EX-15.(C) 12 e31856ex15_c.txt MANAGEMENT PROXY CIRCULAR Exhibit 15(c) [LOGO] ZARLINK SEMICONDUCTOR Dear Shareholder: Your Board of Directors and management of Zarlink Semiconductor Inc. cordially invite you to attend the Company's 2008 Annual and Special Meeting of Shareholders. The meeting will take place at the head offices of the Company, 400 March Road, Ottawa, Ontario, Canada, at 10:30 a.m. on Wednesday, July 23, 2008. Related to this, you will find enclosed the Company's annual report, notice of meeting, management proxy circular and YELLOW form of proxy for the meeting. It is important that all shareholders be represented at the meeting. If you are unable to attend, please take a moment to complete, date and sign the enclosed YELLOW form of proxy, and return it as instructed, or follow the instructions included with the form of proxy to vote by telephone or over the Internet. Please refer to my Chairman's letter and the President's letter in the annual report for our detailed comments on the state of the Company's business. We look forward to seeing you at the meeting. Yours truly, /s/ Henry Simon ------------------------ Dr. Henry Simon Chairperson of the Board Your vote is extremely important. Submit your YELLOW proxy today. [LOGO] ZARLINK SEMICONDUCTOR Notice of Annual and Special Meeting of Shareholders Notice is hereby given that the Annual and Special Meeting of Shareholders of Zarlink Semiconductor Inc. (the "Company") will be held at the head offices of the Company, 400 March Road, Ottawa, Ontario, Canada, on Wednesday, July 23, 2008, at 10:30 a.m. (the "Meeting"), for the following purposes: 1. to receive the consolidated financial statements of Zarlink Semiconductor Inc. prepared in accordance with United States generally accepted accounting principles for the fiscal year ended March 28, 2008 and the Auditors' Report thereon; 2. to elect directors; 3. to appoint auditors; 4. to consider and, if deemed advisable, to adopt, with or without amendments, an ordinary resolution approving an amendment to By-Law No. 16 of the Company to make the Company eligible for direct registration of its common shares, as required by the New York Stock Exchange; 5. to consider and, if deemed advisable, to adopt, with or without amendments, a special resolution to reduce the stated capital account maintained in respect of the Company's common shares from US$479,000,000 to US$149,000,000; and 6. to transact such further or other business as may properly come before the meeting or any adjournment or adjournments thereof. A management proxy circular (the "Circular") providing additional information relating to the matters to be dealt with at the Meeting and a YELLOW form of proxy (the "Form of Proxy") prepared in respect of the Meeting accompany this notice. In order to be represented by proxy at the Meeting, registered shareholders of the Company must complete, date and sign the Form of Proxy, or other appropriate form of proxy and, in either case, (i) deliver the completed proxy to the Company's transfer agent, Computershare Investor Services Inc., 100 University Avenue, 9th Floor, Toronto, Ontario, Canada M5J 2Y1 in the addressed prepaid envelope enclosed; or (ii) submit the completed proxy to Computershare Investor Services Inc., facsimile number (416) 263-9524 or 1-866-249-7775, by no later than 10:30 a.m. on Monday, July 21, 2008 or, if such meeting is adjourned, at the latest 48 hours prior to the adjourned meeting, excluding Saturdays, Sundays and statutory holidays. Registered shareholders of the Company may also vote by telephone or over the Internet. Instructions on how to vote by telephone or over the Internet are provided in the Circular and Form of Proxy. Non-registered shareholders of the Company should follow the instructions on how to complete their voting instruction form or form of proxy and vote their shares on the YELLOW forms that they receive or contact their broker, trustee, financial institution or other nominee for instructions. Ottawa, Ontario, June 4, 2008. BY ORDER OF THE BOARD OF DIRECTORS /s/ Donald G. McIntyre ---------------------- Donald G. McIntyre Corporate Secretary MANAGEMENT PROXY CIRCULAR TABLE OF CONTENTS MANAGEMENT PROXY CIRCULAR......................................................1 SOLICITATION OF PROXIES........................................................1 VOTING SHARES AND PRINCIPAL HOLDERS THEREOF....................................1 VOTING INFORMATION.............................................................2 CONSOLIDATED FINANCIAL STATEMENTS AND AUDITORS' REPORT.........................5 ELECTION OF DIRECTORS..........................................................6 APPOINTMENT OF AUDITORS.......................................................10 AMENDMENT OF BY-LAWS..........................................................11 REDUCTION OF STATED CAPITAL...................................................11 EXECUTIVE COMPENSATION........................................................13 REPORT ON EXECUTIVE COMPENSATION..............................................20 PERFORMANCE GRAPH.............................................................23 EQUITY COMPENSATION PLAN INFORMATION..........................................26 COMPENSATION OF NON-EMPLOYEE DIRECTORS........................................27 INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS.............28 DIRECTORS' AND OFFICERS' LIABILITY INSURANCE..................................28 STATEMENT OF CORPORATE GOVERNANCE PRACTICES...................................28 AUDIT COMMITTEE MEMBERS.......................................................30 REPORT OF THE AUDIT COMMITTEE.................................................31 AUDIT AND OTHER FEES..........................................................31 NORMAL COURSE ISSUER BID......................................................32 OTHER MATTERS.................................................................33 ADDITIONAL INFORMATION........................................................33 [LOGO] ZARLINK SEMICONDUCTOR MANAGEMENT PROXY CIRCULAR This Management Proxy Circular (the "Circular") is furnished in connection with the solicitation of proxies by the Board of Directors and management of Zarlink Semiconductor Inc. (the "Company"), on behalf of the Company, for use at the Annual and Special Meeting (the "Meeting") of the holders of the common shares of the Company (the "Common Shares") to be held on Wednesday, July 23, 2008 at the head offices of the Company, 400 March Road, Ottawa, Ontario, Canada, at 10:30 a.m., and any adjournment thereof, for the purposes set out in the accompanying Notice of Annual and Special Meeting of Shareholders (the "Notice of Meeting"). Unless otherwise specifically indicated, the information contained in the Circular is given as of May 30, 2008, the record date established for holders of Common Shares to receive notice of and to vote at the Meeting (the "Record Date"). Minutes of the 2007 Annual and Special Meeting of Shareholders are available for viewing on the Company's website at ir.zarlink.com/corp_gov/. All dollar amounts in this Circular are in United States dollars unless otherwise stated. SOLICITATION OF PROXIES The enclosed proxy is being solicited by the management of the Company. The solicitation is being made primarily by mail, but proxies may also be solicited by employees or agents of the Company, personally, in writing, by e-mail or by telephone. The entire cost of the solicitation will be borne by the Company. VOTING SHARES AND PRINCIPAL HOLDERS THEREOF Only the holders of Common Shares of record (the "Shareholders") at the close of business on the Record Date will be entitled to receive notice of the Meeting and to vote at the Meeting. Each Shareholder is entitled to one vote for each Common Share registered in the name of such Shareholder. As at May 30, 2008, there were 127,345,682 Common Shares outstanding. The Company shall prepare, no later than 10 days after the Record Date, an alphabetical list of Shareholders entitled to vote at the Meeting that indicates the number of Common Shares held by each Shareholder. The list of Shareholders entitled to vote at the meeting is available for inspection during usual business hours at the office of the Company's transfer agent and registrar, Computershare Investor Services Inc. (the "Transfer Agent"), located at 100 University Avenue, 9th Floor, Toronto, Ontario, Canada, M5J 2Y1. To the knowledge of the directors and senior officers of the Company, as of May 30, 2008, no person or corporation owned, directly or indirectly, or exercised control or direction over more than 10% of the outstanding Common Shares. However, the following entities have reported to the U.S. Securities and Exchange Commission ("SEC") ownership of more than 5% of the outstanding Common Shares: -------------------------------------------------------------------------------- Beneficial Owner Common Shares Per Cent -------------------------------------------------------------------------------- T. Rowe Price Associates, Inc. 10,256,300(1) 8.0% -------------------------------------------------------------------------------- National Bank Financial 6,702,835(2) 5.2% -------------------------------------------------------------------------------- (1) Based on information contained in a Schedule 13G filed with the SEC on February 12, 2008 by T. Rowe Price Associates, Inc. ("Price Associates"), an investment advisor registered under Section 203 of the Investment Advisers Act of 1940. Price Associates has sole power to vote or direct the vote of 1,574,800 Common Shares and the sole power to dispose or direct the disposition of 10,256,300 Common Shares. For purposes of the reporting requirements of the U.S. Securities Exchange Act of 1934, Price Associates is deemed to be a beneficial owner of such securities; however Price Associates expressly disclaims that it is, in fact, the beneficial owner of such securities. (2) Based on information contained in a Schedule 13D jointly filed on May 16, 2005 by Aquilon Capital Corp., Scott Leckie and Jeffrey Francoz, as updated by National Bank Financial ("NBF") (the successor of Aquilon Capital Corp.) on May 1, 2008, certain managed accounts and an investment partnership managed by Scott Leckie on behalf of NBF beneficially own 6,702,835 Common Shares. VOTING INFORMATION Voting by Proxy Voting by proxy means that you are giving the person or people named on your form of proxy (proxyholder) the authority to vote your Common Shares for you at the Meeting or any adjournment thereof. A YELLOW form of proxy (the "Form of Proxy") is included in this package. You can choose from three different ways to vote your shares by proxy: 1. by mail or delivery; 2. by telephone; or 3. on the Internet. A Shareholder has the right to appoint a person, who need not be a Shareholder, other than the persons designated in the Form of Proxy, to attend and act on behalf of the Shareholder at the Meeting. Unless you appoint someone else to be your proxyholder in accordance with the instructions provided herein, the directors or officers who are named on the Form of Proxy will vote your shares for you. If you appoint someone else, he or she must be present at the Meeting to vote your shares. If you are voting your shares by proxy, the Transfer Agent must receive your completed form of proxy by no later than 10:30 a.m. on Monday, July 21, 2008 or, if the Meeting is adjourned, at the latest 48 hours prior to the adjourned Meeting. Registered and Non-Registered (or Beneficial) Shareholders You are a registered shareholder if your name appears on your share certificate. You will receive the Form of Proxy if you are a registered shareholder. You are a non-registered (or beneficial) shareholder if your bank, trust company, securities broker or other financial institution holds your shares for you (your nominee). If you are a non-registered (or beneficial) shareholder, you will receive a voting instruction form or form of proxy from the Company, the institution that holds your shares or their respective agents. -2- How to vote -- registered shareholders A. By proxy 1. By mail or delivery o To vote by mail or delivery, your paper proxy must be completed, signed, dated and returned in accordance with the instructions on the Form of Proxy. 2. By telephone o To vote by telephone, call the toll-free number shown on the Form of Proxy. Using a touch-tone telephone to select your voting preferences, follow the instructions of the "vote voice" and refer to the directions on the Form of Proxy. o Note that voting by telephone is not available if you wish to appoint a person as a proxy holder other than the persons named on the Form of Proxy. In such a case, your proxy should be voted by mail, delivery or the Internet. 3. On the Internet o To vote your proxy on the Internet, visit the website address as shown on the Form of Proxy. Follow the on-line voting instructions given on the Form of Proxy. 4. By appointing another person to go to the Meeting and vote your shares for you o This person does not have to be a Shareholder. o Strike the names that are printed on the Form of Proxy and write the name of the person you are appointing in the space provided. Complete your voting instructions, date and sign the Form of Proxy, and return it to the Transfer Agent as instructed. o Make sure that the person you appoint is aware that he or she has been appointed and attends the Meeting. o At the Meeting, the person appointed should see the scrutineers from the Transfer Agent at the registration table. B. In person at the Meeting You do not need to complete or return the Form of Proxy. You should see a representative of the Transfer Agent before entering the Meeting to register your attendance at the Meeting. Voting in person at the Meeting will automatically cancel any proxy you completed and submitted earlier. -3- How to vote -- non-registered (or beneficial) shareholders o These securityholder materials are being sent to both registered and non-registered owners of the Common Shares, either directly by the Company or indirectly through your nominee or your nominee's agent. o If you are a non-registered owner of Common Shares and the Company or its agent has sent these materials directly to you, your name and address and information about your holdings of Common Shares have been obtained in accordance with applicable securities regulatory requirements from the intermediary holding Common Shares on your behalf. In such case, the Company (and not the intermediary holding Common Shares on your behalf) assumes responsibility for (i) delivering these materials to you, and (ii) executing your proper voting instructions. Please return your voting instructions as specified in the Form of Proxy. o If you have received these materials indirectly through your nominee or your nominee's agent, you will receive the nominee's form of proxy, which is substantially similar to the Form of Proxy, the sole purpose of which is to instruct the registered holder of the Common Shares (i.e. the nominee) how to vote on your behalf (the "Voting Instruction Form"). A. By proxy o Please contact your nominee or the Company if you did not receive a Voting Instruction Form or the Form of Proxy in this package. o In most cases, you will receive a Voting Instruction Form that allows you to provide your voting instructions by telephone, on the Internet or by mail or delivery. If you want to provide your voting instructions on the Internet, go to the website noted on your Voting Instruction Form or Form of Proxy and follow the instructions on the screen. o Some Voting Instruction Forms may be required to be completed and returned, as directed in the instructions provided; or have been pre-authorized by your nominee indicating the number of shares to be voted, which is to be completed, dated, signed and returned to the Transfer Agent by mail. B. In person at the Meeting o The Transfer Agent does not have access to the names or holdings of our non-registered shareholders. That means you can only vote your shares in person at the Meeting if you appoint yourself proxy holder by printing your name in the space provided on the Voting Instruction Form or Form of Proxy provided to you. o Your vote will be taken and counted at the Meeting. o Prior to the Meeting, you should see the scrutineers from the Transfer Agent at the registration table. Completing the Form of Proxy On any ballot that may be called for at the Meeting, the Common Shares represented by the enclosed Form of Proxy will be voted or withheld from voting in accordance with the instructions of the -4- Shareholder indicated thereon and, where a choice is specified, the Common Shares will be voted accordingly. You can choose to vote "For", "Against" or "Withhold", depending on the items listed on the Form of Proxy. When you sign the Form of Proxy, you authorize Kirk K. Mandy or Donald G. McIntyre, who are officers of the Company, or the individual that you have named on the Form of Proxy in accordance with the instructions provided herein, to vote or withhold from voting your shares for you at the Meeting according to your instructions on any ballot that may be called for. If you specify a choice on the Form of Proxy with respect to any matter to be acted upon at the Meeting, your shares will be voted accordingly. If you return the Form of Proxy and do not tell us how you want to vote your Common Shares, your vote will be counted: (i) FOR the election of the nominees for director listed under "Election of Directors"; (ii) FOR the appointment of the auditors named under "Appointment of Auditors"; (iii) FOR the ordinary resolution amending the Company's by-laws; and (iv) FOR the special resolution to reduce the Company's stated capital account for the Common Shares. Your proxy holder will also vote your shares as he sees fit on any amendment or variation to matters identified in the Notice of Meeting or any other matter that may properly come before the Meeting. As of the date of this Circular, management is unaware of any such amendment, variation or other matter proposed or likely to come before the Meeting. If you have appointed a person other than Mr. Mandy or Mr. McIntyre to vote your shares and you do not specify how you want your shares voted, your proxy holder will vote your shares as he or she sees fit on each item and on any other matter that may properly come before the Meeting. If you are an individual Shareholder, you or your authorized attorney must sign the Form of Proxy. If you are a corporation or other legal entity, an authorized officer or attorney must sign the Form of Proxy. Changing your vote You can revoke a vote you made by proxy by: o voting again by telephone or on the Internet by no later than 10:30 a.m. on Monday, July 21, 2008 or, if the Meeting is adjourned, at the latest 48 hours prior to the adjourned Meeting; o completing a form of proxy that is dated later than the form of proxy you are changing and mailing it or faxing it to the Transfer Agent or sending a notice to our Secretary, Mr. Donald McIntyre at 400 March Road, Ottawa, Ontario K2K 3H4 so that it is received by no later than 10:30 a.m. on Monday, July 21, 2008 or, if the Meeting is adjourned, at the latest 48 hours prior to the adjourned Meeting; o giving a notice in writing to the Chairman of the Meeting, at the Meeting or any adjournment thereof. The notice can be from you or your authorized attorney. CONSOLIDATED FINANCIAL STATEMENTS AND AUDITORS' REPORT The consolidated financial statements of the Company and the auditors' report thereon for the fiscal year ended March 28, 2008 (the "2008 Annual Report"), which is available on SEDAR at -5- www.sedar.com and on EDGAR at www.sec.gov. will be submitted to the Shareholders at the Meeting but no vote with respect thereto is required or proposed to be taken. The financial statements included in the 2008 Annual Report for the fiscal year ended March 28, 2008 ("Fiscal 2008") are stated in United States dollars and have been prepared in accordance with United States generally accepted accounting principles ("U.S. GAAP"). ELECTION OF DIRECTORS Eight directors are nominated for election at the Meeting. Each director elected at the Meeting will hold office until the close of the next annual general meeting or until his successor is duly elected, unless he resigns or the office is earlier vacated in accordance with the by-laws of the Company and applicable law. Except where authority to vote in respect of the election of directors is withheld by the Shareholder, the appointees named in the accompanying Form of Proxy will vote the Common Shares represented by such proxy FOR the election of the eight nominees for director listed below. The Board of Directors recommend that Shareholders vote FOR the election of the nominees listed below. For each proposed nominee, the information below indicates his jurisdiction of residence; any positions and offices held by him with the Company; his principal occupation or employment for at least the past five years; the year from which he has continually served as a director of the Company; and the number of voting securities of the Company which he beneficially owns, or controls or directs, directly or indirectly, as at May 30, 2008. The information as to voting securities beneficially owned, or controlled or directed, directly or indirectly, by each proposed nominee has been furnished by the respective nominee individually.
