Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion and analysis contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, and we intend that such forward-looking statements be subject to the safe harbors created thereby. Forward-looking statements are statements other than historical information or statements of current condition. Words such as may, expect, believe, plan, anticipate, intend, could, estimate, continue, or similar expressions or the negative of such expressions are intended to identify forward-looking statements. In addition, any statements that refer to expectations, projections or other characterizations of future events and circumstances are considered forward-looking statements. They are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in forward-looking statements due to various factors including, but not limited to, macroeconomic uncertainty as well as capital spending and network deployment levels in the telecommunications industry (including our ability to quickly adapt cost structures with anticipated levels of business and our ability to manage inventory levels with market demand); future economic, competitive, financial and market conditions; consolidation in the global telecommunications test, service assurance and network visibility markets and increased competition among vendors; capacity to adapt our future product offering to future technological changes; limited visibility with regards to the timing and nature of customer orders; delay in revenue recognition due to longer sales cycles for complex systems involving customers' acceptance; fluctuating exchange rates; concentration of sales; timely release and market acceptance of our new products and other upcoming products; our ability to successfully expand international operations; our ability to successfully integrate businesses that we acquire; and the retention of key technical and management personnel. Assumptions relating to the foregoing involve judgments and risks, all of which are difficult or impossible to predict and many of which are beyond our control. Other risk factors that may affect our future performance and operations are detailed in our Annual Report, on Form 20-F, and our other filings with the U.S. Securities and Exchange Commission and the Canadian securities commissions. We believe that the expectations reflected in the forward-looking statements are reasonable based on information currently available to us, but we cannot assure that the expectations will prove to have been correct. Accordingly, you should not place undue reliance on these forward-looking statements. These statements speak only as of the date of this document. Unless required by law or applicable regulations, we undertake no obligation to revise or update any of them to reflect events or circumstances that occur after the date of this document. This discussion and analysis should be read in conjunction with the consolidated financial statements.
The following discussion and analysis of financial condition and results of operations is dated November 25, 2015.
All dollar amounts are expressed in US dollars, except as otherwise noted.
COMPANY OVERVIEW
We are a leading provider of next-generation test, service assurance and network visibility solutions for fixed and mobile network operators, web-scale service providers as well as equipment manufacturers in the global telecommunications industry. Our intelligent solutions with contextually relevant analytics are designed to improve end-user quality of experience, enhance network performance and drive operational efficiencies throughout the network and service delivery lifecycles. We target high-growth market opportunities related to increasing bandwidth and improving quality of experience on network infrastructures: 4G/LTE (long-term evolution), wireless backhaul, small cells and distributed antenna systems (DAS), 100G network upgrades and fiber-to-the-home (FTTH)/fiber-to-the-curb (FTTC)/fiber-to-the-node (FTTN) deployments.
Our success has been largely predicated on our core expertise in developing test equipment for wireline networks. These solutions are available as handheld test instruments, portable platforms with related modules, and as rack-mounted chassis with related modules. Our PC-centric, open-ended platforms, combined with cloud-based software applications, can be transformed into a fully connected test environment called the FTB Ecosystem. Leveraging platform connectivity, customers can keep track of their entire test fleet, manage software updates and schedule calibration procedures. All test data within the FTB Ecosystem can be stored in a central database and used as a point of reference against future measurements. Consequently, this enhanced test environment enables customers to increase productivity and reduce operating expenses.
Over the years, we expanded our product portfolio into service assurance for next-generation IP (internet protocol) networks and into test equipment for 2G, 3G and 4G/LTE wireless networks. Our service assurance solution, called the Brix System, is a probe-based hardware and software solution that delivers end-to-end, quality of service and quality of experience visibility as well as real-time, IP service monitoring and verification of next-generation IP networks. We have enriched our service assurance offering with infrastructure performance management tools and analytics software solutions via technology acquisitions. Built around a distributed architecture, the Brix System enables the successful launch and ongoing profitable operation of IP-based voice, video and data applications and services across wireline and wireless networks.
Our 2G, 3G and 4G/LTE test portfolio mainly consists of network simulators and protocol analyzers. Our network simulators simulate real-world, large-scale network traffic and end-user behavior in a laboratory environment in order to predict network behavior, uncover faults and optimize networks before wireless networks and services are deployed. Our protocol analyzers analyze mobile network elements in order to validate functionality according to wireless technology specifications, determine whether or not these elements interoperate with each other effectively when combined to form a network, and assess how well the live network performs.
The competitive advantages of our products include a high degree of innovation, modularity (especially wireline products) and ease of use. Ultimately, our products enable network equipment manufacturers and operators to design, deploy, troubleshoot and monitor wireline and wireless networks and, in the process, help them reduce the cost of operating their networks.
We have a staff of approximately 1500 people in 25 countries, supporting more than 2000 customers in approximately 100 countries around the world. We operate three main manufacturing sites, which are located in Quebec City, Canada, in Shenzhen, China and in Oulu, Finland. We also have five main research and development expertise centers in Boston, Toronto, Montreal, Quebec City and Oulu, supported by a software development center in India.
We launched 13 new products or major enhancements in fiscal 2015. Key new product introductions included EXFO Xtract, a real-time analytics software platform that has been well received by network operators for critical end-to-end network performance and service visibility requirements. We also introduced the NetBlazer 800 v2 series, a quad-port, field-portable, transport & datacom performance validation test solution designed to accelerate and simplify the turn-up of 1G and 10G Ethernet services. This solution is housed inthe new FTB-1 Pro, a lightweight and compact test platform allowing field technicians to carry out dedicated optical, Ethernet and multi-service testing. We also released CPRI (common public radio interface) test capabilities for fiber-to-the-antenna (FTTA) and distributed antenna system (DAS) deployments. Finally, we introduced new features for its patented intelligent optical link mapping (iOLM) software and for its automated wireless fiber inspection solutions, both contributing to automate and accelerate fiber deployments in wireless access networks.
We reported sales of $222.1 million in fiscal 2015 compared to $230.8 million in 2014 due to a significant headwind from a stronger US dollar versus other currencies. Otherwise, in fiscal 2015, in constant currency, our sales would have been flat year-over-year. Bookings totaled $223.1 million in fiscal 2015, for a book-to-bill ratio of 1.00, compared to $240.4 million in 2014.
We reported net earnings of $5.3 million, or $0.09 per diluted share, in fiscal 2015, compared to $783,000, or $0.01 per diluted share, in 2014. Net earnings in fiscal 2015 included $2.7 million in after-tax amortization of intangible assets, $1.3 million in after-tax restructuring charges, $1.3 million in stock-based compensation costs, and a foreign exchange gain of $7.2 million. Net earnings in fiscal 2014 included $4.1 million in after-tax amortization of intangible assets, $1.7 million in stock-based compensation costs and a foreign exchange gain of $1.6 million.
Adjusted EBITDA (net earnings before interest, income taxes, depreciation and amortization, restructuring charges, stock-based compensation costs and foreign exchange gain) amounted to $13.8 million, or 6.2% of sales, in fiscal 2015, compared to $14.4 million, or 6.2% of sales, in 2014. See page 64 of this document for a complete reconciliation of adjusted EBITDA and IFRS net earnings.
In the fourth quarter of fiscal 2015, we implemented a restructuring plan to align our cost structure to the challenging market environment. This plan resulted in one-time severance expenses of $1.6 million for employees laid off during the fourth quarter.
On January 7, 2015, we announced that our Board of Directors had authorized a substantial issuer bid (the "Offer") to purchase for cancellation up to 7,142,857 subordinate voting shares for an aggregate purchase price not to exceed CA$30 million. On February 20, 2015, pursuant to the Offer, we purchased for cancellation 6,521,739 subordinate voting shares for an aggregate purchase price of CA$30 million (US$24.0 million), plus related fees of $0.2 million. We used cash to fund the purchase of shares.
On March 25, 2015, we announced that our Board of Directors approved the renewal of our share repurchase program by way of a normal course issuer bid on the open market of up to 10% of the issued and outstanding subordinate voting shares, representing 1,397,598 subordinate voting shares at the prevailing market price. We expect to use cash, short-term investments or future cash flows from operations to fund the repurchase of shares. The normal course issuer bid started on March 27, 2015, and will end on March 26, 2016, or on an earlier date if we repurchase the maximum number of shares permitted under the bid. The program does not require that we repurchase any specific number of shares, and it may be modified, suspended or terminated at any time and without prior notice. All shares repurchased under the bid will be cancelled.
Sales
We sell our products to a diversified customer base in approximately 100 countries through our direct sales force and channel partners, such as sales representatives and distributors. Most of our sales are denominated in US dollars, euros and Canadian dollars.
In fiscal 2013, 2014 and 2015, no customer accounted for more than 10% of our sales, with our top customer representing 6.1%, 6.1% and 7.1% of our sales respectively.
We believe that we have a vast array of products, a diversified customer base, and a good spread across geographical areas, which provides us with reasonable protection against the concentration of sales and credit risk.
Cost of Sales
The cost of sales includes raw materials, salaries and related expenses for direct and indirect manufacturing personnel, as well as overhead costs. Excess, obsolete and scrapped materials are also included in the cost of sales. However, the cost of sales is presented exclusive of depreciation and amortization, which are shown separately in the statements of earnings.
Operating Expenses
We classify our operating expenses into three main categories: selling and administrative expenses, research and development expenses, as well as depreciation and amortization expenses.
Selling and administrative expenses consist primarily of salaries and related expenses for personnel, sales commissions, travel expenses, marketing programs, professional services, information systems, human resources and other corporate expenses.
Gross research and development expenses consist primarily of salaries and related expenses for engineers and other technical personnel, material component costs as well as fees paid to third-party consultants. We are eligible to receive research and development tax credits and grants on research and development activities carried out in Canada and Finland. All related research and development tax credits and grants are recorded as a reduction of gross research and development expenses.
RESULTS OF OPERATIONS
(in thousands of US dollars, except per share data, and as a percentage of sales for the years indicated)
Consolidated statements of earnings data (1):
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|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
Sales
|
|
$
|
222,089
|
|
|
$
|
230,806
|
|
|
$
|
242,150
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cost of sales (2)
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|
85,039
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|
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|
86,836
|
|
|
|
92,469
|
|
|
|
38.3
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|
|
|
37.6
|
|
|
|
38.2
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|
Selling and administrative
|
|
|
82,200
|
|
|
|
86,429
|
|
|
|
88,756
|
|
|
|
37.0
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|
|
|
37.4
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|
|
|
36.6
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|
Net research and development
|
|
|
44,003
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|
|
|
44,846
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|
|
|
45,444
|
|
|
|
19.8
|
|
|
|
19.4
|
|
|
|
18.8
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|
Depreciation of property, plant and equipment
|
|
|
4,835
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|
|
|
4,995
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|
|
|
6,028
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|
|
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2.2
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|
|
|
2.2
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|
|
|
2.5
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Amortization of intangible assets
|
|
|
2,883
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|
|
|
4,398
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|
|
|
6,643
|
|
|
|
1.3
|
|
|
|
1.9
|
|
|
|
2.7
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|
Interest and other income
|
|
|
(155
|
)
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|
|
(326
|
)
|
|
|
(113
|
)
|
|
|
(0.1
|
)
|
|
|
(0.1
|
)
|
|
|
–
|
|
Foreign exchange gain
|
|
|
(7,212
|
)
|
|
|
(1,634
|
)
|
|
|
(4,082
|
)
|
|
|
(3.2
|
)
|
|
|
(0.7
|
)
|
|
|
(1.7
|
)
|
Earnings before income taxes
|
|
|
10,496
|
|
|
|
5,262
|
|
|
|
7,005
|
|
|
|
4.7
|
|
|
|
2.3
|
|
|
|
2.9
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|
Income taxes
|
|
|
5,198
|
|
|
|
4,479
|
|
|
|
5,664
|
|
|
|
2.3
|
|
|
|
2.0
|
|
|
|
2.3
|
|
Net earnings for the year
|
|
$
|
5,298
|
|
|
$
|
783
|
|
|
$
|
1,341
|
|
|
|
2.4
|
%
|
|
|
0.3
|
%
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net earnings per share
|
|
$
|
0.09
|
|
|
$
|
0.01
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
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|
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|
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|
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|
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Other selected information:
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|
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|
|
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin before depreciation and amortization (3)
|
|
$
|
137,050
|
|
|
$
|
143,970
|
|
|
$
|
149,681
|
|
|
|
61.7
|
%
|
|
|
62.4
|
%
|
|
|
61.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Research and development data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross research and development
|
|
$
|
50,148
|
|
|
$
|
52,423
|
|
|
$
|
54,334
|
|
|
|
22.6
|
%
|
|
|
22.7
|
%
|
|
|
22.4
|
%
|
Net research and development
|
|
$
|
44,003
|
|
|
$
|
44,846
|
|
|
$
|
45,444
|
|
|
|
19.8
|
%
|
|
|
19.4
|
%
|
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Restructuring charges included in:
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
$
|
290
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
0.1
|
%
|
|
|
–
|
%
|
|
|
–
|
%
|
Selling and administrative expenses
|
|
$
|
586
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
|
0.3
|
%
|
|
|
–
|
%
|
|
|
–
|
%
|
Net research and development expenses
|
|
$
|
761
|
|
|
$
|
–
|
|
|
$
|
89
|
|
|
|
0.3
|
%
|
|
|
–
|
%
|
|
|
–
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA (3)
|
|
$
|
13,779
|
|
|
$
|
14,391
|
|
|
$
|
17,338
|
|
|
|
6.2
|
%
|
|
|
6.2
|
%
|
|
|
7.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheets data (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
219,002
|
|
|
$
|
278,031
|
|
|
$
|
281,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Consolidated statements of earnings and balance sheets data has been derived from our consolidated financial statements prepared according with IFRS, as issued by the IASB, except for non-IFRS measures (3).
|
(2)
|
The cost of sales is exclusive of depreciation and amortization, shown separately.
|
(3)
|
Refer to page 64 for non-IFRS measures.
|
RESULTS OF OPERATIONS
Sales and Bookings
The following table summarizes sales by product line:
|
|
Years ended August 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
Physical-layer product line
|
|
$
|
144,060
|
|
|
$
|
132,097
|
|
|
$
|
140,941
|
|
Protocol-layer product line
|
|
|
80,591
|
|
|
|
99,618
|
|
|
|
100,829
|
|
|
|
|
224,651
|
|
|
|
231,715
|
|
|
|
241,770
|
|
Foreign exchange gains (losses) on forward exchange contracts
|
|
|
(2,562
|
)
|
|
|
(909
|
)
|
|
|
380
|
|
Total sales
|
|
$
|
222,089
|
|
|
$
|
230,806
|
|
|
$
|
242,150
|
|
Fiscal 2015 vs. 2014
In fiscal 2015, our sales decreased 3.8% to $222.1 million, compared to $230.8 million in 2014, while our bookings decreased 7.2% year-over-year to $223.1 million in 2015 from $240.4 million in 2014, for a book-to-bill ratio of 1.00 (1.04 in 2014).
In fiscal 2015, however, we faced a significant headwind from a stronger US dollar, compared to 2014. Given that we generate a portion of our revenue in Canadian dollars and euros but report our results in US dollars, it had a negative impact on our sales year-over-year. In fiscal 2015, excluding the negative currency impact, our sales would have been flat year-over-year.
In fiscal 2015, we increased sales of our Physical-layer product line by 9.1% based on our leadership position in portable optical testing and the growing need for fiber in wireless access areas. Sales or our Protocol-layer product line, meanwhile, decreased 19.1% year-over-over, especially in the areas of 10G or less, portable transport testing and in wireless protocol analysis, due to delays in the launched of some important products (in the first half of the fiscal year), longer than usual market acceptance of newly launched products and difficult market conditions in Europe, Middle-East and Africa (EMEA). On a constant currency basis, sales growth of our Physical-layer product line would be higher and the decline of our Protocol-layer product line lower to reflect stable sales year-over-year for the combined product lines.
In constant currency, our sales to the Americas and Asia-Pacific (APAC) slightly increased year-over-year. In fiscal 2015, we benefited from some improvements in the Americas, following a challenging year in 2014 due to order delays and lower spending levels, especially among key customers. In fiscal 2015, we would have reported year-over-year increase in sales of our Physical-layer product line in the Americas and APAC, offset in part by a decrease in sales of our Protocol-layer product line in these areas.
In constant currency, sales to EMEA slightly decreased year-over-year as Europe, overall, remained a challenging market due to weaker currencies and economic uncertainties. That slight year-over-year decline in sales in the EMEA region comes from our Protocol-layer product line.
In fiscal 2015, our bookings were also negatively affected by a stronger US dollar, compared to the Canadian dollar and euro. In fiscal 2015, the year-over-year decrease in total bookings comes from our Protocol-layer product line; this more than offset the increase in bookings for our Physical-layer product line in the Americas and Asia-Pacific.
As we gradually evolve from a supplier of dedicated test instruments to a supplier of end-to-end solutions, our quarterly sales and bookings are becoming increasingly subject to quarterly fluctuations, as we are managing more complex, multimillion dollar deals that have prolonged sales and revenue recognition cycles related to our Protocol-layer products; this also explains the year-over-year decrease in sales and bookings in fiscal 2015 for our Protocol-layer product line.
Finally, in fiscal 2015, we faced increased competition and pricing pressure, compared to 2014, which negatively affected our sales and bookings year-over-year.
Fiscal 2014 vs. 2013
In fiscal 2014, our sales decreased 4.7% to $230.8 million, compared to $242.2 million in 2013, while our bookings increased 3.0% year-over-year to $240.4 million in 2014 from $233.5 million in 2013.
The year-over-year decrease in sales in fiscal 2014 compared to 2013 is mainly explained by the timing and nature of orders received in fiscal 2014, which resulted in a significant increase in our backlog at the end of 2014 compared to 2013. In fact, some orders received in fiscal 2014 were not shipped and/or recognized in sales due to the timing and/or nature of these orders, as in some cases, they involved large systems for which revenue recognition is dependent on installation and customer acceptance.
More precisely, in fiscal 2014, most of the year-over-year decrease in sales (in dollars) comes from the first half of the year in the Americas, as market conditions in this region proved to be challenging during that period due to order delays and lower spending levels, especially among key customers. Although in the second half of fiscal 2014 we benefited from projects and strategic initiatives that had been pushed out later in fiscal 2014, as well as from late budget approvals from key customers, and we reported a year-over-year increase in sales and bookings during that period, it was not enough to offset the sales decrease attributable to the Americas region in the first half of the year.
In addition to the above-mentioned explanations, during the first half of fiscal 2013, we had benefited from some calendar year-end budget spending on the part of network operators in the Americas, but we did not benefit from such spending in the first half of fiscal 2014 due to the tight budget control during this period, thereby reducing our sales year-over-year. The magnitude of calendar year-end budget spending can fluctuate year-over-year.
Sales to EMEA and APAC in 2014 also decreased year-over-year, which again is mostly attributable to a timing issue, as bookings have in fact increased year-over-year in both regions.
Furthermore, in fiscal 2014, increased pricing pressure worldwide had a negative impact on our sales and bookings year-over-year.
Finally, we recorded foreign exchange losses of $909,000 on our forward exchange contracts in 2014, compared to foreign exchange gains of $380,000 in 2013, which lowered our sales 0.5% year-over-year.
Geographic Distribution
In fiscal 2015, sales to the Americas, EMEA and APAC accounted for 54%, 26% and 20% of sales respectively, compared to 53%, 28% and 19% respectively in 2014.
