2011 ANNUAL INFORMATION FORM (Fiscal Year Ended March 31, 2011)         CORPORATE OFFICE 8585 Chemin Côte-de-Liesse Saint-Laurent, Québec June 16, 2011Canada H4T 1G6


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TABLE OF CONTENTS 1.CORPORATE STRUCTURE OF CAE.3 1.1Name, Address and Incorporation.3 1.2Inter-corporate Relationships.4 2.OVERVIEW OF CAE AND THE DEVELOPMENT OF ITS BUSINESS.4 2.1Overview..4 2.2Geographic and Segment Revenues and Locations.5 2.3CAEs vision.6 2.4Our strategy and value proposition.6 2.5Industry Overview and Trends.9 2.6Research and Development10 2.7Production and Services.11 2.8Specialized Skills and Knowledge.12 2.9Competition.13 2.10Components.14 2.11Intangible Properties.14 2.12Cycles.15 2.13Environmental Liabilities.15 2.14Employees.16 2.15Foreign Operations.16 3.DESCRIPTION OF THE BUSINESS SEGMENTS.17 3.1Simulation Products/Civil (SP/C)17 3.2Training & Services/Civil (TS/C)18 3.3SP/C and TS/C Market Trends and Outlook.22 3.4Simulation Products/Military (SP/M)25 3.5Training & Services/Military (TS/M)28 3.6SP/M and TS/M Market Trends and Outlook.30 3.7Military Contracts.33 3.8Healthcare Market34 4.RISK FACTORS.36 4.1Risks relating to the industry.36 4.2Risks relating to the Company.38 4.3Risks relating to the market41 5.DIVIDENDS.42 6.DESCRIPTION OF CAPITAL STRUCTURE.42
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7.MARKET FOR SECURITIES.42 7.1Trading Price and Volume.43 8.DIRECTORS AND OFFICERS.43 8.1Name and Occupation.44 8.2Cease Trade Orders, Bankruptcies, Penalties or Sanctions.53 9.TRANSFER AGENTS AND REGISTRARS.53 10.AUDIT COMMITTEE.54 10.1Mandate.54 10.2Membership.54 11.Approval of Services.54 12.ADDITIONAL INFORMATION..55 13.GLOSSARY..57 SCHEDULE A  SUBSIDIARIES.59 SCHEDULE B..63
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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, 2011, and the notes thereto (Consolidated Financial Statements) appear in the Annual Report to Shareholders for the year ended March 31, 2011 (Annual Report). The Consolidated Financial Statements were prepared in accordance with accounting principles generally accepted in Canada(Canadian GAAP). For a discussion of the principal difference between Canadian GAAP and the accounting principles generally accepted in the United States, see note 28to the Consolidated Financial Statements.  The information contained in the Managements Discussion and Analysis and the Consolidated Financial Statements for the year ended March 31, 2011, and the notes thereto, is specifically incorporated by reference into this Annual Information Form(AIF). Any parts of the Annual 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 2011(FY2011) refer to the period from April 1, 2010 to March 31, 2011, references to fiscal 2010 refer to the period from April 1, 2009 to March 31, 2010, and references to fiscal 2009 refer to the period from April 1, 2008 to March 31, 2009. This AIF contains forward-looking statements with respect to CAE and our subsidiaries based on assumptions which CAE considered reasonable at the time they were prepared and may include information concerning CAEs markets, future financial performance, business strategy, plans, goals and objectives. These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ sometimes materially from those contemplated by the forward-looking statements. Statements preceded by the word believe, expect, anticipate, intend, continue, estimate, may, will, should and/or similar expressions are forward-looking statements. CAE cautions the reader that the assumptions regarding future events, many of which are beyond the control of CAE, may affect the extent to which a particular projection materializes and/or could ultimately prove to be incorrect; accordingly, readers are cautioned not to place undue reliance on these forward-looking statements. Factors that could cause actual results or events to differ materially from current expectations are discussed in the section Risk Factors herein. CAE disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law or regulation. In particular, forward-looking statements do not reflect the potential impact of any merger, acquisition or other business combinations or divestitures that may be announced or completed after such statements are made. 1.CORPORATE STRUCTURE OF CAE 1.1Name, Address and Incorporation 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 theCanada 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.
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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 ownership interests of CAE are set out in Schedule A hereto. 2.OVERVIEW OF CAE AND THE DEVELOPMENT OF ITS BUSINESS 2.1Overview Following incorporation in 1947, CAEs primary business focused on the repair and overhaul of electronic and electro-mechanical equipment, as well as the design and installation of telecommunication and navigational systems.  By the early 1950s, CAE had started to pursue new areas of opportunity in the design, development and manufacture of flight, radar and weapons simulators for Canadian defence requirements.  A few years later, CAE began our commercial flight simulation activities. CAE is a world leader in providing simulation and modeling technologies and integrated training services primarily to the civil aviation industry and defence forces around the globe. We design, develop, manufacture and supply simulation tools and equipment and provide a wide range of training and other modeling and simulation-based services. This includes integrated modeling, simulation and training solutions for commercial airlines, business aircraft operators, aircraft manufacturers and military organizations. We also operate a global network of training centres serving pilots and maintenance staff.  We have launched initiatives in healthcare education and the mining industry that provide an avenue for us to leverage our capabilities and competencies in our core business. Our main products include full-flight simulators(FFSs), which replicate aircraft performance in a full array of situations and environmental conditions. Sophisticated visual systems simulate hundreds of airports and geo-specific terrain locations around the world, as well as a wide range of landing areas and flying environments. These work with motion and sound to create a realistic training environment for pilots and crews at all levels. CAE has built an excellent reputation and long-standing customer relationships based on more than 60 years of experience, strong technical capabilities, a highly trained workforce and global reach. CAE employs more than 7,500 people at more than 100 sites and training locations in over 20 countries. About 90% of CAEs annual revenues come from worldwide exports and international activities. We also offer a range of commercial-off-the-shelf (COTS) software through Presagis, a subsidiary that provides advanced COTS solutions for simulation, modeling and embedded applications. CAE Professional Services delivers strategic guidance and technical expertise to clients using simulation-based tools to address analysis, training and operational decision-making.  CAE Flightscape offers software tools and flight safety expertise in flight data analysis and flight sciences to enable the effective study and understanding of recorded flight data to


improve safety, maintenance and flight operations.  CAE Healthcare offers products and services to the healthcare community that enable greater efficiency and safety.
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CAE has delivered simulation products and provided training services to more than 50 defence operators in approximately 35 countries. CAE is the worlds leading supplier of civil flight simulators in the competed market with more than 75% market share and is the second largest independent provider of civil aviation training services based on the number of simulators in operations. 2.2Geographic and Segment Revenues and Locations CAEs consolidated revenue from continuing operations in fiscal 2010 and 2011 was $1.526 billion and $1.629 billion, respectively, and is broken down as follows: Revenue by Product Line (%)
     
     
     
     Geographic Distribution of Revenue (%)201120112011
     201009
     
     
     2011
     2010SP/C
     17
     19
     
     US
     29
     29TS/C
     30
     28
     
     Germany
     9
     12SP/M
     36
     36
     
     Other European countries
     10
     10TS/M
     17
     17
     
     UK
     10
     10100
     100
     
     Other Asian countries The Netherlands
     7
     6Canada
     13
     10The Netherlands
     4
     4Australia
     6
     5China
     5
     5United Arab Emirates
     4
     5Other countries
     3
     3100
     100
  The following sets out, by business segment, the locations of CAEs primary subsidiaries and divisions: Location
     SP/C
     SP/M
     TS/C
     TS/MCanadaMontreal, Québec
     ü
     ü
     ü
     üToronto, Ontario
     
     
     üOttawa, Ontario
     
     
     ü
     üHalifax, Nova Scotia
     
     ü
     
     üVancouver, British Columbia
     
     
     
     üEuropeAmsterdam, The Netherlands
     
     
     üBrussels, Belgium
     
     
     üBurgess Hill, United Kingdom
     
     ü
     ü
     üBudapest, Hungary
     
     üEvora, Portugal
     
     
     üMadrid, Spain
     
     
     üRAF Base, Oxfordshire, United  Kingdom
     
     
     
     üStolberg, Germany
     
     ü
     
     üUnited StatesDallas, Texas
     
     
     üDurham, North Carolina
     
     üFort Worth, Texas
     
     
     üMesa, Arizona
     
     
     üMorristown, New Jersey
     
     
     üOrlando, Florida
     
     ü
     
     üRichardson, Texas
     
     üTampa, Florida
     
     ü
     
     üOtherBangalore, India
     ü
     ü
     ü
     üDubai, United Arab Emirates
     
     
     üGondia, India
     
     
     üKuala Lumpur, Malaysia
     
     
     üMelbourne, Australia
     
     
     
     üPerth, Australia
     
     
     üRae Bareli, India
     
     
     üSydney, Australia
     
     ü
     
     üSao Paolo, Brazil
     
     
     üSantiago, Chile
     
     
     üSingapore
     
     ü
     
     üStavanger, Norway
     
     
     üZhuhai, China
     
     
     ü
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2.3CAEs vision Our vision is for CAE to be synonymous with safety, efficiency and mission readiness. We intend to be the mission partner of choice for customers operating in complex mission-critical environments by providing the most innovative product and service solutions to enhance safety, improve efficiency, and provide superior decision-making capabilities. 2.4Our strategy and value proposition Our strategy We are a world-leading provider of modeling and simulation-based training and decision support solutions. We currently serve customers in two primary markets: civil aerospace and defence. We are extending our capabilities into new markets of simulation-based training and optimization solutions in healthcare and mining. A key tenet of our strategy in our core civil aerospace and defence markets is to derive an increasing proportion of our business from the existing fleet. This would include providing solutions for customers in support of the global fleet of civilian aircraft and military aviation, land and maritime platforms. Historically, the primary driver of our business was the delivery of new commercial aircraft. Our SP/C segment, which in FY2011 represented approximately 17%


of our consolidated revenue, is most dependent on this more deeply cyclical market driver. As a result of our diversification efforts, the balance of our business involves mainly more stable and recurring sources of revenue like training and services as well as military simulation products and services.
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In addition to diversifying our interests among customer markets, our strategy has also involved more balance between products, which tend to be more short-term and cyclical, and services, which tend to be more long term and stable. As well, we continue to diversify our interests globally. This is intended to bring our solutions closer to our customers home bases, which we think is a distinct competitive advantage. This also allows us to be less dependent on any one market and since business conditions are rarely identical in all regions of the world, we believe this provides a degree of stability to our performance. We are investing in both the mature and emerging markets to capitalize on current and future growth opportunities. Approximately one third of our revenue comes from the U.S., one third from Europe and one third from the rest of the world including the high growth, emerging markets.  We continue to execute our growth strategy by selectively investing to meet the long-term needs of our aerospace and defence customers, investing in adjacencies within our core markets and by investing in our new core markets. Value proposition The value we provide customers is the ability to enhance the safety of their operations, improve their mission readiness for potentially dangerous situations and lower their costs by helping them become more operationally efficient. We offer a range of products and services solutions to enhance our customers planning and decision-making abilities, as well as a complete range of products and services that can be arranged in a customized package to suit our customers needs and can be adapted as their needs evolve over the lifecycle of their operations. We also offer a broad global reach, and as a result, we are able to provide solutions in proximity to our customers, which is an important cost-benefit consideration for them. Our core competencies and competitive advantages include: ·World-leading modeling and simulation technology; ·Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modeling and simulation; ·Total array of training products and services solutions; ·Broad-reaching customer intimacy; ·Extensive global coverage and in-depth country familiarity; ·High-brand equity; ·Proven systems engineering and program management processes; ·Best-in-class customer support; ·Well established in new and emerging markets. World-leading modeling and simulation technology We pride ourselves on our technological leadership. Pilots around the world view our simulation as the closest thing to the true experience of flight. We have consistently led the evolution of flight training and simulation systems technology with a number of industry firsts. We have


simulated the entire range of large civil aircraft, a large number of the leading regional and business aircraft and a number of civil helicopters. We are an industry leader in providing simulation and training solutions for fixed-wing, tanker and transport aircraft, maritime patrol aircraft, lead-in fighter trainers, and helicopter platforms for the military. We also have extensive knowledge, experience and credibility in designing and developing simulators for prototype aircraft of major aircraft manufacturers. We have extended our expertise in modeling and simulation beyond aviation to land and maritime systems, and beyond training into other mission‐critical areas where these technologies are used to support superior decision‐making capabilities. As well, we are now applying these capabilities to new markets, such as healthcare and mining.
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Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modeling and simulation We revolutionized the way aviation training is performed when we introduced our CAE SimfinityTM-based training solutions and courseware. These training devices effectively bring the virtual aircraft cockpit into the classroom at the earliest stages of ground school training, making it a more effective and efficient training experience overall. We build upon the CAE SimfinityTMproduct line to develop the trainers that are used in the Airbus pilot and maintenance technician training programs. We also developed e-Learning solutions to enable pilots and technicians to train anytime and anywhere. Total array of training products and services solutions With a large network of training centres, we are a global leader in aviation training providing the complete solution to meet our customers training and pilot placement needs. Our civil pilot training programs span over 90 different aircraft models including business aircraft, civil helicopters and commercial airliners and provide curricula for initial, type rating, recurrent and maintenance training. Our civil pilot provisioning solution adds value and moves our customers businesses forward by identifying, screening, selecting, training and ultimately placing pilots at their airlines. In addition, we deliver civil ab-initio pilot training through our CAE Global Academy which is the largest network of ab initio flight schools in the world, with 11 schools across the globe. With over 60 years of experience in simulation, we are an industry expert in aviation training and are the industrys civil training solution one-stop shop. Broad-reaching customer intimacy We have been in business for more than 60 years and have relationships with most of the worlds airlines and the governments of approximately 50 different national defence forces, including all branches of the U.S. forces. Our customer advisory boards and technical advisory boards involve airlines and operators worldwide. By listening carefully to customers, we are able to gain a deep understanding of their mission needs and respond with innovative product and service offerings that help improve the safety and efficiency of their operations and their ability to make superior decisions. Extensive global coverage and in-depth country familiarity We have operations and offer training and support services in more than 20 countries on five continents and sell our products and services to customers in more than 150 countries. Our broad geographic coverage allows us to respond quickly and cost effectively to customer needs and new business opportunities while having a deep understanding and respect of the regulations and customs of the local market. We operate a fleet of more than 170 full-flight and full-mission simulators in 32 civil aviation, military and helicopter training centres to meet the wide range of


