2014 ANNUAL INFORMATION
FORM (Fiscal
Year Ended March 31, 2014)         CORPORATE OFFICE 8585 Chemin
Côte-de-Liesse Saint-Laurent,
Québec June 12, 2014Canada 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.4 2.3CAE’s
Vision.6 2.4Our
Strategy and Value Proposition.6 2.5Industry
Overview and Trends.8 2.6Research
and Development (“R&D”)9 2.7Production
and Services.10 2.8Specialized
Skills and Knowledge.10 2.9Competition.11 2.10Components.12 2.11Intangible
Properties.12 2.12Cycles.13 2.13Environmental
Liabilities.13 2.14Employees.13 2.15Foreign
Operations.13 3.DESCRIPTION OF THE BUSINESS
SEGMENTS..14 3.1Simulation
Products/Civil (“SP/C”)14 3.2Training
& Services/Civil (“TS/C”)15 3.3SP/C
and TS/C Market Trends and Outlook.17 3.4Simulation
Products/Military (“SP/M”)18 3.5Training
& Services/Military (“TS/M”)20 3.6SP/M
and TS/M Market Trends and Outlook.21 3.7Military
Contracts.23 3.8New
Core Markets.23 4.RISK FACTORS..26 4.1Risks
relating to the Industry.26 4.2Risks
relating to the Company.28 4.3Risks
relating to the Market30 5.DIVIDENDS..31 6.DESCRIPTION OF CAPITAL STRUCTURE..32 7.MARKET FOR SECURITIES..32  1


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7.1Trading Price and Volume.32 8.DIRECTORS AND OFFICERS..33 8.1Name
and Occupation.33 8.2Cease
Trade Orders, Bankruptcies, Penalties or Sanctions.37 9.TRANSFER AGENTS AND REGISTRARS..38 10.AUDIT COMMITTEE..38 10.1Mandate.38 10.2Membership.38 11.Approval
of Services..39 12.ADDITIONAL INFORMATION..39 GLOSSARY..41 SCHEDULE A
– SUBSIDIARIES SCHEDULE B - AUDIT
COMMITTEE MANDATE  2


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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, 2014, and the notes thereto (“Consolidated Financial
Statements”) appear in the Annual Report to Shareholders for the year ended
March 31, 2014 (“Annual Report”). The Consolidated Financial Statements
were prepared in accordance with Part 1 of the CPA Canada Handbook, referred to
as IFRS. The information contained in the Management’s Discussion and Analysis
and the Consolidated Financial Statements for the year ended March 31, 2014,
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 2014 (“FY2014”) refer to the period from April 1, 2013 to
March 31, 2014, references to fiscal 2013 refer to the period from April 1, 2012
to March 31, 2013, and references to fiscal 2012 refer to the period from April
1, 2011 to March 31, 2012. ThisAIF
containsforward-looking
statements about our activities, events and developments that we expect to or
anticipate may occur in the future including, for example, statements about our
vision, strategies, market trends and outlook, future revenues, capital
spending, expansions and new initiatives, financial obligations and expected
sales. Forward-looking statements normally contain words likebelieve,expect,anticipate,plan,intend,continue,estimate,may,will,should, strategy, futureand similar
expressions. By their nature, forward-looking statements require us to make
assumptions and are subject to inherent risks and uncertainties associated with
our business which may cause actual results in future periods to differ
materially from results indicated in forward-looking statements. While these
statements are based on management’s expectations and assumptions regarding historical
trends, current conditions and expected future developments, as well as other
factors that we believe are reasonable and appropriate in the circumstances,
readers are cautioned not to place undue reliance on these forward-looking
statements as there is a risk that they may not be accurate. Important
risks that could cause such differences include, but are not limited to, risks
relating to the industry such as competition, level and timing of defence
spending, government-funded military programs, constraints within the civil
aviation industry, regulatory rules and compliance and conflict mineral rules,
risks relating to CAE such as product evolution, R&D activities,
fixed-price and long-term supply contracts, procurement and original equipment
manufacturer (OEM) leverage, warranty or other product-related claims, product
integration, protection of intellectual property, key personnel, environmental
liabilities and claims arising from casualty losses, integration of acquired
businesses, our ability to penetrate new markets, length of sales cycle and our
reliance on technology, and risks relating to the market such as foreign
exchange, availability of capital pension plan funding, doing business in
foreign countries and income tax laws. Additionally, differences could arise
because of events that are announced or completed after the date of this AIF,
including mergers, acquisitions, other business combinations and divestitures.
You will find more information in theRisk Factorssection of this AIF. We caution readers that
the risks described above are not necessarily the only ones we face; additional
risks and uncertainties that are presently unknown to us or that we may
currently deem immaterial may adversely affect our business. Except
as required by law, we disclaim any intention or obligation to update or revise
any forward-looking statements whether as a result of new information, future
events or otherwise. The forward-looking information and statements contained
in this AIF are expressly qualified by this cautionary statement.  1.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. 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.  3


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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 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 also leverage our simulation capabilities in healthcare
and mining markets. We are globally diversified with approximately 8,000 people
at more than 160 sites and training locations in approximately 35 countries. In
fiscal 2014, we had annual revenue exceeding $2.1 billion, approximately 90% of
which came from worldwide exports and international activities. We have the
largest installed base of civil and military flight simulators and a broad global
aviation training network. We offer civil aviation, military and helicopter
training services in 67 locations worldwide where we train approximately 120,000
civil and military crewmembers annually. Our main products include full-flight
simulators (“FFS”s), which replicate aircraft performance in a full
array of situations and environmental conditions. We apply our simulation
expertise and operational experience to help customers enhance safety, improve
efficiency, maintain readiness and solve challenging problems. Approximately half
of our revenue comes from the sale of simulation products, software and
simulator updates, and the balance from services including training,
maintenance, ab initio pilot training, aircraft crew sourcing and integrated
enterprise solutions. Founded in 1947
and headquartered in Montreal, Canada, CAE has built an excellent reputation
and long-standing customer relationships based on nearly 70 years of
experience, strong technical capabilities, a highly trained workforce and global
reach. CAE’s common
shares are listed on the Toronto and New York stock exchanges under the symbol
CAE. 2.2Geographic and Segment Revenues and Locations CAE’s consolidated
revenue from continuing operations in fiscal 2013 and 2014 was $2.035 billion and
$2.115 billion,respectively,
and is broken down as follows: Revenue by Segment (%)
 
 
 
 Geographic
  Distribution of Revenue (%)2014
 2013
 
 
 2014
 2013SP/C
 22
 22
 
 US
 31
 30TS/C
 34
 32
 
 Germany
 3
 4SP/M
 25
 28
 
 Other European countries
 18
 16TS/M
 14
 12
 
 UK
 12
 12NCM
 5
 6
 
 Other Asian countries
 9
 10100
 100
 
 Canada
 8
 10Australia
 4
 4China
 7
 8United Arab Emirates
 3
 2Other countries
 5
 4100
 100
    4


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The following sets
out, by business segment, the locations of CAE’s primary subsidiaries and
divisions: Location
 SP/C
 SP/M
 TS/C
 TS/M
 NC/MCanadaMontreal,
  Québec
 ü
 ü
 ü
 ü
 üToronto,
  Ontario
 
 
 üOttawa, Ontario
  Sudbury, Ontario
 
 
 
 ü
 üHalifax, Nova
  Scotia
 
 ü
 
 üVancouver,
  British Columbia
 
 
 üEuropeAberdeen, United
  Kingdom
 
 
 üAmsterdam,
  Netherlands
 
 
 üBarcelona, Spain
 
 
 üBrussels,
  Belgium
 
 
 üBurgess Hill,
  United Kingdom
 
 ü
 ü
 üBudapest,
  Hungary
 
 üCopenhagen, Denmark
 
 
 üDublin, Ireland
 
 
 üGatwick, United
  Kingdom
 
 
 üMadrid, Spain
 
 
 üMainz, Germany
 
 
 
 
 üManchester,
  United Kingdom
 
 
 üStavanger,
  Norway
 
 
 üSesto Calende,
  Italy
 
 
 üShannon, Ireland
 
 
 üOslo, Norway
 
 
 üOxford, United
  Kingdom
 
 
 üRAF Base,
  Oxfordshire, United Kingdom
 
 
 
 üStockholm,
  Sweden
 
 
 üStolberg,
  Germany
 
 ü
 
 üVélizy, France
 
 üVeszprem,
  Hungary
 
 
 
 
 üWells, Somerset,
  United Kingdom
 
 
 
 
 üUnited StatesDallas/Fort
  Worth, Texas
 
 
 üMesa, Arizona
 
 
 üMorristown, New
  Jersey
 
 
 üOrlando, Florida
 
 ü
 
 üPhoenix, Arizona
  Redmond,
  Washington
 
 
 ü
 
 üRichardson,
  Texas
 
 üSarasota,
  Florida
 
 
 
 
 üTampa, Florida
 
 ü
 
 üLittleton,
  Colorado
 
 
 
 
 üLittle Rock,
  Arkansas
 
 
 
 üBurlington,
  Massachusetts
 
 üSan Jose,
  California
 
 üOtherBeijing, China
 
 
 üBengaluru, India
 ü
 ü
 ü
 üBrisbane,
  Australia
 
 
 
 
 üBrunei
 
 ü
 
 üNew Delhi, India
 
 
 ü
 
 üDubai, United
  Arab Emirates
 
 
 üGondia, India
 
 
 üHong Kong, China
 
 
 üJohannesburg,
  South Africa
 
 
 
 
 üKaraganda,
  Kazakhstan
 
 
 
 
 üKuala Lumpur,
  Malaysia
 
 
 üLima, Peru
 
 
 ü
 
 üManila/Clark, Philippines
 
 
 üMelbourne,
  Australia
 
 
 ü
 üMexico City,
  Mexico
 
 
 üNova Lima,
  Brazil
 
 
 
 
 üPerth, Australia
 
 
 ü
 
 üSantiago, Chile
 
 
 üSeoul, Korea
 
 
 üShanghai, China
 
 
 üSingapore,
  Malaysia
  Sydney,
  Australia
 ü
 ü
  ü
 ü
  5


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2.3CAE’s Vision We intend to be the partner of choice for customers operating in
complex mission-critical environments by providing the most innovative modeling
and simulation-based solutions to enhance safety and improve efficiency. 2.4Our Strategy and Value Proposition Our
strategy We are a
world-leading provider of modeling and simulation-based training solutions. We
have a long history of serving the needs of customers in the civil aerospace
and defence and security markets, and the CAE brand has become synonymous with
safety, quality and reliability the world over. Our focus involves
supporting airlines, aircraft operators and defence and security forces with
their ongoing, long-term training needs. In defence and security, this means
helping forces to ensure mission readiness, and in civil aviation, the
necessity for training solutions is driven by the need for uncompromised safety
in globally regulated markets. Our unique ability to provide comprehensive
solutions, our technology leadership, proven customer support and a vast globalpresence
differentiates us in our end markets. We are invested in both mature and
emerging markets and this enables us to capitalize on current demand 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 higher growing, emerging 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 product and service solutions to enhance our customers’ planning and
decision-making abilities. 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; -Total
array of training products and services solutions; -Broad-reaching
customer intimacy;  6


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-High
brand equity; -Proven
systems engineering and program management processes; -Best-in-class
customer support; -Well
established in 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 in use today, 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, trainer
aircraft and helicopter platforms for the military. We also have extensive
knowledge, experience and credibility in designing and developing simulators
for first-to-market aircraft of major aircraft manufacturers. We now use our
expertise in modeling and simulation beyond training into other mission‐critical
areas, such as emergency response services, where these technologies are used
to support superior decision‐making capabilities. As well, we have
extended these capabilities to the healthcare and mining markets.  Comprehensive
knowledge of training and learning methodologies With nearly 70
years of experience in simulation, we are an industry expert in aviation
training and are the industry’s training solution one-stop shop. We are
constantly introducing and implementing ways to improve safety and training
efficiency, from ab initio to professional pilot training. For instance, data
from simulation
training sessions is captured, analyzed and displayed to provide instructors
and trainees with real-time feedback on training performance, allowing focus on
priority development areas to increase training efficiency. We are also playing
a leadership role in supporting airlines toward the adoption of the Multi-Crew
Pilot Licence (“MPL”) program, the most recent pilot licence introduced
by the International Civil Aviation Organization (“ICAO”), which embeds
the latest advances in learning leveraging simulation. Another example
is our industry leadership towards implementing Upset Prevention and Recovery
Training, specifically geared toward preparing pilots to address adverse and
extreme flying conditions. In the defence and security market, we
are increasingly leveraging our unique training systems integration
capabilities to offer customers across air, land, sea and public safety
comprehensive training solutions that can include training centres, training
services and simulation products. We are using our experience gained
in the development of training and learning methodologies in aerospace to bring
and enhance modeling and simulation technologies to our training solutions in
the healthcare and mining domains. In healthcare, we offer both training
expertise and the widest breadth of simulation training products in the
industry, with surgical, patient, and ultrasound simulators and trainers for
more than 20 medical specialties. Our simulation centre management system,
LearningSpace, effectively captures every aspect of a live simulation, allowing
the delivery of instant, multimedia debriefing sessions and ongoing training
improvement. In mining, we have borrowed from aviation standards to introduce
new solutions to train mining vehicle operators.  Total array of
training products and services solutions We offer a wide
array of training products, from desktop trainers to FFSs, addressing both our
civil and defence and security customers’ training needs. With a large network
of training centres, we are also a global leader in aviation training providing
the complete solution to meet our customers’ training and pilot sourcing needs.
Our pilot training programs span over 100 different civilian aircraft models
including commercial airliners, business aircraft and helicopters. In the
defence and security market, our programs involve training for transport
aircraft, helicopters, trainer aircraft, tankers, maritime patrol aircraft, remotely
piloted aircraft (“RPA”) systems, tanks, armoured fighting vehicles,
ships and other platforms. Our range of training services includes the
provision of curricula for pilot type training, cabin crew and maintenance
training. Our civil pilot sourcing 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 CAE Oxford Aviation Academy (“CAE OAA”).  Broad-reaching
customer intimacy The
realization of our mission to be our customers’ partner of choice is evident in
the relationships that we have with most of the world’s airlines, aircraft
operators, governments and original equipment manufacturers (“OEMs”).
Our broad geographic coverage allows us to respond quickly and cost effectively
to customer needs and new business opportunities while having a deep
understanding of the regulations and customs of the local market. We operate a
fleet of over 259 full-flight and full-mission simulatorsin
67 civil aviation and military training locations worldwide to meet the wide
range of operational requirements of our customers. Among our thousands of
customers, we have long-term training services agreements and joint ventures
with more than 30 major airlines and aircraft operators around the world and
relationships with approximately 50 defence operators in approximately 35
countries.  7


