that might otherwise be beneficial to our stockholders.
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. 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 CA$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 CA$800,000 ($543,000) to CA$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 EXFO Burleigh Products Group Inc. (formerly Burleigh Instruments, Inc.) ("EXFO Burleigh"), Burleigh Instruments GmBH and Burleigh Instruments (U.K.) Ltd. for 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. In April 2002, the name of Burleigh Instruments, Inc. was changed to EXFO Burleigh Products Group Inc.
EXFO Burleigh, which has been in operation for 31 years, 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 EXFO Photonic Solutions Inc. (formerly EFOS Inc.) ("EXFO Photonic"), 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, is a supplier of precision light-based adhesive spot curing products 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 and other manufacturing activities. 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 15 patents and 25 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 transferred all material intellectual property assets and most of the physical assets of EXFO Automation to EXFO Burleigh.
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 $69 million (or $95 million for the equity minus $26 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 $10 million in cash, net of cash acquired. EXFO Protocol, a company based in Montreal, Canada operating since 1998 is a supplier of fiber-optic testing and optical network performance management equipment that supports a wide range of protocols and data transmission rates.
On December 12, 2001, we announced the signing of a strategic alliance agreement with ATS Automation Tooling Systems Inc. The agreement facilitates integration of EXFO's automated manufacturing subsystems and test systems into ATS' turnkey custom and standard automation solutions to respond to specific needs of optical component and systems manufacturers. Under terms of non-exclusive strategic alliance, ATS and EXFO will jointly generate business leads, establish training programs for end-users, share marketing strategies and forecasts and validate product development initiatives.
During the past year, we continued our efforts to re-align our cost structure to market conditions. First, 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%. Then, on May 15, 2002, we announced a further 20% reduction of our global workforce in an effort to lower our cost structure. In May 2002, we performed an assessment of the carrying value of goodwill and intangible assets recorded in conjunction with the three acquisitions made during the last two years. Considering the ongoing unfavourable market conditions, we recorded a charge of US$222.2 million to write down a significant portion of goodwill and a charge of US$23.7 million to write down a significant portion of acquired intangible assets. Also, overall for fiscal 2002, we wrote off US$18.5 million in excess and obsolete inventories.
In August 2002, EXFO Burleigh received confirmation of the extension of its contract with the U.S. Air Force Research Laboratory into phase 2 of a project for the development by EXFO Burleigh of new high-precision actuator system. The contract for phase 2 provides for an additional funding of US$1.7 million and will extend through the first quarter of 2005.
In October 2002, our newly created, wholly owned subsidiary, EXFO Gnubi Products Group Inc. ("EXFO Gnubi"), acquired substantially all the assets of gnubi communications L.P., including its technology, expertise, customer base, inventories and capital assets. Consideration paid consisted of US$1.8 million in cash and 1,479,290 of our subordinate voting shares. In addition, a further cash amount up to a maximum of US$2.9 million will be paid one year and 60 days after closing according to earn out provisions based on sales volumes. With the acquisition of these assets, EXFO Gnubi, based in Dallas, Texas, continues the operations of gnubi communications, L.P., as a supplier of multi-channel telecom and datacom testing solutions serving optical transport equipment manufacturers and research and development laboratories. At the time of the asset acquisition, 30 employees of gnubi communications transferred to EXFO Gnubi.
B. BUSINESS OVERVIEW
EXFO is a leading designer, manufacturer and marketer of fiber-optic test, measurement, monitoring and automation solutions for the global telecommunications industry. Our field-testing solutions enable telecommunications carriers and network service providers ("NSPs") to deploy, upgrade and operate their optical systems with the efficiency and cost-effectiveness. Our high-end optical testing and manufacturing solutions support system vendors, component makers and researchers in their quest to lower costs and increase yield in their respective environments. EXFO's comprehensive product portfolio extends across the entire life cycle of an optical network including research and development, manufacturing, installation, maintenance and telecommunications network monitoring. Altogether, we market more than 90 product families to 2000-plus customers in 70 countries around the world.
We develop products for two main markets. Our Portable and Monitoring Division provides handheld and modular instruments for the physical-, optical- and protocol-layer testing needs of carriers and NSPs as well as full-time, real-time network surveillance. Our Industrial and Scientific Division offers an extensive line of high-performance instruments, test automation systems and manufacturing automation equipment for system vendors, component makers as well as for research and development labs.
EXFO was founded in Quebec City, Canada in 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. Customers use Portable and Monitoring products for installation, maintenance, monitoring and troubleshooting of optical networking applications. In 1996, we supplemented our product portfolio with an extensive line of Industrial and Scientific products that are mainly dedicated to research and development as well as manufacturing activities. Our Industrial and Scientific products tend to be more complex and higher priced than our Portable and Monitoring products. 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 monitor the integrity of their entire fiber-optic systems by verifying the protocol, optical and physical layers on a real-time basis, twenty-four hours a day, seven days a week.
One of our strongest competitive advantages is our modular platform design. EXFO introduced modular test platforms in 1996, and remains the industry leader with all-in-one test sets that provide added value for customers seeking enhanced productivity. Our PC-based platforms, which are supported by an extensive suite of plug-and-play test modules, are widely accepted among major network service providers and system manufacturers with an established base of more than 10,000 modular platforms sold.
During the last two years, we have strengthened our competitive positioning through acquisitions. In fiscal 2001, we completed two acquisitions to bolster growth in our Industrial and Scientific Division. We acquired EXFO Burleigh for its wavelength measurement instruments and nanopositioning alignment systems. We also added EXFO Photonic for its precision light-based, adhesive spot-curing technology. In fiscal 2002, we expanded into protocol-layer testing with the closing of the Avantas Networks Corporation acquisition (renamed EXFO Protocol Inc.), a supplier of fiber-optic testing and optical-network-performance management equipment. This acquisition was highly strategic because it enabled us to combine protocol-, optical- and physical-layer testing inside a single platform -- the FTB-400 Universal Test System -- to help our customers increase revenues and reduce operational costs in a fast-changing market.
Subsequent to the year-end, we announced that our wholly owned subsidiary, EXFO Gnubi, had purchased substantially all the assets of gnubi communications, L.P., a supplier of multi-channel telecom and datacom testing solutions. EXFO Gnubi's protocol-layer test equipment for system vendors fully complements EXFO Protocol's offering that is targeted at the network service provider market. As a result, these latest acquisitions enabled us to double our addressable market, while offering a complete fiber optic test solution to customers.
We introduced a record 25 new products in fiscal 2002 including the FTB-8000 SONET/SDH Analyzer for deployments of 10 Gb/s optical networks; the FTB-8500 Packet Blazer(TM) to ensure Gigabit Ethernet performance in high-speed optical networking; the FTB-5800 Chromatic Dispersion Analyzer for high-speed, dense wavelength division multiplexing ("DWDM"); the next-generation IQS-500 Intelligent Test System and related test modules for automated testing and manufacturing applications; and the ProAlign(TM) 5000 Component Assembly Workstation for the automated assembly of array-type devices.
Over our 17 year history, 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 chosen 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 PC-based, Windows-driven platform that can accommodate several data acquisition test modules. We have since developed products for each division 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 for their specific testing requirements.
HIGH DEGREE OF TECHNOLOGICAL INNOVATION. We have established a strong reputation for technological innovation over the last 17 years. In fact, this attribute represents a key differentiator for EXFO within a competitive marketplace. Following are some of our industry firsts in recent years:
o ALL-IN-ONE TEST SOLUTION. In 2002, we launched the first all-in-one solution for protocol-, optical- and physical-layer testing to enable customers to increase efficiency and reduce costs in the field. The added value of this concept means that field technicians no longer need to carry separate instruments like bit-error-rate testers ("BERTs"), optical spectrum analyzers ("OSAs") and optical time-domain reflectometers ("OTDRs") to fulfill their testing requirements. All they need is the next-generation FTB-400 field-testing platform and related modules to handle all their testing, storage and retrieval needs.
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.
o HIGH-PERFORMANCE PORTABLE OSA. In 2000, we introduced 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.
HIGH-QUALITY PRODUCTS. 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, as are our Toronto operations. Our subsidiary in Victor, New York is presently working toward ISO9001/2000 registration. Our subsidiaries in Montreal and Dallas, Texas, have rigorous quality assurance programs, but they are not yet certified. All of our products meet required industry standards, and some of our products meet additional voluntary 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.
CUSTOMER SUPPORT. We use 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. Our customer service teams are mainly responsible for supporting our sales force, recommending instruments that best match our customers' testing, measurement, monitoring or automation needs, providing detailed quotations, order management, technical support and training as well as calibration and repair services.
OUR STRATEGY
We intend to improve our competitive position in the fiber-optic test, measurement, monitoring and automation industry through the following initiatives:
FOCUS ON QUALITY OF EXECUTION
We plan on returning to profitability without sacrificing innovation. In fiscal 2002, we took actions to align our cost structure to deteriorating market conditions. We reduced our workforce by 350 employees, froze employee salaries and implemented rigorous cost-control measures. We also improved the efficiency of the organization, in terms of management, manufacturing operations and supply-chain processes. In terms of innovation, we launched a record 25 new products in 2002, and revenues from products that have been on the market two years or less accounted for 48% of our sales. We are working to establish a balance between becoming profitable in the short-term and ensuring growth in the long-term.
INCREASE MARKET SHARE AND EXPAND ADDRESSABLE MARKET
We believe that gaining market share and tapping into new revenue streams will lead to future growth and profitability. EXFO has taken the first steps in that direction by increasing sales 12% and 5% sequentially during the last two quarters of fiscal 2002, and by raising our net bookings in the last three quarters of 2002 with bookings of $13.3 million, $15.5 million and $17.8 million, respectively. Most industry players, meanwhile, witnessed their top lines drop or remain flat during the same period. In terms of market development, we entered the protocol-layer test sector in the 2002 financial year to complement our optical- and physical-layer testing products. The acquisitions of EXFO Protocol in November 2001 and of the assets of gnubi communications, L.P. in October 2002 not only enhanced our competitive position with network service providers and system vendors, but they also allowed us to double our addressable market and expand our presence in the healthier data communications test market. We plan to continue increasing our market share by leveraging competitive advantages, such as our modular platform design, new product development strategy and global customer base, by building on growth vehicles like our new product pipeline, protocol-layer testing solutions and selective acquisition of strategic companies or product lines that further strengthen our competitive position.
MAINTAIN SOUND FINANCIAL POSITION
Over the years we have maintained a solid balance sheet and presently have a cash position of approximately $50 million and practically no debt. This fiscal responsibility, in turn, provides our customers with the assurance that they can count on EXFO as a reliable vendor. We intend to take full advantage of our sound financial position by providing customers with the comfort of a solid, long-term partner.
PRODUCTS
At the core of our test, measurement, monitoring and automation equipment are our FTB-400 Universal Test System ("UTS") and IQS-500 Intelligent Test System ("ITS") 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-500 ITS is a scalable unit that is suited for manufacturing, laboratory engineering and research applications. The added benefit of our IQS-500 ITS is that manufacturers can design their own automated test setup or we can customize a setup for them. Our FTB-400 UTS and IQ-500 ITS 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 IQS-500
UTS MODULES HANDHELDS ITS MODULES INSTRUMENTS
----------- --------- ----------- -----------
Broadband source Used for testing wavelength
dependent behavior of fiber cables X X
and DWDM optical components.
Channel selectors Selects and isolates any
International Telecommunication
Union (ITU) DWDM channel in the C-Band X X
for bit-error-rate testing and
protocol-layer analysis.
Chromatic dispersion Measures increasing levels of
analyzer chromatic dispersion in
high-capacity optical networks.
Chromatic dispersion is a physical
phenomenon inherent to optical
fiber and optical components that
causes information bits to spread X
along a network. This degrades the
quality of the transmission signal
and, in turn, limits the
transmission speed carried by
optical networks.
Clip-on coupling Clips to an optical fiber and allows X
device non-invasive testing.
Component assembly Semi-automated workstation for
workstation arrayed-type devices that combines
precision alignment, spot-curring X
and optical testing.
Digital frequency Used to automatically or manually
locker lock the frequency of a laser source X
to a reference optical filter.
Femtosecond Measures very small levels of
polarization mode polarization mode dispersion in DWDM
dispersion analyzer and broadband components in the X
simplest, fastest and most
repeatable manner.
Gigabit Ethernet Measures data integrity for
tester high-speed internet protocol
communications in metro and edge X X*
networks.
Light-based curing Technology by which a dose of energy
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.
Live fiber detector Clips on to a fiber and is used to
detect the presence and direction of
a signal without interrupting the X
traffic.
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.
Multi-wavelength Measures the power and drift for
meters multiple wavelengths in a DWDM X X X
system.
Nanorobot photonics Offers multi-axis alignment and can
alignment system position optical devices with a
nanometer resolution, which is
essential during the alignment of X
optical components in the
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FORMAT
-----------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION PORTABLE SCIENTIFIC
-------------------- ------------------------------------- ----------------------- -------------------------
FTB 400 IQS-500
UTS MODULES HANDHELDS ITS MODULES INSTRUMENTS
----------- --------- ----------- -----------
manufacturing process.
Narrowly tunable A laser that can be precisely tuned
lasers to simulate a DWDM light sources.
Used primarily in testing optical X
amplifiers.
Optical amplifier Boosts the power of laser sources.
Used for the testing and calibration X
of test systems.
Optical couplers Used in test system to combine
sources or signals. Also used as X
splitters to monitor signals.
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 power meters Measures the power of an optical
signal. It is the basic tool for
the verification of transmitters, X X X X
amplifiers and optical transmission
path integrity.
Optical power Provides a highly accurate and
reference module traceable measurement of power for
the calibration or verification of X
other power measurement instruments.
Optical return loss Combines a laser and a power meter
meters to measure the amount of potentially X X X X
degrading back reflection.
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 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 time domain Like a radar, it measures the time
reflectometers of arrival of reflections of an
(OTDRs) optical signal to determine the X
distance to the breaks or points of
excessive loss in a fiber network.
Optical waveguide Provides the refractive index
analyzer profile of glass and fused
silica-based devices used in next X
generation networks.
Passive component Characterizes passive wavelength-
analyzer selective devices, such as multi-
plexers, demultiplexers and add/drop X
filters, with respect to absolute
wavelength in order to guarantee
their performance within DWDM systems.
Polarization Measures the difference in loss of
dependent loss power for the different states of X
meters polarization.
Polarization mode Measures the dispersion of light
dispersion analyzers that is caused by polarization.
Generally used to determine the X X
speed-distance limitation of fiber
and cables.
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FORMAT
-----------------------------------------------------
INSTRUMENT TYPE TYPICAL APPLICATION PORTABLE SCIENTIFIC
-------------------- ------------------------------------- ----------------------- -------------------------
FTB 400 IQS-500
UTS MODULES HANDHELDS ITS MODULES INSTRUMENTS
----------- --------- ----------- -----------
SONET/ SDH Analyzers Provide accurate bit-error rate and
performance analysis of SONET/SDH
overhead format that reflect the X X*
quality of a transmission system.
Stable light sources Emitting diode or lasers used in
connection with a power meter to X X X X
measure signal loss.
Talk sets A device that attaches to an optical
fiber and serves as a temporary
voice link facilitating coordination X X
of work among installation crews.
Variable optical Used in network simulation setups to
attenuators provide calibrated variable
reduction of the strength of an X X X
optical signal.
Visual fault locators A visible laser that can be
connected to an optical fiber
network to help locate breaks or X X
points of excessive loss.
Widely tunable lasers Can produce laser light across a
broad range of wavelengths. Used to
test DWDM components and value-added X X
optical modules.
* PC-based modular test platform (from EXFO Gnubi)
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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, Gigabit Ethernet bit-error-rate testing, protocol-layer analysis, PMD and CD characterization, high fiber-count testing as well as OTDR and optical loss testing and with a SONET/SDH add-on to handle rates from 64 Kb/s to 10 Gb/s. 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 PC-centric, Windows-based, highly flexible and fully scalable. Their large environmentally robust touchscreens are very practical for field use.
Our Portable and Monitoring products cover the physical, optical and protocol layers of an optical network. If you compare a network to a highway, EXFO products test the road, or the fiber and optical components that make up the physical layer of a network. Our products also characterize the numerous lanes along the highway, or the various wavelengths carrying bandwidth within the optical layer of a network. And our products test the traffic, or the bits and bytes, streaming through the protocol layer of a network.
We also offer stand-alone, autonomous solutions for physical-, optical- and protocol-layer monitoring. Our physical-layer monitoring solution, Fiber Guardian, carries out constant real-time monitoring on up to 32 fibers within an optical network. This monitoring solution displays a message on its embedded screen and sends out an alarm if a measurement falls outside a user-defined threshold. Through state-of-the-art instrumentation, Fiber Guardian can
specify the location of a fault to reduce downtime to a minimum, or it can identify minor degradations to prevent loss of service.
Our optical-layer monitoring product, Optical Guardian, continuously monitors critical parameters of optical channels within "DWDM" or coarse wavelength division multiplexing ("CWDM") networks. Likewise, an alarm is automatically generated when a measurement falls outside user-defined thresholds.
Finally, our protocol-layer monitoring solution, Network Guardian, is an optical network performance management system that supports a wide range of protocols like SONET, T-Carrier, SDH, PDH, 10/100 Ethernet and Gigabit Ethernet. It remotely carries out tests on points of presence, handoff points, co-location sites and customer premise equipment sites. Our portable and monitoring products accounted for 57% of our sales in the financial year ended August 31, 2002 and 48% and 69% of our sales in the 2001 and 2000 financial years respectively.
INDUSTRIAL AND SCIENTIFIC PRODUCTS
Our Industrial and Scientific product line is mainly built around our IQS-500 ITS platform and is available as test modules or stand-alone, benchtop instruments. The IQS-500 ITS is a next-generation scalable platform that enables system vendors, optical component manufacturers and research labs to reduce costs and increase efficiency. It efficiently runs as many as 100 test modules using a single controller unit. These modules can be stacked to produce a high-performance test station for a number of network elements including DWDM multiplexers, optical cross-connects, optical transponders, optical patchcords and VCSEL lasers.
The IQS-500 platform is equipped with the latest in software and hardware technology to support single-button operation for automated testing. Its system-based approach--one box, several test modules--combined with an open architecture (PXI, Windows, LabVIEW(TM), etc.) and ease of programming, produces a highly flexible test and automation environment.
The IQS-500 also provides backward compatibility with recent IQ-generation test modules, while delivering all the power and advantages of a next-generation platform. EXFO's wide selection of high-performance test modules includes high-speed power meters, light sources, WDM laser sources, tunable laser sources, variable attenuators, optical spectrum analyzers, polarization mode dispersion ("PMD") analyzers, multi-wavelength meters, channel selectors, polarization dependent loss ("PDL'") and optical return loss ("ORL") meters, polarization controllers and optical switches.
Our Industrial and Scientific Division also addresses testing issues that cannot be handled by standard test modules or stand-alone benchtop instruments. We have developed a number of integrated test systems and offered them as off-the-shelf solutions to suit a wide range of customer needs. In addition, we have created a software development kit for developers who prefer writing their own programs for our instruments. Following is list of integrated test systems that EXFO provides for characterizing optical components, sub-systems and networks:
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 Cable assembly test system Used to perform insertion loss and
mandrel-free reflection
measurements with the highest
degree of accuracy and
repeatability on short fiber
assemblies.
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 sub-systems under
varying environmental conditions
primarily to ensure compliance
with industry standards.
o DWDM passive component Used to automatically characterize
test system 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 Multi-wavelength comb Used to adjust the power of a bank
controller of DFB-ITU lasers in order to test
loading conditions of optical
amplifiers.
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EXFO 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 (EXFO Burleigh) and precision light-based, adhesive spot-curing (EXFO Photonic). In fiscal 2002, both of these subsidiaries combined with EXFO to produce the ProAlign(TM) 5000 Component Assembly Workstation, the industry's first semi-automated solution for arrayed-type waveguide devices.
Another product from EXFO Burleigh includes the FR-3000 NanoRobot(R) Alignment System, which provides multi-axis alignment and can position optical devices with a 0.1 nanometer of mechanical resolution. EXFO 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 optical component, semiconductor and life science markets. Its products deliver precise doses of the appropriate spectral light onto photosensitive and heat-cured adhesives to significantly reduce bonding time and increase repeatability. Key products include the Novacure(R) IR, which uses infrared spot-curing on conventional heat-cure adhesives; the Novacure(R), a bonding solution that delivers all the benefits of ultraviolet and visible spot-curing on photosensitive adhesives; and the Acticure(R) 4000 Ultraviolet/Visible Spot Cure System, which has an increased lamp life of 2,000 hours and an optional automated controller that offers user-programmable profiles for bonding. All of these light-based curing systems can be adapted to automated or manual assembly environments. In addition, in October 2002, EXFO Photonic released its X-CiteTM 120 fluorescence illumination system, a self-contained illumination unit for fluorescence microscopy applications.
Our modular and benchtop instruments are complemented by multi-channel telecom and datacom test solutions coming from EXFO Gnubi's protocol-layer test instruments that handle data rates from 64 Kb/s to 10 Gb/s - as well as Gigabit Ethernet - inside a PC-based modular platform that is highly comparable to EXFO's. EXFO Gnubi's product offering addresses test requirements for multiple communication ports in lambda routers, optical switches, cross-connects and DWDM systems.
Our Industrial and Scientific products accounted for 43% of our sales in the financial year ended August 31, 2002 and 52% and 31% in the 2001 and 2000 financial years respectively.
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, 2002, our research and development departments included 244 full-time engineers, scientists and technicians, of whom 41 hold post-graduate degrees. Gross research and development expenditures for fiscal 2002 reached $17million compared to $17.6 million for fiscal 2001.
Despite the addition of the EXFO Protocol research and development activities further to that acquisition in November 2001, we effectively reduced our research and development personnel and expenditures during fiscal 2002 as a result of restructuring and cost reduction efforts. However, through our market-oriented product portfolio review process we ensure that our investments in research and development are aligned with our customers' needs and strategies. This process enables us to maximize our returns on research and development investments by focusing our resources on 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. During fiscal 2002, only one customer accounted for more than 10% of our sales and our top three customers represented 15.4% of our sales during this period. With regard to geographic distribution, North American customers represented 57% of our sales, while international customers accounted for 43% during fiscal 2002. For the financial years ended August 31, 2001 and 2000, North American sales accounted for 58% and 62%, and international sales for 42% and 38% respectively. 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, we utilize hybrid (direct and/or indirect) sales organizations as best-suited for particular market segments to generate revenue. Higher technology products to sophisticated buyers is typically a direct sale model. Low to medium technology products to less stringent technical buying groups is typically done through a manufacturer representative organization supported by our local regional sales managers. The team consists of a vice-president supported by a 24-member team of sales directors and regional sales managers, account managers sales engineers and application engineers, who are located throughout major metropolitan areas. Our group of sales professionals has an average of 13 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. This sales team specializes in selling our test, measurement and monitoring equipment and our manufacturing automation products targeted to customers who research, develop or manufacture optical networking products and components. In this market, 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 40 sales representatives and distributors 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 21 sales professionals. Our direct sales network in Europe is supported by a main office and service center in Paris, France, which maintains our head of European sales operations and also provides repair and calibration services for our European, Middle East and African customers. Our main offices for Asia are in Singapore and Beijing 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 90 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 over 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, mail outs 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, Chinese and German. Our Customer Support Group consists of three distinct units: technical support, order management and a repair and calibration authorization service centers. A frequently asked question database is also updated regularly on our Web site.
Through service facilities located in Canada, the United States, Europe and Asia, we provide full after-sales service to our customers that includes the following: technical support and software upgrades, application support, calibration verification, calibration adjustment, repairs (including hardware upgrades and preventive maintenance), training, and field services (including on site installation, repairs, calibration verification, preventive maintenance and training).
MANUFACTURING
Manufacturing operations consist mainly of material planning, procurement, sub-assembly, final assembly, testing, software loading, calibration, quality assurance, shipping, billing and customs management.
As of December 31, 2002, we had 256 employees involved in our manufacturing operations. Our manufacturing operations, which occupy a total of approximately 97,475 square feet, are spread among six buildings in five cities. Manufacturing operations occupy 66,225 square feet in Quebec City, Canada, 10,000 square feet in Victor, United States, 16,000 square feet in Toronto, Canada, 3,300 square feet in Montreal, Canada and 1,950 square feet in Addison, United States. 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. Quality is assured through product testing at numerous stages in the manufacturing process to ensure that our products meet stringent industry requirements and our customers performance requirements. 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 EXFO Burleigh, EXFO Photonic, EXFO Protocol and EXFO Gnubi 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;
o financial stability; and
o price.
The fiber-optic test and measurement sector has recently undergone, and will continue to undergo, significant restructuring and consolidation. We have seen, and expect to continue to see, some competitors opting for strategic retreat, redirecting their research and development to other sectors, divesting or merging.
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, NetTest, Spirent plc and Tektronix, Inc.
The second category refers to niche companies in the fiber-optic test, measurement and automation industry or those serving that industry as a niche market. 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 20 U.S.-issued and seven Canadian-issued patents and we have 28 U.S., 22 Canadian and five 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 March 31, 2021.
We consider six 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 apparatus and method to determine optical phase delay, which forms the basis of our new FTB-5800 product for the measurement of chromatic dispersion in field-installed optical fibers. A US patent has been granted, and applications have been submitted in Canada, Europe (pursuant to PCT), and China;
o an optical spectrum analyzer using optical fibers as input and output "slits". This invention forms the basis of our FTB-5240, FTB-5240B and IQ -5250 products. This patent application is in process in the United States, Canada, Europe (pursuant to PCT) and China;
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 Solutions 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, involving more than 300 other public companies, 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.
On April 19, 2002, the plaintiffs filed an amended complaint containing master allegations against all of the underwriters in all of the 310 cases included in this class action and, also filed an amended complaint containing allegations specific to four of the company's underwriters, the company and two of its executive officers. In addition to the allegations mentioned above, the amended complaint alleges that the underwriters (i) used their analysts to manipulate the stock market; and (ii) implemented schemes that allowed issuer insiders to sell their shares rapidly after an initial public offering and benefit from high market prices. As concerns the company and its two executive officers in particular, the amended complaint alleges that (i) the company's registration statement was materially false and misleading because it failed to disclose the additional commissions and compensation to be received by underwriters; (ii) the two named executive officers learned of or recklessly disregarded the alleged misconduct of the underwriters; (iii) the two named executive officers had motive and opportunity to engage in alleged wrongful conduct due to personal holdings of the company's stock and the fact that an alleged artificially inflated stock price could be used as currency for acquisitions; and (iv) the two named executive officers, by virtue of their positions with the company, controlled the company and the contents of the registration statement and had the ability to prevent its issuance or cause it to be corrected. The plaintiffs in this suit seek an unspecified amount for damages suffered.
In July 2002, the issuers filed a motion to dismiss the plaintiffs' amended complaint and on October 8, 2002, the claims against Messrs. Lamonde and Plamondon were dismissed pursuant to the terms of Reservation of Rights and Tolling Agreements entered into with the plaintiffs.
We believe that our executive officers and we have fully complied with all applicable securities laws and that the claims against us are without merit. We have referred this matter to our insurers and are vigorously defending 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 that may exceed available insurance protections.
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 resumed on January 15, 2002, at which time the court ordered the preparation and filing of an
independent expert report. Both parties have submitted to the court a list of questions and issues to be addressed by the expert. The Court's ruling provided that the report be filed by November 30, 2002, however, we still have not received confirmation of the filing.
On November 28, 2002, EXFO, GAP Optique and the University of Geneva filed a joint motion for provisional measures, with the District Court in the Canton Vaud, Switzerland, against LUCIOL. The joint plaintiffs are seeking an order to prohibit LUCIOL from manufacturing and selling the chromatic dispersion analyzer and the photon-counting OTDR that are both described in the preceding paragraph. The defendant is expected to appear before the court to file an answer to the application in early January 2003.
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, 2002, 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 -- ORGANIZATIONAL CHART]
EXFO Electro-Optical Engineering Inc.
18/09/1985
(Canada)
Operating **
100% 100% 100% 85% 100% 100% 100%
--------------- ------------- -------------- ------------ ---------- ---------------- ---------------- ----------------
EXFO UK Limited EXFO Photonic GEXFO GAP Optique EXFO Asia Nortech Fibronic EXFO Protocol Burleigh
27/02/2001 Solutions Inc. Distribution SA Pacific Inc. Inc.(formerly) Instruments GmbH
(United Kingdom) (formerly Efos Internationale 17/05/1994 PTE Ltd. 14/08/1991 Avantas Networks (Germany)
Non-operating Inc.) Inc. (Switzerland) 18/01/2001 (Canada) Corporation) Non-operating
20/02/1984 17/12/1992 Operating (Singapore) Non-operating 02/11/2001
(Ontario) (Quebec) Operating (Canada)
Operating Holding Operating
/ /
------------------------------------------ ---------------
100% 100% 100% 100%
----------- ------------- ---------- -------------
EXFO Europe EXFO EXFO USA [Nortech
SARL International Inc. Fibronic Inc.
08/02/1994 Services 07/12/2000 (Texas)
(France) Management LLC (Delaware) Dissolved
Operating 22/11/2000 Holding 07/09/2001]
(Hungary) -
Operating
/
----------------------------------------
100% 100% 100%
------------ --------- ----------
EXFO America EXFO EXFO Gnubi
Inc. Burleigh Products
15/12/1992 Products Group Inc.
(Delaware) Group Inc. 04/09/2002
Operating 25/08/1972 (Delaware)
(New York) Operating
Operating
/ \
-------------------------------------------
71.5% 100%
------------- -------------
** [Burleigh Burleigh
28.5% Instruments Automation
(UK) Ltd. Inc.
(United (Delaware)
Kingdom) Non-operating
Dissolved
12/11/2002]
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D. PROPERTY, PLANT AND EQUIPMENT
Our main offices and facilities are located in 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 China, France, Germany, Great Britain, Japan, Singapore and the United States. EXFO Burleigh's facilities are located in Victor, in the state of New York, EXFO Gnubi is located near Dallas, Texas, EXFO Photonic is located near Toronto, Canada and EXFO Protocol is located in Montreal, Canada.
In September 2002, we obtained ownership of one of the buildings housing production facilities in Quebec City that was previously leased from a company controlled by EXFO's president and chief executive officer.
The following table sets forth information with respect to the main facilities that we occupy as of December 31, 2002.
LOCATION USE OF SPACE SQUARE FOOTAGE TYPE OF INTEREST
-------- ------------ -------------- ----------------
436 Nolin Street Manufacturing 44,164 Owned
Vanier (Quebec)
400 Godin Avenue Research and Development, Manufacturing 128,800 Owned
Vanier (Quebec) and Administrative
465 Godin Avenue Executive and Administrative 24,000 Leased
Vanier (Quebec)
2260 Argentia Road Research and Development, Manufacturing 36,000 Leased
and Administrative
Mississauga (Ontario)
2650 Marie-Curie Research and Development, Manufacturing 26,000 Leased
St-Laurent (Quebec) and Administrative
7647 Main Street Fishers Research and Development, Manufacturing 40,000 Owned
Victor (New York) and Administrative
4275 Kellway Circle Research and Development, 8,720 Leased
Addison (Texas) Manufacturing and Administrative
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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 for the fiscal years ended August 31, 2002, 2001 and 2000 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 generally accepted accounting principles 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 generally accepted accounting principles in the United States, or U.S. GAAP, except as described in Note 19 to our consolidated financial statements.
CORPORATE HIGHLIGHTS
EXFO LAUNCHES 25 PRODUCTS IN 2002
EXFO announced in September 2002 that it had launched 25 new products in fiscal 2002. Key product launches included the FTB-8000 SONET/SDH Analyzer for deployments of 10 Gb/s optical networks; the FTB-8500 Packet Blazer(TM) to ensure Gigabit Ethernet performance in high-speed optical networking; the FTB-5800 Chromatic Dispersion Analyzer for high-speed, dense wavelength-division multiplexing; the next-generation IQS-500 Intelligent Test System and related test modules for automated testing and manufacturing applications; and the ProAlign(TM) 5000 Component Assembly Workstation for the automated assembly of array-type devices.
EXFO CARRIES OUT RESTRUCTURING ACTIONS AND REVIEWS ASSETS FOR IMPAIRMENT
As a result of the telecommunications downturn that affected several markets, EXFO carried out a series of restructuring measures in fiscal 2002 to accelerate its return to profitability. Several proactive actions were taken to lower the company's cost structure, including workforce reductions and inventory write-offs. Overall for fiscal 2002, EXFO reduced its workforce by 350 people and wrote off $18.5 million in excess and obsolete inventories.
EXFO also performed in May 2002 an assessment of the carrying value of goodwill and intangible assets recorded in conjunction with the three strategic acquisitions made during the last two years. Considering the ongoing unfavorable market conditions, the company recorded a charge of $222.2 million to write down a significant portion of goodwill and a pre-tax charge of $23.7 million to write down a significant portion of acquired intangible assets.
EXFO IMPLEMENTS NEW ERP SYSTEM
In December 2001, a new enterprise resource planning ("ERP") system was implemented at EXFO's headquarters in Quebec City, QC. This ERP system will enable the company to improve the efficiency of its operations and should provide customers with better and more prompt service.
EXFO COMPLETES ACQUISITION OF AVANTAS NETWORKS
EXFO announced in November 2001 that it had completed its previously announced acquisition of Avantas Networks Corporation (renamed EXFO Protocol) for a total consideration of $95.0 million, or $69.4 million net of $25.6 million of cash and cash equivalents acquired. This acquisition was accounted for using the purchase method and has resulted in goodwill of $58.0 million, which is not amortized under new accounting rules. In May 2002, as part of the assessment of the carrying value of goodwill recorded in business combinations, EXFO Protocol's goodwill was written down to its fair value, resulting in an impairment loss of $49.3 million. EXFO Protocol is a supplier of leading-edge fiber-optic testing and optical-network-performance management equipment supporting a wide range of protocols and data transmission rates.
SUBSEQUENT EVENT
Subsequent to the year-end, EXFO announced it had acquired substantially all the assets of gnubi communications, L.P., including its technology, expertise, customer base and inventories, in a stock-and-cash deal that ranged between $4.3 million and $7.2 million. Consideration paid consisted of $2.5 million in EXFO stock, $1.8 million in cash and a cash earn-out based upon sales volume up to a maximum of $2.9 million. gnubi, a privately held company in Dallas, Texas, is a leading supplier of multi-channel telecom and datacom testing solutions with an established customer base of Tier 1 optical transport equipment manufacturers and R&D labs.
INDUSTRY OVERVIEW
OPTICAL NETWORKING MARKET
The past decade has witnessed growth in the volume of data traffic largely due to the popularity of the Internet and related bandwidth-intensive applications. According to the Computer Industry Almanac, the number of Internet users around the world is expected to increase from 530 million in 2001 to 1.12 billion in 2005. In addition, users are continuously seeking applications that require a great deal of bandwidth such as virtual private networking ("VPN"), storage area networking ("SAN") and rich media streaming over the Internet.
The increase in Internet users and in bandwidth-intensive applications created a need for high-capacity communications networks. To meet this increasing demand for bandwidth, many telecommunications carriers designed and installed new networks based on optical fiber, deployed additional fiber within their existing networks or used advances in optical technology such as dense wavelength-division multiplexing. DWDM involves combining beams of light of slightly different wavelengths through a single fiber, with each wavelength carrying its own stream of information. DWDM gained 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.
Following a period of significant growth, the telecommunications industry is enduring a market correction. Network service providers have lowered their capital spending to improve short-term financials and reduce debt-loads which, in turn, have initiated an industry-wide consolidation period. Despite these challenging market conditions, new bandwidth-hungry applications are pushing telecom and datacom demand deeper into metropolitan, access and
enterprise networks. As a result, NSPs are continuously upgrading their existing networks with higher transmission rates, newer protocols and additional channels to meet the latest bandwidth and application requirements. The system and component manufacturing markets, meanwhile, have been sharply affected by the reduction in capital spending of NSPs. During the past 18 months, NSPs have repeatedly downsized their capital spending budgets for deploying new networks, which has resulted in a slowdown among system and component vendors.
OPTICAL TEST, MEASUREMENT AND AUTOMATION EQUIPMENT MARKET
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, which include all-in-one protocol-, optical- and physical-layer test solutions, marketed their products to NSPs, who needed to upgrade their networks to higher transmission rates, add DWDM channels or maintain their existing networks. Likewise, test, measurement and automation vendors, whose products increase efficiency and reduce costs on the production floor, still attracted the attention of system and optical component manufacturers, who kept investing in their R&D programs to stay ahead of the competition.
Fiber-optic test, measurement and automation equipment is essential for research and development, manufacturing, installation and maintenance as well as network monitoring. 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 NSPs and manufacturers of optical components, sub-systems and optical networking systems ensure performance and reliability.
Fiber-optic test and measurement equipment like a bit-error-rate tester is also used to ensure data integrity. 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 be incomprehensible to the receiver.
Automation equipment is necessary to reduce costs and increase productivity on the manufacturing floor. Optical components and sub-systems, which make up an optical network, are typically assembled by hand. As a result, optical component vendors are increasingly looking for ways to increase efficiency and yield as well as 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 technical resources to developing next-generation products instead of manufacturing tools.
COMPANY 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 telecommunications carriers and network service providers around the world. 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 and manufacturing activities of optical system and component vendors worldwide. Our Industrial and Scientific products tend to be more complex and higher priced than our Portable and Monitoring products. 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 monitor the integrity of their entire fiber-optic systems by verifying the protocol, optical and physical layers.
One of our strongest competitive advantages is our modular platform design. EXFO introduced modular test platforms more than six years ago, and remains the uncontested leader with all-in-one test sets that provide greater value for customers seeking enhanced productivity. Our PC-based platforms, which are supported by an extensive suite of plug-and-play test modules, are widely accepted among Tier 1 carriers and system manufacturers with an established base of more than 10,000 units on the market today.
During the last two years, we strengthened our competitive positioning with a string of acquisitions. In fiscal 2001, we completed two key acquisitions to bolster growth in our Industrial and Scientific Division. We acquired Burleigh Instruments, Inc. (renamed EXFO Burleigh Products Group Inc.) for its wavelength measurement instruments and nanopositioning alignment systems. We also added EFOS Inc. (renamed EXFO Photonic Solutions Inc.) for its precision light-based, adhesive spot-curing technology.
In fiscal 2002, we expanded into protocol-layer testing with the closing of the Avantas Networks Corporation acquisition (renamed EXFO Protocol Inc.), a supplier of leading-edge, fiber-optic testing and optical-network-performance management equipment. This acquisition was highly strategic because it enabled us to combine protocol-, optical- and physical-layer testing inside a single platform--the FTB-400 Universal Test System--to help our customers increase revenues and reduce operational costs in a fast-changing market.
Subsequent to the year-end, we also announced that our wholly-owned subsidiary, EXFO Gnubi Products Group Inc. had purchased substantially all the assets of gnubi communications, L.P., a leading supplier of multi-channel telecom and datacom testing solutions. EXFO Gnubi's protocol-layer test equipment for optical transport equipment manufacturers fully complements EXFO Protocol's offering that is targeted at the network service provider market. As a result, these latest acquisitions enabled us to double our addressable market, while offering a complete test solution for the entire lifecycle of an optical network: R&D, manufacturing, installation and maintenance, as well as network monitoring.
SALES
We sell our products to more than 2000 customers in 70 countries around the world through our direct sales force and, indirectly, through distribution channels. North America accounted for 57% of our sales in fiscal 2002 compared to 43% for the rest of the world. With regard to sales distribution, it was a 57-43% split in favor of our Portable and Monitoring products in 2002. In terms of customer breakdown, we had one 10%-customer in 2002 with our top three customers representing 15.4% of sales for the year.
COST OF SALES
Cost of sales includes raw materials, salaries and related expenses for direct and indirect manufacturing personnel and manufacturing overhead. We expense cost of sales as the related revenue is recognized. Excess, obsolete or scrapped materials are included in cost of sales.
OPERATING EXPENSES
We classify our operating expenses into three general categories:
selling and administrative expenses, research and development expenses and
amortization expenses.
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, material component costs as well as fees paid to third-party consultants. We expense our research and development costs as they are incurred. We are eligible to receive research and development tax credits and government grants on research and development carried out in Canada. Related research and development tax credits and government grants are recorded as a reduction of gross research and development expenses.
Operating expenses related to our restructuring plans have been recorded as a separate component of operating expenses. These expenses consist primarily of severance expenses, costs to exit leased facilities, a write-off of property, plant and equipment, as well as a write-down of intangible assets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of financial conditions and results of operations is based on our consolidated financial statements included elsewhere in this annual report. They have been prepared in accordance with Canadian GAAP. The preparation of financial statements in accordance with GAAP 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 periods. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, allowance for excess and obsolete inventories, research and development tax credits and government grants, impairment of intangible assets and goodwill, future income taxes, warranty obligations, restructuring charges, contingencies and other obligations. We base our estimates on historical experience and on other factors that we believe to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
The following summarizes our critical accounting policies and those that require the most significant judgment and estimates in the preparation of our consolidated financial statements.
REVENUE RECOGNITION. For products in which software is incidental, we recognize revenue when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. In addition, provisions are made for estimated returns, warranties and support obligations.
For products in which software is not incidental, revenues are separated into two categories: product and customer support revenues based upon vendor-specific objective evidence of fair value. Product revenues for these sales are recognized as described above. Customer support revenues are deferred and recognized ratably over the years of the support arrangement. Except when provided within one year of delivery, costs of providing this support are insignificant and accrued at the time of delivery and no software upgrades are provided.
For all sales, we use a binding purchase order as evidence that a sales arrangement exists.
Delivery generally occurs when the product is shipped to a common carrier.
At the time of the transaction, we assess whether the price associated with our revenue transactions is fixed and determinable and whether or not collection is reasonably assured. We assess whether the price is fixed and determinable based on the payment terms associated with the transaction. We assess collection based on a number of factors, including past transaction history and the creditworthiness of the customer. Generally, collateral or other security is not requested from customers.
Most sales arrangements do not generally include acceptance clauses. However, if a sales arrangement includes an acceptance provision, acceptance occurs upon the earliest of receipt of a written customer acceptance or expiration of the acceptance period. For these sales arrangements, the sale is recognized when acceptance occurs.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We estimate collectibility of accounts receivable on an ongoing basis by periodically reviewing balances outstanding over a certain period of time. We determine our allowance for doubtful accounts receivable based on our historical accounts receivable collection experience and on the information that we have about the status of our accounts receivable balances. If the financial conditions of our customers deteriorate, resulting in an impairment of their ability to make required payments, additional allowance may be required, which could adversely affect our future results.
ALLOWANCE FOR EXCESS AND OBSOLETE INVENTORIES. We state our inventories at the lower of cost and net realizable value and provide reserves for excess and obsolete inventories. We determine our reserves for excess and obsolete inventories considering our quantities on hand and our expected needs for these inventories to support future sales of our products. It is possible that additional inventory reserves may occur if future sales are less than our forecasts, which could adversely affect our future results.
RESEARCH AND DEVELOPMENT TAX CREDITS AND GOVERNMENT GRANTS. We record research and development tax credits and government grants based on our interpretation of tax laws and grant programs, especially regarding related eligible projects and expenses, and when there is a reasonable assurance that we have complied and will continue to comply with all conditions and laws. Also, our judgment and estimates are based on historical experience. It is possible, however, that the tax authorities have a different interpretation of laws and application of
conditions related to the programs or that we will not comply with all conditions related to grants in the future, which could adversely affect our future results.
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS. We assess impairment of goodwill and intangible assets 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 value of the unamortized portion. In fiscal 2002, we incurred significant impairment losses on goodwill and intangible assets recorded in conjunction with our three strategic acquisitions made during the last two years.
On September 1, 2002, upon the adoption of section 3062 of the Canadian Institute of Chartered Accountants Handbook (CICA), we performed an initial impairment test of goodwill based on a fair value method. Based on that initial test, goodwill was not considered impaired. Moving forward, this test will be performed on an annual basis or more frequently if events or circumstances occur that more likely than not trigger an impairment.
FUTURE INCOME TAX ASSETS. We account 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 for the years in which the differences are expected to reverse. In assessing the recoverability of our future income tax assets, we consider whether it is more likely than not that some or all of the future income tax assets will not be realized. The ultimate realization of certain future income tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences will become deductible. If we obtain information that causes our forecast of future taxable income to change or if actual future taxable income differs from our forecast, we may have to revise the carrying value of our future income tax assets, which would affect our net earnings in the period in which the change was made. We review the recoverability of our future income tax assets on a quarterly basis.
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, 2000 2001 2002 2000 2001 2002
------------------------------------ -------------------------------
Sales $ 71,639 $ 146,013 $ 68,330 100.0% 100.0% 100.0%
Cost of sales 24,712 54,946 50,801 34.5 37.6 74.3
------------------------------------ -------------------------------
Gross margin* 46,927 91,067 17,529 65.5 62.4 25.7
------------------------------------ -------------------------------
Operating expenses
Selling and administrative 24,304 46,236 35,446 33.9 31.7 51.9
Net research and development 6,402 13,601 12,782 8.9 9.3 18.7
Amortization of property, plant
and equipment 1,451 3,559 5,932 2.0 2.4 8.7
Amortization of intangible assets 47 9,876 11,615 0.1 6.8 17.0
Write-down of intangible assets -- -- 23,657 -- -- 34.6
Restructuring and other charges -- 3,288 2,880 -- 2.3 4.2
------------------------------------ -------------------------------
Total operating expenses 32,204 76,560 92,312 44.9 52.5 135.1
------------------------------------ -------------------------------
Earnings (loss) from operations 14,723 14,507 (74,783) 20.6 9.9 (109.4)
Interest income, net 1,480 6,098 1,456 2.1 4.2 2.1
Foreign exchange gain (loss) (684) 3,327 (458) (1.0) 2.3 (0.7)
------------------------------------ -------------------------------
Earnings (loss) before income taxes
and amortization and write-down
of goodwill 15,519 23,932 (73,785) 21.7 16.4 (108.0)
Income taxes 5,298 8,150 (25,451) 7.4 5.6 (37.2)
------------------------------------ -------------------------------
Earnings (loss) before amortization
and write-down of goodwill 10,221 15,782 (48,334) 14.3 10.8 (70.8)
Amortization of goodwill 297 31,076 38,021 0.4 21.3 55.6
Write-down of goodwill -- -- 222,169 -- -- 325.1
------------------------------------ -------------------------------
Net earnings (loss) for the year $ 9,924 $ (15,294) $(308,524) 13.9% (10.5)% (451.5)%
==================================== ===============================
Basic and diluted net earnings
(loss) per share $ 0.25 $ (0.29) $ (5.09)
Research and development data:
Gross research and development $ 9,374 $ 17,601 $ 17,005 13.1% 12.1% 24.9%
Net research and development $ 6,402 $ 13,601 $ 12,782 8.9% 9.3% 18.7%
------------------------------------ -------------------------------
OTHER DATA (UNAUDITED):**
Pro forma net earnings (loss) $ 10,252 $ 24,500 $ (11,248) 14.3% 16.8% (16.5)%
Basic and diluted pro forma net
earnings (loss) per share $ 0.26 $ 0.46 $ (0.19)
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* Including inventory write-offs of nil, nil and $18,463 for the years ended August 31, 2000, 2001 and 2002, respectively. Excluding inventory write-offs of $18,463 for the year ended August 31, 2002, gross margin would have reached 52.7% for that year. This latter information is unaudited and is a non-GAAP measure.
** Net earnings (loss) excluding amortization and write-down of goodwill and the after-tax effect of amortization and write-down of intangible assets, restructuring and other charges as well as inventory write-offs. This information may not be comparable to similarly titled measures reported by other companies because it is non-GAAP information. Please refer to page 55 of this annual report for a detailed quantitative reconciliation.
SALES
Sales totaled $68.3 million, $146.0 million and $71.6 million in fiscal 2002, 2001 and 2000, respectively. Sales decreased 53% in fiscal 2002 compared to 2001 due to a reduced demand for our products and pricing pressure attributable to the severe downturn in the telecommunications industry. The fiber-optic telecommunications industry has not rebounded as quickly as many industry experts forecasted. Established telecommunications carriers have decreased their capital expenditures to improve short-term financials and reduce debt loads, while a number of others have filed for bankruptcy. Lower spending levels have produced a trickle-down effect throughout the fiber-optic industry, including in research and development, manufacturing, installation and maintenance, as well as network monitoring companies. Test, measurement, monitoring and automation equipment vendors, in turn, have been negatively affected due to the dramatic reduction in the deployment of optical networks. Consequently, both our Portable and Monitoring products and our Industrial and Scientific products suffered from this lack of demand and pricing pressure. Our Industrial and Scientific products, however, were more severely affected by the downturn. With regard to sales distribution, it was a 57%-43% split in favor of our Portable and Monitoring products in fiscal 2002 compared to 52%-48% in favor of our Industrial and Scientific products in 2001.
Net accepted orders decreased 56% to $58.3 million in fiscal 2002 from $132.1 million in 2001. Our book-to-bill ratio decreased to 0.85 in fiscal 2002 compared to 0.90 in 2001. However, our book-to-bill ratio, which began decreasing in the third quarter of 2001, has been steadily increasing since the second quarter of 2002. Our book-to-bill ratio for the last quarter of fiscal 2002 was 1.03.
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 EXFO Burleigh Products Group ("EXFO Burleigh") and EXFO Photonic Solutions acquisitions completed during the year. In addition, the increase in sales of our Industrial and Scientific products significantly increased our top line because these products have a higher average selling price than Portable and Monitoring products. Altogether, our Industrial and Scientific products accounted for 52% of sales in fiscal 2001 compared to 31% in 2000.
Net accepted orders increased 53% to $132.1 million in fiscal 2001 from $86.2 million for 2000. Our book-to-bill ratio, however, decreased 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 affecting our bookings in the third quarter of 2001.
