2017 ANNUALINFORMATIONFORM (FiscalYearEndedMarch31,2017)              CORPORATEOFFICE 8585CheminCôte-de-Liesse Saint-Laurent,
Québec June 14,2017CanadaH4T1G6


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TABLEOFCONTENTS  1.CORPORATESTRUCTUREOFCAE..5 1.1Name,AddressandIncorporation.5 1.2Inter-corporate
Relationships.5 2.OVERVIEW
OF CAE AND THE DEVELOPMENT OF ITS BUSINESS.5 2.1Overview..5 2.2Geographic
and Segment Revenues and Locations.6 2.3CAE’sVision.9 2.4OurStrategyandOperations.10 2.5IndustryOverviewandTrends.11 2.6ResearchandDevelopment(R&D)12 2.7ProductionandServices.14 2.8SpecializedSkillsandKnowledge.15 2.9Competition.16 2.10Components.16 2.11IntangibleProperties.17 2.12Cycles.18 2.13Environmentalliabilities.18 2.14Employees.18 2.15ForeignOperations.19 3.DESCRIPTIONOFTHEBUSINESSSEGMENTS..19 3.1Civil
Aviation Training Solutions.19 3.2CivilMarketTrendsandOutlook.21 3.3Defence
and Security.23 3.4DefenceMarketTrendsandOutlook.25 3.5DefenceContracts.27 3.6Healthcare.28 4.RISKFACTORS..32 4.1Risksrelatingtotheindustry.32 4.2RisksrelatingtotheCompany.34 4.3Risks
relating to the market40 5.DIVIDENDS
AND DISTRIBUTIONS..42 5.1Dividends.42 5.2Repurchase
and cancellation of shares.42 6.DESCRIPTIONOFCAPITALSTRUCTURE..42 7.MARKETFORSECURITIES..43 7.1TradingPriceandVolume.43 8.DIRECTORSANDOFFICERS..44 8.1NameandOccupation.45 8.2CeaseTradeOrders,Bankruptcies,PenaltiesorSanctions.51 9.TRANSFERAGENTANDREGISTRAR..52 10.AUDITCOMMITTEE.52 10.1Mandate.52 10.2Membership.52


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11.APPROVAL OF SERVICES..53 12.ADDITIONALINFORMATION..53 GLOSSARY..55 SCHEDULEA–SUBSIDIARIES AND
OTHER INVESTMENTS..56 SCHEDULEB–AUDIT COMMITTEE
MANDATE..62


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INFORMATION
INCORPORATED BY REFERENCE CAE’s Management’s Discussion and Analysis and our
Consolidated Financial Statements for the year ended March 31, 2017, and the
notes thereto (“Consolidated Financial Statements”) appear in the Annual
Report to Shareholders for the year ended March 31, 2017 (“Annual Financial
Report”). The Consolidated Financial Statements were prepared in accordance
with Part 1 of the CPA Canada Handbook, referred to as IFRS. The information
contained in the Management’s Discussion and Analysis and the Consolidated
Financial Statements for the year ended March 31, 2017, and the notes thereto,
is specifically incorporated by reference into this Annual Information Form (“AIF”).
Any parts of the Annual Financial Report not specifically incorporated by
reference do not form part of this AIF. Unless otherwise noted, all dollar references in this Annual
Information Form are expressed in Canadian dollars. References to fiscal 2017 refer to the period from April 1,
2016 to March 31, 2017, references to fiscal 2016 refer to the period from
April 1, 2015 to March 31, 2016, and references to fiscal 2015 refer to the
period from April 1, 2014 to March 31, 2015. This AIF includes forward-looking statements about our
activities, events and developments that we expect to or anticipate may occur
in the future including, for example, statements about our vision, strategies,
market trends and outlook, future revenues, capital spending, expansions and
new initiatives, financial obligations and expected sales. Forward-looking
statements normally contain words likebelieve, expect, anticipate, plan,
intend, continue, estimate, may, will, should, strategy, futureand similar
expressions. By their nature, forward-looking statements require us to
make assumptions and are subject to inherent risks and uncertainties associated
with our business which may cause actual results in future periods to differ
materially from results indicated in forward-looking statements. While these
statements are based on management’s expectations and assumptions regarding
historical trends, current conditions and expected future developments, as well
as other factors that we believe are reasonable and appropriate in the
circumstances, readers are cautioned not to place undue reliance on these
forward-looking statements as there is a risk that they may not be accurate. Important risks that could cause such differences include,
but are not limited to, risks relating to the industry such as competition,
level and timing of defence spending, government-funded defence and security
programs, constraints within the civil aviation industry, regulatory rules and
compliance, risks relating to CAE such as product evolution, research and
development (“R&D”) activities, fixed-price and long-term supply
contracts, strategic partnerships and long-term contracts, procurement and
original equipment manufacturer (“OEM”) leverage, warranty or other
product-related claims, product integration and program management, protection
of our intellectual property, third-party intellectual property, loss of key
personnel, labour relations, environmental liabilities, claims arising from
casualty losses, integration of acquired businesses, our ability to penetrate
new markets, information technology systems including cybersecurity risk,
length of sales cycle, continued returns to shareholders and our reliance on
technology and third-party providers, and risks relating to the market such as
foreign exchange, political instability, availability of capital, pension plan
funding, doing business in foreign countries including corruption risk and
income tax laws.


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Additionally, differences could arise
because of events announced or completed after the date of this AIF. You will
find more information in the Risk Factors section of this AIF. We caution
readers that the risks described above are not necessarily the only ones we
face; additional risks and uncertainties that are presently unknown to us or
that we may currently deem immaterial may adversely affect our business. Except as required by law, we disclaim any intention or
obligation to update or revise any forward-looking statements whether as a
result of new information, future events or otherwise. The forward-looking
information and statements contained in this AIF are expressly qualified by
this cautionary statement. 1.CORPORATESTRUCTUREOFCAE 1.1Name,AddressandIncorporation On March 17, 1947 CAE Inc. (“Company” or “CAE”)
was incorporated as Canadian Aviation Electronics Ltd. under the laws of Canada
by letters patent. In 1965, the name of the Company was changed to CAE
Industries Ltd. and in 1993 the Company changed its name to CAE Inc. CAE was continued in 1977 under the Canada Business
Corporations Act (“CBCA”). In 1979, CAE’s articles were amended to
change its authorized share capital to an unlimited number of common shares,
and again in 1981 to authorize an unlimited number of preferred shares,
issuable in series, with such rights, privileges, restrictions and conditions
as the Directors of CAE may determine. On June 9, 1995, CAE’s articles were amended to authorize the
Directors to appoint additional Directors in accordance with the provisions of
the CBCA. On April 1, 2001, the Company amalgamated with CAE Electronics Ltd.,
our wholly-owned subsidiary. CAE’s registered office is located at 8585 Côte-de-Liesse,
Saint-Laurent, Québec, Canada H4T 1G6, telephone: (514) 341-6780, fax: (514)
340-5530. 1.2Inter-corporate Relationships The direct and indirect subsidiaries and other
investments or ownership interests of CAE are set out in Schedule A hereto. 2.OVERVIEW OF CAE AND THE DEVELOPMENT OF ITS BUSINESS 2.1Overview CAE is a global leader in training for the civil
aviation, defence and security, and healthcare markets.Backed by a
70-year record of industry firsts, we continue to help define global training
standards with our innovative virtual-to-live training solutions to make flying
safer, maintain defence force readiness and enhance patient safety. We have the
broadest global presence in the industry, with over 8,500 employees, 160 sites
and training locations in over 35countries.Each year, we train more than 120,000 civil and
defence crewmembers and thousands of healthcare professionals worldwide.


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Our training solutions comprise a combination of
products and services, with nearly 60% of our business being derived from the
provision of services. Founded in 1947 and
headquartered in Montreal, Canada, CAE has built an excellent reputation and
long-standing customer relationships based on 70 years of experience, strong
technical capabilities, a highly trained workforce and global reach. CAE’s common shares
are listed on the Toronto and New York stock exchanges under the symbol CAE. 2.2Geographic and Segment Revenues and Locations CAE’s consolidated revenue from continuing
operations in fiscal 2017 was $2.705 billion and in 2016 was $2.512 billion and
is broken down as follows: RevenuebySegment(%)GeographicDistributionofRevenue(%)  2017
 2016
 
 
 2017
 2016Civil Aviation Training Solutions
 58
 57
 
 US
 36
 35Defence
  and Security
 38
 39
 
 Germany
 3
 4Healthcare
 4
 4
 
 Netherlands
 3
 3100
 100
 
 Other
  European countries
 12
 13United
  Kingdom
 10
 11Other
  Asian countries
 12
 9Canada
 10
 9Australia
 2
 3China
 6
 7Other
  countries
 6
 6100
 100


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The  following  sets  out, by business  segment,  the  locations of  CAE’s  primary  subsidiaries’  and  divisions’
material sites: Location
 Civil
  Aviation Training Solutions
 Defence
  and 
  Security
 HealthcareCanadaMontreal,Québec
 ü
 ü
 üCalgary, Alberta
 
 
 üCold Lake, Alberta
 
 üHalifax, Nova Scotia
 
 üMoose Jaw, Saskatchewan
 
 üOttawa,Ontario
 
 üPetawawa, Ontario
 
 üSaint John, Newfoundland
 üToronto,Ontario
 ü
 üTrenton, Ontario
 
 üVancouver,BritishColumbia
 üEuropeAmsterdam,Netherlands
 üBarcelona,Spain
 üBenson,Wallingford,UnitedKingdom
 
 üBrussels,Belgium
 üBudapest,Hungary
 ü
 üBurgessHill,UnitedKingdom
 ü
 ü
 üCopenhagen,Denmark
 üDublin,Ireland
 üGatwick,UnitedKingdom
 üMadrid,Spain
 üMainz,Germany
 
 
 üManchester,UnitedKingdom
 üOslo,Norway
 üOxford,UnitedKingdom
 üParis, France
 üPrague, Czech Republic
 üRome, Italy
 üSestoCalende,Italy
 
 üShannon,Ireland
 üStavanger,Norway
 üStockholm,Sweden
 üStolberg,Germany
 
 üVélizy,France
 
 üVeszprem,Hungary
 
 
 üLocation
 Civil
  Aviation Training Solutions
 Defence and Security
 HealthcareUnitedStatesAltus, Oklahoma
 
 üAnchorage, Alaska
 üCharlotte, North Carolina
 üCorpus Christi, Texas
 
 üDallas/FortWorth,Texas
 üHolloman AFB, New Mexico
 
 üLittleRock,Arkansas
 
 üMesa,Arizona
 üMiami, Florida
 üMinneapolis, Minnesota
 üMorristown,NewJersey
 ü
 üOklahoma City, Oklahoma
 üOrlando,Florida
 ü
 üPhoenix,Arizona
  Redmond,Washington
 ü
 
 üRichardson,Texas
 
 üSan Francisco, California
 üSanJose,California
 
 üSarasota,Florida
 
 
 üTampa,Florida
 
 ü


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Location
 Civil
  Aviation Training Solutions
 Defence
  and Security
 HealthcareOtherAbu Dhabi, United Arab Emirates
 ü
 üAmberley,
  Australia
 
 üAuckland, New Zealand
 
 üBeijing,
  China
 üBengaluru,
  India
 ü
 üBrisbane,Australia
 
 üBrunei,Darussalam
 
 üDoha, Qatar
 üDubai,UnitedArabEmirates
 üGondia,India
 üHongKong,China
 üJohannesburg,SouthAfrica
 üKualaLumpur,Malaysia
 üLima,Peru
 üManila/Clark,Philippines
 üMelbourne,Australia
 ü
 üNewDelhi,India
 üOhakea, New Zealand
 
 üPerth, Australia
 üRichmond, Australia
 
 üSale, Victoria, Australia
 
 üSantiago,Chile
 üSao Paulo, Brazil
 üSeoul,Korea
 üShanghai,China
 üSingapore, Republic of Singapore
 ü
 üSydney,Australia
 
 üTokyo, Japan
 üToluca, Mexico
 üZhuhai, China
 ü
 
 2.3CAE’sVision Our vision is to be the recognized global training partner of
choice to enhance safety, efficiency and readiness.Through the training we provide, our mission is to make air
travel safer, defence forces mission ready and medical personnel better able to
save lives.


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2.4OurStrategyandOperations Our
strategy We address the imperatives of safety, efficiency and
readiness for customers in three core markets: civil aviation, defence and
security, and healthcare. Our
capital and other resource allocation decisions are guided by three overarching
strategic imperatives:growby providing the most comprehensive
solutions worldwide to enable us to be the recognized global training partner
of choice;protectour leadership position by ensuring the highest
levels of customer satisfaction and operational excellence; andinnovateby driving new technology and offerings which advance training for our
customers. We
are a unique, pure-play simulation and training company with a proven record of
commitment to our customers’ long-term training needs. Six
pillars of strength We believe there are
six fundamental strengths that underpin our strategy and position us well for
sustainable long-term growth: -High
degree of recurring business; -Strong
competitive moat; -Headroom
in large markets; -Underlying
secular tailwinds; -Potential
for superior returns; -Culture
of innovation. High degree of recurring business Nearly
60% of our business is derived from the provision of services and largely
involves long-term contracts and training demand from customers operating under
regulations that require them to train on a recurrent basis. Strong competitive moat We
pride ourselves in building strong customer and partner relationships, which in
many cases span several decades, and we are a market leader across all of our
market segments. We offer our customers unique comprehensive solutions with
market-leading global reach and scale. Headroom in large markets We
provide innovative training solutions to customers in large addressable markets
in civil aviation, defence and security and healthcare with substantial
headroom to grow our market share over the long term.


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Underlying
secular tailwinds Industry
experts expect long-term commercial passenger traffic to grow at a rate of 4.2%
annually over the next decade. In defence and security, we see renewed defence
investment as a positive catalyst and an increasing use of simulation-based
training. We also see an increased propensity for customers in both civil
aviation and defence and security to outsource their training enterprises. In
the emerging healthcare market, we also see a rising adoption of simulation for
education and training of healthcare students and professionals. Potential for superior returns Our
rising proportion of revenue from training services provides potential for
lower amplitude cyclicality as training is largely driven by the training
requirements of the installed fleet. As well, we have potential to grow at a
superior rate to that of our underlying markets by growing market share. Culture of innovation We derive significant competitive advantage as an innovative
leader in simulation products and training solutions. As well, we have a
demonstrated flexibility by engaging customers under a variety of partnership
models. Our
operations We
provide integrated training solutions to three markets globally: -The
civil aviation market includes major commercial airlines, regional airlines,
business aircraft operators, civil helicopter operators, aircraft
manufacturers, third-party training centres, flight training organizations,
maintenance repair and overhaul organizations (“MROs”) and aircraft
finance leasing companies; -The
defence and security market includes defence forces, OEMs, government agencies
and public safety organizations worldwide; -The
healthcare market includes hospital and university simulation centres, medical
and nursing schools, paramedic organizations, defence forces, medical societies
and OEMs. 2.5IndustryOverviewandTrends The civil, defence and security and healthcare markets that
CAE serves are driven by factors particular to each market. CAE believes the civil market is most affected by the world
gross domestic product, which in turn drives air travel, measured in revenue
passenger kilometers (“RPK”). This positive RPK generation needs to be
satisfied by aircraft deliveries in addition to the existing fleet, and then
corrected for attrition. Other factors influencing CAE include the nature, size
and composition of aircraft fleets, aircraft delivery schedules, pilot
demographics, certification requirements, market demand for commercial and
business air travel and helicopter transport; the latter two in particular are
also influenced by corporate profits and activity in the oil and gas sector. CAE believes the defence and security market is mostly
influenced by a combination of defence spending and the nature of military
activity. Demand for CAE’s Defence products and services are also influenced by
the degree towhich governments globally lean towards
the outsourcing of functions to the private sector. As well, CAE’s Defence and
Security (“Defence”) business is affected by the extent to which
synthetic training and mission rehearsal solutions gain market acceptance as a
complement or alternative to live training such as flying an actual aircraft or
firing an actual weapon.


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CAE believes the healthcare market is influenced by
developments in treatments for healthcare issues and, in some markets,
government spending. Demand for CAE’s healthcare products and services is also
influenced by the degree to which simulation-based training and procedure
rehearsal solutions gain market acceptance as an alternative to the present
system of on-the-job learning assisted by seasoned clinicians. As well, CAE
believes the introduction of disruptive medical technology will have a bearing
on the rate of adoption for simulation-based training solutions. New medical
devices and advanced procedures, such as intra-cardiac echocardiography, cardiac
assist devices and mechanical ventilation enhancements, require advanced
training solutions, such as simulation, for internal product development and
customer training. 2.6ResearchandDevelopment(R&D) CAE’s competitive strategy is based on technology leadership
of its products and services. This strategy is underpinned by a strong
innovation culture and a long-standing commitment to performing R&D. Also,
CAE’s competitive strategy is based on training leadership. Following the
appointment of its Global Leader-Training Strategy for its Civil Aviation
Training Solutions (“Civil”) business in April 2015, CAE launched its
Flight Instructor Initiative (FIIN) which focuses on recruiting, developing and
retaining the best instructors to make them part of our differentiators.  This
initiative leverages CAE’s ongoing development of instructor support
infrastructures and tools as well as basic research and experimentation with
disruptive technologies related to biometrics and virtual reality. CAE has also
launched a project focused on standardizing of its operations and next
generation training, which are a testament to CAE’s focus on its redefined
vision of becoming the recognized global training partner of choice of its
customers in its fields of operations. CAE will leverage its innovation
capabilities to support the strategic technologies objectives. CAE uses leading practices in the Global Engineering
organization to ensure strategic alignment of the technology roadmap with the
business strategy. Making innovation materialize at all levels within CAE’s
products, services and processes throughout the operational execution continues
to be a strategic priority. To this end, a company-wide “Open Innovation
Challenge” process has been deployed to all employees using an internal social
media platform to stimulate innovation. Our employees are proud to contribute
to the innovation journey leading to new products and services.  Additionally,
CAE’s R&D partnerships with universities and research centers also help
ensure a constant flow of the best talent and leverage the latest technologies
and expert knowledge to improve CAE’s products and services. In FY2016, CAE developed its first simulator using the new
processes and hardware convergence breakthroughs in less than a year, and the
results from their operations are very positive for both Civil and Defence
simulators, in terms of expected lower maintenance efforts, lower power
consumption and overall weight of the simulator, reducing long-term life cycle
operating costs.