GROSS MARGIN BEFORE DEPRECIATION AND AMORTIZATION (non-IFRS measure – refer to page 64 of this document)
Gross margin before depreciation and amortization (gross margin) amounted to 61.7%, 62.4% and 61.8% of sales in fiscal 2015, 2014 and 2013 respectively.
Fiscal 2015 vs. 2014
In fiscal 2015, our gross margin was unfavorably affected by product mix compared to 2014 as our Physical-layer product line represented a larger portion of our sales year-over-year and this product line delivers lower margins than our Protocol-layer product line.
In addition, the decrease in our gross margin year-over-year comes from foreign exchange losses on our forward exchange contracts, which reduced our sales and negatively affected our gross margin by 0.3% compared to 2014.
Furthermore, in fiscal 2015, we faced increased competition and pricing pressure for some product lines, compared to 2014, which negatively affected our gross margin year-over-year.
Finally, in fiscal 2015, we recorded $290,000 in restructuring charges in the cost of sales (nil in 2014), which negatively affected our gross margin for that year (0.1%).
However, in fiscal 2015, we reported lower inventory write-down compared to the same period last year, which increased our gross margin by 0.2% year-over-year.
In addition, in fiscal 2015, a stronger US dollar compared to other currencies reduced our manufacturing costs and had a positive impact on our gross margin year-over-year.
Fiscal 2014 vs. 2013
The increase in our gross margin in fiscal 2014 compared to 2013 can be explained by the following factors.
In fiscal 2014, our gross margin was favorably affected by product mix, including some software-intensive products with higher margins. Namely, in fiscal 2013, we shipped large orders of lower-margin copper-access test solutions, which had negatively affected our gross margin that year. We did not have such orders in 2014.
However, the following factors partly offset the increase in our gross margin year-over-year.
In fiscal 2014, a lower sales volume compared to 2013 (4.7%), resulted in lower absorption of our fixed manufacturing costs, which decreased our gross margin year-over-year.
In addition, increased pricing pressure in fiscal 2014, compared to 2013, had a negative impact on our gross margin year-over-year.
Furthermore, in fiscal 2014, we recorded an inventory write-off of $4.6 million, compared to $4.1 million in 2013. This represents a negative impact of 0.3% on our gross margin year-over-year.
Finally, in fiscal 2014, increased foreign exchange losses on our forward exchange contracts, compared to 2013, also affected our gross margin by 0.1% year-over-year.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses amounted to $82.2 million, $86.4 million and $88.8 million for fiscal 2015, 2014 and 2013 respectively. As a percentage of sales, selling and administrative expenses amounted to 37.0%, 37.4% and 36.6% for fiscal 2015, 2014 and 2013 respectively.
Fiscal 2015 vs. 2014
In fiscal 2015, selling and administrative expenses included $586,000 or 0.3% of sales, in restructuring charges compared to nil in 2014.
Otherwise, in fiscal 2015, our selling and administrative expenses decreased due to the increase in the average value of the US dollar compared to the Canadian dollar and the euro year-over-year, as a portion of our selling and administrative expenses are incurred in these latter two currencies and we report our results in US dollars, and to tight control on expenses, which more than offset inflation and salary increases.
Fiscal 2014 vs. 2013
In fiscal 2014, despite inflation and salary increases, our selling and administrative expenses decreased, compared to 2013, due to tight control on expenses and the increase in the average value of the US dollar, compared to the Canadian dollar as a portion of these expenses are incurred in this currency and we report our results in US dollars.
In addition, in fiscal 2014, commission expenses to our sales channels were lower compared, to 2013, due to a lower sales volume year-over-year.
In fiscal 2014, although our selling and administrative expenses decreased in dollars year-over-year, they increased as a percentage of sales as our sales decreased year-over-year and a large portion of these expenses are relatively fixed in the short term.
RESEARCH AND DEVELOPMENT EXPENSES
Gross research and development expenses
Gross research and development expenses totaled $50.1 million, $52.4 million and $54.3 million for fiscal 2015, 2014 and 2013 respectively. As a percentage of sales, gross research and development expenses amounted to 22.6%, 22.7% and 22.4% for fiscal 2015, 2014 and 2013 respectively, while net research and development expenses accounted for 19.8%, 19.4% and 18.8% of sales for these respective years.
Fiscal 2015 vs. 2014
In fiscal 2015, the year-over-year increase in the average value of the US dollar, compared to the Canadian dollar and the euro had a positive impact on our gross research and development expenses as a large portion of these expenses are incurred in these latter two currencies and we report our results in US dollars.
In fiscal 2015, excluding the positive currency impact year-over-year, inflation, salary increases, as well as a shift in the mix and timing of research and development projects slightly increased our gross research and development expenses, compared to 2014.
In addition, in fiscal 2015, our gross research and development expenses included $761,000, or 0.3% of sales, in restructuring charges, compared to nil in 2014.
Fiscal 2014 vs. 2013
In fiscal 2014, the year-over-year increase in the average value of the US dollar compared to the Canadian dollar and the Indian rupee had a positive impact on our gross research and development expenses as a large portion of these expenses are incurred in these currencies and we report our results in US dollars.
In addition, in fiscal 2013, our gross research and development expenses included $89,000 in restructuring charges, compared to nil in 2014.
Otherwise, in fiscal 2014, inflation, salary increases, as well as a shift in the mix and timing of research and development projects resulted in increased gross research and development expenses compared to 2013.
Tax Credits and Grants
We are entitled to tax credits from the Canadian federal and provincial governments for eligible research and development activities conducted in Canada. We are also eligible for grants by a Finnish technology organization on certain research and development projects conducted in Finland.
Tax credits and grants for research and development activities were $6.1 million, $7.6 million and $8.9 million for fiscal 2015, 2014 and 2013 respectively. As a percentage of gross research and development expenses, tax credits and grants reached 12.3%, 14.5% and 16.4% for fiscal 2015, 2014 and 2013 respectively.
Fiscal 2015 vs. 2014
The decrease in our tax credits and grants in fiscal 2015, compared to 2014, results from the decrease in the statutory Canadian federal and provincial research and development tax credit rates, as well as from the increase in the average value of the US dollar, compared to the Canadian dollar year-over-year, as our tax credits are denominated in Canadian dollars and we report our results in US dollars.
In fiscal 2015, the decrease in tax credits and grants as a percentage of gross research and development expenses, compared to 2014, mainly comes from the decrease in the statutory Canadian federal and provincial research and development tax credit rates.
Fiscal 2014 vs. 2013
The decrease in our tax credits and grants in fiscal 2014, compared to 2013, results from the decrease in the statutory Canadian federal and provincial research and development tax credit rates in 2014, as well as from the increase in the average value of the US dollar, compared to the Canadian dollar year-over-year, as our tax credits are denominated in Canadian dollars and we report our results in US dollars.
In fiscal 2014, the decrease in tax credits and grants as percentage of gross research and development expenses, compared to 2013, mainly comes from the decrease in the statutory Canadian federal and provincial research and development tax credit rates.
AMORTIZATION OF INTANGIBLE ASSETS
In conjunction with the business combinations we completed over the past several years, we recorded intangible assets, primarily consisting of core technology, customer relationships and brand name. In addition, intangible assets include software. These intangible assets resulted in amortization expenses of $2.9 million, $4.4 million and $6.6 million for fiscal 2015, 2014 and 2013 respectively.
Fiscal 2015 vs. 2014
The decrease in amortization expenses in fiscal 2015, compared to 2014, is mainly due to the fact that core technology related to the acquisition of NetHawk Oyj (acquired in fiscal 2010) became fully amortized in the third quarter of fiscal 2015, and that the average value of the US dollar increased compared to the Canadian dollar
year-over-year, as our amortization expenses is incurred in this currency and we report our results in US dollars.
Fiscal 2014 vs. 2013
The decrease in amortization expenses in fiscal 2014 compared to 2013 comes from the fact that core technology related to the acquisition of Brix Networks Inc. (acquired in fiscal 2008) became fully amortized during fiscal 2013. In addition, in fiscal 2014, the increase in the average value of the US dollar compared to the Canadian dollar versus the previous year had a positive impact on our amortization expenses as these expenses are incurred in Canadian dollars and we report our results in US dollars.
FOREIGN EXCHANGE GAIN
Foreign exchange gains and losses are mainly the result of the translation of operating activities denominated in currencies other than our functional currency, which is the Canadian dollar. A portion of our foreign exchange gains or losses result from the translation of cash balances and deferred income taxes denominated in US dollars. We manage our exposure to a currency risk in part with forward exchange contracts. In addition, some of our entities' operating activities are denominated in US dollars, euros and British pounds, which further hedges this risk. However, we remain exposed to a currency risk; namely, any increase in the value of the Canadian dollar, compared to the US dollar, would have a negative impact on our operating results.
We reported a foreign exchange gain of $7.2 million in fiscal 2015, compared to $1.6 million in 2014 and $4.1 million in 2013.
Fiscal 2015
In fiscal 2015, the period-end value of the Canadian dollar significantly decreased versus the US dollar and the euro, compared to the previous year end, which resulted in a significant foreign exchange gain of $7.2 million during the year. The period-end value of the Canadian dollar decreased 17.5% to CA$1.3157 = US$1.00 in fiscal 2015, compared to CA$1.0858 = US$1.00 at the end of the previous year, and decreased 3.0% to CA$1.4755 = €1.00 in fiscal 2015, compared to CA$1.4319 = €1.00 at the end of the previous year. In fiscal 2015, the average value of the Canadian dollar versus the US dollar was CA$1.2093 = US$1.00.
Fiscal 2014
In fiscal 2014, the period-end value of the Canadian dollar decreased versus the US dollar and the euro, compared to the previous year end, which resulted in a foreign exchange gain of $1.6 million during the year. The period-end value of the Canadian dollar decreased 3.0% compared to CA$1.0858 = US$1.00 in fiscal 2014, compared to CA$1.0530 = US$1.00 at the end of the previous year, and decreased 2.7% compared to CA$1.4319 = €1.00 in fiscal 2014, compared to CA$1.3936 = €1.00 at the end of the previous year. In fiscal 2014, the average value of the Canadian dollar versus the US dollar was CA$1.0782 = US$1.00.
Fiscal 2013
In fiscal 2013, the period-end value of the Canadian dollar significantly decreased versus the US dollar and the euro, compared to the previous year end, which resulted in a significant foreign exchange gain of $4.1 million during the year. The period-end value of the Canadian dollar decreased 6.3% compared to CA$1.0530 = US$1.00 in fiscal 2013, compared to CA$0.9863 = US$1.00 at the end of the previous year, and decreased 12.0% compared to CA$1.3936 = €1.00 in fiscal 2013, compared to CA$1.2438 = €1.00 at the end of the previous year. In fiscal 2013, the average value of the Canadian dollar compared to the US dollar was CA$1.0107 = US$1.00.
Foreign exchange rate fluctuations also flow through the P&L line items as a portion of our sales are dominated in Canadian dollars and euros and a significant portion of cost of sales and our operating items are denominated in Canadian dollars, euros and Indian rupees, and we report our results in US dollars.
Fiscal 2015 vs. 2014
In fiscal 2015, the increase in the average value of the US dollar compared to the Canadian dollar and the euro year-over-year had a positive impact on our financial results. The average value of the US dollar in fiscal 2015 increased 10.8% and 14.5%, respectively, compared to the Canadian dollar and the euro.
Fiscal 2014 vs. 2013
In fiscal 2014, the increase in the average value of the US dollar compared to the Canadian dollar and Indian rupee year-over-year had a positive impact on our financial results. The average value of the US dollar in fiscal 2014 increased 6.3% and 9.7%, respectively, compared to the Canadian dollar and the Indian rupee.
INCOME TAXES
In fiscal 2015, we reported income tax expenses of $5.2 million on earnings before income taxes of $10.5 million, compared to income tax expenses of $4.5 million on earnings before income taxes of $5.3 million in 2014 and income tax expenses of $5.7 million on earnings before income taxes of $7.0 million in 2013.
These distorted tax rates mainly resulted from the fact that we did not recognize deferred income tax assets for some of our subsidiaries at loss and had some non-deductible losses and expenses, such as stock-based compensation costs. However, a significant portion of our foreign exchange gain was created by the translation of financial statements of our foreign subsidiaries from their local currency to the functional currency, and was therefore non-taxable. Otherwise, our effective tax rate would have been closer to the combined Canadian and provincial statutory tax rate of 27% for these years.
Please refer to note 18 to our consolidated financial statements for a full reconciliation of our income tax provision.
LIQUIDITY AND CAPITAL RESOURCES
Cash Requirements and Capital Resources
As at August 31, 2015, cash and short-term investments totaled $27.4 million, while our working capital was at $69.4 million. Our cash and short-term investments decreased $32.5 million in fiscal 2015, compared to 2014. First, in fiscal 2015, we made cash payments of $25.5 million for the redemption of share capital under our share repurchase programs, mainly our substantial issuer bid. In addition, during the year, we made cash payments of $5.9 million for the purchase of capital assets. Finally, we recorded an unrealized foreign exchange loss of $7.6 million on our cash and short-term investments. This unrealized foreign exchange loss resulted from the translation, in US dollars, of our Canadian-dollar-denominated cash and short-term investments and was included in the accumulated other comprehensive income in the balance sheet. However, operating activities generated $6.5 million in cash.
Our short-term investments consist of debt instruments issued by high-credit quality corporations; therefore, we consider the risk of non-performance of these financial instruments to be limited. These debt instruments are not expected to be affected by a significant liquidity risk. For the purpose of managing our cash position, we have established a cash management policy, which we follow and monitor on a regular basis. Our cash and short-term investments will be used for working capital and other general corporate purposes, potential acquisitions as well as our share repurchase program. As at August 31, 2015, cash balances included an amount of $10.8 million that bears interest at an annual rate of 1.0%.
We believe that our cash balances and short-term investments of $27.4 million will be sufficient to meet our liquidity and capital requirements for the foreseeable future, including the effect of our share repurchase program. In addition to these assets, we have unused available lines of credit totaling $14.8 million for working capital and other general corporate purposes, and unused lines of credit of $17.7 million for foreign currency exposure related to forward exchange contracts. However, possible operating losses, restructuring charges and/or possible investments in or acquisitions of complementary businesses, products or technologies may require additional financing. There can be no assurance that additional debt or equity financing will be available when required or, if available, that it can be secured on satisfactory terms.
As at August 31, 2015, our commitments under operating leases amount to $2.1 million in 2016, $1.4 million in 2017, $774,000 in 2018, $768,000 in 2019 and $2.5 million in 2020 and after, for total commitments of $7.5 million.
Sources and Uses of Cash
We finance our operations and meet our capital expenditure requirements mainly through cash flows from operating activities, the use of our cash and short-term investments as well as the issuance of subordinate voting shares.
Operating activities
Cash flows provided by operating activities were $6.5 million in fiscal 2015, compared to $19.8 million in 2014 and cash flows used of $2.0 million in 2013.
Fiscal 2015 vs. 2014
Cash flows provided by operating activities in fiscal 2015 were attributable to the net earnings after items not affecting cash of $11.4 million, offset in part by the negative net change in non-cash operating items of $4.9 million; this was mainly due to the negative effect on cash of the increase of $10.8 million in our accounts receivable due to the timing of receipts and sales during the year, the negative effect on cash of the increase of $2.1 million in our income tax and tax credits recoverable due to tax credits earned during the year not yet recovered, and the negative effect on cash of the increase of $982,000 in our prepaid expenses due to timing of payments during the year. These negative effects on cash were offset in part by the positive effect on cash of the decrease of $820,000 in our inventories due to improved inventory turns during the year and the increase of $8.1 million in our accounts payable, accrued liabilities and provisions due to timing of purchases and payments during the year.
Fiscal 2014 vs. 2013
Cash flows provided by operating activities in fiscal 2014 were attributable to the net earnings after items not affecting cash of $11.5 million and the positive net change in non-cash operating items of $8.3 million; this was mainly due to the positive effect on cash of the $3.6 million decrease in our accounts receivable, due to the decrease in sales year-over-year and the timing of receipts and sales during the year, the $1.4 million decrease in our income taxes and tax credits recoverable mainly due to tax credits earned in previous years received during the year, as well as the $3.8 million increase in our accounts payable, accrued liabilities, provisions and other liabilities due to timing of purchases and payments during the year. These positive effects on cash were partly offset by the negative effect on cash of the $734,000 increase in our inventories to meet future demand.
Investing activities
Cash flows used by investing activities amounted to $2.3 million in fiscal 2015, compared to $8.9 million in 2014 and $5.0 million in 2013.
Fiscal 2015
In fiscal 2015, we paid $5.9 million for the purchase of capital assets but we disposed (net of acquisitions) of $3.6 million worth of short-term investments.
Fiscal 2014
In fiscal 2014, we acquired (net of disposal) $1.0 million worth of short-term investments and we paid $7.9 million for the purchase of capital assets, including the assets of ByteSphere and Aito.
Fiscal 2013
In fiscal 2013, we paid $8.0 million for the purchase of capital assets but we disposed (net of acquisitions) of $3.0 million worth of short-term investments.
Financing activities
Cash flows used by financing activities amounted to $25.5 million in fiscal 2015, compared to $1.0 million in 2014 and $3.6 million in 2013.
Fiscal 2015
In fiscal 2015, we redeemed share capital under our share repurchase programs (namely our substantial issuer bid) for a cash consideration of $25.5 million.
Fiscal 2014
In fiscal 2014, we redeemed share capital for a cash consideration of $937,000 and repaid $307,000 of our long-term debt. However, we received $225,000 from the exercise of stock options.
Fiscal 2013
In fiscal 2013, we redeemed share capital for a cash consideration of $3.1 million and repaid $589,000 of our long-term debt. However, we received $87,000 from the exercise of stock options.
FORWARD EXCHANGE CONTRACTS
We are exposed to a currency risk as a result of our export sales of products manufactured in Canada, China and Finland, the majority of which are denominated in US dollars and euros. In addition, we are exposed to a currency risk as a result of our research and development activities in India (Indian rupees). These risks are partially hedged by forward exchange contracts. Forward exchange contracts, which are designated as cash flow hedging instruments, qualify for hedge accounting.
As at August 31, 2015, we held forward exchange contracts to sell US dollars for Canadian dollars and Indian rupees at various forward rates, which are summarized as follows:
US dollars – Canadian dollars
Expiry dates
|
|
Contractual
amounts
|
|
|
Weighted average
contractual forward rates
|
|
|
|
|
|
|
|
|
September 2015 to August 2016
|
|
$
|
20,200,000
|
|
|
|
1.1180
|
|
September 2016 to August 2017
|
|
|
8,000,000
|
|
|
|
1.1530
|
|
September 2017 to December 2017
|
|
|
1,600,000
|
|
|
|
1.2135
|
|
Total
|
|
$
|
29,800,000
|
|
|
|
1.1326
|
|
US dollars – Indian rupees
Expiry dates
|
|
Contractual
amounts
|
|
|
Weighted average
contractual forward rate
|
|
|
|
|
|
|
|
|
September 2015 to July 2016
|
|
$
|
3,900,000
|
|
|
|
66.41
|
|
The carrying amount of forward exchange contracts is equal to fair value, which is based on the amount at which they could be settled based on estimated current market rates. The fair value of forward exchange contracts amounted to net losses of $497,000 and $4.2 million as at August 31, 2014 and 2015 respectively. The US dollar – Canadian dollar year-end exchange rate was CA$1.3157 = US$1.00 as at August 31, 2015.