DR. ADAM CHOWANIEC Dr. Chowaniec has been the Chairman and Chief Executive Officer of Amiga2 Ottawa, Ontario, Canada Corporation, a consulting and investment company, since 2002. Dr. Chowaniec was the founding Chief Executive Officer of Tundra Semiconductor Corporation on Director since: 2007-02-19 December 15, 1995 and served in that position until December 2005. Dr. Chowaniec is also Chairman of the Board of Directors of Tundra Semiconductor Corporation, Total voting former Chair of the Ontario Research and Innovation Council, and serves on securities: approximately 116,410, numerous other boards of directors in Canada and the United States, including consisting of: BelAir Networks, Liquid Computing Corporation, Acentru and Microbridge Corporations. Dr. Chowaniec is a member of the board of the Export Development 91,000 Common Shares Corporation of Canada and has held advisory positions with the Ottawa Economic Development Corporation, the National Research Council's Industrial Research 5,000 Common Shares underlying Assistance Program and the Ottawa Health Research Institute and the Natural options(1) Science and Engineering Council of Canada. He is also the vice-chair of the Museum of Nature's national fundraising campaign. He holds a Master's degree in approximately 20,410 Common Shares Electrical Engineering from Queen's University (Canada), as well as both a underlying Convertible Bachelor of Engineering and a Ph.D. from the University of Sheffield (England). Debentures(2)
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OLEG KHAYKIN Mr. Oleg Khaykin has been President and Chief Executive Officer and a member of Scottsdale, Arizona, U.S.A. the Board of Directors of International Rectifier Corporation, a manufacturer of power semiconductors, since March 2008. Mr. Khaykin acted as Executive Vice Director since: 2007-11-12 President and Chief Operating Officer of Amkor Technology, a leading provider of advanced semiconductor assembling and test services, from May 2003 to March Total voting securities: Nil 2008. From May 1999 to May 2003, Mr. Khaykin was the Vice President of Strategy and Business Development for Conexant Systems Inc./Mindspeed, a company that designs, develops and sells semiconductors for networking applications. Mr. Khaykin was also with the Boston Consulting Group, a strategic consulting firm, from July 1991 to June 1999. Mr. Khaykin began his career as a senior development engineer and product manager with Motorola. HUBERT T. LACROIX Mr. Hubert T. Lacroix has been President and Chief Executive Officer of the Montreal, Quebec, Canada Canadian Broadcasting Corporation / Radio-Canada since Director since: 1992 January 1, 2008. Mr. Lacroix acted as Senior Advisor to Stikeman Elliott LLP (law firm) and as an adjunct professor at the Faculty of Law of Universite de Total voting securities: 170,000, Montreal from May 5, 2003 until December 31, 2007 and as a consultant to consisting of: Telemedia Ventures Inc., a private investment company from May 5, 2003 until December 31, 2005. Mr. Lacroix was Executive Chairman of Telemedia Corporation 100,000 Common Shares from February 2000 to May 2003. From 1984 until his appointment as Executive Chairman of Telemedia Corporation, Mr. Lacroix was a partner with McCarthy 70,000 Common Shares underlying Tetrault LLP (law firm). He is Chairman of the Board and a member of the Audit options(1) Committee and a member of the Strategic Development Committee of SFK Pulp Fund. In addition, he is a trustee of the Lucie and Andre Chagnon Foundation and a director of their private holding company. Mr. Lacroix is also a Director of the Montreal General Hospital Foundation and a Trustee of the Martlet Foundation of McGill University. Mr. Lacroix received his Bachelor of Law degree from McGill University, was admitted to the Quebec Bar in 1977 and holds a Master of Business Administration degree from McGill University. J. SPENCER LANTHIER Mr. J. Spencer Lanthier has been a Corporate Director since his retirement in Toronto, Ontario, Canada 1999 from KPMG Canada, where he had a long and distinguished career culminating in the position of Chairman and Chief Executive from 1993 until his retirement. Director since: 2003 A recipient of the Order of Canada, Mr. Lanthier is currently a member of the Board and Chair of the Audit Committee of the TSX Group, Inc., Torstar Total voting securities: Corporation, Gerdau Ameristeel Inc., Rona Inc. and Ellis Don Inc. He also serves approximately 135,410, consisting of: as Chair of the Wellspring Cancer Support Organization. Mr. Lanthier received an honorary Doctor of Laws degree from the University of Toronto in 2002. 45,000 Common Shares 70,000 Common Shares underlying options(1) approximately 20,410 Common Shares underlying Convertible Debentures(2)
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KIRK K. MANDY Mr. Kirk K. Mandy is President and Chief Executive Officer of the Company. He Woodlawn, Ontario, Canada served as Vice-Chairman of the Company's Board of Directors from 2001 until his appointment as President and Chief Executive Officer of the Company in February Director since: 1998 2005. Over a distinguished career with the Company spanning 15 years, Mr. Mandy held Total voting securities: 1,655,500, increasingly senior roles, culminating in the position of President and Chief consisting of: Executive Officer from 1998 to 2001. He oversaw the Company's strategic decision to focus on semiconductors, and the subsequent divestiture of the Business 640,500 Common Shares Communications Systems (BCS) division. 1,015,000 Common Shares underlying Mr. Mandy is also a member of the Board of Epocal Inc. and Chairman of the options(1) Armstrong Monitoring Corporation. He has served on the Board of the Strategic Microelectronics Corporation (SMC), the Canadian Advanced Technology Association (CATA), The Canadian Microelectronics Corp. (CMC), The Ottawa Center for Research and Innovation (OCRI) and Micronet. He is also past Chairman of the Telecommunications Research Center of Ontario (TRIO), past Chairman of the National Research Council's Innovation Forum and past Co-Chairman of the Ottawa Partnership. Mr. Mandy is a graduate of Algonquin College in Ottawa. JULES M. MEUNIER Mr. Jules M. Meunier has been a management consultant since November 2002. He Vancouver, British Columbia, Canada was President and Chief Executive Officer of Proquent Systems Inc. from January to November 2002. Prior to January 2002, over a 20-year career with Nortel Director since: 2002 Networks Corporation, he helped shape the company's direction as Chief Technical Officer, and held senior positions in its wired, wireless, and optical Total voting securities: 175,000, communications divisions, including serving as President of its Wireless consisting of: Networks division. 85,000 Common Shares Mr. Meunier holds a Bachelor of Science degree in Mathematics and Computer Science from the University of Ottawa. 90,000 Common Shares underlying options(1)
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DENNIS ROBERSON Professor Dennis Roberson has been Vice Provost, Executive Director and Research Wheaton, Illinois, USA Professor with the Illinois Institute of Technology ("IIT") since June 2003, where he established a new undergraduate business school focused on Director since: 2004 entrepreneurship and technology, a wireless research center (WiNCom), IIT's corporate relations initiative, and is developing research centers and business ventures in association with public and private sector partners. From April 1998 Total voting securities: 78,522, to April 2004, Professor Roberson was Executive Vice President and Chief consisting of: Technical Officer of Motorola, Inc. From 1971 to 1998, he held senior executive positions with NCR Corporation, AT&T, Digital Equipment Corp. (now part of Hewlett Packard) and IBM. 33,522 Common Shares Professor Roberson is a Director of Advanced Diamond Technologies, Cleversafe, Sequoia Communications and Sun Phocus Technologies, LLC. He also serves on the 45,000 Common Shares underlying Board of Directors of FIRST Robotics (For Inspiration and Recognition of Science options(1) and Technology), the National Advisory Council for the Boy Scouts of America and as an International Advisory Panel member for the Prime Minister of Malaysia. He holds Bachelor of Science Degrees in Physics and Electrical Engineering from Washington State University and a Master of Science in Electrical Engineering from Stanford University. DR. HENRY SIMON Dr. Henry Simon has been Chairperson of the Company's Board of Directors since London, England July 21, 1994. He is a Special Partner of Schroder Ventures Life Sciences Advisors, a venture capital company advising on investments in the life Director since: 1992 sciences. He joined Schroder Ventures in 1987 to head a venture capital group that developed a life sciences business in the U.K., and was Chief Executive Total voting securities: 245,000, Officer of its life sciences team until 1995. Dr. Simon holds an Electrical consisting of: Engineering degree from the Institute of Technology in Munich, and a doctorate in Telecommunications from the Royal Institute of Technology in Stockholm. 175,000 Common Shares underlying options(1)
---------- (1) Reflects options to purchase Common Shares which are currently exercisable or exercisable within 60 days of May 30, 2008. (2) Reflects convertible debentures convertible into Common Shares at a conversion price of Cdn$2.45 (being a ratio of approximately 408.2 Common Shares per Cdn $1,000 principal amount convertible debenture) at the option of the holder at any time. In Fiscal 2008, 17 meetings of the Board of Directors were held. All directors attended all of the meetings held during the period they served as directors of the Company, with the exception of J. Spencer Lanthier, who missed two meetings, Jules Meunier, who missed one meeting and Andre Borrel, who, prior to his resignation from the Board of Directors on February 4, 2008, missed two meetings. In each case, each of these individuals reviewed the agenda material and gave input to the Chairperson in advance of the meeting. Dr. Adam Chowaniec was a director of IceFyre Semiconductor Inc., a private company, from May 21, 2001 to March 23, 2005. IceFyre Semiconductor Inc. appointed a receiver in bankruptcy in May 2005. -9- Kirk K. Mandy was a director of a private start-up photonics company, Optenia, Inc., in which the Company held a minority equity interest which was reduced proportionally as other equity investments were made. Optenia, Inc., which focused on reducing the cost of bandwidth distribution in optical networks, made an assignment in bankruptcy in March 2002 due to its inability to obtain additional financing and obtained a discharge in the fall of 2003. Independence and Board Committees The following table indicates whether the Board of Directors considers each nominee to be "independent" within the meaning of the Governance Guidelines and NYSE Rules (as such terms are defined below under "Statement of Corporate Governance Practices"). This table also sets out the members of the standing committees of the Board of Directors as of May 30, 2008 and the number of meetings held by each standing committee during Fiscal 2008.