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Furthermore, CAE is continuing its
development and experimentation with data collection and analytics algorithms
which enable operational efficiencies, evidence-based evaluation, as well as
the enhancement of its training systems. These innovative solutions are linked
with the introduction in fiscal 2014 of the new full flight simulator (“FFS”)
benchmark in the industry, the CAE 7000XRTM, and will enable the
development of CAE’s digital ecosystem capabilities. This simulator defines new
customer experience standards for pilots, for instructors, for maintenance
technicians, and for training centre operators. It includes new customer
interfaces, such as a next generation instructor “office” which provides real
time brief/debrief capabilities. It also features new embedded training
capabilities such as upset recovery training systems as mandated by new
regulations. This next generation instructor environment is significant. The
7000XRTM also provides a novel computing infrastructure that
leverages cloud-based big data technologies to provide a superior level of
operational efficiency. During 2016, the Open Geospatial Consortium (“OGC”),
an international consortium developing geospatial standards and interoperable
solutions, approved the CDB (formerly known as the Common Database and
originally developed by CAE) (“CDB”) as an OGC standard.  The adoption
of the CDB as an OGC standard brings together the geospatial intelligence and
modelling and simulation industries to establish greater interoperability in
the use of geospatial data.  In addition, the application of the CDB standard
to future simulation architectures will significantly reduce development,
update, and configuration management timelines for the creation of synthetic
environment databases. CAE has continued to advance its leadership position in
simulation synthetic environments with the release to market of its CAE
Medallion-6000XR image generator.  The CAE Medallion-6000XR was developed with
full support for the Open Geospatial Consortium (OGC) CDB standard and builds
on the proven features and performance of CAE’s long-standing Medallion-6000
family of image generators and visual solutions tailored specifically for the
Defence market.  The next-generation CAE Medallion-6000XR continues to leverage
commercial-off-the-shelf (COTS) graphics processors and includes enhanced
features that support the creation of highly realistic, interoperable and
immersive synthetic environments. Specifically for the defence and security market segment, CAE
continues to actively conduct research and development initiatives related to
distributed mission operations, and live-virtual-constructive (LVC) training,
high-fidelity remotely piloted aircraft training systems, cybersecurity, and
more realistic synthetic environments.  These initiatives are designed to
support the desire of defence forces to conduct more integrated and networked
virtual training and mission rehearsal exercises, as well as optimize the
overall efficiency through the lifecycle of a training system.  Key advancements
include, the continued development of technologies related to enduring
platforms as well as positioning to provide key technologies and capabilities
to new platforms addressing the need for immersive, integrated and
interoperable training environments. As a significant outcome of the 2017 R&D investment, CAE
is pleased to report that it has been granted eighteen patents and has filed
for twenty-eight patents covering the latest innovations in its products. CAE R&D teams have continued their steady progress and
achievements related to Project Innovate which was launched in 2015 to develop
CAE’s next generation of simulation platforms for its Civil and Defence
markets. Project Innovate will enable CAE to create a state-of-the-art modular
system which will be more efficient and much easier to deploy and maintain. The
new system will also enhance the user experience of CAE products. In addition,
CAE willdevelop technologies and training solutions
geared towards joint and networked operations in order to be a training systems
integrator in air, sea and land domains.


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CAE’s Healthcare R&D teams continue to innovate and
introduce novel products.  Among several other innovations, in FY2015, CAE
Healthcare introduced a childbirth simulator based on widely accepted and
validated models of maternal-fetal physiology, which offers human-like vital
signs and responses for practice of obstetrical emergencies as well as labour
and delivery scenarios.  Additionally, in January 2016, CAE Healthcare
introduced AthenaTM, the most sophisticated, high-fidelity female
patient simulator available on the market.  Athena adds a crucial element of
realism and believability to female patient scenarios that is needed to help
learners gain confidence, develop critical thinking and master higher level
skills through simulation. Finally, in January 2017, CAE Healthcare launched
the VimedixAR ultrasound simulator with real-time interactive holograms of
human anatomy generated by Microsoft Hololens, the world’s first self-contained
holographic computer. We are the first to bring a commercial Microsoft HoloLens
mixed reality application to the medical simulation market. 2.7ProductionandServices Production CAE’s manufacturing and assembly facilities are located in
Montreal, Canada; Tampa, U.S.; Sarasota, U.S.; Bengaluru, India; Stolberg,
Germany; and Sydney, Australia. Most of our manufacturing and integration activities for
Civil and Defence simulation systems are conducted at CAE’s facilities in
Montreal, with some integration and update related work also being conducted at
the Tampa, Burgess Hill, Bengaluru, Sydney, and Stolberg sites. The Tampa
facility conducts military systems integration and testing activities for
simulation equipment destined for U.S. military-related contracts. The manufacturing process for an FFS is complex, involving
the coordination of more than 200,000 parts and millions of lines of software
code. The manufacture of a simulator includes six major stages: design,
manufacture and assembly, integration and testing, shipping, site installation
and final qualification on site. Defence simulators, by virtue of their
tactical environments and weapons/sensor systems, are more complex and unique
than Civil simulators and therefore may take more time to design, manufacture
and test. Manufacturing is organized into ten manufacturing cells
comprised of the following three major disciplines: electronics (printed
circuit board assembly), electrical (cables, cabinets, aircraft instruments and
avionics), and mechanical (sheet metal and machine shop, precision assembly and
hydraulics, structural assembly and final assembly). Each cell has its own
planning, methodizing and set of specific products to deliver, which
establishes clear accountability for manufacturing performance. Services CAE’s training and service facilities are based around the
world. While our head office is located in Montreal, Canada, CAE has over 65
training centres globally.


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These locations include Type Rating
Training Organizations offering pilot, maintenance and cabin crew training to
business and commercial aircraft operators; ab-initio training centres which
provide commercial pilot license training to aspiring pilots; Defence training
centres offering academic, simulator and live flying training to produce
qualified military aircrews; and several locations from which CAE offers
technical support services to aviation training centres. CAE provides a range of technical support services to Civil
and Defence simulator operators, including parts replacement and repairs,
installations, relocations, upgrades and technical training. Customers use
CAE’s technical services to answer questions, troubleshoot and receive advice.
This extends to service visits by CAE’s engineers to assist in customer
maintenance and repair activities. Defence and Civil upgrade services are not
restricted to CAE products; CAE can upgrade most other manufacturers’
simulators. CAE services are offered either in conjunction with a sale of a
simulator, through maintenance contracts or individual purchase orders. CAE
believes that our service business provides opportunities to influence the
upgrade of installed FFS while providing valuable insights into customer
training needs. In Defence, CAE provides a range of training support services
such as contractor logistics support, maintenance services, classroom
instruction and simulator training at over 90 customer sites around the world. CAE also provides analytical and engineering services that
leverage modeling and simulation and other advanced technologies to develop
innovative solutions to our clients’ most complex challenges. CAE offers
clients a range of services and subject matter expertise, including human
factors and human system integration, capability based planning, advanced
synthetic environments, system and software engineering for Command, Control,
Communications, Computers, Intelligence, Surveillance and Reconnaissance and
electronic warfare systems, training systems and services, integrated
information environments, and in-service support for fleet operations and
maintenance. 2.8SpecializedSkillsandKnowledge CAE employs predominantly graduates in engineering and
software development, as well as pilots, instructors and other flight training
experts. As an industry leader, CAE is able to train our staff in the
technology and software required for simulation software and equipment. Flight
trainers are typically recruited from the ranks of former airline or military
pilots.  Recognizing that engineering talent is critical to CAE innovation
capability, CAE has an engineering career framework to develop the talent
pipeline within the CAE engineering community. Our 2,000 flight instructors are CAE’s second largest
employee group after engineers and the Company’s face in front of customers. They’re
also key to ensuring we become the industry’s gold standard in training. We’ve
implemented a number of initiatives to improve our instructor capability under
our new training organization.  The Global Leader in Training Strategy enhances
our value proposition in aviation training and engages instructors in achieving
our vision. Strategy was developed to recruit, develop and retain the best
instructors. This strategy includes identifying the attributes of best-in-class
instructors and setting the industry standard for instructor performance
management to enhance our competitive edge. It will serve to elevate the
profile of our instructors both internally and externally. This initiative will
also help us build the right HR infrastructure around instructors and give them
the tools they need to excel.


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To optimize training leadership, CAE
is investing in three areas: -Enhance
instructor performance - As a result, CAE will strengthen the instructor
support infrastructure, including new functions, processes and technical
support tools; -Enhance
course offering by investing in courseware development and training delivery
support tools; and -Training
service innovation - CAE is continuing to invest in R&D to innovate the
training service offering and is leveraging on its engineering organization and
capabilities to support strategic training solutions. 2.9Competition We sell our simulation equipment and training services in
highly competitive markets. Section 4.1.1 of this AIF contains more information
regarding competition as a risk factor for CAE. 2.10Components CAE deals with a variety of goods and services suppliers
across our business segments. Although we are not overly dependent on any
single supplier for any key manufacturing components or services, CAE’s
products contain sophisticated computer systems that run on software and
operating systems supplied to us by third parties. Such computer systems and
software may not always be available to CAE to license or purchase. The production of CAE simulators is often dependent upon
receipt by CAE of data, including confidential or proprietary data, concerning
the functions, design and performance characteristics of a product or system,
the performance of which CAE’s simulator is intended to simulate. CAE cannot
guarantee that we will be able to obtain such data on reasonable terms, or at
all. Original manufacturers of these products and systems could object to the simulation
by CAE of components of, or the totality of their products or systems, or could
request high license fees that could negatively impact CAE’s profit margins. Most of the raw materials used in manufacturing (such as
sheet metal, wires, cables and electronic integrated circuits) are available
off the shelf from multiple commercial sources. The unique parts are the
aircraft parts. These are usually available from aircraft manufacturers, the
resale market, decommissioned or surplus aircrafts as well as through simulated
part manufacturers. The availability of most parts in a timely manner facilitates
a relatively smooth production flow. Aircraft parts, in some instances, may be
an exception, especially on new/prototype aircraft types or those out of production.
The timely delivery of these parts is often the responsibility of CAE’s
customers. CAE’s contracts normally link these aircraft parts delivery dates to
the simulator delivery schedules. In cases where such aircraft parts cannot be
made available, CAE’s customers rely on CAE’s ability to make simulated parts.


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2.11IntangibleProperties We rely, in part, on trade secrets, copyrights and
contractual restrictions, such as confidentiality agreements, patents and
licences, to establish and protect our proprietary rights. These may not be
effective in preventing a misuse of our technology or in deterring others from
developing similar technologies. We may be limited in our ability to acquire or
enforce our intellectual property rights in some countries. Litigation related
to our intellectual property rights could be lengthy and costly and could
negatively affect our operations or financial results, whether or not we are
successful in defending a claim. Intellectual
property Our products contain sophisticated software and computer
systems that are supplied to us by third parties. These may not always be
available to us. Our production of simulators often depends on receiving
confidential or proprietary data on the functions, design and performance of a
product or system that our simulators are intended to simulate. We may not be
able to obtain this data on reasonable terms, or at all. Infringement claims could be brought against us or against
our customers. We may not be successful in defending these claims and we may
not be able to develop processes that do not infringe on the rights of third
parties, or obtain licences on terms that are commercially acceptable, if at
all. The markets in which we operate are subject to extensive
patenting by third parties. Our ability to modify existing products or to
develop new products may be constrained by third-party patents such that we
incur incremental costs to licence the use of the patent or design around the
claims made therein. CAE owns certain patents and has filed applications in
respect of additional patents. CAE enters into agreements containing
non-disclosure and confidentiality clauses with third parties and has similar
provisions in place with our employees to protect our proprietary information
and trade secrets. CAE also has internal policies concerning both ethics and
intellectual property which guide our employees in their dealings with CAE’s
intellectual property and that of third parties. Given the lengthy delay in obtaining patents, during which
some technology may evolve into newer generations, the required detailed patent
application disclosure which may permit competitors to reverse-engineer an
invention, and the cost of maintaining and defending patents, CAE believes that
certain intellectual property is adequately protected by either maintaining it
as a trade secret or selectively disclosing enough of it to forestall anyone
else from subsequently claiming it as their own original innovation. CAE’s agreements with Industry Canada and Investissement
Québec (IQ) restrict, in some cases, CAE’s ability to license (other than to
customers) or transfer ownership of intellectual property developed with the
program’s support until all funding has been repaid or consent has been
obtained. Given CAE’s many decades of success in the field of aviation
simulation and training, CAE believes that the CAE brand and some of our
trademarked products and services have value in the markets we address.


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2.12Cycles The Defence segment sells to government customers such that
there is no evident cycle to the intake of orders, but such order levels may
vary significantly from quarter to quarter because of the irregular timing of
government orders. The Civil segment’s equipment sales to airlines are affected
by the cycles of expansion and contraction of the entire commercial airline
industry, as well as the availability of credit and general economic
conditions. Demand for training services is to a lesser extent, also affected
by the longer wave cycles of the commercial airline industry. The Civil segment
also experiences a significant degree of seasonality; in times of peak travel
(holiday periods, etc.) airline and business jet pilots are often too busy
flying aircraft to attend training sessions. As well, production of CAE’s
simulators is affected by the Company’s annual summer shutdown, which
principally affects manufacturing activities in our main plant in Montreal. Healthcare is subject to the irregular timing of orders by
hospitals, universities, government entities and defence forces. 2.13Environmentalliabilities We use, generate, store, handle and dispose of hazardous
materials at our operations, and used to at some of our discontinued or sold
operations. Past operators at some of our sites also carried out these
activities. New laws and regulations, stricter enforcement of existing
laws and regulations, the discovery of previously unknown contamination, new
clean-up requirements or claims on environmental indemnities we have given may
result in us having to incur substantial costs. This could have a materially
negative effect on our financial condition and results of operations. CAE believes our current operations are in compliance in all
material respects with environmental laws and regulations. Environmental
protection requirements do not have material financial or operational effects
on CAE’s capital expenditures, earnings or competitive position. 2.14Employees CAE strives to have practices in place that drive employee
development and engagement through employee communications, processes such as
its Annual Leadership Development Process. The Company invests in its employees
through technical and leadership training, as well as developmental career
moves. CAE employs over 8,500 employees; of these approximately
1,600 are unionized and covered by 42 different collective agreements all over
the world. The Company maintains constructive relationships with its unions and
strives to achieve mutually beneficial relationships while maintaining cost
competitiveness.


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2.15ForeignOperations For the fiscal year ended March 31, 2017, sales to customers
outside Canada made up approximately 90% of CAE’s revenue. CAE expects sales
outside Canada to continue to represent a significant portion of revenue in the
foreseeable future. As a result, we are subject to the risks of doing business
internationally, including geopolitical instability. These
are the main risks we are facing: -Change
in laws and regulations; -Tariffs,
embargoes, controls, sanctions and other restrictions; -General
changes in economic and geopolitical conditions; -Complexity
and corruption risks of using foreign representatives and consultants. The impact of these factors is difficult to predict and any
one or more of these factors could adversely affect CAE’s operations in the
future. 3.DESCRIPTIONOFTHEBUSINESSSEGMENTS 3.1Civil Aviation Training Solutions We provide comprehensive training solutions for flight,
cabin, maintenance and ground personnel in commercial, business and helicopter
aviation, a complete range of flight simulation training devices, as well as ab
initio pilot training and crew sourcing services. We are uniquely capable of addressing the total lifecycle
needs of the professional pilot, from cadet to captain, with our comprehensive
aviation training solutions. We are the world’s largest provider of commercial
aviation training services and the second largest in business aviation training
services. Our deep industry expertise and credibility, installed base, strong
relationships and reputation as a trusted partner enable us to access a broader
share of the market than any other company in our industry. We provide aviation
training services in 30 countries and through our broad global network of
training centres, we serve all sectors of civil aviation including airlines and
other commercial, business and helicopter aviation operators. Among our thousands of customers, we have long-term training
centre operations and training services agreements and joint ventures with
approximately 40 major airlines and aircraft operators around the world. Our
range of training solutions includes products and services offerings for pilot,
cabin crew and aircraft maintenance technician training, training centre
operations, curriculum development, courseware solutions and consulting
services. We currently operate 269 FFSs, including those operating in our joint
ventures. We offer industry-leading technology , and we are shaping the future
of training through innovations such as the Next Generation Training System,
which will improve training quality and efficiency through the integration of
untapped flight and simulator data-driven insights into training. As the
industry leader in training, we continue our strategy to recruit, develop and
retain the best instructors, who represent our second largest employee group
after engineers. In the formation of new pilots, CAE operates the largest ab
initio flight training network in the world with seven academies and a fleet of
over 165 aircraft. In the area ofresource management,
CAE is the global market leader in the provision of flight crew and technical
personnel to airlines, aircraft leasing companies, manufacturers and MRO
companies worldwide.