SHARE CAPITAL
Share Capital
As at November 9, 2015, EXFO had 31,643,000 multiple voting shares outstanding, entitling to 10 votes each and 22,248,271 subordinate voting shares outstanding. The multiple voting shares and the subordinate voting shares are unlimited as to number and without par value.
OFF-BALANCE SHEET ARRANGEMENTS
As at August 31, 2015, our off-balance sheet arrangements consisted of letters of guarantee amounting to $495,000 for our own selling and purchasing requirements, which were reserved from our lines of credit; these letters of guarantee expire at various dates through fiscal 2020.
STRUCTURED ENTITIES
As at August 31, 2015, we did not have interests in any structured entities.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in accordance with IFRS requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and the disclosures of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, we evaluate these estimates and assumptions, including those related to the fair value of financial instruments, the allowance for doubtful accounts receivable, the amount of tax credits recoverable, the provision for excess and obsolete inventories, the estimated useful lives of capital assets, the valuation of long-lived assets, the impairment of goodwill, the recoverable amount of deferred income tax assets, the amount of certain accrued liabilities, provisions and deferred revenue as well as stock-based compensation costs. We base our estimates and assumptions on historical experience and on other factors that we believe to be reasonable under the circumstances.
Critical Judgments in Applying Accounting Policies
(a)
|
Determination of functional currency
|
We operate in multiple countries and generate revenue and incur expenses in several currencies, namely the Canadian dollar, the US dollar, the euro, the British pound, the Indian rupee and the CNY (Chinese currency). The determination of the functional currency of EXFO and its subsidiaries may require significant judgment. In determining the functional currency of EXFO and its subsidiaries, we take into account primary, secondary and tertiary indicators. When indicators are mixed and the functional currency is not obvious, we use our judgment to determine the functional currency.
(b) Determination of cash generating units and allocation of goodwill
For the purpose of impairment testing, goodwill must be allocated to each cash-generating unit (CGU) or group of CGUs that are expected to benefit from the synergies of the business combination. Initial allocation and possible reallocation of goodwill to a CGU or a group of CGUs requires judgment.
Critical Estimates and Assumptions
We state our inventories at the lower of cost, determined on an average cost basis and net realizable value, and we provide reserves for excess and obsolete inventories. We determine our reserves for excess and obsolete inventories based on the quantities on hand at the reporting dates compared to foreseeable needs over the next 12 months, taking into account changes in demand, technology or market. It is possible that additional inventory reserves may occur if future sales are less than our forecasts or if there is a significant shift in product mix compared to our forecasts, which could adversely affect our results.
We are subject to income tax laws and regulations in several jurisdictions. Under these laws and regulations, uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. We maintain provisions for uncertain tax positions that we believe appropriately reflect our risk based on our interpretation of laws and regulations. In addition, we make reasonable estimates and assumptions to determine the amount of deferred tax assets that can be recognized in our consolidated financial statements, based upon the likely timing and level of anticipated future taxable income together with tax planning strategies. The ultimate realization of our deferred income tax assets is dependent upon the generation of sufficient future taxable income during the periods in which those assets are expected to be realized.
As at August 31, 2015, we had deferred income tax assets in the balance sheet in the amount of $8.9 million mainly for operating losses in the United States. In order to recover these deferred income tax assets, we need to generate approximately $22 million in pre-tax earnings in the United States, and in order to do so over the estimated recovery period of five years, we must generate pre-tax earnings compound annual growth rate (CAGR) of 6%, which we believe is probable. Our losses in the United States can be carried forward over a twenty-year period.
(c)
|
Tax credits recoverable
|
Tax credits are recorded provided that there is reasonable assurance that we have complied and will comply with all the conditions related to the tax credits and that the tax credits will be received. The ultimate recovery of our non-refundable tax credits is dependent upon the generation of sufficient future taxable income during the tax credits carry-forward periods. We have made reasonable estimates and assumptions to determine the amount of non-refundable tax credits that can be recognized in our consolidated financial statements, based upon the likely timing and level of anticipated future taxable income together with tax planning strategies.
As at August 31, 2015, our non-refundable research and development tax credits recognized in the balance sheet amounted to $36.7 million. In order to recover these non-refundable research and development tax credits, we need to generate approximately $238 million (CA$313 million) in pre-tax earnings at the Canadian federal level and approximately $11 million at the Canadian provincial level. In order to generate $238 million in pre-tax earnings at the Canadian Federal level over the estimated recovery period of 18 years, we must generate a pre-tax earnings CAGR of 4%, which we believe is probable. Our non-refundable research and development tax credits can be carried forward over a twenty-year period.
(d)
|
Impairment of non-financial assets
|
Impairment exists when the carrying value of an asset or group of assets (cash generating unit (CGU)) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation for our CGUs is based on a market approach that relies on input from implicit valuation multiples and recent transactions for comparable assets or businesses, within the same industry. We apply judgment in making adjustments for factors such as size, risk profile or profitability and also consider EXFO's value derived from its market capitalization considering a control premium based on comparable situations. Depending on the market evidence available, we, from time to time, may further supplement this market approach with discounted cash flows.
In the fourth quarter of fiscal 2015, we performed our annual goodwill impairment test for our two CGUs, EXFO and Brix.
For the purposes of the impairment test, goodwill has been allocated to the lowest level within the company at which it is monitored by management to make business decisions, which are the following two CGUs:
|
EXFO CGU
|
|
$
|
8,636,000
|
|
|
Brix CGU
|
|
|
13,224,000
|
|
|
Total
|
|
$
|
21,860,000
|
|
In performing the goodwill impairment review of both CGUs, we determined the recoverable amount of goodwill based on fair value less costs of disposal. In estimating the recoverable amount of the EXFO CGU, we used a market approach, which is based on sales multiples within the range of 0.8 to 2.0 times sales, for comparable businesses with similar operations within the same industry over the past year. We applied judgment in making certain adjustments for factors such as size, risk profile or profitability of the comparable businesses, when compared to the EXFO CGU. To calculate the recoverable amount of the Brix CGU, we also applied a similar market approach, based on sales multiples for comparable businesses, which also ranged from 0.8 to 2.0 times sales. Furthermore, as the sales and operations of the EXFO CGU constitutes the significant majority of our sales and operations, we also compared the carrying amount of the EXFO CGU to EXFO's overall market capitalization, after adjustment for a control premium and the adjustment to deduct the recoverable amount of the Brix CGU. Based on this calculation, we calculated a recoverable amount which resulted in an implied sales multiple that was within the 0.8 to 2.0 times range, as used in the market approach described above.
In fiscal 2014, the calculation of recoverable amount of the Brix CGU also included a calculation of fair value based on discounted cash flows. However, this additional valuation technique was not considered necessary for fiscal 2015, on the basis that the market approach provided a more reliable estimate of fair value based on more reliable inputs, compared to the range of amounts being determined using cash flow projections and the significant assumptions applied to those cash flows.
As at August 31, 2015, the recoverable amount for both CGUs exceeded their carrying value. The recoverable amount of both CGUs would equal its carrying value using sales multiples of 0.7 times sales.
NEW IFRS PRONOUNCEMENTS NOT YET ADOPTED
Financial Instruments
The final version of IFRS 9, "Financial Instruments", was issued in July 2014 and will replace IAS 39, "Financial Instruments: Recognition and Measurement". IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. Requirements relating to hedge accounting representing a new hedge accounting model have also been added to IFRS 9. The new standard is effective for annual periods beginning on or after January 1, 2018, and must be applied retrospectively. We have not yet assessed the impact that the new standard will have on our consolidated financial statements.
Revenue from Contracts with Customers
IFRS 15, "Revenue from Contracts with Customers", was issued in May 2014. The objective of this new standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability. This new standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. This new standard is effective for annual periods beginning on or after January 1, 2018. Early adoption is permitted. We have not yet assessed the impact that the new standard will have on our consolidated financial statements or whether or not to early adopt the new standard.
RISKS AND UNCERTAINTIES
Over the past several years, we have managed our business in a difficult environment; focused on research and development programs for new and innovative solutions aimed at expected growth pockets in our sector; continued the development of our domestic and international markets; and made strategic acquisitions. However, we operate in a highly competitive and complex sector 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 plans and policies.
Our business is subject to the effects of general economic conditions in North America and throughout the world and, more particularly, market conditions in the telecommunications industry. In the past, our operating results were adversely affected by reduced capital spending in North America, Europe and Asia and by unfavorable general economic conditions. In particular, sales to network operators in North America were significantly and adversely affected by a downturn in the telecommunications industry in 2001 and by the global economic recession in 2009. Challenging market conditions resurfaced in 2012 and continued through 2015 with network operators placing a tight rein on capital expenditures with the complexity of deploying fully converged IP networks. In the event of another recession or slowdown in key geographic regions or markets, we may experience a material adverse impact on our business, operating results and financial condition.
Our functional currency is the Canadian dollar. We are exposed to a currency risk as a result of our export sales of products manufactured in Canada, China and Finland, the majority of which are denominated in US dollars and euros, while a significant portion of our cost of sales and operating expenses are denominated in Canadian dollars and currencies such as euros, British pounds, Rupees (India) and CNY (China). As a result, even though we manage our exposure to currency risk to some extent with forward exchange contracts (by selling US dollars for Canadian dollars and US dollars for Indian Rupees) and certain cost of sales and operating expenses denominated in currencies other than the Canadian dollar, namely the US dollars and euros, we are exposed to fluctuations in the exchange rates between the Canadian dollar on one hand and the US dollar, euro and other currencies on the other. Any increase in the value of the Canadian dollar relative to the US dollar and other currencies, or any unfavorable variance between the value of the Canadian dollar and the contractual rates of our US dollar - Canadian dollar forward exchange contracts, could result in foreign exchange losses and have a material adverse effect on our operating results. Foreign exchange rate fluctuations also flow through the statement of earnings line items as a significant portion of cost of sales and our operating expenses are denominated in Canadian dollars, euros and Indian rupees, and we report our results in US dollars. Any decrease in the value of the US dollar relative to the Canadian dollar and other currencies, could have a material adverse effect on our operating results.
Risks and uncertainties related to the telecommunications test, service assurance and network visibility industry involve the rapid and timely development of new products that may have short lifecycles and require extensive research and development; the difficulty of adequately predicting market size, trends and customer needs; the ability to quickly adapt our cost structure to changing market conditions in order to achieve profitability; and the challenge of retaining highly skilled employees.
Given our strategic goals for growth and competitive positioning in our industry, we are continuously expanding into international markets, such as the operation of our manufacturing facilities in China and our software development center in India as well as operating other subsidiaries in many countries. This exposes us to certain risks and uncertainties, namely changes in local laws and regulations, multiple technological standards, protective legislation, pricing pressure, cultural differences and the management of operations in different countries.
The economic environment of our industry could also result in some of our customers experiencing difficulties, which, consequently, 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, short-term investments and forward exchange contracts. Our short-term investments consist of debt instruments issued by high-credit quality corporations. Our cash 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 limited.
We depend on a single supplier or a limited number of suppliers for some of the parts used to manufacture our products for which alternative sources may not be readily available. In addition, all our orders are placed through individual purchase orders and, therefore, our suppliers may experience difficulties, suffer from natural disasters, delays or stop supplying parts to us at any time. The reliance on a single source or limited number of suppliers could result in increased costs, delivery problems and reduced control over product pricing and quality. Any interruption or delay in the supply of any of these parts could significantly harm our ability to meet scheduled product deliveries to our customers and cause us to lose sales. Furthermore, the process of qualifying a new manufacturer for complex parts designed to our specifications, such as our optical, electronic or mechanical parts, is lengthy and would consume a substantial amount of time for our technical personnel and management. If we were required to change a supplier in a short period of time, our business would be disrupted. In addition, we may be unsuccessful in identifying a new supplier capable of meeting and willing to meet our needs on terms that we would find acceptable.
While strategic acquisitions, like those we have made in the past and possibly others in the future, 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 businesses, their products, technologies and personnel as well as key personnel retention. Finally, integration of new acquisitions will require the dedication of management resources, which may detract their attention from our day-to-day business and operations.
For a more complete understanding of risk factors that may affect us, please refer to the risk factors set forth in our disclosure documents published with securities commissions at www.EXFO.com, or at www.sedar.com in Canada or www.sec.gov/edgar.shtml in the U.S.
NON-IFRS MEASURES
We provide non-IFRS measures (constant currency data, gross margin before depreciation and amortization and adjusted EBITDA) as supplemental information regarding our operational performance. We use these measures for the purpose of evaluating our historical and prospective financial performance, as well as our performance relative to our competitors. These measures also help us to plan and forecast future periods as well as to make operational and strategic decisions. We believe that providing this information to our investors, in addition to the IFRS measures, allows them to see the company's results through the eyes of management, and to better understand our historical and future financial performance.
The presentation of this additional information is not prepared in accordance with IFRS. Therefore, the information may not necessarily be comparable to that of other companies and should be considered as a supplement to, not a substitute for, the corresponding measures calculated in accordance with IFRS.
Constant currency data represents data before foreign currency impact. Data for the current period is translated using foreign exchange rates of the corresponding period from the preceding year.
Gross margin before depreciation and amortization represents sales less cost of sales, excluding depreciation and amortization.
Adjusted EBITDA represents net earnings before interest, income taxes, depreciation and amortization, restructuring charges, stock-based compensation costs and foreign exchange gain.
The following table summarizes the reconciliation of adjusted EBITDA to IFRS net earnings, in thousands of US dollars:
Adjusted EBITDA (unaudited)
|
|
Years ended August 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
IFRS net earnings for the year
|
|
$
|
5,298
|
|
|
$
|
783
|
|
|
$
|
1,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
4,835
|
|
|
|
4,995
|
|
|
|
6,028
|
|
Amortization of intangible assets
|
|
|
2,883
|
|
|
|
4,398
|
|
|
|
6,643
|
|
Interest and other income
|
|
|
(155
|
)
|
|
|
(326
|
)
|
|
|
(113
|
)
|
Income taxes
|
|
|
5,198
|
|
|
|
4,479
|
|
|
|
5,664
|
|
Restructuring charges
|
|
|
1,637
|
|
|
|
–
|
|
|
|
89
|
|
Stock-based compensation costs
|
|
|
1,295
|
|
|
|
1,696
|
|
|
|
1,768
|
|
Foreign exchange gain
|
|
|
(7,212
|
)
|
|
|
(1,634
|
)
|
|
|
(4,082
|
)
|
Adjusted EBITDA for the year
|
|
$
|
13,779
|
|
|
$
|
14,391
|
|
|
$
|
17,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA in percentage of total sales
|
|
|
6.2
|
%
|
|
|
6.2
|
%
|
|
|
7.2
|
%
|
QUARTERLY SUMMARY FINANCIAL INFORMATION (1) (unaudited)
(tabular amounts in thousands of US dollars, except per share data)
|
|
1st quarter
|
|
|
2nd quarter
|
|
|
3rd quarter
|
|
|
4th quarter
|
|
|
Year ended
August 31,
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
56,724
|
|
|
$
|
50,990
|
|
|
$
|
57,781
|
|
|
$
|
56,594
|
|
|
$
|
222,089
|
|
Cost of sales (2)
|
|
$
|
21,237
|
|
|
$
|
19,546
|
|
|
$
|
22,281
|
|
|
$
|
21,975
|
|
|
$
|
85,039
|
|
Net earnings
|
|
$
|
1,481
|
|
|
$
|
931
|
|
|
$
|
563
|
|
|
$
|
2,323
|
|
|
$
|
5,298
|
|
Basic and diluted net earnings per share
|
|
$
|
0.02
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.09
|
|
|
|
1st quarter
|
|
|
2nd quarter
|
|
|
3rd quarter
|
|
|
4th quarter
|
|
|
Year ended
August 31,
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
56,003
|
|
|
$
|
51,179
|
|
|
$
|
63,882
|
|
|
$
|
59,742
|
|
|
$
|
230,806
|
|
Cost of sales (2)
|
|
$
|
21,185
|
|
|
$
|
20,073
|
|
|
$
|
23,469
|
|
|
$
|
22,109
|
|
|
$
|
86,836
|
|
Net earnings (loss)
|
|
$
|
(747
|
)
|
|
$
|
(1,339
|
)
|
|
$
|
1,665
|
|
|
$
|
1,204
|
|
|
$
|
783
|
|
Basic and diluted net earnings (loss) per share (3)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
$
|
0.01
|
|
(1)
|
Quarterly financial information has been prepared in accordance with IFRS as issued by the IASB. The presentation currency is the US dollars, which differs from the functional currency of the company (Canadian dollar).
|
(2)
|
The cost of sales is exclusive of depreciation and amortization.
|
(3)
|
Per share data is calculated independently for each quarter presented. Therefore, the sum of this quarterly information does not equal the corresponding annual information.
|
Quarterly Sales Analysis
Overall in fiscal 2015, sales were 3.8% lower year-over-year at $222.1 million compared to $230.8 million in 2014. Refer to section ''Sales and bookings'' elsewhere in this document for explanations about the year-over-year annual decrease in sales. On a quarterly basis, our sales may fluctuate from quarter to quarter due to timing and magnitude of orders.
During fiscal 2015, our sales were negatively affected by a stronger US dollar against other currencies. This mainly explains the year-over-year decrease in sales in the last two quarters of fiscal 2015 compared the same periods last year.
Fourth-Quarter Results
Gross margin
In the fourth quarter of fiscal 2015, our gross margin reached 61.2%, compared to 63.0% for the same period last year.
In the fourth quarter of fiscal 2015, our gross margin was unfavorably affected by product mix compared to the same period last year as our Physical-layer product line represented a larger portion of our sales year-over-year and this product line delivers lower margins than our Protocol-layer product line.
In addition, in the fourth quarter of fiscal 2015, we recorded $290,000 in restructuring charges in the cost of sales (nil in 2014), which negatively affected our gross margin for that quarter (0.5%).
Furthermore, in the fourth quarter of fiscal 2015, foreign exchange losses on our forward exchange contracts were higher year-over-year, which reduced our sales and negatively affected our gross margin by 0.4% compared to the same period last year.
Finally, in the fourth quarter of fiscal 2015, we faced increased competition and pricing pressure for some product lines, compared to the same period last year, which negatively affected our gross margin year-over-year.
Net earnings
Net earnings amounted to $2.3 million, or $0.04 per diluted share, in the fourth quarter of fiscal 2015, compared to $1.2 million, or $0.02 per share, for the same period last year.
In the fourth quarter of fiscal 2015, we recorded a foreign exchange gain of $2.4 million compared to a loss of $334,000 for the same period last year due to the fluctuation of the period-end foreign exchange rates; this resulted in a $2.8 million increase in our net earnings year-over-year.
In addition, in the fourth quarter of fiscal 2015, our operating expenses (selling, administrative, net R&D, depreciation and amortization expenses) were $1.8 million lower compared to the same period last year, despite the restructuring charges of $1.3 million incurred during the quarter; the decrease in our operating expenses year-over-year was mainly due to the increase in the average value of the US dollar, compared to the Canadian dollar and the euro as a significant portion of these expenses are incurred in these two currencies and we report our results in US dollars. In addition, amortization of intangible assets decreased year-over-year due to the fact that core technology related to the acquisition of NetHawk Oyj (acquired in fiscal 2010) became fully amortized in the third quarter of fiscal 2015.