North American sales accounted for 57%, 58% and 62% of global sales in fiscal 2002, 2001 and 2000, respectively. International sales represented 43%, 42% and 38% of global sales in fiscal 2002, 2001 and 2000, respectively. Despite the relative stability in our international sales between fiscal 2002 and 2001 as a percentage of total sales, sales to the Asian market reached 19% of global sales in fiscal 2002 compared to 13% in 2001 as a result of our sustained efforts to develop this market. On the other hand, sales to the European market decreased to 14% of global sales in fiscal 2002 compared to 21% of sales in 2001, mainly because this market has been the most affected by the downturn in the telecommunications industry.
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.
We sell our products to a broad range of customers including telecommunications carriers, network service providers, optical component and system manufacturers, as well as research and development laboratories. No customer accounted for more than 10.2%, 6.4% and 5.8% of sales in fiscal 2002, 2001 and 2000, respectively. In fiscal 2002, our three most significant customers represented 15.4% of sales.
GROSS MARGIN
Gross margin amounted to 25.7%, 62.4% and 65.5% of sales for fiscal 2002, 2001 and 2000, respectively.
In fiscal 2002, we recorded inventory write-offs of $18.5 million for obsolete and excess inventories. These special charges were recorded due to weaker demand for our products and our expected needs for the upcoming 24 months at the time of the write-offs. Excluding these special charges, our gross margin would have reached 52.7% of sales. Even excluding these special charges, our gross margin decreased 9.7% in fiscal 2002 from 62.4% in 2001, mainly because of the significant decrease in our sales in 2002. Weaker demand for our products and pricing pressure prevented us from a better absorption of our fixed manufacturing costs. Our manufacturing capacity in Quebec City, Quebec and Victor, New York almost doubled in fiscal 2001, while sales decreased significantly in 2002.
Despite the increase in sales of Industrial and Scientific products in fiscal 2001, 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 in 2001 as well as hired and trained related manufacturing employees to face then and expected 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, 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 manufacturing costs.
Gross margin can be negatively affected by competitive pricing pressure, increase in obsolescence costs, shifts in product mix, reductions in government grants, under-absorption of fixed manufacturing costs and increases in product offerings by other suppliers in the fiber-optic test, measurement, monitoring and automation industry.
SELLING AND ADMINISTRATIVE
Selling and administrative expenses reached $35.4 million, $46.2 million and $24.3 million for fiscal 2002, 2001 and 2000, respectively. As a percentage of sales, selling and administrative expenses amounted to 51.9%, 31.7% and 33.9% for fiscal 2002, 2001 and 2000, respectively. The dollar decrease in fiscal 2002 compared to 2001 is directly related to lower expenses resulting from our restructuring plans implemented since June 2001 and lower commission expenses since our sales decreased significantly in fiscal 2002. However, this decrease was offset in part by the impact of the acquisition of EXFO Protocol in November 2001. On the other hand, the significant drop in sales in fiscal 2002 caused the selling and
administrative expenses percentage to increase since these expenses tend to be fixed and because sales decreased at a faster rate than selling and administrative expenses.
The dollar increase in 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 EXFO Burleigh and EXFO Photonic acquisitions. The percentage decrease is mainly due to a better absorption of these expenses because sales increased at a faster rate than selling and administrative expenses.
Considering the challenging market conditions, we will continue to maintain our selling and administrative expenses at an acceptable level without impeding our efforts to strategically position our company, improve our sales, as well as provide quality service to customers and integrate our acquired companies.
RESEARCH AND DEVELOPMENT
Gross research and development expenses totaled $17.0 million, $17.6 million and $9.4 million for fiscal 2002, 2001 and 2000, respectively. As a percentage of sales, gross research and development expenses amounted to 24.9%, 12.1% and 13.1% for fiscal 2002, 2001 and 2000, respectively.
The slight decrease in gross research and development dollars in fiscal 2002 compared to 2001 is mainly due to the mix and timing of research and development projects and the effect of our restructuring plans implemented in 2002; these factors were partially offset by the impact of the acquisition of EXFO Protocol. The percentage increase reflects our strong focus on innovation despite the significant decrease in sales. We firmly believe that innovation and new product introductions are the key to gaining market share in this current economic environment and ensuring the long-term growth and profitability of the company. In fiscal 2002, 48% of sales originated from products that have been on the market for two years or less. This is a slight improvement compared to 46% of our sales in fiscal 2001. In fiscal 2002, we released 25 new products compared to 20 in 2001. These figures confirm our dedication to innovation and our anticipation of customer needs and expectations.
The increase in gross research and development dollars in fiscal 2001 compared to 2000 reflects the hiring of additional research and development personnel, as well as the acquisitions of EXFO Burleigh and EXFO Photonic. The decrease, as a percentage of sales, in fiscal 2001 compared to 2000 is mainly due to the fact that sales increased at a faster rate than research and development expenses during that period.
Tax credits and grants from federal, provincial and state governments for research and development activities were $4.2 million, $4.0 million and $3.0 million for fiscal 2002, 2001 and 2000, respectively. Our tax credits and grants remained relatively flat between fiscal 2002 and 2001 since our gross research and development expenses were relatively unchanged year-over-year. The increase in our tax credits and grants in fiscal 2001 compared to 2000 is directly related to the hiring of additional research and development personnel as well as the impact of the EXFO Photonic Solutions acquisition.
Tax credits and grants, as a percentage of gross research and development expenses, were 24.8%, 22.7% and 31.7% for fiscal 2002, 2001 and 2000, respectively. Tax credits and grants, as a percentage of gross research and development expenses, increased slightly
between 2001 and 2002 since more research and development activities were carried out in Canada, where such activities are entitled to research and development tax credits, following the acquisition of EXFO Protocol. The decrease in fiscal 2001 compared to 2000 is related to a reduction in the effective tax credit rate and grants on research and development carried out in Canada. It should be noted that research and development carried out by U.S.-based EXFO Burleigh is not eligible for tax credits. As a result, tax credits and grants, as a percentage of gross research and development expenses, was further reduced in fiscal 2001.
In terms of net research and development expenses, they amounted to 18.7%, 9.3% and 8.9% of sales for fiscal 2002, 2001 and 2000, respectively. Although we intend to reduce our research and development expenses as a percentage of sales, we expect to continue investing heavily in research and development in the upcoming year, reflecting our focus on innovation, our desire to gain market share and our goal to exceed customer needs and expectations.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the acquisitions of EXFO Burleigh, EXFO Photonic and EXFO Protocol during the last two years, we recorded $61.1 million in intangible assets, primarily consisting of core technology. These intangible assets, which are amortized over periods from five months to five years from the date of acquisitions, resulted in amortization expenses of $11.6 million and $9.9 million in fiscal 2002 and 2001, respectively.
Intangible assets related to these acquisitions have been reviewed for impairment as described below and this resulted in a pre-tax write-down charge of $23.7 million in the third quarter of 2002. Considering this write-down, the amortization of intangible assets will decrease by approximately $6.5 million in the upcoming fiscal year.
WRITE-DOWN OF GOODWILL AND INTANGIBLE ASSETS
In May 2002, as part of our review of financial results, we performed an assessment of the carrying value of goodwill and intangible assets recorded in conjunction with the acquisitions of EXFO Burleigh, EXFO Photonic and EXFO Protocol. The assessment was performed because of the severe and continued downturn in the telecommunications industry, the persisting unfavorable market conditions affecting our subsidiaries' industries and the decline in technology valuations. The growth prospects for our subsidiaries were significantly lower than previously expected and less than those of historical periods. In addition, the decline in market conditions affecting the subsidiaries is significant and other than temporary. As a result, we concluded that the carrying value of goodwill and certain acquired intangible assets was impaired and we recorded a charge of $222.2 million to write down a significant portion of goodwill and a pre-tax charge of $23.7 million to write down a significant portion of acquired core technology. Of the total impairment loss of $245.8 million, $125.0 million relates to EXFO Burleigh, $71.5 million relates to EXFO Photonic and $49.3 million relates to EXFO Protocol.
The impairment loss was calculated as the excess of the carrying value of the assets over the pre-tax undiscounted future cash flows. The pre-tax undiscounted future cash flows were estimated at the subsidiaries' level since we had distinct cash flows for each of them and because they are not fully integrated into our activities. The cash flow periods used ranged from three to five years, using annual growth rates between 15% and 30%.
The assumptions supporting the estimated undiscounted future cash flows, including the annual growth rates, reflect our best estimates.
On September 1, 2002, upon the adoption of section 3062 of the CICA and under its transitional provisions, we performed an initial impairment test to identify potential goodwill impairment using a fair value-based method. Under the new section, a goodwill impairment loss exists when the carrying value of a reporting unit exceeds its fair value. For the purposes of the impairment test, we allocated our existing goodwill to our reporting units and completed an evaluation of the fair value of such reporting units. Based upon the comparison of the fair value of the reporting units to their carrying value, goodwill of the reporting units was not considered impaired.
For a more complete description of this new accounting standard, please refer to the "New Accounting Standards" section further in this item.
RESTRUCTURING AND OTHER CHARGES
In fiscal 2001, we implemented a structured plan to reduce our costs and increase our efficiency. Under that plan, we recorded charges of $3.3 million, including $0.8 million in severance expenses for the 245 employees who were terminated, $1.5 million for unused assets and $1.0 million for future payments on exited leased facilities.
In fiscal 2002, we incurred additional charges of $2.9 million to further reduce our costs. Under additional structured plans, we recorded $2.0 million in severance expenses for the additional 350 employees who were terminated and $0.9 million for the write-off of property, plant and equipment.
Our cost-cutting measures represent our best efforts to respond to the difficult market conditions. However, these efforts may be inappropriate or insufficient. Our actions in this regard may not be successful in achieving the cost reductions or other benefits expected, may be insufficient to align our cost structure to market conditions, or may be more costly or extensive than anticipated.
INTEREST INCOME, NET
Net interest income amounted to $1.5 million, $6.1 million and $1.5 million for fiscal 2002, 2001 and 2000, respectively. The decrease in our net interest income in fiscal 2002 compared to 2001 is directly related to the use of short-term investments to finance our strategic acquisitions, our operating activities and the purchases of property, plant and equipment, as well as a general decrease in interest rates.
The increase in our net interest income in fiscal 2001 compared to 2000 results solely from short-term investments of the remaining net proceeds of our Initial Public Offering on June 29, 2000.
We expect our net interest income to decrease in the upcoming fiscal year because of the aforementioned reasons.
FOREIGN EXCHANGE GAIN (LOSS)
Foreign exchange loss amounted to $0.5 million in fiscal 2002 compared to a foreign exchange gain of $3.3 million in fiscal 2001 and a foreign exchange loss of $0.7 million in 2000.
The foreign exchange loss in fiscal 2002 is the result of the translation of operating activities denominated in currencies other than the Canadian dollar.
The foreign exchange gain in fiscal 2001 can be mostly attributed to the disposal of short-term investments denominated in US dollars and the translation of operating activities denominated in currencies other than the Canadian dollar.
We manage our exposure to currency risk with forward exchange contracts and operating activities of Canadian entities denominated in currencies other than the Canadian dollar.
INCOME TAXES
Our effective income tax recovery rate was 34.5% in fiscal 2002 compared to income tax rates of 34.1% for both fiscal 2001 and 2000.
As at August 31, 2002, future income tax assets were $10.0 million and mainly relate to tax losses, provisions and accruals as well as research and development expenses, as described in note 15 to our consolidated financial statements. Our current forecasts demonstrate that most of the future income tax assets should be recovered over the next three fiscal years. However, if we obtain information that causes our forecast of future taxable income to change or if actual future taxable income differs from our forecast, we may have to revise the carrying value of our future income tax assets, which would affect our net earnings in the period in which the change was made. We review the recoverability of our future income tax assets on a quarterly basis.
Research and development expenses and most of the provisions and accruals can be carried forward indefinitely against future years taxable income. The Canadian tax losses, which represent $3.5 million in future income tax assets, expire over the next seven years while U.S. tax losses, which represent $3.4 million in future income tax assets, expire in 20 years.
AMORTIZATION OF GOODWILL
In conjunction with the acquisitions of EXFO Burleigh and EXFO Photonic, we recorded $248.5 million in goodwill, which is amortized over five years. These acquisitions resulted in amortization expenses of $38.0 million and $31.1 million for fiscal 2002 and 2001, respectively. The acquisition of EXFO Protocol has been accounted for using new accounting standards contained in sections 1581 and 3062 of the CICA and, consequently, goodwill resulting from this acquisition was not amortized.
Goodwill related to these acquisitions has been reviewed for impairment, as described above, and this resulted in a write-down charge of $222.2 million in the third quarter of 2002. Starting on September 1, 2002, goodwill will no longer be amortized under new accounting standard.
NET EARNINGS (LOSS)
Net loss amounted to $308.5 million and $15.3 million in fiscal 2002 and 2001, respectively, compared to net earnings of $9.9 million in 2000. In terms of per share amounts, we recorded a net loss of $5.09 and $0.29 in fiscal 2002 and 2001, respectively, compared to net earnings of $0.25 in 2000.
PRO FORMA NET EARNINGS (LOSS)
As a measure to assess financial performance, we use pro forma net earnings (loss) and pro forma net earnings (loss) per share. Pro forma net earnings (loss) represent net earnings (loss) excluding amortization and write-down of goodwill and the after-tax effect of amortization and write-down of intangible assets, restructuring and other charges as well as inventory write-offs.
Pro forma net loss amounted to $11.2 million in fiscal 2002 compared to pro forma net earnings of $24.5 million and $10.3 million in fiscal 2001 and 2000, respectively. In terms of pro forma per share amounts, we recorded a loss of $0.19 in fiscal 2002 compared to net earnings of $0.46 and $0.26 in fiscal 2001 and 2000, respectively.
Pro forma net earnings (loss) is reconciled as follows:
YEARS ENDED AUGUST 31,
------------------------------------
2000 2001 2002
---------- ---------- ----------
(unaudited) (unaudited) (unaudited)
Net earnings (loss) in accordance with GAAP $ 9,924 $ (15,294) $(308,524)
Pro forma adjustments:
Amortization of goodwill
297 31,076 38,021
Write-down of goodwill
-- -- 222,169
Amortization of intangible assets
47 9,876 11,615
Tax effect of amortization of intangible assets
(16) (3,363) (4,007)
Write-down of intangible assets
-- -- 23,657
Tax effect of write-down of intangible assets
-- -- (8,160)
Restructuring and other charges and inventory
write-offs -- 3,288 21,343
Tax effect of restructuring and other charges and
inventory write-offs -- (1,083) (7,362)
---------- ---------- ----------
Pro forma net earnings (loss) $ 10,252 $ 24,500 $ (11,248)
========== ========== ==========
Net earnings (loss) per share $ 0.25 $ (0.29) $ (5.09)
Basic and diluted pro forma net earnings (loss) per
share $ 0.26 $ 0.46 $ (0.19)
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We provide pro forma financial information to help the investor better understand our operating results. This information is not in accordance with, or an alternative for, generally accepted accounting principles and may not be comparable to similarly titled measures reported by other companies.
LIQUIDITY AND CAPITAL RESOURCES
We finance our operations and major investments and meet our capital expenditure requirements mainly through the use of cash and cash equivalents, short-term investments and the issuance of subordinate voting shares.
CASH POSITION AND SHORT-TERM INVESTMENTS
As at August 31, 2002, cash and cash equivalents as well as short-term investments consisted of $49.7 million. Our working capital was at $91.4 million. Our cash and cash equivalents and short-term investments decreased by $24.9 million in fiscal 2002 mainly due to $8.7 million for financing of operating activities as well as cash payments of $9.8 million and $5.2 million, respectively, for the acquisition of EXFO Protocol and the purchases of property, plant and equipment.
The acquisition of substantially all the assets of gnubi communications, L.P. will be partially financed with $1.8 million of cash on hand. In fiscal 2003, however, we expect to recover $13.5 million in income taxes mainly due to the carry-back of current tax losses and tax credits on our research and development activities. As at August 31, 2002, total commitments under operating leases and long-term debt for fiscal 2003 amounted to $1.4 million.
OPERATING ACTIVITIES
Cash flows used by operating activities were $8.7 million in fiscal 2002 compared to cash flows provided of $3.9 million in fiscal 2001 and cash flows used of $4.0 million in 2000. Cash flows used by operating activities in fiscal 2002 were primarily due to the net loss after items not affecting cash and cash equivalents of $1.1 million combined with the increase of income taxes receivable of $19.7 million and the decrease in accounts payable and accrued liabilities of $7.5 million. These figures were partially offset by the result of the net decrease in accounts receivable and inventories of $19.7 million. The increase in our income taxes receivable is related to income tax recovery following the carry-back to previous years' taxable income of our consolidated tax loss, while the decrease in our accounts payable and accrued liabilities is due to the reduction in our purchases following the slowdown in our industry. The decrease in our accounts receivable is due to the reduction in our sales level and the improvement in our days of sales outstanding ("DSOs"), while the decrease in our inventories is due to our efforts to maintain them at the lowest acceptable level considering the decrease in sales.
Cash flows provided by operating activities in fiscal 2001 were primarily due to net earnings after items not affecting cash and cash equivalents of $25.3 million. This figure was mainly offset by the increase of $20.3 million in inventories required to ensure minimal manufacturing and delivery lead times.
In fiscal 2002, the major items not affecting cash and cash equivalents consisted of inventory write-offs of $18.5 million, write-down of goodwill and intangible assets of $245.8 million, amortization expenses of $55.6 million and future income tax recovery of $13.4 million. In fiscal 2001, the major items not affecting cash and cash equivalents consisted of amortization expenses of $44.5 million and realized foreign exchange gains on disposal of short-term investments of $3.4 million.
FINANCING ACTIVITIES
Cash flows used by financing activities were $90,000 and $4.6 million in fiscal 2002 and 2001, respectively, compared to cash flows provided of $172.8 million in 2000. Cash flows used by financing activities in fiscal 2002 were due to the repayment of our long-term debt. Cash
flows used in financing activities in fiscal 2001 were mainly due to the repayment of our bank advances and our long-term debt of $5.4 million.
As at August 31, 2002, we had credit facilities that provide for advances of up to CA$10 million (US$6.4 million) under a line of credit. This line of credit bears interest at prime rate.
INVESTING ACTIVITIES
Cash flows provided by investing activities were $10.5 million and $8.4 million in fiscal 2002 and 2001, respectively, compared to cash flows used of $169.0 million in 2000.
In fiscal 2002, we disposed of $25.5 million in short-term investments to finance our operating activities of $8.7 million as well as the respective cash payments of $9.8 million and $5.2 million for the acquisition of EXFO Protocol and the purchases of property, plant and equipment.
In fiscal 2001, we disposed of $92.6 million in short-term investments to finance the cash payments of $68.3 million and $15.9 million for the acquisitions of EXFO Burleigh and EXFO Photonic and the purchases of property, plant and equipment, respectively. Despite these investments and purchases, the disposal of short-term investments generated net cash flows of $8.4 million in fiscal 2001.
OUTLOOK
As described above, we incurred an operating loss of $74.8 million in fiscal 2002 and operating activities used $8.7 million in cash flows. There can be no assurance as to whether and when we will return to profitability or that our sales will return to prior levels. However, we believe that our cash balances and short-term investments, combined with available credit facilities, will be sufficient to meet our expected liquidity and capital requirements for at least the next 12 months. On the other hand, possible additional operating losses and/or 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 satisfactory terms.
STOCK OPTION PLAN
The aggregate number of subordinate voting shares covered by options granted under the stock option plan was 2,597,574 as at August 31, 2002. The weighted average exercise price of those stock options was $22 compared to the market price of $2.13 per share as at August 31, 2002. The maximum number of subordinate voting shares issuable under the plan cannot exceed 4,470,961 shares. The following table summarizes information about stock options granted to the members of the Board of Directors and to Management and Corporate Officers of the company and its subsidiaries as at August 31, 2002:
WEIGHTED
% OF ISSUED AVERAGE
AND EXERCISE
NUMBER OUTSTANDING PRICE
------- ----------- ------------
Chairman of the Board, President and CEO
(one individual) 100,482 3.87% $ 14.06
Board of Directors (four individuals) 80,838 3.11% $ 10.95
Management and Corporate Officers
(ten individuals) 429,155 16.52% $ 21.82
------- ------ ------------
610,475 23.50% $ 19.10
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In November 2001, the CICA issued section 3870, "Stock-Based Compensation and Other Stock-Based Payments", which is effective for fiscal years beginning on or after January 1, 2002. As described in the "New Accounting Standards" section below, we will adopt this new standard prospectively on September 1, 2002, and as permitted by the CICA, we will not account for the stock-based compensation costs arising from awards to employees, but we will comply with the required pro forma disclosures with respect to net earnings and net earnings per share.
Like many other companies, we do not believe that the use of the Black-Scholes option valuation model provides a reliable single measure of the fair value of our employees' stock options and stock awards. For example, using of the Black-Scholes model as required under U.S. GAAP, our 2,597,574 outstanding options with an average exercise price of $22 would have generated aggregate stock-based compensation costs of $26,589,000. None of the options issued by EXFO have been exercised because the market price of the company's common shares as at August 31, 2002, is well below the exercise price.
Please refer to note 19 to our consolidated financial statements for further explanation of stock-based compensation costs.
NEW ACCOUNTING STANDARDS
In November 2001, the CICA revised section 1650, "Foreign Currency Translation", which is effective for fiscal years beginning on or after January 1, 2002. The revised standard, which we will adopt retroactively on September 1, 2002, no longer permits the deferral and amortization of unrealized exchange gains and losses that arise on the translation of long-term foreign currency denominated monetary assets and liabilities. Under the new rules, such gains and losses must be reported in earnings as they arise. Adopting this revised standard will not have a significant impact on our financial statements since we currently have no such long-term monetary items.
In November 2001, the CICA issued Accounting Guideline No. 13, "Hedging Relationships", which shall be applied to hedging relationships in effect in fiscal years beginning on or after July 1, 2003. This new accounting guideline, which we will adopt prospectively on September 1, 2003, establishes basic criteria that must be met before hedge accounting can be used. It also describes the types of exposures that can be hedged and the types of instruments that qualify as hedges, sets detailed designation and documentation requirements and requires
formal effectiveness testing. We have not yet assessed the impact of the adoption of this new guideline.
In November 2001, the CICA issued section 3870, "Stock-Based Compensation and Other Stock-Based Payments", which is effective for fiscal years beginning on or after January 1, 2002. The new section applies to awards granted on or after the date of adoption, and requires that stock-based payments to non-employees and direct awards of stock to employees be accounted for using a fair value-based method. The new section also encourages, but does not require, the use of a fair value-based method to account for stock-based compensation costs arising from awards to employees. The new section requires pro forma disclosures with respect to net earnings and net earnings per share if a fair value-based method of accounting is not adopted for awards granted to employees. We will adopt this new standard prospectively on September 1, 2002. We will not account for the stock-based compensation costs arising from awards to employees. However, we will provide the required pro forma disclosures with respect to net earnings and net earnings per share. Consequently, the adoption of this new standard will not have a significant impact on our financial results.
In August 2001, the CICA issued section 1581 "Business Combinations" and 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 transitional provisions of section 3062, we did not amortize the goodwill resulting from the acquisition of EXFO Protocol, for which the acquisition date was November 2, 2001.
We adopted section 3062 prospectively on September 1, 2002. Upon the adoption of this new section, goodwill recorded prior to July 1, 2001, is no longer subject to amortization. Also, under the transitional provisions of the section, we performed an initial impairment test to identify goodwill impairment using a fair value-based method. Under the new section, a goodwill impairment exists when the carrying value of a reporting unit exceeds its fair value. For the purposes of the impairment test, we allocated our existing goodwill to our reporting units and completed an evaluation of the fair value of such reporting units. Based on the comparison of the fair value of the reporting units to their carrying value, goodwill of the reporting units was not considered impaired.
Goodwill will also be tested for impairment on an annual basis or more frequently if events or circumstances occur that more likely than not reduce the fair value of a reporting unit below its carrying value. Any impairment loss arising from this test will be charged to earnings in the period in which it is incurred.
For details on new U.S. accounting standards, please refer to note 19 to our consolidated financial statements.
RISKS AND UNCERTAINTIES
Over the past few years, we have been able to manage our activities, focus on research and development of new and innovative products, penetrate international markets and close important strategic acquisitions. 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, monitoring and automation industry involve the rapid development of new products that have short life cycles and require extensive research and development; the difficulty of 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 achieve profitability.
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.
The economic slowdown in our industry could also result in some of our customers experiencing difficulties and, consequently, this could have a negative effect on our results especially in terms of future sales and recoverability of accounts receivable. 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 mainly 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 corporations. 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.
For a more complete understanding of risk factors that may affect us, please refer to the risk factors set forth in Item 3D of this annual report.
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, 2002.
NAME AND MUNICIPALITY OF RESIDENCE POSITIONS WITH EXFO ----------------------------------- ---------------------------------------------------- JEAN-FRANCOIS BOULET Vice-President, Customer Service and Human Resources Montmagny, Quebec BRUCE BONINI Vice-President, North American Sales Fairview, Texas STEPHEN BULL Vice-President, Research and Development Lac-Beauport, Quebec DAVID J. FARRELL President, EXFO Burleigh Products Group Inc. Victor, New York ALLAN FIRHOJ General Manager, EXFO Photonic Solutions Inc. Mississauga, Ontario JUAN-FELIPE GONZALEZ Vice-President, International Sales Singapore GERMAIN LAMONDE Chairman of the Board, President and Chief Executive Cap-Rouge, Quebec Officer PIERRE MARCOUILLER Director Magog, Quebec KIMBERLEY ANN OKELL Secretary and Legal Counsel Quebec City, Quebec PIERRE PLAMONDON, CA Vice-President, Finance and Chief Financial Officer Quebec City, Quebec GREGORY SCHINN Chief Technology Officer Quebec City, Quebec DAVID A. THOMPSON Director Newton, North Carolina ANDRE TREMBLAY Director Outremont, Quebec MICHAEL UNGER Director Woodbridge, Ontario SAMI YAZDI President, EXFO Protocol Inc. Beaconsfield, Quebec |
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.
JEAN-FRANCOIS BOULET joined us in March 2000 as Vice-President, Human Resources. In September 2002, Mr. Boulet also assumed responsibility for customer service. 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, customer service 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 Acterna, 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 and is a member of the Optical Society of America.
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.
DAVID FARRELL has been President of EXFO Burleigh since 1987. Mr. Farrell has more than 24 years of industry experience at Burleigh, a wholly owned subsidiary of EXFO since December 2000. Before joining Burleigh as a Sales Engineer in 1977, Mr. Farrell was a member of the Department of Radiation Biology and Biophysics at the University of Rochester Graduate School of Medicine. In 1979, he was appointed Marketing Manager at Burleigh and, in 1983, he was named Vice-President and General Manager, positions he held until becoming President. Mr. Farrell has a Bachelor of Arts degree from the State University of Oswego and a master's degree in Physics from Kent State University. Mr. Farrell is a member of several organizations including the American Association for the Advancement of Science, Optical Society of America, Society of Photo-Optical Instrumentation Engineering and Sigma Xi Research Society.
ALLAN FIRHOJ has been General Manager of EXFO Photonic Solutions Inc. since November 2001. He is responsible for the overall strategic direction and management of EXFO Photonic Solutions. When Mr. Firhoj joined EFOS in 1996, he was responsible for Sales, Marketing and Business Development of the Dental Curing-Products Division. Following the sale of this division to Dentsply International in 1997, he was appointed Director of Marketing and Business Development. Mr. Firhoj continued in this capacity until being appointed to the position of General Manager of EXFO Photonic Solutions. Prior to joining the company, Mr. Firhoj spent six years with The Horn Group, a plastics business involved in medical devices/instrumentation and office communication equipment. He successively held the positions of ISO 9000 Implementation Manager, Technical Sales Manager as well as Marketing and Business Development Manager. In this latter role, he successfully contributed to
increasing sales in their medical market by an annual average of 60% during a three-year period. Mr. Firhoj holds a bachelor's degree in Political Science from Bishop's University in Lennoxville, Quebec.
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.
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 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.
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.
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 and a member of the Board of Directors of SOVAR Inc.
(Societe de valorisation des applications de la recherche de l'Universite Laval)
since December 2000.
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.
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.
SAMI YAZDI co-founded Avantas Networks Corporation (now EXFO Protocol Inc.) and served as President and Chief Executive Officer until the company was acquired by EXFO in November 2001. He is responsible for the overall strategic direction and management of EXFO Protocol. Prior to launching Avantas Networks, Mr. Yazdi was a co-founder of Positron Fiber Systems, a Montreal-based fiber-optic company that went public in 1997 and was acquired by Reltec Corporation in 1998. In his capacity at Positron Fiber Systems, Mr. Yazdi served as Vice-President of Product Management and built a product portfolio to grow the company from product inception to annual sales of over US$60 million. Prior to joining Positron Fiber Systems, Mr. Yazdi spent more than 10 years at Nortel Networks, holding various management positions in the Optical Networking product division. Mr. Yazdi graduated with a bachelor's degree in Electrical Engineering from Concordia University in 1982.
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, 2002, our directors who are not officers or employees received annual compensation of CA$25,000 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. In addition, such directors each received 12,500 options under our stock option plan as partial compensation for the financial year commencing September 1, 2002. Directors who are also committee members received additional annual compensation of CA$3,000 per committee and committee chairpersons received CA$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 CA$1,000 for each meeting of the Board of Directors or of a Committee attended by them in person and fees of CA$500 if such participation was made by telephone were also paid. If more than one meeting occurs on the same day, only one fee is paid. All directors will be reimbursed for traveling and other expenses incurred in connection with attendance at meetings.
As partial remuneration for the financial year ended August 31, 2001, a total of 20,359 options were granted under our Stock Option Plan in October 2001 to directors who are not employees. Then in January 2002, 2,479 options were granted to one director who chose to receive a portion of his remuneration in the form of stock options.
EXECUTIVE COMPENSATION
The table below shows certain compensation information for Mr. Germain Lamonde, the President and Chief Executive Officer of the Corporation, and the four other most highly compensated executive officers of the Corporation and its subsidiaries during the financial year ended August 31, 2002 (collectively, the "Named Executive Officers"). This information includes the US dollar value of base salaries, bonus awards and long term incentive plan payments, the number of options granted, and certain other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
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SECURITIES
OTHER ANNUAL UNDER ALL OTHER
NAME AND PRINCIPAL FINANCIAL SALARY BONUS(1) COMPENSATION OPTIONS(2) COMPENSATION
POSITION YEAR (US$) (US$) (US$) (#) (US$)(3)
------------------------------- ---------- ----------- ----------- ---------------- -------------- -----------------
Germain Lamonde, President 2002 174,758 21,329 - 70,000 -
and Chief Executive Officer
2001 180,044 99,024 - 5,080 -
2000 134,932 63,566 - 25,402 -
Bruce Bonini, 2002 217,500 - - 20,000 7,042
Vice-President,
North American Sales 2001 272,678(4) 33,450 - 82,780 4,565
2000 309,801 20,000 - 3,900 6,768
David J. Farrell, 2002 184,500 - - 10,000 3,193
President, EXFO Burleigh
Products Group Inc. 2001 184,500(5) 16,326(8) - 40,000 4,513(8)
Juan-Felipe Gonzalez, 2002 158,193 - - 30,000 -
Vice-President,
International Sales 2001 204,781(6) 129,629(9) - 45,630 -
2000 153,502 15,879 - 6,900 -
Sami Yazdi, President, EXFO 2002 111,210(7) 5,550 - 50,000 -
Protocol 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 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.
(6) This amount includes an amount of US$4,935 paid as a retroactive adjustment to salary for the financial year ended August 31, 2000.
(7) This amount represents Mr. Yazdi's base annual salary. Since he joined the Corporation on November 2, 2001, the base salary paid to him for the financial year ended August 31, 2002 amounted to US$90,959.
(8) This is the amount paid or payable for the financial year ended August 31, 2001 to Mr. Farrell, as applicable, since December 20, 2000, the date that he joined the Corporation.
(9) This amount includes an amount of US$2,771 paid as a retroactive adjustment to bonus for the financial year ended August 31, 2000.
The following table indicates additional information on the options granted to our Named Executive Officers during the 2002 fiscal year.
PERCENTAGE OF NET MARKET VALUE OF
TOTAL OF OPTIONS SECURITIES
SECURITIES UNDER GRANTED TO UNDERLYING
OPTIONS EMPLOYEES IN EXERCISE OR BASE OPTIONS ON THE
GRANTED(1) FINANCIAL YEAR PRICE (2) (US$/ DATE OF GRANT
NAME (#) (%) SECURITY) (US$/SECURITY)(3) EXPIRATION DATE
---------------------- ----------------- ------------------- ----------------- ------------------ ------------------
Germain Lamonde 70,000 7.8% 9.13 9.01 October 10, 2011
Bruce Bonini 5,000 0.6% 12.22 12.42 January 3, 2012
15,000 2.3% 9.13 9.01 October 10, 2011
David J. Farrell 10,000 1.2% 9.13 9.01 October 10, 2011
Juan-Felipe Gonzalez 15,000 1.7% 12.22 12.42 January 3, 2012
15,000 1.7% 9.13 9.01 October 10, 2011
Sami Yazdi 50,000 5.6% 10.86 10.68 November 2, 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. Options vest at a rate of 25% annually commencing on the first anniversary date of the grant.
(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, 2001 to August 31, 2002 of CA$275,000 (US$174,758) per year. In addition, an annual bonus of CA$137,500 (US$87,429) will be payable if the Corporation's performance-based objectives are met. If the Corporation's performance objectives are not met or are exceeded, such bonus will be lesser or greater in a proportional amount, as applicable. The agreement is for an indeterminate period and the salary is reviewed annually. In the event of the termination of Mr. Lamonde's employment without 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 our subsidiaries, EXFO Burleigh and EXFO Protocol, have employment agreements with Mr. David J. Farrell and Mr. Sami Yazdi, respectively.
The agreement with Mr. Bonini provides for Mr. Bonini's employment as Vice-President, North American Sales at a base salary of US$145,000, plus commissions of US$145,000 if sales objectives are met, for the period from September 1, 2001 to August 31, 2002. If sales objectives are not attained or are exceeded, commissions will vary accordingly. The agreement is for an indeterminate period and salary is reviewed annually. In addition, bonuses totaling US$16,000 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 between EXFO Burleigh and Mr. Farrell provides for Mr. Farrell's employment as President of EXFO Burleigh at an annual base salary of US$184,500. 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 EXFO 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 EXFO Burleigh from the time it was acquired by us.
The agreement with Mr. Gonzalez provides for Mr. Gonzalez's employment as Vice-President, International Sales at a base salary of US$120,753, plus commissions on sales of US$74,952, for the period from September 1, 2001 to August 31, 2002. If sales objectives are not attained or are exceeded, commissions will vary accordingly. The agreement is for an indeterminate period and salary is reviewed annually. In addition, bonuses totaling US$32,000 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 addition Mr. Gonzalez shall be paid a bonus of CA$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 EXFO Protocol and Mr. Yazdi provides for Mr. Yazdi's employment as President of EXFO Protocol at an annual base salary of CA$175,000 (US$111,210). In addition, an annual bonus of CA$43,750 (US$27,818) will be payable if performance-based objectives are met. If such performance objectives are not met or are exceeded, such bonus will be lesser or greater in a proportional amount, as applicable. The agreement is for an indeterminate period and salary is reviewed annually. In the event of termination of Mr. Yazdi's employment other than for cause, Mr. Yazdi will be entitled to severance payments equivalent to 6 months of remuneration.
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 7.1 % of our issued and outstanding share capital as at November 30, 2002. 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, 2002 was 896,975 (net of cancelled options due to employment terminations) at a weighted average exercise price of $10 (CA$15.73) per subordinate voting share. At the end of the financial year ended August 31, 2002, there were 2,597,574 subordinate voting shares covered by options granted and outstanding pursuant to the stock option plan having a weighted average exercise price of US$22 per option. Following these grants, and net of cancelled options for departures, as of August 31, 2002, there were 1,873,387 options available for future grants under the plan. Since August 31, 2002 we have made the following grants to directors and employees: September 1, 2002: 10,500 options and September 25, 2002: 1,013,500 options.
Except for certain options granted to independent directors of the Corporation, all options granted prior to September 1, 2002 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 and options granted after September 1, 2002 vest on a cumulative basis at a rate of 12.5% six months and twelve months after the date of grant and subsequently at a rate of 25% annually and may be exercised in whole or in part once vested.
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 $0.67 (CA$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, 2002, 654,683 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 EXFO 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 EXFO 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 and on December 20, 2002, we issued an aggregate of 83,657 subordinate voting shares and 69,935 subordinate voting shares respectively 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 EXFO 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 EXFO Burleigh's Management Team that is initiated by EXFO Burleigh prior to a change in control of EXFO, the unvested portion of the participant's award of Restricted Shares will be forfeited. However, the Plan provides for discretion in the application of the forfeiture provisions where a change in circumstances renders such action appropriate. During the financial year ended August 31, 2002, we were required to lay-off 42 participants as a result of restructuring. At that time, we decided that the awards of the Plan participants affected by the lay-offs would not be subject to forfeiture, though the transfer restrictions would remain in place until the occurrence of the vesting dates originally contemplated by the award.
Upon the termination without cause of a participant who is designated a member of EXFO 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, 2002, there were 13,000 SAR's outstanding.
DEFERRED PROFIT SHARING PLAN
We maintain a deferred profit sharing plan for certain eligible Canadian resident employees. Under the plan, we may 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. Since June 2002, we have suspended our contributions to the plan as part of our cost reduction efforts. In the year ended August 31, 2002, the aggregate amount of contributions under the plan was $88,000 (CA$136,000).
401(K) PLAN
We maintain a 401(k) plan for eligible United States resident employees of our subsidiaries. Employees become eligible to participate in the 401(k) plan 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) plan. The 401(k) plan permit, but do not require, us to make additional matching contributions to the 401(k) plan 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, 2002, we made an aggregate of $317,000 in matching contributions to the 401(k) plan. Contributions by employees or by us to the 401(k) plan 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) plan invest the assets of the 401(k) plan 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, a human resources committee and a disclosure 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. Further to proposed changes to Nasdaq corporate governance rules and new Securities and Exchange rules flowing from the adoption of the SARBANES-OXLEY ACT, our audit committee charter will be revised during the current financial year to ensure that we comply with all new requirements. 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 four independent directors: Pierre Marcouiller, David A. Thompson, Andre Tremblay and Michael Unger. The chairperson of the human resources committee is Michael Unger.
The disclosure committee is responsible for overseeing our disclosure practices. This committee consists of the chief executive officer, the chief financial officer, investor relations and corporate development director, communications director, manager of financial reporting and accounting as well as legal counsel and corporate secretary.
In addition, in order to deal with issues arising from our implication in the IPO class action suit, in October 2002, the Board of Directors appointed a litigation committee composed of our four independent directors.
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.
As of December 31, 2002, we had a total of 805 employees, down from a total of 1,099 on December 31, 2001. We have 645 employees in Canada, primarily based in Quebec, and 160 employees based outside of Canada. Two hundred and forty-four are involved in research and development, 256 in manufacturing, 144 in sales and marketing, 94 in general administrative positions and 67 in communications and customer support. In the financial year ended August 31, 2002, we were forced to lay off a total of 350 employees as part of our efforts
to reduce costs in response to a general slowdown in the telecommunications industry. 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. In December 2002, we implemented a temporary work sharing program for these employees as a further cost reduction measure that is expected to terminate no later than May 31, 2003. 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, 2002 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 93,000 * 93.83
Bruce Bonini ....... -- -- 54,824 * *
David J. Farrell ... 619,749 2.48 *
Juan Felipe Gonzalez -- -- 51,452 * *
Sami Yazdi (3) ..... -- -- 1,089,040 4.35 *
Pierre Marcouiller . -- -- 5,000 * *
David A. Thompson .. -- -- 2,100 * *
Andre Tremblay (4) -- -- 7,000 * *
---------- --- --------- ---- -----
TOTAL .............. 37,900,000 100 1,922,165 7.70 94.32
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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, 36,000,000 multiple voting shares held of record by G. Lamonde Investissements Financiers inc. and 93,000 subordinate voting shares held of record by Placements Lamonde SENC.
(3) The number of shares held by Sami Yazdi includes 945,267 subordinate voting shares held of record by Sami Yazdi and 143,773 subordinate voting shares held of record by Yazdi Family Trust.
(4) 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, 2002 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
50,000 $ 1.58 September 25, 2012
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
5,000 $12.22 January 3, 2012
40,000 $1.58 September 25, 2012
David J. Farrell........... 40,000 $22.62 December 20, 2010
10,000 $9.13 October 10, 2011
15,000 $1.58 September 25, 2012
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
15,000 $12.22 January 3, 2012
30,000 $1.58 September 25, 2012
Sami Yazdi................. 50,000 $10.86 November 2, 2011
25,000 $1.58 September 25, 2012
Pierre Marcouiller......... 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
17,966 $9.13 October 10, 2011
12,500 $1.58 September 25, 2012
David A. Thompson.......... 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
15,334 $9.13 October 10, 2011
12,500 $1.58 September 25, 2012
Andre Tremblay............. 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
17,291 $9.13 October 10, 2011
12,500 $1.58 September 25, 2012
Michael Unger.............. 2,000 $26.00 June 29, 2010
400 $22.25 January 10, 2011
18,168 $9.13 October 10, 2011
12,500 $1.58 September 25, 2012
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(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, 2002 by persons or groups of affiliated persons known by us to own more than 5% of our voting shares.
MULTIPLE VOTING SHARES SUBORDINATE VOTING SHARES TOTAL PERCENTAGE OF
BENEFICIALLY OWNED (1) BENEFICIALLY OWNED (1) VOTING POWER
---------------------- ---------------------- ------------
NAME NUMBER PERCENT NUMBER PERCENT PERCENT
---- ------ ------- ------ ------- -------
Germain Lamonde (2) 37,900,000 100% 106,791 * 93.83 %
Fiducie Germain Lamonde (3) 1,900,000 5% Nil Nil 4.71 %
G. Lamonde Investissements
Financiers inc. (4) 36,000,000 95% Nil Nil 89.1 %
Placements Lamonde, SENC Nil Nil 93,000 * *
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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. and 93,000 subordinate voting shares held of record by Placements Lamonde, SENC.
(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.
(5) Placements Lamonde, SENC is a parternship 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, 2002, approximately 66% of our subordinate voting shares were held in bearer form and the remainder (8,609,490 subordinate voting shares) were held by 290 record holders. As of December 31, 2002, we believe approximately 67% 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, 2002, the total principal amount guaranteed by us is CA$125,899 (approximately $80,052) and $56,200. We have outstanding loans to some of our employees up to $7,900 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 a lease agreement with G. Lamonde Investissements financiers inc., a company controlled by Mr. Germain Lamonde, for the executive and administrative offices located at 465 Godin Avenue in Vanier, Quebec. This lease was 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 -------- -------------- ----------- ----------- 465 Godin 24,000 CA$144,000 November 30, 2006 |
Based on third-party valuations of the property values, we believe this lease agreement is at prevailing market terms.
In September 2002, we acquired from G. Lamonde Investissements financiers inc. the building located at 436 Nolin Street that houses some of our manufacturing activities. Previous to this acquisition, we had a lease agreement with this company for these premises. We paid CA$1,450,000 for the building and this purchase price is based on an independent third party valuation and the transaction was approved by our audit committee and the board of directors with Mr. Lamonde abstaining.
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.
REGISTRATION RIGHTS AGREEMENT WITH EXFO BURLEIGH SHAREHOLDERS
In December 2000 in connection with the acquisition of EXFO Burleigh, we issued registration rights to the former shareholders of EXFO Burleigh. In July 2001, we fulfilled our obligations to the former shareholders of EXFO 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 EXFO Burleigh. The EXFO 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 EXFO 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 paid all expenses, other than underwriting commissions or discounts, taxes and fees and expenses of counsel and advisors to the EXFO Burleigh shareholders, in connection with the preparation and filing of the foregoing registration statement. 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. In March 2002, we fulfilled our obligations to the former shareholders of EXFO Protocol by filing a registration statement on Form F-3 relating to the resale of the subordinate voting shares held by the former shareholders of EXFO Protocol.
We paid 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 the foregoing registration statement. 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-45
Valuation and qualifying accounts are as follows (in thousands of US dollars):
Allowance for doubtful accounts
2000 2001 2002
------- ------- -------
Balance - Beginning of year $ 30 $ 149 $ 893
------- ------- -------
Addition charged to earnings 147 1,134 1,097
Write-off of uncollectible accounts (41) (184) (925)
Reversal of collectible accounts (3) (268) (538)
Foreign currency translation adjustment 16 62 (7)
------- ------- -------
Balance - End of year $ 149 $ 893 $ 520
======= ======= =======
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For information regarding our valuation allowance on future income tax assets, refer to Note 15 in our financial statements.
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 10, 2003, the last reported sale price for our subordinate voting shares on the NASDAQ National Market was $2.96 per share and the last reported sale price for our subordinate voting shares on The Toronto Stock Exchange was CA$4.50 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
September 1, 2001 to August 31, 2002 15.00 1.35 23.80 2.05
2002 1st Quarter 15.00 8.51 23.80 13.49
2002 2nd Quarter 14.00 5.58 22.10 9.02
2002 3rd Quarter 8.54 2.59 13.55 3.85
2002 4th Quarter 2.83 1.35 4.20 2.05
2003 1st Quarter 3.53 1.40 5.40 2.30
2002 July 2.48 1.85 4.00 2.98
2002 August 2.51 1.95 3.95 3.18
2002 September 2.06 1.47 3.26 2.30
2002 October 2.16 1.40 3.39 2.30
2002 November 3.53 2.13 5.40 3.37
2002 December 3.63 2.51 5.60 3.99
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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 the export of our 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 of certain international subsidiaries and the purchase of raw materials 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 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, 2002, classified by expected transaction dates, none of which exceed two years, as well as 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 made under these contracts.
2003 2004
---- ----
Forward exchange contracts to sell US dollars
in exchange for Canadian dollars
Contractual amounts................................. $ 6,400 $ 2,200
Weighted average contractual exchange rates......... 1.5464 1.5679
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FAIR VALUE
The fair value of these contracts as at August 31, 2002, based on the prevailing exchange rate at that date of $1.00 = CA$1.5589, amounted to CA$13,406,540 compared to a contractual value of CA$13,346,340, resulting in a deferred unrealized loss of CA$60,200 (approximately $39,000).
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 corporations.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
PART II.
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. CONTROLS AND PROCEDURES
Prior to the adoption of the SARBANES-OXLEY ACT OF 2002, we maintained formal and informal procedures that were designed to ensure that we comply with disclosure obligations and that there is a flow of important information to the appropriate collection and disclosure points in a timely manner.
The evaluation of our disclosure controls and procedures, which occurred on December 20, 2002, was supervised and reviewed by our senior management. In doing so, they considered the controls and procedures that we have implemented, and evaluated the existence of any material weaknesses or deficiencies that would significantly and adversely affect our ability to collect, process or disclose required information on a timely basis, all in the context of our relatively small size (805 employees as of December 31, 2002), and the hands-on role that is played by our chief executive officer and our chief financial officer in our day-to-day operations. As a result, our chief executive officer and our chief financial officer have concluded that the procedures and controls that we have implemented ensure timely collection and evaluation of information potentially subject to disclosure under applicable securities laws, and that such procedures and controls capture information that is relevant to an assessment of the need to disclose developments and risks that pertain to our business.
Finally, we confirm that there were no significant changes in our internal controls or in other factors that would significantly affect these controls subsequent to the date of their evaluation.
ITEM 16. [RESERVED]
PART III.
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 to F-45
ITEM 19. EXHIBITS
NUMBER EXHIBIT
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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 Amended By-laws of EXFO.
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., EXFO 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., EXFO
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 (incorporated by
reference to Exhibit 4.3 of EXFO's annual report on Form 20-F
dated January 18, 2002).
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 (incorporated by reference to
Exhibit 4.4 of EXFO's annual report on Form 20-F dated January
18, 2002).
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. (incorporated by
reference to Exhibit 4.8 of EXFO's annual report on Form 20-F
dated January 18, 2002).
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 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).
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4.13 Lease renewal of the existing leases between 9080-9823 Quebec
inc. and EXFO, dated November 30, 2001(incorporated by
reference to Exhibit 4.13 of EXFO's annual report on Form 20-F
dated January 18, 2002).
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).
4.19 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).
4.20 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 Bruce Bonini dated as of September 1,
2000 (incorporated by reference to Exhibit 4.24 of EXFO's
annual report on Form 20-F dated January 18, 2002).
4.23 Employment Agreement of Juan-Felipe Gonzalez dated as of
September 1, 2000 (incorporated by reference to Exhibit 4.25
of EXFO's annual report on Form 20-F dated January 18, 2002).
4.24 Employment Agreement of David J. Farrell dated as of December
20, 2000 (incorporated by reference to Exhibit 4.26 of EXFO's
annual report on Form 20-F dated January 18, 2002).
4.25 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).
4.26 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).
4.27 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).
4.28 Directors' Compensation Plan (incorporated by reference to Exhibit
10.17 of EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.29 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).
4.30 Asset Purchase Agreement by and Among EXFO Electro-Optical
Engineering Inc., EXFO Gnubi Products Group Inc., gnubi
communications, L.P., gnubi communications General Partner,
LLC, gnubi communications Limited Partner, LLC, gnubi
communications, Inc., Voting Trust created by The Irrevocable
Voting Trust Agreement Among Carol Abraham Bolton, Paul
Abraham and James Ray Stevens, James Ray Stevens and Daniel J.
Ernst dated September 5, 2002.
4.31 EXFO Protocol Inc. Executive Employment Agreement with Sami Yazdi
signed November 2, 2001.
4.32 First Amending Agreement to the Employment Agreement of Bruce
Bonini dated as of September 1, 2001.