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Quality, fidelity and reliability are hallmarks of the CAE
brand in flight simulation and we are the world leader in the development of
civil flight simulators. We continuously innovate our processes and lead the
market in the design, manufacture and integration of civil FFSs for major and
regional commercial airlines, third-party training centres and OEMs. We have
established a wealth of experience in developing first-to-market simulators for
more than 35 types of aircraft models. Our flight simulation equipment,
including FFSs, are designed to meet the rigorous demands of their long and
active service lives, often spanning a number of decades of continuous use. We
also provide best-in-class support with a full range of services and by
leveraging our extensive worldwide network of spare parts and service teams. Civil Aviation Training Solutions obtained contracts with an
expected value of $1,698.8 million, including contracts for 50 full-flight
simulators. New
Programs and Products -We
announced that our business aviation Upset Prevention and Recovery Training
(UPRT) program is ready for training and has received endorsement by Dassault
Aviation, reaffirming our leadership position in helping prevent Loss of
Control In-Flight; -We
initiated the Next Generation Training System and launched the validation phase
with AirAsia, focusing on the validation and refinement of the system’s new
training capabilities for pilot critical skill performance; -Our
joint venture Flight Training Alliance unveiled its first C Series aircraft FFS
during an inauguration held in Frankfurt, Germany and began pilot training at
the Lufthansa Flight Training Center Frankfurt; -Our
new CAE Terminal online portal aims to enrich the customer experience by
providing line pilots and flight department leaders instant access to
appropriate documentation, training records and reservation details. Expansions -We
integrated six FFSs into our training network following the completion of our
acquisition of Lockheed
Martin Commercial Flight Training (LMCFT). The FFSs are located in South Korea,
Brazil and Turkey; -Our
joint venture Embraer-CAE Training Services announced an expansion of its
training programs for Embraer Phenom 100 and Phenom 300 pilots and maintenance
technicians at our location in Amsterdam. The program is expected to be ready
for training in the first quarter of calendar 2018; -We
inaugurated, together with the Hibernia Management and Development Company Ltd.
and the Research & Development Corporation, a new helicopter training and
R&D centre in Newfoundland and Labrador featuring the first civilian Level
D helicopter simulator with night vision in Canada; -CAE
Simulation Training Private Limited (CSTPL), a joint venture between CAE and
InterGlobe Enterprises, announced the inauguration of its fourth A320 FFS; -We
commenced training on the Gulfstream G650 FFS, located at the Emirates-CAE
Flight Training centre in Dubai, UAE; -We
announced the expansion of our commercial, business and helicopter aviation
training agreement with Abu Dhabi Aviation (ADA) through which CAE and ADA will
be delivering training to regional operators at ADA’s brand new training
facility in Abu Dhabi, UAE; -CAE-Lider,
a joint venture between CAE and Lider Aviação, announced its designation by
Leonardo Helicopter as the Recognized Flight Simulation Centre for the delivery
of AW139 flight simulator hours supporting training in South America.


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3.2CivilMarketTrendsandOutlook Market Trends and Outlook Demand for training solutions in
the civil aviation market is driven by the following: -Pilot
training and certification regulations; -Safety
and efficiency imperatives of commercial airline and business aircraft
operators; -Expected
long-term global growth in air travel; -Growing
active fleet of commercial and business aircraft; -Demand for trained aviation professionals. Pilot
training and certification regulations Civil aviation training is a largely recurring business
driven by a highly-regulated environment through global and national standards
for pilot licensing and certification, amongst other regulatory requirements.
These mandatory and recurring training requirements are regulated by national
and international aviation regulatory authorities such as the International
Civil Aviation Organization, European Aviation Safety Agency (EASA), and
Federal Aviation Administration (“FAA”). In recent years, pilot certification processes and regulatory
requirements have become increasingly stringent. Simulation-based pilot
certification training is taking on a greater role internationally with the
Multi-crew Pilot License (MPL), Upset Prevention and Recovery Training (UPRT)
and the Airline Transport Pilot (ATP) requirements in the U.S. Safety and
efficiency imperatives of commercial airline and business aircraft operators The commercial airline industry is competitive, requiring
operators to continuously pursue operational excellence and efficiency
initiatives in order to achieve adequate returns while continuing to maintain
the highest safety standards and the confidence of air travelers. Airlines are
finding it increasingly more effective to seek expertise in training from
trusted partners such as CAE to address growing efficiency gaps, pilot
capability gaps, evolving regulatory and training environments, and the
on-going aircraft programs. Partnering with a training provider like CAE gives
airlines immediate access to a world-wide fleet of simulators, courses,
programs and instruction capabilities, and allows them flexibility in pursuing
aircraft fleet options that suit their business. Expected
long-term global growth in air travel The secular growth in air travel is resulting in higher
demand for flight, cabin, maintenance and ground personnel, which in turn
drives demand for training solutions. In commercial aviation, the aerospace industry’s widely held
expectation is that long-term average growth for air travel will continue at
4.2% annually over the next decade. For calendar 2016, global passenger traffic
increased by6.3% compared to calendar 2015. For the
first three months of calendar 2017, passenger traffic increased by 7.0%
compared to the first three months of calendar 2016. Certain markets continued
to outperform with passenger traffic in Asia and the Middle East growing at
10.0% and 9.1% respectively, while Europe, Latin America and North America
increased 6.9%, 5.1% and 2.3% respectively.


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In business aviation, training demand is closely aligned to
business jet travel. According to the FAA, the total number of business jet
flights, which includes all domestic and international flights, was up modestly
with 1.4% growth over the past 12 months. Similarly, according to Eurocontrol,
the European Organisation for the Safety of Air Navigation, the total number of
business aviation flights in Europe has modestly improved by 1.4%. In helicopter aviation, demand is driven mainly by the level
of offshore activity in the oil and gas sector, as helicopter operators
catering to this sector make up the majority of a relatively small training
segment. The current protracted downturn in petroleum prices has negatively
impacted offshore exploration activity for helicopter operators. Potential impediments to steady growth in air travel include
major disruptions such as regional political instability, acts of terrorism,
pandemics, natural disasters, prolonged economic recessions or other major
world events. Growing
active fleet of commercial and business aircraft As an integrated training solutions provider, our long-term
growth is closely tied to the active commercial and business aircraft fleet. The global active commercial aircraft fleet has grown by an
average of 3.2% annually over the past 20 years and is widely expected to
continue to grow at an approximate average rate of 3.6% annually over the next
two decades as a result of increasing emerging market and low-cost carrier
demand and fleet replacement in established markets. From March 2016 to March
2017, the global commercial aircraft fleet increased by 4.2%, growing by 7.0%
in Asia Pacific, 5.0% in Europe, the Middle East and Africa (EMEA), and
increasing modestly by 1.6% in the Americas. Major business jet OEMs are continuing with plans to
introduce a variety of new aircraft models in the upcoming years. Examples
include Bombardier’s Global 7000/8000, Cessna’s Citation Longitude and Hemisphere,
Dassault’s Falcon 5X, Gulfstream’s 500/600, Cirrus’ SF50 and Pilatus’ PC-24. Our business aviation training network, comprehensive suite
of training programs, key long term OEM partnerships and ongoing network
investments, position us well to effectively address the training demand
arising from the entry-into-service of these new aircraft programs. Our strong competitive moat, as defined by our extensive
global training network, best-in-class instructors, comprehensive training
programs and strength in training partnerships with airlines and business
aircraft operators, allows us to effectively address training needs that arise
from a growing active fleet of aircraft. We are well positioned to leverage our technology leadership
and expertise, including CAE 7000XR Series FFSs and CAE SimfinityTM procedures
trainers, in delivering training equipment solutions that address the growing
training needs of airlines that continue to operate their own training centers.


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Demand
for trained aviation professionals We have large headroom in the training services market driven
by a sustained secular demand for trained aviation professionals. Demand for
trained aviation professionals is driven by air traffic growth, pilot
retirements and by the number of aircraft deliveries. The expansion of global
economies and airline fleets have resulted in a shortage of qualified personnel
needed to fulfill this growing capacity. Pilot supply constraints include aging
crew demographics and fewer military pilots transferring to civil airlines.
According to a forthcoming CAE internal market study, expected to be released
in the first half of fiscal 2018, approximately 255,000 new airline pilots will
be needed over the next ten years to sustain the growth of the commercial air
transport industry and support retirements. In support of this growth, the
aviation industry will require innovative solutions to match the learning
requirements of a new generation, leading to an increase in demand for
simulation-based training services and products. 3.3Defence and Security We are a training systems integrator for defence forces
across the air, land and naval domains, and for government organizations
responsible for public safety. We are a global leader in the development and delivery of
integrated live, virtual and constructive (LVC) training solutions for defence
forces. Most militaries leverage a combination of live training on actual
platforms, virtual training in simulators, and constructive training using
computer-generated simulations. CAE is skilled and experienced as a training
systems integrator capable of helping defence forces achieve an optimal balance
of LVC training to achieve mission readiness. Our expertise in training spans a
broad variety of aircraft, including fighters, helicopters, trainer aircraft,
maritime patrol, tanker/transport aircraft and remotely piloted aircraft, also
called unmanned aerial systems. Increasingly, we are leveraging our training
systems integration capabilities in the naval domain to provide naval training
solutions, as evidenced by the contract to provide the United Arab Emirates
(U.A.E) Navy with a comprehensive Naval Training Centre and the delivery of a
naval warfare training system to the Swedish Navy. We also offer training
solutions for land forces, including a range of driver, gunnery and maintenance
trainers for tanks and armoured fighting vehicles, as well as constructive
simulation for command and staff training. We offer training solutions to
government organizations for emergency and disaster management. Defence forces seek to increasingly leverage virtual training
and balance their training approach between live, virtual and constructive
domains to achieve maximum readiness and efficiency. As such, we have been
increasingly pursuing programs requiring the integration of LVC training and
these tend to be larger in size than programs involving only a single component
of such a solution. We are a first-tier training systems integrator and
uniquely positioned to offer our customers a comprehensive range of innovative
LVC solutions, ranging from academic, virtual and live training to immersive,
networked mission rehearsal in a synthetic environment. Our solutions typically
include a combination of training services, products and software tools
designed to cost-effectively maintain and enhance safety, efficiency, mission
readiness and decision-making capabilities. We have a wealth of experience
delivering and operating training solutions across different business models,
including government-owned government-operated; government-owned
contractor-operated; or contractor-owned contractor-operated facilities. Our
offerings include training needs analysis; instructional systems design; learning
management information systems; purpose-built facilities; state-of-the-art
synthetic training equipment; curriculum and courseware development; classroom,
simulator,and live flying instruction; maintenance
and logistics support; lifecycle support and technology insertion; and
financing alternatives.


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We have delivered simulation products and training systems to
approximately 50 defence forces in over 35 countries. We provide training
support services such as contractor logistics support, maintenance services,
classroom instruction and simulator training at over 80 sites around the
world, including our joint venture operations. We continue to increase our
support for live flying training, such as the live training delivered as part
of the NATO Flying Training in Canada and the U.S. Army Fixed-Wing Flight
Training programs, as we help our customers achieve an optimal balance across
their training enterprise. Defence won contracts valued at $1,383.9 million of
orders in FY2017. New Programsand
Products -We
signed a Memorandum of Understanding with Draken International to pursue global
opportunities related to the provision of advanced adversary and aggressor air
training services; -We
supported both the Royal Canadian Air Force and Royal Australian Air Force as
they participated in Coalition Virtual Flag 16, one of the world's largest
virtual air combat exercises; -We
launched our next-generation CAE Medallion-6000XR image generator to support
the creation of highly immersive and realistic synthetic environments; -The
Open Geospatial Consortium (OGC), an international consortium developing
geospatial standards and interoperable solutions, formally approved the
CAE-developed Common Database (CDB) as an international OGC standard. Expansions -We
delivered the Naval Warfare Training System to the Swedish Navy and commenced
the provision of training support services during the third quarter; -We
continue to expand our naval capabilities and expertise, and have begun the
design and build of the Naval Training Centre for the United Arab Emirates
Navy; -We
constructed and inaugurated the CAE Dothan Training Center in Dothan, U.S.,
where we began offering training for the U.S. Army Fixed-Wing Flight Training
program in March 2017; -We
received an Authorization to Operate KC-135 aircrew training devices on the
U.S. Air Force’s Distributed Training Center Network.


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3.4DefenceMarketTrendsandOutlook Demand for
training solutions in the defence and security markets is driven by the
following: -Growing
defence budgets -Installed
base of enduring defence platforms and new customers; -Explicit
desire of governments and defence forces to increase the use of synthetic
training; -Desire
to integrate training systems to achieve efficiencies and enhanced
preparedness; -Attractiveness
of outsourcing training and maintenance services; -Need
for synthetic training to conduct integrated, networked mission training,
including joint and coalition forces training; -Relationships
with OEMs for simulation and training. Growing
defence budgets The U.S. Administration has proposed plans to increase annual
defence spending by over USD $54 billion while also calling on members of the
North Atlantic Treaty Organization (NATO) to increase their own defence
investment. The majority of the 28 members of NATO have also expressed plans to
increase defence spending in the coming years. NATO and allied nations continue
to confront the immediate challenges posed by the war on terrorism and have
been increasingly renewing and augmenting their strategic defences in view of
emerging and resurgent geopolitical threats. Growing defence budgets in the U.S
and much of NATO, as well as other regions such as Asia and the Middle East,
will create increased opportunities throughout the defence establishment.
Training is fundamental for defence forces to achieve and maintain mission
readiness and growth in defence spending is expected to result in corresponding
opportunities for training systems and solutions. Installed
base of enduring defence platforms and new customers CAE generates a high degree of recurring business from its
strong position on enduring platforms, including long-term services contracts.
Most defence forces in mature markets such as the U.S. have slowed down
production of new platforms and delayed new acquisition programs, which has
required military forces to maximize use of their existing platforms. Upgrades,
updates, and life extension programs allow defence forces to leverage existing
assets while creating a range of opportunities for simulator upgrades and training
support services. Enduring platforms, such as the C-130 Hercules transport
aircraft that is operated by more than 60 nations, provide a solid installed
base from which to generate business. Because of our extensive installed base
of simulators worldwide, our prime contractor position on programs such as the
U.S. Air Force (USAF) KC-135 Aircrew Training System and MQ-1 Predator/MQ-9
Reaper aircrew training, and our experience on key enduring platforms, CAE is
well-positioned for recurring product upgrades/updates as well as maintenance
and support services. In addition, there is strong demand for enduring
platforms such as the C-130, P-8A, C295, MH-60R and MQ-1/MQ-9 in global defence
markets, thus providing opportunities to provide new training systems and
services for platforms where CAE has significant experience.


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Explicit desire of governments and
defence forces to increase the use of synthetic training One of the underlying drivers for CAE’s expertise and
capabilities is the increasing use of synthetic training throughout the defence
community. More defence forces and governments are increasingly adopting
synthetic training for a greater percentage of their overall approach because
it improves training effectiveness, reduces operational demands on aircraft,
lowers risk compared to operating actual weapon system platforms and
significantly lowers costs. Synthetic training offers defence forces a
cost-effective way to provide realistic training for a wide variety of
scenarios while ensuring they maintain a high state of readiness. The higher
cost of live training and the desire to save aircraft for operational use are
two factors prompting a greater adoption of synthetic training. The nature of
mission-focused training demands at least some live training; however, the
shift to more synthetic training is advancing. The U.S. Navy reports the share
of simulation-based training on some of their existing aircraft platforms could
increase to nearly 50% by 2020, and for new aircraft such as the P-8A, the training
program has been designed for approximately 70% synthetic training. Because of
the high cost associated with conducting live training exercises, most defence
forces are beginning to rebalance the mix of LVC training and shift more of the
training curriculum to virtual and constructive simulation. An example are the
contracts that CAE won under the USAF KC-135 program to support the Mobility
Air Force Distributed Mission Operations initiative of the USAF. CAE has
upgraded a range of KC-135 aircrew training devices that are now authorized to
be used on the USAF’s Distributed Training Center Network, thus providing the
USAF the ability to conduct distributed, virtual tanker training. Desire to integrate training systems to achieve efficiencies
and enhanced preparedness Increased operational tempo combined with limited personnel
and budget pressures have prompted defence forces around the world to seek
reliable partners who can help develop, manage and deliver the training systems
required to support today’s complex platforms and operations. Increasingly,
defence forces are considering a more integrated and holistic approach to
training. To help manage the complexities and challenges, many training
programs are calling for an industry partner to help design and manage the
total training system. CAE refers to this approach as training systems
integration and has positioned the Company globally as a platform-independent
training systems integrator. The overall intent for defence forces is to
maximize commonality for increased efficiencies, cost savings, and most
importantly, enhanced capability for mission preparedness. A training systems
integrator can address the overall LVC domain to deliver comprehensive
training, from undergraduate individual training all the way through to
operational, multi-service and joint mission training. Attractiveness of outsourcing training and maintenance
services Another driver for CAE’s expertise and capabilities is the
efficiency gained by our customers from outsourcing training and support
services. Defence forces and governments continue to find ways to reduce costs
while not impacting readiness, and allow active-duty personnel to focus on
operational requirements. There has been a growing trend among defence forces
to consider outsourcing a variety of training services and we expect this trend
to continue, which aligns directly with CAE’s strategy to grow long-term,
recurring services business. We believe governments will increasingly look to
industry for training solutions to achieve faster delivery, lower capital
investment requirements, and training support required to achieve desired
readiness levels. For example, we inaugurated our new DothanTraining Center in Dothan, Alabama and have begun
providing fixed-wing flight training. This new training centre supports the
U.S. Army Fixed‐Wing Flight Training program and CAE offers comprehensive
classroom, simulator and live-flying training to the U.S. Army, USAF and other
customers. We believe this type of training service delivery program will
become increasingly attractive to defence forces globally.


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Need for synthetic
training to conduct integrated, networked mission training, including joint and
coalition forces training There is a growing trend among defence forces to use synthetic
training to meet more of their mission training requirements, and to integrate
and network various training systems so military forces can train in a virtual
world. Simulation-based technology solutions enable defence customers to plan
sophisticated missions and carry out full-mission rehearsals in a synthetic
environment as a complement to traditional live training for mission
preparation. Allies are cooperating and creating joint and coalition forces,
which are driving the demand for networked training and operations. Training
devices that can be networked to train different crews and allow for networked
training across a range of platforms are increasingly important as the desire
to conduct mission rehearsal exercises in a synthetic environment increases.
For example, the Royal Canadian Air Force (RCAF) has released its Simulation
Strategy 2025, which specifically calls for leveraging LVC domains within a
networked common synthetic environment. The RCAF is transforming its training
approach from one that relies on aircraft to one that exploits new technologies
to train aircrews in a simulation-focused system that creates a virtual
battlespace. The U.S., U.K. and Australian defence forces have published
similar strategies. We are actively promoting open, standard simulation
architectures, such as the Common Database, to better enable integrated and
networked mission training. Relationships with OEMs
for simulation and training We are an important partner to OEMs because of our
experience, global presence, and innovative technologies. We partner with
manufacturers in the defence and security market to strengthen relationships
and position for future opportunities. OEMs have introduced new platforms and
continue to upgrade and extend the life of existing platforms, which drives
worldwide demand for training systems. For example, Boeing has developed the
P-8A maritime patrol aircraft and has subcontracted CAE to design and develop
P-8A operational flight trainers for the U.S. Navy and Royal Australian Air Force
and continues to market the P-8 internationally, which will create further
opportunities for CAE. Other examples of CAE’s relationships with OEMs on
specific platforms creating opportunities for training systems include Airbus
Defence & Space on the C295, which was selected by Canada for the
Fixed-Wing Search and Rescue program; Leonardo on the M-346 lead-in fighter
trainer; Lockheed Martin on the C‐130J Super Hercules transport aircraft,
which is being acquired by several branches of the USAF as well international
militaries; and General Atomics on the Predator family of remotely piloted
aircraft. We are also part of Team Seahawk in partnership with the U.S. Navy
and companies such as Lockheed Martin/Sikorsky which is offering the MH-60R
helicopter under the foreign military sales program to international customers. 3.5DefenceContracts The majority of CAE’s contract revenue in Defence result from
contracts with militaries or government bodies performed under predominantly
fixed-price contracts with only a small number of cost-plus contracts.