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High brand equity We are
unique in the simulation industry as the only truly global company focused on
modeling, simulation, and training. We continually reinforce our focus,
experience and technology leadership as we position the Company with customers
around the world. We invest in building and maintaining our brand and
reputation as a company committed to innovation that will help its customers
enhance safety, improve efficiency, enhance decision-making and achieve mission
readiness. We are focused on offering the aviation industry’s most
comprehensive portfolio of simulation products, training services, and crew
sourcing with the ability to tailor a flexible training solution to the
individual requirements of each of our customers. Our simulation products are
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, seven days a week. 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. The CAE brand is synonymous
with industry-leading simulation technology as well as superior training and customer
support and we strive to be our customers’ partner of choice for any simulation
and training related requirement.  Proven systems
engineering and program management processes We continue to
evolve our technology platform to meet the changing market needs, and to
develop solutions and deliver technically complex programs to help ensure that
there are trained and mission-ready aircrew and combat troops around the world.
We have a proven track record on delivering complex civil and military
first-to-market simulators. Our defence and security business unit
has several of its organizations around the world certified to Level 3 or above
of the Capability
Maturity Model Integration (“CMMI”), which is an internationally
recognized model of industry best practices in organizational process
improvement, project management, systems engineering and software development. Our
experience, coupled with our continued investment in research and development,
strengthens our technological leadership as well as our management expertise to
provide programs featuring sensor simulation for maritime operations, synthetic
tactical environments for naval and fighter operations as well as 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 emerging markets We
pride ourselves in our local presence in each of our global markets, while
simultaneously maintaining the efficiencies and advantages of being an
international organization. This approach has enabled us to lead in high-growth
markets like China, Eastern Europe, the Indian sub-continent, the Middle East,
South America and Southeast Asia, where we have been active for several
decades. 2.5Industry Overview and Trends The civil, defence and security, healthcare and mining
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. CAE believes the defence and security market is mostly
influenced by a combination of defence spending and the nature of military
activity. Demand for CAE’s defence and security products and services are also
influenced by the degree to which governments globally lean towards the
outsourcing of functions to the private sector. As well, CAE’s defence and
security business is affected bythe 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.  8


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CAE believes the healthcare market is influenced by developments
in treatments for healthcare issues and, in some markets, government spending.
Demand for CAE’s healthcare products and services are also influenced by the
degree to which synthetic training and treatment rehearsal solutions gain
market acceptance as an alternative to the present system of on-the-job
learning assisted by seasoned clinicians. CAE believes the mining market is influenced by economic
cycles and GDP growth. Demand for CAE’s mining products and services are also
influenced by the need for operational efficiencies that can be addressed by
CAE Mining’s solutions. 2.6Research and Development (“R&D”) CAE’s competitive
strategy is hinged on technology leadership of its products and services. This
strategy is underpinned by a strong innovation culture and a long-standing
commitment to performing R&D. CAE uses leading practices
in the Global Engineering organization to ensure strategic alignment of the
technology roadmap with the business strategy. This special governance
mechanism, called the Innovation Board, is held periodically at the most senior
executive level of the Company, to align and review the vision and strategic
direction for R&D. Making innovation materialize at all levels within CAE’s
products, services and processes throughout the operational execution continues
to be a strategic priority. To this end, a company-wide “Open Innovation
Challenge” process is deployed to all employees using an internal social media
platform to stimulate innovation. Our employees are proud to contribute to the innovation
journey leading to new products and services. We are pleased to
report that the strategic initiative of technology convergence is progressing
as planned and is already demonstrating benefits. This project consolidates the
complete CAE technology stack into a single common platform that will provide
the building blocks for all of CAE’s products for the future. We were also
pleased to introduce in FY2014 the new full flight simulator benchmark in the
industry, the CAE 7000XR. This simulator defines new customer experience
standards for pilots, for instructors, for maintenance technicians, and for
training center operators. It includes new customer interfaces, such as a next
generation instructor “office” which provides real time brief/debrief
capabilities. It also features new embedded training capabilities such as upset
recovery training systems as mandated by new regulations. This next generation
instructor environment is significant. The 7000XR also provides a novel
computing infrastructure that leverages cloud big data technologies to provide
a superior level of operational efficiency. In addition to the new software
design, the hardware for this simulator has been optimized to reduce long-term
life cycle operating costs. Continuing on the
success of the 3000 series light helicopter simulator platform introduced in
2012, CAE has developed and launched a new larger version for mid to heavy
helicopters. The CAE 3600 series simulator has successfully entered the market
with innovative design features such as a 12ft direct projection visual system
providing a more immersive experience. CAE has continued
to advance its leadership position in simulation synthetic environments with
the release to market of its Dynamic Synthetic Environment (“DSE”) product
suite. The complete Presagis software tool set and the complete CAE synthetic
software stack have been augmented to be fully dynamic, persistent and
inter-operable. This technology places CAE in a leading position to support the
military forces vision of joint synthetic training. As a significant
outcome of the 2014 R&D investment, CAE is pleased to report that it has
filed for nine patents covering the latest innovations in its products. In 2009, CAE
announced an investment of $714 million in Project Falcon, an R&D program
that spanned over five years. Project Falcon concluded successfully in 2014.
Significant products and technologies were developed which contributed to the
success of the company. We are pleased to report that the Government of Canada
has decided to continue its support to CAE’s strategic technology development
with a repayable loan of $250 million, which was signed on February 27, 2014
for Project Innovate. CAE launched Project, Innovate, to develop its next
generation of simulation platforms for its civil aviation and defence markets.
It will create a state-of-the-art modular system which will be more efficient
and much easier to deploy and maintain. The new system will also enhance CAE's
user experience. In addition, CAE will develop technologies and training
solutions geared towards joint and networked operations in order to be a
training systems integrator in air, sea and land domains.   9


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2.7Production and Services Production CAE’s manufacturing and assembly facilities are located in Montreal,
Canada; Tampa & Sarasota, U.S.; Burgess Hill, U.K.; Bengaluru, India; and
Stolberg, Germany. The manufacturing process for CAE Full Flight simulators is complex,
involving the coordination of more than 200,000 parts and millions of lines of
software code. The manufacture of a simulator includes six major stages:
design, manufacture & assembly, integration & testing, shipping, site
installation and final qualification on site. Military simulators, by virtue of
their tactical environments and weapons/sensor systems, are more complex and
unique than civil simulators and therefore may take more time to design,
manufacture and test. Manufacturing is organized into ten manufacturing cells comprised of the
following three major disciplines: electronics (printed circuit board
assembly), electrical (cables, cabinets, aircraft instruments and avionics),
and mechanical (sheet metal and machine shop, precision assembly and
hydraulics, structural assembly and final assembly).  Each cell has its own
planning, methodizing and set of specific products to deliver, which
establishes clear accountability for manufacturing performance. 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, Bengaluru, Sydney, and Stolberg sites. The Tampa facility
conducts military systems integration and testing activities for simulation
equipment destined for U.S. military-related contracts. 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 67 locations across South America, North America, Europe, the
Middle East, India, China, Russia and Southeast Asia. These locations include Type Rating Training Organizations (“TRTO”)
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 CAE Oxford Aviation Academy (“CAE
OAA”) 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 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
also provides analytical and engineering services that leverage modeling and
simulation and other advanced technologies to develop innovative solutions to
our clients’ most complex challenges. CAE offers clients a range of services
and subject matter expertise, including human factors and human system
integration, capability based planning, advanced synthetic environments, system
and software engineering for Command, Control, Communications, Computers,
Intelligence, Surveillance and Reconnaissance (“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.  Recognizing that engineering
talent is at the center of the Company innovation capability, CAE has an
industry unique engineering career framework that will benefit the talent
pipeline within the CAE engineering community.   10


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2.9Competition We sell our
simulation equipment and training services in highly competitive markets. New
entrants have emerged in recent years and the competitive environment has
intensified as aerospace and defence companies position themselves to try to
take greater market share by consolidating existing civil simulation companies
and by developing their own internal capabilities. Most recently, Lockheed
Martin, L-3 Communications and Textron have all acquired commercial aircraft
simulator competitors. Most of our competitors in the simulation and training
markets are also involved in other large segments of the aerospace and defence
complex beyond simulation and training. As such, several of them are larger
than we are, and may 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. Boeing has a licencing model for 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 Boeing simulators. Airbus
has decided to deepen its services offered to customers for training services.
OEMs like Airbus and Boeing have certain advantages in competing with
independent training service providers. An OEM controls the pricing for the
data, parts and equipment packages that are often required to manufacture a
simulator specific to that OEM’s aircraft, which in turn is a critical capital
cost for any simulation-based training service provider. OEMs may be in a
position to demand licence royalties to permit the manufacturing of simulators
based on the OEM’s aircraft, and/or to permit any training on such simulators.
CAE also has some advantages, including being a simulator manufacturer, having
the ability to replicate certain aircraft without data, parts and equipment
packages from an OEM, and owning a diversified training network that includes
joint ventures with large airline operators which are aircraft customers for
OEMs. We work with some OEMs on business opportunities related to equipment and
training services. Periods of economic recession or credit
constraints for civil market products lead to heightened competition for each
available civil aircraft simulator sale. This in turn leads to a reduction in
profit on sales won during that period. Should such conditions occur, 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 (“L-3
Communications”) and Training, Boeing, Rockwell Collins, Indra Systems, BAE
Systems, Flight Safety International, SAIC, Leidos, Raytheon, General Dynamics,
Cubic, Elbit, Eurocopter, AgustaWestland,  Rheinmetall Defence Electronics,
Saab and Textron.  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. CAE’s major competitors in the civil simulation equipment market include Lockheed
Martin, Flight Safety International, L3 Communications, Rockwell Collins, Tru
Simulation & Training (Textron) and smaller players such as Indra. 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,
Lufthansa Flight Trainingand PanAm
International Flight Academy (ANA Holdings Inc).   11


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2.10Components CAE deals with a
variety of goods and services suppliers across our business segments.  Although
we are not overly dependent on any single supplier for any key manufacturing
components or services,CAE’s
products contain sophisticated computer systems that run on software and
operating systems supplied to us by third parties.  Such computer systems and
software may not always be available to CAE to license or purchase. The production of CAE simulators is often dependent upon receipt by CAE
of data, including confidential or proprietary data, concerning the functions,
design and performance characteristics of a product or system, the performance
of which CAE’s simulator is intended to simulate.  CAE cannot guarantee that we
will be able to obtain such data on reasonable terms, or at all.  Original
manufacturers of these products and systems could object to the simulation by
CAE of components of, or the totality of their products or systems, or could
request high license fees that could negatively impact CAE’s profit margins. Most of the raw materials used in manufacturing (such as sheet metal,
wires, cables and electronic integrated circuits) are available off the shelf
from multiple commercial sources. The unique parts are the aircraft parts.
These are usually available from aircraft manufacturers, the resale market, decommissioned
or surplus aircrafts as well as through simulated part manufacturers. The availability of most parts in a timely manner facilitates a
relatively smooth production flow. Aircraft parts, in some instances, may be an
exception, especially on new/prototype aircraft types or those out of
production.  The timely delivery of these parts is often the responsibility of
CAE’s customers. CAE’s contracts normally link these aircraft parts delivery
dates to the simulator delivery schedules. In cases where such aircraft parts
cannot be made available, CAE’s customers rely on CAE’s ability to make
simulated parts. 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. 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 Investissement Québec (“IQ”) restrict, in some
cases, CAE’s ability to license (other than to customers) or transfer ownership
of intellectual property developed
with the program’s support until all funding has been repaid or consent has
been obtained. Given CAE’s many
decades of success in the field of aviation simulation, CAE believes that the
CAE brand and some of our trademarked products have value in the markets we
address.   12


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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. The Mining segment
is primarily tied to operational budgets of mining companies but can be subject
to the cyclicality of the mining industry’s commodity prices, given its link to
general economic conditions. Seasonality is not a major factor other than the
normal budgeting cycles. Healthcare is subject to the irregular timing of
government/military orders. 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. 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. 2.14Employees CAE strives to have practices in place
that drive employee development and engagement through employee communications,
processes such as Kaizen and its Annual Leadership Development Process (“ALDP”).
The Company invests in its employees through technical and leadership training,
as well as developmental career moves. CAE
employs approximately 8,000 employees; of these approximately 1,300are
unionized and covered by 28 different collective agreements all over the world.
The Company maintains constructive relationships with its unions and strives to
achieve mutually beneficial relationships while maintaining cost
competitiveness. 2.15Foreign Operations For the fiscal year ended March 31, 2014, sales to customers outside
Canada accounted for approximately 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, 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;  13