8.1 Subsidiaries of EXFO (list included in Item 4C of this annual
report).
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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 15, 2003.
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CERTIFICATIONS
I, Germain Lamonde, Chairman of the Board, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 20-F of EXFO Electro-Optical Engineering Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrants' other certifying officers and I have responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation date"); and
c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function);
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date January 15, 2003
/s/ Germain Lamonde ------------------------------------- Germain Lamonde Chairman of the Board, President and Chief Executive Officer |
I, Pierre Plamondon, Vice-President Finance and Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 20-F of EXFO Electro-Optical Engineering Inc.
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrants' other certifying officers and I have responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation date"); and
c) Presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function);
a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date January 15, 2003
/s/ Pierre Plamondon -------------------------- Pierre Plamondon, C.A. Vice-President Finance and Chief Financial Officer |
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, 2001 and 2002 and the consolidated statements of earnings, retained earnings (deficit) contributed surplus and cash flows for the years in the three-year period ended August 31, 2002. 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 generally accepted auditing standards and with auditing standards generally accepted in the United States. 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, 2001 and 2002 and the results of its operations and its cash flows for each of the years in the three-year period ended August 31, 2002 in accordance with Canadian generally accepted accounting principles. In addition, in our opinion, the financial report 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 23, 2002 |
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED BALANCE SHEETS
(in thousands of US dollars, except share and per share data)
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED BALANCE SHEET
(in thousands of US dollars)
2001 2002
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,729 $ 9,128
--------- ---------
Short-term investments (notes 8 and 18) 66,861 40,553
Accounts receivable (notes 8 and 18)
Trade 24,531 9,881
Other 3,660 3,267
Income taxes receivable (note 8) -- 13,473
Inventories (notes 4, 5 and 8) 44,345 23,822
Prepaid expenses 1,265 1,280
Future income taxes (note 15) 1,423 1,272
--------- ---------
149,814 102,676
INCOME TAXES RECEIVABLE (note 8) -- 6,234
PROPERTY, PLANT AND EQUIPMENT (notes 6 and 8) 27,140 26,246
INTANGIBLE ASSETS AND GOODWILL (notes 4, 7 and 8) 264,242 34,040
FUTURE INCOME TAXES (note 15) 1,381 8,730
--------- ---------
$ 442,577 $ 177,926
========= =========
|
LIABILITIES
CURRENT LIABILITIES
Accounts payable and accrued liabilities (note 9) $ 16,180 $ 10,699
Income taxes payable 2,623 --
Deferred revenue 616 503
Current portion of long-term debt 106 100
--------- ---------
19,525 11,302
DEFERRED GRANTS (note 14) 1,002 654
LONG-TERM DEBT (note 10) 664 564
FUTURE INCOME TAXES (note 15) 6,581 --
--------- ---------
27,772 12,520
--------- ---------
COMMITMENTS (note 11)
CONTINGENCIES (note 12)
SHAREHOLDERS' EQUITY
SHARE CAPITAL (note 13) 429,995 489,611
CONTRIBUTED SURPLUS 1,457 1,487
CUMULATIVE TRANSLATION ADJUSTMENT (8,333) (8,854)
DEFICIT (8,314) (316,838)
--------- ---------
414,805 165,406
--------- ---------
$ 442,577 $ 177,926
========= =========
|
The accompanying notes are an integral part of these consolidated financial statements
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands of US dollars, except share and per share data)
YEARS ENDED AUGUST 31,
-----------------------------------
2000 2001 2002
--------- --------- ---------
SALES (note 16) $ 71,639 $ 146,013 $ 68,330
COST OF SALES* 24,712 54,946 50,801
--------- --------- ---------
GROSS MARGIN 46,927 91,067 17,529
--------- --------- ---------
OPERATING EXPENSES
Selling and administrative 24,304 46,236 35,446
Net research and development (note 14) 6,402 13,601 12,782
Amortization of property, plant and equipment 1,451 3,559 5,932
Amortization of intangible assets 47 9,876 11,615
Write-down of intangible assets (note 4) -- -- 23,657
Restructuring and other charges (note 4) -- 3,288 2,880
--------- --------- ---------
TOTAL OPERATING EXPENSES 32,204 76,560 92,312
--------- --------- ---------
EARNINGS (LOSS) FROM OPERATIONS 14,723 14,507 (74,783)
Interest income, net 1,480 6,098 1,456
Foreign exchange gain (loss) (684) 3,327 (458)
--------- --------- ---------
EARNINGS (LOSS) BEFORE INCOME TAXES AND AMORTIZATION AND WRITE-DOWN OF
GOODWILL (note 15) 15,519 23,932 (73,785)
INCOME TAXES (note 15) 5,298 8,150 (25,451)
--------- --------- ---------
EARNINGS (LOSS) BEFORE AMORTIZATION AND WRITE-DOWN OF GOODWILL 10,221 15,782 (48,334)
AMORTIZATION OF GOODWILL 297 31,076 38,021
WRITE-DOWN OF GOODWILL (note 4) -- -- 222,169
--------- --------- ---------
NET EARNINGS (LOSS) FOR THE YEAR $ 9,924 $ (15,294) $(308,524)
--------- --------- ---------
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Earnings (loss) before amortization and write-down of goodwill $ 0.26 $ 0.30 $ (0.80)
Net earnings (loss) $ 0.25 $ (0.29) $ (5.09)
BASIC WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S) 39,951 53,014 60,666
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (000'S) 40,086 53,495 60,966
(note 17)
* Including inventory write-offs of nil, nil and $18,463 for the years ended August 31, 2000, 2001
and 2002, respectively (see note 4).
|
The accompanying notes are an integral part of these consolidated financial statements
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Consolidated Statements of Retained Earnings (Deficit) and Contributed Surplus
(in thousands of US dollars, except per share data)
2000 2001 2002
--------- --------- ---------
BALANCE - BEGINNING OF YEAR $ 14,592 $ 6,980 $ (8,314)
ADD
Net earnings (loss) for the year 9,924 (15,294) (308,524)
--------- --------- ---------
24,516 (8,314) (316,838)
--------- --------- ---------
DEDUCT
Dividends
Class A shares 17,216 -- --
Class F shares 320 -- --
--------- --------- ---------
17,536 -- --
--------- --------- ---------
BALANCE - END OF YEAR $ 6,980 $ (8,314) $(316,838)
========= ========= =========
DIVIDENDS PER SHARE
Class A shares $ 0.45 $ -- $ --
Class F shares $ 0.45 $ -- $ --
|
2000 2001 2002
--------- --------- ---------
BALANCE - BEGINNING OF YEAR $ -- $ -- $ 1,457
ADD
Premium on resale of share capital -- 1,457 30
--------- --------- ---------
BALANCE - END OF YEAR $ -- $ 1,457 $ 1,487
========= ========= =========
|
The accompanying notes are an integral part of these consolidated financial statements
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
YEARS ENDED AUGUST 31,
------------------------------------
2000 2001 2002
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss) for the year $ 9,924 $ (15,294) $(308,524)
Add (deduct) items not affecting cash and cash equivalents
Discount on short-term investments (807) 191 271
Inventory write-offs -- -- 18,463
Amortization 1,795 44,511 55,568
Write-down of goodwill and intangible assets -- -- 245,826
Foreign exchange gains on disposal of short-term investments -- (3,437) (74)
Restructuring and other charges -- 1,083 741
Future income taxes (33) (1,779) (13,397)
Change in non-cash operating working capital items
Accounts receivable (10,476) 447 15,406
Income taxes 2,149 2,237 (19,736)
Inventories (10,732) (20,308) 4,332
Prepaid expenses (519) (67) 356
Accounts payable and accrued liabilities 3,917 (3,736) (7,470)
Deferred revenue 215 100 (106)
Deferred grants 567 (57) (335)
--------- --------- ---------
(4,000) 3,891 (8,679)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank advances (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 (812) (3,355) (106)
Issuance of share capital 209,690 -- --
Redemption of share capital -- (33) (6)
Resale of share capital -- 1,490 36
Share issue expenses (16,743) (331) (14)
Dividends paid (17,587) -- --
--------- --------- ---------
172,842 (4,629) (90)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to short-term investments (519,645) (772,808) (506,228)
Proceeds from disposal of short-term investments 359,886 865,373 531,733
Additions to property, plant and equipment and intangible assets (7,180) (15,911) (5,245)
Business combinations (note 3) (2,108) (68,255) (9,756)
--------- --------- ---------
(169,047) 8,399 10,504
--------- --------- ---------
CHANGE IN CASH AND CASH EQUIVALENTS (205) 7,661 1,735
EFFECT OF FOREIGN EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 511 (661) (336)
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 423 729 7,729
--------- --------- ---------
CASH AND CASH EQUIVALENTS- END OF YEAR $ 729 $ 7,729 $ 9,128
========= ========= =========
SUPPLEMENTARY INFORMATION
Interest paid $ 480 $ 377 $ 269
Income taxes paid $ 3,761 $ 8,171 $ 4,172
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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, monitoring and automation solutions for the global telecommunications industry. These solutions measure the physical-, optical- and protocol-layers of optical fiber and related hardware and help automate manufacturing processes. The company derives substantially all of its revenue from customers located in the United States, Canada, Europe and Asia. The company's customers consist primarily of telecommunications carriers, network service providers, 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 generally accepted accounting principles in Canada. These principles conform, in all material respects, with accounting principles generally accepted in the United States, except for the differences and additional disclosures provided 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 years. 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 functional currency of the company is the Canadian dollar. However, the company has adopted the US dollar as its reporting currency. The financial statements are translated into the reporting currency 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 monthly average exchange rates. 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.
In the event that management decides to declare dividends, such dividends would be declared in Canadian dollars.
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)
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 exchange rate in effect on the date of the transaction. 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 rate in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical rates. Revenues and expenses are remeasured at the monthly average exchange rates. Gains and losses resulting from remeasurement are reflected in the statements of earnings.
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. 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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and balances with banks and 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.
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)
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 10 years Leasehold improvements Remaining lease term |
The carrying value of property, plant and equipment is evaluated for impairment whenever significant events or circumstances occur which may indicate an impairment in value, based upon a comparison of the carrying value to the net recoverable amount.
INTANGIBLE ASSETS, GOODWILL AND AMORTIZATION
Intangible assets include the cost of acquired in-process research and development, core technology, workforce and trademark, net of accumulated amortization. Core technology represents the existing technology acquired in business combinations that has reached technological feasibility while acquired in-process research and development represents the existing technology that has not reached technological feasibility and has no future alternative use. Intangible assets are amortized on a straight-line basis over their estimated useful lives ranging from five to ten months for in-process research and development, five years for core technology, one year for workforce and two years for trademark.
Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of net identifiable assets acquired. Goodwill related to business combinations with a date of acquisition prior to July 1, 2001, is amortized on a straight-line basis over the estimated useful life of five years until August 31, 2002. Goodwill related to business combinations with a date of acquisition after June 30, 2001, is not amortized but is reviewed for impairment.
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.
REVENUE RECOGNITION
For products in which software is incidental, the company recognizes revenue when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed and determinable and collection of the resulting receivable is reasonably assured. In addition, provisions are made for estimated returns, warranties and support obligations.
For products in which software is not incidental, revenues are separated into two categories: product and customer support revenues, based upon vendor-specific objective evidence of fair value. Product revenues for these sales are recognized as described above. Customer support revenues are deferred and recognized ratably over the years of the support arrangement. Except when
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)
provided within one year of delivery, costs of providing this support are insignificant and accrued at the time of delivery and no software upgrades are provided.
For all sales, the company uses a binding purchase order as evidence that a sales arrangement exists.
Delivery generally occurs when the product is shipped to a common carrier.
At the time of the transaction, the company assesses whether the price associated with its revenue transactions is fixed and determinable and whether or not collection is reasonably assured. The company assesses whether the price is fixed and determinable based on the payment terms associated with the transaction. The company assesses collection based on a number of factors, including past transaction history and the creditworthiness of the customer. Generally, collateral or other security is not requested from customers.
Most sales arrangements do not generally include acceptance clauses. However, if a sales arrangement includes an acceptance provision, acceptance occurs upon the earliest receipt of a written customer acceptance or expiration of the acceptance period. For these sales arrangements, the sale is recognized when acceptance occurs.
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 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 assets. 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, 2002, 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 for the years in which the differences are expected to reverse.
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 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
Basic earnings (loss) and dividends per share are determined using the weighted average number of common shares outstanding during the year.
Diluted earnings 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 per share be calculated, using the treasury stock method, as if all dilutive potential common shares had 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 13. 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. The costs related to the stock appreciation rights are accrued and charged to earnings.
NEW ACCOUNTING STANDARDS
In November 2001, The Canadian Institute of Chartered Accountants (CICA) revised section 1650, "Foreign Currency Translation", which is effective for fiscal years beginning on or after January 1, 2002. The revised standard, which the company will adopt retroactively on September 1, 2002, no longer permits the deferral and amortization of unrealized exchange gains and losses that arise on the translation of long-term foreign currency denominated monetary assets and liabilities. Under the new rules, such gains and losses must be reported in earnings as they arise. Adopting this revised standard will not have a significant impact on the company's financial statements since the company currently has no such long-term monetary items.
In November 2001, the CICA issued Accounting Guideline No. 13, "Hedging Relationships", which shall be applied to hedging relationships in effect in fiscal years beginning on or after July 1, 2003. This new accounting guideline, which the company will adopt prospectively on September 1, 2003, establishes basic criteria that must be met before hedge accounting can be used. It also describes the types of exposures that can be hedged and the types of instruments that qualify as hedges, sets detailed designation and documentation requirements and requires formal effectiveness testing. The company has not yet assessed the impact of the adoption of this new guideline.
In November 2001, the CICA issued section 3870, "Stock-Based Compensation and Other Stock-Based Payments", which is effective for fiscal years beginning on or after January 1, 2002. The new section applies to awards granted on or after the date of adoption, and requires that stock-based payments to non-employees and direct awards of stock to employees be accounted for using a fair
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)
value-based method. The new section also encourages, but does not require, the use of a fair value-based method to account for stock-based compensation costs arising from awards to employees. The new section requires pro forma disclosures with respect to net earnings and net earnings per share if a fair value-based method of accounting is not adopted for awards granted to employees. The company will adopt this new standard prospectively on September 1, 2002. The company will not account for the stock-based compensation costs arising from awards to employees. However, it will provide the required pro forma disclosures with respect to net earnings and net earnings per share. Consequently, the adoption of this new standard will not have a significant impact on the company's financial results.
In August 2001, the CICA issued section 1581 "Business Combinations" and 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 the transitional provisions of section 3062, the company did not amortize the goodwill resulting from the acquisition of EXFO Protocol Inc., for which the acquisition date was November 2, 2001.
The company adopted section 3062 prospectively from September 1, 2002. Upon the adoption of this new section, goodwill recorded prior to July 1, 2001, is no longer subject to amortization. Also, under the transitional provisions of the section, the company performed an initial impairment test to identify goodwill impairment using a fair value-based method. Under the new section, a goodwill impairment exists when the carrying value of a reporting unit exceeds its fair value. For the purposes of the impairment test, the company allocated its existing goodwill to its reporting units and completed an evaluation of the fair value of such reporting units. Based on the comparison of the fair value of the reporting units to their carrying value, goodwill of the reporting units was not considered impaired.
Goodwill will also be tested for impairment on an annual basis or more frequently if events or circumstances occur that more likely than not reduce the fair value of a reporting unit below its carrying value. Any impairment loss arising from this test will be charged to earnings in the period in which it is incurred.
3 BUSINESS COMBINATIONS
The company made a number of business combinations in 2000, 2001 and 2002. The fair value allocated to intangible assets acquired was based upon independent valuations performed in conjunction with the business combinations. Also, acquired goodwill is not deductible for income tax purposes.
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 2002
AVANTAS NETWORKS CORPORATION (RENAMED EXFO PROTOCOL INC.)
On November 2, 2001, the company acquired a 100% interest in EXFO Protocol Inc. ("EXFO Protocol"), a Canadian company specializing in fiber-optic protocol testing, in exchange for a total consideration valued at $94,952,000 or $69,381,000 net of $25,571,000 of cash and cash equivalents acquired. The total consideration includes acquisition-related costs of $1,272,000.
The consideration paid consisted of $9,756,000 in cash, net of cash and cash equivalents acquired of $25,571,000 and the issuance of 4,374,573 subordinate voting shares valued at $59,625,000. The fair value of the subordinate voting shares issued was determined based on the market price of the shares beginning three days before and ending three days after the terms of the acquisition were agreed upon and announced, being August 20, 2001.
This acquisition has been accounted for using the purchase method and, consequently, the results of operations of EXFO Protocol have been included in the consolidated statement of earnings of the company since November 2, 2001, being the date of acquisition.
The purchase price, including acquisition-related costs, has been allocated based on the estimated fair value of net assets at the date of acquisition as follows:
Assets acquired
Current assets $ 6,040
Property, plant and equipment 2,003
In-process research and development 1,400
Core technology 5,050
Future income tax assets 476
Current liabilities assumed (3,575)
--------
Net identifiable assets acquired 11,394
Goodwill (note 4) 57,987
--------
Purchase price 69,381
Less: Subordinate voting shares issued 59,625
--------
Cash paid, net of cash and cash equivalents acquired $ 9,756
========
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BUSINESS COMBINATIONS DURING 2001
BURLEIGH INSTRUMENTS, INC. (RENAMED EXFO BURLEIGH PRODUCTS GROUP INC.)
On December 20, 2000, the company acquired a 100% interest in EXFO Burleigh Products Group Inc. ("EXFO 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 $189,270,000, including acquisition-related costs of $2,461,000.
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 consideration paid consisted of $42,461,000 in cash and the issuance of 6,488,816 subordinate voting shares valued at $146,809,000.
Furthermore, as part of this acquisition, the company established a restricted stock award plan for employees of EXFO Burleigh (note 13). 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 EXFO 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 Solutions"), 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 $110,146,000, including acquisition-related costs of $194,000. The consideration paid consisted of $25,194,000 in cash and the issuance of 3,700,000 subordinate voting shares valued at $84,952,000.
These two acquisitions have been accounted for using the purchase method and, consequently, the net earnings of EXFO Burleigh and EXFO Photonic Solutions 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 EXFO Burleigh and March 15, 2001, for EXFO Photonic Solutions.
The fair value of subordinate voting shares issued as part of these business combinations was determined based on the market price of the shares beginning three days before and ending three days after the dates of acquisition of the subsidiaries.
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 EXFO PHOTONIC
BURLEIGH SOLUTIONS
-------- ------------
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 (note 4) 24,000 25,324
Work force 1,250 907
Trademark -- 421
Liabilities assumed (9,068) (7,169)
Future income tax liabilities (8,342) (983)
--------- ---------
Net identifiable assets acquired 21,189 29,721
Goodwill (note 4) 168,081 80,425
--------- ---------
Purchase price 189,270 110,146
Less: Subordinate voting shares issued 146,809 84,952
--------- ---------
Cash paid, net of cash and cash equivalents acquired $ 42,461 $ 25,194
========= =========
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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)
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 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 $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 $2,799,000. The consideration paid consisted of $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 $553,000, and a non-interest-bearing debenture in the amount of $138,000, repaid in 2001.
This acquisition has been accounted for using the purchase method. The estimated fair value of assets and liabilities acquired amounted to $2,488,000 and $2,231,000, respectively, resulting in goodwill of $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 in 2001 for $354,000, resulting in a purchase price adjustment of $189,000, 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 $16,000. The carrying value of the net assets of GAP Optique S.A. was $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.
4 SPECIAL CHARGES
WRITE-DOWN OF GOODWILL AND INTANGIBLE ASSETS
In May 2002, as part of its review of financial results, the company performed an assessment of the carrying value of goodwill and intangible assets recorded in conjunction with the acquisitions of EXFO Burleigh, EXFO Photonic Solutions and EXFO Protocol. The assessment was performed because of the severe and continued downturn in the telecommunications industry, the persisting
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)
unfavorable market conditions affecting the subsidiaries' industries and the decline in technology valuations. The growth prospects for those subsidiaries were significantly lower than previously expected and less than those of historical periods and the decline in market conditions affecting the subsidiaries is significant and other than temporary. As a result, the company concluded that the carrying value of goodwill and certain acquired intangible assets was impaired and it recorded a charge of $222,169,000 to write down a significant portion of goodwill and a pre-tax charge of $23,657,000 to write down a significant portion of acquired core technology. Of the total impairment loss of $245,826,000, $125,017,000 relates to EXFO Burleigh, $71,508,000 relates to EXFO Photonic Solutions and $49,301,000 relates to EXFO Protocol.
The impairment loss was calculated as the excess of the carrying value of the assets over the pre-tax undiscounted future cash flows. The pre-tax undiscounted future cash flows were estimated at the subsidiaries' level since the company had distinct cash flows for each of them and because they are not fully integrated into the company's activities. The cash flow periods used ranged from three to five years, using annual growth rates between 15% and 30%.
The assumptions supporting the estimated undiscounted future cash flows, including the annual growth rates, reflect management's best estimates.
RESTRUCTURING AND OTHER CHARGES AND INVENTORY WRITE-OFFS
During 2001, the company implemented a structured plan to reduce costs and increase efficiency. Under that plan, the company recorded charges 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 exited leased facilities. These charges have been included in the restructuring and other charges in the statement of earnings for the year ended August 31, 2001. As at August 31, 2002, the accrued liabilities related to this restructuring plan amounted to $483,000 and consisted of future payments on exited leased facilities.
During 2002, the company incurred additional charges of $21,343,000 to further reduce its costs. Under additional structured plans, the company recorded $2,012,000 in severance expenses for the additional 350 employees who were terminated and $868,000 for the write-off of property, plant and equipment. These charges are included in the restructuring and other charges in the statement of earnings for the year ended August 31, 2002. Also, the company recorded $18,463,000 in inventory write-offs for excess and obsolete inventories, which are included in the cost of sales in the statement of earnings for the year ended August 31, 2002. As at August 31, 2002, the accrued liabilities related to the severance expenses incurred in 2002 amounted to $299,000.
5 INVENTORIES
2001 2002
--------------- -------------
Raw materials $ 29,891 $ 13,507
Work in progress 3,507 1,382
Finished goods 10,947 8,933
--------------- -------------
$ 44,345 $ 23,822
=============== =============
|
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)
6 PROPERTY, PLANT AND EQUIPMENT
AS AT AUGUST 31,
-------------------------------------------------
2001 2002
----------------------- -----------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
------- ------------ ------- ------------
Land $ 2,735 $ -- $ 2,124 $ --
Buildings 9,077 326 8,043 695
Equipment 23,906 9,286 29,177 14,662
Leasehold improvements 2,390 1,356 4,121 1,862
------- ------------ ------- ------------
38,108 $10,968 43,465 $17,219
============ ============
Less:
Accumulated amortization 10,968 17,219
------- -------
$27,140 $26,246
======= =======
|
7 INTANGIBLE ASSETS AND GOODWILL
AS AT AUGUST 31,
-------------------
2001 2002
-------- --------
In-process research and development, net of accumulated amortization of
$4,195 ($2,769 in 2001) $ -- $ --
Core technology, net of accumulated amortization of $14,815 ($5,678 in 2001) 43,805 16,270
Work force, net of accumulated amortization of $2,148 ($1,281 in 2001) 874 --
|
AS AT AUGUST 31,
-------------------
2001 2002
-------- --------
Other assets, net of accumulated amortization of $305 ($246 in 2001) 391 194
-------- --------
45,070 16,464
Goodwill, net of accumulated amortization of $69,449 ($31,325 in 2001) 219,172 17,576
-------- --------
$264,242 $ 34,040
======== ========
|
In 2002, the company recorded charges of $23,657,000 and $222,169,000 to write down intangible assets and goodwill, respectively (note 4).
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 CREDIT FACILITIES
The company has available credit facilities under a line of credit which provide for advances of up to Cdn$10,000,000 (US$6,415,000). These facilities, which are renewable annually, bear interest at prime rate (prime rate in 2001). Short-term investments, accounts receivable, inventories and all tangible and intangible assets of the company have been pledged as collateral against these facilities. As at August 31, 2001 and 2002, these credit facilities were unused.
9 ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2001 2002
------- -------
Trade $ 7,732 $ 4,738
Salaries and social benefits 3,917 2,638
Commissions 1,307 283
Tax on capital 463 856
Warranty 901 849
Restructuring charges (note 4) 1,230 782
Other 630 553
------- -------
$16,180 $10,699
======= =======
|
10 LONG-TERM DEBT
AS AT AUGUST 31,
-----------------
2001 2002
---- ----
Loans collateralized by equipment, bearing interest
at 9.6%, repayable in monthly installments of
$13,000 including principal and interest, maturing in 2008 $754 $664
Unsecured non-interest-bearing loan, repaid during the year 16 --
---- ----
770 664
Less: Current portion 106 100
---- ----
$664 $564
==== ====
|
As at August 31, 2002, minimum principal repayments required in each of the next five years are $100,000 in 2003, $110,000 in 2004, $122,000 in 2005, $136,000 in 2006 and $146,000 in 2007.
11 COMMITMENTS
The company has entered into operating leases for certain of its premises and equipment, which expire at various dates through May 2011. Minimum rentals payable under these operating leases amount to $6,800,000 as at August 31, 2002.
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)
For the years ended August 31, 2000, 2001 and 2002, rental expense amounted to $579,000, $1,580,000 and $1,936,000, respectively, of which $163,000, $238,000 and $234,000, respectively, were paid to a company owned by the President of the company.
12 CONTINGENCIES
On November 27, 2001, a class action suit was filed in the United States District Court for the Southern District of New York against the company, four of the underwriters of its Initial Public Offering and some of its executive officers pursuant to the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder and sections 11, 12 and 16 of the Securities Act of 1933. This class action alleges that the company's 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 the shares issued in connection with the company's Initial Public Offering; and (ii) the underwriters allegedly entering into agreements with customers whereby shares issued in connection with the company's Initial Public Offering would be allocated to those customers in exchange for which customers agreed to purchase additional amounts of shares in the after market at pre-determined prices.
On April 19, 2002, the plaintiffs filed an amended complaint containing master allegations against all of the underwriters in all of the 310 cases included in this class action and, also filed an amended complaint containing allegations specific to four of the company's underwriters, the company and two of its executive officers. In addition to the allegations mentioned above, the amended complaint alleges that the underwriters (i) used their analysts to manipulate the stock market; and (ii) implemented schemes that allowed issuer insiders to sell their shares rapidly after an initial public offering and benefit from high market prices. As concerns the company and its two executive officers in particular, the amended complaint alleges that (i) the company's registration statement was materially false and misleading because it failed to disclose the additional commissions and compensation to be received by underwriters; (ii) the two named executive officers learned of or recklessly disregarded the alleged misconduct of the underwriters; (iii) the two named executive officers had motive and opportunity to engage in alleged wrongful conduct due to personal holdings of the company's stock and the fact that an alleged artificially inflated stock price could be used as currency for acquisitions; and (iv) the two named executive officers, by virtue of their positions with the company, controlled the company and the contents of the registration statement and had the ability to prevent its issuance or cause it to be corrected. The plaintiffs in this suit seek an unspecified amount for damages suffered.
In July 2002, the issuers filed a motion to dismiss the plaintiffs' amended complaint.
Management believes that the company and its executive officers have fully complied with all applicable securities laws and that the claims against it and its officers are without merit. The company has referred this matter to its insurers and is vigorously defending its position in this litigation. However, at this time, it is not possible to predict the outcome of this case, nor determine the amount of possible losses. Accordingly, no provision for this case has been made in the consolidated financial statements as of August 31, 2002.
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, 2002, the company has outstanding letters of guarantee of Cdn$741,000 (US$475,000), which expire at various dates through 2011.
As at August 31, 2002, the company has guaranteed the repayment of third-party loans totalling Cdn$214,000 (US$137,000) detained by certain employees with respect to the purchase of Class F shares under the stock purchase plan (note 13).
13 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
Prior to June 29, 2000, the company's authorized share capital consisted of Class A, D and F shares.
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 canceled.
The following tables summarize the share capital activity since August 31, 1999:
CLASS A SHARES CLASS F SHARES
---------------------------------- -------------------------------- TOTAL
NUMBER AMOUNT NUMBER AMOUNT AMOUNT
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, 2001
and 2002 - $ - - $ - $ -
================================== ================================ ===============
|
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, 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
Business combination
(note 3) - - 4,374,573 59,625 59,625
Exercise of stock awards - - 144,532 - -
Redemption - - (7,022) (6) (6)
Resale - - 7,022 6 6
Share issue expenses, net of
related income taxes of
$5,000 - - - (9) (9)
-------------------------------- ------------------------------- ---------------
Balance as at August 31, 2002 37,900,000 $ 1 23,565,185 $ 489,610 $ 489,611
================================ =============================== ===============
|
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.
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 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$0.67) per share.
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.
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 2002
--------------------------- ----------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
Outstanding - Beginning of year - $ - 609,734 $ 26 2,414,231 $ 28
Granted 609,734 26 2,153,352 29 1,039,805 10
Forfeited - - (348,855) (29) (856,462) (25)
------------- ------------- ------------- ------------- ----------------------------
Outstanding - End of year 609,734 $ 26 2,414,231 $ 28 2,597,574 $ 22
============= ============= ============= ============= ============= ==============
Exercisable - End of year - $ - 127,561 $ 26 512,161 $ 28
============= ============= ============= ============= ============= ==============
|
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,
2002:
OPTIONS OUTSTANDING AS AT AUGUST OPTIONS EXERCISABLE AS AT AUGUST
31, 2002 31, 2002
------------------------------------- --------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
REMAINING REMAINING
EXERCISE PRICE NUMBER CONTRACTUAL LIFE NUMBER CONTRACTUAL LIFE
$2.59 5,550 3.8 years - -
$5.65 53,479 3.5 years - -
$9.13 to $12.69 849,746 3.2 years - -
$19.19 to $27.80 1,325,170 2.3 years 421,253 2.2 years
$34.07 to $45.94 303,079 2.1 years 75,770 2.1 years
$56.75 60,550 2.0 years 15,138 2.0 years
------------------------------------- --------------------------------------
2,597,574 2.6 years 512,161 2.1 years
===================================== ======================================
|
RESTRICTED STOCK AWARD PLAN
On December 20, 2000, the company established a restricted stock award plan for employees of EXFO Burleigh. Each stock award entitles employees to receive one subordinate voting share 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. According to the plan, upon the involuntary termination of a member of the defined management team, all outstanding restricted stock awards granted to such employees automatically vest. The plan will expire on December 20, 2004.
The following table summarizes the restricted stock award activity since December 2000:
2001 2002
------------------ -------------------
Outstanding - Beginning of year - 359,781
Granted 359,781 -
Exercised - (144,532)
------------------ -------------------
Outstanding - End of year 359,781 215,249
================== ===================
Exercisable - End of year - -
================== ===================
|
As of August 31, 2002, the weighted average remaining contractual life of the outstanding restricted stock awards was 2.3 years.
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)
STOCK APPRECIATION RIGHTS PLAN
On August 4, 2001, the company established a stock appreciation rights 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.
Considering the market price of the common shares of US$2.13 as at August 31, 2002, no compensation expense has been recorded in 2002 under that plan.
The following table summarizes the stock appreciation rights activity since August 2001:
YEARS ENDED AUGUST 31,
-------------------------------------------------------------------------------
2001 2002
------------------------------------- --------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
Outstanding - Beginning of year - $ - 22,400 $ 30
Granted 22,400 30 1,000 12
Forfeited - - (13,400) (31)
---------------- -------------------- ----------------- -------------------
Outstanding - End of year 22,400 $ 30 10,000 $ 26
================ ==================== ================= ===================
Exercisable - End of year - $ - 2,250 $ 27
================ ==================== ================= ===================
|
The following table summarizes information about stock appreciation rights as at August 31, 2002:
STOCK APPRECIATION RIGHTS STOCK APPRECIATION RIGHTS
OUTSTANDING AS AT EXERCISABLE AS AT
AUGUST 31, 2002 AUGUST 31, 2002
------------------------------------- --------------------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
REMAINING REMAINING
EXERCISE PRICE NUMBER CONTRACTUAL LIFE NUMBER CONTRACTUAL LIFE
$12.22 1,000 3.3 years - -
$19.19 to $22.25 6,500 2.3 years 1,625 2.3 years
$45.94 2,500 2.1 years 625 2.1 years
---------------- -------------------- ----------------- --------------------
10,000 2.3 years 2,250 2.2 years
================ ==================== ================= ====================
|
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)
14 OTHER DISCLOSURES
NET RESEARCH AND DEVELOPMENT EXPENSES
Net research and development expenses comprise the following:
YEARS ENDED AUGUST 31,
------------------------------------------------------
2000 2001 2002
----------------- ---------------- -----------------
Gross research and development expenses $ 9,374 $ 17,601 $ 17,005
Research and development tax credits (2,436) (3,369) (3,890)
Government grants (536) (631) (333)
----------------- ---------------- -----------------
$ 6,402 $ 13,601 $ 12,782
================= ================ =================
|
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$385,000) toward 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$1,424,000) 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, 2002, the company recognized a total of Cdn$2,820,000 (US$1,809,000) under this program, of which Cdn$1,801,000 (US$1,155,000) have been credited to earnings with the balance of Cdn$1,019,000 (US$654,000) having been included in deferred grants in the balance sheet.
Furthermore, in 1999, the company entered into another agreement with the Minister. Pursuant to this agreement, the Minister agreed to provide grants 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 the new employees continue to participate in the specific training program for a period of at least ten consecutive months. Should this condition 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$2,965,000 (US$1,902,000) under this program, which has been credited to earnings.
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.
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)
Finally, since 2000, companies operating in the Quebec City area are eligible for a refundable tax credit granted by the Province of Quebec government. 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$3,911,000 (US$2,509,000) under this program, which has been credited to earnings.
The reduction in the company's work force described in note 4 had no effect on amounts already recognized in the statements of earnings 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, 2000, 2001 and 2002, is net of related government grants of $196,000, $15,000 and nil, respectively.
Cost of sales for the years ended August 31, 2000, 2001 and 2002, is net of government grants of $915,000, $1,742,000 and $546,000, respectively.
Selling and administrative expenses for the years ended August 31, 2000, 2001 and 2002, are net of government grants of $386,000, $260,000 and $213,000, respectively.
Research and development expenses for the years ended August 31, 2000, 2001 and 2002, are net of government grants of $536,000, $631,000 and $333,000, respectively.
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 certain eligible Canadian resident employees, under which the company may elect 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. Since June 2002, the company has suspended its contributions to the plan as part of its cost-reduction efforts. Contributions to this plan during the years ended August 31, 2000, 2001 and 2002, amounted to Cdn$202,000 (US$137,000), Cdn$407,000 (US$266,000) and Cdn$136,000 (US$88,000), respectively.
o 401K plan
The company maintains a 401K plan for eligible U.S. resident employees. Under this plan, 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, 2000, 2001 and 2002, the company recorded contributions totaling $23,000, $285,000 and $317,000, 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)
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,
------------------------------------------------------
2000 2001 2002
------------------ --------------- ----------------
Income taxes at combined Canadian federal and provincial $ 5,897 $ 8,855 $ (26,563)
statutory tax rate (38% in 2000, 37% in 2001 and 36%
in 2002)
Increase (decrease) due to:
Manufacturing and processing deduction (645) (1,201) 525
Non-taxable income - (144) (143)
Non-deductible expenses 57 274 334
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 (1,101)
Reduction of Canadian federal statutory tax rate - - 168
Effect of consolidation of subsidiaries - (276) 1,325
Tax deductions - (136) (518)
Other (144) 159 522
Change in valuation allowance - 362 -
----------------- --------------- ----------------
$ 5,298 $ 8,150 $ (25,451)
================= =============== ================
The provision for income taxes consist of the following:
Current
Canadian $ 5,227 $ 8,416 $ (10,816)
United States 61 1,305 (1,232)
Other 43 208 (6)
----------------- --------------- ----------------
5,331 9,929 (12,054)
Future
Canadian (16) 940 (4,475)
United States (17) (2,719) (8,694)
Other - - (228)
----------------- --------------- ----------------
(33) (1,779) (13,397)
----------------- --------------- ----------------
$ 5,298 $ 8,150 $ (25,451)
================= =============== ================
Details of the company's income taxes:
Earnings (loss) before income taxes and amortization and
write-down of goodwill
Canadian $ 15,317 $ 28,202 $ (47,431)
United States 115 (5,356) (28,228)
Other 87 1,086 1,874
----------------- --------------- ----------------
$ 15,519 $ 23,932 $ (73,785)
================= =============== =================
|
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 income tax assets and liabilities are as follows:
AS AT AUGUST 31,
-----------------------------------------
2001 2002
------------------ ------------------
Future income tax assets
Property, plant and equipment and intangible assets $ 107 $ 3,725
Provisions and accruals 1,208 1,339
Government grants 247 206
Deferred revenue 198 -
Share issue expenses 3,128 1,069
Restructuring charges 930 715
Research and development expenses 86 1,178
Losses carried forward 272 6,904
Other 39 7
------------------ ------------------
6,215 15,143
Valuation allowance (362) (359)
------------------ ------------------
$ 5,853 $ 14,784
================== ==================
Future income tax liabilities
Property, plant and equipment and intangible assets $ (8,640) $ (4,566)
Research and development tax credits (680) (150)
Provisions and accruals - (66)
Government grants (310) -
------------------ ------------------
(9,630) (4,782)
------------------ ------------------
Future income tax assets (liabilities), net $ (3,777) $ 10,002
================== ==================
|
As at August 31, 2002, a company's subsidiary has accumulated losses for income tax purposes of approximately $896,000 and research and development expenses of approximately $955,000 at the provincial level for which a valuation allowance of $359,000 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)
16 SEGMENT INFORMATION
Management has organized the company under one operating segment, being the development, manufacturing and marketing of fiber-optic test, measurement, monitoring and automation solutions. This operating segment is composed of Portable and Monitoring products and the Industrial and Scientific products.
Product sales are detailed as follows:
YEARS ENDED AUGUST 31,
------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Portable and Monitoring products $ 49,075 $ 69,399 $ 38,887
Industrial and Scientific products 22,564 76,614 29,443
----------------- ----------------- -----------------
$ 71,639 $ 146,013 $ 68,330
================= ================= =================
|
Sales to external customers by geographic region are detailed as follows:
YEARS ENDED AUGUST 31,
------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
United States $ 36,139 $ 72,604 $ 35,129
Canada 8,006 12,531 3,971
Europe 14,503 30,568 9,539
Asia 6,486 19,059 12,971
South America 2,221 5,838 2,581
Other 4,284 5,413 4,139
----------------- ----------------- -----------------
$ 71,639 $ 146,013 $ 68,330
================= ================= =================
|
Sales have been allocated to geographic regions based on the country of residence of the related customers. During 2002, the company derived 10.2% of its sales ($6,965,000) from one customer. The three most significant customers represented 15.4% of sales for that same year. During 2000 and 2001, there were no customers from which 10% or more of total sales were derived.
Long-lived assets by geographic region are detailed as follows:
2001 2002
------------------ ------------------
United States $ 171,450 $ 16,141
Canada 119,932 44,145
------------------ ------------------
$ 291,382 $ 60,286
================== ==================
|
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 (LOSS) 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,
------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Basic weighted average number of shares
outstanding (000's) 39,951 53,014 60,666
Conversion of preferred shares Series I 26 - -
Stock options 109 231 31
Restricted stock awards - 250 269
----------------- ----------------- -----------------
Diluted weighted average number of shares
outstanding (000's) 40,086 53,495 60,966
================= ================= =================
Stock options excluded from the calculation of
diluted earnings per share because the
exercise price was greater than the average
market price of the common shares (000's) - 953 2,734
================= ================= =================
|
The diluted loss per share for the years ended August 31, 2001 and 2002, was the same as the basic loss per share since the dilutive effect of stock options and restricted stock awards was not included in the calculation; otherwise, the effect would be anti-dilutive. Accordingly, diluted loss per share for those years was calculated using the basic weighted average number of shares outstanding.
18 FINANCIAL INSTRUMENTS
SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
AS AT AUGUST 31,
-----------------------------------------
2001 2002
------------------ ------------------
Commercial paper denominated in Canadian dollars, bearing interest at 52,000 40,553
annual rates of 4.35% to 4.60% in 2001 and 2.61% to 2.93% in 2002,
maturing on different dates between September 2001 and November
2001 in 2001 and September 2002 and November 2002 in 2002 $ $
Mutual fund denominated in Canadian dollars 14,861 -
------------------ ------------------
$ 66,861 $ 40,553
================== ==================
|
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)
FAIR VALUE
Cash and cash equivalents, accounts receivable, 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 $66,861,000 and $40,553,000 as at August 31, 2001 and 2002, 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 corporations. 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.
Due to the geographic 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 $893,000 and $520,000 as at August 31, 2001 and 2002, respectively.
INTEREST RATE RISK
As at August 31, 2002, 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 Accounts payable and accrued liabilities Non-interest bearing Long-term debt As described in note 10 |
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)
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, 2001 and 2002, the company held contracts to sell US dollars at various forward rates, which are summarized as follows:
WEIGHTED AVERAGE
CONTRACTUAL CONTRACTUAL
AMOUNTS FORWARD RATES
---------------- ---------------
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, 2002
September 2002 to August 2003 $ 6,400 1.5464
September 2003 to June 2004 2,200 1.5679
|
As at August 31, 2001 and 2002, these contracts generated deferred unrealized losses of US$533,000 and US$39,000, respectively, which have not been reflected in the statements of earnings.
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 provided in the accompanying 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)
RECONCILIATION OF NET EARNINGS (LOSS) TO CONFORM WITH U.S. GAAP
The following summary sets out the significant differences betwen the company's reported net earnings (loss) and net earnings (loss) per share under Canadian GAAP and as compared to U.S. GAAP:
YEARS ENDED AUGUST 31,
------------------------------------------------------
2000 2001 2002
----------------- ----------------- -----------------
Net earnings (loss) for the year in accordance with
Canadian GAAP $ 9,924 $ (15,294) $ (308,524)
Non-cash stock-based compensation costs related to stock
option plan a) (1,464) (954) 49
Non-cash stock-based compensation costs related to stock
purchase plan a) (538) (477) (661)
Non-cash stock-based compensation costs related to
restricted stock award plan a) - (3,481) (3,038)
Unrealized gains on forward exchange contracts c) - 97 444
Future income taxes on forward exchange contracts c) - 20 (212)
Future income taxes on acquired in-process research and
development d) - (936) (444)
Amortization of intangible assets e) - - 239
Future income taxes on amortization of intangible assets e) - - (80)
Amortization of goodwill d), e) - (8,453) (9,263)
Write-down of goodwill and intangible assets e) - - (62,557)
Future income taxes on write-down of intangible assets e) - - (1,154)
----------------- ----------------- -----------------
Net earnings (loss) for the year in accordance with U.S.
GAAP 7,922 (29,478) (385,201)
Other comprehensive income (loss)
Foreign currency translation adjustments b) 1,555 (9,888) (521)
Unrealized holding gains on available-for-sale securities,
net of related future income taxes f) 37 - -
Reclassification of holding gains on available-for-sale
securities included in net earnings (loss), net of
related future income taxes f) (36) (37) -
----------------- ----------------- -----------------
Comprehensive income (loss) $ 9,478 $ (39,403) $ (385,722)
================= ================= =================
Basic and diluted net earnings (loss) per share in
accordance with U.S. GAAP g) $ 0.20 $ (0.56) $ (6.35)
|
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)
SHAREHOLDERS' EQUITY
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,
--------------------------------------------------------
2000 2001 2002
----------------- ---------------- -----------------
Share capital in accordance with Canadian GAAP $ 198,459 $ 429,995 $ 489,611
Stock-based compensation costs related to stock
purchase plan a), h)
Current year 2,647 (150) (64)
Cumulative effect of prior years 45 2,692 2,542
Reclassification from other capital upon exercise of
restricted stock awards - - 3,270
Shares issued upon business combinations d) - 65,584 65,584
----------------- ---------------- -----------------
Share capital in accordance with U.S. GAAP $ 201,151 $ 498,121 $ 560,943
================= ================ =================
|
DEFERRED STOCK-BASED COMPENSATION COSTS
AS AT AUGUST 31,
--------------------------------------------------------
2000 2001 2002
----------------- ---------------- -----------------
Deferred stock-based compensation costs in accordance -
with Canadian GAAP $ - $ - $
Stock-based compensation costs related to stock-based
compensation plans a), h)
Current year (21,396) (8,145) -
Cumulative effect of prior years (35) (19,429) (7,968)
Amortization for the year 2,002 4,912 4,698
Reduction of stock-based compensation costs - 14,694 403
----------------- ---------------- -----------------
Deferred stock-based compensation costs in accordance
with U.S. GAAP $ (19,429) $ (7,968) $ (2,867)
================= ================ =================
|
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,
--------------------------------------------------------
2000 2001 2002
----------------- ---------------- -----------------
Other capital in accordance with Canadian GAAP $ - $ - $ -
Stock-based compensation costs related to stock-based
compensation plans a), h)
Current year 18,749 8,145 -
Cumulative effect of prior years - 18,749 12,350
Reduction of stock-based compensation costs - (14,544) (1,387)
Reclassification to share capital upon exercise of
restricted stock awards - - (3,270)
----------------- ---------------- -----------------
Other capital in accordance with U.S. GAAP $ 18,749 $ 12,350 $ 7,693
================= ================ =================
|
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)
RETAINED EARNINGS (DEFICIT)
AS AT AUGUST 31,
--------------------------------------------------------
2000 2001 2002
----------------- ---------------- -----------------
Retained earnings (deficit) in accordance with
Canadian GAAP $ 6,980 $ (8,314) $ (316,838)
Stock-based compensation costs related to stock-based
compensation plans a)
Current year (2,002) (4,912) (3,650)
Cumulative effect of prior years (10) (2,012) (6,924)
Unrealized gains on forward exchange contracts, net
of related future income taxes c)
Current year - 117 232
Cumulative effect of prior years - - 117
Future income taxes on acquired in-process research
and development d)
Current year - (936) (444)
Cumulative effect of prior years - - (936)
Write-down of goodwill and intangible assets e)
Current year - - (62,557)
Future income taxes on write-down of intangible assetse)
Current year - - (1,154)
Amortization of intangible assets e)
Current year - - 239
Future income taxes on amortization of intangible
assets e)
Current year - - (80)
Amortization of goodwill d), e)
Current year - (8,453) (9,263)
Cumulative effect of prior years - - (8,453)
Change in reporting currency b)
Cumulative effect of prior years 1,016 1,016 1,016
----------------- ---------------- -----------------
Retained earnings (deficit) in accordance with
U.S. GAAP $ 5,984 $ (23,494) $ (408,695)
================= ================ =================
|
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)
YEARS ENDED AUGUST 31,
--------------------------------------------------------
2000 2001 2002
----------------- ---------------- -----------------
Foreign currency translation adjustments b)
Balance - Beginning of year $ (1,016) $ 539 $ (9,349)
Change during the year 1,555 (9,888) (521)
----------------- ---------------- -----------------
Balance - End of year 539 (9,349) (9,870)
----------------- ---------------- -----------------
Unrealized holding gains on available-for-sale
securities, net of future income taxes f)
Balance - Beginning of year 36 37 -
Unrealized gains arising during the year, net
of related future income taxes 37 - -
Reclassification adjustment for amounts
included in net earnings (loss), net of
related future income taxes (36) (37) -
----------------- ---------------- -----------------
Balance - End of year 37 - -
----------------- ---------------- -----------------
Accumulated other comprehensive income (loss) $ 576 $ (9,349) $ (9,870)
================= ================ =================
|
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, 2001 AS AT AUGUST 31, 2002
--------------------------------------- ----------------------------------------
AS REPORTED U.S. GAAP AS REPORTED U.S. GAAP
Intangible assets e)
Cost $ 55,044 $ 55,044 $ 37,927 $ 30,301
Accumulated amortization (9,974) (9,974) (21,463) (17,030)
------------------ -------------------- -------------------- -------------------
$ 45,070 $ 45,070 $ 16,464 $ 13,271
------------------ -------------------- -------------------- -------------------
Goodwill d), e)
Cost $ 250,497 $ 315,547 $ 87,025 $ 92,747
Accumulated amortization (31,325) (39,762) (69,449) (87,251)
------------------ -------------------- -------------------- -------------------
$ 219,172 $ 275,785 $ 17,576 $ 5,496
================== ==================== ==================== ===================
Shareholders' equity
Share capital a), d), $ 429,995 $ 498,121 $ 489,611 $ 560,943
h)
Contributed surplus 1,457 1,457 1,487 1,487
Cumulative translation
adjustment b) (8,333) - (8,854) -
Deferred stock-based
compensation costs a), h) - (7,968) - (2,867)
Other capital a) - 12,350 - 7,693
Deficit a), b), (8,314) (23,494) (316,838) (408,695)
c), d),
e)
Accumulated other comprehensive
loss b), f) - (9,349) - (9,870)
------------------ -------------------- -------------------- -------------------
$ 414,805 $ 471,117 $ 165,406 $ 148,691
================== ==================== ==================== ===================
|
STATEMENTS OF CASH FLOWS
For the years ended August 31, 2000, 2001 and 2002, 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").
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)
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 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.
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 13, the performance criterion was removed and the number of shares to be issued under the plan was fixed and the company recorded, in 2001, 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
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.
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.
As a result, a permanent difference of $1,016,000 has been created on September 1, 1999, affecting the cumulative translation adjustment and the retained earnings under both Canadian GAAP and 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)
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 require 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 years ended August 31, 2001 and 2002; accordingly, changes in the fair value of the derivatives have been charged to earnings during these years.
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 Canadian GAAP, until June 30, 2001, the value of shares issued upon a business combination was determined based on the market price of the shares over a reasonable period of time before and after the date of acquisition while under U.S. GAAP, the value of shares was 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 EXFO Burleigh and EXFO Photonic Solutions for U.S. GAAP purposes occurred on December 14, 2000 and on 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 GAAP) for EXFO Burleigh and $120,802,000 ($110,146,000 under Canadian GAAP) for EXFO Photonic Solutions, thus increasing share capital and goodwill under U.S. GAAP.
