EXFO INC. - 20-F - 20030116 - RESULTS_OF_OPERATIONS
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)
* 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.
48
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.
49
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
50
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
51
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.
52
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.
53
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.
54
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)
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.
55
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
56
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:
57
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
======= ====== ============
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
58
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.
59
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.
60
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
61
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
62
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.
63
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.
64
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$500 if such participation
was made by telephone were also paid. If more than one meeting occurs on the
same day, only one fee is paid. All directors will be reimbursed for traveling
and other expenses incurred in connection with attendance at meetings.
As partial remuneration for the financial year ended August 31, 2001, a
total of 20,359 options were granted under our Stock Option Plan in October 2001
to directors who are not employees. Then in January 2002, 2,479 options were
granted to one director who chose to receive a portion of his remuneration in
the form of stock options.
EXECUTIVE COMPENSATION
The table below shows certain compensation information for Mr. Germain
Lamonde, the President and Chief Executive Officer of the Corporation, and the
four other most highly compensated executive officers of the Corporation and its
subsidiaries during the financial year ended August 31, 2002 (collectively, the
"Named Executive Officers"). This information includes the US dollar value of
base salaries, bonus awards and long term incentive plan payments, the number of
options granted, and certain other compensation, if any, whether paid or
deferred.
65
SUMMARY COMPENSATION TABLE
--------------------------------------------------------------------------------------------------------------------
SECURITIES
OTHER ANNUAL UNDER ALL OTHER
NAME AND PRINCIPAL FINANCIAL SALARY BONUS(1) COMPENSATION OPTIONS(2) COMPENSATION
POSITION YEAR (US$) (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.
(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$2,771 paid as a retroactive adjustment
to bonus for the financial year ended August 31, 2000.
66
The following table indicates additional information on the options
granted to our Named Executive Officers during the 2002 fiscal year.
PERCENTAGE OF NET MARKET VALUE OF
TOTAL OF OPTIONS SECURITIES
SECURITIES UNDER GRANTED TO UNDERLYING
OPTIONS EMPLOYEES IN EXERCISE OR BASE OPTIONS ON THE
GRANTED(1) FINANCIAL YEAR PRICE (2) (US$/ 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
(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
67
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,
68
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
69
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.
70
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.
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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.
72
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
73
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
* Less than 1%.
(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.
74
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
(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.
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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 * *
* Less than 1%
(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
76
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.
77
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.
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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
YEARS ENDED AUGUST 31,
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
======= ======= =======
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.
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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
81
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
82
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
83
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.
84
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.
85
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
86
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.
87
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.,
88
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.
89
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.
YEARS ENDING AUGUST 31,
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
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.
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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]
91
PART III.
ITEM 17. FINANCIAL STATEMENTS
Not Applicable.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 to F-45
92
ITEM 19. EXHIBITS
NUMBER EXHIBIT
------ -------
1.1 Amended Articles of Incorporation of EXFO (incorporated by
reference to Exhibit 3.1 of EXFO's Registration Statement on Form
F-1, File No. 333-38956).
1.2 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).
93
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).
94
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.
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;
95
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
96
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
97
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
98
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.
The accompanying notes are an integral part of
these consolidated financial statements
F-2
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
F-3
EXFO ELECTRO-OPTICAL ENGINEERING INC.
Consolidated Statements of Retained Earnings (Deficit) and
Contributed Surplus
(in thousands of US dollars, except per share data)
RETAINED EARNINGS (DEFICIT)
YEARS ENDED AUGUST 31,
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 $ -- $ --
CONTRIBUTED SURPLUS
YEARS ENDED AUGUST 31,
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
F-4
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
The accompanying notes are an integral part of
these consolidated financial statements
F-5
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.
F-6
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.
F-7
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
F-8
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.
F-9
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
F-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)
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.
F-11
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 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
========
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.
F-12
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
========= =========
F-13
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
F-14
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
AS AT AUGUST 31,
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
=============== =============
F-15
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
AS AT AUGUST 31,
-------------------
2001 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).
F-16
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
AS AT AUGUST 31,
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.
F-17
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.
F-18
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 - $ - - $ - $ -
================================== ================================ ===============
F-19
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.
F-20
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
============= ============= ============= ============= ============= ==============
F-21
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:
YEARS ENDED AUGUST 31,
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.
F-22
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
================ ==================== ================= ====================
F-23
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.
F-24
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.
F-25
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)
================= =============== =================
F-26
EXFO ELECTRO-OPTICAL ENGINEERING INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands of US dollars,
except share and per share data and as otherwise noted)
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.