--------------------------------------------------------------------------------------------------------- Compensation and Human Resources Nominating and Directors Audit Development Corporate Governance Executive Committee Committee Committee Committee --------------------------------------------------------------------------------------------------------- Independent Directors --------------------------------------------------------------------------------------------------------- Adam Chowaniec X --------------------------------------------------------------------------------------------------------- Oleg Khaykin(1) --------------------------------------------------------------------------------------------------------- Hubert T. Lacroix Chairperson X X --------------------------------------------------------------------------------------------------------- J. Spencer Lanthier X X --------------------------------------------------------------------------------------------------------- Jules Meunier X Chairperson --------------------------------------------------------------------------------------------------------- Dennis Roberson X --------------------------------------------------------------------------------------------------------- Henry Simon Chairperson Chairperson --------------------------------------------------------------------------------------------------------- Not Independent Director --------------------------------------------------------------------------------------------------------- Kirk K. Mandy X --------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------- Meetings held during 7 9 3 nil Fiscal 2008 ---------------------------------------------------------------------------------------------------------
(1) Mr. Khaykin was appointed to the Board of Directors on November 12, 2007. In Fiscal 2008, all members of the standing committees of the Board of Directors attended all meetings of their respective committees held during the period they served as directors of the Company with the exception of J. Spencer Lanthier, who missed two meetings of the Audit Committee and one meeting of the Nominating and Corporate Governance Committee, Dennis Roberson, who missed one meeting of the Compensation and Human Resources Development Committee, and Andre Borrel, who missed one meeting of the Compensation and Human Resources Development Committee prior to his resignation from the Board of Directors on February 4, 2008. In each case, each of these individuals reviewed the agenda material and gave input to the relevant Chairperson in advance of the meeting. APPOINTMENT OF AUDITORS Deloitte & Touche LLP ("Deloitte") have been acting as auditors of the Corporation since July 24, 2007. -10- The Board of Directors recommends that the Shareholders vote FOR the resolution appointing Deloitte as auditors of the Company, to hold office until the next annual meeting of Shareholders or until their successors are appointed. Except where authority to vote in respect of the appointment of Deloitte as auditors of the Company is withheld by the Shareholder, the appointees named in the accompanying Form of Proxy will vote the Common Shares represented by such proxy FOR the appointment of Deloitte. AMENDMENT OF BY-LAWS General At the Meeting, the Shareholders will be asked to consider and, if deemed appropriate, adopt, with or without amendments, a resolution approving an amendment to By-Law No. 16 of the Company. Background The listing requirements of the New York Stock Exchange ("NYSE") require securities issued by the Company to be eligible for direct registration with the Company effective January 1, 2008. When the Company participates in the direct registration system, an investor will be able to hold a security of the Company in electronic form via a book-entry position on the books of the Company, in addition to holding a security of the Company indirectly through a broker, dealer or other financial intermediary, or in the form of a physical security certificate. Such investors will be treated as registered owners of securities. The Company concluded that for the Common Shares to be eligible for direct registration as required by the NYSE, the Company must amend section 7.03 of its By-Law No. 16 to permit Common Shares to be transferred without the need for a certificate representing the Common Shares. The Board of Directors amended Section 7.03 of By-Law No. 16, effective May 20, 2008, which amendment will cease to be effective unless it is confirmed by Shareholders at the Meeting. In the event that the Shareholders do not vote for the adoption of the proposed amendment, the Company will be in breach of its NYSE listing requirements. Vote Required and Recommendation of Board of Directors The text of the resolution, which shall be submitted to the Shareholders at the Meeting, is set forth on Schedule A, attached hereto. For the reasons indicated above, the Board of Directors believes that the proposed amendment is in the best interests of the Company and its Shareholders and, accordingly, recommends that Shareholders vote FOR the resolution. The resolution must be approved by a majority of the votes cast at the Meeting to be effective. Except where a Shareholder who has given the proxy directs that his or her Common Shares be voted against such resolution, the appointees named in the accompanying Form of Proxy will vote the Common Shares represented by such proxy FOR such resolution. REDUCTION OF STATED CAPITAL General At the Meeting, the Shareholders will be asked to consider and, if deemed appropriate, adopt, with or without amendments, a special resolution to reduce the stated capital of the Company from $479,000,000, as at March 28, 2008, to $149,000,000. The amount of the proposed reduction, being $330,000,000, is equal to the amount of the accumulated deficit of the Company as of March 28, 2008, calculated in accordance with Canadian GAAP. The reduction will not be reflected in the Company's balance sheet, as prepared in accordance with US GAAP. -11- Background and Reasons for the Reduction of Stated Capital Under the Act, a corporation is prohibited from taking certain actions, including purchasing its own shares and declaring or paying dividends on its shares, if, among other things, there are reasonable grounds for believing that the realizable value of the corporation's assets would thereby be less than the aggregate of its liabilities and stated capital of all classes of shares. At a meeting of the Board of Directors held on May 20, 2008, the realizable value of the Company's assets, its liabilities and its stated capital were discussed. In order to give the Board of Directors flexibility in managing the Company's capital structure going forward, the Board of Directors has decided to submit a special resolution to the Shareholders for their approval of the reduction of the stated capital to address limitations under the Act which result from the historically high stated capital amount of the Common Shares. Limitation on Reduction of Stated Capital under the Act The Act provides that a corporation may not reduce its stated capital if there are reasonable grounds for believing that, after giving effect to the reduction in the stated capital accounts for the Common Shares, the corporation will be unable to pay its liabilities as they become due or that the realizable value of the corporation's assets will be less than the aggregate amount of its liabilities. Management of the Company is of the view that the Company does not have reasonable grounds to believe that after giving effect to such reduction, the Company will be unable to pay its liabilities as they become due or that the realizable value of the Company's assets will thereby be less than the aggregate amount of its liabilities. Certain Canadian Federal Income Tax Consideration This summary is of a general nature only. It is based on the current provisions of the Tax Act and Regulations, all amendments thereto proposed by the Minister of Finance (Canada) prior to the date hereof, and the Corporation's counsel's understanding of the current published administrative and assessing practices of the CRA. This summary assumes that any proposed amendments will be enacted as intended, and that legislative, judicial or administrative actions will not modify or change the statements expressed herein. It does not otherwise take into account or anticipate any changes in laws whether by judicial, governmental or legislative decision or action or any changes in administrative practices of the CRA nor does it take into account provincial or foreign income tax legislation or considerations. All references to the Tax Act in this summary are restricted to the scope defined in this paragraph. The reduction of stated capital will not result in a deemed dividend or in a reduction of the adjusted cost base of the Common Shares for Shareholders. Furthermore, the reduction in the stated capital account of the Common Shares will not give rise to immediate tax consequences under the Tax Act for Shareholders. Shareholders may wish to consult with their own tax advisors with respect to the proposed stated capital reduction. This summary is not intended to be, nor should it be construed as, legal or tax advice to Shareholders. Vote Required and Recommendation of the Board of Directors The text of the special resolution, which will be submitted to shareholders at the Meeting, is set forth in Schedule B, attached hereto. For the reasons indicated above, the Board of Directors believe that the proposed reduction of stated capital of the Company is in the best interests of the Company and its Shareholders and, accordingly, recommends that Shareholders vote FOR the special resolution. The special resolution must be approved by not less than two-thirds of the votes cast by the Shareholders -12- present in person or represented by proxy at the Meeting to be effective. Except where a Shareholder who has given the proxy directs that his or her Common Shares be voted against such resolution, the appointees named in the accompanying Form of Proxy will vote the Common Shares represented by such proxy FOR such resolution. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth compensation information for Fiscal 2008 and the two fiscal years ended March 30, 2007 ("Fiscal 2007"), and March 31, 2006 ("Fiscal 2006"), respectively, for the Chief Executive Officer (the "CEO"), the Chief Financial Officer (the "CFO"), the three most highly compensated executive officers of the Company, other than the CEO and the CFO, who were serving as executive officers of the Company on March 28, 2008 (collectively, the "Named Executive Officers"). -13-
---------------------------------------------------------------------------------------------------------------------------- Annual Compensation Long-Term ------------------------------------ Compensation Bonus Securities (Annual Other Under Name and Incentive Annual Options All Other Principal Fiscal Salary(1) Awards) Compensation(1)(2) Granted Compensation(1)(3) Position Year $ $ $ # $ ---------------------------------------------------------------------------------------------------------------------------- Kirk K. Mandy 2008 534,894 194,507 19,397 450,000 83,881 President and 2007 484,333 292,000 16,360 450,000 75,952 Chief Executive 2006 459,867 275,920 20,052 450,000 72,115 Officer ---------------------------------------------------------------------------------------------------------------------------- Scott Milligan 2008 325,799 97,253 17,311 125,000 51,982 Senior Vice 2007 295,003 149,000 16,378 125,000 47,113 President Finance 2006 280,101 140,050 14,709 125,000 44,691 and Chief Financial Officer ---------------------------------------------------------------------------------------------------------------------------- Donald McIntyre 2008 325,799 97,253 10,678 125,000 51,706 Senior Vice 2007 295,003 149,000 13,973 125,000 47,298 President, HR, 2006 280,101 140,050 14,234 185,000 44,574 General Counsel and Secretary ---------------------------------------------------------------------------------------------------------------------------- Henry Perret(4) 2008 228,876 100,000 9,264 nil 4,731 Senior Vice 2007 N/A N/A N/A N/A N/A President and 2006 N/A N/A N/A N/A N/A General Manager, Wired Communications ---------------------------------------------------------------------------------------------------------------------------- Stanley Swirhun 2008 275,000 nil 12,380 125,000 9,433 Senior Vice 2007 233,654 103,000 4,901 125,000 12,016 President and 2006 183,462 78,750 913 125,000 255 General Manager, Optical Communications ----------------------------------------------------------------------------------------------------------------------------
(1) For Messrs. Mandy, Milligan, and McIntyre, changes in salary from Fiscal 2007 to Fiscal 2008 were due solely to foreign exchange fluctuations. Canadian dollar amounts have been converted to United States dollars using the Fiscal 2008 average exchange rate of $0.972534 (2007 - 0.880605; 2006 - 0.836121). (2) "Other Annual Compensation" includes the following expenses for certain Named Executive Officers as follows: Mr Mandy - Fiscal 2008 includes car allowance/benefits $18,278 (2007 - $15,535; 2006 - $19,441); Mr. Milligan - Fiscal 2008 includes car allowance/benefits amounting to $15,764 (2007 - $15,272; 2006 -$13,891); Mr. McIntyre - Fiscal 2008 includes car allowance/benefits amounting to $9,131 (2007 - $12,867; 2006 - $13,416); Mr. Perret - Fiscal 2008 includes car allowance/benefits amounting to $7,192; Mr. Swirhun - Fiscal 2008 includes car allowance/benefits amounting to $11,000 (2007 - $3,808). (3) "All Other Compensation" includes contributions made and accrued by the Company to a defined contribution pension plan and supplemental executive retirement plan. (4) Mr. Perret was the former president of Legerity, Inc. which the Company acquired August 3, 2007. As at that date, Mr. Perret assumed the position of Senior Vice President, Wired Communications. -14- Employee Share Ownership Plan The Company's Employee Share Ownership Plan was approved by the Board of Directors in May 1997. The purpose of this plan is to enable employees to invest in equity shares of the Company through employee savings. Employees make contributions by means of payroll deductions and Common Shares are purchased twice per month through normal market facilities by Computershare Investor Services Inc., which assumed the administration role for Montreal Trust Company of Canada (the trustee appointed to administer the plan). The Company pays all brokerage commissions, transfer taxes, and other charges and expenses of the purchase and sale of the common shares except for the issuance of a certificate for fewer than 100 shares, in which case the employee is responsible for such costs. In April 2001, the Company implemented a matching contribution in connection with the Employee Share Ownership Plan which provides for a contribution by the Company equal to 15% of each employee's contribution under the plan, subject to a maximum of $486 per employee per year. The maximum contribution by the Company under this plan for the upcoming fiscal year is estimated at $150,000 based on average headcount during Fiscal 2008, assuming that each eligible employee contributes sufficient funds to achieve a matching contribution by the Company equal to the maximum amount permitted under the plan. Director, CEO and Executive Share Ownership The Company's policy for Director, CEO and Executive Share Ownership (the "Policy"), which was approved by the Board of Directors in May 2003 and revised in January 2006, serves to better align the interests of the Company's directors, CEO and those executives, including the CFO, who report directly to the CEO (together with the CEO, the "Executives") with the financial interests of the Shareholders, create ownership focus and build long-term commitment. The Policy requires that the directors and Executives establish and hold specified dollar investment levels in Common Shares within defined periods of time following the implementation of the Policy or from their date of hire or promotion to these roles after the effective date of the Policy, if later. The Chairperson of the Board must invest a total of CDN$100,000 for the purchase of Common Shares within five years after the effective date of the Policy or his/her date of appointment to the role, if later. Each non-executive director who is not Chairperson of the Board of Directors must invest a total of CDN$50,000 for the purchase of Common Shares within five years after the effective date of the Policy or his/her date of appointment to the Board of Directors, if later. The CEO must invest a total dollar amount equal to two times his/her base salary for the purchase of Common Shares by the end of five years from the effective date of the Policy or his/her date of hire or promotion to the role, whichever is later. Each Executive, other than the CEO, must invest a total dollar amount equal to one times his/her base salary for the purchase of Common Shares by the end of five years from the effective date of the Policy or his/her date of hire or promotion to the role, whichever is later. The following guidelines and rules apply for purposes of the Policy: (a) base salary will be the average base salary of the Executive over the three years prior to each measurement date; (b) interim investment thresholds for the Executives will be 25% of target levels after two years; 50% after three years; 75% after four years; and 100% after five years; (c) if any Executive has not met the target -15- investment level at any of the measurement dates but has earned sufficient after-tax incentive plan payments since the effective date of the Policy or his/her date of hire or promotion to the role, he/she will be reported as in default under the Policy; and (d) after the fifth anniversary date, the measurement date will be each subsequent anniversary date. If any Executive misses the target investment level at any of the measurement dates or thereafter, one-half of any incentive payments earned by the Executive after the measurement date will be withheld and not paid to the Executive until his/her dollar investment level has been increased by the lesser of the after tax value of one-half of the incentive payment or the amount required to meet the required target investment level as of the most recent measurement date. As of the most recent measurement date, all directors and the Executives were in compliance with the terms of the Policy except Stephen Swift. If any director misses the target investment level at any of the measurement dates or thereafter, any annual director's fees owing to that director after the measurement date will be withheld and not paid to the director until his/her investment level has been increased to meet the required target investment level of the most recent measurement date. Pursuant to the Policy, until the required ownership levels are met, it is expected that any exercise of outstanding options to purchase Common Shares will be used to increase the individual's required target investment level in Common Shares. All trades (purchases and sales) of Common Shares by the directors and the Executives must be made in strict adherence with the Company's Insider Trading Guidelines and relevant securities laws. 1991 Stock Option Plan for Key Employees and Non-Employee Directors The Option Plan provides for the granting of non-transferable options to purchase Common Shares to certain key employees and non-employee directors of the Company and its subsidiaries as determined from time to time by the Compensation and Human Resources Development Committee (the "Compensation Committee") administering the Option Plan. The Option Plan was approved by the Shareholders at the 1991 annual and special meeting of shareholders and certain amendments were approved by the Shareholders in 1993, 1995, 1998, 2001 and, most recently, at the Company's annual general and special meeting of shareholders held on July 24, 2007. The price at which Common Shares may be purchased upon exercise of an option shall be determined by the Board of Directors, and shall not be less than the average of the market price (as defined in the Option Plan) of the common shares on the Toronto Stock Exchange for the five trading-day period immediately preceding the date of grant. The Option Plan provides that, in the event of the death or permanent disability of an optionholder, the vesting period of any options unexercised at the date of death or permanent disability will be accelerated so that the optionholder's legal personal representative will be permitted to purchase and take delivery of, (i) in the case where the optionholder shall have been in the employment of the Company or any subsidiary for at least five years prior to the date of such employee's death or permanent disability, 50% of all Common Shares under option and not purchased or delivered at the date of death or permanent disability, and (ii) in the case where the optionholder shall have been in the employment of the Company or any subsidiary for at least ten years prior to the date of such employee's death or permanent disability, all Common Shares under option and not purchased or delivered at the date of death or -16- permanent disability, in each such case