However, in the fourth quarter of fiscal 2015, a lower gross margin in dollars (on lower sales) compared to the same period last year resulted in lower net earnings year-over-year.
Finally, in the fourth quarter of fiscal 2015, we recorded an income tax expense of $1.7 million compared to $1.4 million for the same period last year, which decrease our net earnings year-over-year.
|
|
How to Vote
|
Proxy Form – Annual Meeting of Shareholders of EXFO Inc. to be held on January 7, 2016 (the "Meeting")
Notes to Proxy
|
|
INTERNET
· Go to www.cstvotemyproxy.com
· Cast your vote online
· View Meeting documents
|
TELEPHONE
Use any touch-tone phone, call toll free in Canada and United States 1-888-489-7352 and follow the voice instructions
|
1. This proxy must be signed by a holder or his or her attorney duly authorized in writing. If you are an individual, please sign exactly as your name appears on this proxy. If the holder is a corporation, a duly authorized officer or attorney of the corporation must sign this proxy, and if the corporation has a corporate seal, its corporate seal should be affixed.
|
|
To vote using your smartphone,
please scan this QR Code è
|
|
2. If the securities are registered in the name of an executor, administrator or trustee, please sign exactly as your name appears on this proxy. If the securities are registered in the name of a deceased or other holder, the proxy must be signed by the legal representative with his or her name printed below his or her signature, and evidence of authority to sign on behalf of the deceased or other holder must be attached to this proxy.
|
|
To vote by telephone or Internet you will need your control number. If you vote by Internet or telephone, do not return this proxy.
MAIL, FAX or EMAIL
|
3. Some holders may own securities as both a registered and a beneficial holder; in which case you may receive more than one Circular and will need to vote separately as a registered and beneficial holder. Beneficial holders may be forwarded either a form of proxy already signed by the intermediary or a voting instruction form to allow them to direct the voting of securities they beneficially own. Beneficial holders should follow instructions for voting conveyed to them by their intermediaries.
|
|
· Complete and return your signed proxy in the envelope provided or send to:
CST Trust Company
P.O. Box 721
Agincourt, ON M1S 0A1
|
4. If a security is held by two or more individuals, any one of them present or represented by proxy at the Meeting may, in the absence of the other or others, vote at the Meeting. However, if one or more of them are present or represented by proxy, they must vote together the number of securities indicated on the proxy.
|
|
· You may alternatively fax your proxy to 416-368-2502 or toll free in Canada and the United States to 1-866-781-3111 or scan and email to proxy@canstockta.com
|
All holders should refer to the Proxy Circular for further information regarding completion and use of this proxy and other information pertaining to the Meeting.
This proxy is solicited by and on behalf of Management of the Company.
|
|
An undated proxy is deemed to be dated on the day it was received by CST.
If you wish to receive investor documents electronically in future, please visit www.canstockta.com/electronicdelivery to enrol.
|
|
|
All proxies must be received by January 6, 2016 at 5:00 p.m. (Eastern time).
|
MEETING OF SHAREHOLDERS
AND
MANAGEMENT PROXY CIRCULAR
November 1, 2015
EXFO Inc.
MANAGEMENT PROXY CIRCULAR
SOLICITATION OF PROXIES
This Management Proxy Circular ("Circular") is provided in connection with the solicitation by the Management of EXFO Inc. (the "Corporation" or "EXFO") of proxies to be used at the Annual General Meeting of shareholders (the "Meeting") of the Corporation to be held at the time and place and for the purposes stated in the accompanying Notice of Meeting and at any adjournment thereof. Unless otherwise indicated, the information contained herein is given as at November 1, 2015.
It is expected that the solicitation will be made primarily by mail and e-mail but proxies may also be solicited personally by officers, employees or agents of the Corporation. The Corporation may also reimburse brokers and other persons holding shares in their names or in the names of nominees, for their costs incurred in sending proxy material to principals and obtaining their proxies. The cost of solicitation will be borne by the Corporation and is expected to be nominal.
APPOINTMENT AND REVOCATION OF PROXIES AND ATTENDANCE OF BENEFICIAL SHAREHOLDERS
The persons named in the enclosed Form of Proxy (the "Form of Proxy") are officers of the Corporation. A shareholder desiring to appoint some other person (who need not be a shareholder) to represent him or her at the Meeting may do so by inserting such person's name in the blank space provided in the Form of Proxy and checking item (B).
To be valid, votes or proxies must be received at the Toronto, Canada office of CST Trust Company, 320 Bay Street, B1 Level, Toronto, ON, M5H 4A6, the transfer agent of the Corporation, no later than the close of business on the last business day preceding the day of the Meeting or any adjournment thereof, or proxies may be delivered to the Chairman of the Meeting on the day of the Meeting or any adjournment thereof. A beneficial shareholder who completes a Form of Proxy and who wishes to attend and vote at the Meeting personally must appoint himself or herself proxy holder in the foregoing manner.
A proxy given pursuant to this solicitation may be revoked by instrument in writing executed by the shareholder or by his or her attorney authorized in writing if such instrument is deposited either at the registered office of the Corporation to the attention of the Corporate Secretary or at the Toronto, Canada office of the Corporation's transfer agent no later than the close of business on the last business day preceding the day of the Meeting or any adjournment thereof or with the Chairman of the Meeting on the day of the Meeting or any adjournment thereof.
VOTING OF PROXIES
The shares represented by proxies appointing the persons, or any one of them, designated by Management thereon to represent the shareholder at the Meeting will be voted in accordance with the instructions given by the shareholder. Unless otherwise indicated, the voting rights attached to the shares represented by a Form of Proxy will be voted "FOR" in respect of all the proposals described herein.
The Form of Proxy confers discretionary authority upon the persons named therein with respect to amendments or variations to matters identified in the accompanying Notice of Meeting. As at the date hereof, Management is not aware that any other matter is to be presented at the Meeting. If, however, other matters properly come before the Meeting, the persons designated in the Form of Proxy will vote thereon in accordance with their judgment pursuant to the discretionary authority conferred by such proxy with respect to such matters. A shareholder desiring to vote by telephone should call 1-888-489-7352 or to vote electronically must go to the following site: www.cstvotemyproxy.com and enter the personalized 13-digit e-voting control number printed on the enclosed Form of Proxy and follow the instructions on the screen or otherwise fax or e-mail or mail the enclosed Form of Proxy.
VOTING SHARES AND PRINCIPAL HOLDERS THEREOF
As at November 1, 2015, 22,248,271 Subordinate Voting Shares and 31,643,000 Multiple Voting Shares were outstanding, being the only classes of shares of the Corporation entitled to be voted at the Meeting. Each holder of Subordinate Voting Shares is entitled to one (1) vote and the holder of Multiple Voting Shares is entitled to ten (10) votes for each share registered in his or her name at the close of business on November 9, 2015, being the date fixed by the Board of Directors for the purpose of determining registered shareholders entitled to receive the accompanying Notice of Meeting and to vote (the "Record Date"). A list of shareholders entitled to vote as of the Record Date, showing the number of shares held by each shareholder, shall be prepared within ten (10) days of the Record Date. This list of shareholders will be available for inspection during normal business hours at the Montreal, Canada office of CST Trust Company, the transfer agent of the Corporation, 2001 Robert-Bourassa Boulevard, Suite 1600, Montreal, Quebec, Canada, H3A 2A6, and at the Meeting.
Unless otherwise indicated, the resolutions submitted to a vote at the Meeting must be passed by a majority of the votes cast by the holders of Subordinate Voting Shares and Multiple Voting Shares, as a single class, present at the Meeting in person or by proxy and voting in respect of all resolutions to be voted on by the shareholders of the Corporation.
To the knowledge of executive officers and directors of the Corporation, as at November 1, 2015, the only persons who are beneficial owners or who exercise control or direction, directly or indirectly, over shares carrying more than 10% of the voting rights attaching to any class of shares of the Corporation are:
Name of Shareholder
|
Number of
Subordinate
Voting Shares
|
Percentage of Voting
Rights Attached to
All Subordinate
Voting Shares
|
Number of
Multiple Voting
Shares (1)
|
Percentage of Voting
Rights Attached to
All Multiple
Voting Shares
|
Percentage of Voting
Rights Attached to All
Subordinate and
Multiple Voting Shares
|
Germain Lamonde
|
4,316,247 (2)
|
19.40%
|
31,643,000 (3)
|
100%
|
94.71%
|
EdgePoint Investment Group, Inc.
|
3,775,600
|
16.97%
|
–
|
–
|
1.11%
|
(1)
|
The holder of Multiple Voting Shares is entitled to ten (10) votes for each share.
|
(2)
|
Mr. Lamonde exercises control over 4,000,000 Subordinate Voting Shares through G. Lamonde Investissements Financiers inc., a company controlled by Mr. Lamonde.
|
(3)
|
Mr. Lamonde exercises control over this number of Multiple Voting Shares through G. Lamonde Investissements Financiers inc., a company controlled by Mr. Lamonde and through Fiducie Germain Lamonde, a family trust for the benefit of Mr. Lamonde's family.
|
ELECTRONIC DELIVERY
The Corporation has a voluntary program for e-mail notification to its shareholders advising them that documents which must be delivered pursuant to securities legislation are available on the Corporation's website. Every year, as required by law governing public companies, the Corporation delivers documentation to shareholders, such as this Circular and the Corporation's annual consolidated financial statements together with the auditor's report thereon. The Corporation has made the delivery of such documents more convenient for its shareholders, as shareholders who so wish may be notified by e-mail when the Corporation's documentation is posted in the "Investors" section on its website (www.EXFO.com). Accordingly such documentation will not be sent to such shareholders in paper form by mail. The Corporation believes that electronic delivery will benefit the environment and reduce its costs. Shareholders who do not consent to receive documentation by e-mail will continue to receive such documentation by mail. Shareholders may also notify the Corporation in writing of their intention not to receive the annual consolidated financial statements together with the auditor's report thereon, neither by e-mail nor by mail.
Registered shareholders can consent to electronic delivery by visiting CST Trust Company's web site: www.canstockta.com/electronicdelivery. Unregistered shareholders (i.e. shareholders whose shares are held through a securities broker, bank, trust company or other nominee) can consent to electronic delivery by completing and returning the appropriate form received from the applicable intermediary.
BUSINESS TO BE TRANSACTED AT THE MEETING
Presentation of the Financial Statements
The consolidated financial statements of the Corporation for the financial year ended August 31, 2015 and the auditor's report thereon will be submitted to shareholders at the Meeting but no vote with respect thereto is required or proposed to be taken.
Election of the Directors
According to the articles of the Corporation, the Board of Directors shall consist of a minimum of three (3) and a maximum of twelve (12) directors. The number of directors is currently fixed at six (6) pursuant to a resolution of the Board of Directors. At the Meeting, Management proposes the six (6) persons named hereafter on pages 5 to 10 as nominees for election as directors to hold office until the next annual meeting or until the office is otherwise vacated in accordance with the Corporation's by-laws.
Management does not anticipate that any of the nominees will be unable or, for any reason whatsoever, reluctant to fulfill their duties as directors. Should this occur for any reason whatsoever before the election, the persons named in the Form of Proxy reserve the right to vote for another nominee of their choice unless the shareholder specified on the Form of Proxy to abstain from voting for the election of the directors. The election of the directors must be approved by a majority of the votes cast on the matter at the Meeting.
The Corporation's Majority Voting Policy applies to this election. Under such policy, a director who is elected in an uncontested election with a greater number of votes "withheld" than votes "for" such director will be required to tender his or her resignation to the Chair of the Board. This resignation will be effective when accepted by the Board of Directors. Unless extraordinary circumstances apply, the Board of Directors will accept the resignation. The Board of Directors will announce its decision (including the reason for not accepting a resignation) by press release within ninety (90) days of the meeting during which the election was held. A copy of the Majority Voting Policy is available on the Corporation's website (www.EXFO.com).
Nomination Process
The Human Resources Committee assists the Board of Directors by identifying individuals qualified to become members of the Board of Directors, and making recommendations to the Board of Directors as to selection of director nominees for the next annual meeting of shareholders. In making its recommendations, the Human Resources Committee objectively considers, among others, the competencies and skills that: (i) the Board of Directors considers to be necessary for the Board, as a whole, to possess; (ii) the Board of Directors considers each existing director to possess; and (iii) each new nominee will bring to the board room. Therefore, the competencies and skills, identified by the Human Resources Committee, as a whole, include the skill sets of current board members such as financial literacy, proficiency with test, service assurance and network visibility solutions and technologies, telecommunications industry experience, international business experience and other related competencies. Any additional skill sets deemed to be beneficial are considered, assessed and identified in light of the opportunities and risks facing the Corporation when candidates for director positions are considered.
Appointment and Remuneration of Auditors
A firm of auditors is to be appointed by vote of the shareholders at the Meeting to serve as auditors of the Corporation until the close of the next annual general meeting of the shareholders. The Audit Committee is to be authorized to fix the remuneration of the auditors so appointed. The Board of Directors and Management, upon the advice of the Audit Committee, recommend that PricewaterhouseCoopers LLP be re-appointed as auditors of the Corporation. The re-appointment of PricewaterhouseCoopers LLP must be approved by a majority of the votes cast on the matter at the Meeting.
NOMINEES FOR ELECTION AS DIRECTORS AND THEIR BENEFICIAL OWNERSHIP OF VOTING SECURITIES
The following charts and notes set out the name of each of the individuals proposed to be nominated at the Meeting for election as a director of the Corporation. Included in these charts is information relating to the proposed directors' committee memberships, meeting attendance, period of service as a director, principal directorships with other organizations and equity ownership (or securities over which each of them exercises control or direction) in the Corporation.
GERMAIN LAMONDE
|
|
St-Augustin-de-Desmaures, Quebec, Canada
Director since September 1985
Not Independent (Management)
Principal Occupation:
Chairman of the Board of Directors, President and Chief Executive Officer of the Corporation
|
Germain Lamonde, a founder of EXFO, has been President and Chief Executive Officer of EXFO since its inception in 1985. He has also been Chairman of the Board since EXFO went public in 2000. Responsible for the overall management and strategic direction of EXFO, Mr. Lamonde has grown the company from the ground up into a global leader in the test and measurement and systems and service assurance industry. Mr. Lamonde has served on the board of directors of several organizations such as the Canadian Institute for Photonic Innovations, the POLE QCA Economic Development Corporation, the National Optics Institute of Canada (INO) and Université Laval in Quebec City, to name a few. Germain Lamonde holds a bachelor's degree in engineering physics from the University of Montreal's School of Engineering (École Polytechnique), a master's degree in optics from Université Laval, and is also a graduate of the Ivey Executive Management Program offered by the University of Western Ontario.
|
Board/Committee Membership
|
Attendance (1)
|
Board Memberships of Another Reporting Issuer
|
Chairman of the Board of Directors
|
7/7
|
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares(#)
|
Multiple Voting
Shares(#)
|
RSUs(#)
|
Total Shares (2)
and RSUs(#)
|
Total Market Value (3)
of Shares (2) and RSUs (US$)
|
August 31, 2015
|
4,271,699 (4)
|
31,643,000 (5)
|
97,809
|
36,012,508
|
110,198,274
|
Options Held as at August 31, 2015
|
Date Granted
|
Number(#)
|
Exercise Price (US$) (6)
|
Total Unexercised(#)
|
Value of Options
Unexercised (US$) (7)
|
December 6, 2005
|
11,218
|
4.76
|
11,218
|
‒
|
Total
|
|
|
11,218
|
‒
|
(1)
|
From September 1, 2014 until November 1, 2015, Mr. Lamonde attended five (5) board meetings in person and two (2) board meetings by telephone.
|
(2)
|
Includes both Subordinate Voting Shares and Multiple Voting Shares.
|
(3)
|
The value of unvested RSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2015, which was US$3.06 (CA$4.05). The market value of the Subordinate Voting Shares and Multiple Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August 31, 2015 using the noon buying rate of the Bank of Canada to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of RSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Mr. Lamonde exercises control over 4,000,000 of Subordinate Voting Shares through G. Lamonde Investissements Financiers inc., a company controlled by Mr. Lamonde.
|
(5)
|
Mr. Lamonde exercises control over this number of Multiple Voting Shares through G. Lamonde Investissements Financiers inc., a company controlled by Mr. Lamonde and through Fiducie Germain Lamonde, a family trust for the benefit of Mr. Lamonde's family.
|
(6)
|
These options were granted in Canadian dollars. The exercise price was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on the business day preceding the grant date using the noon buying rate of the Bank of Canada to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars on the grant date.
|
(7)
|
Indicates an aggregate value of "in-the-money" unexercised options held at the financial year ended August 31, 2015. "In-the-money" options are options for which the market value of the underlying securities is higher than the exercise price. The value of unexercised "in-the-money" options at financial year end is the difference between its exercise or base price and the market value of the underlying Subordinate Voting Share as at August 31, 2015, which was US$3.06 (CA$4.05). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August 31, 2015 using the noon buying rate of the Bank of Canada to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. For a Canadian resident, the value of options unexercised is calculated using the exercise price and the market value of the subordinate voting shares on the Toronto Stock Exchange in Canadian dollars.
|
PIERRE-PAUL ALLARD
|
|
Pleasanton, California, USA
Director since September 2008
Independent
Principal Occupation:
Senior Vice-President, Worldwide Sales and President Global Field Operations at Avaya Inc. (1)
|
Pierre-Paul Allard was appointed a member of our Board of Directors in September 2008 and has been a board member of many other technology companies in Canada and in the US. Mr. Allard is Senior Vice-President, Worldwide Sales and President Global Field Operations at Avaya Inc., a global provider of business collaboration and communications solutions. As Chief Revenue Officer, Mr. Allard is responsible for all go-to-market at Avaya. Prior to joining Avaya in May 2012, Mr. Allard worked for nineteen (19) years at Cisco Systems, Inc., where he most recently held the position of Vice-President, Sales and Operations, Global Enterprise. Previously, Mr. Allard was President of Cisco Systems Canada, and before that he held various management roles at IBM Canada for twelve (12) years. In 2002, Mr. Allard co-chaired the Canadian e-Business Initiative, a private-public partnership aiming to measure the role e-Business plays in increasing productivity levels, job creation and competitive position. In 1998, he was the laureate of the Arista-Sunlife Award, for Top Young Entrepreneur in Large Enterprise, conferred by the Montreal Chamber of Commerce. In 2003, he received the Queen's Golden Jubilee Medal, which highlights significant contributions to Canada. In the same year, he was also awarded the prestigious Trudeau Medal from the University of Ottawa, Tefler School of Management. Pierre-Paul Allard holds a bachelor's and masters' degree in Business Administration from the University of Ottawa, Canada.
|
Board/Committee Membership
|
Attendance (2)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
5/7
4/5
4/5
4/5
|
71%
80%
80%
80%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares(#)
|
DSUs(#)
|
Total Shares
and DSUs(#)
|
Total Market Value (3)
of Shares (4) and DSUs (US$)
|
August 31, 2015
|
8,000
|
40,332
|
48,332
|
147,896
|
Options Held as at August 31, 2015
|
Date Granted
|
Number(#)
|
Exercise Price (US$)
|
Total Unexercised(#)
|
Value of Options Unexercised (US$)
|
–
|
–
|
–
|
–
|
–
|
(1)
|
Avaya Inc. is a global provider of business collaboration and communications solutions.
|
(2)
|
From September 1, 2014 until November 1, 2015, Mr. Allard attended four (4) board meetings in person and one (1) board meeting by telephone.