However, since July 1, 2001, the shares issued upon a business combination are valued under Canadian GAAP using the same method as used 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 and 2002, in-process research and development recorded under Canadian GAAP was fully amortized.
e) WRITE-DOWN OF GOODWILL AND INTANGIBLE ASSETS
Under U.S. GAAP, when assets being tested for recoverability were acquired in business combinations accounted for by the purchase method, the goodwill that arose in that transaction shall be included as part of the assets grouping in determining recoverability. The intangible
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)
assets tested for recoverability in 2002 were acquired in business combinations accounted for using the purchase method and, consequently, the company allocated goodwill to those assets on a pro rata basis using the relative fair values of the long-lived assets and identifiable intangible assets acquired as determined at the date of acquisition. The carrying value of goodwill identified with the impaired intangible assets was written down before any reduction was made to the impaired intangible assets. Intangible assets were then written down to their fair value.
The fair value of intangible assets was determined based on discounted future cash flows. The cash flows periods used were ten and eleven years, using annual growth rates ranging between 10% and 30% and discount rates between 15% and 18%. The assumptions supporting discounted cash flows, including the cash flow periods, the annual growth rates and the discount rates, reflect management's best estimates. The discount rates were based upon the company's weighted average cost of capital as adjusted for the risks associated with operations.
The unallocated portion of goodwill was tested for recoverability at the subsidiaries' level based on the related pre-tax undiscounted future cash flows using the same assumptions and methodology as used for Canadian GAAP purposes.
Under U.S. GAAP, the company recorded a charge of $281,278,000 to write down a significant portion of goodwill and a pre-tax charge of $27,105,000 to write down a significant portion of acquired core technology. Of the total charge of $308,383,000, $170,079,000 relates to EXFO Burleigh, $83,637,000 relates to EXFO Photonic Solutions and $54,667,000 relates to EXFO Protocol.
Under Canadian GAAP, no allocation of goodwill is required and each asset is tested for recoverability separately based on its pre-tax undiscounted cash flows over its expected period of use.
Also, under Canadian GAAP, the impairment loss for intangible assets is measured as the difference between the carrying value and the pre-tax undiscounted future cash flows.
Finally, under U.S. GAAP, the carrying value of goodwill reviewed for impairment was $46,380,000 higher than the carrying value of the same goodwill tested under Canadian GAAP because the measurement dates used to account for the business combinations were different between Canadian GAAP and U.S. GAAP as explained in item d).
f) 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.
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)
g) EARNINGS (LOSS) PER SHARE
Under U.S. GAAP, the presentation of per share figures for earnings (loss) before amortization and write-down of goodwill is not permitted. In addition, under U.S. GAAP, amortization and write down of goodwill would be included in the computation of earnings from operations.
h) 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.
i) NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) 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. SFAS 141 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 transitional provisions of SFAS 142, the company did not amortize the goodwill resulting from the acquisition of EXFO Protocol Inc., for which the acquisition date was November 2, 2001.
The company adopted SFAS 142 prospectively on September 1, 2002. Upon the adoption of this new section, goodwill recorded prior to July 1, 2001, is no longer subject to amortization. Also, under the transitional provisions of the SFAS 142, the company performed an initial impairment test to identify goodwill impairment using a fair value-based method. Under SFAS 142, a goodwill impairment exists when the carrying value of a reporting unit exceeds its fair value. For the purposes of the impairment test, the company allocated its existing goodwill to its reporting units and completed an evaluation of the fair value of such reporting units. Based on the comparison of the fair value of the reporting units to their carrying value, goodwill of the reporting units was not considered impaired.
Goodwill will also be tested for impairment on an annual basis or more frequently if events or circumstances occur that more likely than not reduce the fair value of a reporting unit below its carrying value. Any impairment loss arising from this test 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)
In June 2001, the FASB 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 incurred if a reasonable estimate of fair value can be made. The company will adopt this new standard prospectively on September 1, 2002 and its adoption will not have a significant impact on the company's financial statements.
In October 2001, the FASB issued SFAS 144 "Accounting for Impairment or Disposal of Long-Lived Assets", which supersedes SFAS 121 and the provisions of APB 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" with regard to reporting the effects of a disposal of a segment of a business. SFAS 144 retains many of the provisions of SFAS 121, but significantly changes the criteria that would have to be met to classify an asset as held for disposal such that long-lived assets to be disposed of other than by sale are considered held and used until disposed of. In addition, SFAS 144 retains the basic provisions of APB 30 for presentation of discontinued operations in the statement of earnings but broadens that presentation to a component of an entity. This new standard is effective for fiscal years beginning on or after December 15, 2001. The company will adopt this new standard prospectively on September 1, 2002, and its adoption will not have a significant impact on the company's financial statements.
In April 2002, the FASB issued SFAS 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections". This new standard is effective for fiscal years beginning on or after May 15, 2002, or for transactions occurring after May 15, 2002 related to SFAS 13, paragraph 8 and 9 (c). This statement rescinds SFAS 4 "Reporting Gains and Losses from Extinguishment of Debt" and an amendment of that Statement, SFAS 64 "Extinguishments of Debt Made to Satisfy Sinking-Funds Requirements". This Statement also rescinds SFAS 44 "Accounting for Intangible Assets of Motor Carriers". This Statement amends SFAS 13 "Accounting for Leases" to eliminate an inconsistency between the required accounting for sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The company will adopt this new standard prospectively on September 1, 2002, and its adoption will not have a significant impact on the company's financial statements.
In June 2002, the FASB issued SFAS 146 "Accounting for Costs Associated with Exit or Disposal Activities". This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF No. 94-3, "Liability Recognition of Certain Employee Termination Benefits and Other Costs to Exit an Activity". This Statement improves financial reporting by requiring that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. This Statement specifies that a liability for a cost associated with an exit or disposal activity is incurred when the definition of a liability in SFAS 6 is met. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002. The company will adopt this new standard prospectively on January 1, 2003, and has not yet assessed the impact of its adoption.
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)
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 2002 acquisition had been completed on September 1, 2001 and 2000; the 2001 acquisitions had been completed on September 1, 2000.
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.
2001 2002
----------- -----------
(UNAUDITED)
Sales $ 166,083 $ 683,371
Net loss $ (63,203) $ (385,870)
Basic and diluted net loss per share $ (1.03) $ (6.29)
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ACCOUNTING FOR STOCK-BASED COMPENSATION
Under U.S. GAAP, the company has elected to measure compensation costs 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 2002
-------------- ---------------- ----------
Risk-free interest rate 6.04% 5.36% 4.50%
Expected volatility 75% 75% 80%
Dividend yield Nil Nil Nil
Weighted average expected life 32 months 33 months 40 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, the net earnings (loss) and related net earnings (loss) per share figures under U.S. GAAP would be as follows:
YEARS ENDED AUGUST 31,
---------------------------------------------------
2000 2001 2002
---------------- ---------------- ---------------
Pro forma net earnings (loss) for the year $ 8,939 $ (39,109) $ (390,831)
Pro forma basic and diluted net earnings
(loss) per share $ 0.22 $ (0.74) $ (6.44)
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The following table summarizes the stock-based compensation costs for options outstanding based on the fair value-based method:
2000 2001 2002
--------------- --------------- -------------
EXERCISE PRICE
$2.59 $ - $ - $ 1
$5.65 - - 54
$9.13 to $12.69 - - 2,631
$19.19 to $27.80 447 6,636 1,815
$34.07 to $45.94 - 2,902 1,076
$56.75 - 1,047 4
--------------- --------------- -------------
$ 447 $ 10,585 $ 5,581
=============== =============== =============
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These options will generate aggregate stock-based compensation costs of $26,589,000 over their vesting periods. As at August 31, 2002, the deferred stock-based compensation costs amount to $9,976,000 and will be charged to expense over the next four years. For the years ended August 31, 2000, 2001 and 2002, the weighted average fair value of options amounted to $15.07, $14.64 and $9.19, respectively.
As of August 31, 2002, none of the vested options has been exercised. As of August 31, 2002, the market price of the company's common shares was $2.13.
20 SUBSEQUENT EVENTS
On September 3, 2002, EXFO acquired a building from a company owned by the President of the company for a cash consideration of $930,000. This transaction was measured at the exchange amount since it was not in the normal course of operations, the change in ownership interest in the building was substantive and the exchange amount was supported by independent evidence.
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)
On September 5, 2002, the company entered into an agreement to acquire substantially all the assets of gnubi communications, L.P., a U.S. company which supplies multi-channel telecom and datacom testing solutions for optical transport equipment manufacturers and research and development laboratories. This acquisition is expected to be settled for a total consideration ranging between $4,300,000 and $7,200,000. The consideration paid will consist of $1,800,000 in cash, $2,500,000 by the issuance of subordinate voting shares and a cash contingent consideration based on sales volume for 2003. This acquisition will be accounted for using the purchase method. This acquisition is expected to be closed in the first quarter of 2003.
INDEX TO 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 Amended By-laws of EXFO.
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., EXFO 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., EXFO
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 (incorporated by
reference to Exhibit 4.3 of EXFO's annual report on Form 20-F
dated January 18, 2002).
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 (incorporated by reference to
Exhibit 4.4 of EXFO's annual report on Form 20-F dated January
18, 2002).
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. (incorporated by
reference to Exhibit 4.8 of EXFO's annual report on Form 20-F
dated January 18, 2002).
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 summary in English)
(incorporated by reference to Exhibit 10.4 of EXFO's Registration
Statement on Form F-1, File No. 333-38956).
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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(incorporated by
reference to Exhibit 4.13 of EXFO's annual report on Form 20-F
dated January 18, 2002).
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).
4.19 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).
4.20 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 Bruce Bonini dated as of September 1,
2000 (incorporated by reference to Exhibit 4.24 of EXFO's
annual report on Form 20-F dated January 18, 2002).
4.23 Employment Agreement of Juan-Felipe Gonzalez dated as of
September 1, 2000 (incorporated by reference to Exhibit 4.25
of EXFO's annual report on Form 20-F dated January 18, 2002).
4.24 Employment Agreement of David J. Farrell dated as of December
20, 2000 (incorporated by reference to Exhibit 4.26 of EXFO's
annual report on Form 20-F dated January 18, 2002).
4.25 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).
4.26 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).
4.27 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).
4.28 Directors' Compensation Plan (incorporated by reference to Exhibit
10.17 of EXFO's Registration Statement on Form F-1, File No.
333-38956).
4.29 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).
4.30 Asset Purchase Agreement by and Among EXFO Electro-Optical
Engineering Inc., EXFO Gnubi Products Group Inc., gnubi
communications, L.P., gnubi communications General Partner,
LLC, gnubi communications Limited Partner, LLC, gnubi
communications, Inc., Voting Trust created by The Irrevocable
Voting Trust Agreement Among Carol Abraham Bolton, Paul
Abraham and James Ray Stevens, James Ray Stevens and Daniel J.
Ernst dated September 5, 2002.
4.31 EXFO Protocol Inc. Executive Employment Agreement with Sami Yazdi
signed November 2, 2001.
4.32 First Amending Agreement to the Employment Agreement of Bruce
Bonini dated as of September 1, 2001.
8.1 Subsidiaries of EXFO (list included in Item 4C of this annual
report).
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TABLE OF CONTENTS
Page
PART I. ...............................................................2
Item 1. Identity of Directors, Senior Management and Advisors..........2
Item 2. Offer Statistics and Expected Timetable........................2
Item 3. Key Information................................................2
Item 4. Information on the Company....................................19
Item 5. Operating and Financial Review and Prospects..................40
Item 6. Directors, Senior Management and Employees....................61
Item 7. Major Shareholders and Related Party Transactions.............76
Item 8. Financial Information.........................................78
Item 9. The Offer and Listing.........................................80
Item 10. Additional Information........................................80
Item 11. Qualitative and Quantitative Disclosures about Risk...........90
Item 12. Description of Securities Other than Equity Securities........91
PART II. ..............................................................91
Item 13. Defaults, Dividends Arrearages and Delinquencies..............91
Item 14. Material Modifications to the Rights of Security Holders
and Use of Proceeds.......................................91
Item 15. [Reserved]....................................................91
Item 16. [Reserved]....................................................91
PART III. ..............................................................91
Item 17. Financial Statements..........................................92
Item 18. Financial Statements..........................................92
Item 19. Exhibits......................................................93
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enacted pursuant to the
CANADA BUSINESS CORPORATIONS ACT
Adopted as of : May 25, 2000
Amended as of: October 30, 2002
enacted pursuant to the
CANADA BUSINESS CORPORATIONS ACT
PAGE
----
DEFINITIONS....................................................................1
LOCATION OF REGISTERED OFFICE AND OFFICES
Registered office.....................................................1
Offices...............................................................1
SHAREHOLDERS
Annual meetings.......................................................2
Special meetings......................................................2
Meetings Held by Electronic Means.....................................2
Place of meetings.....................................................2
Notice of meetings....................................................3
Record Date...........................................................3
Waiver of Notice......................................................4
Chairman..............................................................4
Quorum................................................................4
Representation at meetings............................................5
Right to Vote.........................................................5
Decisions by a Majority...............................................5
Casting Vote..........................................................5
Vote by Show of Hands.................................................5
Voice Vote............................................................5
Vote by Secret Ballot.................................................6
Procedure at meetings.................................................6
Scrutineers...........................................................6
Addresses of the Shareholders and Subsequent Transferees of Shares....6
Signed Resolutions....................................................6
BOARD OF DIRECTORS
Number................................................................7
Qualification.........................................................7
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Election and Term of Office...........................................7
Resignation...........................................................7
Removal...............................................................7
Vacancy...............................................................8
Replacement...........................................................8
Remuneration..........................................................8
General Powers of the Directors.......................................8
Irregularity..........................................................8
Use of Property or Information........................................8
Conflicts of Interest.................................................8
Contracts and Transactions with the Corporation.......................9
MEETINGS OF THE BOARD OF DIRECTORS
Calling of meetings...................................................9
Meetings by Telephone or Electronic Facilities.......................10
Quorum...............................................................10
Meeting Chairman and Secretary.......................................10
Procedure............................................................10
Voting...............................................................11
Signed Resolution....................................................11
OFFICERS
Officers.............................................................11
Chairman of the Board................................................12
President............................................................12
Vice-President.......................................................12
General Manager or Managing Director.................................12
Comptroller..........................................................12
Secretary............................................................12
Treasurer............................................................13
Removal, Discharge and Resignation...................................13
Vacancy..............................................................13
Remuneration.........................................................13
EXECUTIVE COMMITTEE
Election.............................................................13
Officers, Quorum and Procedure.......................................13
Chairmanship.........................................................13
Secretary............................................................13
Powers...............................................................14
Supervisory Power of the Board of Directors..........................14
Participation by Telephone or Electronic Facilities and
Signed Resolutions................................................14
Meetings.............................................................14
Remuneration.........................................................14
Removal and Replacement..............................................14
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AUDIT COMMITTEE
Composition..........................................................14
Duties...............................................................14
Meetings.............................................................15
Applicable By-laws...................................................15
OTHER COMMITTEES
Other Committees.....................................................15
INDEMNIFICATION AND EXEMPTION
Indemnity............................................................15
Insurance............................................................16
Reimbursement of expenses............................................16
SHARE CAPITAL
Issue and Stock Options..............................................16
Share Certificates and Stock Transfers...............................16
Securities Register..................................................16
Transfer Agents and Registrars.......................................16
Record Date and Closing of Books.....................................17
Lost or Destroyed Certificates.......................................17
DIVIDENDS
Dividends............................................................17
FISCAL YEAR AND AUDIT
Fiscal Year..........................................................18
Audit................................................................18
CORPORATE REPRESENTATION FOR CERTAIN PURPOSES
Declaration..........................................................18
Representation at meetings...........................................18
Signature of Documents...............................................19
Declarations in the Register.........................................19
MISCELLANEOUS PROVISIONS
Conflict with the Articles...........................................19
Amendments...........................................................20
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EXFO ELECTRO-OPTICAL ENGINEERING INC.
(the "Corporation")
enacted pursuant to the
CANADA BUSINESS CORPORATIONS ACT
For the purposes of these By-laws, unless otherwise provided :
- "Act" means the CANADA BUSINESS CORPORATIONS ACT, R.S.C. (1985) ch. C-44, as well as any amendment which may be made thereto, and any act which may be substituted therefor;
- "Articles" means the articles of association, of amalgamation or of continuance of the Corporation, as amended from time to time;
- "Auditor" means the auditor of the Corporation and includes an auditing firm;
- "Ordinary Resolution" means a resolution adopted by the majority of the votes cast by the shareholders qualified to vote in the circumstances, or signed by all of them;
- "Resident Canadian" has the particular meaning ascribed by the Act to such expression, but summarily includes a Canadian citizen and a permanent resident, within the meaning of the IMMIGRATION ACT, who ordinarily reside in Canada;
1. REGISTERED OFFICE. The registered office of the Corporation is situated in the province or territory within Canada specified in its Articles from time to time and at such address therein as the Board may from time to time determine.
2. OFFICES. The Corporation may, in addition to its registered office, establish elsewhere within or outside Canada any other office and agency.
3. ANNUAL MEETINGS. The annual meeting of the shareholders of the Corporation shall be held yearly on the date and at the time the Board of Directors may determine in order to receive and examine the financial statements and, if any, the report of the Auditor, elect directors, appoint an Auditor and fix or authorize the Board of Directors to fix his remuneration and to examine, deal with and dispose of such other business as may properly come before the meeting.
4. SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time as determined by the President or the Board of Directors and shall be called by the Board of Directors when required by one or more shareholders holding no less than five per cent (5%) of the votes attached to the outstanding shares in conformity with the Act.
5. MEETINGS HELD BY ELECTRONIC MEANS . Any person entitled to attend a meeting of shareholders may vote and otherwise participate in the meeting by means of a telephonic, electronic or other communication facility made available by the Corporation that permits all participants to communicate adequately with each other during the meeting. A person participating in a meeting of shareholders by such means is deemed to be present at the meeting.
Directors who call (but not shareholders who requisition) a meeting of shareholders may determine that:
(a) the meeting shall be held, in accordance with the regulations, entirely by means of a telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the meeting; and
(b) any vote shall be held, in accordance with the regulations, entirely by means of a telephone, electronic or other communication facility that the Corporation made available for that purpose.
Any vote at a meeting of shareholders may be carried out by means of a telephonic, electronic or other communication facility, if the facility:
(x) enables the votes to be gathered in a manner that permits their subsequent verification; and
(y) permits the tallied votes to be presented to the Corporation without it being possible for the Corporation to identify how each shareholder or group of shareholders voted.
6. PLACE OF MEETINGS. Meetings of the shareholders shall be held in Canada at the registered office of the Corporation or at any other place that may be fixed by the Board of Directors. Meetings of the shareholders may be held outside Canada if all shareholders entitled to vote thereat so agree
or if the Articles specify a place outside Canada where a meeting of shareholders may be held. A shareholder who attends a meeting being held outside Canada is deemed to have so agreed, unless he is present for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully held.
7. NOTICE OF MEETINGS. Notice of each annual meeting and of each special meeting of the shareholders shall be delivered to the shareholders entitled to vote thereat, the directors and the Auditor or, at the discretion of the person charged with the giving of such notice, mailed by ordinary mail, transmitted by facsimile or sent by electronic mail to the addressees at their respective addresses entered in the books of the Corporation, no less than twenty-one (21) days and no more than sixty (60) days prior to the date fixed for the meeting. If the address of the addressee is not entered in the books of the Corporation, the notice may be sent as aforesaid to the address that the person sending the notice considers to be most likely to reach such addressee promptly. Any irregularity in the notice of meeting or giving thereof, including the accidental omission to send such notice or failure to receive on the part of the shareholder, shall in no way affect the validity of proceedings of the meeting in question.
Such notice shall specify the date, time and place of the meeting. The notice of the annual meeting may, but need not, specify the nature of the business when such meeting is called only to examine the financial statements along with the report of the Auditor, to elect directors and to re-appoint the incumbent Auditor. The notice of the annual meeting at which other business shall be transacted, as well as the notice of special meeting, shall state:
(a) the nature of business to be considered in sufficient detail to permit the shareholders to form a reasoned judgment thereon; and
(b) the text of any Special Resolution to be submitted to the meeting.
It is not necessary to give notice of the reconvening of an adjourned meeting other than by announcement at the earlier meeting that is adjourned; a new notice of meeting shall, however, be required if the shareholders' meeting is adjourned one (1) or more times for an aggregate of thirty (30) days or more.
The signature of any notice of meeting may be written, stamped, typewritten, printed or otherwise mechanically reproduced.
A certificate of the Secretary or of any other duly authorized officer of the Corporation in office at the time of the making of the certificate or of any officer, transfer agent or registrar of transfers of shares of the Corporation shall be conclusive evidence that may be set up against any shareholder or director of the sending or delivery of a notice of meeting.
8. RECORD DATE. Subject to section 134 of the Act, directors may by resolution fix in advance a date and time as the record date to determine which shareholders are entitled to (i) receive notice
of meetings of shareholders, (ii) vote at meetings of shareholders and (iii) receive financial statements of the Corporation in accordance with subsection 159(1) of the Act.
Should the directors fail to fix a date and time in advance as a record date for any aforementioned issue for any meetings of shareholders of the Corporation, the following provisions shall apply, as the case may be:
(a) the record date used to determine which shareholders are entitled to receive notice of meetings of shareholders shall be fixed at the close of business of the day immediately preceding that on which notice has been given or sent or, failing such notice, on the day of the meeting;
(b) the record date used to determine which shareholders are entitled to vote during meetings of shareholders shall be fixed on the day of such meeting; and
(c) the record date used to determine which shareholders are entitled to receive financial statements of the Corporation shall be fixed at the close of business of the day the directors adopt a resolution to that effect.
9. WAIVER OF NOTICE. A shareholder or any other person entitled to be summoned to a meeting of shareholders may waiver a notice of meeting prior to, during or after such meeting is held. The mere presence of a shareholder shall constitute a waiver, unless he is present for the express purpose of opposing the meeting on the grounds that it was irregularly convened.
10. CHAIRMAN. The Chairman of the Board of Directors or, failing which, the President of the Corporation or any other person appointed for such purpose by the Board of Directors, shall preside at meetings of shareholders.
11. QUORUM. A quorum of shareholders shall exist at an annual or special meeting of shareholders, regardless of the number of persons physically present at the meeting, if one or more holders of shares conferring not less than 33 1/3% of the total number of votes attached to the aggregate of the shares carrying voting rights at such meeting are present physically or represented in accordance with section 12 hereinbelow.
If a quorum is present at the opening of the meeting, the shareholders present or represented may proceed with the business of the meeting, even if a quorum is not present throughout the meeting.
If a quorum is not present at the opening of the meeting, the shareholders present or represented may adjourn the meeting, provided there is a majority vote to that effect, to another time and place but may not transact any other business.
If a quorum is present at the reconvening of the meeting so adjourned, the meeting may then proceed, failing which, a new meeting shall be convened.
12. REPRESENTATION AT MEETINGS. Shareholders shall be entitled to vote in person or, if a body corporate, by representatives duly authorized by resolution of its directors or its decision-making body. Shareholders shall also be entitled to vote by proxy.
A proxyholder need not be a shareholder of the Corporation and may represent several shareholders. A proxy may be given for all or part of a shareholder's shares.
A proxy shall be valid only at the meeting in respect of which it is given or any adjournment thereof.
A proxy appointing a proxyholder shall be in the form prescribed by the Act and its Regulations.
The Board of Directors may specify, in the notice of meeting of shareholders, a date and time limit for depositing with the Corporation or its agent proxies to be used at the meeting; such date and time limits shall not precede the meeting by more than 48 hours, excluding Saturdays and statutory holidays.
The Board of Directors may also permit particulars of proxies for use at or in connection with, any such meeting which have been deposited with the Corporation or its agent at a place other than the place of such meeting to be sent by facsimile to the Secretary of the Corporation prior to such meeting. In such event, such proxies, if otherwise in order, shall be valid and any votes cast in accordance therewith shall be counted.
13. RIGHT TO VOTE. Subject to the provisions of the Act, each shareholder is entitled to as many votes as his shares in the Corporation carry votes.
14. DECISIONS BY A MAJORITY. Unless otherwise provided in the Act, any question submitted to the meeting of shareholders shall be decided by a simple majority (50% + 1) of validly cast votes.
15. CASTING VOTE. In the case of a tie vote, the Chairman of the meeting shall have the casting vote.
16. VOTE BY SHOW OF HANDS. Except where a voice vote or secret ballot has been requested, votes shall be taken by a show of hands. In such a case, shareholders or proxyholders shall vote by raising their hands and the number of votes shall be calculated based on the number of hands raised.
17. VOICE VOTE. If the Chairman of a meeting so orders, or any proxyholder representing at least ten per cent (10%) of the votes attaching to outstanding voting shares so requests (such requests may be withdrawn), and if a vote by secret ballot has not been requested, votes shall be taken by voice vote. In such a case, an entry in the minutes of a meeting of shareholders to the effect that the chairman declared a resolution to be carried or defeated is, in the absence of proof to the contrary, proof of the fact without proof of the number or proportion of the votes recorded in favour of or against the resolution.
18. VOTE BY SECRET BALLOT. If the Chairman of a meeting so orders, or a shareholder or proxyholder entitled to vote so requests, the vote shall be taken by secret ballot. A request for a vote by secret ballot may be made at any time before the meeting is closed, regardless of whether a vote by show of hands or a voice vote has been previously held or not; such request may also be withdrawn. Each shareholder or proxyholder shall submit to the scrutineers one or several ballots on which he shall have indicated how he intends to cast his votes and, where relevant, his name and the number of votes he has. The result of a secret ballot shall be deemed to be a resolution of the meeting at which the ballot was taken whether or not a vote by show of hands or a voice vote had previously been taken on the same question.
19. PROCEDURE AT MEETINGS. The Chairman of any meeting of shareholders shall conduct the procedure thereat in all respects and his decision on all matters, including any question regarding the validity or invalidity of any proxy or the admissibility or inadmissibility of a proposal, shall be conclusive and binding upon all the shareholders.
A declaration by the Chairman at any meeting that a resolution has been carried or not, whether unanimously or by particular majority, shall be conclusive evidence of the fact.
At any time during the meeting, at his own discretion or with the approval of the shareholders given by a simple majority, the Chairman may adjourn a meeting provided he has reasonable grounds to do so, such as when confusion and disorder render the harmonious and orderly conduct of a meeting impossible, and he need not give notice for the reconvening of a meeting so adjourned.
Should the Chairman of the meeting fail to carry out his duties loyalty, the shareholders may, at all times, remove and replace him with another person selected from amongst themselves.
The directors of the Corporation shall be entitled, in such sole capacity, to attend meetings of shareholders and to take the floor thereat.
20. SCRUTINEERS. The Chairman of any meeting of shareholders may appoint scrutineers, who may but need not be directors, officers, employees or shareholders of the Corporation, to act as the Chairman shall direct.
21. ADDRESSES OF THE SHAREHOLDERS AND SUBSEQUENT TRANSFEREES OF SHARES. Every shareholder shall furnish the Corporation with a mailing or electronic address to which all corporate notices intended for such shareholder may be sent. Every person who, by operation of the Act, transfer or other means whatsoever, shall become entitled to any share, shall be bound by every notice in respect of such share which, prior to the entry of his name and address on the register, is given to the person whose name appears on the register at the time such notice is given.
22. SIGNED RESOLUTIONS. Subject to subsections 110(2) and 168(5) of the Act, a resolution signed by all the shareholders entitled to vote on such resolution shall be as valid as if it had been passed
unanimously at a meeting duly convened by such holders. Each duly signed resolution shall be kept with the minutes of the meetings of shareholders. BOARD OF DIRECTORS
23. NUMBER. The Board of directors shall be composed of a fixed number of directors indicated in the Corporation's Articles. If the Articles provide for a minimum and maximum number of directors, the Board of Directors shall be composed of such fixed number of directors but not less than three (3), as shall be established by resolution passed by the Board of Directors or, failing this, as the shareholders choose to elect within such limits.
24. QUALIFICATION. No person shall be qualified for election as a director
if he is less than eighteen (18) years of age; if he is of legal age and has
been placed under tutorship or curatorship; if he has been declared of unsound
mind by a court in Canada or elsewhere; if he has the status of an undischarged
bankrupt; or if a court has prohibited him from holding the office of director.
Unless otherwise set out in the Articles of the Corporation, a director need not
be a shareholder. Subject to subsection 105(3.1) of the Act, at least 25% of the
directors shall be Resident Canadians. However, if the Corporation has less than
four (4) directors, at least one (1) must be a Resident Canadian. At least three
(3) of the directors shall not be officers or employees of the Corporation or
its subsidiaries. A retiring director, if otherwise qualified, shall be eligible
for re-election.
25. ELECTION AND TERM OF OFFICE. Except for the appointment of a director following a vacancy during a term of office or for the election of one or several additional directors, each director shall be elected by Ordinary Resolution at a general annual meeting of shareholders, subject to the provisions of the Articles of Corporation providing for cumulative voting or the exclusive right of certain classes of shareholders to elect one or several directors. Each director shall be elected either for a fixed term, which shall end no later than at the close of the third annual meeting thereafter, or for an indeterminate term, which shall end at the close of the first annual meeting thereafter. Not all directors need have the same term of office. Directors shall remain in office, failing the election of new directors by a meeting of shareholders, until such time as a substitute has been elected.
26. RESIGNATION. A director may resign from his office by sending written notice thereof to the Corporation and need give grounds for such resignation. Said resignation shall take effect on the date of sending or remittance thereof, or on such later date as may be indicated therein.
27. REMOVAL. Unless otherwise provided in the Articles, shareholders may remove a director by Ordinary Resolution at a special meeting. The director who receives notice of his impending removal may, in a written statement, explain to the Corporation the reasons why he opposes his removal, and the Corporation shall forward such written statement to the shareholders entitled to vote in such matter.
A vacancy created by the removal of a director may be filled by the shareholders at the same meeting; in such a case, notice of such meeting shall indicate that an election is to be held should the resolution of removal be carried.
Should the holders of shares of a particular class have the exclusive right to elect a director, such director may only be removed by Ordinary Resolution at a special meeting of such holders.
The removal of a director, as well as his election, shall be at the discretion of the shareholders. A director may be removed at any time and such removal need not be based on any particular grounds, whether serious or not. Neither the Corporation nor the shareholders voting in favour of the removal shall incur any liability toward the director by the mere fact of his removal, even if there be no grounds therefor.
28. VACANCY. The office of a director shall become vacant as of the moment his resignation or removal takes effect; moreover, a vacancy is created when a director is no longer qualified to perform his duties pursuant to section 24 or if he dies.
29. REPLACEMENT. If a vacancy occurs on the Board of Directors, the remaining directors may appoint a qualified person to fill such vacancy, for the unexpired term of office. The directors may nonetheless continue to act despite one or several vacancies, provided a quorum exists. Failing a quorum, the remaining directors shall forthwith call a special meeting of shareholders to fill such vacancy, in accordance with section 111 of the Act.
30. REMUNERATION. The remuneration to be paid to the directors shall be as fixed by resolution of the Board of Directors. Such remuneration shall be in addition to the salary or remuneration received as such from the Corporation by an officer, employee or service provider who is also a director, unless a resolution shall provide otherwise. Directors may also seek reimbursement for traveling and other expenses incurred in connection with their duties.
31. GENERAL POWERS OF THE DIRECTORS. The directors of the Corporation shall manage or supervise the management of the business and affairs of the Corporation and may make or cause to be made any contract which it may lawfully enter into. The directors shall be invested with all such powers and authority as the Corporation by statute or its Articles is authorized to exercise and do. The directors shall always act by resolution.
32. IRREGULARITY. Notwithstanding that it be afterwards discovered that there was some defect in the election of the Board of Directors or the election or appointment of any director or that a director lacks or has lost his qualification, all acts thereof shall be as valid and binding upon the Corporation as if every such board or person had been duly elected or appointed and had been qualified.
33. USE OF PROPERTY OR INFORMATION. No director may mingle the Corporation's property with his own property or use for his own profit or that of a third party any property of the Corporation or any information he obtains by reason of his duties, unless he is expressly and specifically authorized to do so by the shareholders of the Corporation.
34. CONFLICTS OF INTEREST. Each director shall avoid placing himself in a situation of conflict between his personal interest and his obligations as a director of the Corporation.
He shall promptly disclose to the Corporation any interest he has in any enterprise or association that is likely to place him in a situation of conflict of interest, as well as the rights he may enforce thereagainst, indicating, if such be the case, the nature and value thereof. Such disclosure of interest shall be recorded in the minutes of the proceedings of the Board of Directors. A general disclosure shall remain valid until the facts have changed, and a director need not reiterate such declaration for any particular, subsequent transaction.
35. CONTRACTS AND TRANSACTIONS WITH THE CORPORATION. A director or an officer may, even in performing his duties, enter into material contracts or transactions with the Corporation, or be a director, an officer or a holder of a material interest in a body corporate that is a party to such contract or transaction. He shall then, in accordance with the Act, disclose in writing to the Corporation or request to have entered in the minutes of meetings of directors the nature and extent of his interest in such material contract or transaction or proposed material contract or transaction, even if such contract or transaction, within the scope of the normal business activity of the Corporation, does not require the approval of either the directors or the shareholders. Such Director shall not vote on any resolution to approve the same except as provided by the Act.
At the request of the President or any director, the interested director shall leave the meeting while the Board of Directors discusses and votes on the contract or transaction or proposed contract or transaction concerned.
For the purposes of this by-law, a general notice that the director or officer is a director, an officer or a holder of a material interest in a body corporate and is to be regarded as interested in any contract or transaction or proposed contract or transaction made with that body corporate, is a sufficient declaration of interest.
Neither the Corporation nor any of its shareholders may contest the validity of a contract or transaction entered into with a director or an officer of the Corporation, or with a body corporate in which such director or officer is a director, an officer or a holder of a material interest, for such sole reason, provided such director or officer has disclosed his interest as aforementioned, the Board of Directors or the Shareholders of the Corporation have approved the contract or the transaction, and the contract or transaction was, at that time, equitable for the Corporation.
36. CALLING OF MEETINGS. Every year, immediately following the annual general meeting of the shareholders, a meeting of the new directors present shall be held without further notice if they constitute a quorum to elect or appoint the officers of the Corporation and consider, deal with and dispose of any further business.
Meetings of the Board of Directors may be called by or by order of the Chairman of the Board of Directors, if any, the President of the Corporation or two (2) directors and may be held
anywhere within or outside Canada. A notice of each meeting, specifying the place, date and time, shall be sent to each director at his residence or workplace. The notice shall be sent no less than five (5) days prior to the date fixed for the meeting by ordinary or registered mail or by facsimile or electronic mail. In the absence of an address for a director, the notice may be sent to the address at which the sender considers that the notice is most likely to reach the director promptly.
The Board of Directors may resolve to hold periodic or fixed meetings of the Board of Directors, with or without notices of meeting, at any place in Canada or elsewhere.
The notice of a meeting of the Board of Directors need not specify the goals or business thereof, with the exception of those matters referred to in subsection 115(3) of the Act, in particular, the declaration of dividends, the issue of securities, the purchase of shares issued by the Corporation, the approval of the annual financial statements, the filling of vacancies on the Board of Directors or in the office of Auditor and the adoption, amendment or repealing of by-laws.
Any director may waive in writing a notice of meeting of the Board of Directors prior to, during or after the holding of such meeting. His mere presence at a meeting shall constitute a waiver, unless he is present for the sole purpose of objecting to the holding thereof on the grounds that the manner of calling it was irregular.
Notice need not be given of the reconvening of an adjourned meeting of directors if the date, time and place of such meeting were announced at the initial meeting.
37. MEETINGS BY TELEPHONE OR ELECTRONIC FACILITIES. Directors may, if all are in agreement, participate in a meeting of the Board of Directors or of a committee of the Board by means of such telephonic, electronic or other communication facility that permits all participants to communicate adequately with each other during the meeting, and a Director participating in such a meeting by such means is deemed to be present at the meeting. Any such consent shall be effective whether given before or after the meeting to which it relates and may be given in respect to all meetings of the Board and of committees of the Board.
38. QUORUM. A majority of the directors in office shall constitute a quorum for a meeting of the Board of Directors. A quorum shall be present throughout the meeting. Once a quorum exists, the directors may exercise their powers, notwithstanding any vacancy on the board. No business shall be dealt with unless the number of "Resident Canadian" directors prescribed in the Act is present.
39. MEETING CHAIRMAN AND SECRETARY. Meetings of the Board of Directors shall be chaired by the Chairman of the Board of Directors, if any, or, failing him, by the President of the Corporation or, failing him, by a Vice-President designated for such purpose by the President. The Secretary of the Corporation shall act as Secretary of the meetings. The directors present at a meeting may nevertheless appoint any other persons as Chairman or Secretary of such meetings.
40. PROCEDURE. The Chairman of the meeting shall ensure that the meeting is conducted smoothly and submit to the Board of Directors the motions on which a vote is to be taken and shall generally
conduct the procedure thereat in all respects, in which regard his decision shall be final and binding on all directors. Should the meeting Chairman fail to submit a motion, any director may submit it himself before the meeting is adjourned or closed and, if such motion lies within the competence of the Board of Directors, the Board of Directors shall consider it. For such purpose, the agenda of each meeting of the Board of Directors shall be deemed to include a period for the submission of motions by the directors. Should the Chairman of the meeting fail to carry out his duties loyally, the directors may remove him at any time and replace him by another person.
41. VOTING. Each director shall be entitled to one vote, and all matters shall be decided by the majority of votes cast. Unless a ballot is demanded, an entry in the minutes of a meeting to the effect that a resolution was carried or defeated is, in the absence of evidence to the contrary, proof of the fact without proof of the number or proportion of the votes recorded in favour of or against the resolution. Voting by proxy shall not be permitted, and the Chairman of the meeting shall have no casting vote in the case of an equality of votes. If the vote is taken by ballot, the meeting Secretary shall act as Scrutineer and count the ballots. The fact of having voted by ballot shall not deprive a director of the right to express his dissent in respect of the resolution concerned and to cause such dissent to be entered.
42. SIGNED RESOLUTION. A written resolution, signed by all the directors, shall be valid and have the same effect as though it were adopted at a meeting of the Board of Directors duly called and held. Each signed resolution shall be inserted in the minute book of the Corporation, in order of its date, in the same manner as minutes.
43. OFFICERS. The officers of the Corporation shall be the Chairman of the board, if appointed, the President, and, if elected or appointed, one or more Vice-Presidents, the General Manager or Managing Director, the Comptroller, the Secretary, the Treasurer, and such other officers as the Board of Directors may appoint and whose duties it may determine by resolution. Subject to those powers which, pursuant to the Act, may only be exercised by the Board of Directors, the officers of the Corporation shall exercise such powers and authority and shall perform such duties, as prescribed by the Board of Directors in addition to those specified in the by-laws. The same person may hold more than one (1) office. None of the officers of the Corporation need be directors or shareholders of the Corporation, with the exception of the President, if any, the Chairman of the Board of Directors, if any, and the General Manager, if any.
The directors may also appoint other agents, officials and employees of the Corporation within or outside Canada, who may be given such titles and who shall exercise such powers and authority and perform such duties of management, as the Board of Directors may determine.
In the event of the absence of any officer or for any other reason that the directors may deem sufficient, the Board of Directors may delegate the powers and authority of such officer to any other officer or to any director of the Corporation.
44. CHAIRMAN OF THE BOARD. The Chairman of the board shall preside at all meetings of the Board of Directors and shareholders.
45. PRESIDENT. The President shall be the chief officer of the Corporation and, subject to the control of the directors and the appointment of a General Manager or Managing Director, shall supervise, administer and manage the business and affairs of the Corporation generally. In the event of the absence, inability or failure of the Chairman of the board to act, the President shall preside at all meetings of the Board of Directors and of the shareholders.
46. VICE-PRESIDENT. In the event of the absence, inability or failure of the President to act, any Vice-President(s) appointed by the Board of Directors shall assume the powers and perform the duties of the President. The Vice-President shall exercise such powers and authority and perform such duties prescribed by the Board of Directors or by the President.
47. GENERAL MANAGER OR MANAGING DIRECTOR. The General Manager or Managing Director shall, subject to the control of the President, manage the operations of the Corporation generally. He shall comply with all instructions received from the Board of Directors and shall give to the Board of Directors or the members thereof the information they require concerning the affairs of the Corporation.
The General Manager or Managing Director shall be a Resident Canadian and a director. The Board of Directors may delegate to such General Manager or Managing Director any of the powers of the board except those which by law a General Manager or Managing Director has no authority to exercise.
48. COMPTROLLER. The Comptroller shall, subject to the control of the President, be the chief accounting officer of the Corporation. He shall, upon request, render account to the President and the directors of the financial position of the Corporation and all its transactions. He shall be entrusted with, and have custody of, the books of account.
49. SECRETARY. The Secretary shall attend to the preparation and sending of all notices of the Corporation. He shall keep the minutes of all meetings of the directors, the committees of the Board of Directors and the shareholders in a book or books to be kept for that purpose. He shall have charge of the records of the Corporation including books containing the names and addresses of the members of the Board of Directors, together with copies of all reports made by the Corporation and such other books and papers as the directors may direct. He shall be responsible for the keeping and filing of all books, reports, certificates and all other documents required by law to be kept and filed by the Corporation. He shall be subject to the control of the President.
50. TREASURER. The Treasurer, subject to the control of the President, shall have general charge of the finances of the Corporation. He shall deposit all moneys and other valuable effects of the Corporation in the name and to the credit of the Corporation in such banks or other depositories as the Board of Directors may designate.
51. REMOVAL, DISCHARGE AND RESIGNATION. The Board of Directors, by the affirmative vote of the absolute majority of its members, may remove any officer with or without cause at any time, unless the resolution or contract providing for his appointment stipulates otherwise. Any agent, officer, official or servant who is not an officer of the Corporation may be discharged by the President or any other officer authorized for such purpose, with or without cause at any time.
Any officer may resign his office at any time by remitting his resignation in writing to the President or the Secretary of the Corporation, or at a meeting of the Board of Directors, unless otherwise agreed.
52. VACANCY. Any vacancy occurring in the office of any officer may be filled by the Board of Directors.
53. REMUNERATION. The remuneration of all officers shall be fixed by the Board of Directors. The remuneration of all other mandataries, officers, officials and servants of the corporation shall be fixed by the President or any other officer authorized for such purpose.
54. ELECTION. The Board of Directors may appoint from among their number a committee of the Board of Directors, designated "Executive Committee".
55. OFFICERS, QUORUM AND PROCEDURE. The committee shall have the power to appoint its officers, to fix its quorum at not less than a majority of its members, and to determine its procedure.
56. CHAIRMANSHIP. Meetings of the Executive Committee shall be chaired by the Chairman of the Board of Directors or, if none is appointed, by the President of the Corporation. In his absence, meetings of the Executive Committee shall be chaired by the person whom the members of the Executive Committee present choose from amongst themselves.
57. SECRETARY. The Secretary of the Corporation shall act as Secretary of the committee unless another secretary is appointed by the committee.
58. POWERS. The Executive Committee shall possess the powers and authority of the Board of Directors for the administration of the day-to-day affairs of the Corporation, except for those powers which, by law, must be exercised by the Board of Directors, as well as the powers which the Board of Directors may expressly reserve for itself.
59. SUPERVISORY POWER OF THE BOARD OF DIRECTORS. All acts of the Executive Committee shall be subject to the supervision of the Board of Directors and shall be reported to the Board of Directors should the latter so directs. The Board of Directors may invalidate or amend decisions made by the Executive Committee, provided that the rights of third parties are not affected.
60. PARTICIPATION BY TELEPHONE OR ELECTRONIC FACILITIES AND SIGNED RESOLUTIONS. Sections 37 and 42 shall apply, MUTATIS mutandis, to meetings of the Executive Committee.
61. MEETINGS. Meetings of committee may be held at the registered office of the Corporation or at such other place within or outside Canada as the committee may determine.
Meetings of the committee may be called by or by the order of its Chairman or two members of such committee.
A member of the Executive Committee may waive in writing a notice of the meeting of the Executive Committee, prior to or after the holding thereof. His mere attendance at a meeting shall be deemed a waiver, except where he attends a meeting solely for the purpose of objecting to the holding thereof on the grounds that the manner of calling it was irregular.
62. REMUNERATION. The members of the committee shall be entitled to receive such remuneration for their services as members of the committee as the Board of Directors may determine.
63. REMOVAL AND REPLACEMENT. The Board of Directors may at any time remove from office any member of a committee of the Board of Directors.
The Board of Directors may also fill any vacancy which may occur on a committee.
64. COMPOSITION. The Audit Committee shall consist of at least three (3) directors, appointed each year by the Board of Directors, the audit committee shall be comprised solely of independent directors.
65. DUTIES. The Audit Committee shall review the financial statements of the Corporation prior to their approval by the Board of Directors and shall perform all the other duties the latter may establish.
66. MEETINGS. The meetings of the Audit Committee shall be convened by one of its members or by the Auditor.
67. APPLICABLE BY-LAWS. The Audit Committee shall, in all other respect, be subject to the same aforementioned provisions that apply to the Executive Committee.
68. OTHER COMMITTEES. The Board of Directors may create any other committee it shall deem appropriate, whether or not it be comprised of members of the Board of Directors. The Board of Directors may delegate to any such committee of the board of directors any of the powers of the board except those which pursuant to the Act a committee of the board of directors has no authority to exercise. Unless otherwise ordered by the board, each committee so created shall have the power to determine its own quorum of no less than a majority of its members, to elect its own Chairman and to determine its own procedures.
69. INDEMNITY. Subject to the limitations provided by the Act, the Corporation shall indemnify any director or officer of the Corporation, former director or officer of the Corporation or person who acts or acted at the Corporation's request as a director or officer (or an individual acting in a similar capacity) of another entity, and his heirs and legal representatives, against all costs, charges and expenses, including, without limitation, an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal, administrative, investigative or other proceeding in which the individual is involved because of that association with the Corporation or other entity, provided:
(a) he acted honestly and in good faith with a view to the best interests of the Corporation or, as the case may be, to the best interests of the other entity for which he acted as a director or officer or in a similar capacity at the Corporation's request; and
(b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds to believe that his conduct was lawful.
The Corporation shall advance monies to a director, officer or other individual for the costs, charges and expenses of a proceeding referred to in this section 68. Such person shall repay the monies if he is not entitled to indemnification as set forth in this section 69.
70. INSURANCE. To the extent permissible by law, the Corporation may purchase and maintain insurance for the benefit of any person referred to above against such liability as the Board of Directors may from time to time determine.
71. REIMBURSEMENT OF EXPENSES. Subject to a contractual agreement stipulating or limiting such obligation, the Corporation shall reimburse the director, officer or other agent for expenses reasonably incurred by him within the performance of his duties, with interest, as of the day he has paid such expenses. An expense shall be reimbursed upon production of any appropriate vouchers.
72. ISSUE AND STOCK OPTIONS. Subject to all provisions contained in the Articles of the Corporation limiting the allocation or issue of shares of the share capital of the Corporation, the directors may accept subscriptions for, allot, distribute, issue unissued shares of the Corporation in whole or in part, grant options thereon or otherwise dispose thereof to any person, enterprise, corporation, company or body corporate, upon the conditions and for the lawful consideration in compliance with the Articles of the Corporation determined by the directors, without any requirement to offer such unissued shares to persons who are already shareholders rateably to the shares held by them.
73. SHARE CERTIFICATES AND STOCK TRANSFERS. Certificates representing shares of the share capital of the Corporation shall bear the signature of the President or a Vice-President and the Secretary. Such signatures may be engraved, lithographed or otherwise mechanically reproduced. Any certificate bearing the facsimile reproduction of the signatures of such authorized officers shall be deemed to have been manually signed by them and shall be as valid as if it had been so manually signed notwithstanding that the persons whose signatures are so reproduced shall have ceased to be officers of the Corporation.
74. SECURITIES REGISTER. A central securities register shall be maintained by the Corporation or its agent at the registered office or at any other place in Canada designated by the Board of Directors. The Board of Directors may from time to time provide that one (1) or more branch securities registers be maintained at such places within Canada or elsewhere as may be designated by a resolution and may appoint officers or agents to maintain the same and to effect and record therein transfers of shares of the share capital of the Corporation.
75. TRANSFER AGENTS AND REGISTRARS. The agents of the Corporation charged with the maintenance of the central and/or branch securities registers may be designated as transfer agents and/or registrars of transfers, according to their functions. The Board of Directors may at any time terminate the appointment of such transfer agents and/or registrars.
76. RECORD DATE AND CLOSING OF BOOKS. Subject to the provisions of the Act with respect to notification, the directors may fix in advance, by resolution, a date preceding by not less than twenty-one (21) days and more than sixty (60) days the date for payment of a dividend or the date for the allotment of rights or the date when any change or conversion or exchange of shares of the capital stock of the Corporation shall go into effect as the record date for the determination of the shareholders entitled to receive payment of such dividend, the allotment of such rights or the exercise of such rights in respect of such change, conversion or exchange of the capital stock of the Corporation with the effect that only the shareholders of record on the date so fixed by the Board of Directors shall be entitled to receive payment of such dividend or allotment of rights or to exercise such rights, as the case may be, notwithstanding a transfer of any shares on the books of the Corporation after such record date. If no record date is so fixed, the record date for the determination of the persons entitled to receive payment of such dividend, the allotment of such rights or the exercise of such rights in respect of such change, conversion or exchange of the capital stock of the Corporation shall be at the close of business on the day on which the resolution relating thereto is passed by the Board.