during the one-year period following such optionholder's death or permanent disability (but in no event after the expiration date of such options). The Option Plan also provides that, in the event of the termination of an employee's employment for any reason other than cause or death or permanent disability, the employee's options may be exercised, to the extent the options are exercisable as of the termination date, within 90 days following the date the employee's employment is terminated (but in no event after the expiration date of such options); provided, however, that the Board of Directors may, in its discretion, amend the terms of any option to permit the employee to exercise such options as if such employee's employment had not been terminated, for up to a maximum of three years following the date of termination of the employee's employment (but in no event after the expiration date of such options). In the event the employee's employment has been terminated for cause, the employee's options shall be immediately cancelled. The optionholder's rights with respect to options granted under the Option Plan are not assignable or transferable by the optionholder other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the U.S. Internal Revenue Code. The Option Plan further provides that, in the event of a change of control (whether in fact or in law) of the Company which results in a non-employee director being replaced, the vesting period shall be waived with respect to the options then held by such non-employee director in order to permit the full exercise of all outstanding options then held by such person. In the event of a resignation of a non-employee director, all options held by such director, which are then exercisable, may be exercised within 180 days following the announcement of the quarterly results next following the date of resignation of such person (but in no event after the expiration date of such options). The Option Plan also provides that the Compensation Committee may determine that any option granted under the Option Plan shall include provisions which accelerate the date on which an option shall become exercisable upon the happening of such events as the Compensation Committee may determine and as permitted in the Option Plan. On January 11, 2000, the Board of Directors decided that all unvested stock options held by each director, the CEO, the then five Senior Vice Presidents which included the CFO and any other executives of the Company as may be designated by the Board of Directors from time to time would be accelerated and become fully vested and immediately exercisable in the event of (i) the making by any person of a take-over bid (as defined in the Securities Act (Ontario)) for the Common Shares, or (ii) a change of control (whether in fact or in law and as more fully defined in such resolution of the Board of Directors) of the Company. By further action of the Board of Directors, this resolution now applies to each director and ten designated executives including the CEO and the CFO. The Option Plan provides that all options granted under the Option Plan must be exercised within a maximum of six years following the date of grant or within such other shorter time or times as may be determined by the Compensation Committee at the time of grant. In the case of options granted to employees of the Company, other than executive officers and non-employee directors and first-time option grants to new employees, the terms of the Option Plan provide for staggered equal monthly vesting at a rate of 2.08% per month over a period of four years commencing on the date of grant of the options, or at such other time or times as may be determined by the Compensation Committee at the time of grant. In the case of first-time option grants to new employees, up to twenty-five percent of the common shares in respect of each option may be purchased after one year from the date of grant and 2.08% per month for each month thereafter during a three-year period, or at such other time or times as may be determined by the Compensation Committee at the time of grant. In the case of executive officers and non-employee directors, up to twenty-five percent of the common shares in respect of each option may be purchased after one year from the date of grant, up to fifty percent after two years from the date of grant, up to seventy-five percent after three years from the date of grant and up to one hundred percent after four years -17- from the date of grant or at such other time or times as may be determined by the Compensation Committee at the time of grant. The maximum number of Common Shares that may be issued under the Option Plan is 20,227,033 Common Shares, which represents 15.9% of the outstanding Common Shares as of May 30, 2008. The Option Plan provides that the maximum number of Common Shares in respect of which options may be granted under the Option Plan to non-employee directors during any fiscal year of the Company is 20,000 Common Shares per director. Furthermore, the Option Plan limits the number of Common Shares issuable to insiders (as that term is defined in the Securities Act (Ontario) and the rules of the Toronto Stock Exchange (the "TSX"), at any time, or issued to insiders within any one-year period, under the Option Plan or any other securities-based compensation arrangement, to 10% of the outstanding Common Shares. As at May 30, 2008, the number of Common Shares issuable under outstanding options and options available for grant was 14,462,313, which represented 11.4% of the then outstanding Common Shares. Also, as at May 30, 2008, a total of 12,049,292 options were outstanding, which represented 9.5% of the then outstanding Common Shares. Shareholder approval is required to be obtained by the Company for any amendment (i) to increase the total number of Common Shares offered under the Option Plan; (ii) to implement a program to provide for the exchange of any option granted under the Option Plan for other options under the Option Plan; (iii) to reduce the price at which Common Shares may be purchased under the Option Plan (except in connection with an adjustment to the share capital in accordance with the terms of the Option Plan) or to cancel and reissue options; (iv) to extend the original expiry date of an option; (v) to increase the maximum number of Common Shares issuable to insiders of the Company under the Option Plan and any other security-based compensation arrangement; (vi) to increase the maximum number of Common Shares in respect of which options may be granted to non-employee directors during any fiscal year; and (vii) to amend the terms of the Option Plan governing the transfer or assignment of options. The Board of Directors otherwise has discretion to make certain amendments to the Option Plan which it may deem necessary, without having to obtain Shareholder approval if such amendments do not result in significant or unreasonable dilution in the Company's outstanding securities or in any additional benefits to employees, particularly insiders, at the expense of the Company and its other Shareholders. Such amendments may include, for example, (i) amendments to the eligibility for, and limitations and conditions on, participation in the Option Plan, (ii) amendments to any terms relating to the grant or exercise of options (other than a reduction in the price of an option), (iii) amendments to permit the grant of deferred or restricted share units or to add or amend any other provisions which result in employees receiving securities of the Company while no cash consideration is received by the Company, (iv) amendments that are necessary to comply with applicable laws, rules or regulations, (v) corrections or rectifications of any ambiguity, defective provision, error or omission in the Option Plan or in any option, and (vi) amendments to the terms relating to the administration of the Option Plan. Amendments to the Option Plan adopted in 2007 The Option Plan was amended by shareholder resolution adopted at the Company's annual general and special meeting held on July 24, 2007 as follows: (i) the number of Common Shares issuable to insiders at any time, or issued to insiders within any one-year period, under the Option Plan or any other securities-based compensation arrangement, was limited to 10% of the outstanding Common Shares; and (ii) the amending provisions of the Option Plan were changed to state what amendments would require Shareholder approval. -18- Options Granted and Exercised in Fiscal 2008 The following table sets forth the details regarding options granted to the Named Executive Officers under the Option Plan during Fiscal 2008.
Option Grants During Fiscal 2008 ----------------------------------------------------------------------------------------------------------------------- Market Value % of Total of Securities Securities Options Underlying Under Granted to Exercise or Options on the Options Employees in Base Price(1) Date of Grant(1) Name Granted(#) Fiscal 2008 ($/Security) ($/Security) Expiration Date ----------------------------------------------------------------------------------------------------------------------- Kirk K. Mandy 450,000 11.87% 0.85 0.85 February 15, 2014 Scott Milligan 125,000 3.30% 0.85 0.85 February 15, 2014 Donald McIntyre 125,000 3.30% 0.85 0.85 February 15, 2014 Henry Perret Nil 0% N/A N/A N/A Stanley Swirhun 125,000 3.30% 0.85 0.85 February 15, 2014 -----------------------------------------------------------------------------------------------------------------------
(1) In accordance with the terms of the Option Plan, the exercise price of an option is determined by averaging the closing share prices on the Toronto Stock Exchange on the five trading days prior to the date of the grant. Market Value is the closing share price on the Toronto Stock Exchange on the date of grant. Canadian dollar values are converted to United States dollars using the closing foreign exchange rate of the Bank of Canada on the date of each grant. See "Report on Executive Compensation - Long Term Incentive" for an explanation of the Company's new option granting practice. The following table summarizes, for each of the Named Executive Officers (a) the number of options, if any, exercised during Fiscal 2008, (b) the aggregate value realized upon exercise, if applicable, which is the difference between the fair market value of the underlying Common Shares on the exercise date and the exercise or base price of the option, (c) the total number of unexercised options, if any, held on March 28, 2008, and (d) the aggregate value of unexercised in-the-money options at March 28, 2008, which is the difference between the exercise or base price of the options and the closing price of the Common Shares on the TSX on March 28, 2008, which was Cdn$0.78 per Common Share. The aggregate values indicated with respect to unexercised in-the-money options at financial year-end have not been, and may never be, realized. These options have not been, and may not be exercised, and actual gains, if any, on exercise will depend on the value of the Common Shares on the date of exercise. There can be no assurance that these values will be realized. -19- Aggregated Options Exercised During Fiscal 2008 and Fiscal Year-End Option Values
--------------------------------------------------------------------------------------------------------------------- Value of Unexercised Unexercised Options In-the-Money Options at Securities Aggregate at March 28, 2008(1) March 28, 2008 Acquired On Value (#) ($) Exercise Realized ------------------------------------------------------------------- Name (#) ($) Exercisable Unexercisable Exercisable Unexercisable --------------------------------------------------------------------------------------------------------------------- Kirk K. Mandy -- -- 1,015,000 1,225,000 -- -- Scott Milligan -- -- 283,750 301,250 -- -- Donald McIntyre -- -- 268,750 331,250 -- -- Henry Perret -- -- -- -- -- -- Stanley Swirhun -- -- 168,750 356,250 -- -- ---------------------------------------------------------------------------------------------------------------------
(1) See "1991 Stock Option Plan for Key Employees and Non-Employee Directors" for details on vesting periods. REPORT ON EXECUTIVE COMPENSATION Composition of the Compensation Committee The Compensation and Human Resources and Development Committee ("Compensation Committee") is comprised of three independent members of the Board of Directors: Jules M. Meunier, the Chairperson of the Committee, Adam Chowaniec and Dennis Roberson. It is the responsibility of the Compensation Committee to recommend to the Board of Directors compensation policies and levels, compensation plans, stock option/purchase plans, benefit plans and pension plans and CEO and senior management goals and performance objectives and assess their performance against these objectives at each fiscal year end. The Compensation Committee is also responsible for reviewing succession plans developed by management that sustain the long-term viability of the Company. General Principles of Executive Compensation Compensation of executive officers, including the Named Executive Officers, is determined by the Compensation Committee and, upon the recommendation of the Compensation Committee, approved by the Board of Directors. The Company's executive compensation policies and programs are designed to enable the Company to increase its profitability and shareholder value, and attract and retain those key individuals who can realize and ensure the short-term and long-term success of the Company. As such, the policies and programs link rewards to individual contribution, Company success and shareholder financial interests. The Company's executive compensation program, on a total compensation basis, aims to be competitive with other companies who are competing in similar geographical regions for the same qualified executive talent as the Company. Executive positions are benchmarked against those of applicable external comparator groups through the use of third party international compensation consultant services. The prime comparator group is one of similar semiconductor and high-technology companies, with complementary comparator groups of other companies used where appropriate. -20- Accordingly, in Fiscal 2006, the Compensation Committee engaged the Hay Group Consultants (Toronto) to review against a comparator group of semiconductor companies the compensation of directors and executives as well as option grants to directors, executives and employees. In addition, the Hay Group was retained to assist management in the design and operation of a 360(degree) evaluation process for executives. The total compensation program for executive officers is comprised of three components: base salary, an annual incentive and a long-term incentive. Base Salary Base salary recommendations are determined based on market data for positions of similar responsibilities and complexity in the comparator groups, on internal equity comparisons and on the individual's ability, experience and contribution level. Base salaries for the executive group overall are reviewed on an annual basis. Those for individual executive positions may also be reviewed outside of the regular cycle so as to take into consideration market pressures. There were no salary increases for the executive group for Fiscal 2008. Annual Incentive Compensation Arrangements The Company's annual incentive plans are intended to focus and reward executives on the achievement of current year financial targets, key Company and/or business unit objectives and some strategic individual performance objectives. While the financial targets serve to focus on results of current year profitability, the key Company, business and individual objectives focus on activities designed to improve financial results and increase profitability in a two to three-year time frame. Financial threshold targets are approved by the Board of Directors at the commencement of the fiscal year and are required to be met for payments to be made according to plan criteria. As the Company threshold financial performance was not achieved for Fiscal 2008, there were no bonus awards to executives under the annual bonus plan based on the assessment by the Compensation Committee and the Board of the individual performances of the executives against specific objectives. There were ad hoc bonuses paid to Kirk Mandy, Scott Milligan and Donald McIntyre relating to the successful acquisition and integration of Legerity, Inc. during the second quarter of Fiscal 2008. See "Executive Compensation - Summary Compensation Table" for the amounts of the bonuses paid to each of the Named Executive Officers over each of the last three fiscal years. The target incentive levels of the executive group are reviewed at the same time as the base salaries. The target and actual total cash compensation (salaries plus annual incentives) of the Company's executive group are currently competitive with those of the applicable comparator group. The comparator group for short term incentives includes primarily semiconductor businesses. Long-Term Incentive Options to purchase Common Shares are granted to the Named Executive Officers and other key employees to sustain commitment to long-term profitability and maximize shareholder value over the long term. Under the terms and conditions of the Option Plan, participants are granted options which are exercisable for periods of time determined by the Compensation Committee to a maximum of six years following the date of grant at an exercise price equal to the average market price of the Common Shares on the Toronto Stock Exchange during the five trading-day period immediately preceding the date of grant. See "Executive Compensation - 1991 Stock Option Plan for Key Employees and Non-Employee Directors". -21- Beginning in Fiscal 2007, the Company established a new option granting practice. General grants of options are now made by the Company on the eighth business day following the date of release of the Company's Q3 financial results. Accordingly, the Option Plan's pricing formula of the five previous trading days' average used to determine the exercise price of the options will commence after the second clear business day following the release of quarterly results, so that the price will reflect the market share price after the markets have had two days to react to the most recent release of financial information. This is consistent with the Company's Insider Trading Guidelines. The Company and Board of Directors believe that stock options provide strong links between executive and key employee rewards, shareholder interests and the success of the Company. Stock option grants to executives and to other top contributors and critical skilled individuals are generally made on an annual basis. The size of grant for the executive group is determined based on the available option pool, the levels and values of options provided by companies in the external comparator group(s), and the number of options required for motivating and retaining the executives and other top contributors and critical skilled employees. During Fiscal 2008, the Company granted options under a general grant and special grant to executives and employees of newly acquired Legerity, Inc. to purchase up to 3,791,000 Common Shares to a total of 145 employees and seven non-employee directors of the Company at an average exercise price of $1.04 per share; of this total grant, 160,000 were granted to directors, 1,400,000 to executive officers and 2,251,000 to key employees. As options to purchase 1,653,753 Common Shares were forfeited in Fiscal 2008 due to the termination of employment of certain employees and expiry of options in the normal course, the net number of options granted during the year was 1.7% of the total number of outstanding Common Shares on March 28, 2008. On March 28, 2008, the number of outstanding options to purchase Common Shares was 9.7% of outstanding Common Shares on such date. The comparator group for long-term incentives is primarily semiconductor businesses. Compensation of the President and Chief Executive Officer In February 2005, Kirk K. Mandy was appointed President and CEO of the Company. Mr. Mandy's compensation was determined by the Compensation Committee and, upon the recommendation of the Compensation Committee, approved by the Board of Directors. The base salary and long-term incentive components of Mr. Mandy's compensation are determined in accordance with the policies applying to all executive officers of the Company. Mr. Mandy's current base salary is $534,894. Mr. Mandy's annual base salary is determined in Canadian dollars and set at CDN$550,000. Mr. Mandy's annual discretionary incentive payment is determined, at each fiscal year end, based on the Compensation Committee's assessment of Mr. Mandy's performance, particularly in improving the Company's financial condition and long term prospects. In Fiscal 2008, the Company did not achieve the EPS target in the Company's annual bonus plan. It also continued to invest strongly in research and development programs to increase the number of new products in order to fuel an acceleration of growth of Company revenue from new products. See "Employment Agreements - Kirk K. Mandy". As the Company did not achieve target financial