operational requirements of our customers. Our fleet includes simulators for various types of aircraft from major manufacturers, including commercial jets, business jets and helicopters, both civil and military.
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High-brand equity Our simulators are typically rated among the highest in the industry for reliability and availability. This is a key benefit because simulators normally operate in high-duty cycles of up to 20 hours a day. We have a broad global footprint, which enables close, long-term relationships with our customers. Our brand not only promises leading technology, but also superior customer support. CAE has a customer sales and support organization that rivals the size of some of our competitors entire organizations. We design our products so customers can upgrade them, giving them more flexibility and opportunity as products change or new air-worthiness regulations are introduced. As we enter new markets like healthcare and mining, we find that CAEs brand is widely regarded as the benchmark for modeling and simulation-based technology and simulation based training services. Proven systems engineering and program management processes We continue to develop solutions and deliver technically complex programs within schedule to ensure that there are trained and mission-ready aircrew and combat troops around the world. This includes MH-60 simulators for the U.S. Navy, C-130J simulators for the U.S., Indian and Canadian Defence Forces; MRH90 simulators for the Australian Defence Forces, Royal Netherlands Navy and German Armed Forces; A330 Multi-Role Tanker Transport training devices for the Royal Australian Air Force, UAE Air Force and Royal Saudi Air Force; and M-346 jet trainer simulators for the Italian Air Force and an Asian military customer. These and other programs combined with our continued investment in R&D continue to strengthen our technological leadership and strengthen our management expertise to deliver complex programs that feature sensor simulation for maritime operations, synthetic tactical environments for naval and fighter operations as well as our visualization and common database technologies that deliver rich, immersive synthetic environments for the most effective training and mission rehearsal possible. Best-in-class customer support We maintain a strong focus on after-sales support, which is often critical in winning additional sales contracts as well as important update and maintenance services business. Our customer support practices, including a web-based customer portal, performance dashboard, and automated report cards, have resulted in enhanced customer support according to customer comments and feedback. Well established in new and emerging markets Our approach to global markets is to model ourselves as a multi-domestic rather than a foreign company. This has enabled us to be a first mover into growth markets like China, India, the Middle East, South America and Southeast Asia. 2.5Industry Overview and Trends The civil and military markets 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. Finally direct factors influence the total offering such as the nature, size and composition of aircraft fleets, aircraft delivery schedules, pilot demographics, certification requirements and market demand for commercial and business air travel, which in particular is also influenced by corporate profits.
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CAE believes the military market is mostly influenced by a combination of defence spending and the nature of military activity.  Demand for CAEs military products and services are also influenced by the degree to which military forces globally lean towards the outsourcing of functions to the private sector. As well, CAEs military business is affected by the extent to which synthetic training and mission rehearsal solutions gain market acceptance as an alternative to live training, such as flying an actual aircraft or firing an actual weapon. 2.6Research and Development CAE is investing in software and hardware innovations that are intended to sustain our leading-edge technologies, underpin our Professional Services offerings and, in addition, complement our training services for CAE training centres and other customers.  Examples of such innovations over the past year are the new CAE 3000 Series helicopter mission simulators, which offer unprecedented realism for civil helicopter-specific mission training, including offshore, emergency medical services, law enforcement, long line, high-altitude, corporate, and other operations.  The 3000 Series is coupled with CAEs latest high fidelity visual system, the Tropos 6000 which offers amore immersive environment and an enhanced pilot training experience with new features leveraging the power of the latest NVIDIA commercial graphics processors.Another example is CAEs Augmented Engineering Environment (AEE), a suite of products and services including a hardware and software integration testbed that can be tailored to meet the aircraft development requirements of any original equipment manufacturer(OEM).  Using CAEs advanced modeling and simulation technologies and systems engineering expertise, OEMs can make extensive use of simulation as they move through the various phases of aircraft development, from concept exploration through to entry-into-service.  Bombardier is making use of CAEs Augmented Engineering Environment to support the development of the new CSeries aircraft. A third example is CAEs Augmented Visionics System (AVS),which is allowing helicopter pilots to see through the most extreme conditions such as brownout.  CAEs AVS solution is designed to deliver a realistic visual alternative to pilots who lose visual cues due to brownout or whiteout obscurant clouds created by rotor wash.  CAEs AVS solution integrates CAEs core technologies in avionics and sensor simulation, visualization, common environment/common database (CE/CDB) and real-time simulation frameworks, and deploys these in training and to the operational phases. CAE is also advancing work on the automation of content generation through Motif Compositing to deliver high resolution content without the burden of expensive satellite imagery in order to keep our library of databases up-to-date with the highest standard of fidelity and accuracy.  In terms of innovative core software development and the evolution of its full-flight simulators, CAE continues to develop and deploy OnePlatform, a new generation of simulation architecture and aircraft systems modeling that reduces the dependency on OEM data and support.  This initiative involves the integration of technologies and tools into a single, common platform for CAEs new generation of 5000/7000 Series simulators and a new generation of CAE Simfinity trainers.
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CAE
differentiates itself by providing superior products and services that rely on
the latest, most advanced technology available. As a result, CAE has a
long-standing commitment to performing R&D. Each business segment is
encouraged to apply R&D across the whole spectrum of its operations, from
product development to production processes and techniques. An integral part of CAE’s
R&D strategy is to participate with universities and government agencies in
North America and in Europe in specific research projects. While development is
the first priority, applied research is also vitally important to CAE’s future.
In addition to the basic internal R&D, R&D may also be carried out in execution
of customer contracts. This involves the development of technology that is
necessary to complete a contract requirement but is also valuable and may be
reapplied by CAE in a broader sense. On March 31, 2009, CAE announced
that we will invest up to $714 million in Project Falcon, an R&D program
that will continue over five years. The goal of Project Falcon is to expand our
current modeling and simulation technologies, develop new ones and increase our
capabilities beyond training into other areas of the aerospace and defence
market, such as analysis and operations. The Government of Canada agreed to
participate in Project Falcon through a repayable investment of up to $250
million made through the Strategic Aerospace and Defence Initiative (“SADI”),
which supports strategic industrial research and pre-competitive development
projects in the aerospace, defence, space and security industries. The
participation from the Government of Canada is unconditionally repayable and
will be accounted for as a long-term obligation repayable over 15 years. The
repayments will begin only after Project Falcon is completed. During FY2010, we announced
that we will invest up to $274 million in Project Genèse/Or/ Courant (a project
targeting growth in CAE’s New Core Markets).  It is an R&D program
extending over seven years in collaboration with Investissement Québec (IQ).
The aim is to leverage our modeling, simulation technologies and training
services expertise into the new markets of healthcare, mining and energy. The
Québec government agreed to participate up to $100 million in contributions
related to costs incurred before the end of fiscal 2016. We carry out a
substantial amount of our R&D initiatives with the financial support of
government, including the Government of Canada through SADI, and the Government
of Québec through IQ. We may not, in the future, be able to replace these
existing programs with other government risk-sharing programs of comparable
benefit to us, which could have a negative impact on our financial performance
and research and development activities. 2.7Production and Services Production CAE’s
manufacturing and assembly facilities are located in Montreal, Canada; Tampa, U.S.;
Burgess Hill, U.K.; Bangalore, India; and Stolberg, Germany. The
manufacturing process for CAE simulators is complex, involving the coordination
of approximately 250,000 parts and millions of lines of software code. The
manufacture of a simulator includes six major stages: design, manufacture and
assembly, testing, shipping, site installation and final test on site. Military
simulators are more complex and unique than civil simulators, and therefore may
take more time to design, manufacture and test. Manufacturing
is organized into 10 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 assemblyand 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.
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Most of
our manufacturing and integration activities for civil and military 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,
Bangalore, Australia, and Stolberg sites. The Tampa facility conducts military
systems integration and testing activities for simulation equipment destined
for U.S. military-related contracts. Services CAE’s
training and service facilities are based around the world. While our head
office is located in Montreal, Canada, CAE provides training and services from
more than 30 locations across South America, North America, Europe, the Middle East,
India, China, Russia and Southeast Asia. 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 as part of the CAE Global Academy initiative; and
several locations from which CAE offers technical support services to aviation
training centres. CAE’s
courseware development is conducted in our Canadian, U.S. and Indian
facilities, and CAE’s flight data solutions, offered through CAE Flightscape, are
offered from Canada. CAE
provides a range of technical support services to civil and military 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.  Military 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
FFSs while providing valuable insights into customer training needs. CAE’s
Professional Services team 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 Professional
Services 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(“C4ISR”)and electronic warfare systems, training
systems and services, integrated information environments, and in-service support
for fleet operations and maintenance. 2.8Specialized Skills and
Knowledge 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. CAE has not experienced material
difficulty in recruiting appropriate staff to carry out our manufacturing,
training and development work.
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2.9Competition We sell our
simulation equipment and training services in highly competitive markets. New
entrants are emerging and others are positioning themselves to try to take
greater market share. Some of our competitors are larger than we are, and have
greater financial, technical, marketing, manufacturing and distribution
resources. In addition, some competitors have well-established relationships
with, or are important suppliers to, aircraft manufacturers, airlines and
governments, which may give them an advantage when competing for projects for
these organizations. In particular, we face competition from Boeing, which has
pricing and other competitive advantages over us with respect to training,
update and maintenance services related to Boeing aircraft simulators. Boeing
has a licencing model for new Boeing civil aircraft simulators which includes a
requirement for simulator manufacturers and service training operators to pay
Boeing a royalty to manufacture, update or upgrade a simulator, and to provide
training services on new Boeing simulators. 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. 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 recessionary
economy and credit constraints for civil market products that prevailed in
2008-2009 led to heightened competition for each available sale. This in turn
led to a reduction in profit on sales won during that period. Should such
conditions recur again, we could experience further price and margin erosion. The
markets in which we sell our products are highly competitive. Certain
competitors are also CAE’s customers, partners and suppliers on specific
programs. The extent of competition for any single project generally varies
according to the complexity of the product and the dollar amount of the
anticipated award.  We believe that we compete on the basis of: ·Quality,
performance and flexibility of our products and services; ·Reputation
for prompt and responsive contract performance; ·Accumulated
technical knowledge, intellectual property and expertise; ·Strong
after sales support; ·Flexibility
of product/service offerings being susceptible to tailor-made customer
solutions; ·Breadth
of product line; and ·Price. CAE’s
future success will depend in large part upon our ability to improve existing
product lines, develop new products and technologies in the same or related
fields, improve delivery intervals and reduce the costs we incur in producing our
products and services. CAE’s
major competitors in the military simulation and training market include
Lockheed Martin, L-3 Communications Link Simulation and Training, Boeing,
Rockwell Collins, Indra Systems, BAE Systems, Thales, Flight Safety
International, SAIC, Raytheon, General Dynamics, Cubic, Elbit, Eurocopter,
AgustaWestland and Rheinmetall Defence Electronics.  Some of these competitors
are predominantly local (one country or region) competitors. CAE sometimes
partners with these and other competitors to cooperate on program contracts.
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CAE’s major competitors in the civil simulation
equipment market include Thales, Rockwell Collins, Flight Safety International,
and smaller players such as Mechtronix Systems, Opinicus, Indra and Sim
Industries. Some of these competitors are low-cost providers with a limited
product portfolio which only addresses a subset of the overall market, while
others offer a broader product portfolio. CAE’s major competitors in civil
pilot training include Flight Safety International, BoeingTraining and Flight Services, Oxford Aviation Academy and PanAm International Flight Academy. 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, 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 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. 2.11Intangible Properties We rely in part
on trade secrets and contractual restrictions, such as confidentiality
agreements and licenses, 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. 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
licenses on terms that are commercially acceptable, if at all. 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. 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 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, CAE believes that the CAE brand
and some of our trademarked products have value in the markets we address. 2.12Cycles The SP/M and TS/M segments
sell 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 SP/C 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. The TS/C segment’s
flight training services do experience an element 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.  TS/C is also affected by
the longer wave cycles of the commercial airline industry, though not to the
same degree as SP/C. 2.13Environmental Liabilities 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. We have made
provisions for claims we know about and remediation we expect will be required,
but there is a risk that our provisions are not sufficient.
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In
addition, our discontinued operations are largely uninsured against such
claims, so an unexpectedly large environmental claim against a discontinued
operation could reduce our profitability in the future. 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. CAE operations include, and
past operations and those of some past operators at some of CAE’s sites have
included, the use, generation, storage, handling and disposal of hazardous
materials which are subject to health and safety and environmental laws and regulations
in the various countries in which CAE operates or has operated. The New York State Department
of Environmental Conservation (“DEC”) considers that Trichloroethylene
is present in ground water at or near CAE USA's former Link Hillcrest New York
facility site and is evaporating and following soil vapors into homes. The DEC
initiated the installation of an air pump system in affected homes to remedy
the effect of such evaporation. The DEC continues to try to determine which
properties, and parties, may have contributed to the alleged contamination.CAE
and the DEC have agreed that CAE will make a $300,000 contribution towards the
DEC’s remediation expenses, and are in discussions concerning the allocation of
responsibility amongst various parties for the balance of such expenses
(approximately $2 million). 2.14Employees CAE strives to
have policies and practices in place that foster employee
engagement.  These efforts were recognized as CAE was selected
as one of Canada's Top 100 Employers for 2009, one of Montreal's Top 15
Employers for 2009 and one of the Best Employers for New Canadians for 2009. 
CAE USA, based in Tampa, Florida, was recognized as one of the top twenty
mid-size companies to work for in the Tampa Bay area. CAE employs approximately 7,500
full-time employees (due in part to acquisitions done during FY2010/11 and
growth in the Military segments) of which approximately 650are
unionized and covered by 12 collective agreements. Four labor contracts were
ratified in FY2010. The collective agreement for 450 employees in Montreal was
renewed in fiscal 2009 and will remain in effect until June 2013. There
are no indications that negotiations on upcoming contract renewals will result
in work stoppages. CAE considers employee relations to be very satisfactory. 2.15Foreign Operations For the
fiscal year ended March 31, 2011, sales to customers outside Canada accounted
for nearly 90% of CAE’s revenue such that CAE is very dependent upon foreign
sales and operations. CAE expects that sales outside Canada will continue to
account for most of its revenue for the foreseeable future. CAE’s
physical presence in countries such as the U.S., Germany, Australia, India,
Singapore and the U.K. has enabled us to develop strong relationships and a
good reputation with governments and other defence contractors who are
important decision makers regarding defence contracts. As a
result, CAE is subject to risks of doing business internationally, including: ·Currency
fluctuations; ·Changes
to regulatory requirements;
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·Changes
to domestic and foreign government policies, including requirements to spend a
portion of program funds locally and governmental industrial cooperation
requirements; ·The
complexity and necessity of using foreign representatives and consultants; ·Imposition
of tariffs or embargoes, export controls, including U.S., Canadian and foreign
arms export controls, currency exchange controls and restrictions, and other
trade restrictions affecting countries in which CAE sells our products or
services; ·The
challenge of managing and operating an enterprise spread over various
countries; ·Compliance
with a variety of foreign laws; and ·General
economic and geopolitical conditions, including international hostilities,
inflation, trade relationships and military and political alliances. 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.DESCRIPTION
OF THE BUSINESS SEGMENTS 3.1Simulation
Products/Civil(“SP/C”) Our SP/C segment is the world
leader in the provision of civil flight simulation equipment. We have designed
and manufactured more civil FFSs for major and regional commercial airlines,
third-party training centres and OEMs than any other company. We have a wealth
of experience in developing simulators for new types of aircraft, including
over 30 models and, more recently, the Bombardier CSeries and Lear 85, Boeing
747-8 and 787, Airbus A380, Embraer Phenom 100/300, Dassault Falcon 7X, ATR
ATR-42/72-600 and the Commercial Aircraft Corporation of China, Ltd (“COMAC”)ARJ21. We also offer a full range of support services including simulator
updates, maintenance services, sales of spare parts and simulator relocations. CAE
builds civil simulators for all categories of aircraft including those built by
Airbus, Boeing, Bombardier, Cessna, Dassault, Embraer, Gulfstream and
Raytheon.  CAE also builds simulators for civil helicopters, including AgustaWestland,
Bell Helicopter, Eurocopter and Sikorsky models. Since our inception, CAE has
taken orders for and delivered more than 900FFSs and
training devices from approximately 125 commercial airlines, aircraft
manufacturers and third-party training centres in 50 countries.  With nearly 60
years of experience in designing and manufacturing FFSs and other flight training
devices, CAE has established long-standing relationships with leading
commercial airlines throughout the world. CAE plans to maintain a
leadership position in civil simulation systems by anticipating future customer
needs through both our own training experience and trusted relationships with
equipment customers, commitment to innovation and technology, product quality,
reliability and efficiency, and continuing efforts to lower costs and shorten
delivery cycles.  CAE continues to improve on its lead-time, cost, quality and
reputation for performance through operational improvements and R&D
programs. SP/C is focused on substantially reducing the costs associated with
manufacturing simulation equipment intended both for sale to third parties as
well as for installation in CAE’s own global network of training centres. CAE’s capabilities in
simulation-based interactive learning, including our leading-edge CAE SimfinityTMsystem,
also complement our traditional strength in FFSs and flight training devices(“FTD”). Combined with a growing
network of training centres, this complete suite of simulation-based equipment
and training products enables CAE to offer airlines and business jet operators
a complete range of training solutions.
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The use of flight simulators in pilot and
crew training is well established within the commercial and business markets. Increased
use of simulators has occurred as a result of the growth in commercial and
business air travel which, in turn, has driven fleet expansion and increased
demand for pilot training.  Civil simulator usage has also increased due to
advances in technology that enable increased realism and the significant cost
savings provided by flight simulation training compared to actual flight time.
The use of synthetically-generated reproductions of airport configurations and
use of satellite terrain imagery incorporated into the simulation further
enhance the effectiveness of simulation training. Simulators are also utilized
by pilots to supplement actual flying time to maintain their certification.
Today’s most sophisticated civil flight simulators are rated Level D by the FAA
or receive similar ratings from regulatory authorities in other countries,
indicating that a pilot can be certified to fly an aircraft type based solely
on simulator training. Flight simulators also allow pilots to experience and
learn emergency procedures that cannot be practiced safely aboard the actual
aircraft. Flight
simulation equipment is purchased by major and regional airlines, aircraft
manufacturers and independent training providers. Simulators are manufactured
by a limited number of companies and are sold based on the criteria of product
quality, customer support, delivery, supplier reputation, price and life cycle
costs. Typical list prices for civil flight simulation equipment can range from
up to US$1 million for sophisticated procedure trainers, from US$2 to US$5
million for an FTD and from US$8 to US$16 millionfor an FFS, assuming
that OEM-supplied data, parts and equipment are included. CAE’s SP/C segment continues
to lead the civil market in the sale of FFSswith more than 70% market share of competed civil sales.
SP/C continues to invest in technology to improve our product offering in terms
of cost, schedule, performance, and additional features that enhance safety and
efficiency.  Over the past year, CAE’s SP/C segment has continued demonstrating
our industry leadership, as evidenced by: ·CAE’s Augmented Engineering
EnvironmentTM is a suite of products and services including a hardware and
software integration testbed that can be tailored to meet the aircraft
development requirements of any OEM.  Using CAE’s advanced modeling and
simulation technologies and systems engineering expertise, OEMs can make
extensive use of simulation as they move through the various phases of aircraft
development, from concept exploration through to entry-into-service. 
Bombardier is making use of CAE’s Augmented Engineering Environment to support
the development of the new CSeries aircraft. ·CAE launched the CAE 3000 Series
family of civil helicopter mission trainers.  This new CAE simulation
capability offers unprecedented realism for civil helicopter-specific mission
training, including offshore, emergency medical services, law enforcement, long
line, high-altitude, corporate, and other operations. The CAE 3000 Series is
designed to address emerging global standards for civil helicopter flight simulation
training devices (“FSTD”)in development by an international
working group sponsored by the International Civil Aviation Organization (“ICAO”). CAE’s SP/C segment total
order intake in FY2011 was $330.8 million, including the capture of 29 FFSs competed
orders during the period. 3.2Training &
Services/Civil (“TS/C”) Our TS/C business is the
largest provider of commercial aviation training services in the world and the
second largest provider of business aviation training services. CAE has a broad
global network of training centres and we serve all sectors of the civil
aviation market including generalaviation, regional
airlines, commercial airlines, civil helicopter operators and business
aviation. We offer a full range of services, including training solutions and
curriculum development, training centre operations, pilot training, aircraft
technician training services, simulator spare parts inventory management,
e-Learning and courseware solutions and consulting services. We are a leader in
flight sciences, using flight data analysis to enable the effective study and understanding
of recorded flight data to improve airline safety, maintenance, flight
operations and training.  The CAE Global Academy is the world’s largest network
of ab initio flight training organizations with a fleet of almost 300 aircraft
between the CAE owned and operating flight schools and the independent CAE
Global Academy members, with a capacity of training more than 1,800 pilot
cadets annually. Along with the CAE Global Academy, we offer airlines a
long-term solution to pilot recruitment with our pilot placement service,
whereby we seek to match the supply of new commercial airline pilots with the
demand for pilots from our global base of airline customers. We have achieved
our leading position through acquisitions, joint ventures and organic
investments in new facilities. We currently operate 156 FFSs and we provide
aviation training and services in approximately 20 countries around the world,
including aviation training centres, flight training organizations (“FTO”)
and third-party locations. We make selective investments to add new revenue
simulator equivalent units (“RSEU”) to our network to maintain our
position, increase our market share, and address new market opportunities.
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CAE continues to expand our
global network of strategically located training centres. CAE’s customers at
the commercial aviation training centres include major, low-cost and regional
airlines that elect to outsource some or all of the training of their pilots
and other crew members using either our training instructors or their own.  CAE’s
training centres are also used by corporate aviation customers who tend to use
third-party training centres as their primary source for simulation training. TS/C is continually looking
for ways to deliver more value to our customers throughout CAE’s global network
of training centres.  For example, TS/C is continually developing new
courseware and related training services to encourage customers to migrate from
renting time on a CAE simulator (dry training) to accepting the training and
curriculum provided by CAE instructors (wet training).  TS/C is also
continuously looking at ways to ensure we are delivering the most
cost-effective and competitive training service in the marketplace. This
includes optimization of our network of RSEUs, which can include the sale, upgrade,
relocation, retirement, or introduction of simulators. Training
services is the largest and fastest growing market segment within the flight
simulation industry.  The training services market consists of sales of
training equipment and the provision of facilities, tools,aircraft–specific pilot and maintenance training programs
and courseware.
Training is provided to pilots and technicians from commercial and regional
airlines, business aircraft operators, and general aviation aircraft and
helicopter operators.Today,
approximately half of all training capacity around the world is owned and
operated by large commercial airlines to provide training for their own pilots.
Most of these training facilities are located within North America and Europe.
Commercial airlines also rely on independent training providers to supplement
their training programs. Smaller operators have traditionally outsourced their
training to independent training providers or to the aircraft manufacturers.  Most
aircraft manufacturers are partnering with third-party training providers in
order to expand their training infrastructure across the world, while some such
as Boeing have developed an in-house training division.
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With the exception of fractional operators, the vast
majority of business aircraft operators have very small fleets.  As a result,
these operators receive their entire training from aircraft manufacturers or
independent training providers. TS/C has continued to invest
in training and services for pilots, aircraft maintenance technicians and cabin
crew members. We have also leveraged our core competencies and now provide a
wider range of training and services. CAE remains dedicated to serving all
segments of aviation on a global scale, and this includes expanding our
business training platforms within our five training hubs for business aircraft
operators located in Europe, Middle East and the U.S. and by propelling our
pilot and training services into emerging markets. In
addition to acquisitions, CAE’s expanding presence in civil flight training and
services has been accelerated during the last fiscal year as follows: Commercial Aviation Training ·We signed an agreement
with Mitsubishi Aircraft Corporation (MJET) to develop and deliver a
comprehensive training solution for the new MRJ regional aircraft. The
agreement includes a 10-year Exclusive Training Provider program and the
establishment of two training centres initially in Japan and the United States.
In support of the agreement we are expanding our training network and
developing two CAE 7000 Series MRJ full-flight simulators (FFSs) as well as CAE
SimfinityTM integrated procedures trainers. ·We signed an agreement
with aircraft manufacturer ATR as a framework for providing a range of products
and support services to operators of ATR aircraft. As part of this agreement,
ATR and CAE will collaborate on deployment of simulation equipment and training
programs in ATR, CAE or customer training centres worldwide. ·We agreed with Airbus
to renew our flight crew training services cooperation agreement through 2017.
The cooperation began in 2002 and provides Airbus operators with a joint global
network of training centres with the largest fleet of FFSs for Airbus aircraft
types, standardized courseware and expert instructors. ·We are working with
key airline customers to expand our training capacity in the rapidly growing
South American commercial aviation market, adding four Level D FFSs, including
a new training location in Peru, to support the renewal of long-term training
contracts. ·We signed a multi-year agreement
with Virgin America to develop and support a new pilot training centre near the
airline’s home base in San Francisco, USA. ·We announced that our training centre
in Bangalore, India is the first non-airline training centre to earn approval
as a fixed-wing Type Rating Training Organization (TRTO) by India's Directorate
General of Civil Aviation (DCGA). ·We acquired an equity
interest in China Southern West Australia Flying College Pty Ltd.(“CSWAFC”)near Perth, Australia and will manage the pilot training school as part of the
CAE Global Academy network. CSWAFC is a joint venture 53% owned by China
Southern Airlines and 47% by CAE. ·The AirAsia cadets in
CAE's Multi-crew Pilot License (MPL) beta program class successfully completed
the Core, Basic and Intermediate phases of the program. ·We announced long-term Pilot
Solutions contracts to provide more than 150 pilots to three airlines in Asia
and Europe, as well as to the Association des Pilotes Professionels
Antillo-Guyanais (APPAG), an aviation initiative sponsored by the European
Commission; with theEuropean Institute of Aviation
and Business GmbH (EIAB), Saarlouis, Germany, to train self-sponsored ab initio
pilot cadets as part of its Bachelor of Aviation degree program; and with Omni
Aviation Training Center, Tires, Portugal, to train ab initio pilot cadets in
Visual Flight Rules (VFR).
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Business Aviation Training ·We launched training
for two business aircraft -- the Bombardier Challenger 300 and Challenger 604 –
and a 5th Business Aviation training location at our centre in
Amsterdam. ·We placed four new
business aviation FFSs into service: a Bombardier Learjet 40/40XR/45/45XR
convertible FFS and a Cessna Citation II FFS in Burgess Hill, UK; and an
Embraer Phenom 100/300 convertible FFS and a Dassault Falcon 50EX in Dallas,
USA. ·We announced plans to
install four additional FFSs in our business aviation network: Bombardier
Challenger 604, Dassault Falcon 7X, and a Falcon 900EX EASy/Falcon 2000EX EASy
convertible at Emirates-CAE Flight Training in Dubai, UAE, as well as a Cessna
Citation Sovereign at the CAE North East Training Center in Morristown, USA. ·We expanded the
Honeywell-CAE Training Alliance and are now offering maintenance training
courses for technicians in Europe, the Middle East, and Asia. Helicopter Aviation
Training ·We acquired CHC Helicopter’s
flight training organization, including 4 FFSs located in Norway, the United
Kingdom and Canada, and executed an agreement to become CHC’s long-term
training partner, responsible for training more than 2,000 helicopter pilots
and maintenance engineers. ·We announced, together with Líder
Aviação, the largest helicopter operator in Brazil, a joint venture that will
provide advanced, simulation-based, helicopter pilot training in South America
by early 2012. The new joint venture company will purchase the first
full-motion Level D CAE 3000 Series FFS, which will replicate the Sikorsky
S-76C++ aircraft. ·We announced the sale of a CAE
3000 Series Level D FFS for the S-76C++ to our joint venture with China
Southern Airlines, the Zhuhai Flight Training Centre. ·We placed the first
CAE 3000 Series helicopter mission simulator, a Eurocopter AS350 B2 model, at a
training centre in Phoenix, Arizona, and it has been qualified by the U.S. FAA
for Level 7 flight training device credits. ·We received FAA
approval to deliver the pilot training ground school for the Eurocopter AS350
helicopter through a CAE SimfinityTM e-Learning program enabling
pilots to reduce their time at the training centre for both initial and
recurrent training. ·We announced, together with the
Airports Authority of India (AAI), a new helicopter pilot ab initio training
program at the CAE Global Academy in Gondia, India. The program will lead to a
commercial helicopter pilot license. Flight Data Services ·CAE Flightscape signed a contract to
deliver a comprehensive flight safety laboratory for the Federal Republic of
Nigeria’s Accident Investigation Bureau (AIB).
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3.3SP/C and TS/C Market Trends
and Outlook In Commercial
aviation, aircraft capacity and passenger traffic growth are primarily driven
by global GDP. This measure of economic activity underlies the aerospace
industry’s widely-held expectation that long-term average growth for air travel
will be approximately 5% annually over the next two decades. The growth rates
in the emerging markets such as China, India, South America, the Middle East
and Southeast Asia have, with their increasing affluent populations, outpaced
the growth of mature markets like Europe and North America. This robust level
of activity has contributed to high commercial backlogs of approximately 8,000
aircraft. Commercial aircraft OEMs have increased their production rates and
announced new programs such as the Airbus A320NEO and A350, the Boeing B747-8
and B787, the Bombardier CSeries and the Mitsubishi MRJ. Other OEMs have also
announced new platforms such as Russia’s UAC SSJ100, which just entered service
and the COMAC ARJ121 and C919 aircraft. In Business aviation, aircraft orders
and utilization are also primarily driven by GDP, but more specifically
corporate profitability. During the last recession, the industry experienced a
sharp reduction in aircraft deliveries and a significant drop in flight hours
and cycles that have yet to recover to pre-downturn levels. Although the
indicators are mostly positive both in terms of U.S. Corporate profit growth
and higher aircraft utilization, aircraft deliveries and U.S. operated aircraft
utilization have about 15-20% improvement required to recover the ground lost
during the recession. Major business aircraft OEMs, such as Bombardier,
Dassault and Gulfstream, have in recent months announced new aircraft programs
which are an indication of their market confidence. Demand for business jet
training has improved in the large- and mid-size cabin segments; while the
small cabin segment has remained stable at current low levels. Higher demand
would normally flow from improvements and sustainment in economic factors such
as corporate profit and capital expenditure growth. In
the SP/C segment, the level of market activity has improved in the current
fiscal year; however the competitive environment remains intense with pricing
slightly improved from recession levels. In fiscal 2011, we won orders for 29
FFSs. At this point, we expect about the same number of simulator sales for
fiscal 2012.  The
following trends support our positive medium-to-long-term view for the civil
market: -Aircraft
backlogs; -New and more
fuel-efficient aircraft platforms; -Demand in
emerging markets arising from secular growth and a need for infrastructure to
support air travel; -Expected
long-term growth in air travel; -Long-term demand
for trained crew members; -International
requirements for the qualification of flight simulation training devices
(FSTDs); -New pilot
certification process requires simulation-based training; -New
more stringent training requirements. Aircraft backlogs The commercial
civil aerospace market conditions have improved significantly since the last
global economic recession. In calendar 2010, Boeing received 530 net orders (firm
orders minus cancellations) for new aircraft, compared to 142 in calendar 2009.
Airbus received 574 net orders in calendar 2010 compared to 271 in 2009. While
net aircraft orders for Boeing and Airbus were 106 and 1 respectively for the
three-month period ending March 31, 2011, they continue to work through strong
backlog levels, each of which is over 3,000 aircraft, and this should help
generateopportunities for our full portfolio of
training products and services. In calendar 2010, Boeing reported a total of
462 commercial airplane deliveries, while Airbus reported 510 deliveries for
the same period, essentially flat over the prior year. For the three-month
period ending March 31, 2011, commercial airplane deliveries were 104 for
Boeing and 119 for Airbus.
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In calendar 2010, Airbus announced it
was increasing production of the A320-family jets, taking it in phases to 40
per month by the first quarter of 2012. For the A320 family, Airbus has
indicated that they may raise production to 42 or even 44 per month beyond
2012, while also announcing plans to introduce the A320 New Engine Option
(NEO). Boeing has also laid out plans for an incremental ramp-up of the 737NG
production rate, from 31.5 aircraft per month to 35 by early 2012, and then to
38 by the second quarter of 2013. For the 737NG, Boeing is also investigating
the possibility of reaching 42 a month, with a subsequent surge to 50 a month
in the future. As for the 777, monthly production will increase from 5 to 7
aircraft a month by mid-2011, with a further increase to 8.3 aircraft a
month in the first quarter of 2013. The increases will take some time to
implement and should ultimately translate into higher demand for training
products and services. Renewed optimism is seen in the business
aviation industry. Business aviation aircraft orders are increasing and
are being driven by large cabin segment demand, especially in international and
emerging markets. While market uncertainty remains, OEMs have increased
production rates and are launching a significant number of new
programs. Worldwide shipments in the last quarter of 2010 increased by 7%
compared to the previous year according to the General Aviation Manufacturers
Association (GAMA). In addition, the number of business jet flights has risen
in the last 12 months with the majority of growth seen in overseas travel
according to the Federal Aviation Administration (FAA). This year, NetJets, the
world’s biggest private jet operator, signed a firm order for 50 Global
business jets from Bombardier with options for 70 more. This is in addition to
another large order NetJets placed in the fall of 2010 for 50 Phenom 300
aircraft from Embraer with options for 75 more. These large orders are
encouraging signs of revival of the business jet industry which is slowly
recovering from the economic downturn. New
and more fuel-efficient aircraft platforms OEMs have announced plans to introduce, or have
already introduced, new platforms that will drive worldwide demand for
simulators and training services. The Boeing 747-8 and 787, Airbus A350XWB and
Airbus A320 NEO, Embraer 190, Dassault Falcon 7X, Embraer Phenom 100 VLJ and
300 LJ aircraft, MRJ, COMAC ARJ21 and the Bombardier Learjet 85 and CSeries are
some recent examples. New platforms will drive the demand for new kinds of
simulators and training programs. One of our strategic priorities is to partner
with manufacturers to strengthen relationships and position ourselves for
future opportunities. For example, in the recent past, we signed contracts with
Bombardier to use our modeling and simulation expertise to support the design,
development and validation of the new CSeries aircraft, and we will also
develop the first CSeries FFS; and we signed an agreement with ATR as a framework
for providing a range of products and support services to operators of ATR
aircraft, which includes the development of the first simulator for the new
ATR42/72-600 aircraft. In the second quarter of fiscal 2011 we announced a
10-year exclusive training provider program with Mitsubishi Aircraft
Corporation to develop and deliver a comprehensive training solution for the
new MRJ. In support of the agreement, we are expanding our training network and
developing two CAE 7000 Series MRJ FFSs as well as CAE SimfinityTM
integrated procedures trainers. In the second quarter of fiscal 2011, we also
announced a contract with Airbus to design and manufacture two CAE 7000
Series FFSs for theA350 XWB, representing the
world’s first FFSs for the new long-range aircraft. We will also develop six
CAE SimfinityTM A350 XWB Airbus Procedures Trainers
(APTs).  Deliveries of new model aircraft are susceptible to program launch
delays, which in turn will affect the timing of our orders and deliveries.
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Demand in emerging markets
arising from secular growth and a need for infrastructure to support air travel Emerging markets such as Southeast Asia,
the Indian sub-continent and the Middle East, South  America and China are
expected to continue experiencing higher air traffic and economic growth over
the long term than mature markets, as well as an increasing liberalization of
air policy and bilateral air agreements. We expect these markets to drive the
long-term demand for the broad array of products and services solutions that
CAE brings to bear. Expected long-term growth in air travel In calendar 2010, passenger traffic increased 8.2%
compared to calendar 2009 while freight-tonne-kilometres increased over 20.6%.
For the first three months of calendar 2011, passenger traffic increased by
5.9% compared to the first three month of calendar 2010, while
freight-tonne-kilometres increased by 4.6% over the same period.Over the past
20 years, air travel grew at an average of 4.8% and we expect that over the
next 20 years both passenger and cargo travel will meet or slightly exceed this
growth. Possible impediments to the steady growth progression in air travel
include major disruptions like regional political instability, acts of
terrorism, pandemics, natural disasters, a sharp and sustained increase in fuel
costs, major prolonged economic recessions or other major world events. Long-term demand for
trained crew members Worldwide demand is
expected to increase over the long term Growth in the civil aviation market has driven the
demand for pilots, maintenance technicians and flight attendants worldwide,
which has created a shortage of qualified crew members in several markets. Supply
constraints include aging crew demographics, fewer military pilots transferring
to civil airlines, and low enrolment in technical schools. In high-growth markets
like India, China, South America and Southeast Asia, long-term air traffic
growth is expected to outpace the growth expected in developed countries, and
the infrastructure available to meet the projected demand for crew members is
lacking. This shortage creates opportunities for pilot placement,
our turnkey service that includes identifying, screening, selection and
training and placement services. The shortage also creates an opportunity for
CAE Global Academy, which now totals 11 flight training organizations around
the world, making it the largest network of ab initio flight schools. Along
with our partners, through CAE Global Academy, we have the capacity to train
more than 1,800 pilot cadets annually as they aspire to a career as a
professional fixed-wing aircraft or helicopter pilot.  Additionally, a global
shortage of maintenance technicians has created an opportunity for us to
accelerate our technical training solutions. This trend is also affecting cabin
crew, for whom we are also delivering training solutions. New pilot certification process requires simulation-based
training Simulation-based pilot certification training is beginning
to take on an even greater role with the Multi-crew Pilot License (MPL)certification
process developed by the ICAO, which is gradually being adopted by individual
national aviation authorities around the world. The MPL processplaces more emphasis on simulation-based training to
developab initiostudents into First Officers for modern aircraft such
as airliners. In the fourth quarter of FY2010, we launched an MPL beta program
with AirAsia satisfying new performance-based requirements developed by
Transport Canada. To date, the beta program has met or exceeded all
expectations and the initial group of cadets has completed all four phases of
the program and has returned to AirAsia to complete the final step in the
program with base familiarization and aircraft take-offs and landings.  If the
MPL process continues to be adopted and gains momentum in emerging markets like
China, India, Southeast Asia and the Middle East, where there is the greatest
need for a large supply of qualified pilots trained in an efficient and
effective manner, it would result in increased use of simulation-based
training.
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International
requirements for the qualification of flight simulation training devices (FSTD) During the summer of 2009, the ICAO
published a strategic analysis intended to define flight simulation
requirements for the qualification of FSTDs in the 190 ICAO member States. The
ICAO document states that the top-fidelity ICAO Standard FSTD (Type VII) is
required to support each of the required training tasks contained in a number
of crucial training to proficiency contexts including recurrent and initial
training, MPL and the Airline Transport Pilot License (ATPL). It also confirms
and recognizes the long-term necessity of high-fidelity FSTDs for such highly
critical training contexts. The qualification requirements of the ICAO Type VII
simulator require a higher fidelity of simulation (including visuals, motion,
sound and air traffic control simulation) than today’s level D simulator
requirements, and we believe the increased demands for more realistic and more
immersive training aligns well with our strengths in aviation training. A
similar ICAO initiative is in the last stages of identifying and drafting requirements
for civil helicopter FSTDs. 3.4Simulation
Products/Military (“SP/M”) Designs, manufactures and supplies
advanced military training equipment and software tools for air forces, armies
and navies Our SP/M segment is a world
leader in the design and production of military flight simulation equipment. We
develop simulation equipment, training systems and software tools for a variety
of military aircraft, including fast jets, helicopters, maritime patrol and
tanker/transport aircraft. We also offer simulation-based solutions for land
and naval forces. We have designed the broadest range of military helicopter
simulators in the world, and we have also developed more training systems for
the C-130 Hercules transport aircraft than any other company. We have delivered
simulation products and training systems to more than 50 defence operators in
approximately 35 countries, including all of the U.S. services. CAE military
simulators provide high-fidelity combat environments that include interactive
enemy and friendly forces, as well as weapons and military sensors. These
simulators incorporate highly realistic visual scenes covering areas as large
as whole countries that are able to show the effects and characteristics of a
variety of battlefield features, including those seen through Forward Looking
Infra Red and radar sensors.   The use of the CAE Medallion visual system for
the prestigious Eurofighter Aircrew Synthetic Training Aids program, as well as
the Turkish Air Force’s F-16 and trainer aircraft flight simulators solidly
establishes the CAE Medallion visual system as a premier image generator for
fast jet simulation applications.  The CAE Medallion image generator is also
well established for demanding low-level rotary-wing applications, as evidenced
by its use on A/MH-6, MH-47, and MH-60 combat mission simulators for the U.S.
Special Operations Forces 160th SOAR(A), as well as the German Army
selectingthe CAE Medallion visual system for a major
upgrade on all 12 helicopter simulators located at the German Army Aviation
School in Bückeburg.
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CAE has
provided simulators for a wide range of aircraft and has designed training
systems for the greatest variety of helicopters.  CAE has established a leading
position in Europe in the supply of army command and staff training systems, by
supplying such systems to the military forces of Germany, Austria, Italy,
Norway, Finland, Lithuania, and Ireland.  In the U.S., CAE expanded itsland vehicle training expertise through the
acquisition of RTI International’s Technology Assisted Learning (TAL) business
unit in late FY2011. 
TAL is providing maintenance training devices for a number of U.S. Army land
vehicles. We generate revenue in six
interrelated areas of the defence market value chain. We provide simulation
products such as full-mission simulators(“FMS”); we perform updates and
upgrades to simulators; we provide maintenance and support services; we offer
turnkey training services; we have a range of capabilities to provide
simulation-based professional services for analysis, training and operational
decision-making; and we have a software business called Presagis, which
develops and sells commercial-off-the-shelf modeling and simulation software
solutions to OEMs, government agencies and defence forces. Our strategy in the defence market has
been to globalize and diversify our military business. There are pressures on
many traditional defence budgets around the world, while some regions such as
India and the Middle East are planning growth in defence expenditures. In
becoming globally diversified, our interests across a broad range of national
markets and related defence budgets which we believe provides us with a more
resilient and predictable stream of military business. We are a leading
supplier of modeling, simulation and training solutions and have a significant
local presence in key defence markets. Through the successful execution of our
strategy, we have seen tangible and positive results from our efforts.  While
there may be some delays and cuts to programs that could have some impact, we
are encouraged by the global trend of militaries increasing their use of
simulation, which gives us long‐term confidence that simulation-based
solutions will be well-placed to address some of the budget challenges facing
the defence establishment. We approach the world’s defence markets by leveraging
our global footprint and our in-country expertise. We have a local presence and
centres of excellence in key markets including the U.S.,  U.K., Canada,
Germany, Australia, India and Singapore. We have developed global operating
processes which allow us to place a high level of decision-making autonomy
within the regions while leveraging the full breadth of our products, services
and capabilities. This results in greater efficiency and stronger customer relationships. We believe we can capitalize on the
experience, expertise and increased visibility with military customers that we
have gained from winning and performing significant contracts.  CAE intends to
continue to foster partnerships with key original equipment manufacturers and
prime contractors.For example, Aermacchi
has selected CAE as its preferred full-mission simulator supplier for the M-346
advanced lead-in fighter trainer aircraft and Hawker Beechcraft selected CAE as
its ground-based training system partner for the new AT-6 Light Attack and
Armed Reconnaissance aircraft.  CAE is Lockheed Martin’s exclusive provider of
C-130J training systems and services, an aircraft platform that continues to
experience strong demand from global militaries.  CAE continues to expand its relationships
with unmanned aerial system (UAS) OEMs to develop comprehensive mission
training and in-service support solutions.  CAE formed a joint venture with India’s
Hindustan Aeronautics Limited (“HAL”) called the Helicopter Academy to
Train by Simulation of Flying (“HATSOFF”), which began operating a
helicoptertraining centre in Bengelaru, India in 2010.
CAE is part of a group of companies led by Lockheed Martin and Sikorsky called
“Team Romeo” to offer the MH-60R maritime helicopter and related training
solutions to global navies.
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CAE remains committed to
introducing new simulation products that enhance our reputation as a technology
leader.  A strategic priority for CAE is to continue to bring innovative
products and simulation-based solutions to market.  For example, the
CAE-developed CDB, originally developed for the United States Special
Operations Command, has now been adopted by defence forces including the German
Army, Turkish Air Force and Canadian Air Force.  The bottom line result is that
with the CDB, the creation, modification and correlation of run-time databases
can take minutes or hours instead of days, weeks or months.  Just as
importantly, these changes can be made very rapidly using the latest intelligence
and source data available, which makes using simulation for mission rehearsal
exercises a real possibility. Presagis (comprised of
Presagis Canada Inc., Presagis USA Inc. and Presagis Europe (S.A.)) was
formed in fiscal 2008 following CAE's acquisition of three companies:
Engenuity Technologies, MultiGen-Paradigm and TERREX.Presagis is a global leader providing
commercial-off-the-shelf (COTS) modeling, simulation and embedded graphics
solutions to the aerospace and defence markets, and is the only developer to
deliver a unified COTS software portfolio based on open-standards. Presagis
combines cutting-edge technology with innovative services to help customers
streamline workflow, reduce project risks, create detailed models and complex
simulations, in addition to developing DO-178B certifiable applications. The
military simulation equipment market is driven in part by the introduction of
new aircraft platforms, upgrades and life extensions to existing aircraft and a
shift to greater use of simulation in pilot training programs due to the high
degree of realism and the significantly lower cost compared to live training.
CAE expects to improve our lead-time, cost, quality and reputation for
performance through continued operational improvements and R&D programs. Military
forces increasingly rely on sophisticated and interrelated weapons systems and
equipment, computer systems, visual systems and other advanced technologies to
operate in a broadening range of conditions and scenarios.  Achieving a high
state of operational readiness is a constant goal and challenge for militaries.
Simulators enable military organizations to achieve their training and mission
rehearsal goals while minimizing the physical use of expensive systems and
equipment. In addition, the use of simulators helps to avoid injuries to
personnel and the loss of equipment due to training accidents. Simulators allow
for the training of tasks and missions that cannot be practiced in the real
world. Flight
simulators are used to train pilots to operate a variety of military aircraft
including fighter jets, helicopters, transports, tankers and maritime patrol
aircraft. Flight simulators permit the crews of military aircraft to coordinate
and improve their combat skills in a safe, cost-effective and realistic range
of environments. The U.S. Air Force estimates that one hour in a simulator
costs less than six minutes in an actual aircraft.   The simulators enable
pilots to realistically practice both offensive and defensive tactics, such as
firing aircraft weapons systems and avoiding attack from enemy surface and air
threats. The immersive environment provided by simulators allows pilots to
train for highly demanding maneuvers and life threatening scenarios, such as
rotor failure, missile impact or the effects of exceptional turbulence. Simulators
for land systems provide similar advantages. With the increasing complexity of land
systems equipment, including integrated C4ISR and sophisticated weapon systems,
combined with defence forces facing budget pressures, there is a growing
tendency toward an increased use of synthetic training for tanks and armoured
fighting vehicles.  This helps save wear and tear onthe
vehicle, reduces live firing and track miles, and allows militaries to devote
systems to operational requirements.
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3.5Training &
Services/Military (“TS/M”) Supplies turnkey training services,
support services, systems maintenance and modeling and simulation solutions Our TS/M segment provides
turnkey training services and training systems integration expertise to global defence
forces such as the Medium Support Helicopter Aircrew Training Facility (MSHATF)
at Royal Air Force (RAF) Benson in the U.K., the Operational Training Systems
Provider (OTSP) program for the Canadian Forces, the modernized C-130 Aircrew
Training System for the Royal Saudi Air Force (RSAF) at King Abdullah Air Base
in Jeddah, and the KC-135 Aircrew Training System for the United States Air
Force (USAF) at 13 U.S. and international bases. We also provide a range
of training support services such as contractor logistics support, maintenance
services and simulator training at over 60 sites around the world. TS/M
additionally provides a variety of modeling and simulation-based professional
and defence services. CAE
provides maintenance support for most of the Canadian Forces flight simulators,
which is a contract that was renewed for five years in FY2011.  CAE continues
to provide maintenance services for most of the flight simulators operated by
the German Army, Air Force and Navy. At the Germany Army Aviation School in Bückeburg,
CAE provides comprehensive training and support services.  In Australia, under
the Management and Support of Australian Defence Forces Aerospace Simulators
(MSAAS) contract, CAE provides engineering and maintenance services on most of
the ADF’s flight simulators.  In the U.S., CAE provides a range of services
across a wide number of bases, such as the U.S. Air Force’s C-130 schoolhouse
at Little Rock Air Force Base.CAE also provides a
range of support services to facilities in the U.K., the Netherlands and Italy,
as well as mission software support for Canada’s CF-18 fighter aircraft. In
FY2011, CAE was awarded acontract from the United States Air Force to provide comprehensive KC-135
aircrew training services.  Under terms of the contract, which was awarded
as a nine-month base contract with nine one-year options, CAE USA is the prime
contractor who will provide aircrew training services at 13 USAF bases in the
United States and internationally where more than 3,500 KC-135 pilots,
co-pilots, and boom operators train annually.  The total value of the contract
over the base contract and nine one-year options is expected to exceed $250
million. In FY2011, as part of an amendment to the MSAAS
contract in Australia, CAE Australia Pty Ltd will now be responsible for
providing comprehensive training services to support the RAAF’s new fleet of
KC-30A tanker aircraft for an initial eight-year period.  CAE staff at RAAF
Base Amberley will provide classroom and simulator instruction, courseware
development, training device maintenance and support services and facilities
management. In
FY2011,the UK Ministry of Defence
awarded CAE UK plc a five-year contract to continue providing training support
services for the Royal Navy's Lynx helicopter training systems at Royal Navy
Air Station (RNAS) Yeovilton as well as the Sea King Mk6 training systems at
RNAS Culdrose.  CAE will provide on-site contractor logistics support services
such as simulator maintenance, preventative maintenance and other support
services. In
FY2011, CAE was awarded a five-year contract by Lockheed Martin ASIC UK to
provide support services for the CAE-built Royal Navy EH101 Merlin Training
System (MTS) located at the RNAS Culdrose.   As part of the Integrated Merlin
Operational Support (IMOS) program,CAE will continue
providing integrated contractor logistics support (CLS), technical support
service (TSS), and obsolescence management services (OMS).  The IMOS aircraft
program is scheduled to continue in support of the Royal Navy’s fleet of EH101
Merlin helicopters until 2029.
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As part
of CAE’s continued global leadership in provisioning C-130 training services, CAE
was awarded a simulator maintenance and support services from IGTEC, a
Malaysia-based aerospace technology company, to support a CAE-manufactured
C-130H full-mission simulator that will be delivered to IGTEC’s new regional
simulation centre near the Subang International Airport in Malaysia.  Earlier in
FY2011, IGTEC contracted CAE to design and manufacture the new C-130H
simulator, which will be delivered in late 2012. In FY2011,Lockheed Martin awarded CAE subcontracts
to provide maintenance and integrated logistics support for the CAE-built
C-130J training devices operated by the Aeronautica Militare Italiana (Italian
Air Force) at the National Training Centre in Pisa, Italy.  In addition, CAE
was awarded a subcontract to providemaintenance and support services for the Royal Air Force’s C-130J training
systems located at RAF Lyneham under a program called the UK RAF C-130J
Hercules Integrated Operational Support. The TS/M group experiences
steady business revenue from our long-term training services and support
services contracts. Given finite defence budgets
and resources, governments and defence forces are increasingly scrutinizing
their expenditures. Outsourced or privatized training service delivery has
demonstrated benefits such as cost-effectiveness, accelerated training delivery
and allowing uniformed military personnel to focus on operational commitments. 
CAE continues to see a growing willingness from defence forces to use synthetic
training to meet more and more of their training requirements, as well as
increasing demand to use simulation for mission rehearsal.  While synthetic
training will never completely replace live combat training, TS/M sees more
militaries increasing the number of synthetic training hours as a complement to
live training. Governments
show an ever-increasing interest in the efficiencies and service enhancement
potential of outsourcing aspects of their military training and support
services to the private sector. The openness of national markets to international
entrants is always an issue, particularly in the sensitive field of national
security. However, many countries have outsourced military training and support
services and have permitted foreign-controlled entities to deliver such
services. The multinational approach adopted by some governments to equipment
development and procurement has facilitated this evolution in the market for
military services. The
industry has responded to this trend by adapting to a greater degree of
cooperation in product and service development and provisioning. However,
competition remains very vibrant, subject to national security constraints in
certain markets. Traditionally, modeling and
simulation has been used to support training. This specific application is well
understood and employed by militaries and civilian agencies around the world. 
CAE also sees significant growth in taking the simulation out of the simulator
and applying simulation across the program lifecycle, including support for
analysis and operations.  To address these market opportunities, CAE has
established a Professional Services business unit.  The same modeling and
simulation approaches and technologies can be used to support analysis,
training, and operations.  For example, synthetic environments can be developed
to support research and development programs and be re-used and refined
throughout the program lifecycle, supporting system design and testing,
creating the training environments to preparepersonnel
to use those new systems, and providing the decision support tools necessary to
support mission planning in operations.
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CAE has experienced numerous
successes in the military market through the TS/M and SP/M segments over the
past year, including: The United States Air Force
     awarding CAE a contract to provide comprehensive KC-135 aircrew training
     services over the next ten years, marking the first time CAE has won a
     USAF aircrew training system (ATS) program as the prime contractor;
 Lockheed Martin
     awarding CAE a contract for a comprehensive CC-130J aircraft maintenance
     technician training solution for the Government of Canada. As part of this
     program, CAE will design and manufacture a CC-130J maintenance training
     suite that includes two CC-130J fuselage systems and servicing training
     devices, one CC-130J integrated cockpit systems training device, CAE
     Simfinity laptop and desktop-based virtual maintenance trainers, and
     courseware.  CAE will also manage the in-service support for the CC-130J
     aircraft maintenance technician training program at Canadian Forces Base
     Trenton until mid-2016;
 The
     German Army awarding CAE a contract to continue providing a range of maintenance and training
     support services at the Hans E. Drebing simulator centre of the German
     Army Aviation School in Bückeburg. The new contract covers the on-site
     maintenance for the next six years of the 12 CAE-built helicopter
     simulators operated at the German Army Aviation School; and
 Acquiring
     RTI International’s TAL business unit in order to further expand its
     offering of land simulation and training solutions.  TAL has provided
     maintenance trainers for the U.S. Army's ground vehicles since the early
     1990s. TAL designs, manufactures and delivers full-scale, high-fidelity
     maintenance trainers as well as virtual desktop trainers for a range of
     variants of the Bradley Fighting Vehicle, Abrams tanks, and the High
     Mobility Artillery Rocket System. 3.6SP/M and TS/M Market Trends
and Outlook We are witnessing varying degrees of
global defence spending rationalization including measures detailed in the U.K.
and Germany. In the U.S., Defense Secretary Gates outlined the latest Defence
budget, which includes $100 billion in cost savings. We have not witnessed any
major program cancellations that would substantially change our outlook; however,
we have experienced delays in obtaining contracts for U.S. defence programs as
a result of the government’s delayed funding of the defence budget under the previous
Continuing Resolution. These developments will present new challenges to the
defence industry as a whole. Nevertheless, CAE should see the benefit of
increased adoption over the long term of simulation-based training in all of
our markets as an important need to reduce costs. Long term forecasting is more difficult
given the evolving market conditions, but our current estimate is that
approximately 9,000 new military manned aircraft will be deployed into global
military fleets over the next five years and this should generate demand for
approximately 275 FMSs. We do not today address all platforms and all markets,
but we have the capability to serve a portion of this expected demand.
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We believe CAE
is uniquely positioned in the current environment to be part of the solution to
reducing the cost of military readiness. In addition to supporting the global
installed base and new aircraft introductions, demand for our products and
services should continue to be driven by the: -Explicit desire
of governments and defence forces to increase the use of modeling and
simulation; -Growing demand
for our specialized modeling and simulation-based products and services; -High cost of
operating live assets for training which leads to more use of simulation; -Current
nature of warfare which requires joint forces training and mission rehearsal. We have a good track record for
delivering programs on time and on budget and we are well positioned to provide
defence forces with solutions on a range of military platforms involving
transport aircraft, aerial refueling tankers, helicopters, lead-in fighter
trainers, and maritime patrol aircraft. These aircraft segments specifically
include the C-130J Hercules transport aircraft, P-8A Poseidon and P‐3C Orion
maritime patrol aircraft, A330 Multi-Role Tanker Transport and KC-46A tanker,
NH90 helicopter, M-346 and Hawk lead-in fighter trainers, S‐70 and H-60
helicopter variants, CH-47 Chinook heavy-lift helicopter, Unmanned Aerial
Systems (UAS) and other aircraft that form part of the backbone of defence
forces globally. Our positive outlook is supported by the expectation that
these aircraft types will continue to be in demand globally. These platforms
involve newer aircraft types with long program lives ahead of them and we
believe this will drive opportunities for us over the next decade. As well, we
continue to pursue new growth in a range of defence markets such as land
vehicle training, as evidenced by our acquisition in the fourth quarter of
fiscal 2011 of RTI International’s TAL business unit. Explicit
desire of governments and defence forces to increase the use of modeling and
simulation Also helping to drive our military
business is the explicit desire of governments and defence forces to increase
the use of modeling and simulation for analysis, training, and operational
decision-making.  These sentiments expressed by militaries globally, especially
by the U.S. and other defence forces facing budget challenges. Unlike civil
aviation where the use of simulators for training is common practice, there are
no requirements to train in simulators in defence and therefore the level of
adoption has traditionally been much lower.  Simulation offers a number of
advantages that address an ever-increasing global threat level and new economic
constraints that are pressuring top-line defence spending. The cost savings
from the use of modeling and simulation are considerable. The USAF estimates
that live training is approximately 10 times more costly than simulation-based
training. According to the Department of Defence Fiscal Year 2012 budget
request, the USAF officials, in an effort to reduce costs, have proposed
cutting the service’s flight training budget. The USAF promises that, by
spending more time in “advanced simulator training” aircrews will make up the
lost flight training. The cost of fuel, detrimental environmental impacts, and
significant wear and tear on weapon systems all point to the greater use of
simulation and synthetic training. This type of training is critical for
ensuring the readiness of global defence forces as they face new and
challenging threats. As one U.K. military official stated when speaking about
the pending cuts to the U.K. defence budget – “despite all of the uncertainties
surrounding the strategic defence review, the one certainty is that simulation
activity will increase going forward given its compelling value proposition.”
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Growing demand for our specialized modeling and
simulation-based products and services New
aircraft platforms One of our strategic priorities is to
partner with manufacturers in the defence market to strengthen relationships
and position ourselves for future opportunities. OEMs are introducing new
platforms that will drive worldwide demand for simulators and training. For
example, Hawker Beechcraft is now offering the AT-6 light attack and armed
reconnaissance aircraft, Boeing is developing a new maritime patrol aircraft
called the P-8A Poseidon and has won the U.S. Air Force contract for new air
refueling tankers, NH Industries is delivering the NH90 helicopter, Airbus
Military is aggressively marketing the A330 MRTT, A400M, and C-295 transport
aircraft worldwide, Lockheed Martin is doubling production of the C-130
aircraft, Alenia Aermacchi is successfully marketing the M-346 advanced lead-in
fighter trainer and Sikorsky isoffering
new models of its H-60 helicopter to armies and navies worldwide, all of which
fuel the demand for new simulators and training, and for all of which we have
products at different development and production stages. Use of modeling and simulation for
analysis and decision support Traditionally, modeling and simulation have been used
to support training. This specific application is well understood and employed
by militaries and civilian agencies around the world. We believe there are
growth opportunities in taking the simulation out of the simulator and applying
simulation across the program lifecycle, including support for analysis and
decision-making operations. We see governments and militaries looking to use
simulation-based synthetic environments to support research and development programs,
system design and testing, and providing the decision support tools necessary
to support mission planning in operations.  A good example is a contract
we signed in 2011 to develop a National Modeling and Simulation Centre (NMSC)
for the Ministry of Defence of Brunei. The NMSC will be used by the Royal
Brunei Armed Forces and Ministry of Defence to analyze force structure options,
evaluate and validate capabilities, develop doctrine and tactics, and support
training and mission rehearsal exercises. Trend
towards outsourcing of training and maintenance services With finite defence budgets and
resources, defence forces and governments continue to scrutinize expenditures
to find ways to save money and allow active-duty personnel to focus on
operational requirements. There has been a growing trend among defence forces
to outsource a variety of training services and we expect this trend to
continue. Governments are outsourcing training services because they can be
delivered more quickly and more cost effectively. For example, we have won or
participated in contracts of this nature in Canada, Germany, Australia, the
U.K. and the U.S.  In the third quarter of fiscal 2011, we announced that CAE
USA was awarded what is expected to be a ten-year contract (subject to annual
funding) to provide comprehensive KC-135 aircrew training services to the USAF.
CAE USA is to be the prime contractor responsible for providing program
management, academic and simulator instruction, maintenance and logistics
services, training device upgrades, and relocation services for more than 3,500
USAF KC-135 tanker aircrews.  In Australia, we are delivering a suite of KC-30A
MRTT training devices and following entry into service, CAE will now provide
comprehensive training services, including classroom and simulator instruction,
to the Royal Australian Air Force.
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Extension and upgrade of
existing weapon system platforms OEMs are
extending the life of existing weapon system platforms by introducing upgrades
or adding new features, which increases the demand for upgrading simulators to
meet the new standards. For example, several OEMs are offering global
militaries operating C-130 aircraft a suite of avionics upgrades, which in turn
leads to a requirement for major upgrades to existing C-130 training systems or
potential new C-130 training systems. In the United Kingdom, the Royal Air
Force’s fleet of Puma helicopters is undergoing a life extension program to
keep the aircraft in service until 2022. This resulted in us signing a contract
with the United Kingdom Ministry of Defence (UK MoD) to upgrade the Puma
simulator and training program at our MSHATF. The USAF is upgrading 52 legacy C‐5 aircraft
to the new C-5M configuration, which includes both avionics upgrades and a
re-engining program. In the second quarter of fiscal 2011 we won a competitive
contract to perform upgrades on the USAF’s C-5 training devices over the next
several years.  The award of the USAF KC-135 Aircrew Training System provides
CAE a contract vehicle for performing upgrades to all the KC-135 training
devices resulting from major aircraft upgrades and simulator obsolescence. High cost of operating live assets for training which
leads to more use of simulation More defence forces and governments are adopting
simulation in training programs because it improves realism, significantly
lowers costs, reduces operational demands on aircraft that are being
depreciated faster than originally planned, and lowers risk compared to operating
actual weapon system platforms. Using a simulator for training also reduces
actual aircraft flying hours and allows training for situations where an actual
aircraft and/or its crew and passengers would be at risk. Current nature of warfare which requires joint
forces training and mission rehearsal Demand for networking Allies are cooperating and creating joint
and coalition forces, which is driving the demand for joint and networked
training and operations. Training devices can be networked to train different
crews and allow for networked training across a range of platforms. Growing
acceptance of synthetic training for mission rehearsal There is
a growing trend among defence forces to use synthetic training to meet more of
their training requirements. Synthetic environment software allows defence
clients to plan sophisticated missions and carry out full-mission rehearsals as
a complement to traditional live training or mission preparation. Synthetic
training offers militaries a cost-effective way to provide realistic training
for a wide variety of scenarios while ensuring they maintain a high state of
readiness. For example, over the past years we have delivered MH-47G and MH-60L
combat mission simulators to the U.S. Army’s 160th Special
Operations Aviation Regiment that feature the CAE-developed Common
Environment/Common Database (CE/CDB).  The CE/CDB enhances rapid
simulation-based mission rehearsal capabilities. 3.7Military Contracts The majority of CAE’s contract revenue in our SP/M and
TS/M segments result from contracts with militaries or government bodies
performed under predominantly fixed-price contracts with only a small number of
cost-plus contracts. 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 pricingpurposes 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.
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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: ·The contractor may be
paid an amount agreed upon for completed and partially completed products and
services accepted by the government; ·The government may not
be liable for the contractor’s costs with respect to unacceptable items, and
may be entitled to repayment of advance payments and progress payments, if any,
related to the termination portion of the contract; and ·The contractor may be
liable for excess costs incurred by the government in procuring undelivered
items from another source. 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. 3.8Healthcare Market Simulation-based training is becoming recognized as
one of the most effective ways to prepare healthcare professionals to care for
patients and respond to critical situations while reducing the overall risk to
patients. Through acquisitions and partnerships with experts in the healthcare
field, we are leveraging our knowledge, experience and best practices in
simulation-based aviation training to work with healthcare experts to deliver
innovative education, technologies and service solutions to improve the safety
and efficiency of this industry. Currently, our healthcare services range from
providing simulation-based training solutions to managing simulation-based
training centres. During the last year, CAE Healthcare further developed
its capabilities in two areas: training centre solutions and medical solutions.
We leveraged our broad expertise in managing aviation simulation centres to
expand our offering for healthcare simulation centres, including training centre
management services and training solutions, as well as the launch of the CAE OwlTMsystem. The CAE OwlTMsystem, a training
technology adapted from aviation, is a brief/debrief system used for optimizing
the way training is conducted. In the area of medical solutions, we entered the
imaging and surgical training fields; both of which are important focus areas
for us and where CAE Healthcare can leverage CAE’s core simulation and modeling
capabilities. The acquisitions of ICCU Imaging Inc. (ICCU) and VIMEDIX Virtual
Medical Imaging Training Systems Inc. (VIMEDIX) give us the ability to offer a
complete solution for bedside ultrasound training by combining simulators with
a comprehensive curriculum. The acquisition of three medical product lines from
the company Immersion enabled our entry into the training field for minimally
invasive surgical procedures.
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During the first quarter of 2011,
CAE Healthcare announced that it was awarded new contracts to supply its new
CAE OwlTM simulation centre management system. Contracts were signed
with Université Laval, the University of Ottawa and the Hôpital Sacré-Coeur de
Montréal (HSCM). CAE Healthcare also announced that it sold its first
transthoracic echocardiography simulator, CAE VIMEDIXTM, to the Beth
Israel Deaconess Medical Center, a teaching hospital of Harvard Medical School. CAE Healthcare formally
celebrated the official opening of one of Canada’s largest healthcare
simulation centres during the first quarter of fiscal 2011. In the second quarter of fiscal
2011, CAE Healthcare increased sales of our CAE VIMEDIX and CAE ICCU bedside
ultrasound solutions as well as our surgical simulators. We also continued to
deploy a number of CAE OwlTM brief/debrief systems to customers. CAE
VIMEDIXTM sales totaled 15 units, including key U.S. military
contracts. In addition, our ICCU program was selected by the American College of
Chest Physicians (ACCP) to be integrated in its first critical care ultrasound
certification program. We also sold 10 surgical simulation systems and a
variety of upgrades to systems already deployed with our customer installed
base. In the third quarter of fiscal
2011, CAE Healthcare continued to increase market share. Progress was made in
Asia, the Middle East and Russia. We are delivering surgical and imaging
solutions to medical institutions including Novosibirsk NII PK/ Meshalkin, a
major cardio-surgery hospital in Russia, Princess Noura University in Riyadh,
Kingdom of Saudi Arabia, multiple universities in Japan and other
important institutions in China, Singapore, Indonesia, India and Turkey. In
North America we made multiple deployments in key hospital teaching
institutions including New York Presbyterian Hospital (Columbia University),
St. Michaels Hospital (Toronto) and multiple U.S. Department of Defense (DoD)
accounts and Veterans Administration Medical Centers (VAMC). In the fourth quarter of fiscal
2011, CAE Healthcare announced the launch of its CAE CaesarTM trauma
patient simulator. CAE Caesar is a high-fidelity patient simulator designed
primarily to enhance the initial and sustainment training of soldier medics and
the training of tactical law enforcement medics, search and rescue teams and
any organization involved in the care of trauma patients at the point of
injury. Mining market In the first quarter of fiscal 2011, we
acquired Datamine to expand our entry into the mining simulation and
optimization field. Datamine has an extensive product and consulting portfolio
ranging from exploration data management and geological (orebody) modeling to
mine planning and mine operations management. This is part of our long-term
strategy to leverage our modeling, simulation and training capabilities in new
markets that have the same imperatives to reduce risks and enhance operational
efficiency as the civil aviation and defence sectors.
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We continued to make good progress in CAE Mining with the
sale of our mine planning, management and optimization software solutions to
major mining companies including BHP Mitsubishi Alliance, Vale Ferrus, and
Anglo American. On January 1, 2011, we acquired the
shares of Century Systems, a supplier of geological data management and
governance systems to the mining industry. Integration is underway to leverage
their expertise, products and Customer relationships in geological data
management systems by expanding our current portfolio and leveraging our  broader
market footprint. The fourth
quarter of fiscal 2011 saw continued growth in software sales with new
customers in Latin America including Colquisiri, Minera Lincuna and Yamana
(Caraiba) and further sales to Votorantim Metais in Brazil, as well as multiple
sites of Fresnillo in Mexico. The fourth
quarter of fiscal 2011 also saw CAE Mining begin to communicate our vision
beyond its software and product consulting businesses to the mining market. In
support of that vision, agreements were made with leading research
organizations to further our thought leadership in mining technology and extend
our product and service offerings in training and consulting. Our New Core
Market initiatives are still very much in their infancy. They offer attractive
long-term potential for growth and the possibility for CAE to emerge as a
market leader, as we have done in all of our core businesses. The New Core
Market results are included in TS/C. 4.RISK FACTORS We operate in several industry segments
that have various risks and uncertainties. Management and the Board discuss the
principal risks facing our business, particularly during the annual 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. Management attempts to
mitigate risks that may affect our future performance through a process of
identifying, assessing, reporting and managing risks that are significant from
a corporate perspective. 4.1Risks relating to the industry 4.1.1Competition We sell our simulation equipment and training services
in highly competitive markets.  New entrants are emerging and others are
positioning themselves to try to take greater market share. Some of our
competitors are larger than we are, and have greater financial, technical,
marketing, manufacturing and distribution resources. In addition, some
competitors have well-established relationships with, or are important
suppliers to, aircraft manufacturers, airlines and governments, which may give
them an advantage when competing for projects for these organizations. In
particular, we face competition from Boeing, which has pricing and other
competitive advantages over us with respect to training, update and maintenance
services related to Boeing aircraft simulators. Boeing has a licencing model
for new Boeing civil aircraft simulators which includes a requirement for
simulator manufacturers and service training operators to pay Boeing a royalty
to manufacture, update or upgrade a simulator, and to provide training services
on new Boeing simulators.
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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. 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 recessionary
economy and credit constraints for civil market products that prevailed in
2008-2009 lead to heightened competition for each available sale. This in turn
led to a reduction in profit on sales won during such a period.  Should such
conditions recur again, we could experience further price and margin erosion. 4.1.2Level and timing of defence spending A
significant portion of our revenue comes from sales to military customers
around the world. In FY2011, for example, sales by the SP/M and TS/M segments
accounted for 53% of our revenue. We are either the primary contractor or a
subcontractor for various programs by Canadian, U.S., European, and other
foreign governments. If funding for a government program is cut, we could lose
future revenue, which could have a negative effect on our operations. If
countries we have contracts with significantly lower their military spending,
there could be a material negative effect on our sales and earnings. Budgetary
reviews and delays, such as that experienced in the U.S. in the beginning of
calendar 2011, can push contract executions out in time and result in delayed
recognition of revenue. 4.1.3Civil aviation industry A significant portion of our
revenue comes from supplying equipment and training services to the commercial
and business airline industry. If jet fuel prices attain high levels for a sustained
period, there could be greater impetus foro 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 our customers and regularlyreviewing 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. 4.1.4Regulatory rules imposed by aviation
authorities 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. Federal Aviation Administration, could mean we have to make unplanned
modifications to our products and services, causing delays and resulting in
cancelled sales. We cannot predict the impact that changing laws or regulations
might have on our operations. Any changes could have a materially negative
effect on our results of operations or financial condition.
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4.1.5Sales or licences of certain CAE products require regulatory approvals
and compliance The sale or
licence of many of our products is subject to regulatory controls. These can
prevent us from selling to certain countries and require us to obtain from one
or more governments an export licence or other approvals to sell certain
technology such as military related simulators or other training equipment,
including military data or parts. These regulations change often and we cannot
be certain that we will be permitted to sell or license 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 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. 4.1.6Government-funded military 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. 4.2Risks relating to the Company 4.2.1Product evolution The civil aviation and military markets
we operate in 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 and technologies, we may lose
current customers and be unable to bring on newcustomers. This could reduce our revenue. The evolution of the
technology could also have an impact on the value of our fleet of FFSs. 4.2.2Research and development activities We carry out some of our R&D initiatives with the
financial support of government, including the Government of Québec through IQ
and the Government of Canada through SADI and TPC. We may not, in the future,
be able to replace these existing programs with other government risk-sharing
programs of comparable benefit to us, which could have a negative impact on our
financial performance and research and development activities. 4.2.3Fixed-price and long-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 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. 4.2.4Procurement and OEMs encroachment We are required to procure data, parts, equipment and
many other inputs from a wide variety of OEMs and sub-contractors. We are not
always able to find two or more sources for inputs weneed,
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.
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4.2.5Warranty or other product-related claims We manufacture simulators that are highly complex and
sophisticated. These may contain defects that are difficult to detect and
correct. If our products 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. 4.2.6Product integration and program
management risk 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. 4.2.7Protection of intellectual property We rely in part on trade secrets and contractual restrictions,
such as confidentiality agreements and licenses, 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. 4.2.8Intellectual 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 licenses on terms that are commercially acceptable, if
at all. 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.
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4.2.9Key personnel 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. 4.2.10Environmental liabilities 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. We have made provisions for claims we know about and
remediation we expect will be required, but there is a risk that our provisions
are not sufficient. In addition, our discontinued operations are largely
uninsured against such claims, so an unexpectedly large environmental claim
against a discontinued operation could reduce our profitability in the future. 4.2.11Liability claims arising from casualty 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 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. 4.2.12Integration of businesses acquired The success of our acquisitions depend 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
business acquired into our existing operations. 4.2.13Our ability to penetrate new markets We are attempting to leverage our knowledge,
experience and best practices in simulation-based aviation training and
optimization to penetrate the new markets of simulation-based training in
healthcare, mining and energy. As we enter these new markets, unforeseen difficulties
and expenditures could arise, which may have an adverse effect on our
operations, profitability and reputation. Penetrating new markets is inherently
more difficult than managing within our already established core markets. The
risks associated with entering new markets are greater; however, we believe
there is potential for CAE to develop material revenues in these new business areas
over the long term.
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4.2.14Enterprise resource planning We are investing time and money in an ERP system. If
the system does not operate as expected or when expected, it may be difficult
for us to claim compensation or correction from any third party. We may not be
able to realize the expected value of the system and this may have a negative
effect on our operations, profitability and reputation. 4.2.15Length
of sales cycle The sales cycle for our
products and services is long and unpredictable, ranging from 6 to 18 months
for civil aviation applications and from 6 to 24 months or longer for military
applications. During the time when customers are evaluating our products and
services, we may incur expenses and management time. Making these expenditures
in a quarter 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. 4.3Risks relating to the market 4.3.1Foreign exchange Our operations are global with nearly 90% of our
revenue generated in foreign currencies, mainly the U.S. dollar, the euro and
the British pound. Our revenue is divided approximately one-third in each of
the U.S., Europe and the rest of the world. Our Canadian operations generate approximately 39% of
our revenues with a large portion of our operating costs in Canadian dollars.
When the Canadian dollar increases in value, it negatively affects our foreign
currency-denominated revenue and hence our financial results. When the Canadian
dollar decreases in value, it negatively affects our foreign
currency-denominated costs and our competitive position compared to other
equipment manufacturers in jurisdictions where operating costs are lower. We
have various hedging programs to partially offset this exposure. However, our
currency hedging activities do not entirely mitigate foreign exchange risk and
provide only short-term offsetting benefits. Business conducted through our foreign operations –
mainly Military and Civil training and services – are substantially based in
local currencies. A natural hedge exists by virtue of revenues and operating
expenses being in like currencies. However, we face currency translation
exposure with these operations since we consolidate results in Canadian dollars
for financial reporting purposes. 4.3.2Availability of capital Our main credit facility, which was refinanced in
April 2011, is up for renewal in April 2015. We cannot determine at this time
whether the credit facility will be renewed at the same cost, for the same
duration and on similar terms as were previously available this year. 4.3.3Pension plans Pension funding is based on actuarial estimates and is
subject to limitations under applicable income tax and other regulations.
Actuarial estimates prepared during the year were based on assumptions related
to projected employee compensation levels at the time of retirement and the
anticipated long-term rate of return on pension plan assets. The actuarial
funding valuation reports determine the amount of cash contributions that we
are required to contribute into theregistered
retirement plans. Our latest pension funding reports show the pension plans to
be in a solvency deficit position. Therefore, we are required to make cash
funding contributions. If this reduced level of pension fund assets persists to
the date of the next funding valuations, we will be required to increase our
cash funding contributions, reducing the availability of such funds for other
corporate purposes.
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4.3.4Doing business in foreign countries We have operations in over 20 countries and sell our
products and services to customers around the world. Sales to customers outside
Canada and the U.S. made up approximately 60% of revenue in FY2011. We expect
sales outside Canada and the U.S. 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. These
are the main risks we are facing: ·Change
in laws and regulations; ·Tariffs,
embargoes, controls and other restrictions; ·General
changes in economic and geopolitical conditions; ·Complexity
and risks of using foreign representatives and consultants. 5.DIVIDENDS CAE is paying a quarterly
dividend of $0.04 per common share. However, any decision to declare and pay
dividends in the future will be made at the discretion of the Board of
Directors, after taking into account the financial results, capital
requirements and other factors the Directors may deem relevant.  CAE’s
contracts with Industry Canada (IC) prohibit the payment of a dividend if such
payment would prevent payment to IC of a royalty owed under the contracts. CAE’s Dividend Reinvestment
Plan provides that Canadian resident shareholders can elect to receive Common Share
dividends in lieu of cash dividends. Currently, CAE offers a 2% discount on
shares acquired through the Dividend Reinvestment Plan; this is subject to
change and the plan terms should be consulted.  During fiscal 2009, 2010 and 2011,
CAE issued 99,407,43,331,
and 52,912common shares, respectively, as share dividends. 6.DESCRIPTION
OF CAPITAL STRUCTURE 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 any distribution of our assets upon
liquidation, dissolution or winding-up, subject to the prior rights of holders
of shares ranking in priority to common shares. As
at the close of business on March 31, 2011 and May 31, 2011 respectively, 256,964,756
and 257,005,300 common shares were issued and outstanding. There are no
preferred shares issued and outstanding. 7.MARKET FOR
SECURITIES 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.
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7.1Trading Price and Volume CAE Inc.
   TSX Share Price
   Information - FY2011Month
 Max.
 Min.
 Total VolumeApril-10
 $   10.42
 $    9.24
 10,251,177May-10
 $    9.78
 $    9.00
 10,948,524June-10
 $    9.85
 $    9.05
 14,054,233July-10
 $   10.09
 $    9.20
 7,944,007August-10
 $   10.50
 $    9.63
 8,042,149September-10
 $   11.03
 $   10.02
 10,778,050October-10
 $   11.71
 $   10.53
 13,434,413November-10
 $   11.72
 $   10.90
 10,232,455December-10
 $   11.73
 $   11.11
 8,670,465January-11
 $   12.81
 $   11.35
 14,529,921February-11
 $   13.36
 $   12.20
 15,662,278March-11
 $   13.00
 $   12.25
 13,810,930NYSE Share Price
  Information - FY2011Month
 Max.
 Min.
 Total VolumeApril-10
 $   10.42
 $    9.08
 885,673May-10
 $    9.61
 $    8.41
 1,070,176June-10
 $    9.66
 $    8.61
 912,123July-10
 $    9.78
 $    8.58
 796,723August-10
 $   10.20
 $    9.16
 831,524September-10
 $   10.73
 $    9.51
 900,465October-10
 $   11.67
 $   10.31
 945,141November-10
 $   11.72
 $   10.64
 715,042December-10
 $   11.66
 $   10.97
 529,612January-11
 $   12.87
 $   11.39
 516,425February-11
 $   13.44
 $   12.42
 684,862March-11
 $   13.39
 $   12.45
 670,775
  8.DIRECTORS AND
OFFICERS 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. Thenames 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 Proxy
Information Circular dated June 15, 2011, in connection with our Annual Meeting
of Shareholders on August 10, 2011.  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.
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The Committees of the Board
of Directors are the Audit Committee, the Corporate Governance Committee, the Human
Resources Committee and the Executive Committee. 8.1Name and Occupation Directors Name and Municipality of Residence and Year First Became
   a Director
 Principal OccupationBrian E. Barents
  Andover,
  Kansas, USA
  (2005)
 Brian E. Barents is a Director of Kaman Corporation, Aerion
  Corporation, The NORDAM Group, Inc., and Hawker Beechcraft Corporation, as
  well as a board member of the Flight Safety Foundation. A former Air National
  Guard Brigadier General and still an active pilot, Mr. Barents was the
  President, CEO and co-founder of Galaxy Aerospace Company, LP from 1997-2001
  and before that President and CEO of Learjet, Inc. from 1989-1996.Mr. Barents is a member of the Human Resources
  Committee.John A. (Ian) Craig
  Ottawa,
  Ontario, Canada
  (2000)
 John A. (Ian) Craig isPresident of Lanzsmirn Investments, an independent
  investment company, Vice Chairman of the Board of the University of Ottawa
  Heart Institute, as well as a Director of Arris Group Inc.He previously held a number
  of positions in Canada and other countries, over 33 years with Nortel
  Networks, including Executive Vice President
  and Chief Marketing Officer, and has served on a broad variety of public and
  private company boards. Mr. Craig is a
  member of the Audit Committee.H. Garfield Emerson, Q.C.
  Toronto,
  Ontario, Canada
  (1992)
 H. Garfield Emerson is Principal, Emerson Advisory,
  an independent business and financial advisory firm, and a corporate
  Director. He is a Director of Canadian Tire Corporation Limited,  Sentry
  Select Capital Corp., and is Executive in Residence with the Rotman School of
  Management, University of Toronto, and with the Faculty of Public Affairs,
  Carleton University.  Mr. Emerson is the past National Chair of Fasken
  Martineau DuMoulin LLP (2001-2006) and was previously President and Chief
  Executive Officer of NM Rothschild & Sons Canada Limited (1990-2001),
  investment bankers,non‐executive
  Chairman of the Board of Rogers Communications Inc. (1993-2006), Chairman of
  First Calgary Petroleums Ltd. (2008), and a senior partner of Davies, Ward
  & Beck. He has also served as a Director of Canada Deposit Insurance
  Corporation, University of Toronto Asset Management Corporation, NM
  Rothschild & Sons Limited, Marathon Realty Company Limited, Genstar
  Capital Corporation, and Sunnybrook Health Sciences Centre.Mr. Emerson is a member of the Corporate
  Governance and Audit Committees.Anthony S. Fell, O.C.
  Toronto,
  Ontario, Canada
  (2000)
 Anthony S. Fell is a corporate Directorand was formerlyChairman ofRBC Capital Markets Inc., Chairman and
  Chief Executive Officer of RBC Dominion Securities and Deputy Chairman of
  Royal Bank of Canada.Mr.
  Fell has in the past served as aGovernor
  of the Toronto Stock Exchange and Chairman of the Canadian Investment Dealers
  Association. He has also played a key role in community affairs as a Governor
  of St. Andrew's College, Chairman of the Metropolitan Toronto United Way
  Capital Campaign, Governor of the Duke of Edinburgh's Award Program in
  Canada, Chairman of the Princess Margaret Hospital Capital Campaign, Chairman
  of the Board of Trustees of the University Health Network, Chairman of the
  Arthritis Society Ontario Division, and Vice Chairman
  of the McMaster University Capital Campaign.Mr.
  Fell is also a Director of BCE Inc., Bell Canada and Loblaw Companies Limited.Mr. Fell is the Chairman of the Corporate Governance Committee and a
  member of the Executive Committee.Hon. Michael M. Fortier, PC
  Town
  of Mount Royal, Quebec, Canada
  (2010)
 Michael M. Fortier joined RBC Capital Markets (RBCCM) as a
  Vice-Chairman in October 2010. He is a Director of Groupe Aeroplan, and
  serves on the Audit Committee of that Board. Prior to joining RBCCM, Mr.
  Fortier was a partner of Ogilvy
  Renault LLP and a Senior
  Advisor to Morgan Stanley in Canada since January 2009.  Between February 2006 and October
  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 from 1985 to 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 Corporate Governance Committee.PaulGagné, CA
  Montréal, Québec, Canada
  (2005)
 Paul Gagné is a Director, and serves on the Audit
  Committees, of Ainsworth Lumber Co. Ltd., Inmet Mining Corporationand Textron Inc., and a Director of various private companies. Mr.
  Gagné is also the Chairman of Wajax Corporation.  The CAE Board has determined that such
  simultaneous service does not impair the ability of Mr. Gagné to effectively
  serve on CAE’s Audit Committee.Mr.
  Gagné worked with Avenor Inc. from 1976 to 1997, last serving as its Chief
  Executive Officer.  In 1998, he joined Kruger Inc., where he served as
  Consultant in Corporate Strategic Planning from 1998
  to 2002.  Mr. Gagné is a Canadian Chartered Accountant.  Mr. Gagné is
  a member of the Audit Committee.James F. Hankinson,
  CA
  Toronto, Ontario, Canada
  (1995)
 James F. Hankinson is a Director of Maple Leaf Foods
  Inc. and Shoppers Drug Mart Corporation. He was the President and Chief
  Executive Officer of Ontario Power Generation Inc. from 2005 until his
  retirement in 2009. He served as President and Chief Executive Officer of New
  Brunswick Power Corporation from 1996 to 2002. In 1973, he joined Canadian
  Pacific Limited and served as President and Chief Operating Officer from 1990
  to 1995. Mr. Hankinson is Chairman of the Audit Committee and a member of the
  Human Resources Committee.E. Randolph (Randy) Jayne II
  Webster
  Groves, Missouri, USA
  (2001)
 E. Randolph (Randy) Jayne isthe Managing Partner of Heidrick &
  Struggles International, Inc.’s Global Aerospace, Defense, and Aviation
  Practice.Mr.
  Jayne was formerly President of NASDAQ-listed Insituform Technologies Inc.,
  and the President of McDonnell Douglas Missile Systems Company (a builder of
  fighter aircraft, cruise missiles and spacecraft). He is chairman of the
  U.S.’s Institute for Defense Analysis Governance Committee, and has written
  extensively on board governance matters.Mr. Jayne is a member of the
  Corporate Governance Committee.Robert Lacroix, Ph.D., CM, OQ, FRSC
  Montréal,
  Québec, Canada
  (2005)
 Robert Lacroix holds a Ph.D in Economics,
  has been a Professor in the Department of Economics at the Université de
  Montréal since 1970, and Professoremeritussince 2006.  He has served
  as Chairman of that Department and Director of the Centre for Research and
  Development in Economics (CRDE) and was Rector (President) of the Université
  de Montréal from 1998-2005. Dr. Lacroix is also member of the Board of the
  Trudeau Foundation and a member of the National Statistics Council of Canada.
   He is also a Director of Pomerleau Inc. and Le Groupe Jean Coutu (PJC) Inc. Dr.
  Lacroixis a member of the Corporate Governance
  Committee.John Manley
  Ottawa,
  Ontario, Canada
  (2008)
 John Manley is President and Chief Executive Officer
  of the Canadian Council of Chief Executives. From 2004-2009 he was Counsel,
  McCarthy Tétrault LLP. Throughout more than 15 years of public service, Mr.
  Manley held several senior portfolios in the Canadian federal government. He
  was appointed to Cabinet in November 1993 as Minister of Industry, Minister
  of Foreign Affairs, Minister of Finance, and Deputy Prime Minister. Mr.
  Manley is a Director of Canadian Pacific Railway Limited, Canadian Imperial
  Bank of Commerce, Optosecurity Inc., CARE Canada, the National Arts Centre
  Foundation and MaRS Discovery District. He is also a member of the Board of Directors
  of the Institute for Research on Public Policy of the Conference Board of
  Canada, andofthe Advisory Board of Canada 2020. In 2008,
  Mr. Manley served as Chair of the Independent Panel on Canada’s Future Role
  in Afghanistan. Mr. Manley is a member of the Human Resources Committee.Marc Parent
  Lorraine,
  Québec, Canada
  (2008)
 Marc Parent has been the CEO of CAE Inc.
  since October 2009. He joined the Corporation 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
  25 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 also a member of
  the Board of Directors of the Canadian Association of Defence and Security
  Industries (CADSI).General Peter J. 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 a member
  of the U.S. Joint Chiefs of Staff from 2003 until 2007. Prior to his first
  retirement, he served as the Commander‐in‐Chief,
  U.S. Special Operations Command from 1997 to 2000. He was the owner/president
  of Quiet Pros, Inc. (defence consulting) from 2000 to 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 Aeroflex Incorporated, as well as several private and non-profit
  companies, the Special Operations Warrior Foundation, and was a Director of
  CAE USA Inc. (from November, 2007 to February, 2009).General Schoomakeris a member of the Human Resources Committee.KatharineB. Stevenson
  Toronto, Ontario, Canada
  (2007)
 Katharine B. Stevensonis
  a corporate Director. She was formerly a senior finance executive at Nortel
  Networks, including holding the position of Corporate Treasurer from 1999
  until 2007.  Prior to joining Nortel Networks, she was a Vice President of JP
  Morgan Chase & Co.Ms. Stevenson serves as a Director on the board of
  Canadian Imperial Bank of Commerce and on its Risk Management Committee.  She
  is also a Director  of Valeant Phamaceuticals, Inc. (serving on its Audit
  & Risk, Transactions & Finance, and Governance Committees), and ofOpen Text Corporation (serving on itsAudit Committee). 
  Ms. Stevenson is a Governor of the University of Guelph.  In  addition, she
  served asthe Chairperson of OSI Pharmaceuticals,
  Inc.’s Audit Committee until the sale of the company, and was the Chairperson
  of the Board of Governors of The Bishop Strachan School, where she
  continues to serve as a Governor.She is certified with
  the professional designation ICD.D granted by the Institute of Corporate
  Directors (ICD).Ms. Stevensonis a
  member of the Audit Committee.Lawrence N. Stevenson
  Toronto, Ontario, Canada
  (1998)
 Lawrence N. Stevenson isManaging Director of Callisto
  Capital, a Toronto-based Private Equity firm which he joined in 2006. He is a
  Director of SNC-Lavalin Group Inc. and chairs its Human Resource Committee. 
  He was the CEO of Pep Boys Inc., an automotive retail and service company
  based in Philadelphia from 2003 until 2006. Prior to that he was the founder
  and CEO of Chapters, Canada’s largest book retailer. He started his business
  career with Bain & Company in London and left as the Managing Director of
  Bain & Company Canada.  Mr. Stevenson has served on numerous public
  company Boards including Oshawa Food Group, Sobeys, Forzani, Chapters, and
  Pep Boys.Mr. Stevenson is Chairman of
  the Human Resources Committee.Lynton R. Wilson, O.C.
  Oakville,
  Ontario, Canada
  (1997)
 Lynton R. Wilson is Chairman
  of the Board of CAE, Chairman of the Daimler Canadian Advisory Council, and a
  Director (Supervisory Board) of Daimler AG.He has
  served as Deputy Minister of Industry and Tourism for the Government of
  Ontario (1978-1981), President, CEO and Chairman of Redpath Industries Ltd.
  (1981-1989), Vice Chairman of the Bank of Nova Scotia (1989-1990), and
  President, CEO and Chairman of BCE Inc. (1990-2000).  Mr. Wilson was Chairman
  of the Board of Nortel Networks Corporation from 2001 to 2005. He also serves
  as Chancellor of McMaster University.
  44