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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”) Designs, manufactures and supplies civil
flight simulation training devices and visual systems We are
the world leader in the provision of civil flight simulation equipment,
including FFSs and a comprehensive suite of integrated training procedures
trainers, flight training devices and web-based e-learning tools, using the
same high-fidelity Level D software as the FFSs. 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 developed
a wealth of experience in developing first-to-market simulators for more than
35 new types of aircraft models, and in recent years we have been developing
simulators for the Airbus A350 XWB, AVIC Medium-Sized Transport, Boeing 747-8,
Mitsubishi Regional Jet (“MRJ”), ATR42-600 and ATR72-600,
Bombardier CSeries, Global 5000/6000, Global 7000/8000 and Learjet 85, Embraer
Phenom 100 and 300, Dassault Falcon 7X and the Commercial Aircraft Corporation
of China, Ltd (“COMAC”) ARJ21 and C919. Leveraging our extensive worldwide
network of spare parts and service teams, we also offer a full range of support
and services. This includes emergency support, simulator updates and upgrades,
maintenance services and simulator relocations. CAE builds civil simulators for all categories of aircraft including
those built by Airbus, Boeing, Bombardier, Cessna, Dassault, Embraer,
Gulfstream, Beechcraft 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 than1,500FFSs and training devices from approximately140commercial airlines, aircraft manufacturers and
third-party training centres in approximately 35 countries. With nearly 70 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
SimfinityTM system, 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. 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 U.S. FAA or
receive similarratings 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.  14


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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$11 to US$20 millionfor an FFS, assuming that OEM-supplied data, parts and equipment are
included (where OEM data, parts and equipment are supplied by CAE’s customer
the pricing will be significantly less). 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: ●The
launch of the CAE 7000XR Series FFS; an evolution of the industry benchmark; ● The launch
of our CAE TroposTM-6000XR CAE’s next generation visual solution. Simulation
Products/Civil won $608.4 million of orders in FY2014, including contracts for
48 full-flight simulators. 3.2Training & Services/Civil (“TS/C”) Provides business, commercial and
helicopter aviation training for flight, cabin, maintenance and ground
personnel and associated services We are the largest
provider of commercial and helicopter aviation training services in the world
and the second largest provider of business aviation training services. We lead
the market in the high-growth emerging regions of China, India, the Middle East,
South America and Southeast Asia. Through our broad global network of training
centres, we serve all sectors of civil aviation including general aviation,
major and regional airlines, helicopter operators and business aviation. We
currently operate 239 FFSs and provide aviation training and services in
training centres located in more than 25 countries around the world, including
simulation-based pilot training services, crew sourcing services and ab initio
training. Among our thousands of customers, we have long-term training services
agreements and joint ventures with more than 20 major airlines and aircraft
operators around the world. We offer a comprehensive range of training
solutions and services, including curriculum development, training centre operations,
pilot training, cabin crew training, aircraft maintenance technician training,
e-Learning and courseware solutions, and consulting services. We are a leader
in flight sciences, using flight data analysis to improve airline safety,
maintenance, flight operations and training. CAE Oxford Aviation Academy is the
largest ab initio flight school network in the world with ten flight academies
and a capacity for training up to 2,000 cadets annually. CAE Parc Aviation is
the world’s largest aviation personnel sourcing organization with approximately
1,100 pilots, maintenance crew and other aviation professionals currently on
assignment with airlines, aircraft OEMs and leasing company customers around
the world. 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, 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, technicians and cabin
personnel from commercial and regional airlines, business aircraft operators as
well as general aviation aircraft and helicopter operators.Today,
approximately 40% of all training capacity around the world is owned and
operated by large commercial airlines to provide training for their own pilots.
Approximately 2/3 of these training facilities are located in North America and
Europe. Commercial airlines also rely on independent training providers tosupplement 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 and Airbus have
developed an in-house training division.  15


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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. CAE’s expanding presence in civil flight training and services has been
accelerated during the last fiscal year as follows: New
Programs and Products -We
introduced CAE TroposTM 6000XR, the latest generation of our market-leading
visual image generator for civil aviation training. The software provides a
more immersive environment and an enhanced pilot training experience; -We
announced maintenance training on the new Dassault Falcon 2000 LXS and 2000S
aircraft platforms, including EASy II and launched CAE RealCase Troubleshooting
for the Dassault Falcon 7X, Falcon 900EX EASy, and Falcon 2000EX EASy models; -We
announced the introduction of the CAE 7000XR Series FFS, leveraging the latest
advancements in technology and training capabilities and setting a new standard
in level D FFSs.This
latest evolution of CAE’s industrybenchmark FFS is designed to
optimize life-cycle costs for our customers and to address new and future
training requirements Expansions -Our
joint venture Emirates-CAE Flight Training (ECFT) inaugurated its second pilot
training facility in Dubai, UAE; -We
added 35 new Piper airplanes to our CAE Oxford Aviation Academy fleet; -ECFT
announced that its dual configuration FFS for Bombardier Challenger 604 and
Challenger 605 business jets has received certification from various countries
and also announced that it will deploy a Bombardier Global 5000/6000 business
jets FFS equipped with the Bombardier Vision flight deck, which is expected to
enter into service at the end of 2014; -We
announced, with Bombardier, the expansion of the Authorised Training Partner
(ATP) agreement in Europe with the addition of a Bombardier Challenger 605
aircraft FFS and the deployment of a new Bombardier Global 5000/6000 business
jets FFS equipped with the Bombardier Vision flight deck in our Amsterdam
training centre; -We
announced, with Aviation Performance Solutions (APS), an extension of our
partnership to provide Upset Prevention and Recovery Training (UPRT) for
business aircraft pilots in Europe. The program uses proven e-Learning
web-based academics, in-aircraft practical skill development and FFS exercises
and scenarios; -We
launched a new MPL training program with Tigerair. In support of this program,
we announced that we will open an ab initio ground school training centre in
Singapore; -We
commenced training at the CAE Simulation Training P.L. centre in Delhi, India.
The training centre is a joint venture between CAE and Interglobe, parent
company of IndiGo; -We
announced an agreement with Airbus Helicopters (formerly Eurocopter Group) to
create an approved EC225 helicopter training centre in Norway featuring a Level
D flight and mission simulator; -We
announced the addition of a fourth Dassault Falcon 7X FFS to our global
training network. The simulator is expected to be ready for training in 2015; -We
deployed a Boeing 737 NG FFS to the Air France training centre located in Orly,
France; -We
announced, with Dassault, an agreement naming CAE as the exclusive
Dassault-Approved Training Provider for the newly-launched Dassault Falcon 5X
long-range business jet.   16


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3.3SP/C and TS/C Market Trends and Outlook Market Trends and Outlook In
commercial aviation, aircraft capacity and passenger traffic growth are
primarily driven by gross domestic product (“GDP”). Over the past 20
years, air travel has grown at an average rate of 4.8% and the aerospace
industry’s widely held expectation is that long-term average growth for air
travel will be approximately 5% annually over the next two decades. The
International Air Transport Association (“IATA”) forecasts that by 2017
total passenger demand is expected to increase by 31%, representing 930 million
more passengers compared to 2012.Growth rates are higher in the
emerging markets than in large and established markets like Europe and the U.S.
Continuedgrowth
in air travel and re-fleeting requirements have led to record commercial
aircraft backlogs andOEMproduction rates. In
the business and helicopter aviation sector, demand for air travel is primarily
driven by corporate profitability and general economic conditions. According to
the U.S. Federal Aviation Administration (“FAA”), the number of business
jet flights has increased by 3.4% in the past 12 months. The industry remains
optimistic of further recovery and long-term growth in business aircraft
travel, and consistent with this view, major business aircraft OEMs have
announced new aircraft programs. Consolidation
of the industry continues as companies position themselves to capitalize on
this robust commercial aerospace market The
following secular trends continue to form the basis of our civil market
investment hypothesis: -Expected
long-term growth in air travel; -Demand
in emerging markets arising from secular growth and a need for infrastructure
to support air travel; -Aircraft
backlogs and delivery rates; -More
efficient and technologically advanced aircraft platforms; -Long-term
demand and shortage of trained aviation professionals (pilots, maintenance,
cabin crew). Expected
Long-Term Growth in Air Travel In
calendar 2013, global passenger
traffic increased by 5.2% compared to
calendar 2012. For the first
three months of calendar 2014, passenger
traffic increased by 5.6% compared to the
first three months of calendar 2013. Emerging markets outperformed; passenger traffic
in the Middle East, Latin America, Asia/Pacific and Europe growing at 13.3%, 7.1%, 7.0% and 5.2% respectively,
while North
America remained
stable. The global commercial
aircraft fleet increased by 4.0% from March 2013 to March 2014, growing in Asia/Pacific, the
Middle East and Latin America by 8.4%, 7.8% and 5.7% respectively, increasing
slightly
in Europe and remaining
stable in North America.
Possible impediments to steady growth progression in air travel include major
disruptions such as regional political instability, acts of terrorism, pandemics,
natural disasters, sharp and sustained increases in fuel costs, major prolonged
economic recessions or other major world events. Demand
in Emerging Markets Arising from Secular Growth and a Need for Infrastructure to
Support Air Travel Emerging
markets such as China, Eastern Europe, the Indian sub-continent, the Middle
East, South America and Southeast Asia are expected to continue experiencing
higher air traffic growth over the long term versus mature markets such as
North America and Western Europe. Aircraft
Backlogs and Delivery Rates Commercial
aircraft OEMs continue to work through record backlog levels of over 12,000
aircraft. Our civil business relies mainly on the already in-service fleet to
drive demand as approximately two thirds of our revenue is generated from
training and services in support of the global fleet. Our product sales are
driven mainly by aircraft deliveries coming from OEMs’ production lines. Recent
aircraft order intake remains strong, with North American airlines such as Air
Canada and American Airlines and airlines in the emerging markets such as Etihad
Airways, Lion Air, VietJet Air and Air Costa leading the intake. We expect the
continued high rate of aircraft deliveries to translate into continued high
demand for training products and incremental demand for services. More Efficient
and Technologically Advanced Aircraft Platforms More efficient and technologically
advanced aircraft platforms will drive the demand for new types of simulators
and training programs. One of our strategic priorities is to partner with
manufacturers to take an early position on these future programs. In recent
years, we have signed contracts with Bombardier for the CSeries aircraft and
the Global 7000/8000 aircraft, ATR for the ATR42/72-600 aircraft, Mitsubishi
Aircraft Corporation for the MRJ aircraft, Airbus for the A350 XWB aircraft, Dassault
for the Falcon 5X, AVIC for the Medium-Sized Transport aircraft and
COMAC for
the
C919 aircraft. These contracts allow us to leverage our modeling, simulation
and training expertise to deliver training solutions, including CAE 7000 Series
FFS
and the recently launched CAE 7000XR Series FFS, CAE SimfinityTM
procedures trainers, comprehensive training programs and expansion of our
network to meet airlines’training needs.The demand fornew and
more efficient platforms is driven by better operational flexibility, reduced
maintenance costs, reduced fuel costs and improved emissions and environmental
footprints. Airlines are actively seeking ways to reduce fuel costs and the
operational risk against further fuel cost fluctuations, as well as ways to
obtain benefits offered by new generation aircraft and propulsion technologies.  17


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Business jet operators also demand high performance aircraft.
Business aircraft OEMs have announced plans to introduce, or have already
introduced, a variety of new aircraft models incorporating the latest
technologies to enhance performance and operator benefits such as range, speed,
comfort and the accessibility of business air travel. Some examples include Bombardier’s
Learjet 70, 75 and 85, Challenger 350 and Global 7000/8000, Embraer’s Legacy
Series and Lineage 1000, Gulfstream’s G650, Cessna’s Citation M2 and Dassault’s
Falcon 5X. Deliveries of new-model aircraft are subject to program delays,
which in turn affect the timing of FFS orders and deliveries. Long-term Demand and Shortage of Trained Aviation Professionals (pilots,
maintenance, cabin crew). 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 cabin crew worldwide, resulting in a shortage of qualified
professionals in several markets, notably the faster growing emerging markets.
Pilot supply constraints include aging crew demographics and fewer military
pilots transferring to civil airlines. New
pilot certification processes require more simulation-based training Simulation-based
pilot certification training is taking on a greater role internationally with
the MPL, with stall and upset prevention and recovery training and with new
Airline Transport Pilot (“ATP”) requirements in the U.S. Indeed, the ICAO
and various national and regional aviation regulatory agencies have published
new regulatory requirements, standards and guidance on these specific topics. MPL
is an alternative training and licensing methodology which places more emphasis
on simulation-based training to develop ab initio students into First Officers
of airliners in a specific airline environment. On average, current MPL
programs in the industry consist of one third of the training in actual
aircraft and two thirds of the training in flight simulation training devices,
versus traditional training for other licences that average 80% to 90% in
actual aircraft. Today, there are approximately 50 nations that have MPL
regulations in place and over 15 of these nations already use these regulations
with training providers and airlines. CAE has MPL programs in Asia and in
Europe with various airlines. From a global industry perspective, MPL is
producing promising results and over 800 MPL graduates are already flying
successfully with their airline. As the MPL methodology continues to gain
momentum, it will result in increased use of simulation-based training. Finally,
the
FAA in the U.S. enacted its final set of rules on July 15th, 2013 on
new pilot certification and qualification requirements for air
carrier operations, requiring pilots to obtain an ATP and Type Rating. As of
August 2014, pilots applying for an ATP certificate will be required to
complete practical requirements which call for more simulation-based
training that includes adverse weather conditions, low energy states, stalls, upset
prevention and recovery, and high altitude operations. We
believe these new requirements will lead to an
increase
in demand
for training in simulators. 3.4Simulation Products/Military (“SP/M”) Designs, manufactures and supplies advanced military training equipment
and software tools for air forces, armies and navies We are a world leader in the design and production of military
flight simulation equipment. We offer solutions to help maintain and enhance
our customers’ safety, efficiency, mission readiness and decision-making
capabilities.We develop simulation equipment, training systems and
software tools for a variety of military aircraft, including fast jets,
helicopters, trainer aircraft, maritime patrol and tanker/transport aircraft.
We also offer simulation-based solutions for land and naval forces, including a
range of driver, gunnery and maintenance trainers for tanks and armoured
fighting vehicles (“AFV”s) as well as naval command team trainers and
wargaming software. We have delivered simulation products and training systems
to more than 50 defence
operators in approximately 35
countries. We
offer the industry’s most comprehensive range of simulation products related to
flight simulation. From desktop trainers to the highest fidelity full-mission
simulators, we offer a broad portfolio of simulation products. We have designed
simulators for the greatest variety of helicopters, and are a recognized leader
in developing simulators and training systems for transports, tankers, maritime
patrol aircraft, lead-in fighter trainers, and combat aircraft.  The company is
recognized around the world as the leader in developing simulators for the
legendary C-130 Hercules aircraft, including all the latest C-130J variants. 
We are currently developing training systems for military aircraft such as the
MH-60S/R, CH-47, NH90, S-70, C-130, C-295, A400M, C-5, KC-135, A330 Multi-Role
TankerTransport, P-8A, P-3C, M-346, Hawk,
Eurofighter, PC-7 and T-6/AT-6 for global military customers.We
have developed the CAE UAS Mission Trainer to provide an open, integrated UAS
mission training capability for individual and team training with the ability
to link to distributed mission operations.  18