performance on an operating basis for Fiscal 2008, the Compensation Committee and Board of Directors assessed Mr. Mandy's specific achievements during the year and awarded him no incentive payment under the annual bonus plan. It did, however, award him an ad hoc bonus of $194,507 for the successful completion of the acquisition and integration of Legerity, Inc. in the second quarter of fiscal 2008. The Compensation Committee of the Board of Directors, whose names are set out below, has approved the issue of this Report on Executive Compensation and its inclusion in this Circular. -22- Jules M. Meunier Dennis Roberson Adam Chowaniec May 30, 2008 PERFORMANCE GRAPH The following graph compares the cumulative total shareholder return on CDN$100 invested in Common Shares with the cumulative total return of the S&P/TSX Composite Index for the five most recently completed fiscal years, assuming reinvestment of all dividends. [The following information was depicted as a line chart in the printed material] TSX TSX Composite ZL Composite ZL Index (Cumulative) Index ---- --------- ------------ --------- March 28, 2003 $100 $100 $100 $100 March 26, 2004 $96 $135 $96 $135 March 25, 2005 $38 $152 $38 $152 March 31, 2006 $65 $193 $65 $193 March 30, 2007 $45 $209 $45 $209 March 28, 2008 $15 $210 $15 $210 EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with the Named Executive Officers on the terms and conditions described below. KIRK K. MANDY Effective January 26, 2005, the Company entered into an employment agreement with Mr. Kirk K. Mandy with respect to his employment as interim President and Chief Executive Officer and, effective February 16, 2005, as full time President and Chief Executive Officer. This employment agreement was revised on May 24, 2007. Pursuant to the agreement, Mr. Mandy is entitled to receive an annual base salary in the amount of 534,894. Mr. Mandy's annual base salary is determined in Canadian dollars and set at CDN$550,000. He is also eligible to receive an annual incentive payment equal to 60% of his annual base salary or, at exceptional performance, 90% of his annual base salary, conditional upon the Board of Directors' assessment of the successful achievement by Mr. Mandy of specific target objectives in each fiscal year. The incentive payment objectives for each fiscal year are reviewed and finalized by the Compensation Committee and the Board of Directors within 60 days following the commencement of each fiscal year. Mr. Mandy's objectives for Fiscal 2009 are as follows: -23- 1. Meet or exceed the Company's Fiscal 2009 earnings targets; 2. Improve the Company's quality of earnings through continued focus on cost containment and margin expansion; and 3. Execute the Company's strategic plan, deriving an increasing proportion of revenue from new product programs, while growing overall revenue. Mr. Mandy is also entitled to customary benefits and currently holds 2,240,000 options for Common Shares at exercise prices determined as follows: 20,000 options (all of which are currently exercisable) may be exercised at the market price (as defined in the Option Plan) of CDN$$5.10 in effect on February 6, 2003; 20,000 options (all of which are currently exercisable) may be exercised at the market price of CDN$5.36 in effect on January 29, 2004; 100,000 options (75,000 of which are currently exercisable) may be exercised at the market price of CDN$2.12 in effect on February 3, 2005; 750,000 options (562,500 of which are currently exercisable) may be exercised at the market price of CDN$2.26 in effect on February 24, 2005; 450,000 options (225,000 of which are currently exercisable) may be exercised at the market price of CDN$2.51 in effect on January 27, 2006; 450,000 options (112,500 of which are currently exercisable) may be exercised at the market price of CDN$2.49 in effect on February 6, 2007; and 450,000 options (none of which are currently exercisable) may be exercised at the market price of CDN$0.86 in effect on February 15, 2008. The options provide for equal annual vesting over a period of four years with first tranche vesting one year following their date of grant, and are otherwise governed by the terms and conditions of the Option Plan. (Canadian dollar amounts have been converted to United States dollars using the closing foreign exchange rate provided by the Bank of Canada on the date of grant). Mr. Mandy's employment agreement provides further that, in the event that the Company terminates his employment without legal grounds for which an employer is entitled to dismiss an employee without notice or compensation in lieu of notice, he will be entitled to the following termination package: (i) a lump sum payment equal to two times his annual base salary, (ii) a lump sum payment in lieu of incentive payment equal to two times his target annual bonus, (iii) a payment of two years' regular annual contributions to an executive pension plan and (iv) continued group life and health benefits coverage until the earlier of two years following the date of termination or 30 days after he secures substantially similar replacement coverage through re-employment. In addition, Mr. Mandy will have a period of six months following the date of termination to exercise all stock options that will have vested up to the end of such exercise period. SCOTT MILLIGAN On May 12, 2003, the Company entered into an employment agreement with Mr. Scott Milligan with respect to his employment as Senior Vice President, Finance and Chief Financial Officer. This employment agreement was revised on May 24, 2007. Pursuant to the agreement, Mr. Milligan is entitled to receive an annual base salary in the amount of 325,799. Mr. Milligan's base salary is determined in Canadian dollars and has been set at CDN$335,000 since Fiscal 2004. The change in the U.S. dollar equivalent of Mr. Milligan's base salary is due solely to foreign exchange fluctuations. He is also eligible to receive an annual incentive payment, conditional upon the successful achievement by Mr. Milligan of specific target objectives in each fiscal year, as follows: (i) if the objectives are achieved in full, the annual incentive payment will be equal to 50% of the annual base salary, and (ii) if the financial component of the objectives is exceeded, Mr. Milligan may earn up to 150% of his target incentive payment. The incentive payment objectives for each fiscal year are reviewed and finalized with the Board of Directors within 45 days following the commencement of each fiscal year. Mr. Milligan is also entitled to customary benefits and received an initial grant of options to purchase 50,000 Common Shares pursuant to the Option Plan. The options -24- provide for equal annual vesting over a period of four years commencing one year following their date of grant, and are otherwise governed by the terms and conditions of the Option Plan. Mr. Milligan's employment agreement provides further that, in the event that the Company terminates his employment without legal grounds for which an employer is entitled to dismiss an employee without notice or compensation in lieu of notice, he will be entitled to the following termination package: (i) a lump sum payment equal to two times his then current annual base salary, (ii) a lump sum payment in lieu of incentive payment equal to two times his target annual incentive payment, (iii) a payment of two years' regular annual contributions to an executive pension plan, and (iv) continued group life and health benefits coverage until the earlier of one year following the date of termination or 30 days after he secures substantially similar replacement coverage through re-employment. In addition, Mr. Milligan will have a period of six months following the date of termination to exercise all stock options that vested up to the end of such exercise period. DONALD MCINTYRE Mr. McIntyre was engaged by the Company, then known as Mitel Corporation, in March 1987 as Vice President, General Counsel and Secretary. His current position is Senior Vice President, Human Resources, General Counsel and Secretary of the Company. Pursuant to his current employment agreement, Mr. McIntyre is entitled to receive an annual base salary of 325,799. His base salary is determined in Canadian dollars and has been set at CDN$335,000 since Fiscal 2004. The change in the U.S. dollar equivalent of Mr. McIntyre's base salary is due solely to foreign exchange fluctuations. Mr. McIntyre is also eligible to receive an annual incentive payment, conditional upon the successful achievement by Mr. McIntyre of specific target objectives in each fiscal year as follows: (i) if the objectives are achieved in full, the annual incentive payment will be equal to 50% of his annual base salary and (ii) if the financial component of the objectives is exceeded, Mr. McIntyre may earn up to 150% of his target incentive payment. The incentive payment objectives for each fiscal year are reviewed and finalized with the Board of Directors of the Company within 45 days following the commencement of each fiscal year. On January 12, 2000, the Board of Directors approved an executive termination agreement for Mr. McIntyre to be effective from that date. The agreement provides that in the event that the Company terminates Mr. McIntyre's employment without legal grounds for which an employer is entitled to dismiss an employee without notice or compensation in lieu of notice, he will be entitled to the following termination package: (i) a lump sum payment equal to two times his then current annual base salary and annual target incentive payment, (ii) a payment of two years' regular annual contributions to an executive pension plan and (iii) continued group life and health benefits coverage during such two-year period. In addition, Mr. McIntyre will have a period of six months following the date of termination to exercise all stock options that will have vested up to the end of such exercise period. HENRY PERRET Mr. Perret was the President and Chief Executive Officer of Legerity, Inc., which was acquired by the Company on August 3, 2007. Mr. Perret agreed to be employed by Zarlink for one year as Senior Vice President, Wired Communications to effect an orderly transition and integration of the business. On July 31, 2007, the Company entered into an employment agreement with Mr. Perret with respect to his employment as Senior Vice President and General Manager, Wired Communications for a term of one year. Pursuant to the agreement, Mr. Perret is entitled to receive a base salary in the amount of $350,000. He is also eligible to receive a bonus of up to 50% of his base salary conditional upon the -25- successful achievement by Mr. Perret of specific target objectives during the term of his agreement. The agreement also provides Mr Perret with the ability to earn a retention bonus of $350,000 as incentive to remain in the employ of the Company, payable after the completion of one year of employment (or earlier if Mr. Perret's employment is terminated by the Company without cause before the expiry of the term). Mr. Perret is also entitled to customary benefits. Mr. Perret's employment agreement provides further that, in the event that the Company terminates his employment without cause, as defined in the agreement, he will be entitled to (i) a lump sum payment equal to the amounts remaining (salary and bonus) for the balance of his one-year employment term, and (ii) a gross amount in cash, less statutory deductions, sufficient to pay for the remaining number of months of the one year employment term of insurance premiums in order to obtain life, health and dental insurance coverage at the same or similar premium basis and level that was available to him at the time of his termination. STANLEY SWIRHUN On May 31, 2005, the Company entered into an employment agreement with Mr. Stanley Swirhun with respect to his employment as Senior Vice President and General Manager, Optical Communications. Pursuant to the agreement, Mr. Swirhun is entitled to receive an annual base salary in the amount of $275,000. He is also eligible to receive an annual incentive payment, conditional upon the successful achievement by Mr. Swirhun of specific target objectives in each fiscal year, as follows: (i) a target annual incentive of 50% of his annual base salary, and (ii) the possibility of earning up to 75% of his annual base salary in the case of exceptional performance. The incentive payment objectives for each fiscal year are reviewed and finalized with the Board of Directors of the Company within 60 days following the commencement of each fiscal year. Mr. Swirhun is also entitled to customary benefits. Mr. Swirhun's employment agreement provides further that, in the event that the Company terminates his employment without legal grounds for which an employer is entitled to dismiss an employee without notice or compensation in lieu of notice, he will be entitled to the following termination package: (i) a lump sum payment equal to one times his then current annual base salary, (ii) a lump sum payment in lieu of incentive payment equal to one times his average earned incentive payment over the previous three years or such shorter period if the period of employment is shorter than three years, and (iii) an amount equivalent to the Company's one-year cost of his current life, health and dental insurance coverage. In addition, Mr. Swirhun will have a period of six months following the date of termination to exercise all stock options that vested up to the end of such exercise period. EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of March 28, 2008 about the Common Shares that may be issued upon exercise of options, warrants and rights under all of the Company's equity compensation plans. -26-
------------------------------------------------------------------------------------------------------------- Number of securities remaining Number of securities to Weighted-average available for future issuance be issued upon exercise exercise price of under equity compensation of outstanding options, outstanding options, plans (excluding securities Plan Category warrants and rights warrants and rights reflected in the first column) ------------------------------------------------------------------------------------------------------------- Equity compensation 12,390,625 $2.30 2,071,688 plans approved by securityholders(1) ------------------------------------------------------------------------------------------------------------- Equity compensation N/A N/A N/A plans not approved by securityholders ------------------------------------------------------------------------------------------------------------- Total 12,390,625 $2.30 2,071,688 -------------------------------------------------------------------------------------------------------------
(1) For more information regarding the Option Plan, please refer to the section "Executive Compensation - 1991 Stock Option Plan for Key Employees and Non-Employee Directors". COMPENSATION OF NON-EMPLOYEE DIRECTORS During the fiscal year ended March 28, 2008, each director who was not a salaried officer of the Company or its subsidiaries received an annual stipend of $9,752 and a director's fee of $1,950 for each meeting of the Board of Directors or any Committee thereof attended in person and for each day spent on the affairs of the Company or $1,219 for each telephone meeting of the Board of Directors and was reimbursed for his expenses. In addition, the Chairperson of each Committee of the Board of Directors received an annual fee of $5,851, with the exception of the Chairperson of the Audit Committee, who received an annual fee of $14,629. The Company pays the Chairperson of the Board of Directors, when such person is not an employee of the Company, an annual stipend of $97,523 (inclusive of Board and Committee meeting fees) and a per diem of $2,438 for attendance to Company business, to an annual maximum of $48,762. The Chairperson did not receive any per diem amount for attendance to Company business, at his request, for the 2nd half of the fiscal year ended March 28, 2008. The per diem portion of the Chairperson's compensation has been suspended indefinitely at the Chairperson's request until the Company returns to an acceptable level of profitability. The compensation of non-employee directors is fixed in Canadian dollars. Changes in compensation for non-employee directors from Fiscal 2007 to Fiscal 2008 were due solely to foreign exchange fluctuations. See note 1 under "Executive Compensation - Summary Compensation Table" for details on the foreign exchange fluctuations. The following table summarizes the aggregate number of unexercised options held by non-employee directors at May 30, 2008. -27- Option Information for Non-Employee Directors
--------------------------------------------------------------------------------------------------------------------- Unexercised Options at May 30, 2008 -------------------------------------------------------------------------------- Date of Grant Exercise Price Exercisable Unexercisable --------------------------------------------------------------------------------------------------------------------- July 13, 2002 CDN $7.15 20,000 0 --------------------------------------------------------------------------------------------------------------------- February 6, 2003(1) CDN $5.10 80,000 0 --------------------------------------------------------------------------------------------------------------------- May 14, 2003(1) CDN $6.68 20,000 0 --------------------------------------------------------------------------------------------------------------------- January 29, 2004(1) USD $4.04 100,000 0 --------------------------------------------------------------------------------------------------------------------- November 26, 2004 USD $2.25 15,000 5,000 --------------------------------------------------------------------------------------------------------------------- February 24, 2005 USD $1.83 90,000 30,000 --------------------------------------------------------------------------------------------------------------------- January 27, 2006 USD $2.18 60,000 60,000 --------------------------------------------------------------------------------------------------------------------- February 6, 2007 USD $2.11 30,000 90,000 --------------------------------------------------------------------------------------------------------------------- February 19, 2007 USD $2.12 5,000 15,000 --------------------------------------------------------------------------------------------------------------------- November 12, 2007 USD $1.16 0 20,000 --------------------------------------------------------------------------------------------------------------------- February 15, 2008 USD $0.85 0 140,000 ---------------------------------------------------------------------------------------------------------------------