|
(3)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2015, which was US$3.06 (CA$4.05). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August 31, 2015 using the noon buying rate of the Bank of Canada to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Refers to Subordinate Voting Shares.
|
FRANÇOIS CÔTÉ
|
|
Montreal, Quebec, Canada
Director since January 2015
Independent
Principal Occupation:
Chairman, TELUS Ventures (1)
|
François Côté oversees the development and implementation of TELUS Ventures' investment strategy. He also actively manages investments which drive return on investment and value creation for TELUS Corporation. Mr. Côté held a variety of executive positions at Bell Canada prior to becoming President and Chief Executive Officer of Emergis. Following the acquisition of Emergis by TELUS in January 2008, he was appointed President of TELUS Quebec, TELUS Health & TELUS Ventures. In this role, Mr. Côté was responsible for broadening TELUS' Quebec presence and driving the company's national health strategy through timely investments in information technology and innovative wireless solutions. Mr. Côté holds a Bachelor's degree in Industrial Relations from Laval University. In 2007, he was named Entrepreneur of the Year by Ernst & Young, in the Corporate Restructuring category for the Quebec City region. Mr. Côté serves on the boards of Fondation du Dr. Julien, Fondation Martin-Matte, Roche Ltd, Consulting Group and Lumenpulse Inc. as well as the Advisory Board of the McGill Centre for the Convergence of Health and Economics (MCCHE). In June 2013, Mr. Côté was named Honourary Lieutenant-Colonel of the Canadian Armed Forces' 34th Signal Regiment. He is also Vice Chair of the TELUS Fund, an independent organization established to finance the creation of health and wellness content.
|
Board/Committee Membership
|
Attendance (2)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
4/4
3/3
3/3
3/3
|
100%
100%
100%
100%
|
Lumenpulse Inc.
|
Securities Held
|
As at
|
Subordinate
Voting Shares(#)
|
DSUs(#)
|
Total Shares
and DSUs(#)
|
Total Market Value (3)
of Shares (4) and DSUs (US$)
|
August 31, 2015
|
3,000
|
4,370
|
7,370
|
22,552
|
Options Held as at August 31, 2015
|
Date Granted
|
Number(#)
|
Exercise Price (US$)
|
Total Unexercised(#)
|
Value of Options Unexercised (US$)
|
–
|
–
|
–
|
–
|
–
|
(1)
|
TELUS Ventures is the strategic venture investment arm of TELUS, a leading North American telecommunications firm that provides a wide range of telecommunications products and services.
|
(2)
|
Mr. Côté joined our Board of Directors in January 2015. From January 8, 2015 until November 1, 2015, Mr. Côté attended three (3) board meetings in person and one board meeting by telephone.
|
(3)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2015, which was US$3.06 (CA$4.05). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August 31, 2015 using the noon buying rate of the Bank of Canada to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Refers to Subordinate Voting Shares.
|
DARRYL EDWARDS
|
|
Weston Under Wetherley, Warwickshire, United Kingdom
Director since September 2011
Lead Director
Independent
Principal Occupation:
President and Chief Executive Officer,
ECI Telecom (1)
|
Darryl Edwards was appointed a member of our Board of Directors in September 2011. Mr. Edwards is the President and Chief Executive Officer of ECI Telecom, a leading provider of access and transport solutions. Prior to leading ECI, Mr. Edwards was the Chairman of the Board for MACH, a leading provider of hub-based mobile communication solutions. He brings to EXFO more than thirty (30) years of telecommunications experience gained from a number of senior executive leadership positions; most recently he was the Chief Executive Officer of AIRCOM International, successfully leading the company through to business sale. Mr. Edwards was previously at Nortel Networks for seventeen (17) years, where he held various executive officer positions, including President of EMEA and President of Global Sales (Carrier Networks). He also was the Chief Executive Officer for two (2) of Nortel's key joint ventures, first in the Middle East and later in Germany. Prior to his time at Nortel, Mr. Edwards spent thirteen (13) years at GEC-Plessey Telecommunications where he worked in engineering, quality assurance and international sales. He was also an advisor to private equity firm Warburg Pincus, the majority shareholder of MACH, on telecommunications-related topics. Mr. Edwards has held a number of chairs, including Chairman of the Board of Nortel's interests in Turkey, Nortel Netas, which was listed on the Istanbul Stock Exchange. He also was a member of the Advisory Counsel to the Turkish government between 2004 and 2008, and previously served on the UK Government Broadband Stakeholders Group and the Information Age Partnership. Darryl Edwards holds a Higher National Certificate (Physics) from Birmingham Polytechnic in the UK.
|
Board/Committee Membership
|
Attendance (2)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
7/7
5/5
4/5
5/5
|
100%
100%
80%
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares(#)
|
DSUs(#)
|
Total Shares
and DSUs(#)
|
Total Market Value (3)
of Shares (4) and DSUs (US$)
|
August 31, 2015
|
–
|
21,778
|
21,778
|
66,641
|
Options Held as at August 31, 2015
|
Date Granted
|
Number(#)
|
Exercise Price (US$)
|
Total Unexercised(#)
|
Value of Options Unexercised (US$)
|
–
|
–
|
–
|
–
|
–
|
(1)
|
ECI Telecom is a global provider of networking infrastructure equipment and other fiber solutions.
|
(2)
|
From September 1, 2014 until November 1, 2015, Mr. Edwards attended four (4) board meetings in person and three (3) board meetings by telephone.
|
(3)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2015, which was US$3.06 (CA$4.05). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August 31, 2015 using the noon buying rate of the Bank of Canada to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Refers to Subordinate Voting Shares.
|
CLAUDE SÉGUIN
|
|
Westmount, Quebec, Canada
Director since February 2013
Independent
Principal Occupation:
Senior Vice-President, Corporate Development and Strategic Investments,
CGI Group Inc. (1)
|
Claude Séguin was appointed a member of EXFO's Board of Directors in February 2013. He brings to EXFO over thirty (30) years of corporate, financial, executive and provincial government experience gained through senior management positions in major corporations and government departments. Mr. Séguin is currently Senior Vice-President, Corporate Development and Strategic Investments at CGI Group Inc., a global leader in information technology and business process services. In this position, he is responsible for all merger and acquisition activities. Prior to joining CGI in 2003, he served as President of CDP Capital—Private Equity, and prior to this position, he served as Teleglobe Inc.'s Executive Vice-President, Finance and Chief Financial Officer, a position that he held from 1992 to 2000. Mr. Séguin also has extensive senior-level government experience, having served as Deputy Finance Minister of the Province of Québec from 1987 to 1992, in addition to Assistant Deputy Finance Minister and Assistant Director of Social Programs at the Quebec Treasury Board. Mr. Séguin is a member of the boards of HEC-Montréal and Centraide of Greater Montreal Foundation as well as being Chairman of the Board of Finance - Montreal, an organization regrouping financial institutions in Montreal. Claude Séguin graduated from HEC-Montréal and earned a Master's and a Ph.D. in public administration from the Syracuse University in New York State.
|
Board/Committee Membership
|
Attendance (2)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
6/7
5/5
4/5
4/5
|
86%
100%
80%
80%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares(#)
|
DSUs(#)
|
Total Shares
and DSUs(#)
|
Total Market Value (3)
of Shares (4) and DSUs (US$)
|
August 31, 2015
|
–
|
15,316
|
15,316
|
46,867
|
Options Held as at August 31, 2015
|
Date Granted
|
Number(#)
|
Exercise Price (US$)
|
Total Unexercised(#)
|
Value of Options Unexercised (US$)
|
–
|
–
|
–
|
–
|
–
|
(1)
|
CGI Group Inc. is an information technology consulting, systems integration, outsourcing and solutions company.
|
(2)
|
From September 1, 2014 until November 1, 2015, Mr. Séguin attended four (4) board meetings in person and two (2) board meetings by telephone.
|
(3)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2015, which was US$3.06 (CA$4.05). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August 31, 2015 using the noon buying rate of the Bank of Canada to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Refers to Subordinate Voting Shares.
|
RANDY E. TORNES
|
|
Frisco, Texas, USA
Director since February 2013
Independent
Principal Occupation:
Vice-President, Sales
Juniper Networks (1)
|
Randy E. Tornes was appointed a member of EXFO's Board of Directors in February 2013. He brings to EXFO nearly thirty (30) years of telecommunications experience gained through senior management positions at leading network equipment manufacturers. Mr. Tornes is Operating Area Leader & Vice-President, Sales (AT&T account) at Juniper Networks, a worldwide leader in high-performance networking and telecommunications equipment. In this position, he is responsible for all sales, service and support of Juniper products to AT&T. Prior to joining Juniper Networks in May 2012, he spent two (2) years at Ericsson, where he was Vice-President Sales (AT&T account). Previous to that position, he worked for Nortel for twenty-six (26) years, holding various sales management positions, including Vice-President Sales, GSM Americas. Mr. Tornes also served as member of the Board of Governors at 3G Americas LLC. Randy E. Tornes holds a Bachelor of Science degree in Business—Organizational Development and Production and Operations Management, from the University of Colorado in Colorado Springs.
|
Board/Committee Membership
|
Attendance (2)
|
Board Memberships of Another Reporting Issuer
|
Board of Directors
Audit Committee
Human Resources Committee
Independent Board of Directors
|
7/7
5/5
5/5
5/5
|
100%
100%
100%
100%
|
–
|
Securities Held
|
As at
|
Subordinate
Voting Shares(#)
|
DSUs(#)
|
Total Shares
and DSUs(#)
|
Total Market Value (3)
of Shares (4) and DSUs (US$)
|
August 31, 2015
|
–
|
32,361
|
32,361
|
99,025
|
Options Held as at August 31, 2015
|
Date Granted
|
Number(#)
|
Exercise Price (US$)
|
Total Unexercised(#)
|
Value of Options Unexercised (US$)
|
–
|
–
|
–
|
–
|
–
|
(1)
|
Juniper Networks is a manufacturer of networking equipment.
|
(2)
|
From September 1, 2014 until November 1, 2015, Mr. Tornes attended five (5) board meetings in person and two (2) board meetings by telephone.
|
(3)
|
The value of unvested DSUs at the financial year-end is the market value of the Subordinate Voting Shares on August 31, 2015, which was US$3.06 (CA$4.05). The market value of the Subordinate Voting Shares was calculated by using the highest of the closing prices of the Subordinate Voting Shares on the Toronto Stock Exchange and on the NASDAQ National Market on August 31, 2015 using the noon buying rate of the Bank of Canada to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required. The actual gains on vesting of DSUs will depend on the value of the Subordinate Voting Shares on the date of vesting. There can be no assurance that these values will be realized.
|
(4)
|
Refers to Subordinate Voting Shares.
|
The information as to Subordinate Voting Shares and Multiple Voting Shares beneficially owned or over which the above-named individuals exercise control or direction is not within the direct knowledge of the Corporation and has been furnished by the respective individuals. The information as to the Principal Board Memberships is also not within the direct knowledge of the Corporation and has been furnished by the respective individuals.
With the exception of Mr. Darryl Edwards (as disclosed below), none of the individuals who are proposed to be nominated at the Meeting for election as a director of the Corporation:
(a)
|
is, as at the date hereof, or has been, within ten (10) years before the date hereof, a director, chief executive officer or chief financial officer of any company that (i) was subject to an order that was issued while such individual was acting in the capacity as director, chief executive officer or chief financial officer, or (ii) was subject to an order that was issued after such individual ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer;
|
(b)
|
is, as at the date hereof, or has been within ten (10) years before the date hereof, a director or executive officer of any company that, while such individual was acting in that capacity, or within a year of that individual ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets;
|
(c)
|
has, within the ten (10) years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold his assets; or
|
(d)
|
has been subject to (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority, or (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable security holder in deciding whether to vote for such individual.
|
Mr. Darryl Edwards acted as an executive officer of Nortel Networks Corporation ("Nortel") and its affiliates from 2001 to 2009, most recently acting as President of Global Carrier Sales of Nortel in 2009 and as President, EMEA sales of Nortel from 2006 to 2009. Nortel and certain of its affiliates filed for bankruptcy protection in a number of jurisdictions in January 2009.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
Compensation Discussion and Analysis
This Compensation Discussion and Analysis focuses primarily on: (i) significant elements of the Corporation's executive compensation program; (ii) principles on which the Corporation makes compensation decisions and determines the amount of each element of executive and director compensation; and (iii) an analysis of the material compensation decisions made by the Human Resources Committee for the financial year ended August 31, 2015.
The following is a discussion of the compensation arrangements with the Corporation's Chief Executive Officer ("CEO"), Chief Financial Officer ("CFO") and each of the three most highly compensated executive officers of the Corporation and its subsidiaries whose total compensation was, individually, more than CA$150,000, (collectively with the CEO and CFO, the "Named Executive Officers" or "NEOs"). The NEOs for the financial year ended August 31, 2015 were Mr. Germain Lamonde (CEO), Mr. Pierre Plamondon (Vice-President, Finance and CFO), Mr. Jon Bradley (Vice-President, Sales — EMEA), Mr. Lee Huat (Joseph) Soo (Vice-President, Sales — Asia-Pacific) and Mr. Dana Yearian (Vice-President, Sales — Americas).
Members of the Human Resources Committee
During the financial year ended August 31, 2015, the Human Resources Committee was composed of:
Ÿ
|
Mr. Guy Marier (Chairman until January 7, 2015)
|
Ÿ
|
Mr. François Côté (Chairman since January 8, 2015)
|
None of these members were officers or employees, or former officers or employees of the Corporation or its subsidiaries. All of the members of the Human Resources Committee are considered "independent", as defined in applicable securities legislation and regulations. They each have experience in executive compensation either as a chief executive officer or a senior executive officer of a publicly-traded corporation. Mr. Pierre-Paul Allard has held management and executive positions for the last thirty (30) years. Mr. Côté held a variety of executive positions, including president and chief executive officer, for approximately twenty (20) years and he is the Chairman of the Human Resources Committee of Lumenpulse Inc. Mr. Côté also holds a Bachelor's degree in Industrial Relations. Mr. Darryl Edwards has held a number of senior executive leadership positions in the last thirty (30) years. Mr. Claude Séguin has held various senior management and executive positions in major corporations in the last thirty (30) years. Mr. Randy E. Tornes has approximately thirty (30) years of management experience through senior sales management positions. Over the course of their careers, all members have been exposed at various degrees to the complexity of balancing efficient executive compensation strategies with the evolution of business requirements, having to manage directly or indirectly impacts and consequences of executive compensation decisions. The Board of Directors believes that the Human Resources Committee collectively has the knowledge, experience and background required to fulfill its mandate.
Mandate of the Human Resources Committee
The Human Resources Committee of the Board of Directors is responsible for establishing the annual compensation and assessing the risks related thereto and overseeing the assessment of the performance of all the Corporation's executive officers, including the President and CEO. The Human Resources Committee also reviews and submits to the Board of Directors recommendations for the salary structure and the short-term and long-term incentive compensation programs for all employees of the Corporation. The Human Resources Committee also evaluates and makes recommendations to the Board of Directors regarding the compensation of directors, including the number of Deferred Share Units credited to the non-employee directors pursuant to the Deferred Share Unit Plan. The Human Resources Committee's goal is to develop and monitor executive compensation programs that are consistent with strategic business objectives and shareholders' interests. Though the Human Resources Committee is responsible for the review of employees' performance and approval of the identity of the employees that will receive Restricted Share Units or options to purchase shares of the Corporation, in accordance with policies established by the Board of Directors and the terms of the Long-Term Incentive Plan, these functions may be shared between the Board of Directors and the Human Resources Committee. During the period from September 1, 2014 to August 31, 2015, these functions have been shared by the Board of Directors and the Human Resources Committee but have mainly been performed by the Human Resources Committee.
The Human Resources Committee has reviewed and discussed with the CEO and Vice-President, Human Capital of the Corporation, the compensation disclosure in this document, and has recommended to the Board of Directors that the disclosure be included in this Annual Report.
From September 1, 2014 to November 1, 2015, the Human Resources Committee held five (5) meetings and at all of those meetings executive compensation was discussed. The Human Resources Committee meetings were attended by all the members of the Human Resources Committee except Mr. Allard, Mr. Edwards, Mr. Marier and Mr. Séguin, each of whom was absent at one (1) meeting. The following table outlines the main activities of the Human Resources Committee during the period from September 1, 2014 to November 1, 2015:
Meeting
|
Main Activities of the Human Resources Committee
|
October 8, 2014
|
●
|
Review of the Business Performance Measures results for the financial year ended August 31, 2014;
|
●
|
Review of the Business Performance Measures for the financial year started September 1, 2014;
|
●
|
Review of the Short-Term Incentive Plan results for the financial year ended August 31, 2014;
|
●
|
Review of the Short-Term Incentive Plan for the financial year started September 1, 2014;
|
●
|
Review and approval of the compensation plans of executive officers for the financial year started September 1, 2014 being the Base Salary, the Short-Term Incentive Plan and the stock-based compensation delivered through the Long-Term Incentive Plan;
|
●
|
Review and approval of the stock-based compensation for the sales force delivered through the Long-Term Incentive Plan for the financial year started September 1, 2014;
|
●
|
Review and approval of the quantum for the stock-based compensation for the performing employees delivered through the Long-Term Incentive Plan for the financial year started September 1, 2014;
|
●
|
Review and approval of the executive compensation section of the Management proxy circular for the financial year ended August 31, 2014;
|
●
|
Review of the Management Structure;
|
●
|
Review of the CEO objectives and review and approval of the CEO compensation plan;
|
●
|
Review of the Risk Assessment of Executive Compensation disclosure obligations.
|
January 7, 2015
|
●
|
Review and approval of the Business Performance Measures for the financial year started September 1, 2014;
|
●
|
Review and approval of the Short-Term Incentive Plan of some executive officers for the financial year started September 1, 2014, including the CEO objectives;
|
●
|
Review of the quarterly payments under the Short-Term Incentive Plan for the financial year started September 1, 2014 and being part of the Short-Term Incentive Plan;
|
●
|
Review and approval of the stock-based compensation for performing employees delivered through the Long-Term Incentive Plan for the financial year started September 1, 2014;
|
●
|
Review of the Management Structure;
|
●
|
Global Compensation Review;
|
●
|
Engagement Survey;
|
●
|
Talent Management.
|
March 24, 2015
|
●
|
Review of the quarterly payments under the Short-Term Incentive Plan for the financial year started September 1, 2014 and being part of the Short-Term Incentive Plan;
|
●
|
Succession Planning;
|
●
|
Review and approval of the Short-Term Incentive Plan of some executive officers for the financial year started September 1, 2014;
|
●
|
Review of the Key Human Capital Initiatives;
|
●
|
Global Compensation Review;
|
●
|
Review of the Management Structure;
|
●
|
Review of the Talent Management.
|
June 23, 2015
|
●
|
Review of the quarterly payments under the Short-Term Incentive Plan for the financial year started September 1, 2014 and being part of the Short-Term Incentive Plan;
|
●
|
Review and approval of the Short-Term Incentive Plan of the remaining executive officers for the financial year started September 1, 2014;
|
●
|
Update on the Global Compensation Review;
|
●
|
Update on the Management Structure Review;
|
●
|
Update on the Talent Management Review;
|
●
|
Review of the Key Human Capital Initiatives.
|
October 7, 2015
|
●
|
Review of the Business Performance Measures results for the financial year ended August 31, 2015;
|
●
|
Review of the Business Performance Measures for the financial year started September 1, 2015;
|
●
|
Review of the Short-Term Incentive Plan results for the financial year ended August 31, 2015;
|
●
|
Review of the Short-Term Incentive Plan for the financial year started September 1, 2015;
|
●
|
Review of the proposed salary scales and salary increases for the year started September 1, 2015;
|
●
|
Review of the compensation plans of executive officers for the financial year started September 1, 2015 being the Base Salary, the Short-Term Incentive Plan and the stock-based compensation delivered through the Long-Term Incentive Plan;
|
●
|
Review and approval of the stock-based compensation plan for the sales force delivered through the Long-Term Incentive Plan for the financial year started September 1, 2015;
|
●
|
Review and approval of the quantum for the stock-based compensation plan for the performing employees delivered through the Long-Term Incentive Plan for the financial year started September 1, 2015;
|
●
|
Review and approval of the executive compensation section of the Management proxy circular for the financial year ended August 31, 2015;
|
●
|
Review and approval of the CEO objectives and compensation plan;
|
●
|
Review of the Risk Assessment of Executive Compensation disclosure obligations.
|
Compensation Plan Control - Compensation Consultant and Internal Review
As a general practice, the Corporation's relative position in terms of compensation levels is determined periodically through studies performed by independent consulting firms using a selected reference market of comparable companies. The benchmarking activities are further detailed below under the heading – "Benchmarking".