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Our simulation and training experience extends well beyond the
air domain.  For decades, CAE has provided a range of products and services
related to training ground forces, including solutions for direct and indirect
fire, close air support, forward observation, driver training and crew gunnery
training. CAE’s command and staff training systems, such as the CAE GESI
constructive simulation system, is used extensively by armies to help develop
the decision-making abilities of commanders in C4ISR environments.We are
also responsible for the design, manufacture and delivery of 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 (“HIMARS”) for the U.S. Army.  In
addition, we provide simulation-based solutions for naval forces, including
tactical and wargaming software systems to facilitate the conduct of realistic
naval operations training. New Programs and Products -We
signed a
memorandum of understanding with Lockheed Martin as its preferred provider of
Canadian F-35 training support, training systems integration, operations and
maintenance should Canada select the F-35; -We signed
a memorandum of understanding with General Atomics Aeronautical Systems to
pursue international opportunities for CAE to offer its simulation and training
systems for the Predator family of remotely piloted aircraft; -We
delivered the latest generation CAE GESI command and staff training system, now
operational at the German Army Combat Simulation Center located in Wildflecken,
Germany; -We
assisted
Ambulance Victoria in Brisbane, Australia with the launch of the Virtual
Paramedic, a simulation-based training solution, to help prepare for mass casualty
incidents; -We
signed a
cooperation agreement to combine CAE’s GESI command and staff training system
with Rolands & Associates Joint Theatre-Level Simulation into a new,
federated constructive simulation solution called GlobalSim; -We
provided an
Emergency Management Information System to the City of Ottawa that will improve
multi-agency collaboration and enhance effective decision-making during
emergency incidents; -We
are designing and manufacturing a UH-60L/M Black Hawk full-mission simulator to
be used by the Mexican Federal Police; -Wearedeveloping a UAS Mission Trainer representing the Predator remotely
piloted aircraft for the Italian Air Force. 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 Common Data Base (“CDB”),
originally developed for the United States Special Operations Command, has now
been adopted by various defence forces including the German Army, Turkish Air
Force and Royal Canadian Air Force.  The bottom line result is that with the
CDB, the creation, modification and correlation of run-time databases is much
faster, which makes using simulation for mission rehearsal exercises a real
possibility. Presagis, part of the SP/M segment, 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.  19


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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. Simulation-based training systems for the land, sea and public safety
markets provide similar advantages. With the increasing complexity of land and
sea 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,
armoured fighting vehicles and naval operations.  This helps save wear and tear
on the weapon system platforms, reduces live firing and track miles, and allows
militaries to devote systems to operational requirements. 3.5Training & Services/Military (“TS/M”) Supplies
turnkey training services, support services, systems maintenance and integrated
enterprise solutions We provide turnkey training services, training systems integration
expertise and training support services to global defence forces. We also provide
a range of training support services such as contractor logistics support,
maintenance services, classroom instruction and simulator training in over80sites around the world, a variety of modeling and simulation-basedintegrated enterprise solutions, and a range of in-service support solutions such as systems
engineering and lifecycle management. We are
a fully capable trainingsystems integrator with
the ability to offer governments, defence forces and original equipment
manufacturers (“OEM”s) across air, land and sea a comprehensive range of
innovative training solutions designed to cost-effectively meet specific
training requirements.  We are flexible and have a wealth of experience
operating and delivering training services across different business models,
includinggovernment-owned,
government-operated; government-owned, contractor-operated; or
contractor-owned, contractor-operated facilities.Our
offerings include training needs analysis, instructional systems design,
learning management information systems, purpose-built facilities,
state-of-the-art synthetic training equipment, curriculum and courseware
development, classroom and simulator instruction, maintenance and logistics
support, lifecycle support and technology insertion, and financing alternatives. Examples of our
TS/M programs include 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 KC-30A
multi role tanker transport program for the RAAF, 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 80 sites around the world. CAE
also provides market-leading consulting and engineering services that leverage
modeling and simulation technologies and expertise to develop software-based
solutions for decision support and training in complex environments.CAEcombines products, software tools and service
delivery capabilities into a comprehensive, integrated solutions offering to
help customers improve operational efficiency, develop and maintain mission
critical systems and provide software-based decision support and training
solutions.  CAE helps provide the guidance, expertise, products and engineering
services required to help customers operate in critical and highly complex
environments.  We also provide systems integration, systems engineering and
in-service support for operational platforms.  We have a wealth of experience
providing engineering information environments, fleet management services,
lifecycle and integrated logistics, and other support services designed to
efficiently and cost-effectively operate and maintain operational weapon systems. Expansions -We
commenced construction of the new CAE Brunei Multi-Purpose Training Centre (“MPTC”)
in Rimba, Brunei Darussalam which is now entering the operational phase. We
alsoannounced
jointly with the Government of Brunei that the CAE Brunei MPTC will establish
an Emergency and Crisis Management Centre of Excellence to support disaster
preparedness; -We
are providing on-site training support services at the Army Aviation Training
Centre in Queensland, Australia, following the acceptance into service of the
world’s first Level D certified NH90 full-flight and mission simulator;  20


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-We installed a CAE
5000 Series King Air 350 simulator at a new training facility in Sale,
Australia and will now provide simulator services to the Royal Australian Air
Force and Royal Australian Navy through 2018 under a contractor-owned,
contractor-operated training program; -We
announced that our Rotorsim training centre in Sesto Calende, Italy, which is a
joint venture with AgustaWestland, will expand with the addition of a CAE 3000
Series AW169 helicopter simulator; -We
announced that the world’s first CAE 3000 Series AW189 FFS was certified to
Level D and is now ready for training at the Rotorsim training centre in Sesto
Calende, Italy; -We
announced that Rotorsim will add a second CAE 3000 Series AW189 helicopter
simulator to a new training location in Aberdeen, Scotland to support Bristow
helicopters and other North Sea operators. The TS/M group
experiences fairly 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 have 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.  CAE employs skilled and
experienced professionals capable of helping our government and defence
customers apply simulation to support analysis, training and operational
decision-making.   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 prepare personnel to use those new systems, and
providing the decision support tools necessary to support mission planning in
operations. 3.6SP/M and TS/M Market Trends and Outlook While
the U.S. Bipartisan Budget Act for fiscal year 2014 has helped reduce the
near-term impact
of
sequestration cuts and provided the U.S. Department of Defense with greater
budget certainty over the current government fiscal year, the
timing of contract awards will continue to be difficult to predict
as the U.S. military services work to achieve the right balance in military
capacity, capabilities and readiness. This may impact our abilityto grow revenue
and income in the short term; however, our view isthat the
impediment to growth is not the size of the market, but rather the timing of
procurements.In Europe, force
structure reductions and reduced future investment plans have narrowed the
pipeline of new opportunities; however, we maintain a portfolio of recurring
business for which we have sized our operations. While the United States and
Europestill
present modest challenges,
we are seeing increased opportunities originating from regions with growing
defence budgets, like Asia and the Middle East where we have an established and
growing presence.We alsocontinue to bid on a solid pipeline of global
opportunities.In addition, there
are encouraging signs for our market specialization and we are confident that
the use of simulation-based training will continue to increase in the future.The
following trends continue to drive the use of our training centres,
services and products
in defence: -Explicit
desire of governments and defence forces to increase the use of modeling and
simulationto mitigate budget pressures; -Attractiveness
of outsourcing of training and maintenance services; -Need
for synthetic training to conduct mission rehearsal, including joint and
coalition forces training; -Relationships
with OEMs as their partner of choice for simulation and training;  21


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-Use of modeling and simulation for analysis and decision support. Explicit desire of governments and defence forces to increase the use of modeling and simulation to mitigate budget pressures More defence forces and governments are adopting simulation in training programs because it improves training effectiveness, reduces operational demands on aircraft, lowers risk compared to operating actual weapon system platforms and significantly lowers costs. For example, the U.S. Air Force (USAF) is making more extensive use of simulation for KC-135 tanker boom operator training, which costs approximately $20,000 for a three-hour training mission in the actual aircraft, but only $1,000 for that same three-hour training mission in simulators. The higher cost of live training and the desire to save aircraft for operational use are two factors prompting a greater adoption of simulation-based training. Unlike civil aviation, where the use of simulators for training is common practice, there are no regulatory requirements to train in simulators in the military and the nature of mission-focused training demands at least some live training; however, the balance of live and synthetic training is shifting more to simulation. We have begun to see militaries plan for the increased use of simulation as part of the overall training curriculum. For example, the U.S. Navy reports the share of simulation-based training on some specific U.S. Navy aircraft platforms could rise close to 50% by 2020. Because of the cost associated with conducting live training exercises, most militaries expect to rebalance the mix of live, virtual and constructive (computer-based) training and shift more of the training curriculum to home station virtual and constructive simulation. For example, the U.S. Army is planning to reduce the use of live training ranges and transfer some of this training to virtual and constructive simulation to reduce costs. This will ultimately create opportunities for simulation-based training centres, services and products. We view CAE as being part of the solution to achieving lower training costs while maintaining or improving readiness. Attractiveness of outsourcing of training and maintenance services Defence forces and governments continue to scrutinize expenditures to find ways to reduce costs and allow active-duty personnel to focus on operational requirements, which has an impact on defence budgets and resources. There has been a growing trend among defence forces to consider outsourcing a variety of training services and we expect this trend to continue.For example, during fiscal year 2014 we opened a new military training centre in Australia where the Australian Defence Forces will train their King Air 350 aircrews. This represents the first simulator services contract that the Australian Defence Forces have signed as part of a contractor-owned/contractor-operated service delivery program. We believe governments will increasinglylook to industry for the delivery of training services because they often can be delivered faster and more cost effectively. Need for synthetic training to conduct mission rehearsal, including joint and coalition forces training There is a growing trend among defence forces to use synthetic training to meet more of theirmissiontraining requirements. Simulation technology solutions enable defence customers to plan sophisticated missions and carry out full-mission rehearsals in a synthetic environment as a complement to traditional live training 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. Allies are cooperating and creating joint and coalition forces, which are driving the demand for networked training and operations. Training devices that can be networked to train different crews and allow for networked training across a range of platforms are increasingly important as the desire to conduct mission rehearsal exercises in a synthetic environment increases. We are actively promoting open, standard simulation architectures, such as the Common Database (CDB),as well as new capabilities such as the CAE Dynamic Synthetic Environment (DSE),to better enable mission rehearsal and joint, networked training. Relationships with OEMs as their partner of choice for simulation and training We partner with manufacturers in the defence and security market to strengthen relationships and position for future opportunities. OEMs have introduced new platforms and continue to upgrade and extend the life of existing platforms, which drives worldwide demand for simulators and training. For example, Boeing has developed the new P-8A maritime patrol aircraft, Airbus Military has sold and continues to marketboththe A330 MRTTand C295globally, Lockheed Martin is successfully marketing variants of the C-130J Hercules transport aircraft and F-35 fighter, Alenia Aermacchi and BAE Systems are selling the M-346 and Hawk lead-in fighter trainers, and AgustaWestland is continuing to develop a range of helicopters such as the AW139, AW169 and AW189. We have established relationships with each of the OEMs on these platforms. We also signed a memorandum of understanding to pursue working with General Atomics Aeronautical Systems, the world’s leading manufacturer of unmanned aircraft systems, on offering training solutions for GA-ASI’s Predator family of remotely piloted aircraft, and during fiscal year 2014 sold a Predator unmanned aerial system (UAS) mission trainer to the Italian Air Force.  22