(1) See "Executive Compensation - 1991 Stock Option Plan for Key Employees and Non-Employee Directors" for details on vesting periods. INDEBTEDNESS OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS As of May 30, 2008, and at no time during Fiscal 2008, was any executive officer, director, employee or former executive officer, director or employee of the Company or any of its subsidiaries indebted to the Company or any of its subsidiaries (other than routine indebtedness). Furthermore, the Company has not provided any guarantee, support agreement, letter of credit or other similar arrangement or understanding in respect of any indebtedness (other than routine indebtedness) of any such person to any other person or entity. DIRECTORS' AND OFFICERS' LIABILITY INSURANCE As at May 30, 2008, the Company had in force Directors' and Officers' Liability Insurance policies in the amount of $30,000,000 for the benefit of the directors and officers of the Company and its subsidiaries. The total amount of the premiums paid by the Company for the policies in effect for the fiscal year ended March 28, 2008 was $681,372. No portion of these premiums was paid by the directors and officers of the Company. The policies do not provide for a deductible for any loss in connection with a claim against a director or an officer. For claims brought against the Company, a deductible of $1,000,000 applies. STATEMENT OF CORPORATE GOVERNANCE PRACTICES The Board of Directors and the Company's management are committed to the highest standard of corporate governance, and the Company has had standards in place for many years. The Nominating and Corporate Governance Committee and the Board of Directors review the Company's governance standards periodically and at least annually and revise them when necessary to respond to changing regulatory requirements and evolving best practices. The Company's principal objective in directing and managing its business and affairs is to enhance shareholder value. The Company believes that effective corporate governance improves corporate performance and benefits all shareholders. The Canadian Securities Administrators ("CSA") published on April 15, 2005 National Policy 58-201 - Corporate Governance Guidelines and National Instrument 58-101 - Disclosure of Corporate -28- Governance Practices which prescribe corporate governance guidelines (the "Governance Guidelines") and related detailed disclosure, which came into force on June 30, 2005. Previously, in March 2004, the CSA rules relating to audit committees and certification of financial disclosure came into force ("CSA Audit Committee Rules"). The Board of Directors of the Company believes that the Company is fully compliant with the Governance Guidelines. The Company's corporate governance practices are compared with the Governance Guidelines in Schedule C hereto. As the Company complies with the NYSE corporate governance rules (the "NYSE Rules") regarding the role and composition of the Audit Committee, the Company is exempt from compliance with the CSA Audit Committee Rules. As the Common Shares are registered in the United States, the Company is subject to certain provisions of the United States Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act") and the rules and regulations ("SEC Rules") of the SEC. Moreover, as the Common Shares are listed on the NYSE, it is subject to the NYSE Rules. Although there are certain differences between the corporate governance practices of the Company, which is a foreign private issuer under the SEC Rules, and those required of a domestic company under the NYSE Rules, we do not believe that any of these differences are significant. The differences in corporate governance practices are set forth in Schedule D hereto. The Governance Guidelines, which are not mandatory, define a director as independent if he or she has no direct or indirect material relationship with the Company. The Governance Guidelines recommend and the NYSE Rules require that a majority of the board be "independent". Independence is defined under the Governance Guidelines and the NYSE Rules to mean the board has affirmatively determined that the director has no material relationship with the Company which could be reasonably expected to interfere with the exercise of a member's independent judgment. The Governance Guidelines and the NYSE Rules deem certain relationships to be indicative of non-independence. The NYSE Rules also require that all audit committee members meet additional independence standards, including not accepting, directly or indirectly, any consulting or other compensatory fee and not being an affiliate of the Company. The Board of Directors has reviewed the Governance Guidelines and NYSE Rules and has individually considered their respective interests in and relationships with the Company. As a consequence, the Board of Directors has determined that, on a rigorous application of these definitions, the Board is composed of seven "independent" directors out of eight board members. The CEO of the Company, Kirk K. Mandy, is the only director not considered to be an "independent" director. The NYSE Rules require that all of audit committee members be independent and financially literate, as defined by such rules. The Company is also required, under the Sarbanes-Oxley Act and SEC Rules, to disclose whether it has an audit committee financial expert (within the meaning of such rules) serving on its audit committee. The Board of Directors has reviewed the independence of each member of the Audit Committee, as well as the education and experience of each member of the Audit Committee relevant to the performance of his duties on the Audit Committee and has determined that all Audit Committee members are independent and financially literate and that Hubert T. Lacroix, Chairperson of the Audit Committee, and J. Spencer Lanthier, a member of the Audit Committee, are the audit committee financial experts. The Board of Directors has approved a detailed set of internal corporate governance policies including mandates for the Board of Directors and its committees and a Code of Ethics and Business -29- Conduct. These policies are described in detail in Schedule C hereto and are available in their entirety at the Company's website at www.zarlink.com. The Board of Directors continues to monitor changes to corporate governance rules and best practices and to take appropriate action, including, as appropriate, the adoption of voluntary policies and procedures. A brief summary of the education and/or experience of each member of the Audit Committee that is relevant to the performance of his responsibilities as a member of the Committee is set out below. AUDIT COMMITTEE MEMBERS Relevant Education and Experience Hubert T. Lacroix has a BCL (1976) and a MBA (1981) from McGill University and has been a member of the Quebec Bar since 1977. Mr. Lacroix has been President and Chief Executive Officer of Canadian Broadcasting Corporation / Radio-Canada ("CBC") since January 1, 2008. From February 1, 2000 to May 2, 2003, he served as Executive Chairman of the Board of Telemedia Corporation as well as Executive Chairman of the Board of Directors of its affiliated companies. Mr. Lacroix is Chairman of the Board of SFK Pulp Fund and a member of its audit committee. Mr. Lacroix has acquired a good understanding of the accounting principles used to prepare financial statements, in general, resulting from his legal practice specializing in business law and the positions held with CBC and Telemedia Corporation as well as the experience acquired as a member of audit committees for several public and private corporations over a period of nearly 20 years. This experience allows him to understand the accounting principles used by the Company in preparing its financial statements and to evaluate, in general, the application of accounting principles as they relate to the accounting of the Company's estimates, accounts receivable, accounts payable and reserves. Moreover, he has an excellent understanding of the procedures regarding the disclosure of financial information. J. Spencer Lanthier was the Chairman and Chief Executive Officer of KPMG Canada from 1993 to 1999 and Vice-Chairman from 1989 to 1993. He also served as a member of the KPMG International Executive Committee and Board. Mr. Lanthier was awarded his F.C.A. designation by the Institute of Chartered Accountants of Ontario in 1982 and served as a partner of KPMG Canada from 1972 until his retirement in 1999. He received the Award of Outstanding Merit from the Institute of Chartered Accountants of Ontario in 2001. Mr. Lanthier also serves as a director on the Board of Directors of several public companies. As a result of his accounting background and active practice as a certified public accountant for over 27 years, Mr. Lanthier has developed a high level of financial expertise. Mr. Lanthier has experience in preparing, auditing, analyzing or evaluating financial statements that present a certain breadth and level of complexity of accounting issues and has actively supervised persons engaged in performing similar functions. Jules Meunier has served as President and CEO of Proquent Systems Inc. and President of Nortel Network's Wireless Network division. He is also a director and a member of the audit committee of Spectrum Signal Processing. In such capacities, Mr. Meunier has acquired accounting and related financial management expertise and general financial literacy. Mr. Meunier has also actively supervised persons engaged in preparing, auditing, analyzing or evaluating financial statements. Mr. Meunier holds a Bachelor of Science degree in Mathematics and Computer Science from the University of Ottawa. -30- REPORT OF THE AUDIT COMMITTEE The Audit Committee oversees the Company's financial reporting process on behalf of the Board of Directors. Management has the primary responsibility for the financial statements and the reporting process, including internal control systems. In fulfilling its oversight responsibilities, the Audit Committee reviews the audited financial statements contained in the Annual Report with management. This review involves a discussion of the quality, and not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of the disclosure in the financial statements. The Audit Committee also reviews the audited financial statements with the independent auditors, who are responsible for expressing an opinion on the conformity of such financial statements with generally accepted accounting principles, their view as to the quality, and not just the acceptability, of the Company's accounting principles and such other matters as are required to be discussed by Statement on Auditing Standards No. 61, as amended (Communications with Audit Committees) and under generally accepted auditing standards. In addition, the Audit Committee discusses with the independent auditors the auditors' independence from management and the Company, and such other matters contained in the written disclosure required by Independence Standards Board No. 1 (Independence Discussions with Audit Committees) and considers the compatibility of non-audit services with the auditors' independence. The Audit Committee discusses the overall scope and plan for the annual audit with the Company's independent auditors. The Audit Committee meets with the independent auditors, with and without management present, to discuss the results of their examinations, their evaluations of the Company's internal controls and the overall quality of the Company's financial reporting. The Audit Committee has adopted a policy that requires advance approval of all audit, audit-related, tax and other services performed by the independent auditor. The policy provides for pre-approval by the Audit Committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the Audit Committee must approve the permitted service before the independent auditor is engaged to perform it. For a full description of the Audit Committee responsibilities, please review Schedule E, the Audit Committee Charter, attached to this Circular. In reliance on the reviews and discussions referred to above, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Annual Report on Form 20-F for Fiscal 2008 for filing with the SEC and all other applicable regulatory authorities and the Board of Directors has approved such financial statements. Hubert T. Lacroix J. Spencer Lanthier Jules Meunier June 4th, 2008 AUDIT AND OTHER FEES The fees billed to the Company by its auditors in Fiscal 2008 and Fiscal 2007 are summarized in the table below. -31- -------------------------------------------------------------------------------- Deloitte & Touche(3) Ernst & Young FEES FISCAL 2008 FISCAL 2007 -------------------------------------------------------------------------------- Audit services(1) $1,191,000 $750,000 -------------------------------------------------------------------------------- Audit-related services(2) $78,000 $13,000 -------------------------------------------------------------------------------- Tax services Nil $185,000 -------------------------------------------------------------------------------- Non-audit services Nil nil -------------------------------------------------------------------------------- Total Fees(1): $1,269,000 $948,000 -------------------------------------------------------------------------------- (1) These fees included fees for the audit of the consolidated financial statements and other services performed such as statutory audits and quarterly reviews. In Fiscal 2008, these fees include incremental costs of approximately $400,000 for audit of internal control over financial reporting (SOX) and approximately $180,000 relating to the acquisition of Legerity, Inc. and the Swindon foundry sale. (2) These fees included fees for the Canadian Public Accountability Board in Fiscal 2008. (3) Deloitte fees were converted to United States dollars from Canadian dollars using the Fiscal 2008 average exchange rate of $0.972534. Based on a review of these services and of the fees billed by Deloitte, the Audit Committee has concluded that Deloitte is independent with respect to the Company. Representatives of Deloitte are expected to be present at the Meeting and will have an opportunity to make a statement if they so desire and will be available to respond to appropriate questions. NORMAL COURSE ISSUER BID On May 22, 2008, the TSX accepted the Company's Notice of Intention (the "Notice") to Make a Normal Course Issuer Bid (the "Bid"). In the Notice, the Corporation stated its intention to repurchase up to 12,272,384 Common Shares, representing approximately 10% of its public float of Common Shares as of May 20, 2008. The Company intends to repurchase Common Shares under the Bid using available cash during a 12-month period from May 26, 2008 to May 25, 2009. The timing and exact number of Common Shares purchased under the bid will be at the Company's discretion, will depend on market conditions, and may be suspended or discontinued at any time. All shares purchased by the Company under the Bid will be cancelled. Purchases under the bid will be made at the prevailing market price through the facilities of the TSX. The average daily trading volume of the Company over the six complete calendar months preceding the filing of the Notice was 411,976 Common Shares (the "ADTV"). Under TSX rules, the Company may purchase up to 25% of the ADTV (or 102,994 Common Shares) per trading day. Once a week, in excess of the daily repurchase limit, the Company may purchase a block of Common Shares not owned by an insider (i) having a purchase price of $200,000 or more, (ii) of at least 5,000 Common Shares with a purchase price of at least $50,000, or (iii) of at least 20 board lots of Common Shares which total 150% or more of the ADTV. To the knowledge of the Company, after reasonable inquiry, no director, senior -32- officer or any of their associates, or any person acting jointly or in concert with the Company, intends to sell Common Shares under the Bid. SHAREHOLDERS' PROPOSALS Proposals of holders of common shares intended to be presented at the next Annual Meeting must be received by the Company, c/o Donald G. McIntyre, Secretary, Zarlink Semiconductor Inc., 400 March Road, Ottawa, Ontario, Canada K2K 3H4, no later than March 6, 2009 for inclusion in the Company's Management Proxy Circular and form of proxy relating to that meeting. It is recommended that proposals be delivered to the Company by registered mail. OTHER MATTERS The information contained herein is given as of May 30, 2008. Management of the Company knows of no amendment of the matters referred to in the Notice of Meeting. However, if any amendment, variation or other business should properly be brought before the Meeting, the accompanying Form of Proxy confers discretionary authority upon the persons named therein to vote upon any amendment or variation of the matters referred to in such notice or on such other business in accordance with their best judgment. ADDITIONAL INFORMATION Financial information is provided in the Company's annual audited financial statements and any interim financial statements submitted subsequent to the filing of the most recent annual financial statements and the Management's Discussion and Analysis ("MD&A") included in those statements. Copies of the Company's financial statements and related MD&A are available upon request from the Company's Corporate Secretary as well as on the Company's website. Additional information relating to the Company is also available on SEDAR at www.sedar.com and on EDGAR at www.sec.gov. DIRECTORS' APPROVAL The contents and sending of this Circular have been approved by the Board of Directors of the Company. Dated this 4th day of June 2008. /s/ Donald G. McIntyre ---------------------- Donald G. McIntyre Corporate Secretary Ottawa, Ontario, Canada -33- SCHEDULE "A" PROPOSED RESOLUTION TO APPROVE THE AMENDMENT TO THE BY-LAWS ZARLINK SEMICONDUCTOR INC. (the "Company") RESOLUTION OF THE SHAREHOLDERS OF THE COMPANY July 23, 2008 ---------- RESOLVED, as an ordinary resolution, that: 1. the amendment to By-Law No. 16 of the Company consisting in the deletion of Section 7.03 thereof and its replacement with the following, be and is hereby confirmed and approved: "7.03 Registration of Transfer. Subject to the provisions of the Act, no transfer of shares shall be registered in a securities register except: (i) upon presentation of the certificate representing such shares with an endorsement which complies with the Act made thereon or delivered therewith duly executed by an appropriate person as provided by the Act, together with such reasonable assurance that the endorsement is genuine and effective, or (ii) if the shares are held through a direct registration system (DRS) that enables persons to hold and transfer shares electronically directly on the books of the Corporation or its registrar and transfer agent, without the need for share certificates representing such shares, upon satisfaction of such conditions applicable to the transfer of shares on such DRS and such other conditions as may be approved by the board from time to time; and 2. any director or officer of the Company be and each of them is hereby authorized, to do such things and to execute and deliver all such documents that such director or officer may, in his discretion, determine to be necessary or useful in order to give full effect to the intent and purpose of this resolution. A-1 SCHEDULE "B" PROPOSED RESOLUTION TO REDUCE THE COMPANY'S STATED CAPITAL ZARLINK SEMICONDUCTOR INC. (the "Company") RESOLUTION OF THE SHAREHOLDERS OF THE COMPANY July 23, 2008 ---------- WHEREAS there are no reasonable grounds for believing that the Company, after the reduction of its stated capital from US$479,000,000 to US$149,000,000, will be unable to pay its liabilities as they become due or that the realizable value of the Company's assets will thereby be less than the aggregate of its liabilities. RESOLVED, as a special resolution, that: 1. the stated capital account maintained in respect of the common shares of the Company is hereby reduced from US$479,000,000 to US$149,000,000; and 2. any director or officer of the Company be and each of them is hereby authorized to do such things and to execute and deliver all such documents that such director or officer may, in his discretion, determine to be necessary or useful in order to give full effect to the intent and purpose of this resolution. B-1 SCHEDULE "C" STATEMENT OF CORPORATE GOVERNANCE PRACTICES
-------------------------------------------------------------------------------------------------------------------------- Guidelines Compliance Description of Approach -------------------------------------------------------------------------------------------------------------------------- 1. Board of Directors Yes The Board of Directors is composed of eight directors. The Governance Guidelines recommend and (a) Disclose the identity of directors who are the NYSE Rules require that a majority of the independent. board must be "independent". The Governance Guidelines define a director as independent if he or she has no material relationship with the Company. Independence is defined under the Governance Guidelines and the NYSE Rules to mean the board has affirmatively determined that the director has no material relationship with the Company. The Governance Guidelines and the NYSE Rules deem certain relationships to be indicative of non-independence. The Board of Directors has determined that, on a rigorous application of these definitions, the Board would be composed of seven "independent" directors out of eight board members, namely Henry Simon, Oleg Khaykin, Adam Chowaniec, Hubert T. Lacroix, J. Spencer Lanthier, Jules Meunier and Dennis A. Roberson. (b) Disclose the identity of directors who are The President and Chief Executive Officer of the not independent, and describe the basis for Company, Kirk K. Mandy, is the one director out of that determination. eight on the Board of Directors not considered to be an "independent" director. (c) Disclose whether or not a majority of the In determining whether or not a director is directors are independent. independent, as that term is defined in the Governance Guidelines and the NYSE Rules, the Board of Directors considers all relevant facts applicable to a director. Based on the foregoing and on the information provided by directors as to their individual circumstances (see "Election of Directors"), the Board has determined that seven of the eight Board of Directors members are independent. See Item 1(a) above. (d) Disclose the names of directors who are This information is provided in each director's directors of any other reporting issuer and biography under the heading "Election of the name of the reporting issuer. Directors" of this Circular. (e) Disclose whether or not the independent The independent directors meet at regularly directors hold regularly scheduled meetings scheduled "executive sessions" without management. at which non-independent directors and The Chairperson of the Board of Directors chairs members of management are not in attendance. the executive sessions; however, he may choose to If the independent directors hold such defer to a Committee Chairperson when the subject meetings, disclose the number of meetings matter of the meeting falls within the purview of held since the beginning of the issuer's a Board Committee. The independent directors, led most recently completed financial year. by the Chairperson of the Board of Directors, determine the frequency, length and agenda for executive sessions. An executive session is scheduled immediately before or after a regular Board of Directors meeting at least quarterly each year. At least four executive sessions were held during the course of the last fiscal year.