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Officers
 Name and Municipality of Residence and Office held with CAE
 Principal Occupation1Jeffrey G. Roberts
  Hudson,
  Québec, Canada
 Group President, Civil Simulation Products, Training
  and Services of CAE, with CAE since 2002.Martin Gagné
  Blainville,Québec,
  Canada
 Group
  President, Military Simulation Products, Training and Services of CAE, with
  CAE since 1996.Stephane Lefebvre, CA
  Town
  of Mount-Royal, Québec, Canada
 Vice President, Finance and Chief Financial Officer,
  with CAE since 1997; formerly Vice President Finance, Military Simulation and
  Training (2005-2011).Hartland J.A. Paterson
  Westmount,
  Québec, Canada
 Vice President, Legal, General Counsel and Corporate
  Secretary, with CAE since 2001.Antoine Auclair, CA
  St. Lambert, Québec, Canada
 Vice
  President and Corporate Controller (2006 to present); formerly Vice President
  Finance and Controller at Bell Nordiq (2005-2006).Jacques Ferraro, CPA
  Laval, Québec, Canada
 Treasurer (2007 to present); formerly Director
  Treasury and Assistant Treasurer (2003-2007) at CAE.Nick Leontidis
  Ile-Bizard, Québec, Canada
 Executive Vice-President, Strategy and Business Development (2009
  to present), Executive Vice President Sales, Marketing and Business
  Development- Civil Training and Services (2005-2009).Bernard Cormier
  Wolfville,Nova Scotia, Canada
 Vice-President, Human Resources since July 2010.  Formerly
  Vice-President Human Resources at Home Depot Canada and Asia (2004-2008), and
  Vice-President Human Resources at Molson Inc. (2001-2004).
  45