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In most instances, under government
regulations, certain costs, including certain financial costs, portions of
R&D costs, representation expenses, certain types of legal expenses and
certain marketing expenses related to the preparation of bids and proposals are
not allowed for pricing purposes and calculation of contract reimbursement
rates under flexibly-priced contracts. Governments also routinely regulate the
methods under which costs are allocated to government contracts. CAE is subject to a variety of audits performed by government
agencies. These include pre-award audits that are performed at the submission
of a proposal to the government. The purpose of the pre-award audit is to
determine the basis of the bid and provide the information required for the
relevant government to effectively negotiate the contract. During the
performance of a contract the government has the right to request and to
examine any labor charges, any material purchase, and any overhead changes to
any contract that is active. Upon a contract’s completion, the government may
perform a post-award audit of all aspects of contract performance to ensure
that CAE has performed in accordance with the terms of the contract. Government
contracts are generally, by their terms, subject to termination by the
government either for convenience or default by the contractor. Fixed-price
contracts provide for payment upon termination for items delivered to and
accepted by the government and, if the termination is for convenience, for
payment of fair compensation of work performed plus the costs of settling and
paying claims by terminated subcontractors, other settlement expenses and a
reasonable profit on the costs incurred. Cost-plus contracts generally provide
that, upon termination, the contractor is entitled to reimbursement of its
allowable costs and, if the termination is for convenience, a total fee
proportionate to the percentage of the work completed under the contract. If a
contract termination is for default, however, typically: ·Thecontractormaybepaidanamountagreeduponforcompletedandpartiallycompletedproductsandservicesacceptedbythegovernment; ·Thegovernmentmaynotbeliableforthecontractor’scostswithrespecttounacceptableitems,andmaybeentitledtorepaymentofadvancepaymentsandprogress
payments,ifany,relatedtotheterminationportionofthecontract;and ·Thecontractormaybeliableforexcess costs incurredbythegovernmentinprocuringundelivereditemsfromanothersource. In addition to the right of the government to terminate,
government contracts are often conditioned upon the continuing availability of
appropriations. Consequently, at the outset of a major program, such contracts
are usually partially funded and additional monies are normally committed to
the contract by the procuring agency only as appropriations are made for future
fiscal years. Failure to obtain such appropriations normally results in
termination of the contract and compensation to the contractor at less than the
full value of the contract. 3.6Healthcare We design and manufacture simulators, audiovisual and
simulation centre management solutions, develop courseware and offer services
for training of medical, nursing and allied healthcare students as well as
clinicians in educational institutions, hospitals and defence organizations
worldwide.


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Simulation-based training is one of
the most effective approaches to prepare healthcare practitioners to care for
patients and respond to critical situations while reducing the overall risk to
patients. We are leveraging our experience and best practices in
simulation-based aviation training to deliver innovative solutions to improve
the safety and efficiency of this industry. The healthcare simulation market is
expanding, with simulation centres becoming increasingly more prevalent in
nursing and medical schools. We offer the broadest range of medical simulation products
and services in the market today, including patient, ultrasound and
interventional (surgical) simulators, audiovisual and simulation centre
management solutions and courseware for simulation‐based healthcare
education and training. We have sold simulators to customers in approximately
90 countries that are currently supported by our network in Australia, Brazil,
Canada, Germany, Hungary, India, Singapore, the U.K. and the U.S. We are a
leader in high‐fidelity patient simulators that are uniquely powered by
complex models of human physiology to mimic human responses to clinical
interventions. For example, our Lucina childbirth simulator for both normal
deliveries and rare maternal emergencies was designed to offer exceptional
reliability and realism in the high-fidelity patient simulation market. Through our Healthcare Academy, we deliver peer-to-peer
training at customer sites and in our training centres in the U.S., U.K.,
Germany and Canada. Our Healthcare Academy includes more than 50 adjunct
faculty consisting of nurses, physicians, paramedics and sonographers who, in
collaboration with leading healthcare institutions, have developed more than
500 Simulated Clinical Experience (SCE) courseware packages for our customers.
Our Academy partnered with the International Nursing Association for Clinical
Simulation and Learning (INACSL) to develop a fellowship program based on
international best practices in healthcare simulation with cohorts in the U.S.,
U.K and U.A.E. We offer turnkey solutions, project management and
professional services for healthcare simulation programs, and collaborate with
medical device companies and professional associations to develop innovative
and custom training solutions. For example, we partnered with the American
Society of Anesthesiologists to develop screen-based simulation training for
practicing physicians. This new platform will deliver Maintenance of
Certification in Anesthesiology (MOCA) education and allow us to expand access
to simulation-based clinical training. Furthermore, through an industry
partnership with a medical device company, we developed a specialized
interventional simulator to train physicians to implant a new generation of
pacemakers. New
programs and products -We
launched the VimedixAR ultrasound simulator with Microsoft Hololens, the first
ultrasound simulator with real-time interactive holograms of human anatomy; -We
launched the Blue Phantom Gen II PICC with IV and arterial access ultrasound
model at the National League for Nursing conference in Orlando, U.S. This model
is used to train clinicians in the skills associated with ultrasound guided
peripheral venous and arterial access procedures; -We
added a Spectral Doppler capability as well as a new Emergency Care pathology
package to our Vimedix offerings.


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Expansions -Our
Vimedix ultrasound simulator was used to deliver the European Diploma in
Echocardiography exam for the first time during the European Society for
Intensive Care Medicine Congress in Milan, Italy, demonstrating its use not
only for training, but also for certification; -We
commenced collaboration under a co-marketing agreement with a medical device
manufacturer promoting point-of-care ultrasound training and its expanded use
for patient assessment and diagnosis; -We
released a new version of the Respiratory Education Simulation Program (RESP 1
and RESP 2) Learning Module for Apollo, iStan, METIman and the Human Patient
Simulator; -Our
Essentials of Simulation course, which is offered in partnership with the
University of Rotterdam, was accredited by the Dutch National Office of
Continuous Medical Education; -We
hosted our 20th Human Patient Simulation Network (HPSN) World conference for
attendees from 21 countries in the fourth quarter, and hosted our first HPSN
conferences in China and India, expanding our potential customer bases and
simulation markets. Healthcare
market trends and outlook Demand for our simulation
products and services in the healthcare market is driven by the following: -Increasing
use of simulation in healthcare education; -Growing
emphasis on patient safety and outcomes; -Limited
access to live patients during training; -Medical
technology revolution. Increasing
use of simulation in healthcare education The majority of product and service sales in healthcare
simulation involve healthcare education. Market research firm Markets and
Markets estimates the total healthcare simulation market at approximately USD
$1.1 billion. North America is the largest market for healthcare simulation,
followed by Europe and Asia. Together with our more than 55 distributors
worldwide, we are reaching new and emerging markets and addressing the
international demand potential for simulation-based training. CAE segments the
healthcare simulation market by high-fidelity patient simulators,
interventional simulators, mid/low fidelity task trainers, ultrasound
simulators, audiovisual and simulation centre management solutions, simulated
clinical environments and training services. In the U.S., significant demand
for healthcare services is driven by, among other factors, longer life
expectancy and the baby boomer generation, resulting in higher healthcare
spending. The U.S. Centers for Medicare and Medicaid Services projects
that annual national health spending will grow at an average rate of 5.8%
annually over the next decade. Increasingly, hospitals are given incentives to
become safer and more efficient, which will drive higher demand for training.
There is a growing body of evidence demonstrating that medical simulation
improves patient outcomes and reduces medical errors, which can help mitigate
the rate of increase in healthcare costs.


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Growing
emphasis on patient safety and outcomes CAE expects increased adoption of simulation-based training
and certification of healthcare professionals as a means to improve patient safety
and outcomes. We believe this would result in a significantly larger
addressable market than the current market which is primarily education-based. According
to a study by patient-safety researchers published in the British Medical
Journal in May 2016, medical errors in hospitals and other healthcare
facilities are the third-leading cause of death in the U.S. Training through
the use of simulation can help clinicians gain confidence, knowledge and
expertise for improving patient safety in a risk-free environment. Simulation
is a required or recommended element in a growing movement towards High Stakes
Assessment and Certification. Examples in the U.S. include MOCA, Fundamentals
of Laparoscopic Surgery and Advanced Trauma Life Support. Moreover, the Accreditation
Council for Graduate Medical Education is evolving towards outcome-based
assessment with specific benchmarks to measure and compare performance which
favours the adoption of simulation products and training. Limited
access to live patients during training Traditionally, medical education has been an apprenticeship
model in which the student cares for patients under the supervision of more
experienced staff. In this model, students have a limited role and access to
high-risk procedures, rare complications and critical decision-making skills.
The use of simulation in professional training programs complements traditional
learning and allows students to hone their clinical and critical thinking
skills for high risk, low frequency events. In 2014, the U.S. National Council
of State Boards of Nursing (NCSBN) released a ground breaking study on the
effectiveness of simulation training in pre-licensure nursing programs. Among
the findings, nursing students who spent up to 50 percent of clinical hours in high-quality
simulation were as well-prepared for professional practice as those whose
experiences were drawn from traditional clinical practice. Simulation provides consistent, repeatable training and
exposure to a broader range of patients and scenarios than one may experience
in normal clinical practice. As an example, our Vimedix ultrasound simulator
offers more than 200 patient pathologies for cardiac, emergency and obstetrics
and gynaecology medicine. The training and education model is evolving, as evidenced
by military branches around the world and most recently the U.S. Pentagon,
prohibiting the use of live tissue testing in most medical training. CAE
Healthcare simulators provide a low-risk alternative for practicing life-saving
procedures, interprofessional team training, major disaster response and
anaesthesia administration. Medical
technology revolution Advancements in medical technology are driving the use of
simulation. New medical devices and advanced procedures, such as intra-cardiac
echocardiography, cardiac assist devices, and mechanical ventilation
enhancements, require advanced training solutions, such as simulation, for
internal product development and customer training. Regulatory and
certification agencies are increasingly stringent in requesting that clinicians
be trained before adopting new disruptive technologies, an undertaking for
which simulation is well suited. As a training partner of choice with leading
OEMs, we continue to collaborate to deliver innovative and custom training for
new technologies. CAE Healthcare announced the release of CAE VimedixAR, an
ultrasound training simulator integratedwith the
Microsoft HoloLens, the world’s first self-contained holographic computer. We
are the first to bring a commercial Microsoft HoloLens mixed reality
application to the medical simulation market.


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4.RISKFACTORS We operate in several industry segments that have various
risks and uncertainties. Management and the Board of Directors (the “Board”)
discuss quarterly the principal risks facing our business, as well as annually
during the strategic planning and budgeting processes. The risks and
uncertainties described below are risks that could materially affect our
business, financial condition and results of operation. These risks are categorized
as industry-related risks, risks specific to CAE and risks related to the
current market environment. These are not necessarily the only risks we face;
additional risks and uncertainties that are presently unknown to us or that we
may currently deem immaterial may adversely affect our business. In order to mitigate the risks that may impact our future
performance, management has established an enterprise risk management process
to identify, assess and prioritize these risks. Management develops and deploys
risk mitigation strategies that align with our strategic objectives and
business processes. Management reviews the evolution of the principal risks
facing our business on a quarterly basis and the Board oversees the risk
management process and validates it through procedures performed by our
internal auditors when it deems necessary. One should carefully consider the
following risk factors, in addition to the other information contained herein,
before deciding to purchase CAE common stock. 4.1Risksrelatingtotheindustry 4.1.1Competition We sell our simulation equipment and training services in
highly competitive markets. New participants have emerged in recent years and
the competitive environment has intensified as aerospace and defence companies
position themselves to try to take greater market share by consolidating
existing commercial aircraft simulation companies and by developing their own
internal capabilities. Most of our competitors in the simulation and training
markets are also involved in other major segments of the aerospace and defence
industry beyond simulation and training. As such, some of them are larger than
we are, and may have greater financial, technical, marketing, manufacturing and
distribution resources. In addition, our main competitors are either aircraft
manufacturers, or have well-established relationships with aircraft
manufacturers, airlines and governments, which may give them an advantage when
competing for projects with these organizations. In particular, we face
competition from Boeing, which has pricing and other competitive advantages
over us. OEMs like Airbus and Boeing have certain advantages in
competing with independent training service providers. An OEM controls the
pricing for the data, parts and equipment packages that are often required to
manufacture a simulator specific to that OEM’s aircraft, which in turn is a
critical capital cost for any simulation-based training service provider. OEMs
may be in a position to demand licence fees or royalties to permit the
manufacturing of simulators based on the OEM’s aircraft, and/or to permit any
training on such simulators. CAE also has some advantages, including being a
simulator manufacturer, having the ability to replicate certain aircraft
without data, parts and equipment packages from an OEM and owning a diversified
training network that includes joint ventures with largeairline
operators which are aircraft customers for OEMs. In addition, we work with some
OEMs on business opportunities related to equipment and training services.


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We obtain most of our contracts through competitive bidding
processes that subject us to the risk of spending a substantial amount of time
and effort on proposals for contracts that may not be awarded to us. A
significant portion of our revenue is dependent on obtaining new orders and
continuously replenishing our backlog. We cannot be certain that we will
continue to win contracts through competitive bidding processes at the same
rate as we have in the past. The presence of new market participants as noted
above, and their efforts to gain market share, creates heightened competition
in bidding which may negatively impact pricing and margins. Economic growth underlies the demand for all of our products
and services. Periods of economic recession, constrained credit, government austerity
and/or international commercial sanctions generally lead to heightened
competition for each available order. This in turn typically leads to a
reduction in profit on sales won during such a period. Should such conditions
occur, we could experience price and margin erosion. 4.1.2Level and timing of defence spending A significant portion of our revenues is generated by sales
to defence and security customers around the world. We provide products and
services for numerous programs to U.S., Canadian, European, Australian, and
other foreign governments as both prime and/or subcontractors. As defence
spending comes from public funds and is always competing with other public
interests for funding, there is a risk associated with the level of spending a
particular country may devote to defence as well as the timing of defence
contract awards. Significant cuts to defence spending by mature markets such as
the U.S., Canada, Germany, U.K. and Australia or a significant delay in the
timing of defence procurement could have a material negative impact on our
future revenue, earnings and operations. In order to mitigate the level and
timing of defence procurements, we have established a diversified global
business and a strong position on enduring platforms. 4.1.3Government-funded defence and security programs Like most companies that supply products and services to
governments, we can be audited and reviewed from time to time. Any adjustments
that result from government audits and reviews may have a negative effect on
our results of operations. Some costs may not be reimbursed or allowed in
negotiations of fixed-price contracts. As a result, we may also be subject to a
higher risk of legal actions and liabilities than companies that cater only to
the private sector, which could have a materially negative effect on our
operations. 4.1.4Civilaviationindustry A significant portion of our revenue comes from supplying
equipment and training services to the commercial and business airline
industry. Lower jet fuel prices generally have a positive impact on
airlines’ profitability; however, the long-term ramifications on the commercial
aviation industry stemming from customers in oil-based economies are more
complex. For example, in helicopter aviation training, which represents less than
2% of our Civil Aviation Training Solutions revenue, demand is driven mainly by
the level of offshore operator activity servicing customers in the oil and gas
sector. Lower petroleum prices in recent years have negatively impacted
offshore activity which, in turn, has had some negative affect on our operating
results.


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As well, airline and business jet
customers originating from the Gulf states may have less capital resources
available to them due to lower oil-related economic activity. We continue to
monitor the potential impact on the civil aviation industry as it relates to
such oil price movements. Conversely, if jet fuel prices attain high levels for
a sustained period, there could be a greater impetus for airlines to replace
older, less fuel efficient aircraft. However, higher fuel costs could also
limit the airlines’ available financial resources and could potentially cause
deliveries of new aircraft to be delayed or cancelled. Airlines may slow
capacity growth or cut capacity should sustained high fuel costs make the
availability of such capacity not economically viable. Such a reaction would
negatively affect the demand for our training equipment and services. Constraints in the credit market may reduce the ability of
airlines and others to purchase new aircraft, negatively affecting the demand
for our training equipment and services, and the purchase of our products. We are also exposed to credit risk on accounts receivable
from our customers. We have adopted policies to ensure we are not significantly
exposed to any individual customer. Our policies include analyzing the
financial position of certain customers and regularly reviewing their credit
quality. We also subscribe from time to time to credit insurance and, in some
instances, require a bank letter of credit to secure our customers’ payments to
us. 4.1.5Regulatoryrulesimposedbyaviationauthorities We are required to comply with regulations imposed by
aviation authorities. These regulations may change without notice, which could
disrupt our sales and operations. Any changes imposed by a regulatory agency,
including changes to safety standards imposed by aviation authorities such as
the U.S. FAA, could mean that we have to make unplanned modifications to our
products and services, causing delays or resulting in cancelled sales. We
cannot predict the impact that changing laws or regulations might have on our
operations. Any changes could present opportunities or, to the contrary, have a
materially negative effect on our results of operations or financial condition. 4.1.6SalesorlicencesofcertainCAEproducts requireregulatory approvalsandcompliance The sale or licence of many of our products is subject to
regulatory controls. These can prevent us from selling to certain countries, or
to certain entities or people in or from a country, and require us to obtain
from one or more governments an export licence or other approvals to sell
certain technology such as defence and security simulators or other training
equipment, including data or parts. These regulations change often and we
cannot be certain that we will be permitted to sell or licence certain products
to customers, which could cause a potential loss of revenue for us. If we fail to comply with government laws and regulations
related to export controls and national security requirements, we could be
fined and/or suspended or barred from government contracts or subcontracts for
a period of time, which would negatively affect our revenue from operations and
profitability, and could have a negative effect on our reputation and ability
to procure other government contracts in the future. 4.2RisksrelatingtotheCompany 4.2.1Productevolution The civil aviation and defence and security markets in which
we operate are characterized by changes in customer requirements, new aircraft
models and evolving industry standards. If we do not accurately predict the
needs of our existing and prospective customers or develop product enhancements
that address evolving standards andtechnologies, we
may lose current customers and be unable to attract new customers. This could
reduce our revenue. The evolution of the technology could also have a negative
impact on the value of our fleet of FFSs.