77. LOST OR DESTROYED CERTIFICATES. The Board of Directors may, upon such terms and conditions as to indemnity and otherwise as they may deem advisable, direct that a new certificate or certificates of shares be issued to replace any certificate or certificates of shares theretofore issued by the Corporation that have been worn out, lost, stolen or destroyed. The Board of Directors, when authorizing the issue of such new certificate or certificates, may, in its discretion, and as a condition precedent thereto, require the owner of such worn-out, lost, stolen or destroyed certificate or his legal representatives to give to the Corporation and/or transfer agent or transfer agents and to such registrar or registrars, as may be authorized or required to countersign such new certificate or certificates a bond in such sum as they may direct, as indemnity against any claim that may be made against them or any of them for or in respect of the shares represented by such certificates alleged to have been-worn out, lost, stolen or destroyed.
78. DIVIDENDS. The Board of Directors may, from time to time and in compliance with the law, declare and pay dividends to the shareholders, in accordance with their respective rights.
The Board of Directors may stipulate that a dividend be payable, in whole or in part, in Corporation stock.
A transfer of shares shall not effect assignment of the rights to the
dividends declared thereon so long as the transfer is not recorded. Where two
(2) or more persons are recorded as joint holders of one share, each of them may
give a valid receipt for any dividend payable or paid on such share.
79. FISCAL YEAR. The period for the fiscal year of the Corporation shall be determined by the Board of Directors.
80. AUDIT. The shareholders, at each annual general meeting, shall appoint an Auditor or auditors to hold office until the next annual general meeting or until the appointment of his or their successor or successors, unless he or they resign or his or their office becomes vacant. At least once in every fiscal year, such Auditor shall examine the accounts of the Corporation and the financial statements to be presented at the annual general meeting and shall report thereon to the shareholders. The remuneration of an Auditor may be fixed by the shareholders or by the Board of Directors, should the former so authorize.
The Auditor shall be independent of the Corporation, of its affiliates, or the directors or officers thereof, in accordance with the Act. The shareholders may remove the Auditor from office at any time at a special meeting. A vacancy created by the removal of the Auditor may be filled by the shareholders at the meeting at which the Auditor is removed or, if not so filled, may be filled by the Board of Directors. Any other vacancy which may occur shall be filled by the Board of Directors in accordance with section 166 of the Act.
The shareholders may decide not to appoint an Auditor for any fiscal year, by resolution receiving the unanimous consent of all the shareholders including those who otherwise are not qualified to vote. The resolution shall be valid only until the next annual meeting.
CORPORATE REPRESENTATION FOR CERTAIN PURPOSES
81. DECLARATION. The President, Chairman of the Board of Directors, any Vice-President, the General Manager or Managing Director, the Comptroller, the Secretary or the Treasurer or any one (1) of them or, if authorized by the Board of Directors, any other officer, official or person, shall be authorized and empowered to make answer for the Corporation to all writs, orders and interrogatories upon articulated facts issued out of any Court, to answer for and on behalf of the Corporation to any writ of attachment by way of garnishment in which the Corporation is garnishee, to make all affidavits and sworn declarations in connection therewith or in connection with any judicial proceedings to which the Corporation is a party, to make petitions for assignment of property, winding-up or receivership against any debtor of the Corporation, to attend and vote at all meetings of creditors of the Corporation's debtors and to grant proxies in connection therewith.
82. REPRESENTATION AT MEETINGS. The President, Chairman of the Board of Directors, any Vice-President, the General Manager or Managing Director, the Comptroller, the Secretary or the Treasurer, or any one (1) of them or any other officer or person thereunto authorized by the Board of Directors shall represent the Corporation, attend and vote at any meeting of shareholders or
members of any firm, company, body corporate or syndicate in which the Corporation holds shares or is otherwise interested, and any action taken and/or vote cast by them shall be deemed to be the act and/or vote of the Corporation.
Any two (2) of the following persons acting jointly, namely the President, the Chairman of the Board of Directors, any Vice-President, the General Manager or Managing Director, the Comptroller, the Secretary or the Treasurer shall moreover be empowered to authorize any person (whether an officer of the Corporation or not) to attend, vote and otherwise act at all meetings of shareholders or members of any firm, company, corporation or syndicate in which the Corporation holds shares or is otherwise interested, and for this purpose, such officers shall be authorized to execute and to deliver for and on behalf of the Corporation a proxy in such form and under such terms as such officers see fit, including therein, but without in any way limiting or restricting the generality of the foregoing, provision for the appointment of a substitute proxyholder and the revocation of all proxies given by the Corporation prior thereto with respect to any such meeting.
83. SIGNATURE OF DOCUMENTS. Contracts, documents, written acts, including discharges and releases, requiring the signature of the Corporation may be validly signed by the President alone, or by any two of the following persons acting jointly, namely, any Vice-President, the General Manager or Managing Director, the Secretary and the Treasurer, and shall hence be binding on the Corporation. The Board of Directors may also designate any other person to sign and deliver on behalf of the Corporation, either alone or jointly with one (1) or several other persons, all contracts, documents and written acts, and such authorization may be given by resolution in general or specific terms.
84. DECLARATIONS IN THE REGISTER. Declarations to be filed with the Inspector General of Financial Institutions in accordance with the ACT RESPECTING THE LEGAL PUBLICITY OF SOLE PROPRIETORSHIPS, PARTNERSHIPS AND LEGAL PERSONS shall be signed by the President, any director of the Corporation or any other person authorized for such purpose by resolution of the Board of Directors. Any director having ceased to hold such office as a result of his resignation, removal or otherwise shall be authorized to sign on behalf of the Corporation and file an amending declaration to the effect that he has ceased to be a director, from fifteen (15) days after the date of such cessation, unless he receives proof that the Corporation has filed such a declaration.
85. CONFLICT WITH THE ARTICLES. In the event of a conflict between the provisions of a by-law and those of the Articles, the latter shall prevail.
86. AMENDMENTS. The Board of Directors shall have the power to adopt, repeal or amend a by-law, but such measure shall apply only until the next annual general or special meeting of the shareholders. If such adoption, repeal or amendment is not confirmed or modified by Ordinary Resolution at such annual general or special meeting, it shall cease to be in force, but only as of that date. Any shareholder may, in accordance with section 137 of the Act, submit a proposal at an annual meeting that a by-law be adopted, amended or repealed.
/s/ GERMAIN LAMONDE ------------------- Germain Lamonde President |
ASSET PURCHASE AGREEMENT
by and among
EXFO ELECTRO OPTICAL ENGINEERING Inc.,
EXFO GNUBI PRODUCTS GROUP Inc.,
GNUBI COMMUNICATIONS, L.P.,
GNUBI COMMUNICATIONS general partner, llc,
GNUBI COMMUNICATIONS limited partner, llc,
GNUBI COMMUNICATIONS, INC.,
VOTING TRUST CREATED BY
THE IRREVOCABLE VOTING TRUST AGREEMENT AMONG CAROL ABRAHAM BOLTON,
PAUL ABRAHAM AND JAMES RAY STEVENS,
JAMES RAY STEVENS and
DANIEL J. ERNST
Dated September 5, 2002
TABLE OF CONTENTS
ARTICLE I Definitions and Usage............................................1
1.1 Definitions......................................................1
1.2 Usage...........................................................11
ARTICLE II Sale and Transfer of Assets; Closing............................12
2.1 Assets to be Sold...............................................12
2.2 Excluded Assets.................................................13
2.3 Consideration...................................................13
2.4 Liabilities.....................................................14
2.5 Adjustments to Purchase Price for Ad Valorem Taxes..............16
2.6 Allocation......................................................16
2.7 Closing.........................................................16
2.8 Closing Obligations.............................................16
ARTICLE III Representations and Warranties of Selling Parties...............18
3.1 Organization, Good Standing; Authority; Enforceability..........19
3.2 No Conflict.....................................................19
3.3 Financial Statements............................................19
3.4 Books and Records...............................................20
3.5 Sufficiency of Assets...........................................20
3.6 Title to Assets; Encumbrances...................................20
3.7 Inventories.....................................................21
3.8 Product Warranties..............................................21
3.9 Condition of Facilities; Personal Property......................21
3.10 No Undisclosed Liabilities......................................21
3.11 Taxes...........................................................21
3.12 No Material Adverse Change......................................22
3.13 Employee Benefits...............................................22
3.14 Compliance With Legal Requirements; Governmental
Authorizations and Consents..................................23
3.15 Legal Proceedings; Orders.......................................24
3.16 Absence of Certain Changes and Events...........................24
3.17 Contracts; No Defaults..........................................25
3.18 Insurance.......................................................26
3.19 Environmental Matters...........................................26
3.20 Employees.......................................................26
3.21 Intellectual Property Rights....................................27
3.22 Ownership; Relationships With Related Persons...................29
3.23 Brokers, Finders or Financial Advisors..........................30
3.24 Securities Law Matters..........................................30
3.25 Solvency........................................................31
3.26 Capital Expenditures............................................31
3.27 Foreign Corrupt Practices Act...................................31
3.28 Budget..........................................................32
3.29 Accounts Receivable.............................................32
3.30 Disclosure......................................................32
ARTICLE IV Representations and Warranties of Buyer and Buyer Parent........33
4.1 Organization, Good Standing and Qualifications..................33
4.2 Authority; No Conflict..........................................33
4.3 Authorization for Buyer Shares..................................34
4.4 Canadian Documents..............................................34
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4.5 Brokers, Finders or Financial Advisors..........................34
ARTICLE V Pre-Closing Covenants of the Parties............................34
5.1 Conduct of Business by Seller...................................34
5.2 Public Announcements............................................36
5.3 Non-Solicitation; Non-Negotiation...............................36
5.4 Access to Information, Due Diligence Investigation;
Confidentiality..............................................36
5.5 Best Efforts....................................................36
5.6 Covenants of Parties............................................37
5.7 Notification....................................................37
5.8 Required Approvals..............................................37
5.9 Demonstration Units.............................................37
5.10 Change of Name..................................................37
5.11 Interim Financial Statements....................................38
5.12 Payment of Liabilities..........................................38
5.13 Termination of Employee Plans...................................38
5.14 Loan to Seller..................................................38
5.15 Patent Application Due Diligence................................38
ARTICLE VI Conditions Precedent to Buyer's Obligation to Close.............38
6.1 Accuracy of Representations.....................................39
6.2 Selling Parties' Performance....................................39
6.3 Consents........................................................39
6.4 Additional Documents............................................39
6.5 No Proceedings..................................................40
6.6 No Conflict.....................................................40
6.7 Employment Agreements...........................................40
6.8 Lock-up Agreement...............................................40
6.9 Governmental Authorizations.....................................40
6.10 Securities Regulatory Approvals.................................40
6.11 Release of Sublease Agreement...................................40
6.12 Arrangement With the Frost National Bank........................41
ARTICLE VII Conditions Precedent to Seller's Obligation to Close.........41
7.1 Accuracy of Representations.....................................42
7.2 Buyer and Buyer Parent's Performance............................42
7.3 No Proceeding...................................................42
7.4 Additional Documents............................................42
ARTICLE VIII Termination.....................................................43
8.1 Termination Events..............................................43
8.2 Effect of Termination...........................................43
ARTICLE IX Additional Covenants............................................44
9.1 Payment of All Taxes Resulting from Sale of
Assets by Seller.............................................44
9.2 Payment of Other Retained Liabilities...........................44
9.3 Removing Excluded Assets........................................44
9.4 Reports and Returns.............................................44
9.5 Assistance in Proceedings.......................................44
9.6 Noncompetition; Nonsolicitation; Nondisparagement...............44
9.7 Customer and Other Business Relationships.......................46
9.8 Employees and Employee Benefits.................................46
9.9 Further Assurances..............................................47
9.10 Retention of and Access to Records..............................47
9.11 Distribution of Buyer Shares....................................48
9.12 Operation of Buyer..............................................48
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ARTICLE X Indemnification; Remedies.......................................48
10.1 Survival........................................................48
10.2 Indemnification and Reimbursement by Selling Parties............49
10.3 Tax Indemnification.............................................49
10.4 Indemnification and Reimbursement by Buyer......................50
10.5 Limitations On Amount--Selling Parties..........................50
10.6 Limitations On Amount--Buyer and Buyer Parent...................50
10.7 Time Limitations................................................51
10.8 Right of Setoff.................................................51
10.9 Third-Party Claims..............................................51
10.10 Other Claims....................................................53
10.11 Indemnification in Case of Strict Liability
or Indemnitee Negligence.....................................53
ARTICLE XI Confidentiality.................................................53
11.1 Definition of Confidential Information..........................53
11.2 Restricted Use of Confidential Information......................54
11.3 Exceptions......................................................54
11.4 Legal Proceedings...............................................55
11.5 Return or Destruction of Confidential Information...............55
11.6 Attorney-Client Privilege.......................................55
ARTICLE XII General Provisions..............................................56
12.1 Entire Agreement; Amendments....................................56
12.2 Notices.........................................................56
12.3 Amendments; Waivers.............................................58
12.4 Headings........................................................58
12.5 Successors and Assigns..........................................58
12.6 No Third Party Beneficiaries....................................59
12.7 Governing Law; Consent to Jurisdiction..........................59
12.8 Execution.......................................................59
12.9 Severability....................................................59
12.10 Interpretation..................................................59
12.11 Expenses........................................................59
12.12 Specific Performance............................................60
12.13 Time of the Essence.............................................60
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PARTS TO DISCLOSURE LETTER
Part 2.1(a) Tangible Personal Property
Part 2.1(d) Governmental Authorizations
Part 2.1(f) Intangible Rights and Property; Intellectual Property
Rights; Going Concern Value; Goodwill; Telephone,
Telecopy and Email Addresses and Listings
Part 2.1(h) Claims Against Third Parties Relating to the Assets
Part 2.1(i) Deposits and Prepaid Expenses
Part 2.2(d) Claims for Refunds and Rights to Offset
Part 2.2(j) Excluded Assets
Part 2.4(a)(i) Assumed Contracts
Part 2.4(a)(iv) Assumed Research and Development Liabilities
Part 2.4(a)(v) Other Assumed Liabilities
Part 2.4(b)(v) Retained Lease Liabilities
Part 3.2 Conflicts
Part 3.3 Financial Statements
Part 3.5 Excluded Assets
Part 3.6(b) Permitted Encumbrances
Part 3.7 Obsolete or Below Standard Inventory
Part 3.8 Product Warranties
Part 3.9 Facilities
Part 3.12 Material Adverse Changes
Part 3.13 Employee Plans
Part 3.14(b) Governmental Authorizations
Part 3.14(c) Consents from Governmental Bodies
Part 3.15 Legal Proceedings/Orders
Part 3.16 Absence of Certain Changes or Events
Part 3.17 Seller Contracts
Part 3.18 Insurance Policies
Part 3.19 Environmental Matters
Part 3.20 Employees
Part 3.21(a) Scheduled Intellectual Property Rights
Part 3.21(b) Intellectual Property Rights Encumbrances
Part 3.21(c) Intellectual Property Rights of Selling or Third
Parties used by Seller
Part 3.21(e) Licenses of Intellectual Property Rights
Part 3.21(k) Infringement of Intellectual Property Rights
Part 3.22(a) Ownership; Relationships with Related Persons
Part 3.22(b) Selling Parties' Relationships with Seller
Part 3.23 Brokers, Finders or Financial Advisors
Part 3.25 Creditors
Part 3.26 Capital Expenditures
Part 3.27(b) Foreign Corrupt Practices Act
Part 3.27(e) Contracts with Prohibited Countries
Part 3.29 Accounts Receivable
Part 5.9 Demonstration Units Held by Related Persons
EXHIBITS
Exhibit A Disclosure Letter Exhibit 2.6 Allocation of Purchase Price Exhibit 2.8(a)(i) Form of Bill of Sale Exhibit 2.8(a)(ii) Form of Assignment and Assumption Agreement Exhibit 2.8(a)(vi) Form of Employment Agreements Exhibit 2.8(a)(vii) Form of Lock-Up Agreement Exhibit 5.14(a) Form of Note Payable to Buyer Exhibit 5.14(b) Form of Guaranty Exhibit 6.4(a) Form of Seller's Counsel Opinion Exhibit 6.7 Form of Nondisclosure Agreement Exhibit 7.4 Form of Buyer's Counsel Opinion Exhibit 9.11 Ultimate Beneficial Owners of Seller Parent Exhibit 9.12 Covered Employees |
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement ("AGREEMENT") is dated September 5, 2002, by and among EXFO Electro Optical Engineering Inc., a Canadian corporation ("BUYER PARENT"); EXFO Gnubi Products Group Inc., a Delaware corporation ("BUYER") and indirect wholly owned subsidiary of Buyer Parent; gnubi communications, Inc., a Delaware corporation, on behalf of itself and its predecessors ("SELLER Parent"); gnubi communications, L.P., a Delaware limited partnership, on behalf of itself and its predecessors ("SELLER"), and indirect wholly owned subsidiary of Seller Parent; gnubi communications general partner, LLC, a Delaware limited liability company ("GENERAL PARTNER"), and wholly owned subsidiary of Seller Parent and sole general partner of Seller; gnubi communications limited partner, LLC, a Delaware limited liability company ("LIMITED PARTNER"), and wholly owned subsidiary of Seller Parent and sole limited partner of Seller; James Ray Stevens, a resident of Richardson, Texas ("JRS"); Daniel J. Ernst, a resident of Carrollton, Texas ("DE"); and that certain voting trust created by that certain Irrevocable Voting Trust Agreement made and entered into as of April 12, 2002 between and among Carol Abraham Bolton, Paul Abraham and JRS, a voting trust ("VOTING TRUST") (JRS, DE and Voting Trust are referred to herein as "FOUNDERS"). Seller, Seller Parent, General Partner, Limited Partner and Founders are sometimes referred to herein as "SELLING PARTIES".
RECITALS
Founders own one million four hundred thirty thousand (1,430,000) shares of the common stock, par value $.01 per share, of Seller Parent, which constitute 69.75% of the issued and outstanding shares of capital stock of Seller Parent. Seller desires to sell, and Buyer desires to purchase, the Assets of Seller for the consideration and on the terms set forth in this Agreement.
The parties, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS AND USAGE
1.1 DEFINITIONS
For purposes of the Agreement, the following terms and variations thereof have the meanings specified or referred to in this SECTION 1.1:
"ACTIVE EMPLOYEE"--as defined in SECTION 9.8(A).
"AGREEMENT"--as defined in the first paragraph to this agreement.
"ANNUAL BUYER REVENUES"--the revenues during the period beginning on the Closing Date and ending on the first anniversary of the Closing Date calculated in accordance with GAAP (i) from the sale by Buyer or any of its Related Persons to any Person that is not a Related Person of Buyer of products designed and shipped by Buyer and (ii) from the licensing of products by Buyer.
"ANNUAL BUYER REVENUES STATEMENT"--as defined in SECTION 2.3(C).
"APPURTENANCES"--all privileges, rights, easements, hereditaments and appurtenances belonging to or for the benefit of the Land, including all easements appurtenant to and for the benefit of any Land (a "DOMINANT PARCEL") for, and as the primary means of access between, the Dominant Parcel and a public right of way, or for any other use upon which lawful use of the Dominant Parcel for the purposes for which
it is presently being used is dependent, and all rights existing in and to any streets, alleys, passages and other rights-of-way included thereon or adjacent thereto (before or after vacation thereof) and underneath any such streets.
"ASSETS"--as defined in SECTION 2.1.
"ASSIGNMENT AND ASSUMPTION AGREEMENT"--as defined in SECTION
2.8(A)(III).
"ASSUMED LIABILITIES"--as defined in SECTION 2.4(A).
"AUDITED FINANCIAL STATEMENTS"--as defined in SECTION 3.3.
"AUDITED BALANCE SHEET"--as defined in SECTION 3.3.
"BILL OF SALE"--as defined in SECTION 2.8(A)(I).
"BREACH"--any breach of, or any inaccuracy in, any representation or warranty or any breach of, or failure to perform or comply with, any covenant or obligation, in or of the Agreement or any other Contract, or any event which with the passing of time or the giving of notice, or both, would constitute such a breach, inaccuracy or failure.
"BUSINESS"--as defined in SECTION 9.6(A).
"BUSINESS DAY"--any day other than (a) Saturday or Sunday or (b) any other day on which state or federal banks in New York are permitted or required to be closed.
"BUYER"--as defined in the first paragraph of the Agreement.
"BUYER CONTACT"--as defined in SECTION 11.2.
"BUYER INDEMNIFIED PERSONS"--as defined in SECTION 10.2.
"BUYER PARENT"--as defined in the first paragraph of the Agreement.
"BUYER SHARES"--as defined in SECTION 2.3(A).
"CANADIAN DOCUMENTS"--as defined in SECTION 4.4.
"CASH CONSIDERATION"--as defined in SECTION 2.3(A).
"CERCLA"--the United States Comprehensive Environmental Response, Compensation and Liability Act of 1980.
"CLOSING"--as defined in SECTION 2.7.
"CLOSING DATE"--the date on which the Closing actually takes place.
"CLOSING PRICE"--the average closing price per share of Buyer Parent Subordinate Voting Shares for the ten trading days ending on the third day preceding the Closing, as reported by the Nasdaq National Market.
"COBRA"--Section 4980B of the Code (as well as its predecessor provision, Section 162(k) of the Code) and Sections 601 through 608, inclusive, of ERISA.
"CODE"--the Internal Revenue Code of 1986.
"COMPETING BUSINESS"--as defined in SECTION 3.22(B).
"CONFIDENTIAL INFORMATION"--as defined in SECTION 3.21(J).
"CONSENT"--any approval, consent, ratification, waiver or other authorization.
"CONTEMPLATED TRANSACTIONS"--all of the transactions contemplated by the Agreement.
"CONTRACT"--any agreement, contract, Lease, consensual obligation, promise, commitment or undertaking (whether written or oral and whether express or implied), whether or not legally binding.
"COVERED EMPLOYEE"--as defined in SECTION 9.12.
"COVERED EMPLOYEE PERCENTAGE"--a fraction, the numerator of which is the number of Covered Employees terminated in a particular Termination Event on or before the first anniversary of the Closing Date, and the denominator of which is twenty (20).
"DAMAGES"--as defined in SECTION 10.2.
"DISCLOSURE LETTER"--the disclosure letter delivered by Seller and Founders to Buyer concurrently with the execution and delivery of the Agreement.
"EARN-OUT AMOUNT"--subject to reduction as set forth in SECTION 9.12, an amount equal to the sum of the following: (a) 12.5% of the first $6,000,000 of Annual Buyer Revenues, if any, plus (b) 40% of the amount, if any, of Annual Buyer Revenues between $6,000,000 and $8,000,000, plus (c) 20% of the amount, if any, of Annual Buyer Revenues between $8,000,000 and $15,000,000.
"EFFECTIVE TIME"--the time at which the Closing is consummated.
"EMPLOYEE PLANS"--as defined in SECTION 3.13(A).
"EMPLOYMENT AGREEMENTS"--as defined in SECTION 2.8(A)(VIII).
"EMPLOYMENT LOSS"--as defined in SECTION 10.2(H).
"ENCUMBRANCE"--any charge, claim, community or other marital property interest, condition, equitable interest, lien, option, pledge, security interest, mortgage, right of way, easement, encroachment, servitude, right of first option, right of first refusal or similar restriction, including any restriction on use, voting (in the case of any security or equity interest), transfer, receipt of income or exercise of any other attribute of ownership.
"ENVIRONMENT"--soil, surface waters, groundwaters, land, stream sediments, surface or subsurface strata, ambient air and any environmental medium.
"ENVIRONMENTAL LAW"--all federal, state 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, HEALTH AND SAFETY LIABILITIES"--any cost, damages, expense, liability, obligation or other responsibility arising from or under any Environmental Law or Occupational Safety and Health Law, including those consisting of or relating to:
(a) any environmental, health or safety matter or condition (including on-site or off-site contamination, occupational safety and health and regulation of any chemical substance or product);
(b) any fine, penalty, judgment, award, settlement, legal or administrative proceeding, damages, loss, claim, demand or response, remedial or inspection cost or expense arising under any Environmental Law or Occupational Safety and Health Law;
(c) financial responsibility under any Environmental Law or Occupational Safety and Health Law for cleanup costs or corrective action, including any cleanup, removal, containment or other remediation or response actions ("Cleanup") required by any Environmental Law or Occupational Safety and Health Law (whether or not such Cleanup has been required or requested by any Governmental Body or any other Person) and for any natural resource damages; or
(d) any other compliance, corrective or remedial measure required under any Environmental Law or Occupational Safety and Health Law.
The terms "removal," "remedial" and "response action" include the types of activities covered by CERCLA.
"ENVIRONMENTAL PERMITS"--any and all federal, state and foreign governmental permits, licenses and other authorizations and approvals issued by or provided to, as the case may be, any government, governmental or regulatory body or agency pursuant to an Environmental Law.
"ERISA"--means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA AFFILIATE"--as defined in SECTION 3.13(I).
"EXCHANGE ACT"--the Securities Exchange Act of 1934.
"EXCLUDED ASSETS"--as defined in SECTION 2.2.
"FACILITIES"--any real property, leasehold or other interest in real property currently owned, possessed, leased or operated by Seller, including the Tangible Personal Property used or operated by Seller at the respective locations of the Real Property specified in SECTION 3.9.
"FINANCIAL STATEMENTS"--as defined in SECTION 3.3.
"FOUNDERS"--as defined in the first paragraph of the Agreement.
"GAAP"--generally accepted accounting principles for financial reporting in the United States, applied on a basis consistent with the basis on which the Audited Balance Sheet and the other financial statements referred to in SECTION 3.3 were prepared.
"GNUBI AG"--as defined in SECTION 3.22(A).
"GOVERNING DOCUMENTS"--with respect to any particular entity, (a) if a
corporation, the articles or certificate of incorporation and the bylaws; (b) if
a general partnership, the partnership agreement and any statement of
partnership; (c) if a limited partnership, the limited partnership agreement and
the certificate of limited partnership; (d) if a limited liability company, the
articles of organization and operating agreement; (e) if another type of Person,
any other charter or similar document adopted or filed in connection with the
creation, formation or organization of the Person; (f) all equityholders'
agreements, voting agreements, voting trust agreements, joint venture
agreements, registration rights agreements or other agreements or documents
relating to the organization, management or operation of any Person or relating
to the rights, duties and obligations of the equityholders of any Person; and
(g) any amendment or supplement to any of the foregoing.
"GOVERNMENTAL AUTHORIZATION"--any Consent, license, registration or permit issued, granted, given or otherwise made available by or under the authority of any Governmental Body or pursuant to any Legal Requirement.
"GOVERNMENTAL BODY"--any:
(a) nation, state, county, city, town, borough, village, district or other jurisdiction;
(b) federal, state, local, municipal, foreign or other government;
(c) governmental or quasi-governmental authority of any nature (including any agency, branch, department, board, commission, court, tribunal or other entity exercising governmental or quasi-governmental powers);
(d) multinational organization or body;
(e) body exercising, or entitled or purporting to exercise, any administrative, executive, judicial, legislative, police, regulatory or taxing authority or power; or
(f) official of any of the foregoing.
"GROUND LEASE"--any long-term lease of land in which most of the rights and benefits comprising ownership of the land and the improvements thereon or to be constructed thereon, if any, are transferred to the tenant for the term thereof.
"GROUND LEASE PROPERTY"--any land, improvements and appurtenances subject to a Ground Lease in favor of Seller.
"GUARANTY"--as defined in SECTION 5.14.
"HAZARDOUS ACTIVITY"--the distribution, generation, handling, importing, management, processing, manufacturing, production, refinement, Release, storage, transfer, transportation, treatment or use (including any withdrawal or other use of groundwater) of Hazardous Material in, on, under, about, from or in connection with any of the Facilities or any part thereof and any other act, business, operation or thing that materially increases the danger, or risk of material danger, or poses an unreasonable risk of harm, to persons or property on or off the Facilities.
"HAZARDOUS MATERIAL"--any substance, material or waste which is regulated by any Governmental Body, including any material, substance or waste which is defined as a "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste," "restricted hazardous waste,"
"contaminant," "toxic waste" or "toxic substance" under any provision of Environmental Law, and including petroleum, petroleum products, asbestos, asbestos-containing material, mold occurring in the interior of a building or other improvement constituting part of the Facilities, urea formaldehyde and polychlorinated biphenyls.
"HAZARDOUS SUBSTANCE"--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."
"HIRED ACTIVE EMPLOYEE"--as defined in SECTION 9.8(B)(I).
"IMPROVEMENTS"--all buildings, structures, fixtures and improvements located on the Land or included in the Assets, including those under construction.
"INDEMNIFIED PERSON"--as defined in SECTION 10.9(A).
"INDEMNIFYING PERSON"--as defined in SECTION 10.9(A).
"INDEPENDENT ACCOUNTING FIRM"--as defined in SECTION 2.3(C).
"INTELLECTUAL PROPERTY RIGHTS"--as defined in SECTION 3.21(A).
"INTERIM BALANCE SHEET"--as defined in SECTION 3.3.
"INTERIM FINANCIAL STATEMENTS"--as defined in SECTION 3.3.
"INVENTORIES"--all inventories of Seller, wherever located, including all finished goods, work in process, raw materials, spare parts and all other materials and supplies to be used or consumed by Seller in the production of finished goods.
"IRS"--the United States Internal Revenue Service and, to the extent relevant, the United States Department of the Treasury.
"KNOWLEDGE"--an individual will be deemed to have Knowledge of a particular fact or other matter if:
(a) that individual is actually aware of that fact or matter; or
(b) a prudent individual could be expected to discover or otherwise become aware of that fact or matter in the course of assessing the accuracy of any representation or warranty contained in the Agreement.
A Person (other than an individual) will be deemed to have Knowledge of a particular fact or other matter if any individual who is serving, or who has at any time served, as a director, officer, partner, executor or trustee of that Person (or in any similar capacity) has, or at any time had, Knowledge of that fact or other matter (as set forth in (a) and (b) above), and any such individual (and any individual party to the Agreement) will be deemed to have conducted a reasonably comprehensive investigation regarding the accuracy of the representations and warranties made herein.
"LAND"--all parcels and tracts of land in which Seller has an ownership interest.
"LEASE"--any Real Property Lease or any lease or rental agreement, license, right to use or installment and conditional sale agreement to which Seller is a party and any other Seller Contract pertaining to the leasing or use of any Tangible Personal Property.
"LEGAL REQUIREMENT"--any federal, state, local, municipal, foreign, international, multinational or other constitution, law, ordinance, principle of common law, code, regulation, statute or treaty.
"LIABILITY"--with respect to any Person, any liability or obligation of such Person of any kind, character or description, whether known or unknown, absolute or contingent, accrued or unaccrued, disputed or undisputed, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise, whether arising in contract or tort, in strict liability or otherwise and whether or not the same is required to be accrued on the financial statements of such Person.
"LOCK-UP AGREEMENT"--the Lock-Up Agreement to be entered into at the Closing among Buyer, Buyer Parent and the Selling Parties.
"MATERIAL ADVERSE EFFECT"--with respect to any Person or group of Persons means any event, change or effect that is reasonably likely to be materially adverse to the financial condition, properties, assets, liabilities, business, operations, results of operations or prospects of such Person or group of Persons, as the case may be, but shall not include any effect or change occurring as a result of general economic or financial conditions affecting the U.S. economy as a whole that do not individually or in the aggregate have a disproportionate effect on such Person relative to other similarly situated companies in such Person's industry.
"NOTE"--defined in SECTION 5.14.
"OCCUPATIONAL SAFETY AND HEALTH LAW"--any Legal Requirement designed to provide safe and healthful working conditions and to reduce occupational safety and health hazards, including the Occupational Safety and Health Act, and any program, whether governmental or private (such as those promulgated or sponsored by industry associations and insurance companies), designed to provide safe and healthful working conditions.
"ORDER"--any order, injunction, judgment, decree, ruling, assessment or arbitration award of any Governmental Body or arbitrator.
"ORDINARY COURSE OF BUSINESS"--an action taken by a Person will be deemed to have been taken in the Ordinary Course of Business only if that action:
(a) is consistent in nature, scope and magnitude with the past practices of such Person and is taken in the ordinary course of the normal, day-to-day operations of such Person; and
(b) does not require authorization by the board of directors, board of managers, shareholders, limited partners or members of such Person (or by any Person or group of Persons exercising similar authority).
"PART"--a part or section of the Disclosure Letter.
"PATENT APPLICATION"--as defined in SECTION 5.15.
"PATENT RECIPIENTS"--as defined in SECTION 5.15.
"PERMITTED ENCUMBRANCES"--as defined in SECTION 3.6(B).
"PERSON"--an individual, partnership, corporation, business trust, limited liability company, limited liability partnership, joint stock company, trust, unincorporated association, joint venture or other entity or a Governmental Body.
"PROCEEDING"--any action, mediation, arbitration, audit, hearing, investigation, litigation or suit (whether civil, criminal, administrative, judicial, injunctive, declaratory or pertaining to a subpoena or investigative, whether formal or informal, whether public or private) commenced, brought, conducted or heard by or before, or otherwise involving, any Governmental Body or arbitrator.
"PURCHASE PRICE"--as defined in SECTION 2.3(A).
"REAL PROPERTY"--the Land and Improvements and all Appurtenances thereto and any Ground Lease Property.
"REAL PROPERTY LEASE"--any Ground Lease or Space Lease.
"RECORD"--information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
"RELATED PERSON"--With respect to a particular individual:
(a) each other member of such individual's Family (as defined below);
(b) any Person that is directly or indirectly controlled by any one or more members of such individual's Family;
(c) any Person in which members of such individual's Family hold (individually or in the aggregate) a Material Interest (as defined below); and
(d) any Person with respect to which one or more members of such individual's Family serves as a director, officer, partner, executor or trustee (or in a similar capacity).
With respect to a specified Person other than an individual:
(a) any Person that directly or indirectly controls, is directly or indirectly controlled by or is directly or indirectly under common control with such specified Person;
(b) any Person that holds a Material Interest in such specified Person;
(c) each Person that serves as a director, officer, partner, executor or trustee of such specified Person (or in a similar capacity);
(d) any Person in which such specified Person holds a Material Interest; and
(e) any Person with respect to which such specified Person serves as a general partner or a trustee (or in a similar capacity).
For purposes of this definition, (a) "control" (including "controlling," "controlled by," and "under common control with") means the possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise, and shall be construed as such term is used in the rules promulgated under the Securities Act; (b) the "Family" of an individual includes (i) the individual, (ii) the individual's spouse, (iii) any other natural person who is related to the individual or the individual's spouse within the second degree and (iv) any other natural person who resides with such individual; and (c) "Material Interest" means direct or indirect beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of voting securities or other voting interests representing at least ten percent (10%) of the outstanding voting power of a Person or equity securities or other equity interests representing at least ten percent (10%) of the outstanding equity securities or equity interests in a Person.
"RELEASE"--any release, spill, emission, leaking, pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching or migration on or into the Environment or out of any property.
"REMAINING TERM PERCENTAGE"--a fraction, the numerator of which is the number of days remaining until the first anniversary of the Closing Date, and the denominator of which is 365.
"REMEDIAL ACTION"--all actions, including any capital expenditures,
required or voluntarily undertaken (a) to clean up, remove, treat or in any
other way address any Hazardous Material or other substance; (b) to prevent the
Release or Threat of Release or to minimize the further Release of any Hazardous
Material or other substance so it does not migrate or endanger or threaten to
endanger public health or welfare or the Environment; (c) to perform
pre-remedial studies and investigations or post-remedial monitoring and care; or
(d) to bring all Facilities and the operations conducted thereon into compliance
with Environmental Laws and environmental Governmental Authorizations.
"REPRESENTATIVE"--with respect to a particular Person, any director, officer, manager, employee, agent, consultant, advisor, accountant, financial advisor, legal counsel or other representative of that Person.
"RETAINED LIABILITIES"--as defined in SECTION 2.4(B).
"SCHEDULED INTELLECTUAL PROPERTY RIGHTS"--as defined in SECTION
3.21(A).
"SECURITIES ACT"--the Securities Act of 1933, as amended.
"SELLER"--as defined in the first paragraph of the Agreement.
"SELLER CONTACT"--as defined in SECTION 11.2(A).
"SELLER CONTRACT"--any Contract (a) under which Seller has or may acquire any rights or benefits; (b) under which Seller has or may become subject to any obligation or liability; or (c) by which Seller or any of the assets owned or used by Seller is or may become bound.
"SELLER PARENT"--as defined in the first paragraph of the Agreement.
"SELLING PARTIES"--as defined in the first paragraph of the Agreement.
"SPACE LEASE"--any lease or rental agreement pertaining to the occupancy of any improved space on any Land.
"SUBSIDIARY"--with respect to any Person, any corporation or other Person of which securities or other interests having the power to elect a majority of that corporation's or other Person's board of directors
or similar governing body, or otherwise having the power to direct the business and policies of that corporation or other Person (other than securities or other interests having such power only upon the happening of a contingency that has not occurred), are held by the owner or one or more of its subsidiaries.
"TANGIBLE PERSONAL PROPERTY"--all machinery, equipment, tools, furniture, office equipment, computer hardware, supplies, materials, vehicles and other items of tangible personal property of every kind owned or leased by Seller (wherever located and whether or not carried on Seller's books), together with any express or implied warranty by the manufacturers or sellers or lessors of any item or component part thereof and all maintenance records and other documents relating thereto.
"TAX"--any income, gross receipts, license, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental, windfall profit, customs, vehicle, airplane, boat, vessel or other title or registration, capital stock, franchise, employees' income withholding, foreign or domestic withholding, social security, unemployment, disability, real property, personal property, sales, use, transfer, value added, alternative, add-on minimum and other tax, fee, assessment, levy, tariff, charge or duty of any kind whatsoever and any interest, penalty, addition or additional amount thereon imposed, assessed or collected by or under the authority of any Governmental Body or payable under any tax-sharing agreement or any other Contract.
"TAX CLAIMS"--as defined in SECTION 10.3.
"TAX LOSSES"--as defined in SECTION 10.3.
"TAX RETURN"--any return (including any information return), report, statement, schedule, notice, form, declaration, claim for refund or other document or information filed with or submitted to, or required to be filed with or submitted to, any Governmental Body in connection with the determination, assessment, collection or payment of any Tax or in connection with the administration, implementation or enforcement of or compliance with any Legal Requirement relating to any Tax.
"TERMINATION EVENT"--as defined in SECTION 9.12.
"THIRD PARTY"--a Person that is not a party to the Agreement.
"THIRD-PARTY CLAIM"--any claim against any Indemnified Person by a Third Party, whether or not involving a Proceeding and whether arising in tort, in contract, under strict liability or otherwise.
"THREAT OF RELEASE"--a reasonable likelihood of a Release of a Hazardous Material not later than four years after the Closing Date that may require action in order to prevent or mitigate damage to the Environment that may result from such Release.
"TRANSACTION AGREEMENTS"--the Agreement, the Lock-Up Agreement, the Bill of Sale, the Assignment and Assumption Agreement, the Employment Agreements, the Note and the Guaranty.
"ULTIMATE BENEFICIAL OWNER" -- defined in SECTION 9.11.
"VOTING TRUST"--as defined in the first paragraph of this Agreement.
"WAIVED BREACHES"--as defined in Section 5.7.
"WARN ACT"--defined in SECTION 3.20(B).
1.2 USAGE
(a) INTERPRETATION. In the Agreement, unless a clear contrary intention appears:
(i) the singular number includes the plural number and vice versa;
(ii) reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are not prohibited by the Agreement, and reference to a Person in a particular capacity excludes such Person in any other capacity or individually;
(iii) reference to any gender includes each other gender;
(iv) reference to any agreement, document or instrument means such agreement, document or instrument as amended or modified and in effect from time to time in accordance with the terms thereof;
(v) reference to any Legal Requirement means such Legal Requirement as amended, modified, codified, replaced or reenacted, in whole or in part, and in effect from time to time, including rules and regulations promulgated thereunder, and reference to any section or other provision of any Legal Requirement means that provision of such Legal Requirement from time to time in effect and constituting the substantive amendment, modification, codification, replacement or reenactment of such section or other provision;
(vi) "hereunder," "hereof," "hereto," and words of similar import shall be deemed references to the Agreement as a whole and not to any particular Article, Section or other provision hereof;
(vii) "including" (and with correlative meaning "include") means including without limiting the generality of any description preceding such term;
(viii) "or" is used in the inclusive sense of "and/or";
(ix) with respect to the determination of any period of time, "from" means "from and including" and "to" means "to but excluding"; and
(x) references to documents, instruments or agreements shall be deemed to refer as well to all addenda, exhibits, schedules or amendments thereto.
(B) ACCOUNTING TERMS AND DETERMINATIONS. Unless otherwise specified herein, all accounting terms used herein shall be interpreted and all accounting determinations hereunder shall be made in accordance with GAAP.
(C) LEGAL REPRESENTATION OF THE PARTIES. The Agreement was negotiated by the parties with the benefit of legal representation, and any rule of construction or interpretation otherwise requiring the Agreement to be construed or interpreted against any party shall not apply to any construction or interpretation hereof.
ARTICLE II
SALE AND TRANSFER OF ASSETS; CLOSING
2.1 ASSETS TO BE SOLD
Upon the terms and subject to the conditions set forth in the Agreement, at the Closing, but effective as of the Effective Time, Seller shall sell, convey, assign, transfer and deliver to Buyer, and Buyer shall purchase and acquire from Seller, free and clear of any Encumbrances other than Permitted Encumbrances, all of Seller's right, title and interest in and to all of Seller's property and assets, real, personal or mixed, tangible and intangible, of every kind and description, wherever located, including the following (but excluding the Excluded Assets):
(a) all Tangible Personal Property, including those items described in Part 2.1(a);
(b) all Inventories;
(c) all Seller Contracts listed in Part 2.4(a)(i) and all Seller Contracts assumed by Buyer under SECTION 2.4(A)(II);
(d) all Governmental Authorizations and all pending applications therefor or renewals thereof, in each case to the extent transferable to Buyer, including those listed in Part 2.1(d);
(e) all data and Records related to the operations of Seller, including client and customer lists and Records, referral sources, research and development reports and Records, production reports and Records, service and warranty Records, equipment logs, operating guides and manuals, financial and accounting Records, creative materials, advertising materials, promotional materials, studies, reports, correspondence and other similar documents and Records and, subject to Legal Requirements, copies of all personnel Records and other Records described in SECTION 2.2(F);
(f) all of the intangible rights and property of Seller, Intellectual Property Rights, going concern value, goodwill, telephone, telecopy and e-mail addresses and listings and those items listed in Part 2.1(f);
(g) all insurance benefits, including rights and proceeds, arising from or relating to the Assets or the Assumed Liabilities prior to the Effective Time, unless expended in accordance with this Agreement;
(h) all claims of Seller against Third Parties relating to the Assets, whether choate or inchoate, known or unknown, contingent or noncontingent, including all such claims listed in Part 2.1(h); and
(i) all rights of Seller relating to deposits and prepaid expenses listed in Part 2.2(i), claims for refunds and rights to offset in respect thereof that are not listed in Part 2.2(d) or not referenced in SECTION 2.2(G) and that are not excluded under SECTION 2.2(J).
All of the property and assets to be transferred to Buyer hereunder are herein referred to collectively as the "ASSETS."
Notwithstanding the foregoing, the transfer of the Assets pursuant to the Agreement shall not include the assumption of any Liability related to the Assets unless Buyer expressly assumes that Liability pursuant to SECTION 2.4(A).
2.2 EXCLUDED ASSETS
Notwithstanding anything to the contrary contained in SECTION 2.1 or elsewhere in the Agreement, the following assets of Seller (collectively, the "EXCLUDED ASSETS") are not part of the sale and purchase contemplated hereunder, are excluded from the Assets and shall remain the property of Seller after the Closing:
(a) all cash, cash equivalents and short-term marketable investments;
(b) all Accounts Receivable;
(c) all minute books and other organizational records;
(d) those rights relating to deposits and prepaid expenses and claims for refunds, including refunds on prepaid insurance, and rights to offset in respect thereof listed in Part 2.2(d);
(e) all of the Seller Contracts not listed in Part 2.4(a)(i);
(f) all personnel Records and other Records that Seller is required under any Legal Requirement to retain in its possession;
(g) all claims for refund of Taxes and other governmental charges of whatever nature;
(h) all rights in connection with and assets of the Employee Plans;
(i) all rights of Seller under the Transaction Agreements;
(j) the property and assets expressly designated in Part 2.2(j) as Excluded Assets; and
(k) all stock in Gnubi AG and in gnubi communications Canada, Inc.
2.3 CONSIDERATION
(a) PURCHASE PRICE. The total consideration to be paid by Buyer
for the Assets (the "PURCHASE PRICE") shall consist of the following: (i)
$1,780,205 payable in cash at the Closing (the "CASH CONSIDERATION"), (ii) that
number of Buyer Parent Subordinate Voting Shares equal to $2,500,000 divided by
the Closing Price (the "BUYER SHARES"), which shall be held by Buyer as provided
below in this SECTION 2.3 pursuant to the terms of the Lock-Up Agreement, and
(iii) the Earn-Out Amount, which shall be paid as provided below. If prior to
the Closing, there is any stock dividend or stock split or reclassification of
the outstanding Buyer Parent Subordinate Voting Shares, then in such event any
and all new, substituted, or additional securities to which Seller 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 the purposes
of the Agreement and the consideration to be received by Seller shall be
adjusted accordingly. No fraction of a share of Buyer Parent Subordinate Voting
Shares shall be issued, and each fractional share thereof shall be rounded up to
the nearest whole number.
(b) LOCK-UP. The Buyer Shares will be held by Buyer pursuant to the Lock-Up Agreement until released in accordance with the terms of the Lock-Up Agreement. The provisions of the Lock-Up Agreement shall govern in the event of any conflict between the Lock-Up Agreement and this SECTION 2.3.
(c) CALCULATION AND PAYMENT OF EARN-OUT AMOUNT. On or before sixty
(60) days after the first anniversary of the Closing Date, Buyer shall deliver
to Seller a statement setting forth in reasonable detail its calculation of
Annual Buyer Revenues and the Earn-out Amount based on such Annual Buyer
Revenues (the "ANNUAL BUYER REVENUES STATEMENT"). If Seller disputes Buyer's
Annual Buyer Revenues Statement, Seller shall notify Buyer of its objections
within sixty (60) days after delivery of the Annual Buyer Revenues Statement and
shall set forth in reasonable detail in such notice the reason for Seller's
objections. If Seller fails to deliver such notice within such time period, (i)
Seller shall be deemed to have accepted the Annual Buyer Revenues Statement and
shall not be entitled to dispute such Annual Buyer Revenues Statement and (ii)
Buyer shall pay the Earn-out Amount reflected on the Annual Buyer Revenues
Statement to Buyer as provided below within the earlier of ten (10) days after
the end of the objection period or notification from Seller that it does not
object to the Annual Buyer Revenues Statement. If Seller delivers such notice,
Buyer and Seller shall endeavor in good faith to resolve their dispute over the
Annual Buyer Revenues Statement within sixty (60) days after Buyer's receipt of
Seller's notice. If they are unable to do so within such 60-day period, the
dispute shall be submitted to an audit partner experienced in the business
conducted by Buyer of an independent nationally-recognized accounting firm in
the United States as shall be mutually acceptable to Sellers and Buyer (an
"INDEPENDENT ACCOUNTING FIRM") who shall act as an expert and not as an
arbitrator, and who shall resolve the dispute within 10 days. The decision of
the Independent Accounting Firm as to the Annual Buyer Revenues Statement shall
be final and binding upon the Buyer and Seller, except to the extent of any
merely computational errors present on the face of the Annual Buyer Revenues
Statement which, once corrected, shall be final and binding upon Buyer and
Seller. One-half of the expenses of the Independent Accounting Firm shall be
borne by Seller, and the remaining one-half of such expenses shall be borne by
Buyer. Seller and Buyer shall cooperate with each other in the determination of
the Annual Buyer Revenues Statement, including without limitation, allowing
Seller and the Independent Accounting Firm full access to the books and records
of Buyer. Any party shall make any payment required to comply with such decision
within ten (10) days after such decision is reached. Payment of any Earn-out
Amount shall be made by check to Seller at the address set forth in SECTION
12.2, or at such other place in the United States of America as Seller shall
designate to Buyer in writing, or by wire transfer to an account designated by
Seller in writing. If any payment of any Earn-out Amount is due on a day which
is not a Business Day, such payment shall be due on the next succeeding Business
Day.
2.4 LIABILITIES
(a) ASSUMED LIABILITIES. On the Closing Date, but effective as of the Effective Time, Buyer shall assume and agree to discharge only the following Liabilities of Seller (the "ASSUMED LIABILITIES"):
(i) any Liability arising after the Effective Time under the Seller Contracts described in Part 2.4(a)(i) (other than any Liability arising under the Seller Contracts listed on Part 2.4(a)(i) arising out of or relating to a Breach that occurred prior to the Effective Time);
(ii) any Liability of Seller arising after the Effective Time under any Seller Contract that is entered into by Seller after the date hereof in accordance with the provisions of the Agreement that Buyer expressly assumes at its sole discretion (other than any Liability arising out of or relating to a Breach that occurred prior to the Effective Time);
(iii) any Liability to Seller's customers under product or service warranties up to, but not exceeding, $15,000 in the aggregate (inclusive of labor charges at the standard rates used by Buyer);
(iv) any Liability up to, but not exceeding, $150,000 in the aggregate for the payment of materials and services used in Seller's research and development projects pursuant to the purchase orders specifically set forth on Part 2.4(a)(iv); and
(v) any Liability of Seller described in Part 2.4(a)(v).