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1Where the date 2006 appears, it signifies the
beginning of the last five years and not necessarily the date upon which the
individual commenced the relevant position or occupation. The Directors and senior
officers of CAE as a group as at the date hereof beneficially own, directly or
indirectly, or exercise control or direction over 2,594,465 common shares which
represent 1.01% of CAE's outstanding common shares. 8.2Cease Trade Orders,
Bankruptcies, Penalties or Sanctions 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. From May 31, 2004 until on or
about June 21, 2005, certain Directors, senior officers and certain current and
former employees of Nortel Networks Corporation (“Nortel”) and Nortel
Networks Limited (“NNL”), including Messrs. Manley and Wilson and Ms.
Stevenson, were prohibited from trading in securities of Nortel and NNL
pursuant to management cease trade orders issued by the Ontario Securities
Commission (“OSC”),theAutorité
des marchés financiers(“AMF”)
and certain other provincial securities regulators (collectively the“Regulators”)
in connection with the delay in the filing of certain of their financial
statements.  The Regulators issued a further management cease trade order
on April 10, 2006 in connection with the delay in filing certain 2005 financial
statements prohibiting certain Directors, senior officers and certain current
and former employees, including Messrs. Manley and Wilson and Ms. Stevenson,
from trading in securities of Nortel and NNL.  Following the filing of the
required financial statements, the OSC and AMF lifted such cease trade orders
effective June 8, 2006 and June 9, 2006, respectively, following which the
other Regulators lifted their cease trade orders. Mr. Manley was a Director of Nortel and NNL when Nortel and NNL were
granted creditor protection under theCompanies’ 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.Also, 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 Companies’ Creditors Arrangement Act (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 February 2011.  Fraser’s common shares were
suspended from trading on the TSX on June 23, 2009.  On March 10, 2011, the OSC
issued a cease trade order against Fraser. Mr.
Craig was a Director of Bell Canada International Inc. when it filed
for court-supervised liquidation under theCCAAin
2003.  Mr. Craig remained as one of two independent Directors to oversee
the company from 2003 to 2007 when it was finally liquidated. Mr. Fell, a
Director of BCE Inc., was appointed a Director of Teleglobe Inc., then a
wholly-owned subsidiary of BCE Inc., on January 23, 2002 and resigned three
months later on April 23, 2002.  Teleglobe filed for court protection
under insolvency status on May 15, 2002. 9.TRANSFER
AGENTS AND REGISTRARS CAE only has common shares
issued.  CAE’s transfer agent is Computershare Trust Company of Canada located
at 100 University Avenue, 9th Floor, Toronto, Ontario, M5J 2Y1.
  46