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4.2.2Researchanddevelopmentactivities We carry out some of our R&D initiatives with the
financial contribution of governments, including the Government of Quebec
through Investissement Québec (IQ) and the SA2GE program, and the
Government of Canada through its Strategic Aerospace and Defence Initiative
(SADI). The level of government financial participation reflects government
policy, fiscal policy and other political and economic factors. We may not, in
the future, be able to replace these existing programs with other government
funding and/or risk sharing programs of comparable benefit to us, which could
have a negative impact on our financial performance and research and
development activities. We receive investment tax credits from federal and provincial
governments in Canada and from the federal government in the U.S. on eligible R&D
activities that we undertake. The credits we receive are based on legislation
currently enacted. The investment tax credits available to us can be reduced by
changes to the respective governments’ legislation which could have a negative
impact on our financial performance and research and development activities. 4.2.3Fixed-priceandlong-term supply
contracts We provide our products and services mainly through
fixed-price contracts that require us to absorb cost overruns, even though it
can be difficult to estimate all of the costs associated with these contracts
or to accurately project the level of sales we may ultimately achieve. In
addition, a number of contracts to supply equipment and services to commercial
airlines and defence organizations are long-term agreements that can run up to
20 years. While some of these contracts can be adjusted for increases in
inflation and costs, the adjustments may not fully offset the increases, which
could negatively affect the results of our operations. 4.2.4Strategic partnerships and long-term contracts We have long-term strategic partnerships and contracts with
major airlines, aircraft operators and defence forces around the world. We
cannot be certain that these partnerships and contracts will be renewed on
similar terms, or at all, when they expire. 4.2.5ProcurementandOEMleverage We secure data, parts, equipment and many other inputs from a
wide variety of OEMs, sub-contractors and other sources. We are not always able
to find two or more sources for inputs that we require and in the case of
specific aircraft simulators and other training equipment, significant inputs
can only be sole sourced. We may therefore be vulnerable to delivery schedule
delays, the financial condition of the sole-source suppliers and their
willingness to deal with us. Within their corporate groups, some sole-source
suppliers include businesses that compete with parts of our business. This
could lead to onerous licencing terms, high licence fees or even refusal to
licence to us the data, parts and equipment packages that are often required to
manufacture and operate a simulator based on an OEM’s aircraft. Where CAE uses an internally produced simulation model for an
aircraft, or develops courseware without using OEM-sourced and licenced data,
parts and equipment, the OEM in question may attempt retaliatory or obstructive
actions against CAE to block the provision of training services or
manufacturing, sale and/or deployment for training of asimulator
for such aircraft, claiming breach of its intellectual property rights or other
legal basis. Such actions may cause CAE to incur material legal fees and/or may
delay or prevent completion of the simulator development project or provision
of training services, which may negatively impact our financial results.


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Similarly, where CAE uses open source software, freeware or
commercial off-the-shelf software from a third party, the third party in
question or other persons may attempt retaliatory or obstructive actions
against CAE to block the use of such software or freeware, claiming breach of
licence rights or other legal basis. Such actions may cause CAE to incur
material legal fees and/or may delay or prevent completion of the simulator
development project or provision of training services, which may negatively impact
our financial results. 4.2.6Warrantyorotherproduct-relatedclaims We manufacture simulators that are highly complex and
sophisticated. Additionally, we may purchase simulators or obtain simulators in
a business acquisition. These simulators may contain defects that are difficult
to detect and correct and if they fail to operate correctly or have errors,
there could be warranty claims or we could lose customers. Correcting these
defects could require significant capital investment. If a defective product is
integrated into our customer’s equipment, we could face product liability
claims based on damages to the customer’s equipment. Any claims, errors or
failures could have a negative effect on our operating results and business. We
cannot be certain that our insurance coverage will be sufficient to cover one
or more substantial claims. 4.2.7Productintegrationandprogram
managementrisk Our business could be negatively affected if our products do
not successfully integrate or operate with other sophisticated software,
hardware, computing and communications systems that are also continually
evolving. If we experience difficulties on a project or do not meet project
milestones, we may have to devote more engineering and other resources than
originally anticipated. While we believe we have recorded adequate provisions
for risks of losses on fixed-price contracts, it is possible that fixed-price
and long-term supply contracts could subject us to additional losses that
exceed obligations under the terms of the contracts. 4.2.8Protectionof ourintellectualproperty We rely, in part, on trade secrets, copyrights and
contractual restrictions, such as confidentiality agreements, patents and
licences to establish and protect our proprietary rights. These may not be
effective in preventing a misuse of our technology or in deterring others from
developing similar technologies. We may be limited in our ability to acquire or
enforce our intellectual property rights in some countries. Litigation related
to our intellectual property rights could be lengthy and costly and could
negatively affect our operations or financial results, whether or not we are
successful in defending a claim. 4.2.9Third-party intellectual property Our products contain sophisticated software and computer
systems that are supplied to us by third parties. These may not always be
available to us. Our production of simulators often depends on receiving
confidential or proprietary data on the functions, design and performance of a
product or system that our simulators are intended to simulate. We may not be
able to obtain this data on reasonable terms, or at all.


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Infringement claims could be brought
against us or against our customers. We may not be successful in defending
these claims and we may not be able to develop processes that do not infringe
on the rights of third parties, or obtain licences on terms that are
commercially acceptable, if at all. The markets in which we operate are subject to extensive
patenting by third parties. Our ability to modify existing products or to
develop new products may be constrained by third-party patents such that we
incur incremental costs to licence the use of the patent or design around the
claims made therein. 4.2.10Keypersonnel Our continued success will depend in part on our ability to
retain and attract key personnel with the relevant skills, expertise and
experience. Our compensation policy is designed to mitigate this risk. We also
have succession plans in place to help identify and develop an internal
pipeline of leadership talent pertaining to the technical, pilot instructor and
general management domains. 4.2.11Labour relations Approximately 1,600 of our employees are represented by
unions and are covered by 42 collective agreements. These differing collective
bargaining agreements have various expiration dates. While we maintain positive
relationships with our respective unions, the re-negotiations of the collective
bargaining agreements could result in work disruption including work stoppages
or work slowdowns. Should a work stoppage occur, it could interrupt our
manufacturing or service operations at the impacted locations which could
adversely affect service to our customers and our financial performance. 4.2.12Environmentalliabilities We use, generate, store, handle and dispose of hazardous
materials at our operations, and used to at some of our discontinued or sold
operations. Past operators at some of our sites also carried out these
activities. New laws and regulations, stricter enforcement of existing
laws and regulations, the discovery of previously unknown contamination, new
clean-up requirements or claims on environmental indemnities we have given may
result in us having to incur substantial costs. This could have a materially
negative effect on our financial condition and results of operations. 4.2.13Liability claims arisingfromcasualty losses Because of the nature of our business, we may be subject to
liability claims, including claims for serious personal injury or death,
arising from: ·Accidents
or disasters involving training equipment that we have sold or aircraft for
which we have provided training equipment or services; ·Our
pilot provisioning; ·Our
live flight training operations. We may also be subject to product liability claims relating
to equipment and services that our discontinued operations sold in the past. We
cannot be certain that our insurance coverage will be sufficient to cover one
or more substantial claims, though to date our insurance coverage has been
adequate to meet claims.


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4.2.14Integrationofacquiredbusinesses The success of our acquisitions depends on our ability to
crystallize synergies both in terms of successfully marketing our broadened
product offering as well as efficiently consolidating the operations of the
acquired businesses into our existing operations. 4.2.15Ourabilitytopenetratenewmarkets We are leveraging our knowledge, experience and best
practices in simulation-based aviation training and optimization to penetrate
the simulation-based training market in healthcare. As we operate in this market, unforeseen difficulties and
expenditures could arise, which may have an adverse effect on our operations,
profitability and reputation. Penetrating a new market is inherently more
difficult than managing within our already established markets. 4.2.16Lengthofsales
cycle The sales cycle for our products and services can be long and
unpredictable, ranging from 6 to 18 months for civil aviation applications and
from 6 to 24 months or longer for defence and security applications. During the
time when customers are evaluating our products and services, we may incur
expenses and management time. Making these expenditures in a period that has no
corresponding revenue will affect our operating results and could increase the
volatility of our share price. We may pre-build certain products in
anticipation of orders to come and to facilitate a faster delivery schedule to
gain competitive advantage; if orders for those products do not materialize
when expected, we have to carry the pre-built product in inventory for a period
of time until a sale is realized. Government procurement policies often allow unsuccessful
bidders to protest a contract award. The protest of a contract awarded to CAE
may result in the cancellation of our award, extend the period before which we
can start recognizing revenue or cause us to incur material legal fees. 4.2.17Returnsto shareholders Payment of dividends, the repurchase of shares under our NCIB
and other cash or capital returns to our shareholders depend on various
factors, including our operating cash flows, sources of capital, the
satisfaction of solvency tests and other financial requirements, our operations
and financial results, as well as CAE’s dividend and other policies which may
be reviewed from time to time. 4.2.18Information technology systems An information technology system failure or non-availability,
cyber-attack or breach of systems security could disrupt our operations, cause
the loss of, corruption of, or unauthorized access to business information and
data, compromise confidential or classified information belonging to CAE, our
employees, or our business partners, including aircraft OEMs and Defence and
Security customers, expose us to regulatory investigation, litigation or
contractual penalties or cause reputational harm. We depend on information
technology infrastructure and systems, hosted internally or outsourced, to
process, transmit and store electronic data and financial information, to
manage business operations and to comply with regulatory, legal, national
security, contractual and tax requirements. These information technology
networks and systems are essential to our ability to perform day-to-day
operations and to the effective operation of our business. If the systems do
not operate as expected or when expected, this may have anegative
effect on our operations, reporting capabilities, profitability and reputation.
A series of governance processes are in place to mitigate this risk.


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We may, from time to time, replace or update our information
technology networks and systems. The implementation of, and transition to, new
networks and systems can temporarily disrupt our business activities and result
in productivity disruptions. 4.2.19Reliance on third-party providers for
information technology systems and infrastructure management We have outsourced certain information technology systems
maintenance and support services and infrastructure management functions, to
third-party service providers. If these service providers are disrupted or do
not perform effectively, it may have a material adverse impact on our
operations and/or we may not be able to achieve the expected cost savings and
may have to incur additional costs to correct errors made by such service
providers. Depending on the function involved, such errors may also lead to business
disruption, processing inefficiencies and/or security vulnerability. 4.2.20Cybersecurity We may experience cybersecurity threats to our information
technology infrastructure and systems, and unauthorized attempts to gain access
to our proprietary or sensitive information, as may our customers, suppliers,
subcontractors and joint venture partners. Our dependence on information
technology infrastructure and systems and our business relationships with
aircraft OEMs and defence and security customers may increase the risk of such
cybersecurity threats. We may experience similar security threats at customer
sites that we operate or manage. We must rely on our own safeguards as well as
the safeguards put in place by our partners to mitigate the threats. Our partners
have varying levels of cybersecurity expertise and safeguards, and their
relationships with government contractors, such as CAE, may increase the
likelihood that they are targeted by the same cyber threats we face. Our business requires the appropriate and secure utilization
of sensitive and confidential information belonging to third parties such as
aircraft OEMs and national defence forces. Our customers or governmental
authorities may question the adequacy of our threat mitigation and detection
processes and procedures and this could have a negative impact on existing
business or future opportunities. Furthermore, given the highly evolving nature
of cyber or other security threats or disruptions and their increased
frequency, the impact of any future incident cannot be easily predicted or
mitigated, and the costs related to such threats or disruptions may not be
fully insured or indemnified by other means. We have implemented security
controls, policy enforcement mechanisms, management oversight and monitoring
systems in order to prevent, detect and address potential threats. The Audit
Committee of our Board of Directors is responsible for the oversight of our
cybersecurity risk mitigation strategy. Any prior cyber-attacks directed at us
have not had a material impact on our financial results and we believe our
threat detection and mitigation processes and procedures are adequate.


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4.3Risks relating to the market 4.3.1Foreign exchange Our operations are global with approximately 90% of our
revenue generated from worldwide exports and international activities generally
denominated in foreign currencies, mainly the U.S. dollar, the Euro and the
British pound. Our revenue is generated approximately one-third in each of the
U.S, Europe and the rest of the world. A significant portion of the revenue generated in Canada is
in foreign currencies, while a large portion of our operating costs is in
Canadian dollars. When the Canadian dollar increases in value, it negatively
affects our foreign currency-denominated revenue and hence our financial
results. We continue to hold a portfolio of currency hedging positions intended
to mitigate the risk to a portion of future revenues presented by the
volatility of the Canadian dollar versus foreign currencies. The hedges are intended
to cover a portion of the revenue in order to allow the unhedged portion to
match the foreign cost component of the contract. It is not possible to
completely offset the effects of changing foreign currency values, which leaves
some residual exposure that may impact our financial results. This residual
exposure may be higher when currencies experience significant short term
volatility. When the Canadian dollar decreases in value, it negatively affects
our foreign currency-denominated costs. In order to minimize the impact foreign
exchange market fluctuations may have, we also hedge some of the foreign
currency costs incurred in our manufacturing process. Business conducted through our foreign operations are
substantially based in local currencies. A natural hedge exists by virtue of
revenues and operating expenses being in like currencies. However, changes in
the value of foreign currencies relative to the Canadian dollar creates
unhedged currency translation exposure since results are consolidated in
Canadian dollars for financial reporting purposes. Appreciation of foreign
currencies against the Canadian dollar would have a positive translation impact
and a devaluation of foreign currencies against the Canadian dollar would have
the opposite effect. 4.3.2Availability of capital We have various debt facilities with maturities ranging
between May 2017 and October 2036, and we cannot provide assurance that these
facilities will be refinanced at the same cost, for the same duration and on
similar terms as were previously available. 4.3.3Pension plans Economic and capital market fluctuations can negatively
affect the investment performance, funding and expense associated with our
defined benefit pension plans. Pension funding for these plans is based on actuarial
estimates and is subject to limitations under applicable regulations. Actuarial
estimates prepared during the year were based on, amongst others, assumptions
regarding the performance of financial markets, discount rates, inflation
rates, future salary increases, estimated retirement ages and mortality rates.
The actuarial funding valuation reports determine the amount of cash
contributions that we are required to make into registered retirement plans.
There can be no assurance that our pension expense and the funding of these
plans will not increase in the future, negatively impacting our earnings and
cash flow. We seek to mitigate this risk by implementing policies and
procedures designed to control investment risk and through ongoing monitoring of
our funding position.


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Additional cash contributions, if
required, to fund our defined benefit and defined contribution pension plans
may have a negative effect on our operations, financial results and reputation. 4.3.4Doing business in foreign countries We have operations in over 35 countries including our joint
venture operations and sell our products and services to customers around the
world. Sales to customers outside Canada made up approximately 90% of revenue
in fiscal 2017. We expect sales outside Canada to continue to represent a
significant portion of revenue in the foreseeable future. As a result, we are
subject to the risks of doing business internationally, including geopolitical
instability. These are the main risks we are facing: -Change
in laws and regulations; -Tariffs,
embargoes, controls sanctions and other restrictions; -General
changes in economic and geopolitical conditions; -Complexity
and corruption risks of using foreign representatives and consultants. Sales to foreign customers are subject to Canadian and
foreign laws and regulations, including, without limitation, the Corruption of
Foreign Public Officials Act (Canada), the Foreign Corrupt Practices Act
(United States) and other anti-corruption laws. While we have stringent policies
in place to comply with such laws, failure by CAE, our employees, foreign
representatives and consultants or others working on our behalf to comply with
it could result in administrative, civil, or criminal liabilities, including
suspension, debarment from bidding for or performing government contracts,
which could have a material adverse effect on us. We frequently team with
international subcontractors and suppliers who are also exposed to similar
risks. Changes to the political and regulatory environment in
countries in which we do business may lead to higher tariffs or stricter trade
policies that may have a negative impact on our sales, financial results and
business model. 4.3.5Political instability Political instability in certain regions of the world may be
prolonged and unpredictable. A prolongation of political instability could lead
to delays or cancellation of orders, deliveries or projects, or the
expropriation of assets, in which we have invested significant resources,
particularly when the customers are state-owned or state-controlled entities.
Geo-political risks will change over time and CAE must respect any applicable
sanctions and controls applied in the countries in which we carry on business.
It is possible that in the markets we serve, unanticipated political
instability could impact our operating results and financial position. 4.3.6Income tax laws A substantial portion of our business is conducted in foreign
countries and is thereby subject to numerous countries’ tax laws and fiscal
policies. A change in applicable tax laws, treaties or regulations or their
interpretation, including any new action to
address Base Erosion and Profit Shifting (BEPS) released by the Organization
for Economic Co-Operation and Development (OECD),could result in a
higher effective tax rate on our earnings which could significantly impact our
financial results.