(b) RETAINED LIABILITIES. The Retained Liabilities shall remain the sole responsibility of and shall be retained, paid, performed and discharged solely by Seller. "RETAINED LIABILITIES" shall mean every Liability of the Selling Parties other than the Assumed Liabilities, including:
(i) any trade account payable incurred by Seller that remains unpaid other than those set forth on Part 2.4(a)(iv);
(ii) any Liability arising out of or relating to products of Seller to the extent manufactured or sold prior to the Effective Time other than as provided in SECTION 2.4(A)(III);
(iii) any Liability under any Contract assumed by Buyer pursuant to SECTION 2.4(A) that arises after the Effective Time but that arises out of or relates to any Breach that occurred prior to the Effective Time;
(iv) any Liability for Taxes which are attributable or relating to (A) the Assets or the business or the ownership of Seller for any periods ending on or before the Effective Time, (B) any Taxes that will arise as a result of the Contemplated Transactions, and (C) any deferred Taxes of any nature;
(v) any Liability under any Contract not assumed by Buyer, including (1) any Liability arising out of or relating to Seller's indebtedness not assumed by Buyer under SECTION 2.4(A), or any security interest related thereto and (2) the Leases set forth on Part 2.4(b)(v);
(vi) any Liability to Seller's customers under product or service warranties other than as provided in SECTION 2.4(A)(III);
(vii) any Environmental, Health and Safety Liabilities arising out of or relating to the operation of Seller's business or Seller's leasing, ownership or operation of real property;
(viii) any Liability under the Employee Plans or relating to payroll, vacation, sick leave, workers' compensation, unemployment benefits, pension benefits, employee stock option or profit-sharing plans, health care plans or benefits or any other employee plans or benefits of any kind for Seller's employees or former employees or both;
(ix) any Liability under any employment, severance, retention or termination agreement with any employee of Seller or any of its Related Persons;
(x) any Liability arising out of or relating to any employee grievance to the extent relating to or arising out of events or occurrences prior to the Effective Time, whether or not the affected employees are hired by Buyer;
(xi) any Liability of Seller to any Related Person of Seller or any member, partner or stockholder of Selling Parties;
(xii) any Liability to indemnify, reimburse or advance amounts to any Related Person or Representative of Seller;
(xiii) any Liability to distribute assets, rights or properties to either General Partner or Limited Partner, or otherwise apply all or any part of the consideration received hereunder;
(xiv) any Liability arising out of any Proceeding pending as of the Effective Time;
(xv) any Liability arising out of any Proceeding commenced after the Effective Time and to the extent arising out of or relating to any occurrence or event happening prior to the Effective Time;
(xvi) any Liability arising out of or resulting from Seller's compliance or noncompliance with any Legal Requirement or Order of any Governmental Body;
(xvii) any Liability of Seller under the Agreement or any other document executed in connection with the Contemplated Transactions; and
(xviii) any Liability of Seller based upon Seller's acts or omissions occurring after the Effective Time.
2.5 ADJUSTMENTS TO PURCHASE PRICE FOR AD VALOREM TAXES
Ad valorem real and tangible personal property taxes with respect to the Assets for the calendar year in which the Closing occurs shall be prorated between Seller and Buyer as of the Closing Date on the basis of no applicable discount. If the amount of such taxes with respect to any of the Assets for the calendar year in which the Closing occurs has not been determined as of the Closing Date, then the taxes with respect to such Assets for the preceding calendar year, on the basis of no applicable discount, shall be used to calculate such prorations, with known changes in valuation or millage applied. The prorated taxes shall be an adjustment to the Cash Consideration to be paid at the Closing. If the actual amount of any such taxes varies by more than one thousand dollars ($1,000.00) from estimates used at the Closing to prorate such taxes, then the parties shall re-prorate such taxes within ten (10) days following request by either party based on the actual amount of the tax bill.
2.6 ALLOCATION
The Purchase Price shall be allocated in accordance with EXHIBIT 2.6. After the Closing, the parties shall make consistent use of the allocation and fair market value specified in EXHIBIT 2.6 for all Tax purposes and in all filings, declarations and reports with the IRS in respect thereof, including the reports required to be filed under Section 1060 of the Code. In any Proceeding related to the determination of any Tax, neither Buyer nor Seller or Founders shall contend or represent that such allocation is not a correct allocation.
2.7 CLOSING
The purchase and sale provided for in the Agreement (the "CLOSING") will take place at the offices of Haynes and Boone, LLP, 2505 N. Plano Road, Suite 4000, Richardson, Texas 75082, commencing at 10:00 a.m. (Richardson time) on September 30, 2002 or at such other time or other place as the parties hereto agree. Subject to the provisions of Article 8, failure to consummate the purchase and sale provided for in the Agreement on the date and time and at the place determined pursuant to this SECTION 2.7 will not result in the termination of the Agreement and will not relieve any party of any obligation under the Agreement. In such a situation, the Closing will occur as soon as practicable, subject to Article 8.
2.8 CLOSING OBLIGATIONS
In addition to any other documents to be delivered under other provisions of the Agreement, at the Closing:
(a) Selling Parties shall deliver to Buyer, together with funds sufficient to pay all Taxes necessary for the transfer, filing or recording thereof:
(i) a bill of sale for all of the Assets in the form of EXHIBIT 2.8(A)(I) (the "BILL OF SALE") executed by Seller;
(ii) an assignment and assumption agreement for Buyer's assumption of the Assumed Liabilities in the form of EXHIBIT 2.8(A)(II) (the "ASSIGNMENT AND ASSUMPTION AGREEMENT") executed by Seller;
(iii) assignments of all Intellectual Property Rights and other intangible personal property, together with and separate assignments of all registered trademarks, patents and copyrights in a form reasonably satisfactory to Buyer and executed by Seller;
(iv) such other deeds, bills of sale, assignments, certificates of title, documents and other instruments of transfer and conveyance as may reasonably be requested by Buyer, each in form and substance reasonably satisfactory to Buyer and executed by Seller;
(v) releases from all Encumbrances on the Assets, in a form reasonably satisfactory to Buyer;
(vi) employment agreements in the form of EXHIBIT 2.8(A)(VI), executed by JRS and DE (the "EMPLOYMENT AGREEMENTS");
(vii) the Lock-Up Agreement in the form of EXHIBIT 2.8(A)(VII), executed by the Selling Parties;
(viii) a Termination Agreement for any intercompany agreements in a form reasonably satisfactory to Buyer and executed by Seller and Gnubi AG or gnubi communications Canada, Inc.;
(ix) a certificate executed by Selling Parties as to the accuracy of their representations and warranties as of the date of the Agreement and as of the Closing in accordance with SECTION 6.1 and as to their compliance with and performance of their covenants and obligations to be performed or complied with at or before the Closing in accordance with SECTION 6.2;
(x) a certificate of the Secretary of the General Partner certifying, as complete and accurate as of the Closing, attached copies of the Governing Documents of Seller, General Partner and Limited Partner, certifying and attaching all requisite resolutions or actions of the General Partner and the Limited Partner approving the execution and delivery of the Agreement and the consummation of the Contemplated Transactions and certifying to the incumbency and signatures of the officers of the General Partner and the Limited Partner executing the Agreement and any other document relating to the Contemplated Transactions;
(xi) a certificate of the Secretary of Seller Parent certifying, as complete and accurate as of the Closing, attached copies of the Governing Documents of Seller, certifying and attaching all requisite resolutions or actions of Seller Parent approving the execution and delivery of the Agreement and the consummation of the Contemplated Transactions and certifying to the incumbency and signatures of the officers of Seller Parent executing the Agreement and any other document relating to the Contemplated Transactions; and
(xii) a certificate of no Tax due issued for the Seller by the Texas Comptroller.
(b) Buyer shall deliver to Selling Parties:
(i) the Cash Consideration by wire transfer to an account specified by Seller in a writing delivered to Buyer at least five (5) Business Days prior to the Closing Date;
(ii) the Lock-Up Agreement executed by Buyer;
(iii) the Assignment and Assumption Agreement executed by Buyer;
(iv) the Employment Agreements, executed by Buyer;
(v) a certificate executed by Buyer as to the accuracy of
its representations and warranties as of the date of the Agreement and
as of the Closing in accordance with SECTION 7.1 and as to its
compliance with and performance of its covenants and obligations to be
performed or complied with at or before the Closing in accordance with
SECTION 7.2;
(vi) a certificate of the Secretary of Buyer certifying, as complete and accurate as of the Closing, attached copies of the Governing Documents of Buyer and certifying and attaching all requisite resolutions or actions of Buyer's board of directors approving the execution and delivery of the Agreement and the consummation of the Contemplated Transactions and certifying to the incumbency and signatures of the officers of Buyer executing the Agreement and any other document relating to the Contemplated Transactions; and
(vii) a certificate evidencing the Buyer Shares, which Seller shall at Closing return to the custody of Buyer to be held pursuant to the terms of the Lock Up Agreement.
(c) Buyer Parent shall deliver to Selling Parties:
(i) a certificate executed by Buyer Parent as to the accuracy of its representations and warranties as of the date of the Agreement and as of the Closing in accordance with SECTION 7.1 and as to its compliance with and performance of its covenants and obligations to be performed or complied with at or before the Closing in accordance with SECTION 7.2; and
(ii) a certificate of the Secretary of Buyer Parent certifying, as complete and accurate as of the Closing, attached copies of the Governing Documents of Buyer Parent and certifying and attaching all requisite resolutions or actions of Buyer Parent's board of directors approving the execution and delivery of the Agreement and the consummation of the Contemplated Transactions and certifying to the incumbency and signatures of the officers of Buyer Parent executing the Agreement and any other document relating to the Contemplated Transactions.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLING PARTIES
The Selling Parties jointly and severally represent and warrant to Buyer and Buyer Parent that the following representations and warranties are correct and complete as of the date hereof except as set forth in the disclosure schedule attached hereto as EXHIBIT A (the "DISCLOSURE LETTER"). Nothing in the Disclosure Letter shall be deemed adequate to disclose an exception to a representation or warranty made herein, however, unless the Disclosure Letter identifies the exception with reasonably sufficient detail. Without limiting the generality of the foregoing, the mere listing (or inclusion of a copy) of a document or other item shall not be deemed adequate to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or other item itself). The Disclosure Letter will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Article.
3.1 ORGANIZATION, GOOD STANDING; AUTHORITY; ENFORCEABILITY
(a) Seller is a limited partnership duly organized, validly existing and in good standing in the State of Delaware. Each of the Limited Partner and the General Partner is a limited liability company duly organized, validly existing and in good standing in the State of Delaware. Seller Parent is a corporation duly incorporated, validly existing and in good standing in the State of Delaware. Each of Seller, Limited Partner, General Partner and Seller Parent has delivered true and correct copies of its Governing Documents to Buyer. Each of the Selling Parties has the requisite 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 the Transaction Agreements and consummate the Contemplated Transactions. Each of the Selling Parties is duly qualified to do business 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 Material Adverse Effect on such Selling Party. No Selling Party is in violation of any of the provisions of its Governing Documents. Seller has no Subsidiary and does not own any shares of capital stock or other securities of any other Person.
(b) The execution and delivery by each of the Selling Parties of the Transaction Agreements and the consummation by the Selling Parties of the Contemplated Transactions have been duly and validly authorized by all necessary action on the part of the Selling Parties, and no other proceedings on the part of the Selling Parties are necessary to authorize the Transaction Agreements or to consummate the Contemplated Transactions. The Agreement has been, and the other Transaction Agreements when executed by the Selling Parties will be, duly and validly executed and delivered by each of the Selling Parties, and, assuming each of the Transaction Agreements constitutes a valid and binding obligation of Buyer and Buyer Parent, the Agreement constitutes, and each of the other Transaction Agreements when executed by the Selling Parties will constitute, a valid and binding agreement of each of the Selling Parties 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 creditor's rights and to general principles of equity, regardless of whether such enforceability is considered in equity or at law.
3.2 NO CONFLICT
Except as set forth on Part 3.2, the execution and delivery of the Transaction Agreements do not, and the consummation of the Contemplated Transactions 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 Encumbrance upon any of the properties or assets of any of the Selling Parties pursuant to, any provision of: (i) the Governing Documents of such Selling Party; or (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease or other agreement, instrument, permit, concession, franchise or license applicable to the Selling Party or its properties or assets.
3.3 FINANCIAL STATEMENTS
Attached as Part 3.3 are (a) complete and correct copies of Seller
Parent's audited consolidated balance sheet as of December 31, 2001 (the
"AUDITED BALANCE SHEET"), and the related consolidated statements of income
(loss), stockholders' equity (deficit) and cash flows (together with the
auditors' report thereon) for the year ended December 31, 2001, together with
notes to such financial statements; (b)
complete and correct copies of Seller Parent's predecessor's audited consolidated balance sheet as of December 31, 2000, and the related consolidated statements of income (loss), stockholders' equity (deficit) and cash flows (together with the auditors' report thereon) for the year ended December 31, 2000, together with notes to such financial statements (collectively, the "AUDITED FINANCIAL STATEMENTS"); and (c) complete and correct copies of Seller Parent's reviewed, interim consolidated balance sheet and notes to the balance sheet as of July 31, 2002 (the "INTERIM BALANCE Sheet"), and the related statements of income (loss), stockholders' equity (deficit) and cash flows (together with the review report thereon) for the seven-month period ended July 31, 2002, certified by the chief financial officer of Seller Parent (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 Seller Parent and have been prepared in accordance with GAAP consistently applied throughout the periods covered thereby and present fairly in all material respects, as of their respective dates, the consolidated financial condition and results of operations of Seller Parent (subject, in the case of Interim Financial Statements, to normal, recurring year-end adjustments that may be required upon audit that would not be material, either individually or in the aggregate). Any pro-forma or provisional financial statement or financial information provided to the Buyer prior to the Closing were prepared in accordance with the same accounting standards that were used to prepare the Financial Statements. All of the Assets are reflected on the Interim Balance Sheet.
3.4 BOOKS AND RECORDS
The books of account and other financial Records of Seller, all of which have been made available to Buyer, are complete and correct and represent actual, bona fide transactions and have been maintained in accordance with sound business practices and the requirements of Section 13(b)(2) of the Exchange Act (regardless of whether Seller is subject to that Section or not), including the maintenance of an adequate system of internal controls. The minute books and organizational records of Seller, all of which have been made available to Buyer, contain accurate and complete Records of all meetings held, and action taken, and no meeting has been held for which minutes have not been prepared or are not contained in such organizational books.
3.5 SUFFICIENCY OF ASSETS
Except as set forth in Part 3.5, the Assets (a) constitute all of the assets, tangible and intangible, of any nature whatsoever, necessary to operate Seller's business in the manner presently operated by Seller; and (b) include all of the operating assets of Seller. Except as set forth on Part 3.5, no Related Person of Seller owns any asset necessary to conduct Seller's business as presently conducted.
3.6 TITLE TO ASSETS; ENCUMBRANCES
(a) Seller has good and marketable title to, or a valid leasehold interest in, all the Assets set forth on the Interim Balance Sheet free and clear of all Encumbrances 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 the date of the Interim Balance Sheet; (b) Encumbrances specifically identified in the Financial Statements; and (c) Encumbrances for current Taxes not yet due and payable. Seller has a valid leasehold, license or other interest in all other assets used by it in its business.
(b) Each of the Selling Parties warrants to Buyer that, at the time of Closing, all Assets shall be free and clear of all Encumbrances other than those identified on Part 3.6(b) as permitted Encumbrances ("PERMITTED ENCUMBRANCES").
3.7 INVENTORIES
All items included in the Inventories consist of a quality and quantity usable and, with respect to finished goods, saleable, in the Ordinary Course of Business of Seller except for obsolete items and items of below-standard quality, all of which have been written off or written down to net realizable value as set forth in Part 3.7. Seller is not in possession of any inventory not owned by Seller, including goods already sold. All of the Inventories have been valued at net realizable value at its weighted average cost. Inventories now on hand that were purchased after the date of the Interim Balance Sheet were purchased in the Ordinary Course of Business of Seller at a cost not exceeding market prices prevailing at the time of purchase. Work-in-process Inventories are now valued, and will be valued on the Closing Date, according to GAAP.
3.8 PRODUCT WARRANTIES
Each product manufactured, sold, leased, or delivered by Seller has been in material conformity with all applicable contractual commitments and all warranties, and Seller has no Liability for replacement or repair thereof or other damages in connection therewith arising out of products manufactured, sold, leased or delivered, except as set forth in Part 3.8. Except as set forth in Part 3.8, no product manufactured, sold, leased, or delivered by Seller is subject to any express guaranty, warranty, or other indemnity made Seller. Seller has no Liability arising out of any injury to individuals or property as a result of the ownership, possession, or use of any product manufactured, sold, leased, or delivered by Seller, except as set forth in Part 3.8.
3.9 CONDITION OF FACILITIES; PERSONAL PROPERTY
Seller does not own any real property. Part 3.9 contains an accurate description (by location, name of lessor, date of lease and term expiry date) of all Real Property Leases included within the Assets (collectively, the "FACILITIES"). Except as set forth on Part 3.9, 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 Material Adverse Effect on Seller or which prevent any continued use thereof in the usual and normal conduct of Seller's business. There are no pending or, to the Knowledge of any Selling Party, threatened condemnation proceedings relating to any of the Facilities. All of the Tangible Personal Property owned or used by Seller is in good operating condition and repair, except for ordinary wear and tear, and are usable in the Ordinary Course of Business of Seller and free from latent and patent defects. No item of Tangible Personal Property is in need of repair or replacement other than as part of routine maintenance in the Ordinary Course of Business of Seller. Except as disclosed in Part 3.9, at Closing all Tangible Personal Property used in Seller's business will be at the Facilities.
3.10 NO UNDISCLOSED LIABILITIES
Seller does not have any Liability except for: (a) liabilities for which fully funded reserves are specifically identified in the Interim Balance Sheet; and (b) liabilities of a short-term nature which have arisen in the Ordinary Course of Business of Seller since the date of the Interim Balance Sheet.
3.11 TAXES
Each of the Selling Parties 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. Each of the Selling Parties has paid all Taxes required to be paid by it. The most recent financial statements contained in the Financial Statements reflect an adequate reserve for all Taxes payable by Selling Parties for all taxable periods and portions thereof accrued through the date of such financial statements. No deficiencies for any Taxes have been proposed,
asserted or assessed against any Selling Party that are not adequately reserved for on the Financial Statements in accordance with GAAP. There is no pending dispute with any taxing authority relating to any of Selling Parties' Tax Returns and there is no tax audit, assessment or reassessment of any Tax Return of any Selling Party pending or currently in process. All Taxes that each Selling Party 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 Body. There are no Encumbrances for Taxes upon any of the assets of any Selling Party, except Encumbrances for current Taxes not yet due and payable. Consummation of the Contemplated Transactions will not result in the imposition or creation of any Taxes or Encumbrances on the Assets, except for Taxes that shall remain the Liability of Seller.
3.12 NO MATERIAL ADVERSE CHANGE
Except as set forth on Part 3.12, since the date of the Audited Balance Sheet, Seller has conducted its business only in the Ordinary Course of Business 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 Material Adverse Effect on Seller; (b) there has not been any change in the accounting principles, policies, practices or procedures of Seller or their application to Seller; and (c) Seller has not taken any action or omitted to take any action that would have been prohibited under SECTION 5.1.
3.13 EMPLOYEE BENEFITS
(a) Part 3.13 lists all employee benefit plans (as defined in
Section 3(3) of ERISA) and collective bargaining, employment or severance
agreements or other similar arrangements which Seller sponsors, maintains, or to
which contributions are made, for the benefit of employees of Seller or any
Subsidiary, including, without limitation, any profit-sharing, deferred
compensation, bonus, stock option, stock purchase, stock appreciation, or other
equity-based compensation, pension, retainer, consulting, retirement, severance,
change in control, health, medical, dental or other welfare plan, agreement or
arrangement, and any plan, agreement or arrangement providing for "fringe
benefits." The plans, agreements and arrangements described in this SECTION 3.13
are referred to herein as the "EMPLOYEE Plans."
(b) Seller has delivered or made available to Buyer true and complete copies of all documents, trust agreements, summary plan descriptions, and any other instrument under which an Employee Plan is established or operated or summary descriptions of any such Employee Plan not otherwise in writing.
(c) Each Employee Plan has been administered in accordance with its terms. Each Employee Plan has been established and administered in accordance with all applicable laws.
(d) All reports, returns and similar documents with respect to each Employee Plan required to be filed with any Governmental Body or distributed to any participant of each Employee 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 Knowledge of any Selling Party, threatened with respect to any Employee Plan. No audits, inquiries, reviews, proceedings, claims, or demands are pending with any Governmental Body with respect to any Employee Plan.
(f) No Employee 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 law (e.g. COBRA), 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 Employee Plans, the Contemplated Transactions 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 Employee 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 the Closing shall have been made or properly accrued on the current balance sheets or will be properly accrued on the books and records of Seller as of the Closing Date. None of the Employee Plans has any unfunded liabilities which are not reflected on the current balance sheet or the books and records of Seller.
(i) No Employee Plan of Seller and no Employee Plan of any of Seller's ERISA Affiliates is or has been subject to Title IV of ERISA or Section 412 of the Code, and neither Seller nor any of its ERISA Affiliates has at any time contributed to or had any obligation to contribute to or has any liability (contingent or otherwise) to any "multiemployer plan," as that term is defined in Section 3(37) of ERISA. "ERISA AFFILIATE" means any trade or business (whether or not incorporated) that is as of the date of the Agreement, or at any time within six (6) years preceding the date hereof would have been, treated as a "single employer" with Seller under Section 414(b), (c), (m) or (o) of the Code.
(j) Except for any formal written qualification requirement with respect to which the remedial amendment period set forth in Section 401(b) of the Code, and any regulations, rulings or other IRS releases thereunder, has not expired, each Employee Plan that is intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the IRS and is so qualified in form and operation under Section 401(a) of the Code.
(k) Seller has delivered or made available to Buyer each updated
determination letter for Employee Plan that is intended to be qualified under
Section 401(a) of the Code.
3.14 COMPLIANCE WITH LEGAL REQUIREMENTS; GOVERNMENTAL AUTHORIZATIONS AND CONSENTS
(a) Seller is and at all times since January 1, 1997 has been in compliance with all applicable statutes, laws, ordinances, regulations, rules, judgments, decrees and orders of any Governmental Body applicable to its business or operations. Seller has not received any notice or other communication (whether oral or written) from any Governmental Body or any other Person regarding (i) any actual alleged, possible or potential violation of, or failure to comply with, any Legal Requirement or (ii) any actual, alleged, possible or potential obligation on the part of Seller to undertake, or to bear all or any portion of the cost of, any remedial action of any nature.
(b) Part 3.14(b) contains a complete and accurate list of each Governmental Authorization that is held by Seller or that otherwise relates to Seller's business or the Assets. Each Governmental Authorization listed or required to be listed in Part 3.14(b) is valid and in full force and effect. Except as set forth in Part 3.14(b):
(i) Seller is, and at all times since January 1, 1997, has been, in full compliance with all of the terms and requirements of each Governmental Authorization identified or required to be identified in Part 3.14(b);
(ii) to the Knowledge of any Selling Party, no event has occurred or circumstance exists that may (with or without notice or lapse of time) (A) constitute or result directly or indirectly in a violation of or a failure to comply with any term or requirement of any Governmental Authorization listed or required to be listed in Part 3.14(b) or (B) result directly or indirectly in the revocation,
withdrawal, suspension, cancellation or termination of, or any modification to, any Governmental Authorization listed or required to be listed in Part 3.14(b);
(iii) Seller has not received, at any time since January 1, 1997, any notice or other communication (whether oral or written) from any Governmental Body or any other Person regarding (A) any actual, alleged, possible or potential violation of or failure to comply with any term or requirement of any Governmental Authorization or (B) any actual, proposed, possible or potential revocation, withdrawal, suspension, cancellation, termination of or modification to any Governmental Authorization; and
(iv) all applications required to have been filed for the renewal of the Governmental Authorizations listed or required to be listed in Part 3.14(b) have been duly filed on a timely basis with the appropriate Governmental Bodies, and all other filings required to have been made with respect to such Governmental Authorizations have been duly made on a timely basis with the appropriate Governmental Bodies.
The Governmental Authorizations listed in Part 3.14(b) collectively constitute all of the Governmental Authorizations necessary to permit Seller to lawfully conduct and operate its business in the manner in which it currently conducts and operates such business and to permit Seller to own and use its assets in the manner in which it currently owns and uses such assets.
(c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Body or any other Person, is required by or with respect to any of the Selling Parties in connection with the execution and delivery of the Transaction Agreements by the Selling Parties or consummation by the Selling Parties of the Contemplated Transactions, except for those listed in Part 3.14(c).
3.15 LEGAL PROCEEDINGS; ORDERS
Except as set forth on Part 3.15, there is no action, suit or proceeding, governmental or otherwise, pending or, to the Knowledge of any Selling Party, overtly threatened against Seller or any of its properties or business. Except as set forth on Part 3.15, there is no judgment, decree, injunction, rule or order of any Governmental Body outstanding against Seller, its business or any of the Assets. To the Knowledge of each Selling Party, no event has occurred or circumstance exists that is reasonably likely to give rise to or serve as a basis for the commencement of any such action, suit or proceeding. There are no actions, suits or proceedings listed or required to be listed in Part 3.15 that could have a Material Adverse Effect on Seller or a material adverse effect upon the Assets.
3.16 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth on Part 3.16, since the date of the Audited Balance Sheet, Seller has conducted its business only in the Ordinary Course of Business and there has not been any:
(a) amendment to the Governing Documents of Selling Parties;
(b) payment (except in the Ordinary Course of Business) or increase by Seller of any bonuses, salaries or other compensation to any officer or employee or entry into any employment, severance or similar Contract with any officer or employee;
(c) adoption of, amendment to or increase in the payments to or benefits under, any Employee Plan;
(d) damage to or destruction or loss of any Asset, whether or not covered by insurance;
(e) entry into, termination of or receipt of notice of termination of (i) any license, distributorship, dealer, sales representative, joint venture, credit or similar Contract to which Seller is a party, or (ii) any Contract or transaction involving a total remaining commitment by Seller of at least $50,000;
(f) sale (other than sales of Inventories in the Ordinary Course of Business), lease, license or other disposition of any Asset or property of Seller (including the Intellectual Property Rights) or the creation of any Encumbrance on any Asset;
(g) cancellation or waiver of any claims or rights with a value to Seller in excess of $50,000;
(h) indication by any customer or supplier of an intention to discontinue or change the terms of its relationship with Seller;
(i) change in the accounting methods used by Seller; or
(j) Contract by Seller to do any of the foregoing.
3.17 CONTRACTS; NO DEFAULTS
Part 3.17 sets forth a list of:
(a) each Contract of Seller which requires total payments to or by Seller of at least $50,000;
(b) each Contract of Seller which has a remaining term longer than one (1) year, which requires total payments to or by Seller of at least $25,000 during the remaining term and which is not terminable on thirty (30) or fewer days' notice without penalty;
(c) each Contract to which Seller 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 Seller;
(e) any collective bargaining agreement, union agreement, employment agreement, consulting agreement, management service agreement or substantially similar type of contract or agreement to which Seller is a party;
(f) any consent decree and other judgment, decree or order, settlement agreement or other agreement limiting the ability of Seller to compete in any line of business or with any Person in any geographic areas;
(g) each written warranty, guaranty and/or other similar undertaking with respect to contractual performance extended by Seller;
(h) any joint venture agreement or other contract, agreement or commitment to which Seller is a party involving a sharing of profits or expenses; and
(i) any outstanding loan or advance by Seller to, or investment by Seller 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 Part 3.17 (collectively, the "SELLER CONTRACTS") are valid obligations of Seller and are binding and in full force and effect in accordance with their terms and conditions. There is no existing default thereunder or breach thereof by Seller or, to Seller's Knowledge, 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 Seller, or by any other party to a Seller Contract. There are no pending or, to the Knowledge of any Selling Party, threatened disputes with respect to the Seller Contracts.
3.18 INSURANCE
Part 3.18 sets forth a list of all policies of fire, extended coverage, liability and all other kinds of insurance held by Seller in connection with the conduct of its business and operations (other than policies relating to Employee Plans). Such policies are in full force and effect and Seller is not in default with respect to its obligations under any of such insurance policies. Seller maintains the type and amount of insurance which Seller believes is adequate in coverage and amount to insure fully against the risks to which Seller and its employees, business, properties and other assets would reasonably be expected to be exposed in the operation of their respective business.
3.19 ENVIRONMENTAL MATTERS
Except as disclosed in Part 3.19:
(a) the business of Seller is and has been operated in compliance with Environmental Law. Seller has not received any notice of non-compliance with or of any Liability under any Environmental Law;
(b) Seller has not Released or caused or permitted to be Released, any Hazardous Substances on, to or from the Facilities, or in connection with the operation of Seller's businesses, except in compliance with Environmental Law;
(c) Seller has not permitted the Facilities to be used for any Hazardous Activity;
(d) Seller 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 Material Adverse Effect on Seller;
(e) there are no claims, actions, proceedings or demands against or involving Seller either in progress, pending or, to the Knowledge of any Selling Party, threatened which allege the existence against Seller or the Facilities of any Environmental, Health and Safety Liabilities; and
(f) copies of all environmental reports or audits performed or prepared since its inception within the possession of Seller with respect to the Facilities have been provided to Buyer.
3.20 EMPLOYEES
(a) Part 3.20 sets forth (i) the names, the rate of compensation (and the portions thereof attributable to salary and bonuses, respectively) and location of all current employees of Seller and (2) the names of all former employees of Seller who are currently covered under any Employee Plan pursuant to
COBRA. To Seller's Knowledge, no key employee or group of employees has any plans to terminate employment with Seller. Seller 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. 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 Seller. Seller has complied in all respects with all Legal Requirements relating to employment practices, terms and conditions of employment, equal employment opportunity, nondiscrimination, immigration, wages, hours, benefits, collective bargaining and other requirements, the payment of social security and similar Taxes and occupational safety and health. Seller is not liable for the payment of any Taxes, fines, penalties, or other amounts, however designated, for failure to comply with any of the foregoing Legal Requirements.
(b) Since the enactment of the Worker Adjustment and Retraining Notification Act of 1988 ("WARN ACT"), Seller has not effectuated (i) a "plant closing" (as defined in the WARN Act) affecting any site of employment or one or more facilities or operating units within any site of employment or facility of Seller; or (ii) a mass layoff (as defined in the WARN Act) affecting any site of employment or facility of Seller; nor has Seller been affected by any transaction or engaged in layoffs or employment terminations sufficient in number to trigger application of any similar state or local law. Seller will not take any action prior to the Closing which could result in any obligation or liability being imposed on Seller under the WARN Act, and Seller shall be responsible for giving any and all notices, to the extent required, and complying with the provisions of the WARN Act in connection with the transactions governed by this Agreement for any "employment losses" that occur prior to Closing.
3.21 INTELLECTUAL PROPERTY RIGHTS
(a) Part 3.21(a) sets forth all of the Scheduled Intellectual Property Rights owned or used by Seller in the operation of the Business including, all application and registration dates and numbers, the name and all parties to any agreements, and other information reasonably required to identify such Scheduled Intellectual Property Rights. "SCHEDULED INTELLECTUAL PROPERTY RIGHTS" means domestic and foreign patents (including design registrations and other government grants of rights to inventions), patent applications, patent licenses from Third Parties, know-how licenses from Third Parties, trade names, material unregistered trademarks, trademark registrations and applications, material unregistered service marks, service mark registrations and applications, trademark licenses from Third Parties, material unregistered copyrights (including, software), copyright registrations and applications (including, mask work registrations), copyright licenses from Third Parties (including, software licenses), and domain names. "INTELLECTUAL PROPERTY RIGHTS" means Scheduled Intellectual Property Rights, concepts, ideas, discoveries, designs, research, processes, procedures, techniques, methods, mask works, inventions, unregistered trademarks, unregistered service marks, unregistered copyrights, trade secrets, know-how, confidential information and other proprietary rights.
(b) Except as set forth in Part 3.21(b), Seller owns or has the right to use pursuant to an appropriate agreement, free and clear of all Encumbrances and payment obligations, all Intellectual Property Rights necessary for the operation of Seller's business as presently conducted, as contemplated in the performance of existing contracts, and as described in Seller's current business plan.
(c) Part 3.21(c) identifies each item of Intellectual Property Rights that any Selling Party (other than Seller) or Third Party owns and that Seller uses. Except as set forth in Part 3.21(c), in respect of each such item of used Intellectual Property Rights:
(i) the agreement covering the item is legal, valid, binding, enforceable and in full force and effect;
(ii) the agreement is freely transferable to Buyer without any consent or payments of any kind;
(iii) following the consummation of the Contemplated Transactions, the agreement will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms to those prior to the Closing Date; and
(iv) no party to the agreement is in breach or default in any material respect, no Contemplated Transaction will result in a breach or default in any material respect, and no event has occurred, nor will the Contemplated Transactions cause an occurrence, which with notice or lapse of time would constitute a material breach or default or permit termination, modification or acceleration thereunder.
(d) No Intellectual Property Rights used by Seller are owned by any Selling Party (other than Seller), or any Related Person of a Selling Party.
(e) Except as set forth in Part 3.21(e), Seller has not granted any licenses of or other rights to use any Intellectual Property Rights to any Third Party.
(f) All software used, sold or licensed by Seller is free from any material defect, performs materially in conformance with its documentation, and does not contain any code or mechanism that could be used to interfere with the operation of the software. All software owned by Seller contains both object code and source code and has sufficient documentation to enable an individual reasonably skilled in its associated programming language to modify and maintain it.
(g) Seller owns the domain names set forth in Part 3.21(a).
(h) There are no past due, unpaid required maintenance fees, annuities or other governmental fees on the Intellectual Property Rights owned by Seller, and all patents and issued trademark, service mark and copyright registrations included in such Intellectual Property Rights are valid and subsisting.
(i) Each officer, employee, consultant and independent contractor of Seller has executed an agreement which includes an obligation to assign to Seller all rights to Intellectual Property Rights originated or invented by such officer, employee, consultant or independent contractor during the course of such person's relationship with Seller.
(j) Seller has taken all commercially reasonable actions to protect and preserve the confidentiality of all trade secrets and confidential information (including all source code for software owned by Seller) included in the Intellectual Property Rights used by Seller in the operation of its business ("CONFIDENTIAL INFORMATION"). No Confidential Information material to the business of Seller as currently operated has been disclosed or authorized to be disclosed to any Third Party, other than pursuant to a non-disclosure agreement that protects Seller's proprietary interests in and to such Confidential Information or under circumstances in which the Third Party is under a legal duty not to disclose such Confidential Information.
(k) Infringement.
(i) Except as set forth in Part 3.21(k), no Selling Party has interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property Rights of any Third Party, including through the manufacture, marketing, licensing or sale of its products and services, and no
Selling Party has received any charge, complaint, claim or notice alleging any such interference, infringement, misappropriation or violation.
(ii) Except as set forth in Part 3.21(k), no Person other than a Selling Party has, to the Knowledge of any Selling Party, interfered with, infringed upon, misappropriated or otherwise come into conflict with any Intellectual Property Rights of Seller, General Partner, Limited Partner or Seller Parent.
(iii) Except as set forth in Part 3.21(k), Seller has not entered into any agreement to indemnify any other Person against any charge of infringement of any Intellectual Property Right.
3.22 OWNERSHIP; RELATIONSHIPS WITH RELATED PERSONS
(a) The General Partner is the sole general partner of Seller, and the Limited Partner is the sole limited partner of Seller. The sole asset of the General Partner is its general partnership interest in Seller, and the only business that General Partner is or has engaged in is the holding of its general partnership interest in Seller. The sole asset of the Limited Partner is its limited partnership interest in Seller, and the only business that Limited Partner is or has engaged in is the holding of its limited partnership interest in Seller. Seller Parent is the sole member of each of General Partner and Limited Partner. The sole assets of Seller Parent are its membership interests in General Partner and Limited Partner and its 100% equity ownership of Gnubi Communications, Ltd., a Swiss Aktiengesellschaft ("GNUBI AG") and of gnubi communications Canada, Inc., a Nova Scotia corporation, and the only business that Seller Parent is or has engaged in is the holding of its membership interests in General Partner and Limited Partner. Except as set forth on Part 3.22(a), none of General Partner, Limited Partner or Seller Parent has any Liabilities. The authorized equity securities of Seller Parent consist of fifteen million (15,000,000) shares of capital stock, of which 5,000,000 of such authorized shares are Preferred Stock, 5,000,000 of such authorized shares are Class A Common Stock and 5,000,000 of such authorized shares are Class B Common Stock, in each case with a par value per share of $.01 per share. Of such authorized shares, two million fifty thousand and one (2,050,001) shares are issued and outstanding and owned by the Persons and in the amounts set forth on Part 3.22(a). Except as set forth on Part 3.22(a), the Persons listed on Part 3.22(a) are and will be on the Closing Date the record and beneficial owners and holders of all of the shares of Seller Parent free and clear of all Encumbrances. Except as set forth on Part 3.22(a), there are no Contracts relating to the issuance, sale or transfer of any equity interests or other interests of any of the Selling Parties. None of the outstanding equity interests of any of the Selling Parties was issued in violation of the Securities Act or any other Legal Requirement.
(b) Except as set forth on Part 3.22(b), none of the Selling Parties except for Seller nor any Related Person of any of them has, or since January 1, 2001, has had, any interest in any property (whether real, personal or mixed and whether tangible or intangible) used in or pertaining to Seller's business. None of the Selling Parties nor any Related Person of any of them owns, or since January 1, 2001, has owned, of record or as a beneficial owner, an equity interest or any other financial or profit interest in any Person that has (i) had business dealings or a material financial interest in any transaction with Seller other than business dealings or transactions disclosed in Part 3.22(b), each of which has been conducted in the Ordinary Course of Business with Seller at substantially prevailing market prices and on substantially prevailing market terms; (ii) engaged in competition with Seller with respect to any line of the products or services of Seller (a "COMPETING BUSINESS") in any market presently served by Seller, except for ownership of less than one percent (1%) of the outstanding capital stock of any Competing Business that is publicly traded on any recognized exchange or in the over-the-counter market; or (iii) received any loan or other advance from Seller. Except as set forth in Part 3.22(b), none of the Selling Parties nor any Related Person of any of them is a party to any Contract with, or has any claim or right against, Seller.
3.23 BROKERS, FINDERS OR FINANCIAL ADVISORS
Except as set forth on Part 3.23, no broker, investment banker, financial advisor or other person, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by the Agreement based upon arrangements made by or on behalf of any of the Selling Parties.
3.24 SECURITIES LAW MATTERS
(a) Seller alone, or its representative, has such knowledge and experience in financial and business matters and such experience in evaluating and investing in companies such as Buyer Parent as to be capable of evaluating the merits and risks of an investment in the Buyer Shares. Seller has the financial ability to bear the economic risk of its investment in the Buyer Shares being acquired hereunder, has adequate means for providing for its current needs and contingencies and has no need for liquidity with respect to its investment in Buyer Parent. Seller is an "accredited investor" as such term is defined in Rule 501(a) of the Securities Act.
(b) Seller 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. Seller understands that the Buyer Shares have not been distributed pursuant to a prospectus in Canada pursuant to applicable legislation and have not been registered under the Securities Act, or under the securities laws of various states of the United States or under the securities laws of Canada, by reason of a specified exemption from the registration provisions thereunder which depends upon, among other things, the bona fide nature of Seller's investment intent as expressed herein. Seller acknowledges that its representations and warranties contained herein are being relied upon by Buyer Parent 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) Seller acknowledges 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 and that Buyer and Buyer Parent have no obligation whatsoever to register the Buyer Shares. Seller 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 Parent and compliance with applicable requirements regarding the holding period and the amount of securities to be sold and the manner of sale. Seller understands that only Buyer Parent can take action to register the Buyer Shares.
(d) Seller acknowledges that the Buyer Shares must also be held in accordance with applicable securities laws in Canada and Seller undertakes not to sell, transfer or assign the Buyer Shares in contravention of the applicable laws in force in Canada.
(e) Seller or its representative has had an opportunity to discuss the Buyer Parent's business, management, financial affairs and acquisition plans with its management, to review the Buyer Parent's facilities, and to obtain such additional information concerning Seller's investment in the Buyer Shares in order for Seller to evaluate its merits and risks, and Seller has determined that the Buyer Shares are a suitable investment for Seller and that at this time Seller could bear a complete loss of its investment.
(f) Seller is aware that no U.S. or Canada federal, state, provincial or other agency has passed upon or made any finding or determination concerning the fairness of the Contemplated Transactions or the adequacy of the disclosure of the exhibits and schedules hereto or thereto.
(g) Seller understands that all certificates for the Buyer Shares issued to Seller shall bear a legend in substantially the following form and including such legend as may be required under Canadian securities laws:
"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."
(h) Seller 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 the Agreement is exempt pursuant to Section 4(2) of the Securities Act and that the reliance of the Buyer Parent on such exemption is predicated in part on Seller's representations set forth herein. Seller further understands that the Buyer Shares will not be distributed pursuant to a prospectus in Canada at the time of their issuance for the reason that the sale provided for in the Agreement is exempt under applicable Canadian securities laws.
3.25 SOLVENCY
Immediately after giving effect to the consummation of the Contemplated
Transactions: (i) Seller will be able to pay its Liabilities as they become due;
(ii) Seller will have assets (calculated at fair market value) that exceed its
Liabilities; and (iii) taking into account all pending and threatened
litigation, final judgments against Seller in actions for money damages are not
reasonably anticipated to be rendered at a time when, or in amounts such that,
Seller will be unable to satisfy any such judgments promptly in accordance with
their terms (taking into account the maximum probable amount of such judgments
in any such actions and the earliest reasonable time at which such judgments
might be rendered) as well as all other obligations of Seller. Seller will
receive reasonably equivalent value for the Assets in connection with the
Contemplated Transactions. Set forth on Part 3.25 is a list of Seller's
creditors as of the date of this Agreement and the amounts owed to such
creditors.
3.26 CAPITAL EXPENDITURES
Part 3.26 sets forth all of the completed and planned capital expenditures of Seller.
3.27 FOREIGN CORRUPT PRACTICES ACT
(a) None of the Selling Parties nor any of their respective Representatives have, to obtain or retain business, directly or indirectly offered, paid or promised to pay, or authorized the payment of, any money or other thing of value to:
(i) any person who is an official, officer, agent, employee or representative of any Governmental Body or of any existing or prospective customer (whether government owned or nongovernment owned);
(ii) any political party or official thereof;
(iii) any candidate for political or political party office; or
(iv) any other individual or entity;
while knowing or having reason to believe that all or any portion of such money or thing of value would be offered, given, or promised, directly or indirectly, to any such official, officer, agent, employee, representative, political party, political party official, candidate, individual, or any entity affiliated with such customer, political party or official or political office, in contravention of the Foreign Corrupt Practices Act or any Legal Requirement.
(b) Except as set forth in Part 3.27(b), Seller has made all payments to Third Parties by check mailed to such Third Parties' principal place of business or by wire transfer to a bank located in the same jurisdiction as such party's principal place of business.
(c) Each transaction is properly and accurately recorded on the books and Records of Seller, and each document upon which entries in Seller's books and Records are based is complete and accurate in all respects. Seller maintains a system of internal accounting controls adequate to insure that Seller maintains no off-the-books accounts and that Seller's assets are used only in accordance with Seller's management directives.
(d) Seller has at all times been in compliance with all Legal Requirements relating to export control and trade embargoes. No product sold or service provided by Seller during the last five (5) years has been, directly or indirectly, sold to or performed on behalf of any person or entity of Cuba, Iraq, Iran, Libya North Korea, Sudan or Syria.
(e) Except as set forth in Part 3.27(e), Seller has not violated the antiboycott prohibitions contained in 50 U.S.C. sect. 2401 et seq. or taken any action that can be penalized under Section 999 of the Code. Except as set forth in Part 3.27(e), during the last five (5) years, Seller has not been a party to, is not a beneficiary under and has not performed any service or sold any product under any Seller Contract under which a product has been sold to customers in Bahrain, Iraq, Jordan, Kuwait, Lebanon, Libya, Oman, Qatar, Saudi Arabia, Sudan, Syria, United Arab Emirates or the Republic of Yemen.
3.28 BUDGET
The break-even budget with sales of $6,000,000 delivered by or on behalf of the Selling Parties to Buyer was prepared in good faith based on and using assumptions that the Selling Parties believe to be reasonable.
3.29 ACCOUNTS RECEIVABLE
Seller has at all times collected its accounts receivable in full without any setoff within ninety (90) days after the day on which it first became due and payable other than the accounts listed on Part 3.29.
3.30 DISCLOSURE
Each of the Selling Parties has made or caused to be made such inquiry as a prudent individual could be expected to make with respect to each of the representations, warranties and statements contained in the Agreement and in each of the parts, certificates, documents and other writings referred to herein or furnished to Buyer and Buyer Parent 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 the Transaction Agreements, 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, there are not any facts which
should reasonably be made known to Buyer and Buyer Parent relating to the Selling Parties not herein disclosed, which might be reasonably expected to materially diminish Buyer's and Buyer Parent's appreciation of the worth or profitability of Seller, or which, if known by Buyer and Buyer Parent, might be reasonably expected to deter Buyer and Buyer Parent from completing the Contemplated Transactions.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER AND BUYER PARENT
Buyer and Buyer Parent hereby represent and warrant to the Selling Parties, as of the date hereof as follows:
4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATIONS
Each of Buyer and Buyer Parent is a corporation duly incorporated, 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.
4.2 AUTHORITY; NO CONFLICT
(a) Each of Buyer and Buyer Parent has the requisite corporate power and authority to enter into and to consummate the Contemplated Transactions and otherwise to carry out their obligations hereunder. The execution and delivery of the Transaction Agreements by Buyer and Buyer Parent and the consummation by each of them of the Contemplated Transactions have been duly authorized by all necessary action on the part of Buyer and Buyer Parent and no further action is required by Buyer or Buyer Parent, subject to regulatory approval under applicable securities laws and regulations. The Agreement has been, and the other Transaction Agreements will be when executed by Buyer and Buyer Parent (to the extent each is a party), duly executed by Buyer and Buyer Parent and, assuming each of the Transaction Agreements constitutes a valid and binding obligation of the Selling Parties, the Agreement constitutes, and each of the other Transaction Agreements when executed by Buyer and Buyer Parent (to the extent each is party) will constitute, a valid and binding agreement of Buyer and Buyer Parent enforceable against them in accordance with their respective 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.
(b) Subject to regulatory approval under applicable securities
laws and regulations, including those of any stock exchanges, the execution and
delivery of the Transaction Agreements do not, and the consummation of the
Contemplated Transactions and compliance with the provisions of the Transaction
Agreements will not, conflict with, or result in any violation of or default
(with or without notice or lapse of time, or both) under, or give rise to a
right of termination, cancellation or acceleration of any obligation or to loss
of a material benefit under, or result in the creation of any Encumbrance upon
any of the properties or assets of Buyer or Buyer Parent pursuant to, any
provision of: (a) the Certificate of Incorporation or bylaws of Buyer or Buyer
Parent; (b) any loan or credit agreement, note, bond, mortgage, indenture, lease
or other agreement, instrument, permit, concession, franchise or license
applicable to Buyer or Buyer Parent or their respective properties or assets; or
(c) subject to the governmental filings and other matters referred to in SECTION
4.3(B), any statute, law, rule, regulation, judgment, order or decree applicable
to Buyer or Buyer Parent or their respective properties or assets, other than
with respect to any of the matters described in this SECTION 4.3(B), any such
conflicts, violations, defaults, rights or Encumbrances that individually or in
the aggregate would not reasonably be expected to have a Material Adverse Effect
on Buyer or Buyer Parent, as the case may be, or prevent or materially delay the
consummation of any of the Contemplated Transactions.
(c) No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Body is required by or with respect to Buyer or Buyer Parent in connection with the execution and delivery of the Agreement by Buyer or Buyer Parent or the consummation by Buyer or Buyer Parent of the Contemplated Transactions, except for: (i) approval for the listing of the Buyer Shares on The Toronto Stock Exchange and for a quotation on the Nasdaq National Market; (ii) 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 Buyer Parent; and (iii) 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 Material Adverse Effect or prevent or materially delay the consummation of any of the Contemplated Transactions.
4.3 AUTHORIZATION FOR BUYER SHARES
Buyer Parent 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 the Agreement, will be validly issued, fully paid and nonassessable and free and clear of all Encumbrances (other than restrictions on transfer imposed by applicable securities laws and the Lock-Up Agreement) and will not be issued in violation of any preemptive rights, rights of first refusal or similar rights.
4.4 CANADIAN DOCUMENTS
The Selling Parties have been made aware by Buyer Parent of the location of each statement and report, as may be required to have been filed as of the date hereof under Canadian securities laws (the "CANADIAN DOCUMENTS"). As of their respective filing dates, the Canadian Documents complied in all material respects with the requirements of the securities laws in force in Canada, and none of the Canadian Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading, except to the extent corrected by a subsequently filed Canadian Document.
4.5 BROKERS, FINDERS OR FINANCIAL ADVISORS
No broker, investment banker, financial advisor or other person, is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by the Agreement based upon arrangements made by or on behalf of any of Buyer.