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10.AUDIT
COMMITTEE 10.1Mandate The
mandate of CAE’s Audit Committee is as set out in Schedule B hereto. 10.2Membership The members of CAE’s Board of
Directors’ Audit Committee are: Mr. James F. Hankinson (chair) Mr. John A. (Ian) Craig Mr.
H. Garfield Emerson Mr.
Paul Gagné Mrs.
Katharine B. Stevenson Each of these members is
independent and financially literate. Mr. Hankinson is a chartered
accountant and has an MBA from McMaster University. In addition to his current
activities set out in the Directors’ table above, he served as President and
Chief Executive Officer of New Brunswick Power Corporation from 1996 to 2002.
In 1973, he joined Canadian Pacific Limited, and served as Chief Operating Officer
from 1990 to 1995. Mr. Hankinson is also a member of the Audit Committee of the
Board of Directors of Maple Leaf Foods Inc. Mr. Craig has extensive board
experience. He is also member of the Audit Committee of ARRIS Group Inc. Mr. Emerson has extensive
board experience, including past service as chairman or member of several public
company Audit Committees. Mr. Gagné is a chartered
accountant.In addition to his current activities set
out in the Directors’ table above, healso serves on the Audit
Committees of the Boards of Directors of Inmet Mining Corporation, Ainsworth
Lumber Co. Ltd.and Textron Inc.The CAE Board has determined that such simultaneous
service does not impair the ability of Mr. Gagné to effectively serve on CAE’s
Audit Committee. Ms. Stevenson has extensive
financial and accounting experience, including from her services as Treasurer
of Nortel Networks Corporation, as Vice President, Corporate Finance with J.P.
Morgan Chase & Co., a global financial services firm based primarily in New
York, and as former chair of the Audit Committee ofOSI
Pharmaceuticals, Inc. She also serves on the Audit Committee of Open
Text Corporation, the Audit & Risk Committee of Valeant Pharmaceuticals
International Inc. and theRisk Management Committee of Canadian Imperial Bank of
Commerce. 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.
  47