In 2015, the Corporation relied on the latest studies mentioned above and on the work accomplished in previous years. In 2013 and 2014, the Corporation engaged Towers Watson to perform an executive compensation review and to provide recommendations regarding the short-term incentive and long-term incentive compensation design of the Corporation (hereinafter in this Annual Report referred to as the "Target Compensation Positioning"). The compensation elements covered by the analysis were: base salary; target bonus; long term incentive; perquisites and pension (hereinafter in this Annual Report referred to as the "Target Total Compensation"). Towers Watson's work included assistance in benchmarking, assessing potential gaps between the market and the executives' compensation levels, to propose potential changes to ensure alignment with the market and with the Corporation's compensation policy. Towers Watson also assessed the competitiveness of the compensation offered to the independent Directors of the Board and proposed changes to ensure alignment with market practices.
In addition, internal pay equity studies are a key factor used by the Corporation to complete the compensation review process and indicate where necessary adjustments may be required. During the financial year ended August 31, 2015, this practice continued and certain compensation adjustments were made as have been made in previous years. Notably, in 2012, the Human Resources Committee, after the evaluation of the share ownership of the CEO, determined that the CEO should no longer receive equity-based compensation within his compensation since the share ownership of the CEO is sufficient and equity-based compensation is no longer reasonably considered as an incentive to performance. Accordingly, it was decided that the base salary of the CEO would be adjusted over a period of four (4) years starting from the financial year started September 1, 2012.
The Human Resources Committee has the authority to retain any independent consultants of its choice to advise its members on total executive compensation policy matters, and to determine the fees and the terms and conditions of the engagement of these consultants. The Human Resources Committee is ultimately responsible for its own decisions, which may take into consideration more than the information and recommendations provided by its compensation consultants or Management.
For the financial year that ended on August 31, 2014, the Human Resources Committee retained the services of Towers Watson for an analysis on executive officers' and directors' compensation and also 37-2 Conseil Inc. for an analysis on executive officers' compensation.
For the financial years that ended on August 31, 2014 and 2015, the Corporation also retained the services of Towers Watson, 37-2 Conseil Inc., Aon-Hewitt, Eckler, Groupe Créacor Inc., Savard Martin et associés, Lee Hecht Harrison, Knightsbridge, Morneau Shepell, Mercer and SPB Psychologie organisationnelle for services which were not related to executive compensation. The services provided by Towers Watson concerned an analysis on the compensation structure of the sales employees, compensation survey for all positions other than sales and the access to benefits and compensation data and surveys for employees. The services provided by 37-2 Conseil Inc. related to an analysis of the compensation structure of the Corporation, the access to compensation data for employees, the preparation of various analyses with respect to the elaboration of a new salary structure for the Corporation and various work related to the compensation of sales employees including an analysis on the sales employees efficiency and productivity. The services provided by Aon-Hewitt related to the access to compensation data and surveys for sales employees in various countries. The services provided by Eckler relates to pension plan analysis, governance and communication to employees. The Corporation consulted Groupe Créacor Inc. and Savard Martin et associés for assistance with employees' training. The services provided by Lee Hecht Harrison, Knightsbridge and Morneau Shepell and Savard Martin et associés related to outplacement services. The Corporation consulted Mercer for assistance with employees' benefits and benchmarking, compensation data for expatriate employees and assistance with the compliance of the Pay Equity Act established by the Government of Quebec, Canada. The Corporation consulted SPB Psychologie organisationnelle for tests before hiring. Fees for the services performed that are not related to executive compensation are not required to be approved by the Human Resources Committee.
The aggregate fees paid to Towers Watson, 37-2 Conseil Inc., Aon-Hewitt, Eckler, Groupe Créacor Inc., Savard Martin et associés, Lee Hecht Harrison, Knightsbridge, Morneau Shepell, Mercer and SPB Psychologie organisationnelle for consulting services provided to the Human Resources Committee related to determining compensation for any of the Corporation's directors and executive officers and to the Corporation for all other services provided during the financial years ended August 31, 2014 and 2015 were as follows:
Type of Fee
|
Financial 2014 Fees
|
Percentage of
Financial 2014 Fees
|
Financial 2015 Fees
|
Percentage of
Financial 2015 Fees
|
Executive Compensation - Related Fees
|
|
CA$16,823 (1) (2)
|
18%
|
|
CA$0,00
|
|
0%
|
|
All Other Fees
|
|
CA$76,541
|
82%
|
|
CA$115,333
|
|
100%
|
|
Total
|
|
CA$93,364
|
100%
|
|
CA$115,333
|
|
100%
|
|
(1)
|
The aggregate fees paid to Towers Watson are CA$13,854 for financial year 2014, and the aggregate fees paid to 37-2 Conseil Inc. are CA$2,969 in financial year 2014.
|
(2)
|
These fees are not exclusively related to executive compensation as some work was also used for other employees.
|
Benchmarking
For the purpose of assessing the competiveness of the Target Total Compensation of senior executives, the Corporation considered compensation data from a comparator group including private and publicly-traded companies of comparable size and similar industry, operations in multiple countries and attracting similar profiles of employees, professionals and experts. The comparator group has been revised in 2013 with the guidance and advice from Towers Watson.
·
|
Canadian executives: For the executives based in Canada, the Corporation used the following comparator group: 5N Plus Inc., Aastra Technologies Ltd., ACCEO Solutions, Atos It Services and Solutions, Inc., Avigilon Corporation, Calian Technologies Ltd., COM DEV International Ltd., Constellation Software Inc., GTECH, Ericsson Canada Inc., Evertz Technologies Ltd., Hemisphere GPS Inc., Hitachi Data Systems, Miranda Technologies Inc., OpenText Corporation, Redline Communications Group Inc., Sandvine Corporation, Sierra Wireless Inc., Smart Technologies Inc., Vecima Networks Inc. and Wi-Lan Inc.
|
·
|
United States executives: For the executives based in the United States, the Corporation used the following comparator group: AMETEK, Aricent Group, Cincinnati Bell, Consolidated Communications, Crown Castle, ESRI, Fidessa Group, Globecomm Systems, Hutchinson Technology, Itron, Kaspersky Lab, Omgeo, Openet, PASCO Scientific, Plexus, SAS Institute, Sensata Technologies, Spotify, Teradata and Total System Services.
|
·
|
United Kingdom executives: For the executives based in the United Kingdom, the Corporation used the following comparator group: ARM Holdings, BT, Cable & Wireless, COLT Telecom, Computacenter, Electrocomponents, Everything Everywhere, hibu (prev. Yell Group), Hitachi Data Systems, Office Depot, Pearson Group, Pitney Bowes, Reed Elsevier, Sage UK, Telefonica O2, Three, Virgin Media and Vodafone.
|
·
|
Asia executives: For the executives based in Asia, the Corporation used a broader comparator group, based on general industry data: Abbott Laboratories, Ace Insurance Limited, Acr Capital Holdings Pte Ltd, Aeg Power Solutions, Agilent Technologies, Aia Co. Ltd (Singapore), Allianz Insurance, Allianz Se Reinsurance Branch Asia Pacific, Amlin Plc, Aon Asia Pacific, Astrazeneca Singapore Pte Ltd, Atos, Australia And New Zealand Banking Group Limited, Avanade, Aviva Asia, Aviva Ltd, Axa Asia Regional Centre Pte Ltd, Axa Insurance Singapore Pte Ltd, Axa Life Insurance Singapore, Bank Of America, Bank Of East Asia, Barclays Capital, Baxter Healthcare (Asia) Pte Ltd, BBC Worldwide, Belgacom, Biosensors Interventional Technologies Pte Ltd, Boeing (United States), Bombardier Transportation Gmbh, Boston Scientific Asia Pacific, BP, British Telecomms, Cable & Wireless, Canon, Catlin Singapore Pte Ltd, Celgene Pte Ltd, Cerebos Pacific, Certis Cisco Security, Chartis S'Pore, Chubb Pacific Underwriting, Cimb, Cisco, Citigroup, Clearwater Capital, Colt Technology Services Sa, Commerzbank Ag, Commscope Solutions Singapore Pte Ltd, Credit Suisse, Dbs, De Lage Landen Pte Ltd, Delphi Automotive Systems, Dematic, Dentsply, Deutsche Bank, Dhl Global Forwarding Management (Asia Pacific) Pte Ltd, Dhl Global Fowarding Singapore, Dhl Supply Chain Singapore, Diageo Plc, Discovery, Edwards Lifesciences (Asia) Pte Ltd, Edwards Lifesciences (Singapore) Pte Ltd, Energy Market Company, Enpro, Espnstar Sports, Estee Lauder Asia, Euler Hermes Credit Insurance Agency (S) Pte Ltd, Expedia, Inc., Experian Plc, Franklin Templeton Capital Holdings Pte Ltd, Friends Provident International Ltd, General Reinsurance Ag, Goldman Sachs, Great Eastern Life Insurance, Hewlett-Packard, Hill-Rom, Hilton Worldwide, Htc Corporation, Ida, Ii-Vi, Img, Ing Bank N.V., Singapore, Intel, Jabil Circuit, Inc., Jardine Lloyd Thompson Limited, John Wiley & Sons, Jones Lang Lasalle, JPMorgan Chase, Lenovo, Lexmark, Liberty Insurance Pte Ltd, Liberty Insurance Underwriters, Lilly-Nus Centre For Clinical Pharmacology Pte Ltd, M1, Malayan Banking Berhad, Manulife (Singapore) Pte Ltd, Marvell, Mastercard, Merck Pte Ltd, Microsoft, Mine Safety Appliances (United States), Molex, Morgan Stanley, Mp Biomedicals Asia Pacific Pte Ltd, Msig Insurance, MTV Asia, Mundipharma Pte Ltd, Munich Management Pte Ltd, Nagravision, National Australia Bank, NBC Universal, Nomura, Ocbc, Orange Business Services, Pacific Life Re Limited, Singapore Branch, Pall Corporation, Pearson Education South Asia Pte Ltd, Pfizer Asia Pacific Pte Ltd, Philips Electronic (S) Pte Ltd, Pramerica Financial Asia Hq Pte Ltd, Premier Farnell (Element14), Printronix, Prudential Assurance Company Singapore (Pte) Ltd, Qbe Insurance (International) Ltd, Qliktech International, Rbc Dexia Investor Services Bank, Reckitt Benckiser, East Asia, Reed Elsevier, Rentokil Initial Asia Pacific Management Pte Ltd, Research In Motion, Rhb Bank, Rolls Royce, Royal Bank Of Scotland, Royal Bank Of Scotland Gbm, Royal Dutch Shell, Royal Philips Electronics, Rsa Insurance, Sakari Resources Limited, Sandoz International Gmbh, Sanofi-Aventis Singapore Pte Ltd, SAS Institute, Scor Services Asia Pacific Pte Ltd, Sirtex Medical Ltd, Skandinaviska Enskilda Banken Ab Publ, Smith & Nephew Pte Ltd, Sompo Japan Insurance (Singapore) Pte Ltd, Standard & Poors, Standard Chartered Bank, Standard Life International, Starhub, Straits Developments, Swarovski Management Pte, Swiss Reinsurance Co, Takeda Pharmaceuticals (Asia Pacific) Pte Ltd, Teleplan, Tellabs, Temasek International, Tenet Insurance Co. Ltd., The Economist Group (A/P) Limited, The Walt Disney Company, Thomsonreuters, Tokio Marine Life Insurance Singapore Ltd, Transamerica Life (Bermuda) Ltd, Transitlink, T-Systems International, Tui Travel, UBS, Underwriters Laboratories (United States), Unilever, Unisys, United Overseas Insurance Ltd., Verizon Business, Xl Re Ltd, Zimmer Pte Ltd, Zurich Insurance Company (Singapore Branch) and Urich International.
|
To be considered in the comparator group, a company had to meet the following specific criteria:
a)
|
Similar industry: Technology Hardware and Equipment, Telecommunications Equipment and Services or Software and Services; and
|
b)
|
Comparable in size: revenues under CA$1 billion. Only one publicly traded company had revenues slightly above the equivalent of CA$1 billion. The compensation market comparison is done using the regression analysis which is a method to predict the "size-adjusted" competitive level of compensation to reflect the size of the Corporation in relation to that of the other companies of the reference group. This method mitigates the impact that larger companies may have on the competitive compensation levels for the Corporation.
|
The Corporation also participates in two (2) major surveys on an annual basis and accordingly is permitted to purchase the results in order to continue the benchmarking of our compensation on a regular basis. The first one is Towers Watson High Tech Middle Management, Professional and Support Compensation Survey, providing and receiving data for Canada, USA, UK, Finland and Lebanon. The other one is Radford (AON Hewitt) Global Sales Survey, providing and receiving data for all the countries where the Corporation employs sales force.
Guiding Principles for Compensation of Executive Officers
The Corporation's executive compensation plans are designed to attract, retain and motivate key executives who directly impact the Corporation's long-term success and the creation of shareholder value. In determining executive compensation, the Human Resources Committee considers the following four principles:
·
|
Performance-based: Executive compensation levels reflect both the results of the Corporation and individual results based on specific quantitative and qualitative objectives established at the beginning of each financial year in keeping with the Corporation's long-term strategic objectives.
|
·
|
Aligned with shareholder interests: An important portion of incentive compensation for executives is composed of equity awards to ensure that executives are aligned with the principles of sustained long-term shareholder value growth.
|
·
|
Market competitive: Compensation of executives is designed to be externally competitive when compared against executives of comparable peer companies, and in consideration of the Corporation's results.
|
·
|
Individually equitable: Compensation levels are also designed to reflect individual factors such as scope of responsibility, experience, and performance against individual measures.
|
Compensation Policies and Practices
In April 2007, the Corporation adopted a Best Practice Regarding the Granting Date of Stock Incentive Compensation. The purpose of this best practice is to ensure that the Corporation complies with securities regulation and avoids the back-dating of equity based incentive compensation. The best practice states that the Corporation shall: (i) grant recurrent equity based incentive compensation pursuant to its Long Term Incentive Plan on the fifth business day following the public release of the Corporation's financial results; and (ii) grant recurrent stock based incentive compensation pursuant to its Deferred Share Unit Plan on the last business day of each quarter. In October 2014, the Corporation amended the Human Resources Committee Charter in order to adapt it to the latest NASDAQ Rules on independency of directors, nomination and compensation committees and to better describe the nomination of directors process.
Risk Assessment of Executive Compensation Program
The Human Resources Committee considers the implications of the risks associated with the Corporation's compensation policies and practices when establishing recommendations for the compensation of executive officers. As such, for the financial year ended August 31, 2015, the Human Resources Committee conducted an internal risk assessment for executive compensation. The Human Resources Committee individually examined the compensation plans for each potential NEO against a list of elements that could trigger executives taking inappropriate or excessive risks. For the financial year ended August 31, 2015, the Human Resources Committee did not identify any risks associated with the Corporation's executive compensation policies and practices that are reasonably likely to have a material adverse effect on the Corporation.
On October 9, 2012 the Human Resources Committee Charter was amended in order to expressly reflect the responsibility of the Human Resources Committee to conduct an annual assessment of the risks associated with the Corporation's executive compensation policies and procedures.
Purchase of Hedging Financial Instruments by an Executive Officer or Director
While the Corporation has not adopted a policy prohibiting or restricting its executive officers and directors from purchasing financial instruments, including prepaid variable forward contracts, equity swaps, collars, or units of exchange funds, that are designated to hedge or offset a decrease in market value of equity securities granted as compensation or held, directly or indirectly, by the executive officer or director, to Management's knowledge, no executive officer or director has purchased any such financial instruments as of November 1, 2015. In addition, according to the Security Trading Policy of the Corporation, executive officers and directors are required to pre-clear with the Corporation's legal counsel's office any transaction concerning the Corporation's securities, which includes the entering into any of the above-mentioned financial instruments.
Compensation Elements
The key elements of the Corporation's 2015 executive compensation program were (i) base salary, (ii) short-term incentive compensation (by way of the Short-Term Incentive Plan or the Sales Incentive Plan) and (iii) the stock-based incentive compensation delivered through the Long-Term Incentive Plan. In addition, the Corporation has also offered benefit plans and, if applicable, contributed to a Deferred Profit-Sharing Plan or a 401K Plan. To determine appropriate compensation levels for each compensation component, the Human Resources Committee considered all key elements of the executive compensation program. The Human Resources Committee did not assign specific weightings to any key element of the Corporation's 2015 executive compensation program.
Base Salaries
In establishing the base salaries of senior officers, including the President and CEO, the Corporation takes into consideration responsibilities, job descriptions and salaries paid by other similar organizations for positions similar in magnitude, scope and complexity. The Human Resources Committee's objective is to align executive compensation levels with the Target Compensation Positioning offered within a reference market of comparable companies that are similar in size to the Corporation, with a particular focus on those within the high-technology/telecommunications and manufacturing-durable goods industries. The Human Resources Committee reviews the base salary of each executive officer on an annual basis at the beginning of each financial year and recommends that the Board of Directors approve appropriate adjustments, if required, within the salary range in order to maintain a competitive position within the market place.
Short-Term Incentive Compensation
The Short-Term Incentive Plan ("STIP"), or the Sales Incentive Plan ("SIP") for the executive officers that are included within the sales force, provides executive officers with the opportunity to earn annual bonuses based on the Corporation's financial performance and the achievement of strategic corporate and departmental objectives established on a yearly basis (the "Business Performance Measures") as well as the achievement of individual performance objectives ("Individual Performance Measures"). The Business Performance Measures under the STIP also apply to all other employees of the Corporation, except the sales force, for which the SIP applies. The Individual Performance Measures only apply to executive officers and directors levels of the Corporation.