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Use of modeling
and simulation for analysis and decision support Traditionally, modeling and simulation
have been used to support training, but is now increasingly applied across the
program lifecycle, including support for analysis and decision-making
operations. We see governments and defence forces looking to use simulation-based
synthetic environments to support research and development programs, system
design and testing, intelligence analysis, integration and exploitation, and to
provide the decision support tools necessary to support mission planning in
operations. As an example, we were recently contracted to establish a training
centre and conduct emergency management training for the Brunei Ministry of
Home Affairs and see further opportunities to develop integrated modeling and
simulation centres. 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 pricing purposes and
calculation of contract reimbursement rates under flexibly-priced contracts.
Governments also routinely regulate the methods under which costs are allocated
to government contracts. CAE is subject to a variety of audits performed by
government agencies. These include pre-award audits that are performed at the
submission of a proposal to the government. The purpose of the pre-award audit
is to determine the basis of the bid and provide the information required for
the relevant government to effectively negotiate the contract. During the
performance of a contract the government has the right to request and to
examine any labor charges, any material purchase, and any overhead changes to
any contract that is active. Upon a contract’s completion, the government may
perform a post-award audit of all aspects of contract performance to ensure
that CAE has performed in accordance with the terms of the contract. Government contracts are generally, by their terms, subject to
termination by the government either for convenience or default by the
contractor. Fixed-price contracts provide for payment upon termination for
items delivered to and accepted by the government and, if the termination is
for convenience, for payment of fair compensation of work performed plus the
costs of settling and paying claims by terminated subcontractors, other
settlement expenses and a reasonable profit on the costs incurred. Cost-plus
contracts generally provide that, upon termination, the contractor is entitled
to reimbursement of its allowable costs and, if the termination is for
convenience, a total fee proportionate to the percentage of the work completed
under the contract. If a contract termination is for default, however,
typically: ·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. 3.8New Core Markets Healthcare Market Simulation-based training is one of the most effective ways to prepare
healthcare practitioners to care for patients and respond to critical
situations while reducing the overall risk to patients. Through acquisitions
and partnerships with experts in healthcare, we are leveraging our experience
and best practices in simulation-based aviation training to deliver innovative
solutions to improve the safety and efficiency of this industry. The healthcare
simulation market is growing rapidly, with simulation centres becoming the
standard in nursing and medical schools, while proprietary education is now
using technology and simulation to compete with public institutions. We are a leader in simulation-based technology for healthcare with more
than 8,000 deliveries of patient, imaging and surgical simulators in medical
schools, nursing schools, hospitals, defence forces and other entities. We have
offices located in Canada, the U.S., Hungary and Germany and a network of
approximately 50 distributors in more than 50 countries.  23


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We generate revenue in five main areas: patient simulators, surgical simulators, ultrasound simulators and task trainers, learning applications/courseware and centre management systems. Our patient simulators offer a high level of believability and life-like responses and teach students and practitioners to intervene with appropriate clinical measures. Our surgical simulators incorporate haptic technology that allows students and practitioners to acquire skills and practice in performing minimally invasive procedures, including bronchoscopies, endoscopies and catheter-based procedures. Our ultrasound solutions utilize e-learning, ultrasound training models, mannequins and 3D animated displays that allow students and practitioners to become familiar with diagnostic bedside ultrasound and ultrasound-guided procedures. Our simulation learning applications can be embedded within hospital work environments or large teaching institutions, allowing remote delivery of content for self‐guided learning and assessment. Our medical simulation centre solutions simplify the operations behind managing complex simulation, assessment, recording and debriefing. Market Trends and Outlook The Healthcare simulation-based market is focused mainly on education, and is estimated upwards of $850 million. Of that, the largest share of the market is represented by the human patient simulation market, which is expected to grow in the double-digit range over the next five years. Our vision is for CAE Healthcare to lead in the broad adoption of simulation-based training solutions for healthcare practitioners to improve patient safety, reduce overall training cost and ultimately save more lives. Medical simulators can help to reduce medical errors by fundamentally changing the competency assessment and training of healthcare practitioners, just as flight simulators revolutionized pilot certification and training decades ago. In addition to the 850,000 active physicians and 67,000 medical students, there are approximately 3 million nurses and 250,000 nursing students in the U.S. and 8.8 million physicians and 14.5 million nurses worldwide. The demand for our products and services is driven by the: -Use of patient simulators to improve training and patient safety; -Increased adoption of minimally invasive surgery; -Advances in imaging technology applications in healthcare; -Increasing healthcare costs; -Service provider shortages. Use of patient simulators to improve training and patient safety Patient simulators are the most commonly used simulators in the healthcare education and training markets. Human patient simulation provides an opportunity to reduce medical errors by providing opportunities to train for high-risk, low-frequency events. Increased adoption of minimally invasive surgery Minimally-invasive surgery (“MIS”) is accomplished through small surgical incisions, specialized surgical instruments, and endoscopic or alternative surgical imaging. Due to the advantages of MIS, such as reduced patient trauma and shorter hospitalization periods, it has seen increased adoption in place of previously more invasive surgical procedures. Continuing advances in surgical technology and MIS techniques have established surgery as a leading driver for simulation technology training. Advances in imaging technology applications in healthcare Regulatory reform, the development of affordable technology-driven products and growing industry awareness have advanced the integration of imaging technology into healthcare. Increasing patient awareness of alternative technologies and procedures has helped to pressure insurers and providers to implement advanced imaging technologies. Bedside ultrasonography has become an invaluable tool in the management of critically ill patients. The hand-carried ultrasound (HCU) can immediately provide diagnostic information that is not accessible by a physical examination alone, provided that healthcare practitioners performing the examinations have adequate training. Increase in healthcare costs The growth and increasing cost of medical care is correlated to population growth and healthcare coverage expansion. Longer life expectancy and the baby boomer generation have generated significant demand for healthcare services. Widespread adoption of advanced medical technologies and services could translate into higher demand for training. Experts have demonstrated that medical simulation improves patient outcomes and reduces errors, which can help to mitigate the rate of increase in healthcare costs.  24


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Service provider
shortages The World Health Organization has
reported that there were 57 countries with critical shortages equivalent to a
global deficit of 
2.4
million doctors, nurses and midwives worldwide. As students graduate and move
into clinical practice, there is a growing need among hospitals for on‐boarding
programs that transition the new students to competent
practitioner effectively and efficiently. Simulation is now moving from the
academic setting into clinical practice to provide a safe environment for
clinical training. Mining
market We
have customers in over 90 countries that are currently supported by our offices
in Australia, Brazil, Canada, Chile, India, Kazakhstan, Mexico, Peru, South
Africa, the U.S. and the U.K. We provide products and services for open pit and
underground operations to mining organizations, from large diversified miners
to junior miners and consultancies. We
generate revenue by delivering products and services across the mining value
chain. Our software products are used for managing exploration and geological
data, mine strategy, optimization, detailed design and scheduling for all
mining methods and commodities. Our technical consulting team includes experienced
geologists and mining engineers, servicing client needs such as managing
exploration drilling programs, mining studies, resource evaluation, on-site
technical services and business improvement projects. Our CAE Terra mining
equipment simulators leverage our experience in simulation to provide an
unrivalled level of realism. Our simulators are integrated with a comprehensive
student management system, lesson planning tools and interactive touch panel
instructor station. Our training services include workforce development
planning, training needs analysis, professional development in technical
disciplines and the design and implementation of operator training curriculum.
Our operator training courseware is designed for multiple delivery modes
including self-paced e-learning, instructor-led classroom training, procedural
training and scenarios delivered in our high fidelity simulators. Market
trends and outlook Our
technology and services are used by customers to increase productivity and
improve safety. The factors driving demand for our technology and services are: -Health
and safety priority; -Declining
grades and higher energy consumption resulting in increased cost of extraction; -Cyclicality
of commodity prices; -Operations
management and control. Health
and safety priority Health
and safety standards continue to be an area of focus for improvement through
the use of technological advances and increased skills training to create a
more highly skilled and better-educated work force. Mining companies are
focusing on automated equipment, remote control of operations and
simulation-based training of the workforce as means to improve overall safety. Declining
grades and higher energy consumption resulting in increased cost of extraction In
the last 30 years, the average grade of ore bodies has halved, while the waste
removed to access the minerals has more than doubled, resulting in higher
energy use and cost of extraction. Given the volatility of mineral prices and
energy costs, different approaches are needed. These will include the increased
use of optimization tools, simulation and scenario analysis within the industry
to maximize value and maintain the viability of current operations, while
helping mining companies focus on maximizing metal recovery instead of simply
maximizing throughput. We are actively involved in finding technology-based
solutions for recovering metal using less energy. Our existing tools for
optimization and scenario analysis help mining organizations respond to
changing prices and input costs in order to maximize the potential of their
existing operations. Cyclicality
of commodity prices Demand
for commodities is highly correlated to economic cycles. This means that in
addition to the increased cost of extraction, mining companies will usually
experience pricing pressure during economic contractions. This tends to result
in a reduction in capital spending by mining companies and delays in
procurements, which negatively affect the business prospects of the mining
industry supply chain. However, this factor serves as another driver toward
increased use of optimization tools, simulation and scenario analysis within
the industry to maximize the efficiency of operations.  25


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Operations
management and control With increasing scale and complexity of
operations, mining companies are seeking solutions for the real time oversight,
coordination, decision-making and remote control of fixed and mobile assets. We
are collaborating in global markets and providing mine operators with an
opportunity to integrate our widely used mining systems with other operational
management technologies. 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 participants have
emerged in recent years and the competitive environment has intensified as
aerospace and defence companies position themselves to try to take greater
market share by consolidating existing civil simulation companies and by
developing their own internal capabilities. Most recently, Textron,
Lockheed
Martin and L-3 Communications have acquired commercial aircraft simulator
competitors. Most of our competitors in the simulation and training markets are
also involved in other major segments of the
aerospace and defence complex beyond simulation and training. As such, they are
larger than we are, and may have greater financial, technical, marketing,
manufacturing and distribution resources. In addition, our main
competitors
are either aircraft manufacturers, or have well-established
relationships with, 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. Boeing has
a licencing model for 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 Boeing simulators. Airbus
has decided to deepen its services offered to customers for
training services. OEMs like Airbus and Boeing have
certain advantages in competing with independent training service providers. An
OEM controls the pricing for the data, parts and equipment packages that are
often required to manufacture a simulator specific to that OEM’s aircraft,
which in turn is a critical capital cost for any simulation-based training
service provider. OEMs may be in a position to demand licence royalties to
permit the manufacturing of simulators based on the OEM’s aircraft, and/or to
permit any training on such simulators. CAE also has some advantages, including
being a simulator manufacturer, having the ability to
replicate
certain
aircraft without data, parts and equipment packages from an OEM, and owning a
diversified training network that includes joint ventures with large airline
operators which are aircraft customers for OEMs. We work with some OEMs on
business opportunities related to equipment and training services. We
obtain most of our contracts through competitive bidding processes that subject
us to the risk of spending a substantial amount of time and effort on proposals
for contracts that may not be awarded to us. A significant
portion of our revenue is dependent on obtaining new orders and continuously
replenishing our backlog. We cannot be certain that we will
continue to win contracts through competitive bidding processes at the same
rate as we have in the past. The presence of new market participants
as noted above, and their efforts to gain market share, creates heightened
competition in bidding which may negatively impact pricing and margins. Economic
growth underlies the demand for all of our products and services. Periods of
economic recession, constrained credit, and or government austerity generally
lead to heightened competition for each available order. This in turn typically
leads to a reduction in profit on sales won during such a period. Should such
conditions occur, we could experience price and margin erosion. 4.1.2Level and timing of defence spending A
significant portion of our revenue comes from sales to defence and
security
customers around the world. 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. When
countries we have contracts with significantly lower their military spending,
there could be a material negative effect on our sales and earnings.InEurope, force structure reductions and reduced future
investment plans have narrowed the pipeline of new opportunities. We are
also experiencing longer and delayed procurement processes in mature markets,
such as the U.S.
and
Canada, which impacts the timing of contract awards and results in delayed
recognition of revenue.  26


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4.1.3Government-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. 4.1.4Civil 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 a
greater impetus for airlines to replace older, less fuel-efficient aircraft.
However, higher fuel costs could also limit the airlines’ available financial
resources, and could potentially cause deliveries of new aircraft to be delayed
or cancelled. Airlines may slow capacity growth or cut capacity should
sustained high fuel costs make the availability of such capacity not
economically viable. Such a reaction would negatively affect the demand for our
training equipment and services. Constraints
in the credit market may reduce the ability of airlines and others to purchase
new aircraft, negatively affecting the demand for our training equipment and
services, and the purchase of our products. We
are also exposed to credit risk on accounts receivable from our customers. We
have adopted policies to ensure we are not significantly exposed to any
individual customer. Our policies include analyzing the financial position of
certain customers and regularly reviewing their credit quality. We also
subscribe from time to time to credit insurance and, in some instances, require
a bank letter of credit to secure our customers’ payments to us. 4.1.5Regulatory 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. FAA, could
mean
that
we have to make unplanned modifications to our products and services, causing
delays or resulting in cancelled sales. We cannot predict the impact that
changing laws or regulations might have on our operations. Any changes could
present opportunities or, to the contrary, have a materially
negative effect on our results of operations or financial condition. 4.1.6Sales 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, or to certain entities
or people in a country, 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 licence certain products to customers, which could
cause a potential loss of revenue for us. If
we fail to comply with government laws and regulations related to export
controls and national security requirements, we could be fined and/or suspended
or barred from government contracts or subcontracts for a period of time, which
would negatively affect our revenue from operations and profitability, and
could have a negative effect on our reputation and ability to procure other
government contracts in the future. 4.1.7Conflict minerals We
are subject to rules of the Securities Exchange Commission (“SEC”)
issued pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection
Act that require public companies to conduct due diligence on and disclose
whether certain materials including gold, tantalum, tin and tungsten that
originate from mines in the Democratic Republic of the Congo or certain
adjoining countries, known as conflict minerals, are used in products that we
manufacture. The first report was filed on May 21, 2014 for the 2013 calendar
year and we have implemented appropriate measures to comply with such
requirements, including verifying with our suppliers the sources of their
minerals. The implementation of these rules could adversely affect the
sourcing, supply, and pricing ofmaterials used in our
products, although this has not proved to be the case to date. If we determine
that certain of our products contain minerals not determined to be conflict
free or if we are unable to sufficiently verify the origins for all conflict
minerals used in our products, it could have a negative effect on our
reputation.  27