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5.DIVIDENDS AND DISTRIBUTIONS 5.1Dividends We paid a dividend of $0.075 per share in the first quarter
and $0.08 per share in the second, third and fourth quarter of fiscal 2017.
These dividends were eligible under the Income Tax Act (Canada) and its
provincial equivalents. Our Board of Directors has the discretion to set the amount
and timing of any dividend. The Board reviews the dividend policy once a year
based on the cash requirements of our operating activities, liquidity
requirements and projected financial position. We expect to declare dividends
of approximately $85.9 million in fiscal 2018 based on our current dividend
policy and the number of common shares outstanding as at March 31, 2017. CAE’s Dividend Reinvestment Plan provides that Canadian
resident shareholders can elect to receive Common Share dividends in lieu of
cash dividends. During fiscal 2015, 2016 and 2017, CAE issued 1,817,917,
1,589,080 and 221, 020 common shares, respectively, as stock dividends. 5.2Repurchase and cancellation of shares On February 19, 2016, the Company announced that it received
approval from the Toronto Stock Exchange (TSX) to purchase, by way of a normal
course issuer bid (NCIB) up to 5,398,643 of its common shares, representing 2%
of the 269,932,164 issued and outstanding common shares as of February 12,
2016. The NCIB began on February 23, 2016, and ended on February 22, 2017. On February 14, 2017 the Company announced the renewal of the
NCIB to purchase up to 5,366,756 of its common shares, representing 2% of the
268,337,816 issued and outstanding common shares as of February 9, 2017. The
NCIB began on February 23, 2017 and will end on February 22, 2018 or on such
earlier date when the Company completes its purchases or elects to terminate
the NCIB. These purchases will be made on the open market plus brokerage fees
through the facilities of the TSX and/or alternative trading systems at the
prevailing market price at the time of the transaction, in accordance with the
TSX’s applicable policies. All common shares purchased pursuant to the NCIB
will be cancelled. As at March 31, 2017, the Company had repurchased and
cancelled a total of 2,490,900 common shares (2016 – 515,200), at a weighted
average price of $16.73 per common share (2016 – $15.01), for a total
consideration of $41.7 million (2016 – $7.7 million). An excess of the shares’
repurchase value over their carrying amount of $36.1 million (2016 – $6.6
million) was charged to retained earnings as share repurchase premiums. 6.DESCRIPTIONOFCAPITALSTRUCTURE Our authorized capital consists of an unlimited number of
common shares without par value and an unlimited number of preferred shares
without par value, issuable in series. Each common share entitles the holder thereof to dividends
if, as and when declared by our Directors, to one vote at all meetings of
holders of common shares and to participate, pro rata, with the holders of
common shares, in anydistribution of our assets upon
liquidation, dissolution or winding-up, subject to the prior rights of holders
of shares ranking in priority to common shares.


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As at the close of business on March 31, 2017 and May 31,
2017 respectively, 268,397,224 and 268,477,014 common shares were issued and
outstanding. There are no preferred shares issued and outstanding. 7.MARKETFORSECURITIES The outstanding common shares of
CAE are listed and posted for trading on The Toronto Stock Exchange and on the
New York Stock Exchange under the symbol CAE. 7.1TradingPriceandVolume CAEInc.
  TSXSharePriceInformation-FY2017Month
 Min.
 Max.
 TotalVolumeApril-16
 14.50
 15.09
 9,371,977May-16
 14.56
 16.56
 12,535,549June-16
 15.40
 16.84
 13,394,190July-16
 15.47
 17.42
 8,220,475August-16
 17.09
 18.72
 11,079,197September-16
 17.85
 19.11
 9,001,299October-16
 18.48
 19.15
 8,058,405November-16
 18.40
 19.93
 14,249,684December-16
 18.53
 19.87
 10,256,338January-17
 18.35
 19.06
 9,281,583February-17
 18.38
 20.72
 13,931,730March-17
 19.44
 20.66
 10,056,342


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NYSESharePriceInformation-FY2017Month
 Min.(USD)
 Max.(USD)
 TotalVolumeApril-16
 11.06
 12.00
 671,187May-16
 11.39
 12.70
 1,035,424June-16
 11.85
 13.27
 1,150,291July-16
 11.92
 13.35
 1,253,133August-16
 12.98
 14.34
 1,295,165September-16
 13.57
 14.63
 1,400,713October-16
 13.84
 14.62
 1,278,062November-16
 13.75
 14.89
 2,208,914December-16
 13.75
 14.87
 2,340,222January-17
 13.80
 14.57
 1,763,620February-17
 14.04
 15.88
 2,147,322March-17
 14.53
 15.49
 3,781,102
 8.DIRECTORSANDOFFICERS The Directors of CAE are elected at
each annual meeting of shareholders and hold office until the next annual
meeting of shareholders or until their successors are elected or appointed. The
names and municipalities of residence of the Directors and Officers of CAE as
of the date hereof, the positions and offices held by them in CAE, their
respective principal occupations for the last five years, and the year in which
they became a Director are set forth below. More information concerning CAE’s Directors may be found in
the Management Proxy Circular dated June 14, 2017, in connection with our
Annual Meeting of Shareholders to be held on August 10, 2017. In addition to fulfilling all statutory requirements, the
Board of Directors oversees and reviews: (i) the strategic and operating plans
and financial budgets and the performance against these objectives; (ii) the
principal risks and the adequacy of the systems and procedures to manage these
risks; (iii) the compensation and benefit policies; (iv) management development
and succession planning; (v) business development initiatives; (vi) the
communications policies and activities, including shareholder communications;
(vii) the integrity of internal controls and management information systems;
(viii) the monitoring of the corporate governance system; and (ix) the
performance of the President and Chief Executive Officer. The Committees of the Board of Directors are the Audit
Committee, the Governance Committee and the Human Resources Committee.


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8.1NameandOccupation DIRECTORS  Name and Municipality
   of Residence and Year First Became a Director
 PrincipalOccupationMARGARET S. (PEG) BILLSON
  Albuquerque, New Mexico, USA
  (2015)
 Ms. Billson is a veteran aviation business leader with over
  30 years of experience leading technology rich companies, including serving
  as the President & CEO of BBA Aviation Aftermarket Services, a division
  of BBA Aviation plc., as President & General Manager of the Airplane
  Division of Eclipse Aviation and as the Vice-President & General Manager
  of Airframe Systems at Honeywell International Inc. Ms. Billson has a
  Master’s degree in Engineering-Aerospace and, in recognition of her industry
  accomplishments, has been inducted into Embry-Riddle Aeronautical
  University’s Hall of Fame. Ms. Billson is also an instrument-rated pilot.
  Ms. Billson is a member of the Audit Committee.HON.MICHAELM.FORTIER,PC
  TownofMountRoyal,Quebec,Canada
  (2010)
 Mr. Fortier joined RBC Capital Markets (RBCCM) as a
  Vice-Chairman in 2010. Prior to joining RBCCM, Mr. Fortier was a partner of
  Ogilvy Renault LLP (now Norton Rose Fulbright Canada LLP) and a Senior
  Advisor to Morgan Stanley in Canada.
  Between 2006 and 2008, Mr. Fortier held various positions
  in the Government of Canada, as Minister of Public Works and Government
  Services, Minister of International Trade and Minister responsible for
  Greater Montréal.  Prior to that, Mr. Fortier was active in the investment
  banking industry, first as a Managing Director with Credit Suisse First
  Boston (1999 - 2004) and then as a Managing Director with TD Securities (2004
  - 2006).
  Mr. Fortier also practiced law with Ogilvy Renault LLP
  (1985 - 1999) in the areas of corporate finance and mergers and acquisitions.
  He was based in London, England for several years during this period.
  Mr. Fortier is a member of the Human Resources Committee.PAULGAGNÉ,CPA,CA
  Senneville,Quebec,Canada(2005)
 Mr.  Gagné is a Director of various public and private
  companies. Mr. Gagné serves on the Audit and Organization and Compensation
  Committees of the board of Textron Inc., as well as the Audit, Human
  Resources and Environment, Health & Safety Committees of Norbord Inc. Mr.
  Gagné worked with Avenor Inc. (1976 - 1997), last serving as its Chief
  Executive Officer. In 1998, he joined Kruger Inc., where he served as
  Consultant in Corporate Strategic Planning (1998 – 2002). Mr. Gagné is a
  Chartered Professional Accountant.
  Mr. Gagné is Chair of the Human Resources Committee and is
  a member of the Audit Committee.JAMESF.HANKINSON,CPA,CA
  Toronto,Ontario,Canada(1995)
 Mr. Hankinson is a corporate Director. He was the President
  and Chief Executive Officer of Ontario Power Generation Inc. from 2005 until
  his retirement in 2009. He has broad management experience in energy,
  transportation, resource and manufacturing-based businesses. Mr. Hankinson
  was previously a Director of ENMAX Corporation, a private company, from 2010
  to May 2016. He served as President and Chief Executive Officer of New
  Brunswick Power Corporation (1996 - 2002). In 1973, he joined Canadian
  Pacific Limited and served as President and Chief Operating Officer (1990 -
  1995). Mr. Hankinson is a Chartered Professional Accountant.
  Mr. Hankinson is the Chairman of the board.ALAN
  N. MACGIBBON, CPA, CA
  Oakville,
  Ontario, Canada
  (2015)
 Mr. MacGibbon has been non executive Vice Chair of the law
  firm Osler, Hoskin & Harcourt LLP since July 2014 and a director of
  Toronto Dominion Bank since April 2014. He was Global Managing Director,
  Quality, Strategy and Communications of Deloitte Touche Tohmatsu Limited
  (2011 - 2013), and was also Senior Counsel to Deloitte LLP (Canada) (2012 -
  2013), and the Managing Partner and Chief Executive of Deloitte LLP (Canada)
  prior to June 2012. Mr. MacGibbon holds an undergraduate degree in
  business administration and an honorary doctorate degree from the University
  of New Brunswick. Mr. MacGibbon is a Chartered Professional Accountant, a
  Chartered Accountant and a Fellow of the Chartered Professional Accountants
  of Ontario.
  Mr. MacGibbon isChairof theAudit Committee.HON.JOHNP.MANLEY,PC,OC
  Ottawa,Ontario,Canada
  (2008)
 Mr. Manley is President and Chief Executive Officer of the
  Business Council of Canada (not-for-profit) and Chairman of Canadian Imperial
  Bank of Commerce. From 2004 to 2009, he served as Counsel to McCarthy
  Tétrault LLP, a national law firm. Prior to that, Mr. Manley had a 16-year
  career in politics, serving as Deputy Prime Minister of Canada and Minister
  in the portfolios of Industry, Foreign Affairs and Finance. Mr. Manley
  obtained a Bachelor of Arts from Carleton University and a Juris Doctorate
  from the University of Ottawa, is a certified Chartered Director from
  McMaster University and holds honorary doctorates from six Canadian
  universities.
  Mr. Manley is a member of the Human Resources Committee and
  the Governance Committee.FRANÇOIS OLIVIER
  Montreal, Quebec, Canada
  (Elected February 17, 2017)
 Mr. Olivier became President and Chief Executive
  Officer of Transcontinental Inc. in 2008. After joining the Printing
  sector of Transcontinental in 1993, he went on to become the General
  Manager of one to several printing facilities, and ultimately the Senior
  Vice-President of the Newspaper Group. He later took on the role of President
  of the Information Products Printing sector, and became Chief Operating
  Officer of Transcontinental in 2007. Prior to joining Transcontinental,
  François Olivier worked as General Manager of Canada Packers. He has a
  B.Sc. from McGill University and is a graduate of the Program for Management
  Development at Harvard Business School.MARCPARENT
  Montreal,Quebec,Canada(2008)
 Mr. Parent has been the President and CEO of CAE Inc. since
  October 2009. He joined the Company in February 2005 as Group President,
  Simulation Products, was appointed Group President, Simulation Products
  and Military Training & Services in May 2006, and then Executive Vice
  President and Chief Operating Officer in November 2008. Mr. Parent has over
  30 years of experience in the aerospace industry. Before joining CAE, Mr.
  Parent held various positions with Canadair and within Bombardier Aerospace
  in Canada and the U.S. Mr. Parent is past Chairman of the Board of Directors
  of the Aerospace Industries Association of Canada (AIAC) and of Aéro Montréal
  (Québec’s aerospace cluster). Mr. Parent graduated as an engineer from École
  Polytechnique, is a graduate of the Harvard Business School Advanced
  Management Program and holds an honourary doctorate from École Polytechnique.
  Mr. Parent is an active pilot holding a Transport Canada Airline
  Transport Pilot license.GENERALPETERJ.SCHOOMAKER,USA(RET.)
  Tampa,Florida,USA(2009)
 General Schoomaker is a consultant on defence matters. He
  is a former four-star U.S. Army general who was recalled from retirement to
  active duty as the 35th Chief of Staff, Army and member of the U.S. Joint
  Chiefs of Staff (2003 - 2007). Prior to his first retirement, he served as
  Commander‐in‐Chief, U.S. Special Operations Command (1997 -
  2000). He was the owner/President of Quiet Pros, Inc. (defence consulting)
  (2000 - 2003). General Schoomaker spent over 35 years in a variety of command
  and staff assignments with both conventional and special operations forces.
  General Schoomaker is a Director of several  private and non-profit
  companies, the Special Operations Warrior Foundation and was a Director of
  CAE USA Inc. (2007 - 2009).
  General Schoomaker is a member of the Human Resources
  Committee and the Governance Committee.ANDREWJ.STEVENS
  Cheltenham, Gloucestershire, UK(2013)
 Mr. Stevens is a corporate Director based in the U.K who
  has operating experience globally in the aerospace and defence sector. 
  Beginning with the Dowty Group, a leadingBritishmanufacturer of aircraft equipment
  (1976 - 1994), Bowthorpe plc (1994 - 1996), Messier-Dowty as Managing
  Director then Chief Operating Officer (1996 - 2000), Rolls-Royce, where he
  served as Managing Director Defence Aerospace (2001 - 2003), and Cobham plc
  as a Board member where he served variously as Group Managing Director,
  Aerospace Systems, Chief Operating Officer and Chief Executive Officer (2003
  - 2012).
  Mr. Stevens is a Chartered Engineer, with a 1st
  Class honour degree in Product Engineering from Aston University. He is a
  Fellow of the Royal Aeronautical Society, a Fellow of the Institution of
  Electrical Engineers and was awarded a honorary Doctor of Science in 2013.
  Mr. Stevens is Chair of the Governance Committee and a
  member of the Human Resources Committee.KATHARINEB.STEVENSON
  Toronto,Ontario,Canada(2007)
 Ms. Stevenson is a corporate Director who has served on a
  variety of corporate boards in Canada and the United States. She was formerly
  the global Treasurer of Nortel Networks Corporation (Nortel).  Prior to
  joining Nortel, she held progressively senior finance roles in investment and
  corporate banking at J.P. Morgan and Company, Inc. Ms. Stevenson serves as
  Director of Canadian Imperial Bank of Commerce and chairs its Corporate
  Governance Committee. She is also a Director of Open Text Corporation and Capital
  Power Corporation and serves on their Audit Committees.
  Ms. Stevenson holds a Bachelor of Arts degree (Magna Cum
  Laude) from Harvard University and has the professional designation ICD.D
  granted by the Institute of Corporate Directors (ICD).
  Ms. Stevenson is a member of the Governance Committee and
  Audit Committee.


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OFFICERS NameandMunicipalityofResidenceandOfficeheldwithCAE
 PrincipalOccupationNICKLEONTIDIS
  Ile-Bizard, Quebec,Canada
 GroupPresident,CivilAviationTrainingSolutions;previouslyExecutiveVice-President,StrategyandBusinessDevelopment(2009to2013),ExecutiveVicePresidentSales,MarketingandBusinessDevelopment-CivilTrainingandServices(2005-2009).GENNARO(GENE)A.COLABATISTTO
  Washington, DC, USA
 GroupPresident,DefenceandSecurity,withCAEsince2012;formerlySeniorVicePresident,ProgramDevelopmentfortheIntelligence,SurveillanceandReconnaissanceGroupatScienceApplicationsInternationalCorporation(2008-2012)andbeforethatPresidentofOliveGroupNorthAmerica.SONYABRANCO,CPA,CA
  Montreal,Quebec,Canada
 VicePresident,FinanceandChiefFinancialOfficer since May 2016,withCAEsince2008; formerlyVicePresident,
  FinanceandCorporateController,and
  DirectorPlanningandForecasting.Ms.BrancoisaCharteredProfessionalAccountant.MARK HOUNSELL
  Town of Mount Royal,Quebec,Canada
 GeneralCounsel,ChiefComplianceOfficerandCorporateSecretary,withCAEsinceFebruary
  2016; formerly Chief Legal Officer and Corporate Secretary of Aimia Inc.
  (2006-2016).CONSTANTINO MALATESTA, CPA, CA
  Laval, Quebec, Canada
 Vice President and Corporate Controllersince May 2016, with
  CAE since 2006; formerly Director Finance, CAE Oxford Aviation Academy
  (2014-2016), and Director Finance and Assistant Corporate Controller
  (2011-2014).   Mr. Malatesta is a Chartered Professional Accountant and U.S.
  Certified Public Accountant.MARIO PIZZOLONGO, CPA, CA
  Blainville, Quebec, Canada
 Treasurer, with CAE since January 2016; formerly Vice
  President, Finance and Treasurer of Future Electronics Inc. (2010-2016).Mr. Pizzolongo is a Chartered Professional
  Accountant.


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All Directors and officers as a group (17 persons) owned
beneficially or exercised control or direction over 325,996 Common Shares
representing 0.12% of the class as at June 14, 2017. 8.2CeaseTradeOrders,Bankruptcies,PenaltiesorSanctions None of the Directors of CAE is, or within ten years prior
hereto has been, subject to a cease trade or similar order except as set out
below. Mr. Manley was a Director of Nortel Networks Corporation (“Nortel”)
and Nortel Networks Limited (“NNL”) when Nortel and NNL were granted
creditor protection under the Companies’ Creditors Arrangement Act (“CCAA”)
on January 14, 2009, and under other similar bankruptcy legislation in the U.S.
and other jurisdictions. Mr. Gagné resigned as Director of Gemofor Inc., a privately
held manufacturer of sawmill equipment, in November 2006. Within a year of his
resignation Gemofor Inc. filed for bankruptcy. In addition, Mr. Gagné was a
Director of Fraser Papers Inc. (“Fraser”) from April 2004 through
February 2011. In June 2009, Fraser initiated a court-supervised restructuring
under the CCAA, and under other similar bankruptcy legislation in the U.S. As
part of its restructuring, Fraser sold all of its productive assets and
distributed the proceeds from the sale of those assets pursuant to a
Consolidated Plan of Compromise and Arrangement which was approved by the courts
in February2011. Fraser’s common shares were
suspended from trading on the TSX on June 23, 2009.  On March 10, 2011, the
Ontario Securities Commission issued a cease trade order against Fraser.