Annually the Human Resources Committee determines the annual incentive target for each executive officer, being a percentage of the executive's base salary ("Annual Incentive Target"). The Annual Incentive Targets for executive officers eligible for incentive bonuses in the financial year ended August 31, 2015 were established to be progressively in line with the objective of the Human Resources Committee of aligning compensation with the Target Compensation Positioning offered in the reference market. For the most recently ended financial year, the Annual Incentive Target for the NEOs was:
Name & Position
|
Annual Incentive Target as % of Base Salary
|
Germain Lamonde, CEO
|
65.0%
|
Pierre Plamondon, Vice-President, Finance and CFO
|
42.5%
|
Jon Bradley, Vice-President, Sales — EMEA
|
70.0%
|
Lee Huat (Joseph) Soo, Vice-President, Sales — Asia-Pacific
|
55.0%
|
Dana Yearian, Vice-President, Sales — Americas
|
89.0%
|
●
|
Short-Term Incentive Plan
|
The STIP awards are calculated as follows:
Base Salary
|
X
|
Annual Incentive Target (%)
|
X
|
Business Performance Measures (%)
|
X
|
Individual Performance Measures (%)
|
At the beginning of each financial year, the Human Resources Committee recommends for approval by the Board of Directors the Business Performance Measures that will account for the annual incentive compensation. The following table provides the Business Performance Measures, their weight and result within the overall Business Performance Measures applicable to all executive officers and employees of the Corporation except those executives and employees that are within the sale force:
Business Performance Measure (1)
|
Weight
|
Annual Target
|
Result (%)
|
Consolidated revenues (2)
|
25%
|
|
US$264.2 million
|
2.09%
|
|
Adjusted EBITDA (3)
|
25%
|
|
US$23.8 million
|
6.76%
|
|
Consolidated gross margin (4)
|
25%
|
|
US$170 million
|
4.05%
|
|
Quality (5)
|
15%
|
|
100%
|
11.94%
|
|
On-time delivery (5)
|
10%
|
|
97%
|
10.24%
|
|
Total
|
100%
|
|
|
35.08%
|
|
(1)
|
The corporate Adjusted EBITDA result for the quarter must be positive (above 0) for the whole Business Performance Measure to trigger a payout. Adjusted EBITDA represents net earnings before interest, income taxes, depreciation and amortization, restructuring charges, stock-based compensation costs and foreign exchange gain.
|
(2)
|
For consolidated revenues metric, results will be based on the achievement from 35% to 125%, calculated on a pro-rated basis, of the minimum level of revenue targets defined at the beginning of the financial year.
|
(3)
|
For Adjusted EBITDA metric, results will be based on the achievement from 35% to 150%, calculated on a pro-rated basis, of the minimum level of Adjusted EBITDA targets defined at the beginning of the financial year.
|
(4)
|
For consolidated gross margin metric, results will be based on the achievement from 35% to 125%, calculated on a pro-rated basis, of the minimum level of consolidated gross margin targets defined at the beginning of the financial year.
|
(5)
|
For quality and on-time delivery metrics, results will range from nil to 100% of the weight upon attainment of a minimum threshold of 50% and 96.7%, respectively, up to the annual target defined at the beginning of the financial year and from 100% to 150% of the weight from such annual target to the maximum threshold of 125% and 99.7%, respectively.
|
The Individual Performance Measures are determined annually by the executive's supervisor or the Human Resources Committee and approved by the Board of Directors of the Corporation. They are based upon the position, role and responsibilities of each executive within the Corporation, departmental objectives and personal management objectives. At the conclusion of each year, the executive's supervisor or, the Human Resources Committee evaluates the performance of the executive against the pre-determined objectives and the executive's performance is evaluated by progress, achievements and contributions. The following tables provide for each NEO subject to the STIP an overview of the elements included within the Individual Performance Measures, their weight and result for financial year 2015 within the overall Individual Performance Measures:
Germain Lamonde, CEO
|
|
|
Elements of Individual Performance Measures1
|
Weight
(from 0% to 115%)
|
Result
(%)
|
Financial objectives
|
Corporate revenues
|
From 0% to 20%
|
10.0
|
Corporate EBITDA
|
From 0% to 35%
|
16.0
|
Corporate Gross Margin
|
From 0% to 20%
|
10.0
|
Strategic contribution
|
Establishment and implementation of a strategic plan towards a solution centric organization
|
From 0% to 20%
|
20.0
|
Establishment and implementation of a strategic plan that will result in revenue growth in identified products family
|
From 0% to 10%
|
8.0
|
Establishment and implementation of a strategic plan that will result in EBITDA growth in identified products family
|
From 0% to 10%
|
8.0
|
Total
|
|
72.0
|
(1)
|
If the minimum level of the Corporate EBITDA, as determined at the beginning of the financial year, is not achieved, payment of any variable compensation to the CEO will be at the discretion of the Human Resources Committee.
|
Pierre Plamondon, Vice-President, Finance and CFO
|
Elements of Individual Performance Measures
|
Weight
(from 0% to 137.5%)
|
Result
(%)
|
Financial objectives
|
Weight
|
From 0% to 65%
|
31.0
|
Corporate EBITDA
|
35%
|
Corporate revenues
|
30%
|
Strategic contribution
|
Weight
|
From 0% to 72.5%
|
57.5
|
Delivering the strategies and objectives under the NEO's responsibility as set forth in the Corporation's strategic plan
|
32.5%
|
Maintaining the highest standard and compliance in the Corporation's financial reporting; internal controls and corporate governance; corporate development and risk management
|
25%
|
Delivering a Strategic Contribution and Support in the Corporation's information technology management and legal services
|
15%
|
Total
|
|
|
88.5
|
●
|
The Sales Incentive Plan
|
The SIP objectives for executive officers in the sales force are aimed to reward four (4) elements: three (3) elements are shareholder oriented (contribution margins, contribution margin growth and billings) and one (1) is based on specific objectives. The objectives are determined by the executive's supervisor and are for the territory under the executive's supervision. The following tables outline the SIP objectives for each NEO who is within the sales force:
Jon Bradley, Vice-President, Sales — Europe, Middle East and Africa (EMEA)
|
Business Performance Measure
|
Incentive Target (US$)
|
Result (US$)
|
Contribution Margin Bonus (1)
|
84,584
|
|
62,375
|
|
Bonus on Billings (2)
|
21,146
|
|
15,940
|
|
Bonus on Specific Product Lines Objectives (3)
|
21,146
|
|
0
|
|
Contribution Margin Growth Bonus (4)
|
14,097
|
|
0
|
|
Total
|
140,973
|
|
78,315
|
|
(1)
|
The amount of bonus for the attainment of the quarterly contribution margin targets for the territory of the EMEA is based on the percentage of achievement from above 35% to 100% of the quarterly contribution margin targets defined at the beginning of the financial year. An accelerated amount of bonus based on the percentage of attainment of the quarterly contribution margin targets above 100% is also payable.
|
(2)
|
The amount of bonus for the attainment of the billings targets for the territory of the EMEA is based on the percentage of achievement from above 50% to 100% of the quarterly and annual billings targets defined at the beginning of the financial year. An additional amount of bonus based on the percentage of attainment from above 100% to 125% of the quarterly and annual billings targets is also payable. Upon percentage of achievement above 125% of the quarterly billings targets, such corresponding exceeding portion of percentage achievement is added to the next quarter for the calculation of the amount of bonus. An additional amount of bonus based on the percentage of attainment above 125% of the annual billings targets is also payable.
|
(3)
|
The amount of bonus for the attainment of the specific product lines bookings targets for the territory of the EMEA is based on the percentage of achievement from above 50% to 200% of the annual bookings targets of the specific product lines defined at the beginning of the financial year.
|
(4)
|
The amount of bonus for the contribution margin growth targets for the territory of the EMEA in fiscal year 2016 is based on the percentage of such growth from above 5% to 15%. An additional amount of bonus based on the percentage of attainment above 15% of the contribution margin growth targets is also payable.
|
Lee Huat (Joseph) Soo, Vice-President, Sales — Asia-Pacific (APAC)
|
Business Performance Measure
|
Incentive Target (US$)
|
Result (US$)
|
Contribution Margin Bonus (1)
|
77,313
|
|
49,032
|
|
Bonus on Billings (2)
|
19,328
|
|
13,248
|
|
Bonus on Specific Product Lines Objectives (3)
|
19,328
|
|
5,317
|
|
Contribution Margin Growth Bonus (4)
|
12,885
|
|
12,750
|
|
Total
|
128,854
|
|
80,347
|
|
(1)
|
The amount of bonus for the attainment of the quarterly contribution margin targets for the territory of the APAC is based on the percentage of achievement from above 35% to 100% of the quarterly contribution margin targets defined at the beginning of the financial year. An accelerated amount of bonus based on the percentage of attainment of the quarterly contribution margin targets above 100% is also payable.
|
(2)
|
The amount of bonus for the attainment of the billings targets for the territory of the APAC is based on the percentage of achievement from above 50% to 100% of the quarterly and annual billings targets defined at the beginning of the financial year. An additional amount of bonus based on the percentage of attainment from above 100% to 125% of the quarterly and annual billings targets is also payable. Upon percentage of achievement above 125% of the quarterly billings targets, such corresponding exceeding portion of percentage achievement is added to the next quarter for the calculation of the amount of bonus. An additional amount of bonus based on the percentage of attainment above 125% of the annual billings targets is also payable.
|
(3)
|
The amount of bonus for the attainment of the specific product lines bookings targets for the territory of the APAC is based on the percentage of achievement from above 50% to 200% of the annual bookings targets of the specific product lines defined at the beginning of the financial year.
|
(4)
|
The amount of bonus for the contribution margin growth targets for the territory of the APAC in fiscal year 2016 is based on the percentage of such growth from above 5% to 15%. An additional amount of bonus based on the percentage of attainment above 15% of the contribution margin growth targets is also payable.
|
Dana Yearian, Vice-President, Sales — Americas
|
Business Performance Measure
|
Incentive Target (US$)
|
Result (US$)
|
Contribution Margin Bonus (1)
|
121,575
|
|
97,594
|
|
Bonus on Billings (2)
|
30,394
|
|
27,334
|
|
Bonus on Specific Product Lines Objectives (3)
|
30,394
|
|
23,644
|
|
Contribution Margin Growth Bonus (4)
|
20,263
|
|
7,790
|
|
Total
|
202,626
|
|
156,372
|
|
(1)
|
The amount of bonus for the attainment of the quarterly contribution margin targets for the territory of the Americas is based on the percentage of achievement from above 35% to 100% of the quarterly contribution margin targets defined at the beginning of the financial year. An accelerated amount of bonus based on the percentage of attainment of the quarterly contribution margin targets above 100% is also payable.
|
(2)
|
The amount of bonus for the attainment of the billings targets for the territory of the Americas is based on the percentage of achievement from above 50% to 100% of the quarterly and annual billings targets defined at the beginning of the financial year. An additional amount of bonus based on the percentage of attainment from above 100% to 125% of the quarterly and annual billings targets is also payable. Upon percentage of achievement above 125% of the quarterly billings targets, such corresponding exceeding portion of percentage achievement is added to the next quarter for the calculation of the amount of bonus. An additional amount of bonus based on the percentage of attainment above 125% of the annual billings targets is also payable.
|
(3)
|
The amount of bonus for the attainment of the specific product lines bookings targets for the territory of the Americas is based on the percentage of achievement from above 50% to 200% of the annual bookings targets of the specific product lines defined at the beginning of the financial year.
|
(4)
|
The amount of bonus for the contribution margin growth targets for the territory of the Americas in fiscal year 2016 is based on the percentage of such growth from above 5% to 15%. An additional amount of bonus based on the percentage of attainment above 15% of the contribution margin growth targets is also payable.
|
Long-Term Incentive Compensation
The long-term incentive compensation offered by the Corporation is made up of two (2) main initiatives: i) the Long-Term Incentive Plan (the "LTIP") for directors, officers, employees and consultants of the Corporation and its subsidiaries and ii) the Deferred Share Unit Plan (the "DSU plan") for non-employee directors of the Corporation.
●
|
Long-Term Incentive Plan
|
The principal component of the long-term incentive compensation offered by the Corporation is the LTIP. Introduced in May 2000, amended in October 2004 and effective as of January 2005, the LTIP is designed to provide directors, officers, employees and consultants with an incentive to create value and accordingly ensures that their interests are aligned with those of the Corporation's shareholders and to further attract, motivate and retain all of its employees, including the NEOs with the exception of the CEO who as of August 31, 2012 is no longer participating. The LTIP is subject to review by the Human Resources Committee to ensure maintenance of its market competitiveness. The Board of Directors has full and complete authority to interpret the LTIP 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 LTIP, provided that such interpretations, rules, regulations and determinations are consistent with the rules of all stock exchanges on which the securities of the Corporation are then traded and with all applicable securities legislation and regulations. The Board of Directors or the Human Resources Committee may, at any time, with the prior approval of the competent regulatory authorities, amend, suspend or terminate the LTIP in whole or in part. Any material amendment shall be approved by a majority of votes cast at a meeting of shareholders of the Corporation. In addition to the foregoing, any material amendment to an award held by an insider shall be approved by a majority of votes cast at a meeting of shareholders of the Corporation, other than votes attaching to shares beneficially owned by the insider. A material amendment to an award held by an insider does not include an accelerated expiry of an award or change of the time during which an award may first be exercised or vested or change of the time of an award, or any part thereof, will become exercisable or vest.
The LTIP provides for the issuance of options to purchase Subordinate Voting Shares and the issuance of Restricted Share Units ("RSUs") redeemable for actual Subordinate Voting Shares or the equivalent in cash to participating directors, officers, employees and consultants. The Board of Directors, upon recommendation from the Human Resources Committee, designates the recipients of options or RSUs and determines the number of Subordinate Voting Shares covered by each option or RSU, the dates of vesting, the expiry date and any other conditions relating to these options or RSUs, in each case in accordance with the applicable legislation of the securities regulatory authorities. During the financial year ended August 31, 2015, target awards for eligible officers under the LTIP were established to be in line with the objective of the Human Resources Committee to align compensation with the Target Compensation Positioning offered in the reference market. Each NEO, with the exception of the CEO since the end of the financial year ended August 31, 2012, is entitled to receive RSUs annually in accordance with the following policy:
Name & Position
|
Grant Levels (1) (% of Previous Year Base Salary)
|
Pierre Plamondon, Vice-President, Finance and CFO
|
42.5%
|
Jon Bradley, Vice-President, Sales ─ EMEA
|
42.5%
|
Lee Huat (Joseph) Soo, Vice-President, Sales ─ Asia-Pacific
|
35.0%
|
Dana Yearian, Vice-President, Sales ─ Americas
|
42.5%
|
(1)
|
Actual grant value may differ from the grant level guidelines as the stock price may vary between the time of the grant and its approval.
|
RSU awards are based on the expected impact of the role of the executive officer on the Corporation's performance and strategic development as well as market benchmarking. The Human Resources Committee undertakes an analysis from time to time to determine the possible payouts pursuant to the LTIP under various scenarios and at various levels of share price growth to ensure that the LTIP is aligned with the interests of the Corporation's shareholders.
RSUs are also used to attract and retain top executives, as well as in business acquisitions. For the year ended August 31, 2015, the Corporation determined the number of RSUs granted to each executive officer according to their individual contribution, specifically with respect to additional responsibilities as the case may be. As disclosed under the section "Summary Compensation Table" hereof, all of the NEOs, with the exception of the CEO as described earlier, were granted RSUs during the last financial year. The purpose of the grants was to focus the executives on developing and successfully implementing the continuing growth strategy of the Corporation and to align the executives with the principles of sustained long-term shareholder value growth. The grants were also considered to contribute to the Corporation's objective to align the compensation of the executives with the reference market. The Corporation did not take into account the amount and terms of outstanding options or RSUs or the restrictions on resale of such units, when determining the grants mentioned above.
The exercise price of the options is determined by the Board of Directors at the time of granting the options, subject to compliance with the rules of all stock exchanges on which the Subordinate Voting Shares are listed and with all applicable securities legislation and regulation. In any event, the exercise price may not be lower than 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 Bank of Canada on the grant date to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars. Any option issued is non-transferable. As at August 31, 2015, there were a total of 17,099 options granted to all LTIP participants and outstanding pursuant to the LTIP having a weighted average exercise price of US$4.76 (CA$5.50) per option.
The fair value at the time of grant of an RSU is equal to the market value of Subordinate Voting Shares at the time the RSU is granted. The grant date market value is equal to 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 Bank of Canada on the grant date to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars. Any RSU issued is non-transferable. At the end of financial year ended August 31, 2015, there were a total of 1,299,958 RSUs granted and outstanding pursuant to the LTIP having a weighted average fair value at the time of grant of US$3.86 (CA$5.11) per RSU.
The maximum number of Subordinate Voting Shares that are issuable under the LTIP shall not exceed 6,306,153 Subordinate Voting Shares, which represents 11.7% of the Corporation's issued and outstanding voting shares as of November 1, 2015. The maximum number of Subordinate Voting Shares that may be granted to any one individual shall not exceed 5% of the number of outstanding Subordinate Voting Shares, which represents 1,112,414 issued and outstanding Subordinate Voting Shares as of November 1, 2015. The maximum number of Subordinate Voting Shares that may be granted to insiders, within a one (1) year period, shall not exceed 10% of the number of outstanding Subordinate Voting Shares, which represents 2,224,827 issued and outstanding Subordinate Voting Shares as of November 1, 2015.
Some options granted to directors and employees vest on the first anniversary date of their grant. Some options granted in the financial years ended August 31, 2004 and 2005 vested at a rate of 12.5% six (6) months after the date of grant, 12.5% twelve (12) months after the date of grant and 25% annually thereafter commencing on the second anniversary date of the grant in October 2005. Otherwise all options vest at a rate of 25% annually commencing on the first anniversary date of the grant. All options may be exercised in whole or in part once vested. All of the options that are granted under the LTIP must be exercised within a maximum period of ten (10) years following the date of their grant or they will be forfeited.
The vesting dates of RSUs are subject to a minimum term of three (3) years and a maximum term of ten (10) years from the award date. The following table presents, for the last five (5) financial years, the RSUs granted and their respective vesting schedule.
Financial
Year Ended
|
Grant Date
|
RSUs
Granted
(#)
|
Fair Value
at the Time
of Grant
(US$/RSU)
|
Vesting Schedule
|
August 31, 2015
|
October 16, 2014
|
29,150
|
|
3.71
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 14, 2015
|
163,400
|
|
3.55
|
March 31, 2015
|
5,000
|
|
3.78
|
July 2, 2015
|
12,299
|
|
3.27
|
October 16, 2014
|
197,726
|
|
3.71
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
July 2, 2015
|
1,946
|
|
3.27
|
August 31, 2014
|
October 16, 2013
|
36,950
|
|
5.28
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 15, 2014
|
132,000
|
|
4.36
|
July 3, 2014
|
29,502
|
|
4.77
|
October 16, 2013
|
138,233
|
|
5.28
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
August 31, 2013
|
October 16, 2012
|
30,006
|
|
5.06
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 16, 2013
|
145,750
|
|
5.61
|
October 16, 2012
|
140,404
|
|
5.06
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
August 31, 2012
|
October 18, 2011
|
23,000
|
|
5.43
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 17, 2012
|
8,321
|
|
6.61
|
January 18, 2012
|
122,000
|
|
6.47
|
January 23, 2012
|
7,576
|
|
6.55
|
April 3, 2012
|
2,571
|
|
7.06
|
October 18, 2011
|
163,651
|
|
5.43
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
|
January 23, 2012
|
6,330
|
|
6.55
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
|
April 3, 2012
|
1,429
|
|
7.06
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained.
|
Financial
Year Ended
|
Grant Date
|
RSUs
Granted
(#)
|
Fair Value
at the Time
of Grant
(US$/RSU)
|
Vesting Schedule
|
August 31, 2011
|
October 19, 2010
|
30,250
|
|
6.03
|
50% on each of the third and fourth anniversary dates of the grant.
|
January 19, 2011
|
119,900
|
|
9.32
|
April 7, 2011
|
7,297
|
|
8.28
|
April 18, 2011
|
8,226
|
|
8.64
|
October 19, 2010
|
56,361
|
|
6.03
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 100% on the third or fourth anniversary date of the grant when performance objectives related to revenue, as determined by the Board of Directors of the Corporation, are fully attained.
|
October 19, 2010
|
128,348
|
|
6.03
|
100% on the fifth anniversary date of the grant subject to early vesting of up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation, are fully attained.
|
If any vesting dates fall into any black-out period or any other restrictive period during which the RSU holder is not entitled to trade the Corporation's Subordinate Voting Shares, the RSUs shall: (i) vest on the fifth trading day the RSU holder is entitled to trade after such black-out period or restrictive period; or (ii) if the RSU holder decides, prior to such vesting date, to pay his/her income tax without using any of the Subordinate Voting Shares' proceeds, then and only then, the vesting date shall remain the one determined on the granting date for such RSUs.