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(f) Disclose whether or not the chair of the The Chairperson of the Board of Directors, Dr. board is an independent director. If the Henry Simon, is an independent director and board has a chair or lead director who is an ensures that the Board of Directors can function independent director, disclose the identity independently of management. The Chairperson's of the independent chair or lead director, primary role includes ensuring that the Board of and describe his or her role and Directors functions properly, that it meets its responsibilities. obligations and responsibilities, that it fulfills its mandate and that its organization and mechanisms are in place and are working effectively. The Chairperson's responsibilities are to ensure that the Board of Directors meets on a regular basis and at least quarterly without management present; in consultation with the CEO, to establish a calendar for holding meetings of and setting the agendas for the meetings of the Board of Directors and the Shareholders; to coordinate the schedule of meetings of the Board Committees with the Chairpersons of the Board Committees; to act as liaison and to maintain communication with all directors and Board Committee Chairpersons to optimize and co-ordinate input from directors, and to optimize effectiveness of the Board of Directors and Board Committees; to ensure that the Board of Directors receives adequate and regular updates from the President and CEO on all issues important to the welfare and future of the Company; and to meet periodically with the CEO and the Secretary to optimize his liaison function and to ensure efficient communication between management and the Board of Directors. A copy of the role description for the Chairperson of the Board of Directors can be found on the Company's website at www.zarlink.com. (g) Disclose the attendance record of each Each director's attendance at Board of Directors director for all board meetings held since meetings is disclosed under "Election of the beginning of the most recently completed Directors" and each director's attendance at financial year. Committee meetings is disclosed under "Election of Directors - Independence and Board Committees". -------------------------------------------------------------------------------------------------------------------------- 2. Board Mandate Yes Disclose the text of the board's written The mandate of the Board of Directors is mandate. reproduced under Schedule F to this Circular and can also be found on the Company's website at www.zarlink.com. -------------------------------------------------------------------------------------------------------------------------- 3. Position Descriptions Yes (a) Disclose whether or not the board has The Board of Directors has developed written developed written position descriptions for position descriptions for the Chairperson of the the chair of the board and the chair of each Board of Directors (see item 1(f) above) as well board committee. as for each Committee Chair. A copy of the role description for the Chairperson of the Board and for the Committee Chairs can be found on the Company's website at www.zarlink.com. (b) Disclose whether or not the board and CEO The Board of Directors has developed a written have developed a written position position description for the CEO under the name description for the CEO. "Terms of Reference for the Chief Executive Officer" and can be found on the Company's website at www.zarlink.com. --------------------------------------------------------------------------------------------------------------------------
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4. Orientation and Continuing Education Yes (a) Briefly describe what measures the board The Board of Directors considers that orienting takes to orient new members regarding: and educating new directors is an important element of ensuring responsible corporate (i) the role of the board, its committees governance. In addition to having extensive and its directors, and discussions with the Chairperson of the Board of Directors and the President and CEO with respect (ii) the nature and operation of the to the business and operations of the Company, a issuer's business. new director receives a record of public and other information concerning the Company and prior minutes of recent meetings of the Board of Directors and applicable committees. The details of the orientation of each new director are tailored to that director's individual needs and areas of interest. (b) Briefly describe what measures, if any, the The Board of Directors is responsible for ensuring board takes to provide continuing education that an appropriate continuing education program for its directors. is made available to all directors. Educational presentations are provided at the Board of Directors meetings from time to time. In addition, all directors receive from the CEO regular business updates and are provided with a copy of all CEO communications to employees. -------------------------------------------------------------------------------------------------------------------------- 5. Ethical Business Conduct Yes (a) Disclose whether or not the board has All of the Company's employees (including the adopted a written code for its directors, senior executives) are subject to a Code of Ethics officers and employees. If the board has and Business Conduct, a copy of which is available adopted a written code: on the Company's website at www.zarlink.com. The CEO, the CFO and the Corporate Controller of the (i) disclose how a person or company may Company must, in addition, meet the standards and obtain a copy of the code; requirements of the Supplementary Code of Ethics and Business Conduct, which can be found on the Company's website at www.zarlink.com. (ii) describe how the board monitors Two direct email links posted on Zarlink's website compliance with its code; and to the Audit Committee Chairperson and the Chairperson of the Board of Directors permit employees and third parties to communicate directly with the Board of Directors. The Audit Committee Chairperson is also copied directly on all ad hoc incident and monthly reports sent to the Company by ReportLine, a third party ethics line provider to which employees and third parties may complain or report. (iii) provide a cross-reference to any The Board of Directors has not granted any waiver material change report filed since the to its Code of Ethics and Business Conduct. beginning of the issuer's most recently completed financial year that pertains to any conduct of a director or executive officer that constitutes a departure from the code.
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(b) Describe any other steps the Board takes to No material conflicts of interest were declared by ensure directors exercise independent a director or an officer in Fiscal 2008 except (i) judgment in considering transactions and relating to the discussion and determination of agreements in respect of which a director or compensation matters for the CEO, and (ii) any executive officer has a material interest. discussions relating to ownership of 10,000,000 shares of Mitel Networks Corporation and any amendments relating to put rights, as the CEO was a member of the Board of directors of Mitel Networks Corporation when the decision to sell the Mitel Networks shares was made. When there is a declaration of material conflict of interest, the declarant is asked to immediately leave the Board of Directors or Committee meeting for the duration of the discussion, and not participate in any decision, relating to the transaction or agreement in respect of which he or she has a material interest. (c) Describe any other steps the Board takes to The Board of Directors requires employees to encourage and promote a culture of ethical review annually the Company's Code of Ethics and business conduct. Business Conduct and to sign acknowledgements that the employees have read and understood the Code. The Board also requires the CEO, the CFO and the Corporate Controller of the Company to review annually the Supplementary Code of Ethics and Business Conduct and sign an acknowledgement that they have read and understood the Supplementary Code. The Board also provides direct email links to the Audit Committee Chairperson and Chairperson of the Board of Directors and provides an ethics reporting line hosted by a third party provider, ReportLine to ensure ease of communication directly to the Board of employee or third party complaints or reports relating to ethical business conduct. -------------------------------------------------------------------------------------------------------------------------- 6. Nomination of Directors Yes (a) Describe the process by which the board The Nominating and Corporate Governance Committee identifies new candidates for board reviews and recommends the slate of directors nomination. nominees to be proposed annually for election by the shareholders, considering the size of the Board of Directors and the competencies and skills of proposed nominees, and annually reviews the composition of the Board of Directors and its committees to determine if the members meet the "independent" director criteria of the Governance Guidelines and the NYSE Rules. When considering a potential candidate, the Nominating and Corporate Governance Committee will take into consideration such factors as it deems appropriate, including the following: o the appropriate size of the Board of Directors; o the needs of the Company with respect to the particular talents and experience of its directors; o the knowledge, skills and experience of nominees, including experience at the policy making level in technology, business, finance, administration or public service, in light of prevailing business conditions, the knowledge, skills and experience already possessed by other members of the Board of Directors and the highest
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professional and personal ethics and values; o minimum individual qualifications, including strength of character, mature judgment, familiarity with the Company's business and industry, independence of thought and an ability to work collegially; o experience with accounting rules and practices; o appreciation of the relationship of our business to the changing needs of society; and o the desire to balance the considerable benefit of continuity with the periodic injection of the fresh perspective provided by new members. The Nominating and Corporate Governance Committee will evaluate director candidates recommended by shareholders in light of the Committee's criteria for the selection of new directors. Any shareholder recommendation of a director candidate should include the candidate's name, biographical data and a detailed description of the candidate's qualifications for membership on the Board of Directors, and should be sent to Zarlink Semiconductor Inc., 400 March Road, Ottawa, Ontario, Canada K2K 3H4, Attention: Company Secretary or can be communicated directly to the Chairperson of the Board of Directors by addressing an e-mail to boardchair@zarlink.com. Any shareholder recommendations must be submitted in sufficient time for an appropriate evaluation by the committee. However, if a shareholder wishes the recommendation of a potential candidate to constitute a proposal intended to be included in the Company's next year circular, it must follow the procedure set forth under the heading "Shareholders' Proposals" of this Circular. The Nominating and Corporate Governance Committee will periodically assess the appropriate size of the Board of Directors, and whether any vacancies on the Board of Directors are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Committee will consider potential candidates for director who may come to its attention through current members of the Board of Directors, shareholders or other persons. The Company has in the past engaged search firms to help identify or evaluate or assist in identifying potential nominees. The candidates will be evaluated at meetings of the Nominating and Corporate Governance Committee, and may be considered at any point during the year. (b) Disclose whether or not the board has a The Board of Directors has a nominating committee, nominating committee composed entirely of the Nominating and Corporate Governance Committee, independent directors. composed of three independent directors, namely Dr. Henry Simon (Chairperson), Hubert T. Lacroix and J. Spencer Lanthier.