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4.2Risks relating to the Company 4.2.1Product evolution The civil aviation and defence and security
markets in which we operate are characterized by changes in customer
requirements, new aircraft models and evolving industry standards. If we do not
accurately predict the needs of our existing and prospective customers or
develop product enhancements that address evolving standards and technologies,
we may lose current customers and be unable to attract newcustomers. This could reduce our revenue. The
evolution of the technology could also have a negative 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
governments, including the Government of Québec through Investissement Québec
(“IQ”) and
the Government of Canada through its Strategic Aerospace and Defence
Initiative (“SADI”). In February
2014, CAE and the Government of Canada entered into a new SADI funding program
for a five and a half year period. The level of government financial support
reflects government policy, fiscal policy and other political and economic
factors.
We may not, in the future, be able to replace these existing programs with
other government funding and/or risk-sharing
programs of comparable benefit to us, which could have a negative impact on our
financial performance and research and development activities. We
receive investment tax credits on eligible R&D activities that we undertake
in Canada from the federal government and investment tax credits on eligible
R&D activities that we undertake in Québec from the provincial government.
The credits we receive are based on federal and provincial legislation
currently enacted. The investment tax credits available to us can be reduced by
changes to the respective governments’ legislation which could have a negative
impact on our financial performance and research and development activities. 4.2.3Fixed-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 OEM leverage We
secure data, parts, equipment and many other inputs from a wide variety of
OEMs, sub-contractors and other sources. We are not always able to find two or
more sources for inputs that we require and in
the case of specific aircraft simulators and other training equipment,
significant inputs can only be sole sourced. We may therefore be vulnerable to
delivery schedule delays, the financial condition of the sole-source suppliers
and their willingness to deal with us. Within their corporate groups, some
sole-source suppliers include businesses that compete with parts of our
business. This could lead to onerous licencing terms, high licence fees or even
refusal to licence to us the data, parts and equipment packages that are often
required to manufacture and operate for training, a
simulator based on an OEM’s aircraft. 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.   28


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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, patents and licences, to
establish and protect our proprietary rights. These may not be effective in
preventing a misuse of our technology or in deterring others from developing
similar technologies. We may be limited in our ability to acquire or enforce
our intellectual property rights in some countries. Litigation
related to our intellectual property rights could be lengthy and costly and
could negatively affect our operations or financial results, whether or not we
are successful in defending a claim. 4.2.8Intellectual 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
licences on terms that are commercially acceptable, if at all. Certain markets in which we operate,
including without limitation the healthcare market, are subject to extensive
patenting by third parties. Our ability to modify existing products or to
develop new products may be constrained by third party patents such that we
incur incremental costs to licence the use of the patent or design around the
claims made therein. 4.2.9Key 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. 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 that we have sold or aircraft for which we have
provided training equipment or services; -Our pilot provisioning; -Our live flight training
operations. We
may also be subject to product liability claims relating to equipment and
services that our discontinued operations sold in the past. We cannot be
certain that our insurance coverage will be sufficient to cover one or more
substantial claims.   29


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4.2.12Integration of acquired businesses The
success of our acquisitions depends on our ability to crystallize synergies both
in terms of successfully marketing our broadened product offering as well as
efficiently consolidating the operations of the acquired businesses into our
existing operations. 4.2.13Our ability to penetrate new markets We
are leveragingour knowledge,
experience and best practices in simulation-based aviation training and
optimization to penetrate thesimulation-based training
markets
in healthcare and mining. As
we operate
in
these 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. 4.2.14Enterprise resource planning (ERP) Following the
successful implementation of the Canadian manufacturing portion of the ERP system
in fiscal 2013,
we continue to
invest time and money in the next phases. If the
system does not operate as expected or when expected, we may
not be able to realize the expected value of the system and this may have a
negative effect on our operations, reporting capabilities, profitability
and reputation.
A governance process has been designed to mitigate this risk. 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 period that has no
corresponding revenue will affect our operating results and could increase the
volatility of our share price. We may pre-build certain products in
anticipation of orders to come and to facilitate a faster delivery schedule to
gain competitive advantage; if orders for those products do not materialize
when expected, we have to carry the pre-built product in inventory for a period
of time until a sale is realized. 4.2.16Securityand information technology We
depend on information technology networks and systems to process, transmit and
store electronic data and financial information, to manage business operations
and to comply with regulatory, legal, national security, contractual and tax
requirements. In addition, our business requires the appropriate and secure
utilization of sensitive and confidential information belonging to third
parties such as aircraft OEMs and national defence forces. An
information technology system failure, cyber-attack or breach of systems
security could disrupt our operations, cause the loss of, or unauthorized
access to, business information, compromise confidential information, expose us
to regulatory investigation and litigation, require significant management
attention and resources and could materially and adversely affect our
operations, reputation and financial performance. We have implemented security
controls, policy enforcement mechanisms and monitoring systems in order to
prevent, detect and address potential threats. 4.3Risks relating to the Market 4.3.1Foreign exchange Our
operations are global with approximately 90% of our revenue
generated from
worldwide exports and international activities generally denominated in
foreign currencies, mainly the U.S. dollar, the Euro and the British pound. Our
revenue is generated
approximately one-third in each of the U.S, Europe and the rest of the world. A
significant portion of the revenue generated in Canada is in foreign
currencies, while a large portion of our operating costs in Canadian
dollars. When the Canadian dollar increases in value, it negatively affects our
foreign currency-denominated revenue and hence our financial results.We continue to
hold a portfolio of currency hedging positions intended to mitigate the risk to
a portion of future revenues presented by the volatility of the Canadian dollar
versus foreign currencies. The hedges are intended to cover a portion of the
revenue in order to allow the unhedged portion to match the foreign cost
component of the contract. It is not possible to completely offset the effects
of changing foreign currency values, which leaves some residual exposure that
may impact our financial results.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.In order to reduce the variability of
specific U.S. dollar and Euro-denominated manufacturing costs, wealsohedge some of the
foreign currency costs incurred in our manufacturing process.  30


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Business conducted through our foreign
operations is substantially based in local currencies. A natural hedge exists
by virtue of revenues and operating expenses being in like currencies. However,
changes
in the value of foreign currencies relative to the Canadian dollar create
unhedged currency translation exposure since results are consolidated in
Canadian dollars for financial reporting purposes. Devaluation of foreign
currencies against the Canadian dollar would have a negative translation impact and an
appreciation of foreign currencies against the Canadian dollar would have the
opposite effect. 4.3.2Availability of capital Our main credit facility, which was extended
in October 2013, is scheduled for renewal in October 2018. 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. We also have various debt facilities with
maturities until October 2036. We cannot determine at this time whether these
facilities will be refinanced at the same cost, for the same durations and on
similar terms as were previously available. 4.3.3Pension plans We
sponsor pension plans for employees in many of our locations. Where plans of a
defined benefit nature are provided, 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 several
assumptions, amongst which anticipated long-term rate of return on pension plan
assets, anticipated mortality experience and projected increases in employee
compensation levels. We rely on actuarial funding valuation reports to
determine the amount of cash contributions that we are required to contribute
to these plans. Where necessary, CAE may be required to make additional
contributions to fund plans which are in a deficit position, thus reducing the
availability of funds for other corporate purposes. 4.3.4Doing business in foreign countries We
have operations in 35 countries and sell our products and
services to customers around the world. Sales to customers outside North
America made up approximately 60% of revenue in fiscal 2014. We
expect sales outside North America to continue to represent a significant
portion of revenue in the foreseeable future. As a result, we are subject to
the risks of doing business internationally, including
geopolitical instability. These are the main risks we are facing: -Change in laws and
regulations; -Tariffs, embargoes,
controls and other restrictions; -General changes in
economic and geopolitical conditions; -Complexity and corruption
risks of using foreign representatives and consultants. 4.3.5Income tax laws A substantial portion of our business is
conducted in foreign countries and is thereby subject to numerous countries’
tax laws and fiscal policies. A change in applicable tax laws, treaties or
regulations or their interpretation could result in a higher effective tax rate
on our earnings which could be significant to our financial results. 5.DIVIDENDS We
paid
a dividend of $0.05 per share in the first and second
quarter and $0.06 per share in the third and fourth quarter of fiscal 2014.
These
dividends were
eligible under the Income Tax Act(Canada)and its provincial
equivalents. Our Board
of Directors
has the discretion to set the amount and timing of any dividend. The Board
reviews the dividend policy once a year based on the cash requirements
of
our operating activities, liquidity requirements and projected financial
position. We expect to declare dividends of approximately $63.3 million in
fiscal 2015 based on our current dividend policy and the number of common
shares outstanding as at March 31, 2014. 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 2012,
2013 and 2014, CAE issued762,041,1,228,831 and
1,403,418 common shares, respectively, as stock dividends.   31


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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, 2014 and May 31, 2014 respectively, 263,771,443
and
264,017,594 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. 7.1Trading Price and Volume CAE Inc.
   TSX Share Price
   Information - FY2014Month
 Min.
 Max.
 Total VolumeApril-13
 9.82
 10.99
 14
  321 827May-13
 10.50
 11.44
 17
  357 762June-13
 10.24
 11.00
 10 348 390July-13
 10.88
 12.02
 15 426 990August-13
 10.92
 11.94
 8 199 709September-13
 10.99
 11.75
 8 339 924October-13
 10.96
 12.24
 17 866 233November-13
 11.55
 12.54
 9 413
  714December-13
 11.81
 13.81
 12 714 613January-14
 13.33
 14.99
 13 867 264February-14
 13.75
 15.27
 15 967 258March-14
 14.36
 15.54
 12 503 925NYSE Share Price Information - FY2014Month
 Min. (USD)
 Max. (USD)
 Total VolumeApril-13
 9.60
 10.86
 411
  665May-13
 10.24
 11.25
 1 471
  693June-13
 9.72
 10.58
 620 147July-13
 10.32
 11.53
 504 056August-13
 10.41
 11.55
 312 225September-13
 10.67
 11.38
 299 270October-13
 10.58
 11.71
 903 614November-13
 11.04
 11.91
 528
  577December-13
 11.10
 13.29
 596 626January-14
 12.53
 13.65
 684 257February-14
 12.43
 13.77
 683 990March-14
 13.00
 13.99
 671 324
    32


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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. The names and municipalities of residence of the Directors and
Officers of CAE as of the date hereof, the positions and offices held by them
in CAE, their respective principal occupations for the last five years, and the
year in which they became a Director are set forth below. More information
concerning CAE’s Directors may be found in the Management Proxy Circular dated June
7, 2014, in connection with our Annual Meeting of Shareholders to be held on
August 13, 2014.  In addition to fulfilling all statutory requirements, the
Board of Directors oversees and reviews: (i) the strategic and operating
plans and financial budgets and the performance against these objectives; (ii)
the principal risks and the adequacy of the systems and procedures to manage
these risks; (iii) the compensation and benefit policies; (iv) management development
and succession planning; (v) business development initiatives; (vi) the
communications policies and activities, including shareholder communications;
(vii) the integrity of internal controls and management information systems;
(viii) the monitoring of the corporate governance system; and (ix) the
performance of the President and Chief Executive Officer. The Committees of
the Board of Directors are the Audit Committee, the 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 several companies. 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 to 2001 and before that President and CEO of Learjet, Inc. from
  1989 to 1996. He is a past Chairman of the General Aviation Manufacturers
  Association. He currently serves on the boards of Kaman Corporation, Aerion
  Corporation and The NORDAM Group.
  Mr. Barents is a member of both the Human Resources
  Committee and the Corporate Governance Committee.Hon.
  Michael M. Fortier, PC
  Town of Mount Royal, Quebec, Canada
  (2010)
 Michael
  M. Fortierjoined RBC Capital Markets (RBCCM) as a Vice-Chairman
  in 2010. Prior to joining RBCCM, Mr. Fortier was a partner of Ogilvy Renault
  LLP (now Norton Rose Fulbright Canada LLP) and a Senior Advisor to Morgan
  Stanley in Canada.
  Between
  2006 and 2008, Mr. Fortier held various positions in the Government of
  Canada, as Minister of Public Works and Government Services, Minister of
  International Trade and Minister responsible for Greater Montreal.  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, CPA, CA
  Senneville, Quebec, Canada
  (2005)
 Paul
  Gagné is a Director of various public and private companies. Mr. Gagné is the
  Chairman of Wajax Corporation and also serves on the Audit Committees of the
  boards of Ainsworth Lumber Co. Ltd. and Textron Inc.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 Chartered
  Professional Accountant.
  