F-27
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:
Long-lived assets consist of property, plant and equipment, intangible assets
and goodwill.
F-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)
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
================== ==================
F-29
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
F-30
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.
F-31
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)
F-32
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)
================= ================ =================
F-33
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
================= ================ =================
F-34
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)
================= ================ =================
F-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)
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)
================= ================ =================
F-36
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").
F-37
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.
F-38
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
F-39
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.
F-40
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.
F-41
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.
F-42
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.
YEARS ENDED AUGUST 31,
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)
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:
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.
F-43
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)
The following table summarizes the stock-based compensation costs for options
outstanding based on the fair value-based method:
STOCK-BASED COMPENSATION COSTS FOR THE YEARS ENDED
AUGUST 31,
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.
F-44
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.
F-45
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).
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).
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
EXHIBIT 1.2
EXFO ELECTRO-OPTICAL ENGINEERING INC.
CODE OF GENERAL BY-LAWS
enacted pursuant to the
CANADA BUSINESS CORPORATIONS ACT
Adopted as of : May 25, 2000
Amended as of: October 30, 2002
CODE OF GENERAL BY-LAWS OF
THE CORPORATION
enacted pursuant to the
CANADA BUSINESS CORPORATIONS ACT
INDEX
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
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
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
- 1 -
CODE OF GENERAL BY-LAWS OF
EXFO ELECTRO-OPTICAL ENGINEERING INC.
(the "Corporation")
enacted pursuant to the
CANADA BUSINESS CORPORATIONS ACT
DEFINITIONS
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;
LOCATION OF REGISTERED OFFICE AND OFFICES
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.
- 2 -
SHAREHOLDERS
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
- 3 -
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
- 4 -
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.
- 5 -
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.
- 6 -
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
- 7 -
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.
- 8 -
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.
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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.
MEETINGS OF THE BOARD OF DIRECTORS
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
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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
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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.
OFFICERS
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.
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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.
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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.
EXECUTIVE COMMITTEE
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.
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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.
AUDIT 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.
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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.
OTHER COMMITTEES
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.
INDEMNIFICATION AND EXEMPTION
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.
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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.
SHARE CAPITAL
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.
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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.
DIVIDENDS
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.
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FISCAL YEAR AND AUDIT
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
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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.
MISCELLANEOUS PROVISIONS
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.
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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
EXHIBIT 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
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
i
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
ii
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
iii
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
iv
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
v
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
1
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.
2
"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.
3
"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).
4
"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,"
5
"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.
6
"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.
7
"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
8
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
9
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).
10
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.
11
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).
12
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.
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(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
14
(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;
15
(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:
16
(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.
17
(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
18
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)
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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").
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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,
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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.
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(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,
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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;
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(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
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(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
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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;
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(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
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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.
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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.
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(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
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(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
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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.
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(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;
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(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.
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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.
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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
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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):
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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
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(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.
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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):
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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.
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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.
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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.
(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
44
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.
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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.
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(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
47
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.
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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
49
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
50
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
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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
52
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
53
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
54
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
55
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:
Attention: President
Telephone: 418-683-0211
Facsimile: 418-683-2170
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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.
58
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
59
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.
60
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
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
- ii -
12. Warranties, Covenants and Remedies.............................. 11
13. Co-operation by Executive....................................... 12
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
- 2 -
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;
- 3 -
(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;
- 4 -
"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
- 5 -
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:
- 6 -
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 -
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.
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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 -
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
- 10 -
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
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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
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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.
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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;
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(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
---------------------------------------
I agree to my employment on these terms
/s/ Sami Yadzi
---------------------------------------
Signature of Executive
Sami Yazdi
Name of Executive (Please Print)
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.
- 2 -
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:
Attention: Vice President Finance and Chief Financial Officer
Facsimile: (418) 683-9839
EXHIBIT 4.32
[GRAPHIC OMITTED]
[LOGO - EXFO]
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.
[GRAPHIC OMITTED]
[LOGO - EXFO]
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.
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.
[GRAPHIC OMITTED]
[LOGO - EXFO]
SCHEDULE A
TO
FIRST AMENDING AGREEMENT
TO THE EMPLOYMENT AGREEMENT
BRUCE BONINI
REMUNERATION, VACATION, PLACE OF WORK
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.
[GRAPHIC OMITTED]
[LOGO - EXFO]
(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
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.
[GRAPHIC OMITTED]
[LOGO - EXFO]
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.
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