ARTICLE V
PRE-CLOSING COVENANTS OF THE PARTIES
5.1 CONDUCT OF BUSINESS BY SELLER
Except to the extent consented to in writing by Buyer or as expressly permitted or contemplated by the Agreement, during the period from the date of the Agreement to the Closing, Seller shall carry on its business in the Ordinary Course of Business and, to the extent consistent therewith, use best efforts to preserve intact its current business organizations, keep available the services of its current 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 during the period from the date of the Agreement to the Closing, none of the Selling Parties shall:
(a) amend its Governing Documents;
(b) 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 Seller, except purchases in the Ordinary Course of Business;
(c) sell, lease, license, mortgage or otherwise encumber or subject to any Encumbrances (other than Permitted Encumbrances pursuant to its existing indebtedness) or otherwise dispose of any of its properties or assets, except in the Ordinary Course of Business;
(d) incur any indebtedness for borrowed money (except to Buyer) or guarantee any such indebtedness of another person, 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 $100,000, the endorsement of checks in the Ordinary Course of Business and the extension of credit to customers in the Ordinary Course of Business; or (ii) make any loans, advances or capital contributions to, or investments in, any other Person;
(e) except for the items currently contracted for by Seller, make or agree to make any new capital expenditure or expenditures which, individually, is in excess of $10,000 or, in the aggregate, are in excess of $50,000;
(f) make any material Tax election or settle or compromise any material income Tax liability;
(g) pay, discharge, settle or satisfy any claims, liabilities or obligations (absolute, accrued or contingent, asserted or unasserted) relating to the Assets, the business of the Seller or the Assumed Liabilities, without the prior written consent of Buyer, other than the payment, discharge or satisfaction, in the Ordinary Course of Business 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;
(h) modify, amend or terminate any material Seller Contract, or waive, release or assign any material rights or claims;
(i) except as required to comply with applicable law, (i) adopt, enter into or amend any Employee Plan; (ii) increase in any manner the compensation or fringe benefits of, or pay any bonus to, any employee of Seller; or (iii) terminate, amend, modify, or grant any awards under, any Employee Plan;
(j) other than as required by law or GAAP, make any change to its accounting policies or procedures;
(k) maintain the Assets in a state of repair and condition that complies with Legal Requirements and is consistent with the requirements and Seller's Ordinary Course of Business;
(l) comply with all Legal Requirements and contractual obligations applicable to the operation of Seller's business;
(m) except as mutually agreed upon by Seller and Buyer, materially change Seller's existing employment conditions, hire new employees or terminate current Seller employees; or
(n) authorize any of, or commit or agree to take any of, the foregoing actions.
5.2 PUBLIC ANNOUNCEMENTS
From the date of the Agreement until the earlier of the Closing or the termination of the Agreement, no Selling Party will issue or cause the publication of any press release or other public announcement with respect to the Agreement or the Contemplated Transactions without the prior consent 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 Governmental Body or the exchanges or markets on which Buyer Parent 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 and Selling Parties may disclose the Agreement and the Contemplated Transactions to Third Parties in connection with securing consents of such Third Parties and in connection with any Legal Requirements. To the extent feasible, prior to the Closing, all press releases or other announcements or notices regarding the Contemplated Transactions shall be made solely by Buyer.
5.3 NON-SOLICITATION; NON-NEGOTIATION
Each of the Selling Parties agrees that, it will not, and it will use its best efforts to cause its Representatives, agents or employees acting on its behalf, not to, after the execution of the Agreement until the earlier of (a) the termination of the Agreement; or (b) the Closing, directly or indirectly, solicit, encourage, initiate, negotiate or discuss with, or provide any nonpublic information to, any Third Party or permit the consummation of any acquisition proposal relating to or affecting Seller, or any direct or indirect interests in Seller, whether by exchange offer, purchase of assets other than in the Ordinary Course of Business or stock, business combination, merger or other transaction, and that Selling Parties will promptly advise Buyer of the terms of any communications they may receive relating to any such acquisition proposal.
5.4 ACCESS TO INFORMATION, DUE DILIGENCE INVESTIGATION; CONFIDENTIALITY
The Selling Parties shall afford to Buyer and the Representatives of Buyer access during the period prior to the Closing, to such of the properties, books, Contracts, Records and employees as Buyer may reasonably request for the purpose of conducting a full and complete due diligence investigation of all aspects of Seller, including, without limitation, financial, legal and accounting and, during such period, Selling Parties shall furnish as promptly as possible to Buyer and its Representatives all information concerning Seller and its business, properties and personnel as Buyer may request. Buyer shall make all commercially reasonable efforts to minimize disruption to the business of Seller which may result from the requests for data and information hereunder. All requests for access and information shall be coordinated through senior executives of the parties to be designated. Any investigation by Buyer shall not affect the representations and warranties of any of the Selling Parties.
5.5 BEST EFFORTS
Subject to the terms and conditions herein, each of the parties hereto agrees to use best 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 Contemplated Transactions, 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 the Agreement or the Contemplated Transactions, including, without limitation, the execution of additional instruments, Buyer and the Selling Parties shall take all such necessary action.
5.6 COVENANTS OF PARTIES
From the date of the Agreement until the earlier of the Closing or the termination of the Agreement, 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 the 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 Material Adverse Effect on such Party; (c) any of the conditions set forth in the Agreement not being satisfied or in a violation of any provision of the Agreement; or (d) adversely affecting the ability of any of them to obtain any of the Consents or approvals required from any Governmental Body as a condition to Closing.
5.7 NOTIFICATION
Between the date of the Agreement and the Closing, Selling Parties
shall promptly notify Buyer in writing if any of them becomes aware of (a) any
fact or condition that causes or constitutes a Breach of any of Selling Parties'
representations and warranties made as of the date of the Agreement; or (b) the
occurrence after the date of the Agreement of any fact or condition that would
be reasonably likely to (except as expressly contemplated by this Agreement)
cause or constitute a Breach of any such representation or warranty had that
representation or warranty been made as of the time of the occurrence of such
fact or condition. Should any such fact or condition require any change to the
Disclosure Letter, Seller shall promptly deliver to Buyer a supplement to the
Disclosure Letter specifying such change. If Selling Parties timely furnish
Buyer with a supplement to the Disclosure Letter under clause (b) of this
SECTION 5.7, then Buyer has the option, by delivering written notice to Selling
Parties of either (i) waiving the Breaches identified in such supplement to the
Disclosure Letter (the "WAIVED BREACHES"), in which event the Disclosure Letter
shall be deemed amended to reflect such exceptions to the representations and
warranties and the subject matter thereof, or (ii) terminating this Agreement as
provided in SECTION 8.1(A), whereupon the Selling Parties, Buyer and Buyer
Parent shall have no further obligations to each other with respect to any
Liability of Selling Parties for any such Waived Breaches, notwithstanding
SECTION 8.2. Except as set forth in the immediately preceding sentence, such
delivery of a supplement to the Disclosure Letter shall not affect any rights of
Buyer under Article 8 and Article 10. During the same period, Selling Parties
also shall promptly notify Buyer of the occurrence of any Breach of any covenant
to Buyer in this Article 5 or of the occurrence of any event that may make the
satisfaction of the conditions in Article 6 impossible or unlikely.
5.8 REQUIRED APPROVALS
As promptly as practicable after the date of the Agreement, Buyer shall make, or cause to be made, all filings required by Legal Requirements to be made by it to consummate the Contemplated Transactions. Buyer also shall cooperate, and cause its Related Persons to cooperate, with Seller (a) with respect to all filings Seller shall be required by Legal Requirements to make; and (b) in obtaining all Consents identified in Part 3.14(c).
5.9 DEMONSTRATION UNITS
Selling Parties shall enter into an agreement with Buyer, in form and substance reasonably satisfactory to Buyer, to sell to Buyer or its designee contemporaneously with the Closing at a total price of $10,000 all demonstration units identified in Part 5.9 held by Related Persons of Seller.
5.10 CHANGE OF NAME
On or before the Closing Date, Seller, General Partner, Limited Partner and Seller Parent shall (a) amend their Governing Documents and take all other actions necessary to change such parties' names to
ones sufficiently dissimilar to such parties' present names, in Buyer's judgment, to avoid confusion; and (b) take all actions requested by Buyer to enable Buyer to change its name to Seller's present name.
5.11 INTERIM FINANCIAL STATEMENTS
Until the Closing Date, Seller shall deliver to Buyer within fifteen
(15) days after the end of each month complete and correct copies of the
Seller's unaudited balance sheet and the related statements of loss, deficit and
cash flows for such month prepared in a manner and containing information
consistent with Seller's current practices and certified by Seller's chief
financial officer as to compliance with SECTION 3.3.
5.12 PAYMENT OF LIABILITIES
Seller shall pay or otherwise satisfy in the Ordinary Course of Business all of its Liabilities and obligations.
5.13 TERMINATION OF EMPLOYEE PLANS
Prior to the date of Closing, Seller will take all actions necessary to terminate Seller's Employee Plans effective as of the date immediately prior to the date of Closing. On or prior to the Closing Date, Seller will deliver to Buyer a copy of all notifications given to employees and their spouses and dependants within the four-year period preceding the Closing Date of their rights under Section 601 et seq. of ERISA, Section 4980B of the Code, Section 9801 et seq. of the Code, and under all other applicable federal and state laws regulating the notice requirements of Group Health Plans (as defined in Section 607(1) of ERISA).
5.14 LOAN TO SELLER
If the Closing occurs, at the Closing, if requested by Seller, Buyer shall lend Seller the principal sum of $587,000 pursuant to the promissory note in the form of EXHIBIT 5.14(A) (the "NOTE") executed by Seller; provided that the Selling Parties other than Seller and the Founders execute a Guaranty of performance and payment in the form of EXHIBIT 5.14(B) (the "GUARANTY").
5.15 PATENT APPLICATION DUE DILIGENCE
Subject to that Confidentiality Agreement dated September 4, 2002 by and among the Seller and Sami Yazdi, Nando Digiambattista and Patrick Ostiguy of Buyer Parent (the "PATENT RECIPIENTS"), the Selling Parties have provided to the Patent Recipients that certain OC-192 Patent Application covering method and system for framing bits (the "PATENT APPLICATION") and other evidence in the form and substance reasonably acceptable to the Patent Recipients, in order to perform a due diligence review to assess and evaluate the Patent Application. Buyer shall cause the Patent Recipients to notify Seller and Buyer in writing on or before September 15, 2002, after they have received the complete Patent Application under this SECTION 5.15 whether or not the Patent Recipients are satisfied with their due diligence review of the Patent Application.
ARTICLE VI
CONDITIONS PRECEDENT TO BUYER'S OBLIGATION TO CLOSE
Buyer's obligation to purchase the Assets and to take the other actions required to be taken by Buyer at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Buyer, in whole or in part):
6.1 ACCURACY OF REPRESENTATIONS
(a) All of Selling Parties' representations and warranties in the Agreement (considered collectively), and each of these representations and warranties (considered individually), shall have been accurate in all material respects as of the date of the Agreement, and shall be accurate in all material respects as of the time of the Closing as if then made, without giving effect to any supplement to the Disclosure Letter (unless the Breaches dislcosed in any such supplement have been waived by Buyer in accordance with Section 5.7).
(b) Each of the representations and warranties in SECTIONS 3.1(B) and 3.3 and each of the representations and warranties in the Agreement that contains an express materiality qualification, shall have been accurate in all respects as of the date of the Agreement, and shall be accurate in all respects as of the time of the Closing as if then made, without giving effect to any supplement to the Disclosure Letter (unless the Breaches dislcosed in any such supplement have been waived by Buyer in accordance with Section 5.7).
6.2 SELLING PARTIES' PERFORMANCE
All of the covenants and obligations that Selling Parties are required to perform or to comply with pursuant to the Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), shall have been duly performed and complied with.
6.3 CONSENTS
Each of the Consents identified in Part 3.14(c) shall have been obtained and shall be in full force and effect.
6.4 ADDITIONAL DOCUMENTS
Selling Parties shall have caused the documents and instruments required by SECTION 2.8(A) and the following documents to be delivered (or tendered subject only to the Closing) to Buyer:
(a) An opinion of Scheef and Stone, L.L.P., dated the Closing Date, in the form of EXHIBIT 6.4(A);
(b) The Certificate of Limited Partnership, Agreement of Limited Partnership and all amendments thereto of Seller, duly certified as of a recent date by the Secretary of State of Delaware;
(c) Certificates dated as of a date not earlier than the fifth Business Day prior to the Closing as to the good standing of Seller and payment of all applicable state Taxes by Seller, executed by the appropriate officials of the State of Delaware and each jurisdiction in which Seller is licensed or qualified to do business as specified in Part 3.1(a); and
(d) Such other documents as Buyer may reasonably request for the purpose of:
(i) evidencing the accuracy of any of Selling Parties' representations and warranties;
(ii) evidencing the performance by Selling Parties of, or the compliance by Selling Parties with, any covenant or obligation required to be performed or complied with by Selling Parties;
(iii) evidencing the satisfaction of any condition referred to in this Article 6; or
(iv) otherwise facilitating the consummation or performance of any of the Contemplated Transactions.
(e) Releases of all Seller employees from non-disclosure and other similar agreements they may have entered into with any of the Seller Parties or their predecessors.
6.5 NO PROCEEDINGS
Since the date of the Agreement, there shall not have been commenced or
threatened against Buyer, or against any Related Person of Buyer, any Proceeding
(a) involving any challenge to, or seeking Damages or other relief in connection
with, any of the Contemplated Transactions; or (b) that may have the effect of
preventing, delaying, making illegal, imposing limitations or conditions on or
otherwise interfering with any of the Contemplated Transactions.
6.6 NO CONFLICT
Neither the consummation nor the performance of any of the Contemplated Transactions will, directly or indirectly (with or without notice or lapse of time), contravene or conflict with or result in a violation of or cause Buyer or any Related Person of Buyer to suffer any adverse consequence under (a) any applicable Legal Requirement or Order; or (b) any Legal Requirement or Order that has been published, introduced or otherwise proposed by or before any Governmental Body.
6.7 EMPLOYMENT AGREEMENTS
Each of the Founders shall have duly executed and delivered to Buyer the Employment Agreements. Ninety percent (90%) of Seller employees as of the date of this Agreement who are offered employment by Buyer shall have accepted Buyer's offer for employment, and each such accepting employee shall have delivered to Buyer a non-disclosure agreement in the form attached hereto as EXHIBIT 6.7.
6.8 LOCK-UP AGREEMENT
Selling Parties shall have entered into the Lock-Up Agreement.
6.9 GOVERNMENTAL AUTHORIZATIONS
Buyer shall have received such Governmental Authorizations as are necessary or desirable to allow Buyer to consummate the Contemplated Transactions and to operate the Assets from and after the Closing.
6.10 SECURITIES REGULATORY APPROVALS
The regulatory approvals required under United States and Canadian securities laws and under the bylaws, regulations or policies of the United States and Canadian securities regulatory authorities and stock exchanges.
6.11 RELEASE OF SUBLEASE AGREEMENT
Seller shall have delivered to Buyer a binding agreement in form and substance satisfactory to Buyer and duly executed by CISCO Systems, Inc. that terminates that certain Sublease Agreement between gnubi communications, Inc. and CISCO Systems, Inc. dated as of July 27, 2001 and that releases the Selling Parties from all Liabilities thereunder.
6.12 ARRANGEMENT WITH THE FROST NATIONAL BANK
Buyer, Selling Parties and The Frost National Bank shall have entered into a mutually agreeable agreement providing for the following in connection with the Contemplated Transactions:
(a) Buyer shall have a first priority security interest in the Buyer Shares securing payment of the indemnification obligations of the Selling Parties under this Agreement, and Buyer shall retain control of the Buyer Shares;
(b) The Frost National Bank shall have a second priority security interest in the Buyer Shares, subordinate to the security interest of Buyer, and shall not be able to foreclose upon any Buyer Shares unless and until the Buyer Shares are released to Seller under the Lock-Up Agreement;
(c) Buyer shall have a second priority security interest in the Selling Parties' right to all Tax refunds, subordinate to the interest of The Frost National Bank (to the extent that the amount of Seller's indebtedness to The Frost National Bank does not increase other than as a result of the accrual of interest, costs, reasonable attorneys' fees and all other expenses pursuant to the terms of the loan documents between the Selling Parties and The Frost National Bank), and securing payment of the Note;
(d) Buyer shall not exercise its right to set off amounts due under the Note against payment of the Earn-out Amount unless and until all indebtedness owed to The Frost National Bank is paid in full (to the extent that the amount of Seller's indebtedness to The Frost National Bank does not increase other than as a result of the accrual of interest, costs, reasonable attorneys' fees and all other expenses pursuant to the terms of the loan documents between the Selling Parties and The Frost National Bank);
(e) Buyer may set off at any time claims under Article 10 of this Agreement against the Buyer Shares held under the Lock-Up Agreement;
(f) Seller shall not make any payments on the Note unless and until the indebtedness owed to The Frost National Bank is paid in full (to the extent that the amount of Seller's indebtedness to The Frost National Bank does not increase other than as a result of the accrual of interest, costs, reasonable attorneys' fees and all other expenses pursuant to the terms of the loan documents between the Selling Parties and The Frost National Bank);
(g) the Guaranty shall be subordinate (to the extent that the amount of Seller's indebtedness to The Frost National Bank does not increase other than as a result of the accrual of interest, costs, reasonable attorneys' fees and all other expenses pursuant to the terms of the loan documents between the Selling Parties and The Frost National Bank) to the guaranties of the indebtedness to The Frost National Bank signed by Seller Parent, JRS, General Partner and Limited Partner; and
(h) to the extent that the provisions of this SECTION 6.12
conflict with any other provision of this Agreement, the provisions of this
SECTION 6.12 will control.
ARTICLE VII
CONDITIONS PRECEDENT TO SELLER'S OBLIGATION TO CLOSE
Seller's obligation to sell the Assets and to take the other actions required to be taken by Seller at the Closing is subject to the satisfaction, at or prior to the Closing, of each of the following conditions (any of which may be waived by Seller in whole or in part):
7.1 ACCURACY OF REPRESENTATIONS
(a) All of Buyer and Buyer Parent's representations and warranties in the Agreement (considered collectively), and each of these representations and warranties (considered individually), shall have been accurate in all material respects as of the date of the Agreement, and shall be accurate in all material respects as of the time of the Closing as if then made.
(b) Each of the representations and warranties in SECTION 4.2(A) and each of the representations and warranties in the Agreement that contains an express materiality qualification, shall have been accurate in all respects as of the date of the Agreement, and shall be accurate in all respects as of the time of the Closing as if then made.
7.2 BUYER AND BUYER PARENT'S PERFORMANCE
All of the covenants and obligations that Buyer and Buyer Parent is required to perform or to comply with pursuant to the Agreement at or prior to the Closing (considered collectively), and each of these covenants and obligations (considered individually), shall have been performed and complied with in all material respects.
7.3 NO PROCEEDINGS
Since the date of the Agreement there shall not have been commenced or threatened against Selling Parties or against any Related Person of Selling Parties, any Proceeding (a) involving any challenge to, or seeking Damages or other relief in connection with, any of the Contemplated Transactions or (b) that may have the effect of preventing, delaying, making illegal, imposing limitations or conditions on or otherwise interfering with any of the Contemplated Transactions.
7.4 ADDITIONAL DOCUMENTS
Buyer shall have caused to be delivered to Selling Parties an opinion in the form of EXHIBIT 7.4, which opinions may be divided between Haynes and Boone, LLP, and in-house counsel to Buyer Parent, and the documents and instruments required by SECTION 2.8(B) and such other documents as Seller may reasonably request for the purpose of:
(a) evidencing the accuracy of any of Buyer's or Buyer Parent's representations and warranties;
(b) evidencing the performance by Buyer or Buyer Parent of, or the compliance by Buyer or Buyer Parent with, any covenant or obligation required to be performed or complied with by Buyer or Buyer Parent;
(c) evidencing the satisfaction of any condition referred to in this Article 7; or
(d) otherwise facilitating the consummation or performance of any of the Contemplated Transactions.
ARTICLE VIII
TERMINATION
8.1 TERMINATION EVENTS
By notice given prior to or at the Closing, subject to SECTION 8.2, the Agreement may be terminated as follows:
(a) by Buyer, if a material Breach of any provision of the Agreement has been committed by any of the Selling Parties;
(b) by Seller, if a material Breach of any provision of the Agreement has been committed by Buyer or Buyer Parent;
(c) by Buyer, if any condition in Article 6 has not been satisfied as of September 30, 2002 or such later date as the parties may mutually agree, or if satisfaction of such a condition by such date is or becomes impossible (other than through the failure of Buyer to comply with its obligations under the Agreement);
(d) by Seller, if any condition in Article 7 has not been satisfied as of September 30, 2002 or such later date as the parties may mutually agree, or if satisfaction of such a condition by such date is or becomes impossible (other than through the failure of Selling Parties to comply with their obligations under the Agreement);
(e) by mutual written consent of Buyer and Seller;
(f) by Buyer, if the Closing has not occurred on or before October 31, 2002, or such later date as the parties may agree upon, unless the Buyer is in material Breach of the Agreement;
(g) by Seller, if the Closing has not occurred on or before October 31, 2002, or such later date as the parties may agree upon, unless the Selling Parties are in material Breach of the Agreement; or
(h) by Buyer, on or before September 15, 2002, if the results of the due diligence review of the Patent Application are not satisfactory to the Patent Recipients in their sole discretion.
8.2 EFFECT OF TERMINATION
Each party's right of termination under SECTION 8.1 is in addition to any other rights it may have under the Agreement or otherwise, and the exercise of such right of termination will not be an election of remedies. If the Agreement is terminated pursuant to SECTION 8.1, all obligations of the parties under the Agreement will terminate, except that the obligations of the parties in this SECTION 8.2 and Articles 11 and 12 (except for those in SECTION 12.12) will survive; PROVIDED, HOWEVER, that the termination of this Agreement shall not relieve any party for the consequences of such party's Breach of this Agreement.
ARTICLE IX
ADDITIONAL COVENANTS
9.1 PAYMENT OF ALL TAXES RESULTING FROM SALE OF ASSETS BY SELLER
Selling Parties shall pay in a timely manner all Taxes resulting from or payable in connection with the sale of the Assets pursuant to the Agreement, regardless of the Person on whom such Taxes are imposed by Legal Requirements.
9.2 PAYMENT OF OTHER RETAINED LIABILITIES
In addition to payment of Taxes pursuant to SECTION 9.1, Selling Parties shall pay, or make adequate provision for the payment, in full all of the Retained Liabilities and other Liabilities of Seller under the Agreement. Selling Parties shall pay all indebtedness owing to The Frost National Bank promptly after receipt by Seller of any tax refund, to the extent of the tax refund.
9.3 REMOVING EXCLUDED ASSETS
On or before the Closing Date, Selling Parties shall remove all Excluded Assets from all Facilities and other Real Property to be occupied by Buyer. Such removal shall be done in such manner as to avoid any damage to the Facilities and other properties to be occupied by Buyer and any disruption of the business operations to be conducted by Buyer after the Closing. Any damage to the Assets or to the Facilities resulting from such removal shall be paid by Selling Parties at the Closing. Should Selling Parties fail to remove the Excluded Assets as required by this Section, Buyer shall have the right, but not the obligation, (a) to remove the Excluded Assets at Selling Parties' sole cost and expense; (b) to store the Excluded Assets and to charge Selling Parties all storage costs associated therewith; (c) to treat the Excluded Assets as unclaimed and to proceed to dispose of the same under the laws governing unclaimed property; or (d) to exercise any other right or remedy conferred by the Agreement or otherwise available at law or in equity. Selling Parties shall promptly reimburse Buyer for all costs and expenses incurred by Buyer in connection with any Excluded Assets not removed by Selling Parties on or before the Closing Date.
9.4 REPORTS AND RETURNS
Seller shall promptly after the Closing prepare and file all reports and returns required by Legal Requirements relating to the business of Seller as conducted using the Assets, to and including the Effective Time.
9.5 ASSISTANCE IN PROCEEDINGS
The parties to this Agreement will cooperate with each other and their respective counsel in the contest or defense of, and make available its personnel and provide any testimony and access to its books and Records in connection with, any Proceeding involving or relating to (a) any Contemplated Transaction; or (b) any action, activity, circumstance, condition, conduct, event, fact, failure to act, incident, occurrence, plan, practice, situation, status or transaction on or before the Closing Date involving Seller or its business or Founders.
9.6 NONCOMPETITION; NONSOLICITATION; NONDISPARAGEMENT
(a) NONCOMPETITION. None of the Selling Parties shall, for a period of three (3) years from the Closing Date, within Canada, the United States, the European Union and in any other country in which
Buyer or Seller presently conducts or may conduct business, engage in 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 Seller or Buyer as the business of the Seller and Buyer may change from time to time (the "Business") in the future (or in the case of the Founders, as such Business is conducted during their respective terms of employment with Seller and Buyer), without the prior written consent of 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 employee, principal, agent, shareholder or in any other manner whatsoever, carry on or be engaged in or be concerned with or lend money to, guarantee the debts or obligations of, or permit their names to be used or employed by any person or entity engaged or concerned with or interested in the Business.
(b) NONSOLICITATION. For a period of three (3) years after the Closing Date, none of the Selling Parties shall, directly or indirectly:
(i) solicit the business of any Person who is or was a customer of Seller as of the Closing or during the year preceding the Closing if the solicitation is not made, directly or indirectly, by a Person who is engaged, or intends to engage, in whole or in part in a business similar to the Business;
(ii) cause, induce or attempt to cause or induce any customer, supplier, licensee, licensor, franchisee, employee, consultant or other business relation of Buyer to cease doing business with Buyer, to deal with any competitor of Buyer or in any way interfere with its relationship with Buyer;
(iii) cause, induce or attempt to cause or induce any customer, supplier, licensee, licensor, franchisee, employee, consultant or other business relation of Seller on the Closing Date or within the year preceding the Closing Date to cease doing business with Buyer, to deal with any competitor of Buyer or in any way interfere with its relationship with Buyer; or
(iv) hire, retain or attempt to hire or retain any employee or independent contractor of Buyer or in any way interfere with the relationship between Buyer and any of its employees or independent contractors.
(c) NONDISPARAGEMENT. After the Closing Date, none of the Selling Parties will disparage Buyer, Buyer Parent or any of their respective shareholders, directors, officers, employees or agents.
(d) MODIFICATION OF COVENANT. If a court or tribunal of competent jurisdiction determines that any term or provision contained in SECTION 9.6(A) through (C) is invalid or unenforceable, then the parties agree that the court or tribunal will have the power to reduce the scope, duration or geographic area of the term or provision, to delete specific words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. This SECTION 9.6 will be enforceable as so modified after the expiration of the time within which the judgment may be appealed. This SECTION 9.6 is reasonable and necessary to protect and preserve Buyer's legitimate business interests and the value of the Assets and to prevent any unfair advantage conferred on Selling Parties.
9.7 CUSTOMER AND OTHER BUSINESS RELATIONSHIPS
After the Closing, Selling Parties will cooperate with Buyer in its efforts to continue and maintain for the benefit of Buyer those business relationships of Selling Parties existing prior to the Closing and relating to the business to be operated by Buyer after the Closing, including relationships with lessors, employees, regulatory authorities, licensors, customers, suppliers and others, and Selling Parties will satisfy the Retained Liabilities in a manner that is not detrimental to any of such relationships. Selling Parties will refer to Buyer all inquiries relating to such business. No Selling Party nor any of their respective employees or agents shall take any action that would tend to diminish the value of the Assets after the Closing or that would interfere with the business of Buyer and Buyer Parent to be engaged in after the Closing, including disparaging the name or business of Buyer or Buyer Parent.
9.8 EMPLOYEES AND EMPLOYEE BENEFITS
(a) INFORMATION ON ACTIVE EMPLOYEES
For the purpose of this Agreement, the term "ACTIVE EMPLOYEES" shall mean all employees employed on the Closing Date by Seller for its business who are set forth on Part 3.20.
(b) EMPLOYMENT OF ACTIVE EMPLOYEES BY BUYER
(i) Buyer may make an offer of employment to any Active Employee, whose acceptance of such offer will be effective on the Closing Date (the "HIRED ACTIVE EMPLOYEES"). Subject to Legal Requirements, Buyer will have reasonable access to the Facilities and personnel Records (including performance appraisals, disciplinary actions and grievances) of Seller for the purpose of preparing for and conducting employment interviews with all Active Employees and will conduct the interviews as expeditiously as possible prior to the Closing Date. Access will be provided by Seller upon reasonable prior notice during normal business hours. Effective immediately before the Closing, Seller will terminate the employment of all of the Active Employees.
(ii) No Selling Party or their Related Persons shall solicit the continued employment of any Active Employee (unless and until Buyer has informed Seller in writing that the particular Active Employee will not receive any employment offer from Buyer) or the employment of any Hired Active Employee after the Closing.
(iii) It is understood and agreed that (A) Buyer's expressed intention to extend offers of employment as set forth in this section shall not constitute any Contract or understanding (expressed or implied) of any obligation on the part of Buyer to a post-Closing employment relationship of any fixed term or duration or upon any terms or conditions other than those that Buyer may establish pursuant to individual offers of employment; and (B) employment offered by Buyer is "at will" and may be terminated by Buyer or by an employee at any time for any reason (subject to any written commitments to the contrary made by Buyer or an employee and Legal Requirements). Nothing in this Agreement shall be deemed to prevent or restrict in any way the right of Buyer to terminate, reassign, promote or demote any of the Hired Active Employees after the Closing or to change adversely or favorably the title, powers, duties, responsibilities, functions, locations, salaries, other compensation or terms or conditions of employment of such employees.
(c) SALARIES AND BENEFITS
(i) Seller shall be responsible for the payment of all wages and other remuneration due to Active Employees with respect to their services as employees of Seller through the close of business on the Closing Date, including pro rata bonus payments and all vacation pay earned prior to the Closing Date. Seller shall be solely liable for any severance payment required to be made to its employees due to the Contemplated Transactions.
(ii) Seller shall be liable for any claims made or incurred by Active Employees and their beneficiaries through the Closing Date under the Employee Plans. For purposes of the immediately preceding sentence, a charge will be deemed incurred, in the case of hospital, medical or dental benefits, when the services that are the subject of the charge are performed and, in the case of other benefits (such as disability or life insurance), when an event has occurred or when a condition has been diagnosed that entitles the employee to the benefit.
(d) GENERAL EMPLOYEE PROVISIONS
(i) Seller shall give any notices required by Legal Requirements and take whatever other actions with respect to the plans, programs and policies described in this SECTION 9.8 as may be necessary to carry out the arrangements described in this SECTION 9.8.
(ii) If any of the arrangements described in this SECTION 9.8 are determined by the IRS or other Governmental Body to be prohibited by law, Seller and Buyer shall modify such arrangements to as closely as possible reflect their expressed intent and retain the allocation of economic benefits and burdens to the parties contemplated herein in a manner that is not prohibited by law.
(iii) Seller shall provide Buyer with completed I-9 forms and attachments with respect to all Hired Active Employees, except for such employees as Seller certifies in writing to Buyer are exempt from such requirement.
(iv) Buyer shall not have any responsibility, liability or obligation, whether to Active Employees, former employees, their beneficiaries or to any other Person, with respect to any employee benefit plans, practices, programs or arrangements (including the establishment, operation or termination thereof and the notification and provision of COBRA coverage extension) maintained by Seller.
9.9 FURTHER ASSURANCES
The parties shall cooperate reasonably with each other and with their respective Representatives in connection with any steps required to be taken as part of their respective obligations under the Agreement, and shall (a) furnish upon request to each other such further information; (b) execute and deliver to each other such other documents; and (c) do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of the Agreement and the Contemplated Transactions; provided, that, neither Buyer nor Buyer Parent shall be required to dispose of or make any material change to its business to comply with SECTION 9.9.
9.10 RETENTION OF AND ACCESS TO RECORDS
After the Closing Date, Buyer shall retain for a period consistent with Buyer's record-retention policies and practices those Records of Seller delivered to Buyer. Buyer also shall provide Selling Parties
and their Representatives reasonable access thereto, during normal business hours and on at least three days' prior written notice, to enable them to prepare financial statements or tax returns or deal with tax audits or third party claims. After the Closing Date, Selling Parties shall provide Buyer and its Representatives reasonable access to Records that are Excluded Assets, during normal business hours and on at least three days' prior written notice, for any reasonable business purpose specified by Buyer in such notice.
9.11 DISTRIBUTION OF BUYER SHARES
After the Closing, if Seller desires to distribute the Buyer Shares, subject to the Lock Up Agreement, to the ultimate beneficial owners of Seller Parent set forth on EXHIBIT 9.11 (the "ULTIMATE BENEFICIAL OWNERS"), then, subject to all Legal Requirements and at the expense of Seller, Buyer and Buyer Parent shall use commercially reasonable efforts to assist Seller in effecting the transfer of the Buyer Shares into the names of the Ultimate Beneficial Owners in the percentages set forth on EXHIBIT 9.11; provided, that such Buyer Shares must be distributed to the Ultimate Beneficial Owners pro rata according to their respective ownership interest in Seller Parent and no Ultimate Beneficial Owner may furnish any consideration for the Buyer Shares that are distributed; provided, further, that each of the Ultimate Beneficial Owners must deliver an executed investment representation letter in a form reasonably satisfactory to Buyer, must agree in writing to be bound by the Lock Up Agreement as if the Ultimate Beneficial Owner were a party thereto and must appoint Seller in writing as the Ultimate Beneficial Owner's representative for all purposes under the Lock Up Agreement.
9.12 OPERATION OF BUYER
From the Closing Date until 120 days after the Closing Date, Buyer
shall not terminate the employment of any of the twenty (20) individuals whose
name is set forth on Part 9.12 (the "COVERED EMPLOYEES"), except for just cause.
If Buyer terminates the employment of an aggregate of four (4) or more of the
Covered Employees without just cause on or before the first anniversary of the
Closing Date (the termination of the fourth Covered Employee and any additional
termination of a Covered Employee thereafter being a "TERMINATION EVENT"), the
Earn Out Amount shall be adjusted with respect to each Termination Event by
reducing each dollar threshold within the definition of "EARN OUT AMOUNT" by an
amount equal to the product of (x) the subject dollar threshold, multiplied by
(y) the Covered Employee Percentage, multiplied by (z) the Remaining Term
Percentage.
ARTICLE X
INDEMNIFICATION; REMEDIES
10.1 SURVIVAL
All representations, warranties, covenants and obligations in this Agreement, the Disclosure Letter, any supplement to the Disclosure Letter, the certificates delivered pursuant to SECTION 2.8 and any other certificate or document delivered pursuant to this Agreement shall survive the Closing and the consummation of the Contemplated Transactions, subject to SECTION 10.7. The right to indemnification, reimbursement or other remedy based upon such representations, warranties, covenants and obligations shall not be affected by any investigation (including any environmental investigation or assessment) conducted with respect to, or any Knowledge acquired (or capable of being acquired) at any time, whether before or after the execution and delivery of this Agreement or the Closing Date, with respect to the accuracy or inaccuracy of or compliance with any such representation, warranty, covenant or obligation. The waiver of any condition based upon the accuracy of any representation or warranty, or on the performance of or compliance with any covenant or obligation, will not affect the right to indemnification, reimbursement or other remedy based upon such representations, warranties, covenants and obligations.
10.2 INDEMNIFICATION AND REIMBURSEMENT BY SELLING PARTIES
Each Selling Party, jointly and severally, will indemnify and hold harmless Buyer and Buyer Parent, and their respective Representatives, Subsidiaries and Related Persons (collectively, the "BUYER INDEMNIFIED PERSONS"), and will reimburse the Buyer Indemnified Persons for any loss, liability (including the STRICT LIABILITY of any Buyer Indemnified Person), claim, damage, expense (including costs of investigation and defense and reasonable attorneys' fees and expenses) or diminution of value, whether or not involving a Third-Party Claim (collectively, "DAMAGES"), arising from or in connection with:
(a) any Breach of any representation or warranty made by any Selling Party in (i) this Agreement (without giving effect to any supplement to the Disclosure Letter, unless such Breach disclosed in such supplement has been waived by Buyer in accordance with SECTION 5.7) or the other Transaction Agreements, (ii) the Disclosure Letter, (iii) any supplement to the Disclosure Letter, (iv) the certificates delivered pursuant to SECTION 2.8 (for this purpose, each such certificate will be deemed to have stated that Seller Parties' representations and warranties in the Agreement fulfill the requirements of SECTION 7.1 as of the Closing Date as if made on the Closing Date without giving effect to any supplement to the Disclosure Letter, unless such Breach disclosed in such supplement has been waived by Buyer in accordance with SECTION 5.7), (v) any transfer instrument or (vi) any other certificate, document, agreement, writing or instrument delivered by any Selling Party pursuant to the Agreement;
(b) any Breach of any covenant or obligation of any Selling Party in the Agreement, the other Transaction Agreements or in any other certificate, document, agreement, writing or instrument delivered by any Selling Party pursuant to the Agreement;
(c) any Liability arising out of the ownership or operation of the Assets prior to the Effective Time other than the Assumed Liabilities;
(d) any brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding made, or alleged to have been made, by any Person with any Selling Party (or any Person acting on their behalf) in connection with any of the Contemplated Transactions;
(e) any product or component thereof manufactured by or shipped, or any services provided by, any Selling Party, in whole or in part, prior to the Closing Date other than as provided in SECTION 2.4(A)(III);
(f) any matter disclosed in Parts 3.15 of the Disclosure Letter;
(g) any noncompliance with any fraudulent transfer law in respect of the Contemplated Transactions;
(h) any liability under the WARN Act or any similar state or local Legal Requirement that may result from an "EMPLOYMENT LOSS", as defined by 29 U.S.C. sect. 2101(a)(6), caused by any action of Selling Parties prior to the Closing or by Buyer's decision not to hire previous employees of Seller;
(i) any Employee Plan established or maintained by Seller or any Related Person; or
(j) any Retained Liabilities.
10.3 TAX INDEMNIFICATION
Selling Parties agree, jointly and severally, to indemnify and hold harmless the Buyer Indemnified Persons 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 Seller pursuant to federal, state, local or foreign law; and (ii) any breach of the representations or warranties made by Selling Parties in SECTION 3.11 (all such Losses being "TAX LOSSES"). Any indemnity payments to or from Selling Parties or to or from Buyer pursuant to the Agreement, whether under this SECTION 10.3 or otherwise, shall be treated by Buyer and Selling Parties as purchase price adjustments for all tax purposes. All indemnification obligations set forth in this SECTION 10.3 shall be treated as "TAX CLAIMS" for purposes of this Agreement.
10.4 INDEMNIFICATION AND REIMBURSEMENT BY BUYER
Buyer and Buyer Parent, jointly and severally, will indemnify and hold harmless Selling Parties, and will reimburse Selling Parties, for any Damages arising from or in connection with:
(a) any Breach of any representation or warranty made by Buyer or Buyer Parent in this Agreement, the other Transaction Agreements or in any certificate, document, writing or instrument delivered by Buyer or Buyer Parent pursuant to the Agreement;
(b) any Breach of any covenant or obligation of Buyer or Buyer Parent in this Agreement, the other Transaction Agreements or in any other certificate, document, writing or instrument delivered by Buyer pursuant to the Agreement;
(c) any brokerage or finder's fees or commissions or similar payments based upon any agreement or understanding made, or alleged to have been made, by any Person with Buyer or Buyer Parent (or any Person acting on their behalf) in connection with any of the Contemplated Transactions;
(d) any Liability arising out of the ownership or operation of the Assets after the Effective Time other than the Retained Liabilities; or
(e) any Assumed Liabilities.
10.5 LIMITATIONS ON AMOUNT--SELLING PARTIES
The Selling Parties shall have no liability (for indemnification or otherwise) with respect to claims under SECTION 10.2(A) until the total of all Damages with respect to such matters exceeds forty thousand dollars ($40,000), in which event Selling Parties shall become liable for the full amount of all claims on a dollar for dollar basis, up to a maximum amount equal to fifty percent (50%) of the Purchase Price (the Purchase Price being calculated for this purpose as if the Annual Buyer Revenues equal or exceed $15,000,000 and without regard to any reduction of the Earn-out Amount pursuant to SECTION 9.12). However, this SECTION 10.5 will not apply to claims under Section 10.2(B) through (J) or to matters arising in respect of SECTIONS 3.6, 3.11, 3.19, 3.22, 3.23, 3.24, or 3.25 or to any Breach of any Selling Party's representations and warranties of which any Selling Party had Knowledge at any time prior to the date on which such representation and warranty is made, and Selling Parties will be jointly and severally liable for all Damages with respect to such Breaches. In determining the amount of any Damages for which Buyer Indemnified Persons may seek indemnification under SECTION 10.2(A), any materiality standard or qualification shall be disregarded.
10.6 LIMITATIONS ON AMOUNT--BUYER AND BUYER PARENT
Buyer and Buyer Parent shall have no liability (for indemnification or otherwise) with respect to claims under SECTION 10.4(A) until the total of all Damages with respect to such matters exceeds forty thousand dollars ($40,000) in which event Buyer and Buyer Parent shall become liable for the full amount of all claims on a dollar for dollar basis, up to a maximum amount equal to fifty percent (50%) of the
Purchase Price (the Purchase Price being calculated for this purpose as if the
Annual Buyer Revenues equal or exceed $15,000,000 and without regard to any
reduction of the Earn-out Amount pursuant to SECTION 9.12). However, this
SECTION 10.6 will not apply to claims under SECTION 10.4(B) through (D) or to
any Breach of any of Buyer's or Buyer Parent's representations and warranties of
which Buyer had Knowledge at any time prior to the date on which such
representation and warranty is made or any intentional Breach by Buyer of any
covenant or obligation, and Buyer and Buyer Parent will be liable for all
Damages with respect to such Breaches. In determining the amount of any Damages
for which Selling Parties may seek indemnification under SECTION 10.4(A), any
materiality standard or qualification shall be disregarded.
10.7 TIME LIMITATIONS
(a) If the Closing occurs, Selling Parties will have liability (for indemnification or otherwise) with respect to any Breach of (i) a covenant or obligation to be performed or complied with prior to the Closing Date (other than those in SECTIONS 2.1 AND 2.4(B) and Articles 9 and 11, as to which a claim may be made at any time) or (ii) a representation or warranty (other than those in SECTIONS 3.1, 3.6, 3.11, 3.13, 3.19, 3.21, 3.22, 3.23 AND 3.24, as to which a claim may be made at any time), only if on or before the date which is the third anniversary of the Closing Date, Buyer notifies Selling Parties of a claim specifying the factual basis of the claim in reasonable detail to the extent then known by Buyer.
(b) If the Closing occurs, Buyer and Buyer Parent will have liability (for indemnification or otherwise) with respect to any Breach of (i) a covenant or obligation to be performed or complied with prior to the Closing Date (other than those in SECTIONS 2.1 and 2.4(A) and Article 11, as to which a claim may be made at any time); or (ii) a representation or warranty (other than that set forth in SECTION 4.2(A), as to which a claim may be made at any time) only if on or before the date which is the third anniversary of the Closing Date, Selling Parties notify Buyer of a claim specifying the factual basis of the claim in reasonable detail to the extent then known by Selling Parties.
10.8 RIGHT OF SETOFF
Except as prohibited by Section 6.12, upon notice to Selling Parties specifying in reasonable detail the basis therefor, Buyer may set off any amount to which it may be entitled under this Article 10 or under the Note against amounts otherwise payable under this Agreement and may give notice of a claim under the Lock-Up Agreement. Neither the exercise of nor the failure to exercise such right of setoff or to give a notice of a claim will constitute an election of remedies or limit Buyer in any manner in the enforcement of any other remedies that may be available to it. With respect to claims under Article 10, Buyer shall be entitled to set off such claim against amounts due to Seller under SECTION 2.3(C) only to the extent that such claim exceeds the Value (as defined in the Lock-Up Agreement) of the Buyer Shares then held by Buyer under the Lock-Up Agreement.
10.9 THIRD-PARTY CLAIMS
(a) Promptly after receipt by a Person entitled to indemnity under
SECTION 10.2, 10.3 OR 10.4 (an "INDEMNIFIED PERSON") of notice of the assertion
of a Third-Party Claim against it, such Indemnified Person shall give notice to
the Person obligated to indemnify under such Section (an "INDEMNIFYING PERSON")
of the assertion of such Third-Party Claim, provided that the failure to notify
the Indemnifying Person will not relieve the Indemnifying Person of any
liability that it may have to any Indemnified Person, except to the extent that
the Indemnifying Person demonstrates that the defense of such Third-Party Claim
is prejudiced by the Indemnified Person's failure to give such notice.
(b) If an Indemnified Person gives notice to the Indemnifying Person pursuant to SECTION 10.9(A) of the assertion of a Third-Party Claim, the Indemnifying Person shall be entitled to
participate in the defense of such Third-Party Claim and, to the extent that it wishes (unless (i) the Indemnifying Person is also a Person against whom the Third-Party Claim is made and the Indemnified Person determines in good faith that joint representation would be inappropriate; or (ii) the Indemnifying Person fails to provide reasonable assurance to the Indemnified Person of its financial capacity to defend such Third-Party Claim and provide indemnification with respect to such Third-Party Claim), to assume the defense of such Third-Party Claim with counsel satisfactory to the Indemnified Person. After notice from the Indemnifying Person to the Indemnified Person of its election to assume the defense of such Third-Party Claim, the Indemnifying Person shall not, so long as it diligently conducts such defense, be liable to the Indemnified Person under this Article 10 for any fees of other counsel or any other expenses with respect to the defense of such Third-Party Claim, in each case subsequently incurred by the Indemnified Person in connection with the defense of such Third-Party Claim, other than reasonable costs of investigation. If the Indemnifying Person assumes the defense of a Third-Party Claim, (i) such assumption will conclusively establish for purposes of the Agreement that the claims made in that Third-Party Claim are within the scope of and subject to indemnification; and (ii) no compromise or settlement of such Third-Party Claims may be effected by the Indemnifying Person without the Indemnified Person's Consent unless (A) there is no finding or admission of any violation of Legal Requirement or any violation of the rights of any Person; (B) the sole relief provided is monetary damages that are paid in full by the Indemnifying Person; and (C) the Indemnified Person shall have no liability with respect to any compromise or settlement of such Third-Party Claims effected without its Consent. If notice is given to an Indemnifying Person of the assertion of any Third-Party Claim and the Indemnifying Person does not, within ten (10) days after the Indemnified Person's notice is given, give notice to the Indemnified Person of its election to assume the defense of such Third-Party Claim, the Indemnifying Person will be bound by any determination made in such Third-Party Claim or any compromise or settlement effected by the Indemnified Person.
(c) Notwithstanding the foregoing, if an Indemnified Person determines in good faith that there is a reasonable probability that a Third-Party Claim may adversely affect it or its Related Persons other than as a result of monetary damages for which it would be entitled to indemnification under this Agreement, the Indemnified Person may, by notice to the Indemnifying Person, assume the exclusive right to defend, compromise or settle such Third-Party Claim, but the Indemnifying Person will not be bound by any determination of any Third-Party Claim so defended for the purposes of the Agreement or any compromise or settlement effected without its Consent (which may not be unreasonably withheld).
(d) Notwithstanding the provisions of SECTION 12.7, the parties to this Agreement hereby consent to the nonexclusive jurisdiction of any court in which a Proceeding in respect of a Third-Party Claim is brought against any Indemnified Person for purposes of any claim that an Indemnified Person may have under the Agreement with respect to such Proceeding or the matters alleged therein and agree that process may be served on the parties to this Agreement with respect to such a claim anywhere in the world.
(e) With respect to any Third-Party Claim subject to
indemnification under this Article 10: (i) both the Indemnified Person and the
Indemnifying Person, as the case may be, shall keep the other Person fully
informed of the status of such Third-Party Claim and any related Proceedings at
all stages thereof where such Person is not represented by its own counsel; and
(ii) the parties agree (each at its own expense) to render to each other such
assistance as they may reasonably require of each other and to cooperate in good
faith with each other in order to ensure the proper and adequate defense of any
Third-Party Claim.
(f) With respect to any Third-Party Claim subject to indemnification under this Article 10, the parties agree to cooperate in such a manner as to preserve in full (to the extent possible) the confidentiality of all Confidential Information and the attorney-client and work-product privileges. In connection therewith, each party agrees that: (i) it will use its best efforts, in respect of any Third-Party Claim in which it has assumed or participated in the defense, to avoid production of Confidential Information (consistent with applicable law and rules of procedure); and (ii) all communications between any party hereto and counsel
responsible for or participating in the defense of any Third-Party Claim shall, to the extent possible, be made so as to preserve any applicable attorney-client or work-product privilege.
10.10 OTHER CLAIMS
A claim for indemnification for any matter not involving a Third-Party Claim may be asserted by notice to the party from whom indemnification is sought and shall be paid promptly after such notice except to the extent that the claim has been satisfied pursuant to SECTION 10.8.
10.11 INDEMNIFICATION IN CASE OF STRICT LIABILITY OR INDEMNITEE NEGLIGENCE
THE INDEMNIFICATION PROVISIONS IN THIS ARTICLE 10 SHALL BE ENFORCEABLE REGARDLESS OF WHETHER THE LIABILITY IS BASED UPON PAST, PRESENT OR FUTURE ACTS, CLAIMS OR LEGAL REQUIREMENTS (INCLUDING ANY PAST, PRESENT OR FUTURE BULK SALES LAW, ENVIRONMENTAL LAW, FRAUDULENT TRANSFER ACT, OCCUPATIONAL SAFETY AND HEALTH LAW OR PRODUCTS LIABILITY, SECURITIES OR OTHER LEGAL REQUIREMENT) AND REGARDLESS OF WHETHER ANY PERSON (INCLUDING THE PERSON FROM WHOM INDEMNIFICATION IS SOUGHT) ALLEGES OR PROVES THE SOLE, CONCURRENT, CONTRIBUTORY OR COMPARATIVE NEGLIGENCE OF THE PERSON SEEKING INDEMNIFICATION OR THE SOLE OR CONCURRENT STRICT LIABILITY IMPOSED UPON THE PERSON SEEKING INDEMNIFICATION.