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The following chart shows all
fees paid to PwC by CAE and our subsidiaries in the most recent and prior
fiscal years for the various categories of services (generic description only). FEE TYPE
 2011
 2010($ MILLIONS)1. Audit
  services
 2.1
 2.62.
  Audit-related services
 0.5
 0.43. Tax services
 0.5
 0.5Total
 3.6
 3.5
  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’sacquisitions, translation and other miscellaneous
accounting-related services. Tax fees are
related to tax compliance support. 12.ADDITIONAL
INFORMATION 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 Proxy
Information Circular dated June 15, 2011, in connection with CAE's Annual
Meeting of Shareholders on August 10, 2011. Additional financial information,
including comparative consolidated audited financial statements and MD&A,
are provided in CAE’s Annual Report to the shareholders for the financial year
ended March 31, 2011.  A copy of such documents may be obtained from the Vice
President, Global Communications or the Secretary ofCAE
upon request, or are available online at www.sedar.com, as well as CAE’s website at www.cae.com. In addition, CAE will provide
to any person or company, upon request to the Vice President, Global Communications or the Secretary of CAE, the documents specified below: (a)  When
the securities of CAE are in the course of a distribution under a preliminary
short form prospectus or a short form prospectus: (i)    one copy of CAE’s annual information form
together with one copy of any document, or the pertinent pages of any document,
incorporated by reference in such annual information form; (ii)   one copy of CAE’s comparative financial
statements for our most recently completed financial year together with the
accompanying report of the auditors and one copy of CAE’s most recent interim
financial statements for any period after the end of our most recently
completed financial year;
  48