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9.TRANSFERAGENTANDREGISTRAR CAE only has common shares issued. CAE’s transfer agent and
registrar is Computershare Trust Company of Canada located at 100 University
Avenue, 8th Floor, Toronto, Ontario, M5J 2Y1. 10.AUDITCOMMITTEE 10.1Mandate ThemandateofCAE’s AuditCommitteeisassetoutinScheduleBhereto. 10.2Membership The members of CAE’s Board of Directors’ Audit
Committee are: -Mr. Alan N. MacGibbon (Chair) -Ms. Margaret S. (Peg) Billson -Mr. Paul Gagné -Ms. Katharine B. Stevenson Each of these members is independent
and financially literate. Mr.
MacGibbon was formerly the Managing Partner and Chief Executive of Deloitte LLP
(Canada), a member of Deloitte’s Board of Directors, and a member of the
Executive and Board of Directors of Deloitte Touche Tohmatsu Limited. Mr.
MacGibbon is a chartered professional accountant and a Fellow of the Ontario
Institute of Chartered Professional Accountants. Ms. Billson has extensive managerial experience
within the aerospace sector. This managerial experience, set out in the
Directors’ table above, has provided Ms. Billson with significant insight into
financial issues encountered by companies conducting business within the
aerospace sector. Mr. Gagné is a Chartered Professional Accountantwho served on the Audit Committees of the Boards of Directors of Ainsworth
Lumber Co. Ltd. and Textron Inc. and previously chaired CAE’s Audit Committee. Ms. Stevenson has extensive financial and
accounting experience, including from her services as Treasurer of Nortel
Networks Corporation, as a finance executive with J.P. Morgan Chase & Co.,and
as former Chair of the Audit Committee ofOSI
Pharmaceuticals, Inc. She currently serves on the Audit Committees of
Open Text Corporation and Capital Power Corporation and chairs the Corporate
Governance Committee of Canadian Imperial Bank of Commerce.


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11.APPROVAL OF SERVICES The Audit Committee is responsible for the appointment,
compensation, retention and oversight of the work of CAE’s independent auditor.
The Audit Committee must pre-approve any audit and non-audit services performed
by PricewaterhouseCoopers LLP (“PwC”), CAE’s auditor, or such services
must be entered into pursuant to the policies and procedures established by the
Committee. Pursuant to such policies the Audit Committee annually authorizes
CAE and our affiliates to engage the auditor for specified permitted tax,
financial advisory and other audit-related services up to specified fee levels.
The Audit Committee has considered and concluded that the provision of these
services by PwC is compatible with maintaining PwC’s independence. The Audit
Committee’s policy also identifies prohibited services that PwC is not to
provide to CAE. PwC has advised that they are independent with respect to CAE
within the meaning of the Code of Ethics of the “Ordre des comptables
professionnels agréés du Québec”. The following chart shows all fees paid to PwC by CAE and our
subsidiaries in the most recent and prior fiscal year for the various
categories of services (generic description only).  FEE TYPE
 2017
 2016($MILLIONS)1.Auditservices
 4.1
 3.82.Audit-relatedservices
 0.2
 0.63.Taxservices
 0.9
 0.9Total
 5.2
 5.3
  Audit fees are comprised of fees billed for professional
services for the audit of CAE’s annual financial statements    and services
that are normally provided by PwC in connection with statutory and regulatory
filings, including the audit of the internal controls over financial reporting
as required by the Sarbanes-Oxley legislation. Audit-related fees are comprised of fees relating to work
performed in connection with CAE’s acquisitions, translation and other
miscellaneous accounting-related services. Tax fees are mainly related to tax compliance support. 12.ADDITIONALINFORMATION Additional information, including Directors' and Officers'
remuneration and indebtedness, principal holders of CAE's securities, options
to purchase securities and interests of insiders in material transactions,
where applicable, is contained in the Management Proxy Circular dated June 14,
2017, in connection with CAE's Annual Meeting of Shareholders to be held on
August 10, 2017. Additional financial information, including comparative
consolidated audited financial statements and MD&A, are provided in CAE’s
Annual Financial Report to the shareholders for the financial year ended March
31, 2017. A copy of such documents may be obtained from the Vice President,
PublicAffairs and Global Communications or the
Corporate Secretary of CAE upon request, or are available online atwww.sedar.com,as well as CAE’s website atwww.cae.com.


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In addition, CAE will provide to any person or company, upon
request to the Vice President, Public Affairs and Global Communications or the
Corporate Secretary of CAE, the documents specified below: (a)WhenthesecuritiesofCAEareinthecourseofadistributionunderapreliminaryshortformprospectusorashortformprospectus: (i)onecopyofCAE’sannualinformationformtogetherwithonecopyofanydocument,orthepertinentpagesofanydocument,incorporatedbyreferenceinsuchannualinformationform; (ii)onecopyofCAE’scomparativefinancialstatementsforourmostrecentlycompletedfinancialyeartogetherwiththeaccompanyingreportoftheauditorsandonecopyofCAE’smostrecentinterimfinancialstatementsforany periodaftertheendofourmostrecently
completedfinancialyear; (iii)onecopyoftheinformationcircularinrespectofourmostrecentannualmeetingofshareholdersthatinvolvedtheelectionofDirectors;and (iv)onecopyofanyotherdocumentswhichareincorporatedbyreferenceintothepreliminaryshortformprospectusortheshortformprospectusandarenotrequiredtobeprovidedunder(i)to(iii)above;or (b)Atanyothertime,onecopyofanyotherdocumentreferredtoinclauses(i),(ii)and(iii)ofparagraph(a)above,providedthatCAEmayrequirethepaymentof areasonablechargeiftherequestismadebyapersonorcompany whoisnotasecurity holderofCAE.


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GLOSSARY  For thepurposesofthisAnnualInformationForm,thefollowingtermshavethemeanings
setoutbelow: “AIF”meanstheAnnualInformationForm “AnnualFinancialReport”meanstheAnnualReporttoShareholdersfortheyearendedMarch31,2017 “CBCA”meanstheCanadaBusinessCorporationsAct “CCAA”meanstheCompanies’CreditorsArrangement
Act “CDB”means CAE’sCommonEnvironment/CommonDataBase “Civil” means
Civil Aviation Training Solutions “Company” or “CAE” means CAE Inc. “Consolidated Financial Statements” means the
Consolidated Financial Statements for the year ended March 31, 2017 and the
notes thereto “Defence” means Defence and Security “FAA” means the U.S. Federal Aviation Administration “FFS”means
full-flight simulators “FY2015”means fiscal2015 “FY2016”means fiscal2016 “FY2017”means fiscal2017 “MD&A”meansCAE’sManagement’sDiscussionandAnalysisofFinancialConditionandResultsofOperations “MROs” means maintenance repair and
overhaul organizations “OEM”meanstheoriginalequipmentmanufacturer “OGC”
means theOpen Geospatial Consortium “PwC”means PricewaterhouseCoopersLLP “R&D”meansresearch and development “RPK”meansrevenuepassengerkilometers


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SCHEDULEA–SUBSIDIARIES AND OTHER INVESTMENTS Set forth below are the names of all the direct and indirect subsidiaries and other investments of CAE as at March 31, 2017. Please note that all entities are wholly owned, except as mentioned.  NameofSubsidiary or other investment

   JurisdictionofIncorporationCanada7320701 Canada Inc...........................................................................................................

   Canada9595058 Canada Inc.........................................................................................................................

   CanadaCAEHealthcareCanadaInc.....................................................................................................................................................................................................

   CanadaCAEInternationalHoldings Limited...............................................................................................................................................................................

   CanadaCAEMachinery Ltd........................................................................................................................................................................................................................................................................

   BritishColumbiaCAE Military Aviation Training Inc. ..................................................................................................

   CanadaCAE Mining Equipment Canada Inc................................................................................................

   CanadaCAE Operational Training Services Inc..........................................................................................

   CanadaCAERailwayLtd............................................................................................................................................................................................................................................................................

   CanadaCAEServices (Canada)Inc.........................................................................................................................................................................................................

   CanadaCAESimulatorServicesInc........................................................................................................................................................................................................

   QuébecCAEWoodProductsG.P.
   1....................................................................................................................................................................................................

   QuébecFlightSimulator-CapitalL.P.2....................................................................................................................................................................................................

   QuebecFlightSimulatorCapitalManagementInc.............................................................................................................................................................

   QuebecPresagisCanadaInc.....................................................................................................................................................................................................................................................................

   CanadaUnitedStatesAdvancedMedicalTechnologies,LLC......................................................................................................................................................................

   WashingtonCAE(US)Inc.................................................................................................................................................................................................................................................................................

   DelawareCAE(US)LLC................................................................................................................................................................................................................................................................................

   DelawareCAECivilAviationTrainingSolutionsInc.............................................................................................................................................................

   FloridaCAEDelawareBuycoInc..............................................................................................................................................................................................................................................................

   DelawareCAEFlightSolutionsUSAInc.................................................................................................................................................................................................

   DelawareCAEHealthcare,Inc......................................................................................................................................................................................................................................................................

   DelawareCAENorthEastTrainingInc.......................................................................................................................................................................................................

   DelawareCAEOxfordAviationAcademyPheonixInc...................................................................................................................................................

   ArizonaCAESimuFliteInc............................................................................................................................. ............................................................................................................................................................... ..........................................................................................................

   DelawareCAEUSAInc................................................................................................................................................................................................................................................................................

   DelawareCAE USA Mission Solutions Inc.......................................................................................................

   DelawareEmbraerCAETrainingServices,LLC.(49%).................................................................................................................................................

   DelawareEngenuity Holdings(USA)Inc........................................................................................................ ......................................................................................................................................................................................................................................................

   DelawareKVDBFlightTrainingServices,Inc.(49%)..........................................................................................................................................................

   ArizonaOxfordAirlineTrainingCenterInc.....................................................................................................................................................................................

   ArizonaParcU.S.Inc..................................................................................................................................................................................................................................................................................

   DelawarePresagisUSAInc...........................................................................................................................................................................................................................................................................

   CaliforniaRotorsimUSALLC.(50%)..............................................................................................................................................................................................................................................................

   DelawareEuropeARGERheinmetallDefenceElectronicsGmbh/CAEElektronikGmbH (50%) 3......................                                 ..............

   GermanyAviationPersonnelSupportServices Limited...............................................................................................................................................

   IrelandAviation Training Northeast Asia B.V. (50%)..................................................................................

   NetherlandsCAEAircrewTrainingServicesplc(78%)...................................................................................... .......................................................................

   UnitedKingdomCAEAviationTrainingB.V................................................................................................................................................................ .............................................................................................

   NetherlandsCAEBeyssGrundstücksgesellschaftGmbH................................................................................

   GermanyCAECenterAmsterdamB.V............................................................................................................ ...........................................................................................

   NetherlandsCAECenterBrusselsN.V................................................................................................................................................................ ...............................................................................................

   BelgiumCAE CFT B.V.....................................................................................................................................

   NetherlandsCAE CFT Holdings B.V......................................................................................................................

   NetherlandsCAECentreCopenhagenA/S......................................................................................................... ........................................................................................

   DenmarkCAECentreOsloAS........................................................................................................................

   NorwayCAECentreStockholmAB..............................................................................................................

   SwedenCAE Elektronik GmbH ......................................................................................................................

   GermanyCAEEngineeringKorlátoltFelelősségűTársaság.......................................................................

   HungaryCAEEurocoS.à.r.l............................................................................................................................

   LuxembourgCAEGlobalAcademy Évora,SA. ...................................................................................................

   PortugalCAEHealthcareGmbH..................................................................................................................................................................................................................................................................

   GermanyCAEHealthcareKFT.............................................................................................................................................................................................................................................................................................................................

   HungaryCAEHoldingsBV..............................................................................................................................                                 ............................................................................................................................................................................................................................................................

   NetherlandsCAEHoldingsLimited............................................................................................................................................................... ......................................................................................................

   UnitedKingdomCAEInternationalCapitalManagementHungaryLLC................................................................. ....................................................

   HungaryCAEInvestmentsS.àr.l................................................................................................................................................................ ...................................................................................................

   LuxembourgCAELuxembourgAcquisitionS.àr.l................................................................................................ ................................................................................

   LuxembourgCAELuxembourgFinancingS.àr.l................................................................................................. .................................................................................

   LuxembourgCAEManagementLuxembourgS.àr.l......................................................................................................................................................................................................................................................................................................................................................................................................................

   LuxembourgCAE Oxford Aviation Academy Amsterdam B.V.  ........................................................................ ...........................................................

   NetherlandsCAE Parc Aviation Jersey Limited ................................................................................................. ..................................................................................

   JerseyCAEServicesGmbH............................................................................................................................................................... .......................................................................................................

   GermanyCAEServices Italia,S.r.l. ............................................................................................................................................................... .................................................................................................

   ItalyCAEServiciosGlobalesdeInstruccióndeVuelo(España)S.L......................................................................................

   SpainCAESTSLimited............................................................................................................................... ............................................................................................................................................................... ...........................................................................................................

   UnitedKingdomCAETraining&ServicesBrusselsNV.......................................................................................................................................................................

   BelgiumCAETraining&ServicesUKLtd.......................................................................................................................................................................................

   UnitedKingdomCAETrainingAircraftB.V...............................................................................................................................................................................................................................................................

   NetherlandsCAETrainingNorwayAS................................................................................................................. ...............................................................................................................................................................................................................................................................

   NorwayCAE(UK)plc..................................................................................................................................................................................................................................................................................................................................................................

   UnitedKingdomCAEVerwaltungsgesellschaftmbH.................................................................................................................................................................................................................................

   GermanyCVSLeasingLimited(13.39%)...................................................................................................................................................................................................................................................................... .......................................................................................

   UnitedKingdomEmbraerCAETrainingServices(UK)Limited (49%)..................................................................(49%)                    ......................................................

   UnitedKingdomEurofighterSimulationSystemsGmbH(12%).............................................................................................................................................

   GermanyFlight Training Alliance GmbH (50%) .............................................................................................

   GermanyGCATFlight AcademyMaltaLimited...................................................................................................................................................

   MaltaHelicopterTrainingMediaInternationalGmbH(50%)................................................................. ....................................................

   GermanyHFTSHelicopterFlightTrainingServicesGmbH(25%)............................................................. ..................................................

   GermanyOxfordAviationAcademy (Oxford)Limited................................................................................... .....................................................................

   UnitedKingdomOxfordAviationAcademy EuropeAB............................................................................................. .............................................................................

   SwedenOxfordAviationAcademy EuropeanHoldingsAB...................................................................................................................................

   SwedenOxfordAviationAcademy FinanceLimited.................................................................................................................................................................................................................................................. .....................................................................

   IrelandOxfordAviationAcademy IrelandHoldingsLimited.....................................................................

   IrelandOxfordAviationAcademyNorwayHoldingsAS......................................................................................................................................

   NorwayParcAviation(UK)Limited ............................................................................................................... ............................................................................................................................................................... ...............................................................................................

   UnitedKingdomParcAviationEngineeringServices Limited................................................................................. ............................................................................................................................................................... ...................................................................

   IrelandParcAviationInternationalLimited....................................................................................................................................................................................................................................

   IrelandParcAviationLimited................................................................................................................................................................ ......................................................................................................

   IrelandParcAviationServicesLimited....................................................................................................................................................................................................................................................

   IsleofManParcInterimLimited ............................................................................................................................................................... .........................................................................................................

   IrelandParcSelectionLimited................................................................................................................................................................ ....................................................................................................

   IsleofManPresagisEurope(S.A.)..................................................................................................................................................................................................................................................................

   FranceRotorsims.r.l.(50%)........................................................................................................................................................................................................................................................................................ ........................................................................................................

   ItalyServiciosdeInstruccióndeVuelo,S.L.(80%)............................................................................... ................................................................

   SpainSim-Industries Production B.V......................................................................................................... NN

   NetherlandsSimubelN.V.(aCAEAviationTrainingCompany)...................................................................... .........................................................

   BelgiumSIVOpsTraining,S.L. (80%)............................................................................................................................................................... .....................................................................................................

   SpainOtherAACE Vietnam Limited Liability Company (50%) ........................................................................

   VietnamAsianAviationCentreofExcellence(Singapore)PteLtd. (50%)..................................................................................

   SingaporeAsianAviationCentreofExcellenceSdn.Bhd.(50%).................................................................

   MalaysiaCAEAircraftMaintenancePtyLtd. (50%).....................................................................................                                                                       ...............................................................................................................................................................                                 ................................................................................................................................................................................................................................................

   AustraliaCAE Australia Pty Ltd.........................................................................................................................

   AustraliaCAE Aviation Services Pte Ltd........................................................................................................

   SingaporeCAEAviationTrainingChileLimitada
   4.....................................................................................................................................................................

   ChileCAEAviationTrainingInternationalLtd...................................................................................................................................................................

   MauritiusCAEAviationTrainingPeruS.A.........................................................................................................................................................................................

   PeruCAEBruneiMulti-PurposeTrainingCenterSdn.Bhd.(60%)..............................................................................................

   BruneiCAECentreHongKongLimited.........................................................................................................................................................................................

   ChinaCAE CFT Korea Ltd...........................................................................................................................

   KoreaCAEChinaSupportServicesCompanyLimited.......................................................................................................................................

   ChinaCAEFlight&SimulatorServicesSdn.Bhd.......................................................................................................................................................

   MalaysiaCAEFlightandSimulatorServicesKoreaLtd. (50%)..................................................................................................................................

   KoreaCAEFlightTraining(India)PrivateLimited(50%)..................................................................................................................................

   IndiaCAEFlightTrainingCenterMexico,S.A. deC.V....................................................................................................................................

   MexicoCAEIndiaPrivateLimited.....................................................................................................................................................................................................

   IndiaCAEIntegratedEnterpriseSolutionsAustraliaPtyLtd....................................................................................................................

   AustraliaCAEJapanFlightTrainingInc...............................................................................................................................................................................................

   JapanCAE Maritime Middle East LLC (49%)............................................................................................

   UAECAEMelbourneFlightTrainingPtyLtd. (50%)........................................................................................................................................................