ARTICLE XI
CONFIDENTIALITY
11.1 DEFINITION OF CONFIDENTIAL INFORMATION
(a) As used in this Article 11, the term "CONFIDENTIAL INFORMATION" includes any and all of the following information of Selling Parties, Buyer or Buyer Parent that has been or may hereafter be disclosed in any form, whether in writing, orally, electronically or otherwise, or otherwise made available by observation, inspection or otherwise by either party (Buyer and Buyer Parent on the one hand or Selling Parties, collectively, on the other hand) or its Representatives (collectively, a "DISCLOSING PARTY") to the other party or its Representatives (collectively, a "RECEIVING PARTY"):
(i) all information that is a trade secret under applicable trade secret or other law;
(ii) all information concerning product specifications, data, know-how, formulae, compositions, processes, designs, sketches, schematics, data sheets, work product, techniques, programs, photographs, graphs, drawings, samples, inventions and ideas, past, current and planned research and development, current and planned manufacturing or distribution methods and processes, customer lists, current and anticipated customer requirements, price lists, market studies, business plans, computer hardware and computer software and database technologies, systems, structures and architectures;
(iii) all information concerning the business and affairs of the Disclosing Party (which includes historical and current financial statements, financial projections and budgets, tax returns and accountants' materials, historical, current and projected sales, capital spending budgets and plans, business plans, strategic plans, marketing and advertising plans, publications, client, customer and supplier lists and files, contracts, the names and backgrounds of key personnel and personnel training techniques and materials, however documented), and all information obtained from review
of the Disclosing Party's documents or property or discussions with the Disclosing Party regardless of the form of the communication; and
(iv) all notes, analyses, compilations, studies, summaries and other material prepared by the Receiving Party to the extent containing or based, in whole or in part, upon any information included in the foregoing.
(b) Any trade secrets of a Disclosing Party shall also be entitled to all of the protections and benefits under applicable trade secret law and any other applicable law. If any information that a Disclosing Party deems to be a trade secret is found by a court of competent jurisdiction not to be a trade secret for purposes of this Article 11, such information shall still be considered Confidential Information of that Disclosing Party for purposes of this Article 11 to the extent included within the definition. In the case of trade secrets, each of Buyer, Buyer Parent or any Selling Party hereby waives any requirement that the other party submit proof of the economic value of any trade secret or post a bond or other security.
11.2 RESTRICTED USE OF CONFIDENTIAL INFORMATION
(a) Each Receiving Party acknowledges the confidential and proprietary nature of the Confidential Information of the Disclosing Party and agrees that such Confidential Information (i) shall be kept confidential by the Receiving Party; (ii) shall not be used for any reason or purpose other than to evaluate and consummate the Contemplated Transactions; and (iii) without limiting the foregoing, shall not be disclosed by the Receiving Party to any Person, except in each case as otherwise expressly permitted by the terms of the Agreement or with the prior written consent of an authorized representative of Seller with respect to Confidential Information of Selling Parties (each, a "SELLER CONTACT") or an authorized representative of Buyer with respect to Confidential Information of Buyer or Buyer Parent (each, a "BUYER CONTACT"). Each of Buyer, Buyer Parent and any Selling Party shall disclose the Confidential Information of the other party only to its Representatives who require such material for the purpose of evaluating the Contemplated Transactions and are informed by Buyer, Buyer Parent or any Selling Party, as the case may be, of the obligations of this Article 11 with respect to such information. Each of Buyer, Buyer Parent and any Selling Party shall (i) enforce the terms of this Article 11 as to its respective Representatives; (ii) take such action to the extent necessary to cause its Representatives to comply with the terms and conditions of this Article 11; and (iii) be responsible and liable for any breach of the provisions of this Article 11 by it or its Representatives.
(b) Unless and until the Agreement is terminated, Selling Parties shall maintain as confidential any Confidential Information (including for this purpose any information of any Selling Party of the type referred to in SECTIONS 11.1(A)(I), (II) and (III), whether or not disclosed to Buyer or Buyer Parent) of any Selling Party relating to any of the Assets or the Assumed Liabilities. Notwithstanding the preceding sentence, Seller may use any Confidential Information of Seller before the Closing in the Ordinary Course of Business in connection with the transactions permitted by SECTION 5.1.
(c) From and after the Closing, the provisions of SECTION 11.2(A) above shall not apply to or restrict in any manner Buyer or Buyer Parent's use of any Confidential Information of Selling Parties relating to any of the Assets or the Assumed Liabilities.
11.3 EXCEPTIONS
SECTIONS 11.2(A) and (B) do not apply to that part of the Confidential Information of a Disclosing Party that a Receiving Party demonstrates (a) was, is or becomes generally available to the public other than as a result of a breach of this Article 11 or the Confidentiality Agreement by the Receiving Party or its Representatives; (b) was or is developed by the Receiving Party independently of and without reference to
any Confidential Information of the Disclosing Party; or (c) was, is or becomes available to the Receiving Party on a nonconfidential basis from a Third Party not bound by a confidentiality agreement or any legal, fiduciary or other obligation restricting disclosure. No Selling Party shall disclose any Confidential Information of any Selling Party relating to any of the Assets or the Assumed Liabilities in reliance on the exceptions in clauses (b) or (c) above.
11.4 LEGAL PROCEEDINGS
If a Receiving Party becomes compelled in any Proceeding or is requested by a Governmental Body having regulatory jurisdiction over the Contemplated Transactions to make any disclosure that is prohibited or otherwise constrained by this Article 11, that Receiving Party shall provide the Disclosing Party with prompt notice of such compulsion or request so that it may seek an appropriate protective order or other appropriate remedy or waive compliance with the provisions of this Article 11. In the absence of a protective order or other remedy, the Receiving Party may disclose that portion (and only that portion) of the Confidential Information of the Disclosing Party that, based upon advice of the Receiving Party's counsel, the Receiving Party is legally compelled to disclose or that has been requested by such Governmental Body, provided, however, that the Receiving Party shall use reasonable efforts to obtain reliable assurance that confidential treatment will be accorded by any Person to whom any Confidential Information is so disclosed. The provisions of this SECTION 11.4 do not apply to any Proceedings between the parties to the Agreement.
11.5 RETURN OR DESTRUCTION OF CONFIDENTIAL INFORMATION
If this Agreement is terminated, each Receiving Party shall (a) destroy all Confidential Information of the Disclosing Party prepared or generated by the Receiving Party without retaining a copy of any such material; (b) promptly deliver to the Disclosing Party all other Confidential Information of the Disclosing Party, together with all copies thereof, in the possession, custody or control of the Receiving Party or, alternatively, with the written consent of a Seller Contact or a Buyer Contact (whichever represents the Disclosing Party) destroy all such Confidential Information; and (c) certify all such destruction in writing to the Disclosing Party, PROVIDED, HOWEVER, that the Receiving Party may retain a list that contains general descriptions of the information it has returned or destroyed to facilitate the resolution of any controversies after the Disclosing Party's Confidential Information is returned.
11.6 ATTORNEY-CLIENT PRIVILEGE
The Disclosing Party is not waiving, and will not be deemed to have waived or diminished, any of its attorney work product protections, attorney-client privileges or similar protections and privileges as a result of disclosing its Confidential Information (including Confidential Information related to pending or threatened litigation) to the Receiving Party, regardless of whether the Disclosing Party has asserted, or is or may be entitled to assert, such privileges and protections. The parties (a) share a common legal and commercial interest in all of the Disclosing Party's Confidential Information that is subject to such privileges and protections; (b) are or may become joint defendants in Proceedings to which the Disclosing Party's Confidential Information covered by such protections and privileges relates; (c) intend that such privileges and protections remain intact should either party become subject to any actual or threatened Proceeding to which the Disclosing Party's Confidential Information covered by such protections and privileges relates; and (d) intend that after the Closing the Receiving Party shall have the right to assert such protections and privileges. No Receiving Party shall admit, claim or contend, in Proceedings involving either party or otherwise, that any Disclosing Party waived any of its attorney work-product protections, attorney-client privileges or similar protections and privileges with respect to any information, documents or other material not disclosed to a Receiving Party due to the Disclosing Party disclosing its Confidential
Information (including Confidential Information related to pending or threatened litigation) to the Receiving Party.
ARTICLE XII
GENERAL PROVISIONS
12.1 ENTIRE AGREEMENT; AMENDMENTS
The Agreement, together with the Exhibits and Parts 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 the Agreement and the Exhibits and Parts hereto.
12.2 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 (3) Business Days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or (d) two (2) 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 the Agreement shall be delivered or sent to the following:
Selling Parties:
gnubi communications, L.P.
4275 Kellway Circle, Suite 122
Addison, Texas 75001
Attention: James R. Stevens
Telephone: 972-836-0100
Facsimile: 972-836-0162
With a copy (which shall not constitute notice) to:
Scheef and Stone, LLP 5956 Sherry Lane, Suite 1400 Dallas, Texas 75225
Attention: William Stone, Esq.
Telephone: 214-706-4210 Facsimile: 214-706-4242
Until The Frost National Bank has been paid in full, to:
The Frost National Bank
4200 S. Hulen
Fort Worth, TX 76109
Attention: Jennifer A. Crabtree
Telephone: 817-420-5628
Facsimile: 817-420-5610
Buyer:
EXFO Gnubi Products Group Inc.
465 Godin Avenue
Vanier, Quebec
G1M 3G7 Canada
Attention: President
Telephone: 418-683-0211
Facsimile: 418-683-2170
With a copy (which shall not constitute notice) to:
Haynes and Boone, LLP 2505 N. Plano Road, Suite 4000 Richardson, Texas 75082
Attention: Robert R. Kibby
Telephone: 972-680-7550 Facsimile: 972-680-7551
With a copy to Buyer Parent:
EXFO Electro Optical Engineering Inc.
465 Godin Avenue
Vanier, Quebec
G1M 3G7 Canada
Attention: President Telephone: 418-683-0211 Facsimile: 418-683-2170 |
With a copy (which shall not constitute notice) to:
Haynes and Boone, LLP 2505 N. Plano Road, Suite 4000 Richardson, Texas 75082
Attention: Robert R. Kibby
Telephone: 972-680-7550 Facsimile: 972-680-7551
If to JRS or Voting Trust:
James R. Stevens
6511 Cliffbrook
Dallas, Texas 75254
If to DE:
Daniel J. Ernst
4275 Kellway Circle, Suite 122
Addison, Texas 75001
Or such other address as may be designated in writing hereafter, in the same manner, by such Person.
12.3 AMENDMENTS; WAIVERS
No provision of the Agreement may be waived or amended except in a written instrument signed, in the case of an amendment, by each party to the 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 the 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. The rights and remedies of the parties to this Agreement are cumulative and not alternative.
12.4 HEADINGS
The headings herein are for convenience only, do not constitute a part of the Agreement and shall not be deemed to limit or affect any of the provisions hereof.
12.5 SUCCESSORS AND ASSIGNS
The Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. No Selling Party may assign the Agreement or any rights or obligations hereunder without the prior written consent of Buyer and Buyer Parent. Neither Buyer nor Buyer Parent may assign the Agreement or any of the rights or obligations hereunder without the prior written consent of Selling Parties.
12.6 NO THIRD PARTY BENEFICIARIES
The 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.
12.7 GOVERNING LAW; CONSENT TO JURISDICTION
The Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas without regard to the principles of conflicts of law thereof. Each party hereby irrevocably consents to the jurisdiction of the courts located in the State of Texas, to adjudicate any dispute arising pursuant to the Agreement or the transactions contemplated hereby, and waives any objections thereto.
Any Proceeding arising out of or relating to the Agreement or any Contemplated Transaction may be brought in the courts of the State of Texas, County of Dallas; and each of the parties irrevocably submits to the exclusive jurisdiction of each such court in any such Proceeding, waives any objection it may now or hereafter have to venue or to convenience of forum, agrees that all claims in respect of the Proceeding shall be heard and determined only in any such court and agrees not to bring any Proceeding arising out of or relating to the Agreement or any Contemplated Transaction in any other court. The parties agree that either or both of them may file a copy of this paragraph with any court as written evidence of the knowing, voluntary and bargained agreement between the parties irrevocably to waive any objections to venue or to convenience of forum.
12.8 EXECUTION
The 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.
12.9 SEVERABILITY
In case any one or more of the provisions of the Agreement shall be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of the 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 the Agreement.
12.10 INTERPRETATION
The section headings in the Agreement are for convenience of reference only and shall not be deemed to alter or affect the meaning or interpretation of any provision hereof. All currency amounts herein are expressed in United States dollars.
12.11 EXPENSES
Except as otherwise provided in the Agreement, each party to the Agreement will bear its respective fees and expenses incurred in connection with the preparation, negotiation, execution and performance of the Agreement and the Contemplated Transactions, including all fees and expense of its Representatives. If
the Agreement is terminated, the obligation of each party to pay its own fees and expenses will be subject to any rights of such party arising from a Breach of the Agreement by another party.
12.12 SPECIFIC PERFORMANCE
Each party hereto acknowledges and agrees that the other parties hereto would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms and that any Breach of this Agreement by a party hereto could not be adequately compensated in all cases by monetary damages alone. Accordingly, in addition to any other right or remedy to which a party hereto may be entitled, at law or in equity, it shall be entitled to enforce any provision of this Agreement by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent Breaches or threatened Breaches of any of the provisions of this Agreement, without posting any bond or other undertaking.
12.13 TIME OF THE ESSENCE
With regard to all dates and time periods set forth or referred to in this Agreement, time is of the essence.
IN WITNESS WHEREOF, the parties hereto have caused this Asset Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
SELLER:
GNUBI COMMUNICATIONS, L.P.
By: GENERAL PARTNER, LLC
By: /s/ James R. Stevens
------------------------------------
Name: James R. Stevens
Title: President and CEO
|
GENERAL PARTNER:
GNUBI COMMUNICATIONS GENERAL PARTNER, LLC
By: /s/ James R. Stevens
------------------------------------
Name:
Title:
|
LIMITED PARTNER:
GNUBI COMMUNICATIONS LIMITED PARTNER, LLC
By: /s/ Darrell K. Lane
------------------------------------
Name: Darrell K. Lane
Title: Manager
|
SELLER PARENT:
GNUBI COMMUNICATIONS, INC.
By: /s/ James R. Stevens
------------------------------------
Name:
Title:
|
FOUNDERS:
/s/ James R. Stevens ---------------------------------------- James Ray Stevens /s/ Daniel Ernst ---------------------------------------- Daniel J. Ernst |
VOTING TRUST
By: /s/ James R. Stevens
------------------------------------
Name: James R. Stevens
Title: Trustee
|
BUYER:
EXFO GNUBI PRODUCTS GROUP INC.
By: /s/ Germain Lamonde
------------------------------------
Name: Germain Lamonde
Title: Chairman of the Board
|
BUYER PARENT:
EXFO ELECTRO OPTICAL
ENGINEERING INC.
By: /s/ Germain Lamonde
------------------------------------
Name: Germain Lamonde
Title: President and CEO
|
EXFO PROTOCOL INC.
EXECUTIVE EMPLOYMENT AGREEMENT
SAMI YAZDI
TABLE OF CONTENTS
1. Definitions..................................................... 1
2. Employment and Term............................................. 4
3. Nature of Employment............................................ 4
4. Remuneration.................................................... 5
4.1. Basic Remuneration..................................... 5
4.2. Benefits............................................... 5
4.3. Bonus Remuneration..................................... 5
5. Expenses........................................................ 5
6. Vacation........................................................ 5
7. Termination..................................................... 6
7.1. Notice................................................. 6
7.2. Effective Date......................................... 6
7.3. Stop Work Notice....................................... 7
7.4. No Other Entitlement................................... 7
8. No Conflicting Obligations...................................... 8
9. Confidential Information........................................ 8
9.1. Protection of Confidential Information................. 8
9.2. Covenants Respecting Confidential Information.......... 8
9.2.1. Non-Disclosure.................................. 8
9.2.2. Using, Copying, etc............................. 9
9.2.3. Return of Confidential Information.............. 9
9.3. Obligations Continue................................... 9
10. Competition and Solicitation.................................... 9
10.1. Non-Competition........................................ 9
10.2. No Solicitation of Clients and Suppliers............... 10
10.3. No Solicitation of Employees........................... 10
10.4. Independent Covenants.................................. 10
11. Intellectual Property........................................... 10
11.1. Ownership.............................................. 10
11.2. Records................................................ 11
11.3. Moral Rights........................................... 11
11.4. Further Assurances..................................... 11
12. Warranties, Covenants and Remedies.............................. 11
13. Co-operation by Executive....................................... 12
14. Notices......................................................... 12
15. Headings........................................................ 12
16. Invalidity of Provisions........................................ 12
17. Entire Agreement................................................ 13
18. Waiver, Amendment............................................... 13
19. Governing Law and Attornment.................................... 13
20. Counterparts.................................................... 13
21. Acknowledgement................................................. 13
EXFO PROTOCOL INC.
EXECUTIVE EMPLOYMENT AGREEMENT
RECITALS:
A. The corporation specified in Schedule A (the "Corporation") is a member of the corporate group of companies of EXFO Electro-Optical Engineering Inc. ("EXFO") (the "EXFO Group") and is in the business of researching, developing, manufacturing and supporting photonics technology.
B. The Corporation and the undersigned employee named in Schedule "A" (the "Executive") wish to enter into this Agreement to set forth the rights and obligations of each of them with respect to the Executive's employment with the Corporation, for their mutual benefit and to reflect the nature of the Executive's employment by the Corporation.
C. To the extent that the Executive has been engaged by the Corporation prior to the date of this Agreement, the Executive acknowledges entering into this Agreement (in part) in consideration of the specific and additional benefits provided by this Agreement that supplement and clarify rights existing under any preceding agreement.
NOW THEREFORE IN CONSIDERATION OF THE MUTUAL COVENANTS AND AGREEMENTS CONTAINED IN THIS AGREEMENT AND OTHER GOOD AND VALUABLE CONSIDERATION (THE RECEIPT AND SUFFICIENCY OF WHICH ARE HEREBY ACKNOWLEDGED), THE CORPORATION AND THE EXECUTIVE AGREE AS FOLLOWS:
1. DEFINITIONS
In this Agreement,
"AGREEMENT" means this agreement and all schedules attached to this agreement, in each case as they may be amended or supplemented from time to time;
"BASIC SALARY" has the meaning set out in section 4.1;
"BENEFITS" has the meaning set out in section 4.2;
"BUSINESS DAY" means any day, other than Saturday, Sunday or any statutory holiday in the Province of Quebec;
"COMPETITIVE BUSINESS" means currently 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 Corporation as the business of the Corporation may change from time to time;
"CONFIDENTIAL INFORMATION" means information, whether or not originated by the Executive, that relates to the business or affairs of any entity in the EXFO Group, its clients or suppliers and is confidential or proprietary to, about or created by any entity in the EXFO Group, its clients or suppliers.
(a) Confidential Information includes, but is not limited to, the
following types of information and other information of a
similar nature (whether or not reduced to writing or
designated or marked as confidential):
(i) work product resulting from or related to work or
projects performed or to be performed by any entity
in the EXFO Group, including but not limited to, the
interim and final lines of inquiry, hypotheses,
research and conclusions related thereto and the
methods, processes, procedures, analysis, techniques
and audits used in connection therewith;
(ii) computer software of any type or form and in any
stage of actual or anticipated development, including
but not limited to, programs and program modules,
routines and subroutines, procedures, design
concepts, design specifications (design notes,
annotations, documentation, flowcharts, coding
sheets, and the like), source code, object code and
load modules, programming, program patches and system
designs;
(iii) information relating to developments (as hereinafter
defined) prior to any public disclosure thereof,
including but not limited to, the nature of the
developments, production data, technical and
engineering data, test data and test results, the
status and details of research and development of
products and services, and information regarding
acquiring, protecting, enforcing and licensing
proprietary rights (including patents, copyrights and
trade secrets);
(iv) internal EXFO Group personnel and financial
information, vendor names and other vendor
information, purchasing and internal cost
information, internal services and operational
manuals, and the manner and method of conducting
business by entities in the EXFO Group;
(v) marketing and development plans, price and cost data,
price and fee amounts, pricing and billing policies,
quoting procedures, marketing techniques and methods
of obtaining business, forecasts and forecast
assumptions and volumes, and future plans and
potential strategies of the EXFO Group or any entity
in the EXFO Group which have been or are being
discussed;
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(vi) contracts and their contents, client services, data provided by clients and the type, quantity and specifications of products and services purchased, leased, licensed or received by clients of the entities in the EXFO Group; and
(vii) all information which becomes known to the Executive as a result of employment, which the Executive acting reasonably, believes is confidential information or which any entity in the EXFO Group takes measures to protect.
(b) Confidential Information does not include:
(i) the general skills and experience gained during the Executive's employment or engagement which the Executive could reasonably have been expected to acquire in similar employment or engagements with other companies;
(ii) information publicly known without breach of this Agreement or similar agreements; or
(iii) information, the disclosure of which is required to be made by any law, regulation, governmental authority or court (to the extent of the requirement), provided that before disclosure is made, notice of the requirement is provided to the affected entity in the EXFO Group, and to the extent possible in the circumstances, such entity is afforded an opportunity to dispute the requirement.
"DEVELOPMENTS" means all discoveries, inventions, designs, works of authorship, improvements and ideas (whether or not patentable or copyrightable) and legally recognized proprietary rights (including, but not limited to, patents, copyrights, trademarks, topographies, know-how and trade secrets), and all records and copies of records relating to the foregoing, that:
(a) result or derive from the Executive's employment or from the Executive's knowledge or use of Confidential Information;
(b) are conceived or made by the Executive (individually or in collaboration with others) during the term of the Executive's employment by the Corporation or by another entity in the EXFO Group;
(c) result from or derive from the use or application of the resources of the Corporation or of another entity in the EXFO Group; or
(d) relate to the business operations of or actual or demonstrably anticipated research and development by the EXFO Group or an entity in the EXFO Group;
"DISABILITY" means the mental or physical state of the Executive such that the Executive has been unable as a result of illness, disease, mental or physical disability or similar cause, as determined by a legally qualified practitioner selected by the Corporation, to fulfil the Executive's obligations under this Agreement either for any consecutive 120-day period or for any period of 180 days (whether or not consecutive) in any consecutive 730-day period;
"EMPLOYMENT PERIOD" has the meaning attributed to such term in section 2;
"JUST CAUSE" means: (i) theft, fraud, dishonesty, or misconduct by the Executive involving the property, business or affairs of the Corporation or the carrying out of the Executive's duties; (ii) any material breach or non-observance by the Executive of any term of this Agreement that is capable of correction, after notice by the Corporation of the failure to do so and an opportunity for the Executive to correct the same within a reasonable time from the date of receipt of such notice, or (iii) any breach or threatened breach of any of sections 8, 9, 10, 11 or 12;
"PERSON" means any individual, partnership, limited partnership, joint venture, syndicate, sole proprietorship, company or corporation with or without share capital, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, regulatory body or agency, government or governmental agency, authority or entity however designated or constituted;
"STOP WORK NOTICE" has the meaning set out in section 7.3;
"TERMINATION DATE" has the meaning set out in section 7.2; and
"YEAR OF EMPLOYMENT" means any 12 month period commencing on the date of commencement of the Executive's employment as set out in Schedule "A" or on any anniversary of that date.
2. EMPLOYMENT AND TERM
The Corporation will employ the Executive, and the Executive will serve the Corporation, in the office set out in Schedule "A" with effect from the date set out in Schedule "A", until the effective date that the Executive's employment is terminated in accordance with section 7 (the "Employment Period").
3. NATURE OF EMPLOYMENT
3.1. The Executive will perform the duties at the office in Montreal, Quebec as set out in Schedule "A".
3.2. During the Employment Period, the Executive will faithfully, honestly and diligently serve the Corporation and the EXFO Group. The Executive will (except in the case of illness or accident) devote all of the Executive's business time and attention to the Executive's employment and will use the Executive's best efforts to promote the interests of the Corporation
and of the EXFO Group. Unless otherwise specified in Schedule "A", the Executive appreciates that the Executive's duties may involve significant travel from the Executive's place of employment (both within and outside of Canada), and the Executive agrees to travel as reasonably required in order to fulfil the Executive's duties.
3.3. The Executive will comply with all rules, regulations and instructions of the Corporation now in force, or that may be adopted from time to time, and communicated by the Corporation to its executives generally.
4. REMUNERATION
4.1. BASIC REMUNERATION. The Corporation will pay the Executive a gross annual salary (the "Basic Salary") as set out in Schedule "A". The Basic Salary will be payable in periodic equal instalments in accordance with the practices of the Corporation applicable to its other senior executives. The Corporation will review the Executive's Basic Salary at least annually, with a view to considering increases, as appropriate.
4.2. BENEFITS. The Executive will be entitled to participate in all benefit plans, funds or arrangements available from time to time to senior executive officers of the Corporation (the "Benefits") (currently the benefits set out in Schedule "A"). In addition, the Corporation will continue to pay to the Executive amounts in respect of Basic Salary during the qualification period before the long-term disability plan becomes effective (provided that this requirement may be superseded by new provisions in the standard benefits package which are at least as favourable to the Executive).
4.3. BONUS REMUNERATION. The Executive will be entitled to receive bonus remuneration, if any, in respect of each Year of Employment during the Employment Period, as the board of directors of the Corporation, in its sole discretion, may authorize in accordance with the terms of any management incentive compensation plan of the Corporation in effect from time to time. The terms of any management incentive compensation of the Corporation will be detailed to the Executive at the beginning of each fiscal year, in the absence of which the plan in effect in the prior fiscal year will remain in place.
5. EXPENSES
The Corporation will, upon presentation of expense statements or receipts and any other supporting documentation as the Corporation may reasonably require, pay or reimburse the Executive in accordance with the Corporation's expense policies for all travel and out-of-pocket expenses reasonably incurred or paid by the Executive in the performance of the Executive's duties and responsibilities.
6. VACATION
The Executive will be entitled during each Year of Employment during the Employment Period to vacation time with pay as set out below:
2 years of directly related experience - 2 weeks of vacation per year
2 to 10 years of directly related experience - 3 weeks of vacation per year
+ 10 years of directly related experience - 4 weeks of vacation per year
Vacation will be taken by the Executive at times reasonably acceptable to the Corporation having regard to its operations. Except as provided under applicable employment legislation and except with respect to vacation accrued prior to the date hereof, which may be carried over until not lather than December 31, 2002, the Executive shall not be entitled to carry over any unused portion of vacation to the following Year of Employment and will lose the entitlement to such unused portion.
7. TERMINATION
7.1. NOTICE. The Executive's employment may be terminated at any time:
7.1.1. by the Corporation without prior notice and without further obligations under this Agreement to the Executive for reasons of Just Cause or because of the occurrence of Disability;
7.1.2. by the Executive on giving prior written notice as set out in Schedule "A"; or
7.1.3. in any other case by the Corporation on giving prior written notice as set out in Schedule "A", provided that if, in the case of termination by the Corporation under this section 7.1.3, the Executive is entitled under applicable employment legislation to a longer period of notice than that set out in Schedule "A", the notice to be given by the Corporation under this section 7.1.3 will be that minimum period of notice that is required under such employment legislation and no more.
The Executive's employment will be automatically terminated, without further obligation on the part of the Corporation or the EXFO Group, upon the Executive's death.
7.2. EFFECTIVE DATE. The effective date on which the Executive's employment will be deemed to have been terminated under this section 7 (the "Termination Date") will be:
7.2.1. in the case of termination under section 7.1.1, the day on which the Executive is deemed, under section 14, to have received notice from the Corporation of termination;
7.2.2. in the case of termination under section 7.1.2 or 7.1.3, the last day of the minimum period referred to in the relevant section; and
7.2.3. in the case of the death of the Executive, on the date of the Executive's death.
7.3. STOP WORK NOTICE. Notwithstanding the foregoing, where the Corporation is giving or has given written notice to the Executive, pursuant to section 7.1.3 above, the Corporation will have the right, at any time prior to the end of the Employment Period, by giving notice to the Executive (a "Stop Work Notice") to require that the Executive cease to perform the Executive's duties and responsibilities and cease attending the Corporation's premises immediately upon the giving of the Stop Work Notice. The Executive will, as requested in these circumstances, resign all offices held in with entities in the EXFO Group.
If a Stop Work Notice is given, the Corporation will continue to pay the Executive to the end of the Employment Period. For that purpose, in calculating the Executive's entitlement to Basic Salary the Executive will be considered to have been actively employed by the Corporation to the end of the Employment Period, and the Basic Salary will be the actual Basic Salary on the date on which notice was given under section 7.1.3. The Executive will be entitled to Benefits only if permitted by the terms of any fund, plan or arrangement. To the extent that continued participation in Benefits is not permitted, the Corporation will pay to the Executive the amount of contributions the Corporation would otherwise have been required to make with respect to any relevant fund, plan or arrangement to the end of the Employment Period.
Subject to this paragraph, the Executive will not be required to mitigate the Executive's loss in these circumstances, or to account to the Corporation for any amount earned that might otherwise be considered to mitigate the liability of the Corporation to make the payments described above. If the Executive accepts alternative employment during the notice period, all obligations of the Corporation in respect of the continuation of benefits or payments of premiums in lieu will cease with effect as to the date of commencement of the alternative employment. The Executive will advise the Corporation forthwith of the acceptance of any employment relevant to this paragraph.
7.4. NO OTHER ENTITLEMENT. Except as provided above in this section 7, where the Executive's employment has been terminated by the Executive or terminated or deemed to have been terminated by the Corporation for any reason, the Executive will not be entitled, except to the extent required under any mandatory employment standard under applicable employment legislation, to receive any bonus, any payment as termination pay, severance pay, pay in lieu of notice, or as damages. Except as to any entitlement as provided above, the Executive hereby waives any claims the Executive may have against the Corporation for or in respect of termination pay, severance pay, or on account of loss of office or employment or notice in lieu thereof or damages in lieu thereof (other than rights to accrued and unpaid Basic Salary and to reimbursement for expenses pursuant to section 5). Payments to the Executive upon termination in accordance with this Agreement by the Corporation will be deemed to include and to satisfy entitlement to termination pay, vacation pay and severance pay pursuant to applicable employment legislation to the extent of those payments. Receipt by the Executive of payments in accordance with this Agreement will be deemed to constitute a full and final release and discharge by the Executive of the Corporation, the entities in the EXFO Group and all of their directors, officers and agents (for each of whom and for this purpose the Corporation contracts as a trustee) from all claims in respect of the Executive's hiring by, employment with and termination of employment with the Corporation.
8. NO CONFLICTING OBLIGATIONS
8.1. The Executive warrants to the Corporation that:
8.1.1. the performance of the Executive's duties as an employee of the Corporation will not breach any agreement or other obligation to keep confidential the proprietary information of any third party; and
8.1.2. the Executive is not bound by any agreement with or obligation to any third party that conflicts with the Executive's obligations as an employee of the Corporation or that may affect any interest of an entity in the EXFO Group in Developments.
8.2. The Executive will not, in the performance of the Executive's duties as an employee of the Corporation:
8.2.1. improperly bring to the Corporation or use any trade secrets, confidential information or other proprietary information of any third party; or
8.2.2. knowingly infringe the intellectual property rights of any third party.
9. CONFIDENTIAL INFORMATION
9.1. PROTECTION OF CONFIDENTIAL INFORMATION. All Confidential Information, whether it is developed by the Executive during the Employment Period or by others employed or engaged by or associated with any entity in the EXFO Group, is the exclusive and confidential property of such entity in the EXFO Group or its clients, as the case may be, and will at all times be regarded and protected as such, as provided in this Agreement.
9.2. COVENANTS RESPECTING CONFIDENTIAL INFORMATION. As a consequence of the acquisition of Confidential Information, the Executive will occupy a position of trust and confidence with respect to the affairs and business of each entity in the EXFO Group and their clients. In view of the foregoing, it is reasonable and necessary for the Executive to make the following covenants regarding the Executive's conduct during and subsequent to the Executive's employment by the Corporation:
9.2.1. NON-DISCLOSURE. At all times during and subsequent to the Executive's employment with the Corporation, the Executive will not disclose Confidential Information to any person or entity (other than as necessary in carrying out the Executive's duties on behalf of the Corporation) without first obtaining the consent of the affected entity in the EXFO Group, and the Executive will take all reasonable precautions to prevent inadvertent disclosure of any Confidential Information. This prohibition includes, but is not limited to, disclosing or confirming the fact that any similarity exists between the Confidential Information and any other information.
9.2.2. USING, COPYING, ETC. At all times during and subsequent to the Executive's employment with the Corporation, the Executive will not use, copy, transfer or destroy any Confidential Information (other than as necessary in carrying out the Executive's duties on behalf of the Corporation) without first obtaining the consent of the affected entity in the EXFO Group, and the Executive will take all reasonable precautions to prevent inadvertent use, copying, transfer or destruction of any Confidential Information. This prohibition includes, but is not limited to, licensing or otherwise exploiting, directly or indirectly, any products or services which embody or are derived from Confidential Information or exercising judgment or performing analysis based upon knowledge of Confidential Information.
9.2.3. RETURN OF CONFIDENTIAL INFORMATION. Within five days after the termination of the Executive's employment by the Corporation on any basis, or of receipt by the Executive of a written request, the Executive will promptly deliver to the applicable entity in the EXFO Group all property of or belonging to or administered by such entity, including without limitation, all Confidential Information that is embodied in any physical or ephemeral form, whether in hard copy or on magnetic media, and that is within the Executive's possession or under the Executive's control.
9.3. OBLIGATIONS CONTINUE. The Executive's obligations under this section 9 are to remain in effect perpetually and will exist and continue in full force and effect notwithstanding any breach or repudiation or any alleged breach or repudiation of this Agreement by the Corporation.
10. COMPETITION AND SOLICITATION
10.1. NON-COMPETITION. The Executive acknowledges that employment by the Corporation will give the Executive access to Confidential Information, and that the Executive's knowledge of Confidential Information will enable the Executive to put the Corporation at a significant competitive disadvantage if the Executive is employed or engaged by or becomes involved in a Competitive Business. Accordingly, during the Employment Period and for the relevant period of time after the Termination Date as set out in Schedule "A", the Executive will not, directly or indirectly, individually or in partnership or in conjunction with any Person:
10.1.1. be engaged, directly or indirectly, in any manner whatsoever, including, without limitation, either individually or in partnership, jointly or in conjunction with any other Person, or as an employee, consultant, adviser, principal, agent, member or proprietor in any Competitive Business; or
10.1.2. advise, invest in, lend money to, guarantee the debts or obligations of, or otherwise have any other financial or other interest (including an interest
by way of royalty or other compensation arrangements) in or in respect of any Person which carries on a Competitive Business.
The restriction in section 10.1.2 above will not prohibit the Executive from holding not more than five percent of the issued shares of a public company listed on any recognized stock exchange or traded on any BONA FIDE "over the counter" market anywhere in the world.
For greater certainty, the Executive's obligations under this section 10.1 are in addition to the obligations respecting disclosure and use of Confidential Information in section 9.
10.2. NO SOLICITATION OF CLIENTS AND SUPPLIERS. The Executive acknowledges the importance to the business carried on by the EXFO Group of the client and supplier relationships developed by it and the unique opportunity that the Executive's employment and the Executive's access to the Confidential Information offers to interfere with these relationships. Accordingly, during the Employment Period and for the relevant period of time after the Termination Date as set out in Schedule "A", the Executive will not, directly or indirectly, contact or solicit any person who the Executive knows to be a prospective, current or former client or supplier of any entity in the EXFO Group for the purpose of (i) selling to the client any products or services that are the same as or substantially similar to, or in any way competitive with, the products or services sold by entities in the EXFO Group; or (ii) buying from such supplier any products or services that are used or intended for use in any products or services that are the same as or substantially similar to, or in any way competitive with, the products or services sold by entities in the EXFO Group, and in each case during the Executive's employment or at the end thereof, as the case may be.
10.3. NO SOLICITATION OF EMPLOYEES. The Executive acknowledges the importance to the business carried on by the entities in the EXFO Group of the human resources engaged and developed by it and the unique access the Executive's employment offers to interfere with these resources. Accordingly, during the Employment Period and for the relevant period of time after the Termination Date as set out in Schedule "A", the Executive will not induce or solicit, attempt to induce or solicit or assist any third party in inducing or soliciting any employee or consultant of any entity in the EXFO Group, to leave such entity or to accept employment or engagement elsewhere.
10.4. INDEPENDENT COVENANTS. Each of sections 10.1, 10.2 and 10.3 will be construed as constituting obligations independent of any other obligations of the Executive pursuant to this Agreement. The existence of any claim or cause of action the Executive may have or assert against the Corporation, whether based on this Agreement or otherwise, will not constitute a defence to the enforcement by the Corporation of any of the covenants and agreements in such foregoing sections.
11. INTELLECTUAL PROPERTY
11.1. OWNERSHIP. All Developments will be the exclusive property of the Corporation or of the relevant entity in the EXFO Group and the Corporation, or such relevant entity, will have sole discretion to deal with Developments. For greater certainty, all work done during the
Employment Period by the Executive for the Corporation or another entity in the EXFO Group is a work for hire of which the Corporation, or the other relevant entity in the EXFO Group, as the case may be, is the first author for copyright purposes and in respect of which all copyright will vest in the Corporation or the relevant entity in the EXFO Group, as the case may be.
11.2. RECORDS. The Executive will keep complete, accurate and authentic notes, reference materials, data and records of all Developments in the manner and form requested by the Corporation.
All these materials will be Confidential Information upon their creation.
11.3. MORAL RIGHTS. The Executive hereby irrevocably waives all moral rights arising under the COPYRIGHT ACT (Canada) as amended (or any successor legislation of similar effect) or similar legislation in any applicable jurisdiction, or at common law, that the Executive may have now or in the future with respect to the Developments, including, without limitation, any rights the Executive may have to have the Executive's name associated with the Developments or to have the Executive's name not associated with the Developments, any rights the Executive may have to prevent the alteration, translation or destruction of the Developments, and any rights the Executive may have to control the use of the Developments in association with any product, service, cause or institution. The Executive agrees that this waiver may be invoked by the Corporation, and by any of its authorized agents or assignees, in respect of any or all of the Developments.
11.4. FURTHER ASSURANCES. The Executive will do all further things that may be reasonably necessary or desirable in order to give full effect to the foregoing. If the Executive's co-operation is required in order for any entity in the EXFO Group to obtain or enforce legal protection of the Developments following the termination of the Executive's employment, the Executive will provide that co-operation so long as the Corporation pays to the Executive reasonable compensation for the Executive's time at a rate to be agreed, provided that the rate will not be less than the last Base Salary or compensation rate paid to the Executive by the Corporation during the Executive's employment.
12. WARRANTIES, COVENANTS AND REMEDIES
12.1. The obligations of the Executive as set forth in sections 8, 9, 10 and 11 of this Agreement will be deemed to have commenced as of the date on which the Executive was first employed by an entity in the EXFO Group. The Executive warrants that the Executive has not, to date, breached any of the obligations set forth in any of those sections. Any breach or threatened breach of those sections by the Executive will constitute Just Cause for immediate termination of the Executive's employment or engagement by the Corporation.
12.2. The Executive understands that the entities in the EXFO Group have expended significant financial resources in developing their products and the Confidential Information. Accordingly, a breach or threatened breach by the Executive of any of sections 8, 9, 10, 11 or 12.1, could result in unfair competition with entities in the EXFO Group and could result in the Corporation, the other entities in the EXFO Group and their respective shareholders suffering
irreparable harm that is not capable of being calculated and that cannot be fully or adequately compensated by the recovery of damages alone. Accordingly, the Executive agrees that the Corporation and/or the relevant entity in the EXFO Group will be entitled to interim and permanent injunctive relief, specific performance and other equitable remedies, in addition to any other relief to which the Corporation or such entity may become entitled.
12.3. The Executive's obligations under each of sections 8, 9, 10, 11, 12.1 and 12.2 are to remain in effect in accordance with each of their terms and will exist and continue in full force and effect despite any breach or repudiation, or alleged breach or repudiation, of this Agreement or the Executive's employment (including, without limitation, the Executive's wrongful dismissal) by the Corporation.
13. CO-OPERATION BY EXECUTIVE
The Executive will co-operate in all respects with the Corporation if a question arises as to whether the Executive has a Disability. Without limitation, the Executive will authorize the Executive's medical doctor or other health care specialist to discuss the condition of the Executive with the Corporation and will as reasonably requested by the Corporation submit to examination by a medical doctor or other health care specialist selected by the Corporation.
14. NOTICES
Any notice or other communication required or permitted to be given hereunder must be in writing, and must be given by facsimile or other means of electronic communication or by hand-delivery as hereinafter provided, except that any notice of termination by the Corporation under section 7 above must be hand-delivered or given by registered mail. Any notice of other communication, if mailed by registered mail, will be deemed to have been received on the day that mail is delivered by the post office, or if sent by facsimile, will be deemed to have been received on the Business Day following the sending, or if delivered by hand to the Executive will be deemed to have been received at the time it is delivered to the Executive or, if delivered to the Executive or the Corporation at the applicable address set out in Schedule "A", when it is delivered to the Executive or the Corporation at the applicable address set out in Schedule "A", when it is delivered either to the individual set out in Schedule "A" or to an individual at that address having apparent authority to accept deliveries on behalf of the addressee. Notice of change of address will also be governed by this section. Notices and other communications must be addressed as set out in Schedule "A".
15. HEADINGS
The inclusion of headings in this Agreement is for convenience of reference only and is not to affect construction or interpretation.
16. INVALIDITY OF PROVISIONS
Each of the provisions contained in this Agreement is distinct and severable and a declaration of invalidity or unenforceability of any provision by a court of competent jurisdiction will not affect the validity or enforceability of any other provision.
17. ENTIRE AGREEMENT
This Agreement and the attached Schedule "A" constitute the entire agreement between the parties pertaining to the subject matter of this Agreement. This Agreement supersedes and replaces all prior agreements, if any, written or oral, with respect to the Executive's employment by the Corporation and any rights which the Executive may have by reason of any prior agreement or by reason of the Executive's prior employment, if any, by another entity in the EXFO Group. There are no warranties, representations or agreements between the parties in connection with the subject matter of this Agreement except as specifically set forth or referred to in this Agreement. No reliance is placed on any representation, opinion, advice or assertion of fact made by the Corporation, any other entity in the EXFO Group or their respective directors, officers and agents (for each of whom and for this purpose the Corporation contracts as trustee) to the Executive, except to the extent that the same has been reduced in writing and included as a term of this Agreement. Accordingly, there will be no liability, either in tort or in contract, assessed in relation to any representation, opinion, advice or assertion of fact, except to the extent aforesaid.
18. WAIVER, AMENDMENT
Except as expressly provided in this Agreement, no amendment or waiver of this Agreement will be binding unless executed in writing by the party to be bound. No waiver of any provision of this Agreement will constitute a waiver of any other provision nor will any waiver of any provision of this Agreement constitute a continuing waiver unless otherwise expressly provided.
19. GOVERNING LAW AND ATTORNMENT
This Agreement will be governed exclusively by and construed in accordance with the laws of Quebec and the laws of Canada applicable therein. The parties attorn to the non-exclusive jurisdiction of the Courts of Quebec.
20. COUNTERPARTS
This Agreement may be signed in counterparts. Each counterpart will constitute an original document and all counterparts, taken together, will constitute one and the same instrument. Executed counterparts may be delivered by telecopier or other electronic delivery.
21. ACKNOWLEDGEMENT
The Executive acknowledges that:
(i) the Executive has received a copy of this Agreement;
(ii) the Executive has had sufficient time to review and consider this Agreement thoroughly;
(iii) the Executive has read and understands the terms of this Agreement and the Executive's obligations under this Agreement;
(iv) the restrictions placed upon the Executive by this Agreement are reasonably necessary to protect the proprietary interests in the Confidential Information and the Developments of the entities in the EXFO Group, and will not preclude the Executive from being gainfully employed in a suitable capacity following termination of the Executive's employment by the Corporation, given the Executive's general knowledge and experience;
(v) the Executive has been given an opportunity to obtain independent legal advice, or other advice as the Executive may desire, concerning the interpretation and effect of this Agreement, and by signing this Agreement the Executive has either obtained advice or voluntarily waived the Executive's opportunity to receive same; and
(vi) the Agreement is entered into voluntarily by the Executive.
IN WITNESS WHEREOF THE PARTIES HAVE EXECUTED THIS AGREEMENT.
EXFO PROTOCOL INC.
Date: November 2, 2001 By : /s/ Sami Yadzi
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I agree to my employment on these terms
/s/ Sami Yadzi
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Signature of Executive
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SCHEDULE "A"
EXECUTIVE EMPLOYMENT AGREEMENT
This schedule is attached to and forms an essential part of the executive employment agreement between EXFO Protocol Inc. (the "Corporation") and Sami Yazdi (the "Executive").
1. In accordance with section 2 of the Agreement, the Executive's employment under the Agreement will commence on November 2, 2001.
2. In accordance with section 2 of the Agreement, the office to be held by the Executive in the Corporation will be President. The Corporation may, at any time, assign the Executive to perform other functions that are consistent with the Executive's skill and experience.
3. In accordance with section 3.1 of the Agreement, the undersigned has agreed to perform the duties of the office of President, which include, without limitation, responsibility for the overall management and direction of the Corporation, giving strategic leadership to the Senior Management Team and focusing on the medium to long-term business strategy of the Corporation.
4. In accordance with section 4.1 of the Agreement, the Executive will be entitled to an annual salary of $175,000 (before deduction for income taxes and other required deductions, but excluding the Benefits paid by the Corporation as provided in section 4.2 of the Agreement). The first annual revision shall occur in September 2002.
5. In accordance with section 4.2 of the Agreement, the Executive is currently entitled to receive the following benefits: 80% of insurance premium to be paid by the Corporation.
6. In accordance with section 6 of the Agreement, the Executive will be entitled to 4 weeks of paid vacation annually.
7. The Executive shall be eligible, in accordance with EXFO's policies, to be considered to participate in the EXFO Stock Option Plan to receive stock options and purchase shares pursuant to the Stock option Plan as the same is in effect at any relevant time.
8. In accordance with section 7.1.2 of the Agreement, the Executive may terminate the Executive's employment on giving to the Corporation at least 6 month's prior written notice. However, the Executive will attempt to provide as much (additional) prior notice as is possible and will, in all cases, assist fully as reasonably requested by the Corporation in effecting an orderly transition to the Executive's successor.
9. In accordance with section 7.1.3 of the Agreement, the Corporation may terminate the Executive's employment on giving to the Executive at least 6 months' prior written notice.
10. In accordance with section 10.1, the "Non-Competition" provisions will be valid until 24 months following the Termination Date.
11. In accordance with section 10.2, the "No Solicitation of Clients and Suppliers" provisions will be valid until 2 years following the Termination Date.
12. In accordance with section 10.3, the "No Solicitation of Employees" provisions will be valid until 2 years following the Termination Date.
13. In accordance with section 14 of the Agreement, any notice or communication to be given or made must be addressed as follows:
if to the Executive:
if to the Corporation:
2650 Marie-Curie
St. Laurent, Quebec
H4S 2C3
Attention: President
Facsimile: 514-856-2232
with a copy to:
EXFO Electro-Optical Engineering Inc.
465 Godin Avenue
Vanier, Quebec
G1M 3G7
Attention: Vice President Finance and Chief Financial Officer Facsimile: (418) 683-9839
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FIRST AMENDING AGREEMENT
TO THE EMPLOYMENT AGREEMENT
This First Amending Agreement dated as of September 1, 2001, 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").
WHEREAS the Corporation and the Employee entered into an Employment Agreement dated September 1, 2000 (the "Agreement") providing for the terms of employment of the Employee;
WHEREAS the parties hereto have agreed to amend the Agreement to modify certain terms of employment;
THEREFORE the parties agree as follows:
1. AMENDMENTS
Schedule A to the Agreement is hereby replaced in its entirety with the Schedule A attached hereto and forming an integral part hereof.
2. MISCELLANEOUS
2.1 In all respects, except for those changes required to give
meaning and effect to the amendments provided for in the
foregoing sections hereof, the Agreement, as amended hereby,
remains in full force and effect, is hereby ratified and
confirmed in all respects, and is binding upon the parties
hereto. The Agreement constitutes the whole and entire
agreement between the parties hereto with respect to the
subject matter thereof and cancels and supersedes any prior
written agreements, declarations, commitments,
representations, undertakings, written or oral, in respect
thereof.
2.2 This First Amending 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
1.
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Employee at any other residence, or care of a subsequent
employer, of which the Corporation may be aware.
2.3 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.
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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
2.
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1. REMUNERATION
From September 1, 2001 to August 31, 2002:
(i) Base salary of US$145,000 per annum.
(ii) Commission on Total Bookings (as defined in Schedule 4 of the Employment Agreement):
During the period from September 1, 2001 to August 31, 2002, commissions will be payable to Employee on a monthly basis in amounts equal to the following percentages of Total Bookings made in North America by all companies in the Corporation's group of companies:
For Total Bookings from US$0 to US$45,000,000 - 0.1933% of the Total Bookings figure is payable;
For Total Bookings exceeding US$45,000,000 and up to US$60,000,000 - 0.3867% of the Total Bookings figure is payable; and
For Total Bookings exceeding US$60,000,000 - 0.5800% of the Total Bookings figure is payable.
Notwithstanding the preceding paragraphs and as an exceptional measure for the current financial year given the unusual market conditions, the Corporation undertakes to pay commissions to Employee of at least US$72,500 in the event Total Bookings for the period from September 1, 2001 to August 31, 2002 are less than US$37,506,467.
3.
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(iii) Quarterly bonus: After the end of each of the Corporation's financial quarters, the Employee shall be paid a bonus of US$4,000 if the following Total Bookings objectives by the North American Sales department for each such quarter are
attained: 1st Quarter: US$14,000,000 3rd Quarter: US$16,000,000 2nd Quarter: US$14,000,000 4th Quarter: US$16,000,000. |
In the event the annual Total Bookings objective for the North American Sales department of US$60,000,000 for the financial year ending August 31, 2002 (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$16,000, 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$7,000 shall be paid to Employee and if the Annual Objective is exceeded by 20% or more, a further additional bonus of US$7,000 shall be paid to Employee.
(iv) 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 October 10, 2001, 15,000 stock options;
o On January 3, 2002, 5,000 stock options.
(v) The Employee shall receive a monthly car expense allowance of US$700.00.
(vi) The provisions governing the payment of commission and the reimbursement of expenses are set forth in Schedule D to the Agreement.
(vii) An annual review of remuneration shall occur on or about September 1, 2002.
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.
4.
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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.
5.