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(iii)  one copy of
the information circular in respect of our most recent annual meeting of
shareholders that involved the election of Directors; and (iv)  one copy of any other documents which are
incorporated by reference into the preliminary short form prospectus or the
short form prospectus and are not required to be provided under (i) to (iii)
above; or (b)  At
any other time, one copy of any other document referred to in clauses (i), (ii)
and (iii) of paragraph (a) above, provided that CAE may require the payment of
a reasonable charge if the request is made by a person or company who is not a
security holder of CAE.
  49


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13.GLOSSARY For the purposes of this Annual Information Form, the
following terms have the meanings set out below: “AIF”means theAnnual Information Form  “Annual Report”means the Annual Report to Shareholders
for the year ended March 31, 2011  “AVS”means CAE’s AugmentedVisionicsSystem  “C4ISR”meansCommand, Control, Communications,
Computers, Intelligence, Surveillance and Reconnaissance  “Canadian GAAP”means the generally accepted accounting
principles in Canada  “CBCA”means theCanada Business Corporations Act  “CCAA”means theCompanies’ Creditors
Arrangement Act  “CE/CDB”means CAE’s Common Environment/Common Data
Base  “COMAC”means Commercial Aircraft Corporation of China, Ltd  “Company”or“CAE”means CAE Inc.  “Consolidated Financial Statements”means the Consolidated Financial Statements
for the year ended March 31, 2011, and the notes thereto  “FFS”means full-flight simulators  “FMS”meansfull-mission
simulators  “FSTD”means flight simulation training devices  “FTD”meansflight
training devices  “FTO”means a flight training organization  “FY2011”means fiscal 2011  “HATSOFF”refers to CAE’s joint venture called the
Helicopter Academy to Train by Simulation of Flying  “HAL”refers to Hindustan Aeronautics Limited  “ICAO”means the International Civil Aviation Organization  “MD&A”means CAE’sManagement’s
Discussion and Analysis of Financial Condition and Results of Operations
  50


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“MFTS”means the United Kingdom’s Military Flying
Training System  “MPL”means the CAE Multi-crew Pilot License  “MSHATF”means CAE’sMedium Support Helicopter Aircrew Training Facility in the U.K.  “OEM” means the original equipment
manufacturer  “OTSP”means Canada’s Operational Training Systems Provider program
for flight and related training  “PwC”means PricewaterhouseCoopers LLP  “RAAF”means theRoyal Australian Air Force  “RPK”meansrevenue
passenger kilometers  “RSEU”means revenue simulator equivalent units  “SADI”means Canada’s Strategic Aerospace and Defence Initiative  “SP/C”means Simulation Products/Civil  “SP/M”means
Simulation Products/Military  “TS/C”means
Training & Services/Civil  “TS/M”means
Training & Services/Military  “UAS”means unmanned aerial systems
  51