With the exceptions mentioned under the section entitled "termination and change of control", unless otherwise determined by the Board of Directors, any option granted pursuant to the LTIP will lapse: (i) immediately upon the termination of the relationship with the Corporation or one of its subsidiaries for a good and sufficient cause for employees or officers or at the date on which an employee or an officer resigns or leaves his employment with the Corporation or one of its subsidiaries (or within thirty (30) days if the holder's employment is terminated for reasons not related to cause); and (ii) thirty (30) days after a director ceases to be a member of the Board of Directors of the Corporation or one of its subsidiaries. In the event of retirement or disability, any option held by an employee lapses thirty (30) days after the date of any such disability or retirement. In the event of death, any option held by the optionee lapses six (6) months after the date of death.
With the exceptions mentioned under the section entitled "termination and change of control", unless otherwise determined by the Board of Directors, any RSU granted pursuant to the LTIP will lapse: (i) immediately, where vesting of a unit is subject to the attainment of performance objectives, if such performance objectives have not been attained (or postponed at a further vesting date as determined by the Board of Directors); and (ii) immediately, whether or not subject to attainment of performance objectives, upon the termination of the relationship with the Corporation or one of its subsidiaries for a good and sufficient cause for employees or officers or at the date on which an employee or an officer resigns or leaves his employment with the Corporation or one of its subsidiaries.
Any RSU granted pursuant to the LTIP will vest immediately, to a certain proportion as determined by the LTIP, upon the termination of the relationship of an employee or officer with the Corporation or one of its subsidiaries: (i) for reasons not related to cause; (ii) because of death or permanent disability; or (iii) retirement.
●
|
Restricted Share Unit Grants in Last Financial Year
|
The aggregate number of RSUs granted during the financial year ended August 31, 2015 was 409,521 having a weighted average fair value at the time of grant of US$3.63 (CA$4.21) per RSU. The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. At August 31, 2015, there were a total of 1,299,958 RSUs granted and outstanding pursuant to the LTIP having a weighted average fair value at the time of grant of US$3.86 (CA$5.11) per RSU.
The RSUs may be redeemed for actual Subordinate Voting Shares or the equivalent in cash at the discretion of the Board of Directors of the Corporation on the vesting dates established by the Board of Directors of the Corporation at the time of grant in its sole discretion.
Therefore, the value at vesting of a RSU, when converted to Subordinate Voting Shares, is equivalent to the market value of a Subordinate Voting Share at the time the conversion takes place and is taxable as employment income. The table above shows information regarding RSU grants made under the LTIP during the financial year ended August 31, 2015.
During the financial year ended August 31, 2015, the following RSUs were granted to the following NEOs:
Name
|
RSUs
Granted
(#)
|
Percentage of Total
RSUs Granted to
Employees in
Financial Year (%) (1)
|
Fair Value
at the Time
of Grant
(US$/RSU) (2)
|
Grant Date
|
Vesting Schedule (3)
|
Pierre Plamondon
|
27,729
|
6.77%
|
3.71
|
October 16, 2014
|
100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained. (4)
|
Jon Bradley
|
22,528
|
5.50%
|
3.71
|
October 16, 2014
|
100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained. (4)
|
Lee Huat (Joseph) Soo
|
21,332
|
5.21%
|
3.71
|
October 16, 2014
|
100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained. (4)
|
Dana Yearian
|
25,706
|
6.28%
|
3.71
|
October 16, 2014
|
100% on the fifth anniversary date of the grant subject to early vesting up to 1/3 on the third anniversary date of the grant and up to 50% of the remaining units on the fourth anniversary date of the grant if performance objectives namely related to long-term growth of revenue and profitability, as determined by the Board of Directors of the Corporation are fully attained. (4)
|
(1)
|
Such percentage does not include any cancelled RSUs.
|
(2)
|
The fair value at the time of grant of a RSU is equal to the market value of Subordinate Voting Shares at the time RSUs are granted. The grant date market value is equal to 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 Bank of Canada on the grant date to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars as required.
|
(3)
|
All RSUs first vesting cannot be earlier than the third anniversary date of their grant.
|
(4)
|
Those RSUs granted in the financial year ended August 31, 2015 vest on the fifth anniversary date of the grant but are subject to early vesting on the third and fourth anniversary date of the grant on the attainment of performance objectives, as determined by the Board of Directors of the Corporation. Accordingly, subject to the attainment of performance objectives, the first early vesting is up to 1/3 of the units on the third anniversary date of the grant and the second early vesting is up to 50% of the remaining units on the fourth anniversary date of the grant. The early vesting shall be subject to the attainment of performance objectives. Such performance objectives are based on the attainment of a sales growth metric combined with profitability metric. The sales growth metric is determined by the Compound Annual Growth Rate of sales of the Corporation for the period described below (SALES CAGR). The profitability metric is determined as the Cumulative Corporation's IFRS net earnings before interest, income taxes, depreciation of property, plant and equipment, amortization of intangible assets, foreign exchange gain or loss, change in fair value of cash contingent consideration, and extraordinary gain or loss over the Cumulative Sales for the same period (LTIP EBITDA). Accordingly, the first early vesting performance objectives will be attained, calculated on a pro-rated basis as follows: i) 100% for a SALES CAGR of 20% or more and 0% for a SALES CAGR of 5% or less for the three-year period ending on August 31, 2017; cumulated with ii) 100% for a LTIP EBITDA of 15% and 0% for a LTIP EBITDA of 7.5% or less for the three-year period ending on August 31, 2017. The second early vesting performance objectives will be attained on the same premises as described above but for the four-year period ending on August 31, 2018.
|
The following table summarizes information about RSUs granted to the members of the Board of Directors and to Management and Corporate Officers of the Corporation and its subsidiaries as at August 31, 2015:
|
Number of
RSUs (#)
|
% of Issued and
Outstanding RSUs
|
Weighted Average Fair Value at
the Time of Grant ($US/RSU)
|
President and CEO (one (1) individual)
|
97,809
|
|
7.52%
|
|
5.70
|
|
Board of Directors (five (5) individuals)
|
–
|
|
–
|
|
–
|
|
Management and Corporate Officers (ten (10) individuals)
|
607,604
|
|
46.74%
|
|
4.92
|
|
●
|
Option Grants in Last Financial Year
|
There were no options to purchase the Corporation's Subordinate Voting Shares granted during the financial year ended August 31, 2015. As at August 31, 2015, there were a total of 17,099 Subordinate Voting Shares covered by options granted and outstanding pursuant to the LTIP having a weighted average exercise price of US$4.76 (CA$5.50) per option.
The following table summarizes information about stock options granted to the members of the Board of Directors and to Management and Corporate Officers of the Corporation and its subsidiaries as at August 31, 2015:
|
Number of
Options (#)
|
% of Issued and
Outstanding Options
|
Weighted Average Exercise Price
($US/Security)
|
President and CEO (one (1) individual)
|
11,218
|
|
65.61%
|
|
4.76
|
|
Board of Directors (five (5) individuals)
|
–
|
|
–
|
|
–
|
|
Management and Corporate Officers (two (2) individuals)
|
5,881
|
|
34.39%
|
|
4.76
|
|
●
|
Deferred Share Unit Plan
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Introduced in October 2004 and effective as of January 2005, the Corporation's DSU plan (the Deferred Share Unit Plan) is designed to align more closely the interests of the Corporation's non-employee directors with those of its shareholders.
Under the Deferred Share Unit Plan, non-employee directors may elect to receive up to 100% of their retainer fees in the form of DSUs, each of which has an estimated value 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 Bank of Canada on the grant date to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars, as required. The value at vesting of a DSU is equivalent to the market value of a Subordinate Voting Share when a DSU is converted to such Subordinate Voting Share. Any DSU issued is non-transferable.
The Deferred Share Unit Plan may be amended or terminated at any time and from time to time by the Board of Directors, with the prior approval of the competent regulatory authorities, provided that any such amendment or termination does not in any way infringe upon any rights of participants in respect of DSUs previously credited to the account of participants. DSUs attract dividends in the form of additional DSUs at the same rate as dividends on Subordinate Voting Share. When a director ceases to be a member of the Board of Directors, the DSUs are converted and paid in Subordinate Voting Shares that are either purchased on the open market or issued by the Corporation. Such Subordinate Voting Shares issued by the Corporation will be issued from the same pool of Subordinate Voting Shares reserved for issuance pursuant to the LTIP, which is 11.7% of the total issued and outstanding voting shares.
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Deferred Share Unit Grants in Last Financial Year
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The aggregate number of DSUs credited to non-employee directors during the financial year ended August 31, 2015 was 45,806. The estimated value at the time of grant of a DSU 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 Bank of Canada on the grant date to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars, as required. The value at vesting of a DSU is equivalent to the market value of the Subordinate Voting Shares when a DSU is converted to such Subordinate Voting Shares. As at August 31, 2015, there were a total of 114,810 DSUs credited and outstanding pursuant to the Deferred Share Unit Plan having a weighted average fair value at the time of grant of US$4.25 (CA$4.74).
During the financial year ended August 31, 2015, the following DSUs were granted to the non-employee members of the Board of Directors:
DSUs
Granted (#)
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Weighted Average Fair Value
at the Time of Grant (US$/DSU)
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Total of the Fair Value
at the Time of Grant (US$)
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Vesting
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45,806
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3.38
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154,824
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At the time director ceases to be a member of the Board of Directors of the Corporation
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The following table summarizes information about DSUs granted to the non-employee members of the Board of Directors as at November 1, 2015:
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Number of
DSUs (#)
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% of Issued and
Outstanding DSUs
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Total of the Fair Value at
the Time of Grant (US$)
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Weighted Average Fair Value
at the Time of Grant (US$/DSU)
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Board of Directors (five (5) individuals)
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114,157
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100%
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486,309
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4.26
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Number of Subordinate Voting Shares Reserved for Future Issuance
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During the financial year ended August 31, 2015, 45,806 DSUs and 409,521 RSUs were granted to directors, officers and employees. Such awards were issued from the pool of Subordinate Voting Shares reserved for issuance pursuant to the LTIP and the Deferred Share Unit Plan of which the maximum number of Subordinate Voting Shares issuable shall not exceed 6,306,153, which represents 11.7% of the Corporation's issued and outstanding voting shares as at November 1, 2015. As at November 1, 2015, the number of Subordinate Voting Shares reserved for future issuance is 1,193,535 representing 2.2% of the Corporation's issued and outstanding voting shares as at November 1, 2015.
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Stock Appreciation Rights Plan
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On August 4, 2001, the Corporation established a Stock Appreciation Rights Plan (the "SAR Plan"), as amended on January 12, 2010, for the benefit of certain employees residing in countries where the granting of stock-based compensation under the LTIP is not feasible in the opinion of the Corporation. The Board of Directors 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 or the date of vesting 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 exercise or vesting, the expiry date and other conditions. Under the terms of the SAR Plan, the exercise price determined on the date of grant of the stock appreciation right is equal to zero (0) if the stock appreciation right is to reflect a RSU under the LTIP or, if the stock appreciation right is to reflect an option under the LTIP, the exercise price determined on the date of grant 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 Bank of Canada on the grant date to convert either the NASDAQ National Market closing price to Canadian dollars or the Toronto Stock Exchange closing price to United States dollars. Stock appreciation rights are non‑transferable.
The stock appreciation rights, reflecting a RSU under the LTIP, vest at a rate of 50% annually commencing on the third anniversary date of the date of grants made in October 2010, October 2011, October 2012, January 2013, October 2013, January 2014, October 2014, January 2015 and October 2015.
The stock appreciation rights, reflecting a RSU under the LTIP, will: i) lapse immediately upon the termination of the relationship with the Corporation or one (1) 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 (1) of its subsidiaries; and ii) vest immediately, to a certain proportion as determined by the SAR Plan, upon the termination without cause of the relationship of an employee with the Corporation or one (1) of its subsidiaries.
The stock appreciation rights, reflecting an option under the LTIP, vest over a four-year period, with 25% vesting annually commencing on the first anniversary date of the date of grant. However, since October 2007, some stock appreciation rights, representing an option under the LTIP, vest at a rate of 50% annually commencing on the third anniversary date of the grants made in October 2007, October 2008 and October 2009.
For stock appreciation rights, reflecting an option under the LTIP, once vested, such right may be exercised between the second and the fifteenth business day following each release of the Corporation's quarterly financial results and will lapse immediately upon the termination of the relationship with the Corporation or one (1) 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 (1) of its subsidiaries (or within thirty (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 thirty (30) days after the date of any such disability or retirement. In the event of death, any stock appreciation right lapses six (6) months after the date of death.
All of the stock appreciation rights that are granted under the SAR Plan may be exercised within a maximum period of ten (10) years following the date of their grant.
During the financial year ended August 31, 2015, 500 Stock Appreciation Rights ("SARs") were exercised.
During the financial year ended August 31, 2015, 6,150 SARs were granted to employees. As at August 31, 2015, there were 42,324 SARs outstanding.
Benefits and Perquisites
Certain employees of the Corporation, including the NEOs, are eligible to participate in the Corporation's benefits programs, which may include life insurance, extended health and dental coverage, short and long-term disability coverage, accidental death and dismemberment (AD&D) compensation and emergency travel assistance. Although the majority of costs of the benefits are paid by the Corporation, employees (including the NEOs) may also be required to contribute to obtain such benefits.
With the exception of car allowances that are provided to the Corporation's CEO and Vice-Presidents of Sales, executive officers, including other NEOs, do not receive any perquisites. The value of the perquisites for each of the NEOs, if applicable, is less than CA$50,000 or 10% of total annual salary and bonus for the financial year and, as such, is not included in the table provided under the heading "Summary Compensation Table" and in the table provided under the heading "Termination and Change of Control Benefits".
Deferred Profit-Sharing Plan
The Corporation maintains a deferred profit-sharing plan (the "DPSP") for certain eligible Canadian resident employees, including NEOs but excluding the Corporation's CEO, under which the Corporation may elect to match the employees' contributions up to a maximum of 4% (3% prior to January 2014) of an employee's gross salary, provided that the employee has contributed to a tax-deferred registered retirement savings plan. Cash contributions, for eligible employees to the DPSP, and expenses for the years ended August 31, 2013, 2014 and 2015 amounted to US$1,165,000, US$1,451,000 and US$1,492,000, respectively. The amounts contributed to the DPSP are invested at the employee's will in the investment vehicles offered by Manufacturers Life Insurance Company (Manulife) (previously Standard Life), the Corporation's fund administrator. Withdrawals of funds from the DPSP account are not permitted. In the event of termination of the employment, if the employee has been a member of the DPSP for more than two (2) years, the employee is entitled to receive the funds accumulated in his DPSP account.
401K Plan
The Corporation maintains a 401K plan for eligible United States resident employees of its subsidiaries. Employees become eligible to participate in the 401K plan on the date they are hired. Under this plan, the Corporation must contribute an amount equal to 3% of an employee's current compensation. In addition, 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 401K plan. The 401K plan permits, but does not require the Corporation to make additional matching contributions to the 401K 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. The Corporation contributes up to 3% of the participant's current compensation, subject to certain legislated maximum contribution limits. In the years ended August 31, 2013, 2014 and 2015, the Corporation made aggregate contributions of US$632,000, US$616,000 and US$628,000 respectively, to the 401K plan. Contributions by participants or by the Corporation to the 401K plan and income earned on plan contributions are generally not taxable to the participant until withdrawn and contributions by the Corporation are generally deductible by the Corporation when made. At the direction of each participant, the trustees of the 401K plan invest the assets of the 401K plan in selected investment options.
2015 Performance and Compensation
Compensation for the NEOs is awarded through the Corporation's executive compensation plan, which aligns compensation with key strategic objectives and individual performance. The Corporation has established Business Performance Measures outlining key performance indicators which are applicable to all employees. You will find more information on such indicators under the heading "Short-Term Incentive Compensation". These performance indicators focus efforts, communicate priorities and enable performance to be benchmarked.
The following table highlights the NEOs early vesting achievement in accordance with the Corporation's LTIP:
Long-Term Incentive Plan (LTIP) - RSUs
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Date of Grant
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Vesting Date
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% of Early Vesting Achievement (1)
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October 18, 2011
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October 19, 2015
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0%
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October 16, 2012
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October 16, 2015
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0%
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(1)
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The vesting schedules are provided in the table under the heading "Long-Term Incentive Plan".
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CEO Performance Compensation during Last Three (3) Financial Years
The following table compares the compensation awarded to Mr. Germain Lamonde in respect of his performance as CEO to the Total Market Capitalization Growth for the last three (3) financial years. The compensation includes base salary, short-term incentive payments, as well as long-term incentive payments at grant date pursuant to the LTIP.
Compensation Elements
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2015
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2014
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2013
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Three-Year Total
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Cash
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Base Salary
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CA$615,332
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CA$557,767
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CA$498,663
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CA$1,671,762
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Short-Term Incentive
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CA$101,022
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CA$214,300
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CA$185,866
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CA$501,188
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Equity
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Long-Term Incentive
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–
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–
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–
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–
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Total Direct Compensation
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CA$716,354
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CA$772,067
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CA$684,529
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CA$2,172,950
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Pension Value
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–
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–
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–
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–
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All Other Compensation
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–
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–
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–
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–
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Total Compensation
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CA$716,354
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CA$772,067
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CA$684,529
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CA$2,172,950
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Annual Average
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–
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–
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–
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CA$724,317
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Total Adjusted Market Capitalization (CA$ millions) (1)
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217.6
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255.2
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258.5
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243.8
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Total Adjusted Market Capitalization Growth (CA$ millions)
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(37.6)
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(3.2)
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3.2
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(37.6)
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Total Market Capitalization (CA$ millions)
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217.6
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286.6
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288.8
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264.4
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Total Cost as a % of Market Capitalization
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0.33%
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0.27%
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0.24%
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0.27%
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(1)
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Total market capitalization for fiscal year 2014 and 2015 is adjusted to reflect the redemption of 663,256, of 214,470 and of 368,233 Subordinate Voting Shares respectively in financial years 2013, 2014 and 2015 under the normal course issuer bid of the Corporation during these years, the redemption of 6,521,739 Subordinate Voting Shares in 2015 under the Substantial Issuer Bid of the Corporation and the issuance of 354,155, of 516,430 and 278,256 during fiscal year 2013, 2014 and 2015.
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