   AustraliaCAE Middle East L.L.C. (49%)........................................................................................................

   UAECAEMiddleEastHoldings Limited(50%)............................................................................................................................................................

   UAECAENewZealandPtyLimited................................................................................................................................................................................................

   NewZealandCAE Nigeria Flight Training Services Limited...............................................................................

   NigeriaCAE Oxford Aviation Academy (Singapore) Pte Ltd....................................................................

   SingaporeCAEShanghaiCompany,Limited...................................................................................................................................................................................

   ShanghaiCAESimulationTechnologies PrivateLimited.............................................................................................................................................

   IndiaCAESimulationTrainingPrivateLimited(25%)..........................................................................................................................................

   IndiaCAESingapore(S.E.A.)PteLtd..................................................................................................... ...................................................................................................................................................................................................................................................

   SingaporeCAESouthAmericaFlightTrainingdoBrasilLtda................................................................................................................................

   BrazilCAE-LIDERTrainingDoBrasilLtda.(50%).......................................................................................................................................................

   BrazilChinaSouthernWestAustraliaFlyingCollegePtyLtd(47%).............................................................................................

   AustraliaEmirates-CAEFlightTraining(L.L.C.)(49%)...................................................................................................................................................

   DubaiFlight Simulation Technique Centre Private Limited (48%).........................................................

   IndiaFlightTrainingDevice(Mauritius)Limited............................................................................................................................................................

   MauritiusHATSOFFHelicopterTrainingPrivateLimited(50%).......................................................................................................................

   IndiaInternationalFlightSchool(Mauritius)Ltd.........................................................................................................................................................

   MauritiusJAL CAE Flight Training Co., Ltd. (50%)........................................................................................

   JapanNationalFlyingTrainingInstitutePrivateLimited(51%)..............................................................................................................

   IndiaOxfordAviationAcademy (Australia)PtyLtd. (50%).....................................................................................................................................

   AustraliaOxfordAviationAcademy HoldingsPtyLtd. (50%)..........................................................................................................................................

   AustraliaParcAviationJapanLimited......................................................................................................................................................................................................

   JapanPegasus Uçus Egitim Merkezi A.S. (49.9%).................................................................................

   TurkeyPhilippineAcademyforAviationTraining,Inc.(20%)........................................................................................................................

   PhilippinesSabenaFlightAcademy–Africa(34%)...................................................................................................................................................................

   CamerounSIM-Industries Brasil Administração de Centros de Treinamento Ltda....................................

   BrasilSim-Lease Korea Ltd.........................................................................................................................

   KoreaSimulatorServiciosMexico,S.A. deC.V.............................................................................................................................................................

   MexicoZhuhaiFreeTradeZoneXiangYiAviationTechnology Company Limited. (49%)......................................

   ChinaZhuhaiXiangYiAviationTechnology Company Limited(49%)......................................................................................

   China


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INACTIVE NameofSubsidiary or other investment

   JurisdictionofIncorporationCAE Beteiligungsgesellschaft mbH...................................................................

   GermanyGCAT Flight Academy Germany GmbH..........................................................................

   GermanyCAEScreenplatesSA................................................................................................

   FranceInvertronSimulatorsplc...............................................................................................

   UnitedKingdomISDATSimulationSDNBHD(20%)...........................................................................

   MalaysiaParc-CVLimited...........................................................................................

   IrelandParcAviationTrainingLimited..........................................................................

   IrelandXtendInc................................................................................................................

   Utah
  Notes 1; 2; 3; 4 refer to a partnership.


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SCHEDULEB–AUDIT COMMITTEE MANDATE CAEINC. MEMBERSHIPANDRESPONSIBILITIESOF THE AUDIT COMMITTEE OF THE
BOARD OF DIRECTORS 1.ROLEANDMEMBERSHIP TheAuditCommittee(the“Committee”)shallbeacommitteeoftheBoardofDirectors. TheCommitteeshallconsistofthreetofivedirectors(oneofwhomshallbetheChairmanoftheCommittee).AllmembersoftheCommitteeshallbeindependentdirectors,asdeterminedbytheBoardtakingintoconsiderationapplicablelaws,regulationsandotherrequirementsandregulatoryguidelinesapplicabletosuchdetermination.EachmembershallannuallycertifytoCAEInc.(“CAE”orthe“Company”)astohisorherindependence,informcompliantwiththestandardsofindependenceset outbyregulatoryauthorities,stockexchangesandotherapplicablelaws,regulationsandrequirements.Eachmembershallbeabletoreadandunderstandfinancialstatements(balancesheet,incomestatement,cashflowstatement)thatpresentabreadthandlevelofcomplexityofaccountingissuesthataregenerallycomparabletothebreadthandcomplexityoftheissuesthatcanreasonablybeexpectedtoberaisedbyCAE’sfinancialstatements,orshallbecomeabletodosowithinareasonableperiodoftimeafterjoiningtheauditcommittee.Onemembershallqualifyasa“financialexpert”(asdefinedbyapplicableregulation)andthereforehavepastemploymentinfinance,accountingoranyothercomparableexperienceorbackgroundprovidingfinancialexpertise.TheCommitteecomposition,includingthequalificationsofitsmembers,shallcomplywiththerequirementsofregulatoryauthorities,stockexchangesandotherapplicablelaws,regulationsandrequirements,assuchrequirementsmaybeamendedfromtimetotime. TheChairmanoftheCommitteeanditsmembersshallbeelectedannuallybytheBoardofDirectorsfollowingrecommendationoftheGovernanceCommitteeandtheChairmanoftheBoard.IfthedesignatedChairmanoftheCommitteeisunabletoattendaCommitteemeeting,theotherCommitteememberspresentshallelectareplacementChairmanforthatmeeting. AmajorityofmembersoftheCommitteeshallconstituteaquorum. 2.RESPONSIBILITIES WorkcloselyandcooperativelywithsuchofficersandemployeesofCAE,itsauditors,and/orotherappropriateadvisorsandwithaccesstosuchinformationastheCommitteeconsiderstobenecessaryoradvisableinordertoperformitsdutiesandresponsibilities,asassignedbytheBoardofDirectors,inthefollowingareas: 3.REVIEWOFAUDITEDFINANCIALSTATEMENTS 3.1ReviewtheannualauditedconsolidatedfinancialstatementsandmakespecificrecommendationstotheBoardofDirectors.Aspartofthis
processtheCommitteeshould: ·Review the appropriateness of
and any changes to the underlying accounting principles and practices.


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·Review the appropriateness of
estimates, judgments of choice and level of conservatism of accounting
alternatives. ·Reviewannuallywithmanagement,externalandinternalauditorstheidentification,assessmentandresultingmitigationstrategyforfinancialrisks,andtheinputoftheintegratedriskassessmentintotheannualauditplanningcycle
withsubsequentquarterlyupdatesbyChiefFinancialOfficerofanymaterialchangeswithrespecttofinancialriskassessment.. ·OverseethereviewbyinternalauditoftheexistenceandeffectivenessofCAE’sgroup-wideriskmanagementprogram. ·Reviewtheannualauditedfinancialstatementsandactuarialvaluationreports,ifany,fortheSupplementaryPension,DesignatedExecutivePensionPlan,EmployeePensionPlan,U.S.401(K)RetirementSavingsPlansandothermaterialpensionplansoftheCompanyanditssubsidiaries. 4.ENGAGEMENTOFEXTERNALAUDITORS 4.1RecommendtotheBoardofDirectorstheappointmentoftheexternalindependentauditor,whichshallbeaccountabletotheBoardandtheauditcommitteeasrepresentativesoftheshareholders. 4.2Reviewandapprovalofengagementletter.AspartofthisreviewthecommitteereviewsandrecommendstotheBoardofDirectorsfortheirapprovaltheauditors’feesfortheannualaudit.TheCommitteeisresponsiblefor theoversightoftheworkoftheCompany’sauditorforthepurposeofpreparingorissuinganauditreportorrelatedwork,andtheauditorshallreportdirectlytotheCommittee.TheCommitteeshallpre-approvetheengagementof theexternalauditorsfor theaudit,anyaudit-relatedservices,advicewithrespecttotaxationmattersandotherpermittedservicesandfeesforsuchservices,includingapprovalprocessesforanysuchservicethatcomplywiththerequirementsofregulatoryauthorities,stockexchangesandotherapplicablelaws,regulationsandrequirements,asamendedfrom
timetotime. 4.3ReceiptofawrittenstatementnotlessthanannuallyfromtheexternalauditordescribingindetailallrelationshipsbetweentheauditorandCAEthatmayimpacttheobjectivityandindependenceoftheauditor.ReviewannuallywiththeBoardofDirectorstheindependenceoftheexternalauditorsandeitherconfirmtotheBoardofDirectorsthattheexternalauditorsareindependentinaccordancewithapplicablelistingrequirements,laws,regulationsandotherregulatoryguidelines,orrecommendthattheBoardofDirectorstakeappropriateactiontosatisfyitselfoftheexternalauditors’independence.ReviewandapproveCAE’shiringpoliciesregardingpartners,employeesandformerpartnersandemployeesofthepresentandformerexternalauditorofCAE. 5.REVIEWANDDISCUSSIONWITHEXTERNALAUDITORS 5.1Reviewwiththeexternalauditorsandmanagementtheannualexternalauditplansandagendawhichwouldincludeobjectives,scope,risksassessments,timing,materiality levelandfeeestimate. 5.2Requestandreviewanannualreportpreparedbytheexternalauditorsofanysignificantrecommendationstoimproveinternalcontroloverfinancialreportingandcorrespondingmanagementresponses.


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5.3Requestandreviewanannualreportpreparedbytheexternalauditorsregardingtheauditor’sinternalquality-controlprocedures,materialissuesraisedbythemostrecentinternalquality-controlreviewoftheauditors,orbyanyinquiryorinvestigationbygovernmentalorprofessionalauthorities,withinthepreceding5years,respectingoneormoreauditscarriedout bytheauditors,andanystepstakentodealwithanysuchissues. 5.4Holdtimelydiscussionswiththeexternalauditorsregarding(i)criticalaccountingpoliciesandpractices,(ii)alternativetreatmentsoffinancialinformationwithingenerallyacceptedaccountingprinciplesrelatedtomaterialitemsdiscussedwithmanagement,ramificationsthereofandtreatmentpreferredbytheexternalauditor,and(iii)othermaterialwrittencommunicationbetweentheexternalauditorandmanagement,includingthemanagementletter andscheduleofunadjusteddifferences. 5.5Meettoreviewanddiscusswiththeexternalauditorstheannualauditedfinancialstatementsandquarterlyfinancialstatements,includingdisclosuresinmanagementdiscussionandanalysis. 5.6Meetseparately,quarterly,withtheexternalauditors(includingtheleadpartner). 5.7Makespecificanddirectinquiryof theexternalauditors’work relatingto: ·Performanceofmanagementinvolvedinthepreparationoffinancialstatements. ·Anyrestrictionsonthescopeofauditwork. ·Thelevelofcooperationreceivedintheperformanceoftheaudit. ·Theeffectivenessoftheworkofinternalaudit. ·Anyunresolvedmaterialdifferencesofopinionordisputesbetweenmanagementandtheexternalauditors,andbedirectlyresponsibleforoverseeingtheresolutionofdisagreementsbetweenmanagementandtheexternalauditorsregardingfinancialreporting. ·Anytransactionsoractivities
whichmaybeillegalorunethical. ·Independenceoftheexternalauditorincludingthenatureandfeesofnon-auditservicesperformedbyexternalauditfirmanditsaffiliates. ·Anyothermattersodesired. 5.8Provideevaluationandregularfeedbacktotheexternalauditors. 6.REVIEWANDDISCUSSIONWITHINTERNALAUDITORS 6.1Reviewtheannualinternalauditplanincludingassessmentofauditrisk,plannedactivities,levelandnatureofreporting,auditorganizationandannualbudget. 6.2PeriodicallyreviewtheadequacyandeffectivenessoftheCompany’sdisclosurecontrolsandproceduresandtheCompany’sinternalcontroloverfinancialreporting,includinganysignificantdeficienciesandsignificantchangesininternalcontrols. 6.3Set andcommunicatetothedirectorofinternalaudithighexpectationsandholdhim/herandthedepartmentaccountableformeetingthem.Provideguidanceonreportedpotentialmanagementlapsesandevaluatethestatusandimplementationofrecommendations.


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6.4Meetseparately,regularly,withthedirectorofinternalaudit. 6.5Makespecificanddirectinquiryof theinternalauditors’work relatingto: ·Anysignificantrecommendationstoimprovefinancial,operationalandcomplianceinternalcontrolsandcorrespondingmanagementresponses. ·Thelevelofindependenceofinternalaudit. ·Anymaterialdisagreementwithmanagementorscopeorrestrictionsencounteredinthecourseofthefunction’swork. ·Anyothermattersodesired. 6.6DiscussgoalsandevaluatetheperformanceoftheDirectorofInternalAudit.Overseeatleastonceeveryfiveyearsanexternalreviewof theinternalauditfunction. 7.REVIEWANDDISCUSSIONWITHMANAGEMENT 7.1Reviewandassesstheadequacyandqualityoforganization,staffingandsuccessionplanningforaccountingandfinancialresponsibilities(includinginternalaudit). 7.2Reviewanalysespreparedbymanagementsettingforthsignificantfinancialreportingissuesandjudgementsmadeinconnectionwiththepreparationofthefinancialstatements,includinganalysesoftheeffectofalternativeand/ornewGAAPmethodsonthefinancialstatements. 7.3Discusswithmanagementtheannualauditedfinancialstatementsandquarterlyfinancialstatementsandtheindependentauditor,includingCAE’sdisclosuresunderManagement’sDiscussionandAnalysisofFinancialConditionandResultsofOperations(“MD&A”). 7.4Reviewwithmanagementtheannualperformanceofexternalandinternalauditandrespondtoresultsthereof. 7.5Reviewat leastannually withmanagement: ·Taxcompliance; ·ITandCyber-Security
risksandcontrols;and ·Capitalstructureappropriatenessandefficiency. 8.REVIEWANDDISCUSSIONWITHTHEHUMANRESOURCESCOMMITTEE 8.1Onrequest,providesupporttotheHumanResourcesCommitteeoftheBoard(“HRCommittee”)regardingmanagementincentivesandrelatedtopics(includingcompensationandappropriateuseofcorporateassets). 8.2SupporttheHRCommitteeinitsassessmentoftheincentivestructureandwhetheritcontributestoincreasedfraudorotherrisks.


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9.REVIEWOFPUBLICDISCLOSUREDOCUMENTS 9.1ReviewallmaterialpublicdocumentsrelatingtoCAE’sfinancialperformance,financialpositionoranalysesthereon,includingfinancialstatements,MD&A,annualandinterimearningspressreleasesandtheAnnualInformationForm(“AIF”),priortotheirrelease.ReviewandmonitorpracticesandproceduresadoptedbytheCompanytoassurecompliancewithapplicablelistingrequirements,laws,regulationsandotherrules,andwhereappropriate,makerecommendationsorreportsthereontotheBoardofDirectors.DiscussCAE’sfinancialinformationandearningsguidance,ifany,providedtoanalystsandratingagencies. 9.2Reviewmajorissuesregardingaccountingprinciplesandfinancialreportpresentations,includinganysignificantchangesintheaccountingprinciplestobeobservedinthepreparationoftheaccountsoftheCompanyanditssubsidiaries,orintheirapplication;majorissuesastotheCompany’sinternalcontrols;andanyspecialauditstepsadoptedinlightofmaterialcontroldeficiencies. 9.3Prepare/reviewsuchreportsoftheCommitteeasmayberequiredbyanyapplicablesecuritiesregulatoryauthoritytobeincludedintheCompany’s managementproxycircular
oranyotherdisclosuredocumentoftheCompany. 9.4TheCommitteeshallreviewandapprovetheproceduressetoutintheCompany’sCorporateCommunications&DisclosurePolicyandwillannuallyverifythatadequateproceduresexistwithintheCompanyforthereviewofitsdisclosureoffinancialinformationderivedfromitsfinancialstatements. 10.ETHICALANDLEGALCOMPLIANCE 10.1Oversee,review,andannuallyupdatetheCompany’scodeofbusinessconductandthecompany’ssystemtomonitorcompliancewithandenforcethis code. 10.2Review,withtheCompany’sgeneralcounsel,legalcomplianceandlegalmattersthatcouldhaveasignificantimpactontheCompany’sfinancialstatements. 11.OTHERRESPONSIBILITIES 11.1TheBoardmayreferfromtimetotimesuchmattersrelatingtothefinancialaffairsandriskmanagementoftheCompanyastheBoardmay
deemappropriate. 12.MEETINGS 12.1TheCommitteeshallmeetatsuchtimesasdeemednecessarybytheBoardortheCommitteeandshallreportregularlytotheBoard. 13.ENGAGEMENTOFPROFESSIONALSERVICES 13.1TheCommitteeisauthorizedtoengageindependentcounsel,andotheradvisers,asitdeterminesnecessarytocarryoutits duties.TheCompany shallprovideforappropriatefunding,asdeterminedbytheCommittee,forsuchservices. 14.HANDLINGOFCOMPLAINTS 14.1TheCommitteeshallmaintainproceduresforthereceipt,retentionandtreatmentofcomplaintsreceivedbytheCompanyregardingaccounting,internalaccountingcontrolsorauditingmatters,andtheconfidential,anonymoussubmissionbyemployeesoftheCompany ofconcernsregardingquestionableaccountingorauditingmatters.


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15.ANNUALREVIEW 15.1TheCommitteeshallreviewandassesstheadequacyofitsmandateannually,reporttotheBoardofDirectorsthereonandrecommendtotheBoardofDirectors(forapproval)anyproposedchangestoitsprocesses,proceduresandagendas,aswellasthis charter. 15.2TheCommitteeshallalsoperformanannualevaluationofthecomposition(includingconsideringperiodicallyrotatingitsmembers),independenceandperformanceoftheCommitteeandshallreporttotheChairmanoftheGovernanceCommitteeoftheCAEBoardofDirectorsthereon. 16.ORIENTATIONANDCONTINUINGEDUCATION 16.1Identifyandparticipatewhereappropriateornecessaryincontinuingauditcommitteeeducationreadingand/activities.