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SCHEDULE A  SUBSIDIARIES Set forth below are the names of all the direct and indirect subsidiaries of CAE as at March 31, 2011.  All companies are wholly owned except as noted. Name of Subsidiary
     Jurisdiction of IncorporationCanada7320701 Canada Inc. ................................................................................
     Canada7510438 Canada Inc..................................................................................
     CanadaBGT BioGraphic Technologies Inc..............................................................
     CanadaCAE Datamine Canada Inc. .......................................................................
     CanadaCAE Flightscape Incorporated....................................................................
     OntarioCAE Healthcare Inc. .................................................................................
     CanadaCAE International Holdings Limited ...........................................................
     CanadaCAE Machinery Ltd. .................................................................................
     British ColumbiaCAE Professional Services (Canada) Inc....................................................
     CanadaCAE Railway Ltd. .....................................................................................
     CanadaCAE Services (Canada) Inc........................................................................
     CanadaCAE Simulator Services Inc. ......................................................................
     QuébecCAE Wood Products G.P.
[1]....................................................................
     QuébecCentury Systems Technologies Inc. ............................................................
     CanadaFlight Simulator-Capital L.P.[2](19.5%)....................................................
     QuebecFlight Simulator Capital Management Inc. (19.5%)......................................
     QuebecICCU Imaging Inc. ....................................................................................
     QuebecPresagis Canada Inc. .................................................................................
     CanadaUnited StatesCAE (US) Inc. ..........................................................................................
     DelawareCAE (US) LLC..........................................................................................
     DelawareCAE Civil Aviation Training Solutions Inc....................................................
     FloridaCAE Flight Solutions USA Inc. ..................................................................
     DelawareCAE Global Academy Phoenix Inc............................................................
     ArizonaCAE Healthcare USA Inc. .........................................................................
     DelawareCAE North East Training Inc......................................................................
     DelawareCAE SimuFlite Inc......................................................................................
     TexasCAE USA Inc............................................................................................
     DelawareDatamine North America, Inc. ...................................................................
     ColoradoEmbraer CAE Training Services, LLC. (49%).............................................
     DelawareEngenuity Holdings (USA) Inc. .................................................................
     DelawareKVDB Flight Training Services, Inc. (49%).................................................
     ArizonaPresagis USA Inc. .....................................................................................
     CaliforniaRotorsim USA LLC. .................................................................................
     DelawareEuropeARGE Rheinmetall Defence ElectronicsGmbh/CAE Elektronik GmbH (50%)
[3]
     GermanyBackairn Limited........................................................................................
     United KingdomB.V. Nationale Luchtvaartschool.................................................................
     NetherlandsCAE Aviation Training Peru Inc.
     PeruCAE Aircrew Training Services plc (78%)..................................................
     United KingdomCAE Aviation Training B.V.........................................................................
     NetherlandsCAE Beyss Grundstücksgesellschaft GmbH ...............................................
     GermanyCAE Center Amsterdam B.V.....................................................................
     NetherlandsCAE Center Brussels N.V..........................................................................
     BelgiumCAE Datamine Australia Pty Ltd. ...............................................................
     AustraliaCAE Datamine Chile SA............................................................................
     ChileCAE Datamine Corporate Limited..............................................................
     United KingdomCAE Datamine International Limited...........................................................
     United KingdomCAE Datamine Peru S.A. ..........................................................................
     PeruCAE Datamine Software Limited................................................................
     United KingdomCAE Elektronik GmbH ..............................................................................
     GermanyCAE EngineeringKorlátolt Felelősségű Társaság ........................................
     HungaryCAE Euroco S.à.r.l. ..................................................................................
     LuxembourgCAE Global Academy Évora, SA...............................................................
     PortugalCAE Holdings BV......................................................................................
     NetherlandsCAE Holdings Limited................................................................................
     United KingdomCAE International Capital Management Hungary LLC.................................
     HungaryCAE Investments S.àr.l...............................................................................
     LuxembourgCAE Management Luxembourg S.àr.l.........................................................
     LuxembourgCAE Mining Brasil Soluçoes em Tecnologia Ltda. ......................................
     BrazilCAE Services GmbH.................................................................................
     GermanyCAE Services Italia, S.r.l............................................................................
     ItalyCAE Servicios Globales de Instrucción de Vuelo (España) S.L. ................
     SpainCAE STS Limited......................................................................................
     United KingdomCAE Training Aircraft B.V..........................................................................
     NetherlandsCAE Training Norway AS..........................................................................
     NorwayCAE (UK) plc............................................................................................
     United KingdomCAE Verwaltungsgesellschaft mbH.............................................................
     GermanyCAE-LÍDER Training Do Brasil Ltda.
     BrazilCVS Leasing Limited (13.39%)..................................................................
     United KingdomEmbraer CAE Training Services (UK) Limited (49%).................................
     United KingdomEurofighter Simulation Systems GmbH (12%) .............................................
     GermanyHelicopter Training Media International GmbH (50%).................................
     GermanyHFTS Helicopter Flight Training Services GmbH (25%)..............................
     GermanyInvertron Simulators plc..............................................................................
     United KingdomLandmark Operations Limited.....................................................................
     United KingdomLandmark Training Limited.........................................................................
     United KingdomMineral Industries Computing Limited.........................................................
     United KingdomPresagis Europe (S.A.) ..............................................................................
     FranceRotorsim (Consortium) (50%)
[4]...
     ItalyRotorsim s.r.l (50%)...................................................................................
     ItalySabena Flight Academy NV......................................................................
     BelgiumSabena Flight Academy  Africa (48%).....................................................
     CamerounSabena Flight Academy  Consulting (25%)...............................................
     BelgiumSAGO Grünstucks-Verwaltungsgesellschaft mbH & Co. KG (95%)..........
     GermanyServicios de Instrucción de Vuelo, S.L. (80%)............................................
     SpainSimubel N.V. (a CAE Aviation Training Company).....................................
     BelgiumSIV Ops Training, S.L................................................................................
     SpainZFB Zentrum für Flugsimulation Berlin GmbH (17%)...................................
     GermanyOtherCAE Australia Pty Ltd................................................................................
     AustraliaCAE Aviation Training Chile Limitada
[5].....................................................
     ChileCAE Aviation Training International Ltd......................................................
     MauritiusCAE China Support Services Company Limited .........................................
     ChinaCAE Dubai LLC (49%).............................................................................
     DubaiCAE Flight & Simulator Services Sdn. Bhd. ...............................................
     MalaysiaCAE Flight Training (India) Private Limited (50%).......................................
     IndiaCAE Flight Training Center Mexico, S.A. de C.V. .....................................
     MexicoCAE India Private Limited (76%)...............................................................
     IndiaCAE Japan Inc. .........................................................................................
     JapanCAE Labuan Inc. ......................................................................................
     MalaysiaCAE Professional Services Australia Pty Ltd. .............................................
     AustraliaCAE Simulation Technologies Private Limited............................................
     IndiaCAE Singapore (S.E.A.)Pte Ltd...............................................................
     SingaporeCAE South America Flight Training do Brasil Ltda......................................
     BrazilChina Southern West Australia Flying College Pty Ltd (47%)......................
     AustraliaDatamine South Africa (Pty) Ltd. ...............................................................
     South AfricaEmirates-CAE Flight Training (L.L.C.) (49%).............................................
     DubaiFlight Training Device (Mauritius) Limited....................................................
     MauritiusHATSOFF Helicopter Training Private Limited (50%)................................
     IndiaInternational Flight School (Mauritius) Ltd. .................................................
     MauritiusKestrel Technologies Pte Ltd. ....................................................................
     SingaporeNational Flying Training Institute Private Limited (51%) ..............................
     IndiaSimulator Servicios Mexico, S.A. de C.V. .................................................
     MexicoZhuhai Free Trade Zone Xiang Yi Aviation Technology Company Limited...
     ChinaZhuhai Xiang Yi Aviation Technology Company Limited (49%)...................
     China
  [1]Partnership
 [2]Partnership
 [3]Partnership
 [4]Partnership
 [5]Partnership
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DISCONTINUED OR
INACTIVE Name of Subsidiary
 Jurisdiction of
   IncorporationCAE
  Beteiligungsgesellschaft mbH........................................................
 GermanyCAE
  Center Maastricht B.V. .................................................................
 NetherlandsCAE
  Screenplates SA.............................................................................
 FranceCityLine
  Canadair Simulator und Training GmbH.................................
 GermanyISDAT
  Simulation SDN BHD (20%).....................................................
 MalaysiaExtend
  Inc. .............................................................................................
 UtahSAGO
  Grünstucks-Verwaltungsgesellschaft mbH.................................
 Germany
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SCHEDULE
B CAE Inc. Membership and
Responsibilities of the
Audit Committee of the Board of Directors
 Role and Membership The Audit Committee (the“Committee”)
shall be a committee to the Board of Directors. The Committee shall consist
of not fewer than four (4) such directors, one of whom shall be the Chairman of
the Committee. All members of the Committee shall be independent directors, as
determined by the Board taking into consideration applicable laws, regulations
and other requirements applicable to such determination. Each member shall
annually certify to CAE as to his or her independence, in form compliant with
the standards of independence set out by regulatory authorities, stock
exchanges and other applicable laws, regulations and requirements.  Each member
shall be able to read and understand financial statements (balance sheet,
income statement, cash flow statement) that present a breadth and level of
complexity of accounting issues that are generally comparable to the breadth
and complexity of the issues that can reasonably be expected to be raised by
CAE's financial statements, or shall become able to do so within a reasonable
period of time after joining the audit committee. One member shall have past
employment in finance, accounting or any other comparable experience or
background providing financial expertise. The Committee composition, including
the qualifications of its members, shall comply with the requirements of
regulatory authorities, stock exchanges and other applicable laws, regulations
and requirements, as such requirements may be amended from time to time. The Chairman of the Committee
and its members shall be elected annually by the Board of Directors following
recommendation of the Governance Committee and the Chairman of the Board. If
the designated Chairman of the Committee is unable to attend a Committee
meeting, the other Committee members present may elect a replacement Chairman
for that meeting. A majority of members of the
Committee shall constitute a quorum. Responsibilities Work closely and
cooperatively with such officers and employees of CAE, its auditors, and/or
other appropriate advisors and with access to such information as the Committee
considers to be necessary or advisable in order to perform its duties and
responsibilities, as assigned by the Board of Directors, in the following
areas: Review of Audited Financial Statements 1.         Review
the annual audited consolidated financial statements and make specific
recommendations to the Board of Directors. As part of this process the
Committee should: ·Review the appropriateness of and any changes to the
underlying accounting principles and practices. ·Review the appropriateness of estimates, judgments of choice
and level of conservatism of accounting alternatives. ·Review financial risks, uncertainties, commitments and
contingent liabilities and discuss policies with respect to financial risk
assessment and provide oversight of the existenceand
effectiveness of CAE’s group-wide risk management program.
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·Review the annual audited financial statements and actuarial
valuation reports, if any, for the Supplementary Pension, Designated Executive
Pension Plan, Employee Pension Plan, U.S. 401(K) Retirement Savings Plans and
other material pension plans of the Company and its subsidiaries. Engagement
of External Auditors 2.         Recommend to the Board of Directors
the appointment of the external auditor, which shall be accountable to the
Board and the audit committee as representatives of the shareholders. 3.         Review and
approval of engagement letter. As part of this review the committee reviews and
recommends to the Board of Directors for their approval the auditors’ fees for
the annual audit. The Committee is responsible for the oversight of the work of
the Company’s auditor for the purpose of preparing or issuing an audit report
or related work, and the auditor shall report directly to the Committee. The
Committee shall pre-approve the engagement of the external auditors for the
audit, any audit-related services, advice with respect to taxation matters and
other permitted services and fees for such services, including approval
processes for any such service that comply with the requirements of regulatory
authorities, stock exchanges and other applicable laws, regulations and
requirements, as amended from time to time. 4.         Receipt of a
written statement not less than annually from the external auditor describing
in detail all relationships between the auditor and CAE that may impact the
objectivity and independence of the auditor. Review annually with the Board of
Directors the independence of the external auditors and either confirm to the
Board of Directors that the external auditors are independent in accordance
with applicable listing requirements, laws, regulations and other rules, or
recommend that the Board of Directors take appropriate action to satisfy itself
of the external auditors’ independence. Review and approve CAE's hiring
policies regarding partners, employees and former partners and employees of the
present and former external auditor of CAE. Review and Discussion with External Auditors 5.         Review
with the external auditors and management the annual external audit plans which
would include objectives, scope, timing, materiality level and fee estimate. 6.         Request and review
an annual report prepared by the external auditors of any significant
recommendations to improve internal control and corresponding management
responses. Request and review an annual report prepared by the external
auditors regarding the auditor’s internal quality-control procedures, material
issues raised by the most recent internal quality-control review of the
auditors, or by any inquiry or investigation by governmental or professional
authorities, within the preceding 5 years, respecting one or more audits
carried out by the auditors, and any steps taken to deal with any such issues.
Meet separately, periodically, with external auditors. 7.         Make specific and
direct inquiry of the external auditors relating to: ·Performance of management involved in the preparation of financial
statements. ·Any restrictions on the scope of audit work. ·The level of cooperation received in the performance of the audit. ·The effectiveness of the work of internal audit.
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·Anyunresolved material differences of opinion or disputes between management
and the external auditors, and be directly responsible for overseeing the
resolution of disagreements between management and the external auditors
regarding financial reporting. ·Any transactions or activities which may be illegal or unethical. ·Independence of the external auditor including the nature and fees
of non-audit services performed by external audit firm and its affiliates. Any
other matter so desired. Review
and Discussion with Internal Auditors 8.         Review the annual
internal audit plan including assessment of audit risk, planned activities,
level and nature of reporting, audit organization and annual budget. Meet
separately, periodically, with internal auditors. 9.         Make specific and
direct inquiry of the internal auditors relating to: ·Any significant recommendations to improve internal
controls and corresponding management responses. ·The level of independence of internal audit. ·Any material disagreement with management. Any other matter so
     desired. Review
and Discussion with Management 10.       Review and assess
the adequacy and quality of organization and staffing for accounting and
financial responsibilities as well as discuss with management the annual
audited financial statements and quarterly financial statements and the
independent auditor, including CAE’s disclosures under Management’s Discussion
and Analysis of Financial Condition and Results of Operations(“MD&A”). 11.       Review with
management the annual performance of external and internal audit. Review
of other Public Documents 12.       Ensure the Committee reviews all
material public documents relating to CAE’s financial performance, financial
position or analyses thereon, including financial statements, MD&A, annual
and interim earnings press releases and the AIF, prior to their release. Review
and monitor practices and procedures adopted by the Company to assure
compliance with applicable listing requirements, laws, regulations and other
rules, and where appropriate, make recommendations or reports thereon to the
Board of Directors.Discuss CAE’s financial information and earnings
guidance, if any, provided to analysts and rating agencies. 13.       Review
significant changes in the accounting principles to be observed in the
preparation of the accounts of the Company and its subsidiaries, or in their
application, and in financial disclosure presentation. 14.       Prepare such
reports of the Committee as may be required by any applicable securities
regulatory authority to be included in the Company’s information circular or
any other disclosure document of the Company.
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15.       The
Committee shall review and approve the procedures set out in the Company’s
Corporate Communications & Disclosure Policy and will annually verify that
adequate procedures exist within the Company for the review of its disclosure
of financial information derived from its financial statements. Other
Responsibilities 16.       The Board may refer
from time to time such matters relating to the financial affairs of the Company
as the Board may deem appropriate. Meetings 17.       The Committee shall
meet at such times as deemed necessary by the Board or the Committee and shall
report regularly to the Board. Engagement
of Professional Services 18.       The Committee is
authorized to engage independent counsel, and other advisers, as it determines
necessary to carry out its duties. The Company shall provide for appropriate
funding, as determined by the Committee, for such services. Handling
of Complaints 19.       The Committee shall
maintain procedures for the receipt, retention and treatment of complaints received
by the Company regarding accounting, internal accounting controls or auditing
matters, and the confidential, anonymous submission by employees of the Company
of concerns regarding questionable accounting or auditing matters. Annual
Review 20.       The Committee shall
review and assess the adequacy of its mandate annually, report to the Board of
Directors thereon and recommend any proposed changes to the Board of Directors
for approval. The Committee shall also perform an annual evaluation of the
performance of the Committee and shall report to the Chairman of the
Governance Committee of the CAE Board of Directors thereon.
 
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