  Mr. Gagné is Chairman of the Human Resources Committee and is a
  member of the Audit Committee.James F.
  Hankinson, CPA,
  CA
  Toronto, Ontario, Canada
  (1995)
 James
  F. Hankinson is a corporate Director. He was the President and Chief
  Executive Officer of Ontario Power Generation Inc. from 2005 until his
  retirement in 2009. He has broad management experience in energy,
  transportation, resource and manufacturing-based businesses. Mr. Hankinson is
  a Director of ENMAX Corporation, a private company. 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 a Chartered
  Professional Accountant.Hon. John P. Manley,P.C., O.C.
  Ottawa, Ontario, Canada
  (2008)
 John Manley is
  President and Chief Executive Officer of the Canadian Council of Chief
  Executives (not-for-profit), a position he has held since 2010. He is also a
  director of theCanadian Imperial Bank of Commerce(CIBC) and Telus Corporation. From 2004 to 2009, he served as Counsel to
  McCarthy Tétrault LLP, a national law firm. Prior to that, Mr. Manley had a
  16-year career in politics, serving as Deputy Prime Minister of Canada and
  Minister in the portfolios of Industry, Foreign Affairs and Finance. He obtained
  a Bachelor of Arts from Carleton University and a Juris Doctorate from the
  University of Ottawa, is a certified Chartered Director from McMaster
  University and holds honorary doctorates from the University of Toronto,
  University of Ottawa, Carleton University and University of Western Ontario.
  Mr. Manley chairs the Corporate Governance Committee and is a
  member of the Human Resources Committee.Marc Parent
  Lorraine, Quebec, 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 30 years of
  experience in the aerospace industry. Before joining CAE, Mr. Parent held
  various positions with Canadair and within Bombardier Aerospace in Canada and
  the U.S. Mr. Parent is past Chairman of the Board of Directors of the
  Aerospace Industries Association of Canada (AIAC) and of Aéro Montreal
  (Quebec’s aerospace cluster).Mr. Parent graduated as an engineer fromÉcole
  Polytechnique, is a graduate of the Harvard Business School Advanced
  Management Programand holds an honourary doctorate from École
  Polytechnique.GeneralPeter J.
  Schoomaker,
  USA (Ret.)
  Tampa, Florida, USA
  (2009)
 General Schoomaker is a consultant on defense matters.
  He is a former four-star U.S. Army general who was recalled from retirement
  to active duty as the 35th Chief of Staff, Army and member of the
  U.S. Joint Chiefs of Staff from 2003 until 2007. Prior to his first
  retirement, he served as Commander‐in‐Chief, U.S. Special
  Operations Command from 1997 to 2000. He was the owner/President of Quiet
  Pros, Inc. (defense 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 several public, 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 Schoomaker is a member of both the Human Resources
  Committee and the Corporate Governance Committee.Andrew J. Stevens
  Gloucestershire, UK
  (2013)
 Andrew J. Stevens is a corporate Director based in the
  U.K who has operating experience globally in the aerospace and defence
  sector.  Beginning with the Dowty Group,a leadingBritishmanufacturer of aircraft equipment(1976-94),Bowthorpe plc (1994-96), Messier-Dowty as Managing Director then Chief
  Operating Officer (1996-2000),
  Rolls-Royce, where he served as Managing Director Defence Aerospace
  (2001-2003), and Cobham plc as a Board member where he served variously asGroup
  Managing Director, Aerospace Systems, Chief Operating Officer and Chief
  Executive Officer.(2003-12).
  
  Mr. Stevens is a member of the Human Resources Committee and the
  Audit Committee.KatharineB. Stevenson
  Toronto, Ontario, Canada
  (2007)
 Katharine B. Stevenson is a corporate Director who
  serves on a variety of corporate and not-for-profit boards. She was formerly
  the Treasurer of Nortel NetworksCorporation.Prior to joining Nortel NetworksCorporation, she was a Vice President of J.P. Morgan & Company, Inc.
  Ms. Stevenson serves as Director on the board of Canadian Imperial Bank of
  Commerce (CIBC) and on its Audit Committee. She is also a Director of Valeant
  Pharmaceuticals International, Inc., serving on its Audit & Risk
  Committee and Transactions & Finance Committee. She is a Director of Open
  Text Corporation and a member of its Audit Committee.
  The CAE Board has determined that such simultaneous service does not
  impair the ability of Ms. Stevenson to effectively serve on CAE’s Audit
  Committee.  In addition, she served asthe
  Chairperson of OSI Pharmaceuticals, Inc.’s Audit Committee until the sale of
  the company. Ms. Stevenson is a Governor and past Chair of The Bishop
  Strachan School and Vice Chairman of the Board of the University of Guelph
  (as well as Chair ofits Finance Committee).She is certified with the
  professional designation ICD.D granted by the Institute of Corporate
  Directors (ICD).
  
  Ms. Stevenson chairs the Audit Committee.Kathleen E.
  Walsh
  Boston,
  Massachusetts, USA
  (2013)
 Kathleen
  E. Walsh is currently CEO of Boston Medical Center, a non-profit 496-bed
  medical center in Boston, Massachusetts that employs more than 1,200
  physicians and 1,500 nurses while also serving as the primary teaching
  affiliate of the Boston University School of Medicine. Previously she served
  as Executive Vice President and Chief Operating Officer of Brigham and
  Women's Hospital, Chief Operating Officer, Novartis Institutes for BioMedical
  Research for Novartis AG, various positions up to Senior Vice President,
  Medical Services and Cancer Center at the Massachusetts General Hospital, and
  previously with four other hospitals. Ms. Walsh is also on the boards of the
  Greater Boston Chamber Of Commerce, Emmanuel College, and the Advisory Board
  of the Clinical Center of the National Institutes of Health in Bethesda MD.
  
  Ms. Walsh is a member of the Audit Committee.
  33


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Officers
 Name and
   Municipality of Residence and Office held with CAE
 Principal
   Occupation1Nick
  Leontidis
  Ile-Bizard,Quebec, Canada
 Group
  President, Civil Simulation Products, Training and Services of CAE;
  previouslyExecutive
  Vice-President, Strategy and Business Development (2009 to 2013), Executive
  Vice President Sales, Marketing and Business Development - Civil Training and
  Services (2005-2009).Gennaro
  (Gene) A. Colabatistto
  Baie d’Urfé, Quebec, Canada
 Group President, Defence &
  Security of CAE, with CAE since 2012; formerly Senior Vice President, Program
  Development for the Intelligence, Surveillance and Reconnaissance Group at
  Science Applications International Corporation (2008 – 2012) and before that
  President of Olive Group North America.Stéphane Lefebvre, CPA, CA
  Town of Mount-Royal, Quebec,
  Canada
 Vice
  President, Finance and Chief Financial Officer, with CAE since 1997; formerly
  Vice President Finance, Military Simulation and Training (2005-2011). Mr. Lefebvre
  is a Chartered Professional Accountant.Hartland
  J.A. Paterson
  Westmount, Quebec, Canada
 General
  Counsel, Chief Compliance Officer and Corporate Secretary, with CAE since
  2001.Sonya
  Branco, CPA, CA
  Montreal, Quebec, Canada
 Vice President and Corporate Controller
  (2011 to present); formerly Director Planning and Forecasting (2008-2011) and
  prior to that, Associate Director Mergers and Acquisitions at BCE Inc. (2007-2008).
  Ms. Branco is a Chartered Professional Accountant.Bruce
  McConnell, CPA, CA
  Beaconsfield, Quebec, Canada
 Director
  Corporate Finance and Treasurer of CAE Inc (2012-present). Previously,
  Vice-President with Business Development Bank of Canada (2006-2012). Mr.
  McConnell is a Chartered Professional Accountant.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).
 1Where the date 2009
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 exevutive
officers of CAE as a group as at the date hereof beneficially own, directly or
indirectly, or exercise control or direction over 214,475 common shares which
represent 0.08% 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. On May
3, 2012, while Mr. Barents was a Director thereof, Hawker Beechcraft
Corporation filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code; that company exited Chapter 11 in February
2013 after which Mr. Barents left the Hawker Beechcraft Board of Directors.   34


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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 Mr. Manley  as Director, 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 Mr. Manley as Director, 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 the Companies’ Creditors Arrangement Act (“CCAA”) on January 14,
2009, and under other similar bankruptcy legislation in the U.S. and other
jurisdictions. Mr. Gagné resigned
as Director of Gemofor Inc., a privately held manufacturer of sawmill equipment,
in November 2006. Within a year of his resignation Gemofor Inc. filed for
bankruptcy. 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. 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. 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: Ms.
Katharine B. Stevenson (chair)
Mr. Paul Gagné 
Mr. Andrew J. Stevens
Ms. Kathleen E. Walsh  Each of these
members is independent and financially literate. 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. Mr. Gagné is a Chartered
Professional 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 Ainsworth Lumber Co. Ltd.and Textron Inc.
and previously chaired CAE’s Audit Committee. Mr. Stevens has
extensive managerial experience within the aerospace sector. This managerial
experience, set out in the Directors’ table above, has provided Mr. Stevens
with significant insight into financial issues encountered by companies
conducting business within the aerospace sector. Ms. Walsh is
currently the CEO of Boston Medical Center, whichis one
of the largest safety net hospitals in New England. Ms. Walsh has extensive
financial and accounting knowledge gained from her managerial experience, which
is outlined in the Directors’ table above.   35


---



11.Approval of Services The
Audit Committee is responsible for the appointment, compensation, retention and
oversight of the work of CAE’s independent auditor.  The Audit Committee must
pre-approve any audit and non-audit services performed by
PricewaterhouseCoopers LLP (“PwC”), CAE’s auditor, or such services must
be entered into pursuant to the policies and procedures established by the
Committee. Pursuant to such policies the Audit Committee annually authorizes
CAE and our affiliates to engage the auditor for specified permitted tax,
financial advisory and other audit-related services up to specified fee levels.
The Audit Committee has considered and concluded that the provision of these
services by PwC is compatible with maintaining PwC’s independence. The Audit
Committee’s policy also identifies prohibited services that PwC is not to
provide to CAE. PwC has advised
that they are independent with respect to CAE within the meaning of the Code of
Ethics of the Ordre des comptables professionnels agréés du Québec The following chart
shows all fees paid to PwC by CAE and our subsidiaries in the most recent and
prior fiscal year for the various categories of services (generic description
only). FEE TYPE
 2014
 2013($ MILLIONS)1. Audit services
 3.2
 2.92. Audit-related services
 0.2
 0.33. Tax services
 0.9
 0.6Total
 4.3
 3.8
  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 Management Proxy Circular dated June 7, 2014, in connection with CAE's
Annual Meeting of Shareholders to be held on August 13, 2014. 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, 2013.  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; (iii)    one
copy of the information circular in respect of our most recent annual meeting
of shareholders that involved the election of Directors; and  36


---



(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.    37


---



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, 2014  “C4ISR”meansCommand, Control, Communications, Computers, Intelligence, Surveillance and
Reconnaissance  “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, 2014, and the notes thereto  “FFS”means full-flight simulators  “FMS”meansfull-mission simulators  “FTD”meansflight training
devices  “FTO”means a flight training organization  “FY2014”means fiscal 2014  “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  “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   38


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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, 2014.  All companies are wholly owned except as noted. Name of Subsidiary

   Jurisdiction of IncorporationCanada7320701 Canada Inc. ....................................................................................................

   Canada8218765 Canada Inc. ....................................................................................................

   CanadaCAE Flightscape Inc. .....................................................................................................

   OntarioCAE Healthcare Canada Inc. ........................................................................................

   CanadaCAE International Holdings Limited ..............................................................................

   CanadaCAE Machinery Ltd. ......................................................................................................

   British ColumbiaCAE Mining Canada Inc. ...............................................................................................

   CanadaCAE Mining Holdings Inc. .............................................................................................

   CanadaCAE Railway Ltd. ..........................................................................................................

   CanadaCAE Services (Canada) Inc...........................................................................................

   CanadaCAE Simulator Services Inc. .........................................................................................

   QuébecCAE Wood Products G.P.[1]............................................................................................

   QuébecFlight Simulator-Capital L.P.[2]........................................................................................

   QuebecFlight Simulator Capital Management Inc......................................................................

   QuebecPresagis Canada Inc. ....................................................................................................

   CanadaUnited StatesAdvanced Medical Technologies, LLC. .........................................................................

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

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

   DelawareCAE Civil Aviation Training Solutions Inc.......................................................................

   FloridaCAE Delaware Buyco Inc. Dela

   DelawareCAE Flight Solutions USA Inc. ......................................................................................

   DelawareCAE Healthcare, Inc. .....................................................................................................

   DelawareCAE Integrated Enterprise Solutions USA Inc. .............................................................

   DelawareCAE Mining North America Inc. ....................................................................................

   ColoradoCAE North East Training Inc..........................................................................................

   DelawareCAE Oxford Aviation Academy Pheonix Inc. ................................................................

   ArizonaCAE SimuFlite Inc. ........................................................................................................

   TexasCAE USA Inc. ................................................................................................................

   DelawareEmbraer CAE Training Services, LLC. (49%)................................................................

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

   DelawareGCAT Delaware LLC.....................................................................................................

   DelawareKVDB Flight Training Services, Inc. (49%)....................................................................

   ArizonaOxford Airline Training Center Inc. ................................................................................

   ArizonaParc U.S. Inc. ................................................................................................................

   DelawarePresagis USA Inc. .........................................................................................................

   CaliforniaRotorsim USA LLC. (50%).............................................................................................

   DelawareEuropeARGE Rheinmetall Defence Electronics Gmbh/CAE Elektronik GmbH (50%)[3].............

   GermanyAviation Personnel Support Services Limited. ..............................................................

   IrelandBackairn Limited.............................................................................................................

   United KingdomCAE 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 Centre Copenhagen A/S .......................................................................................

   DenmarkCAE Centre Oslo AS. ....................................................................................................

   NorwayCAE Centre Stockholm AB ...........................................................................................

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

   GermanyCAE EngineeringKorlátolt Felelősségű Társaság ........................................................

   HungaryCAE Euroco S.à.r.l. .......................................................................................................

   LuxembourgCAE Global Academy Évora, SA...................................................................................

   PortugalCAE Healthcare GmbH .................................................................................................

   GermanyCAE Healthcare KFT .....................................................................................................

   HungaryCAE Holdings BV...........................................................................................................

   NetherlandsCAE Holdings Limited....................................................................................................

   United KingdomCAE International Capital Management Hungary LLC...................................................

   HungaryCAE Investments S.àr.l..................................................................................................

   LuxembourgCAE Luxembourg Acquisition S.àr.l...............................................................................

   LuxembourgCAE Luxembourg Financing S.àr.l................................................................................

   LuxembourgCAE Management Luxembourg S.àr.l...........................................................................