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(c) If the board has a nominating committee, The mandate of the Nominating and Corporate describe the responsibilities, powers and Governance Committee is (i) to conduct the CEO operation of the nominating committee. candidate identification and appointment process; (ii) to conduct the director identification, evaluation, selection and performance assessment processes; and (iii) to take the leadership role in shaping corporate governance by establishing, amending and monitoring the corporate governance processes and practices of the Company, including an annual review that members of the Board of Directors and its committees meet the "independent" director criteria of the Governance Guidelines and the NYSE Rules. The Committee also has the mandate to review the compensation of directors to ensure that the compensation realistically reflects the responsibilities and risk involved in being an effective director. A copy of the mandate of the Nominating and Corporate Governance Committee can be found on the Company's website at ir.zarlink.com/corp_gov/nominating.htm. -------------------------------------------------------------------------------------------------------------------------- 7. Compensation Yes (a) Describe the process by which the board The process by which the Board determines the determines the compensation for the issuer's compensation for the Company's directors and directors and officers. officers is outlined under "Report on Executive Compensation" included in this Circular. (b) The process by which the Board determines The Board of Directors has a compensation the compensation for the Company's directors committee, the Compensation and Human Resources and officers is outlined under "Report on Development Committee, composed of three Executive Compensation" included in this independent directors, namely Jules Meunier Circular. Disclose whether or not the board (Chairperson), Adam Chowaniec and Dennis Roberson. has a compensation committee composed entirely of independent directors. (c) Describe the responsibilities, powers and The mandate of the Compensation and Human operation of the compensation committee. Resources Development Committee is outlined under "Report on Executive Compensation" included in this Circular. A copy of the mandate of the Compensation and Human Resources Development Committee can be found on the Company's website at www.zarlink.com. (d) If a compensation consultant or advisor has, In Fiscal 2006, the Compensation Committee engaged at any time since the beginning of the the Hay Group Consultants (Toronto) to review issuer's most recently completed financial against a comparator group of semiconductor year, been retained to assist in determining companies the compensation of directors and compensation for any of the issuer's executives as well as option grants to directors, directors and officers, disclose the executives and employees. In addition, Hay Group identity of the consultant or advisor and was retained to assist management in the design briefly summarize the mandate for which they and operation of a 360(degree) evaluation process have been retained. If the consultant or for executives. advisor has been retained to perform any other work for the company, state that fact and briefly describe the nature of the work. -------------------------------------------------------------------------------------------------------------------------- 8. Other Board Committees Yes If the board has standing committees other The Board of Directors has one other standing than the audit, compensation and nominating committee, the Executive Committee composed of Dr. committees, identify the committees and Henry Simon (Chairperson), Hubert T. Lacroix, two describe their function. independent directors, and Kirk K. Mandy,
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President and CEO of the Company. The mandate of the Executive Committee is (when the Board of Directorsis not in session) to supervise, control and manage the business and affairs of the Company and exercise all of the powers of the Board of Directors, save and except certain powers which are exclusive to the Board of Directors. A copy of the mandate of the Executive Committee can be found on the Company's website at www.zarlink.com. -------------------------------------------------------------------------------------------------------------------------- 9. Assessments Yes Disclose whether or not the board, its The Board has implemented and reviews, from time committees and individual directors are to time, a process to annually assess the regularly assessed with respect to their effectiveness of the Board of Directors, the Board effectiveness and contribution. If committees and individual directors. Annually, assessments are regularly conducted, each director completes a questionnaire evaluating describe the process used for the the performance of the Board of Directors assessments. generally. In addition, the Chairperson of the Board of Directors conducts one-on-one interviews with each director in order to obtain information regarding the effectiveness and performance of the Board of Directors, and of each member of the Board of Directors. The members of each committee also complete an evaluation questionnaire for each committee on which they sit, which is then reviewed by the applicable committee and reported to the Board of Directors. The Nominating and Corporate Governance Committee Chairperson also conducts one on one interviews with each member of the Board of Directors in the evaluation of the performance of the Board Chairperson. The results of all assessments are discussed with the Board of Directors and form the basis of recommendations to the Board of Directors for change. The last full Board of Directors and director performance review was completed by the Board of Directors on May 20, 2008. --------------------------------------------------------------------------------------------------------------------------
C-7 SCHEDULE "D" New York Stock Exchange - Differences in Corporate Governance Practices Compliance with NYSE Standards Zarlink's corporate governance practices differ from those of the NYSE in only one way: the NYSE Standards require that the Compensation Committee determine and approve the Chief Executive Officer's compensation. While the Governance Guidelines require the Compensation Committee to determine the Chief Executive Officer's compensation, his or her compensation is approved by the Board upon the recommendation of the Compensation Committee. Zarlink believes that this variation in its corporate governance practices from those of the NYSE is not significant. D-1 SCHEDULE "E" AUDIT COMMITTEE CHARTER Appointment The Audit Committee (the "Committee") is a standing committee of the Board of Directors (the "Board") hereby constituted with all the powers and duties conferred on it by the laws governing the Company and such powers and duties as may be conferred on it from time to time by resolution of the Board. The Board shall appoint at least three directors to serve on the Committee at the first meeting of the Board following each annual meeting of shareholders of the Company, to hold office, subject to paragraph 5 of the Qualifications, Powers and Procedures section, until the next annual shareholders' meeting. Mandate The Board has given the Committee the following mandate: The Committee shall be directly responsible for the appointment, compensation, retention and oversight of the work of any registered public accounting firm engaged (including resolution of disagreements between management and the auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work or performing other audit, review or attest services for the Company. Each such registered public accounting firm shall report directly to the Committee. The Committee shall establish approval guidelines for any non-audit related work to be undertaken by the independent auditors. 1. The Committee's purpose will be to assist the Board oversight of: i. The integrity of the Company's financial statements; ii. The Company's compliance with legal and regulatory requirements; iii. The independent auditors' qualifications and independence; iv. The performance of the Company's internal control self-assessment committee and independent auditors; and v. The process for monitoring compliance with laws and regulations and with the Code of Ethics and Business Conduct. 2. The Committee shall: i. Review the significant accounting principles and management estimation processes incorporated in the Company's financial statements, including any changes in the Company's accounting principles or application thereof; ii. Review the results of assessments of the Company's internal controls including disclosure controls and procedures, and the steps adopted to correct significant internal control deficiencies, if any; E-1 iii. Oversee the work of the independent auditors, including (a) resolving disagreements between management and the independent auditors with respect to financial reporting and (b) reviewing the planned scope and approach of the independent audit and the areas of significant emphasis and the measures taken by management to deal with significant internal control deficiencies, if any. The Committee shall discuss with the independent auditors any difficulties encountered in the course of the audit work and any restrictions on the scope of activities or access to requested information. iv. Review the analyses prepared by management and/or the independent auditors setting forth significant financial reporting issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative GAAP methods on the financial statements; v. Review the effect of regulatory and accounting initiatives as well as off-balance sheet structures, if any, on the financial statements of the Company; vi. Discuss earnings press releases as well as financial information and earnings guidance provided to analysts and rating agencies; vii. Obtain and review a report by the Company's independent auditors describing: a. The independent auditing firm's internal quality control procedures; any material issues raised by the most recent internal quality-control review, or peer review, of the firm, or by any inquiry or investigation by governmental or professional authorities, within the preceding five years, respecting one or more independent audits carried out by the firm, and any steps taken to deal with any such issues; b. The results of the most recent SEC Peer Review and (when available) the practice inspection assessments conducted on behalf of the Public Accounting Oversight Board, and similar practice inspection assessments conducted on behalf of the Canadian Public Accountability Board; and c. All relationships between the Company and the independent auditor which would permit the Committee to assess the auditor's independence; viii. Discuss the annual audited financial statements and unaudited quarterly financial statements with management and the independent auditors including the Company's disclosures under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and review related press releases, before such information is publicly disclosed; ix. Ensure that adequate procedures are in place for review of the Company's public disclosure of financial information extracted or derived from the Company's financial statements (other than (viii) above) and periodically assess the adequacy of such procedures; x. Discuss policies with respect to risk assessment and risk management; xi. Meet separately, at least quarterly, with management, with the internal control self-assessment committee and with the independent auditors; E-2 xii. Review with the independent auditors any audit problems or difficulties and management's response to them; xiii. Set clear hiring policies for employees, partners or former employees or partners of the independent auditors; xiv. Establish procedures for the receipt, retention, processing and treatment of complaints regarding accounting, internal accounting controls, or auditing matters; xv. Establish procedures for the confidential, anonymous submission by employees and third parties of concerns regarding questionable accounting or auditing practices; xvi. Inquire of the appropriate personnel of the Company and the independent auditors as to any deviation from the established Code of Ethics and Business Conduct and Supplementary Code of Ethics and Business Conduct for Designated Executives and periodically review the policies covering such Codes; xvii. Review and evaluate the qualifications and performance of the lead audit partner and other relevant personnel of the auditors; xviii. Report regularly to the Board any issues that arise with respect to the quality or integrity of the Company's financial statements, the Company's compliance with legal or regulatory requirements, the performance and independence of the Company's independent auditors, or the performance of the internal control self-assessment committee; xix. Review and discuss with management and the independent auditor a) the annual audited financial statements, including disclosures made in management's discussion and analysis, and recommend to the Board whether the audited financial statements should be included in the Company's Form 20-F and b) the Company's quarterly financial statements prior to the filing of its Form 6-K, including the results of the independent auditor's review of the quarterly financial statements; xx. Review and pre-approve all audit services and all permissible non-audit services to be performed by the independent auditors subject to the de minimis exception for non-audit services set forth in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934; xxi. Annually review the status of the Company's environmental compliance program; xxii. Review and discuss with management and the independent auditors any related party transaction (as defined in the rules of the U.S. Securities and Exchange Commission (SEC); xxiii. Prepare the report of the Committee to be included in the annual proxy circular or statement; xxiv. Review, with the Company's General Counsel, any legal matter that could have a significant impact on the Company's financial statements. E-3 Delineation of Responsibilities Management is responsible for preparing the Company's financial statements with all material disclosures such that they are complete, accurate and fairly present the information set forth in conformity with Generally Accepted Accounting Principles (GAAP) and all applicable rules and regulations. The independent auditor is responsible to provide an opinion, based on its audits, that the financial statements fairly present, in all material respects, the financial position of the Company, its results of operations and its cash flows in conformity with GAAP. The independent auditors report directly to the Audit Committee. The Audit Committee's role is one of oversight in line with its mandate. Qualifications, Powers and Procedures 3. All members of the Committee shall be "independent" directors as defined by the listing guidelines of the New York Stock Exchange (NYSE) and applicable Canadian securities legislation, rules and policies. All members shall be financially literate and have relevant and practical business experience and competencies as determined by the Nominating and Corporate Governance Committee from time to time. At least one member shall be determined by the Board to be an audit committee "financial expert" as defined by the SEC. 4. Committee members shall not serve on three or more public company audit committees simultaneously unless the Board determines that such simultaneous service would not impair the ability of such member to effectively serve the shareholders' and Company's best interests. Any such determination shall be disclosed in the Company's annual proxy circular and annual report on Form 20-F. 5. Committee members are barred from accepting any consulting, advisory or other compensatory fee, directly or indirectly, from the Company or an affiliate of the Company, other than in the member's capacity as a member of the Board and any Board committee. This prohibition precludes payments to a spouse, a minor child or stepchild or a child or stepchild sharing the home with the member, as well as payments accepted by an entity in which a Committee member is a partner, member, officer or principal or occupies a similar position and which provides accounting, consulting, legal, investment banking, financial or other advisory services or any similar services to the Company. A Committee member shall not be an affiliated person of the Company or any subsidiary of the Company. 6. The Committee shall elect from its members a Chairperson. The Secretary shall be elected from its members, or shall be the Secretary, or the Assistant or Associate Secretary, of the Company. 7. Any member of the Committee may be removed or replaced at any time by the Board. A member shall cease to be a member of the Committee upon ceasing to be a director of the Company. 8. Meetings of the Committee shall be called by the Chairperson of the Committee and shall be held at least four times a year. 9. The times and places where meetings of the Committee shall be held and the procedures at such meetings shall be as determined, from time to time, by the Committee. 10. Notice of each meeting of the Committee shall be given to each member of the Committee. Subject to the following, notice of a meeting shall be given orally or by letter, telex, telegram, electronic mail, telephone facsimile transmission or telephone not less than 48 hours before the time fixed for the meeting. Notice of regular meetings need state only the day of the week or C-12 month, the place and the hour at which such meetings will be held and need not be given for each meeting. Members may waive notice of any meeting. 11. The Committee may invite from time to time such person as it may see fit to attend its meeting and to take part in discussion and consideration of the affairs of the Committee. However, any such persons invited may not vote at any meeting of the Committee. 12. A meeting of the Committee may be held by means of such telephonic, electronic or other communications facilities as permit all persons participating in the meeting to communicate adequately with each other during the meeting. 13. The majority of the Committee shall constitute a quorum for the purposes of conducting the business of the Committee. Notwithstanding any vacancy on the Committee, a quorum may exercise all of the powers of the Committee. 14. Any decision made by the Committee shall be determined by a majority vote of the Members of the Committee present. A member will be deemed to have consented to any resolution passed or action taken at a meeting of the Committee unless the member dissents. 15. A record of the minutes of, and the attendance at, each meeting of the Committee shall be kept. The approved minutes of the Committee shall be circulated to the Board forthwith. 16. The Committee shall report to the Board on all proceedings and deliberations of the Committee at the first subsequent meeting of the Board, and at such other times and in such manner as the Board or the By-laws of the Company may require or as the Committee in its discretion may consider advisable. 17. The Committee shall review annually its Mandate and all Guidelines, Procedures, Policies or other documents used by it in fulfilling its responsibilities. 18. The Committee shall assess performance of the Committee and each of its members on an annual basis in accordance with performance assessment guidelines provided by the Nominating and Corporate Governance Committee. 19. In the performance of its duties and responsibilities, the Committee shall have access to any and all books and records of the Company necessary for the execution of the Committee's obligations and may discuss with the officers and auditors of the Company such accounts, records, documents and other matters considered appropriate. 20. The Committee may retain, at the Company expense, such outside legal, accounting or other consultants and advisors as it deems necessary from time to time to fulfill its duties and responsibilities. E-5 SCHEDULE "F" BOARD MANDATE Appointment Directors are elected annually by the shareholders of the Company and together with those appointed to fill vacancies or appointed as additional directors throughout the year, collectively constitute the Board of Directors (the "Board") of the Company. Mandate The Board establishes the overall policies for the Company; monitors and evaluates the Company's strategic direction, and retains plenary power for those functions not specifically delegated by it to its Committees or to management. Accordingly, in addition to the duties of directors of a Canadian corporation as prescribed by statute, the mandate of the Board is to supervise the management of the business and affairs of the Company with a view to evaluate, on an ongoing basis, whether the Company's resources are being managed in a manner consistent with enhancing shareholder value, ethical considerations and corporate social responsibility. In order to better fulfill its mandate, the Board is responsible for, among other matters: 1. Selecting the Chairperson for the Board of Directors annually or as otherwise required; 2. Reviewing and approving, prior to the beginning of each fiscal year, the business plan, capital budget and financial goals of the Company as well as longer term strategic plans (taking into account the opportunities and risks of the business) prepared and elaborated by management and, throughout the year, monitoring the achievement of the objectives set; 3. Reviewing and approving all regulatory filings such as the Annual Report, Proxy Circular, Annual Information Form and Reports on Form 10-K, 10-Q and 8-K; 4. Ensuring that it is properly informed, on a timely basis, of all important issues (including environmental, cash management and business development issues) and developments involving the Company and its business environment; 5. Identifying, with management, the principal risks of the Company's business and the systems put in place to manage these risks as well as monitoring, on a regular basis, the adequacy of such systems; 6. Ensuring proper succession planning, including appointing, training and monitoring senior executives; 7. To the extent feasible, satisfying itself as to the integrity of the chief executive officer (the "CEO") and other senior officers and that the CEO and other senior officers create a culture of integrity throughout the organization; 8. Reviewing and ratifying the Compensation and Human Resources Development Committee's assessment of the performance of the senior executives; 9. Adopting and enforcing good corporate governance practices and processes; F-1 10. Ensuring proper communication with shareholders, customers and governments; 11. Monitoring the efficiency and integrity of internal control and management information systems; 12. Assessing annually the performance of the CEO, the Board, its committees and each of its directors; 13. Recommending to shareholders, pursuant to the recommendation of the Audit Committee, the appointment of auditors and approving auditor compensation where authorized by shareholders; 14. Developing, with the CEO, a position description for the CEO and developing and approving the corporate goals and objectives that the CEO must meet; 15. Nominating or appointing directors, as appropriate, based on the advice of the Nominating and Corporate Governance Committee and considering the size of the Board and the competencies and skills of directors and proposed directors; 16. Ensuring the new directors receive comprehensive orientation to the Board and that an appropriate continuing education program is made available to all directors; 17. Ensuring that the compensation of directors realistically reflects the responsibilities and risk involved in being an effective director. and has taken, when necessary, specific measures in respect of these items. Long-term goals and strategies for the Company are developed as part of management's annual strategic planning process with the Board, which also includes the preparation of a detailed one-year operating plan. Through this process, led by the President and Chief Executive Officer and senior management of the Company, the Board adopts the operating plan for the coming financial year and monitors senior management's relative progress through a regular reporting and review process. The Board reviews on a quarterly basis the extent to which the Company has met the current year's operating plan. Consistent with the Board's power to delegate management of the day-to-day operation of the Corporation's business, the Board exercises business judgment in establishing and revising guidelines for authorization of expenditures or other corporate actions, and these have been periodically reviewed with management. The current committee structure of the Corporation includes the following committees: Audit, Nominating and Corporate Governance, Executive and Compensation and Human Resources Development. The mandate of each standing committee is reviewed periodically by the Board with a view to delegating to committees the authority of the Board concerning specified matters appropriate to such committees. Such authorities are set forth in board resolutions or bylaws pertaining to the charters of board committees. The Board has put policies in place to ensure effective, timely and non-selective communications between the Company, its stakeholders and the public. The Board, or the appropriate committee thereof, reviews the content of the Company's major communications to shareholders and the investing public, including the quarterly and annual reports, and approves the proxy circular, the F-2 annual information form and any prospectuses that may be issued. The disclosed information is released through mailings to shareholders, news wire services, the general media and a home page on the internet. Qualifications and Procedures At least twenty-five percent of the directors shall be "resident Canadians" as defined by the Canada Business Corporations Act and a majority of the directors shall be "independent" as defined by the listing guidelines of the New York Stock Exchange (NYSE) and applicable Canadian securities legislation, rules and policies. The Board shall review and affirmatively determine the "independent" status of each director. These percentages also apply to director attendance at any Board meetings. The independent directors shall meet at regularly scheduled executive sessions at least quarterly without management present. If the Chairperson of the Board is an "independent" director, he/she will preside over the executive sessions of the Board. Otherwise, the independent directors shall designate and publicly disclose the name of the independent director who will preside at the executive sessions. The Board may retain such outside consultants and advisors (at Company expense), as it deems necessary from time to time to fulfill its duties and responsibilities. The Board's operational procedures are set out in By-Law No. 16 of the Company as amended from time to time. F-3