   LuxembourgCAE Mining Corporate Limited......................................................................................

   United KingdomCAE Mining International Limited ..................................................................................

   United KingdomCAE Mining Software Limited.......................................................................................

   United KingdomCAE Oxford Aviation Academy Amsterdam B.V. .........................................................

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

   JerseyCAE Services GmbH......................................................................................................

   GermanyCAE Services Italia, S.r.l................................................................................................

   ItalyCAE Servicios Globales de Instrucción de Vuelo (España) S.L. ..................................

   SpainCAE STS Limited...........................................................................................................

   United KingdomCAE Training & Services Brussels NV ..........................................................................

   BelgiumCAE Training & Services UK Ltd. ..................................................................................

   United KingdomCAE Training Aircraft B.V...............................................................................................

   NetherlandsCAE Training Norway AS...............................................................................................

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

   United KingdomCAE Verwaltungsgesellschaft mbH...............................................................................

   GermanyCVS Leasing Limited (13.39%)......................................................................................

   United KingdomEmbraer CAE Training Services (UK) Limited (49%).....................................................

   United KingdomEurofighter Simulation Systems GmbH (12%) ..............................................................

   GermanyGCAT Flight Academy Malta Limited ............................................................................

   MaltaHelicopter Training Media International GmbH (50%)...................................................

   GermanyHFTS Helicopter Flight Training Services GmbH (25%)................................................

   GermanyMineral Industries Computing Limited............................................................................

   United KingdomOxford Aviation Academy (Oxford) Limited....................................................................

   United KingdomOxford Aviation Academy Europe AB............................................................................

   SwedenOxford Aviation Academy European Holdings AB.........................................................

   SwedenOxford Aviation Academy Finance Limited....................................................................

   IrelandOxford Aviation Academy Ireland Holdings Limited.......................................................

   IrelandOxford Aviation Academy Latvia SIA.............................................................................

   LatviaOxford Aviation Academy Norway Holdings AS.............................................................

   NorwayParc Aviation (UK) Limited.............................................................................................

   United KingdomParc Aviation Engineering Services Limited..................................................................

   IrelandParc Aviation International Limited.................................................................................

   IrelandParc Aviation Limited.....................................................................................................

   IrelandParc Aviation Services Limited.......................................................................................

   Isle of ManParc Interim Limited.......................................................................................................

   IrelandParc Selection Limited...................................................................................................

   Isle of ManPresagis Europe (S.A.) .................................................................................................

   FranceRotorsim s.r.l. (50%)......................................................................................................

   ItalyServicios de Instrucción de Vuelo, S.L. (80%)...............................................................

   SpainSimubel N.V. (a CAE Aviation Training Company)........................................................

   BelgiumSIV Ops Training, S.L....................................................................................................

   SpainOtherAsian Aviation Centre of Excellence (Singapore) Pte Ltd.(50%) ..................................

   SingaporeAsian Aviation Centre of Excellence Sdn. Bhd. (50%) ..................................................

   MalaysiaCAE Aircraft Maintenance Pty Ltd. ................................................................................

   AustraliaCAE Aviation Training Chile Limitada[4]...........................................................................

   ChileCAE Aviation Training International Ltd.........................................................................

   MauritiusCAE Aviation Training Peru S.A. ...................................................................................

   PeruCAE Brunei Multi Purpose Training Center SDN BHD (60%)........................................

   BruneiCAE Centre Hong Kong Limited....................................................................................

   ChinaCAE China Support Services Company Limited ...........................................................

   ChinaCAE Datamine Peru S.A. ..............................................................................................

   PeruCAE Dubai LLC (49%)...................................................................................................

   DubaiCAE Flight & Simulator Services Sdn. Bhd. ..................................................................

   MalaysiaCAE Flight and Simulator Services Korea Ltd...............................................................

   KoreaCAE Flight Training (India) Private Limited (50%).........................................................

   IndiaCAE Flight Training Center Mexico, S.A. de C.V. .........................................................

   MexicoCAE India Private Limited (76%)....................................................................................

   IndiaCAE Integrated Enterprise Solutions Australia Pty Ltd..................................................

   AustraliaCAE Japan Flight Training Inc. J

   JapanCAE Labuan Inc. ...........................................................................................................

   MalaysiaCAE Melbourne Flight Training Pty Ltd..........................................................................

   AustraliaCAE Middle East Holdings Limited (50%) .....................................................................

   DubaiCAE Mining Africa (Pty) Ltd. .........................................................................................

   South AfricaCAE Mining Australia Pty Ltd. .......................................................................................

   AustraliaCAE Mining Brasil Soluçoes em Tecnologia Ltda. ........................................................

   BrazilCAE Mining Chile SA ....................................................................................................

   ChileCAE Mining Services Mexico, S.A. de C.V....................................................................

   MexicoCAE New Zealand Pty Limited.......................................................................................

   New ZealandCAE Shanghai Company, Limited .................................................................................

   ShanghaiCAE Simulation Technologies Private Limited...............................................................

   IndiaCAE Simulation Training Private Limited (25%).............................................................

   IndiaCAE Singapore (S.E.A.)Pte Ltd...................................................................................

   SingaporeCAE South America Flight Training do Brasil Ltda........................................................

   BrazilCAE-LIDER Training Do Brasil Ltda. (50%)...................................................................

   BrazilChina Southern West Australia Flying College Pty Ltd (47%).......................................

   AustraliaEmirates-CAE Flight Training (L.L.C.) (49%).................................................................

   DubaiFlight Training Device (Mauritius) Limited......................................................................

   MauritiusGCAT Australia PTY Limited .........................................................................................

   AustraliaHATSOFF Helicopter Training Private Limited (50%)....................................................

   IndiaInternational Flight School (Mauritius) Ltd. ....................................................................

   MauritiusKestrel Technologies Pte Ltd. .......................................................................................

   SingaporeNational Flying Training Institute Private Limited (51%) ...............................................

   IndiaOxford Aviation Academy (Australia) Pty Ltd.................................................................

   AustraliaOxford Aviation Academy Holdings Pty Ltd...................................................................

   AustraliaParc Aviation Japan Limited...........................................................................................

   JapanPhilippine Academy for Aviation Training, Inc. (40%)....................................................

   PhilippinesRotorsim Australia Pty Ltd. ............................................................................................

   AustraliaSabena Flight Academy – Africa (34%) Came

   CamerounSimulator 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
  39


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DISCONTINUED OR INACTIVE Name of
   Subsidiary
 Jurisdiction of
   IncorporationBGT BioGraphic Technologies Inc.................................................................................
 CanadaCAE Beteiligungsgesellschaft mbH................................................................................
 GermanyCAE Screenplates SA....................................................................................................
 FranceGCAT Flight Academy Germany GmbH........................................................................
 GermanyICCU Imaging Inc...........................................................................................................
 CanadaInvertron Simulators plc.................................................................................................
 United KingdomISDAT Simulation SDN BHD (20%)...............................................................................
 MalaysiaOxford
  Aviation Academy Finco S.à r.l..........................................................................
 LuxembourgOxford Aviation Academy
  Luxembourg S.à r.l...............................................................
 LuxembourgOxford Aviation Academy
  Luxembourg 2 S.à r.l............................................................
 LuxembourgOxford Aviation Academy
  Luxembourg 3 S.à r.l............................................................
 LuxembourgParc-CV Limited.............................................................................................................
 IrelandParc Aviation Training Limited.......................................................................................
 IrelandXtend Inc........................................................................................................................
 UtahZFB Zentrum für Flugsimulation
  Berlin GmbH (17%)....................................................
 Germany
  40


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SCHEDULE
B – AUDIT COMMITTEE MANDATE cae
inc. Membership
and Responsibilities of the Audit Committee of the Board of Directors
 1.Role
and Membership The
Audit Committee (the “Committee”) shall be a committee of the Board of
Directors. The
Committee shall consist of three to five 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 and regulatory guidelines applicable
to such determination. Each member shall annually certify to CAE Inc. (“CAE”
or the “Company”) 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 qualify as a
“financial expert” (as defined by applicable regulation) and therefore 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 shall elect a
replacement Chairman for that meeting. A
majority of members of the Committee shall constitute a quorum. 2.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: 3.Review
of Audited Financial Statements 3.1Review 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
annually with management, external and internal auditors the identification,
assessment and resulting mitigation strategy for financial risks, and the input
of the integrated risk assessment into the annual audit planning cyclewith
subsequent quarterly updates by Chief Financial Officer of any material changes
with respect to financial risk assessment. . ·Oversee
the review by internal audit of the existence and effectiveness of CAE’s
group-wide risk management program. ·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. 4.Engagement
of External Auditors 4.1Recommend to the
Board of Directors the appointment of the external independent auditor, which
shall be accountable to the Board and the audit committee as representatives of
the shareholders. 4.2Review 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. 4.3Receipt 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 regulatory
guidelines, or  41


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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. 5.Review
and Discussion with External Auditors 5.1Review with the
external auditors and management the annual external audit plans and agenda
which would include objectives, scope, risks assessments, timing, materiality
level and fee estimate. 5.2Request and
review an annual report prepared by the external auditors of any significant
recommendations to improve internal control over financial reporting and
corresponding management responses. 5.3Request 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. 5.4Hold timely
discussions with the external auditors regarding (i) critical accounting
policies and practices, (ii) alternative treatments of financial
information within generally accepted accounting principles related to material
items discussed with management, ramifications thereof and treatment preferred
by the external auditor, and (iii) other material written communication between
the external auditor and management, including the management letter and
schedule of unadjusted differences. 5.5Meet to review
and discuss with the external auditors theannual audited financial statements
and quarterly financial statements, including disclosures in management
discussion and analysis. 5.6Meet separately, quarterly, with the external auditors (including the
lead partner). 5.7Make specific
and direct inquiry of the external auditors’ work 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. ·Any
unresolved 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. 5.8Provide
evaluation and regular feedbackto the external auditors. 6.Review
and Discussion with Internal Auditors 6.1Review the
annual internal audit plan including assessment of audit risk, planned
activities, level and nature of reporting, audit organization and annual
budget. 6.2Periodically review the adequacy and effectiveness of the Company’s
disclosure controls and procedures and the Company’s internal control over
financial reporting, including any significant deficiencies and significant
changes in internal controls. 6.3Set and
communicate to the director of internal audit highexpectations
and hold him/her and the department accountable for meeting them. Provide
guidance on reported potential management lapses and evaluate the status and
implementation of recommendations. 6.4Meet separately, regularly, with the director of internal audit. 6.5Make specific
and direct inquiry of the internal auditors’ work relating to: ·Any
significant recommendations to improve financial, operational and compliance
internal controls and corresponding management responses. ·The
level of independence of internal audit. ·Any
material disagreement with management or scope or restrictions encountered in
the course of the function’s work. ·Any
other matter so desired. 6.6Discuss
goals and evaluate the performance of the Director of Internal Audit. Oversee
at least once every five years an  42


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external review of
the internal audit function. 7.Review
and Discussion with Management 7.1Review and
assess the adequacy and quality of organization, staffing and succession
planning for accounting and financial responsibilities (including internal
audit). 7.2Review analyses
prepared by management setting forth significant financial reporting issues and
judgements made in connection with the preparation of the financial statements,
including analyses of the effect of alternativeand/or newGAAP methods on the financial
statements. 7.3Discuss 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”). 7.4Review with
management the annual performance of external and internal audit and respond to
results thereof. 7.5Review at least
annually with management: ·Tax
compliance; ·IT
and Cyber-Security risks and controls; and ·Capital
structure appropriateness and efficiency. 8.Review
and Discussion with the Human Resources Committee 8.1On
request, provide support tothe Human Resources Committee of the Board (“HR Committee”) regarding management incentives and related topics
(including compensation and appropriate use of corporate assets). 8.2Support
with the HR Committee in its assessment ofthe incentive structure and whether it contributes to
increased fraud or other risks. 9.Review
of Public Disclosure Documents 9.1Review 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 Annual Information Form (“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. 9.2Review major
issues regarding accounting principles and financial report presentations,
including any 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; major issues as to the Company’s internal controls; and any
special audit steps adopted in light of material control deficiencies. 9.3Prepare/review
such reports of the Committee as may be required by any applicable securities
regulatory authority to be included in the Company’s management proxy circular
or any other disclosure document of the Company. 9.4The 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. 10.Ethical
and Legal compliance 10.1Oversee, review,
and annually update the Company’s code of business conduct and the company’s
system to monitor compliance with and enforce this code. 10.2Review, with the
Company’s general counsel, legal compliance and legal matters that could have a
significant impact on the Company’s financial statements. 11.Other
Responsibilities 11.1The Board may
refer from time to time such matters relating to the financial affairs and risk
management of the Company as the Board may deem appropriate. 12.Meetings 12.1The Committee
shall meet at such times as deemed necessary by the Board or the Committee and
shall report regularly to the Board. 13.Engagement
of Professional Services 13.1The Committee is
authorized to engage independent counsel, and other advisers, as it determines
necessary to carry out its  43


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duties. The Company shall
provide for appropriate funding, as determined by the Committee, for such
services. 14.Handling
of Complaints 14.1The 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. 15.Annual
Review 15.1The Committee
shall review and assess the adequacy of its mandate annually, report to the
Board of Directors thereon and recommend to the Board of Directors (for
approval) any proposed changes to its processes, procedures and agendas, as
well as this charter. 15.2The Committee
shall also perform an annual evaluation of the composition (including
considering periodically rotating its members), independence and performance of
the Committee and shall report to the Chairman of the Governance Committee of
the CAE Board of Directors thereon. 16.Orientation
and Continuing Education 16.1Identify and
participate where appropriate or necessary in continuing audit committee
education reading and/activities.


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