Voting And Exchange Trust Agreement

VOTING AND EXCHANGE TRUST AGREEMENT


THIS VOTING AND EXCHANGE TRUST AGREEMENT (this "AGREEMENT"), dated December 22, 2000, is entered into by and among IMAGE PROCESSING SYSTEMS INC., a corporation existing under the laws of Ontario ("COMPANY"), PHOTON DYNAMICS, INC., a California corporation ("PARENT"), PHOTON DYNAMICS NOVA SCOTIA COMPANY ("CANCO") and MONTREAL TRUST COMPANY OF CANADA, a trust company incorporated under the laws of Canada ("TRUSTEE");


WHEREAS pursuant to an Acquisition Agreement for Plan of Arrangement (the "ACQUISITION AGREEMENT") dated as of September 27, 2000, between Parent, CanCo and Company, all of the existing common shares of Company will be recapitalised and exchanged for Exchangeable Shares;


AND WHEREAS pursuant to the Acquisition Agreement, Parent, CanCo and Company have agreed to execute an exchange agreement substantially in the form of this Agreement;


AND WHEREAS the foregoing recitals are made as representations and statements of fact by Parent, Company and CanCo and not by the Trustee;


NOW THEREFORE in consideration of the respective covenants and agreements provided in this Agreement and for other valuable consideration (the receipt and sufficiency of which are acknowledged), the parties agree as follows:


ARTICLE 1


DEFINITIONS AND INTERPRETATION


1.1 DEFINITIONS


In this Agreement, the following terms shall have the following
meanings:


"AFFILIATE" has the meaning ascribed thereto in the Exchangeable Share
Provisions;


"AUTOMATIC EXCHANGE RIGHTS" means the benefit of the obligation of
Parent to effect the automatic exchange of Parent Common Shares for
Exchangeable Shares pursuant to section 2.12;


"BENEFICIARIES" means the persons (other than Parent, CanCo, Company or
their respective Affiliates) who are the registered holders of
Exchangeable Shares from time to time (and at the time the definition
is being applied);


"BENEFICIARY VOTES" has the meaning ascribed thereto in section 4.5
hereof;


"BOARD OF DIRECTORS" means, with respect to Parent or Company, as the
case may be, the board of directors of Parent or Company, as the case
may be;


"BUSINESS DAY" means any day other than a Saturday, a Sunday or a day
when banks are not open for business in any or all of San Jose,
California and Toronto, Ontario;


"COVENANTS" means the covenant of Company contained in section 5.1
hereof and the covenants of Parent contained in sections 2.11, 2.12 and
5.2 hereof;


"CURRENT MARKET PRICE" has the meaning ascribed thereto in the
Exchangeable Share Provisions;


"EXCHANGE RIGHT" has the meaning ascribed thereto in section 2.1;


"EXCHANGEABLE SHARE PROVISIONS" means the rights, privileges,
restrictions and conditions attaching to the Exchangeable Shares as set
out in Appendix "A" to this Agreement;


"EXCHANGEABLE SHARES" means the non-voting exchangeable shares in the
capital of Company as currently constituted;


"INSOLVENCY EVENT" shall mean:


(1) the insolvency or bankruptcy of Company or the making by
Company of an assignment for the benefit of creditors or the
making by Company of a proposal pursuant to any bankruptcy or
debtor relief legislation for the benefit of its creditors or
the filing by Company of a notice of intention to file a
proposal or the making or authorization by Company of any
bankruptcy proceeding, petition or application to any tribunal
for the appointment of a receiver or trustee for its or for
any substantial part of its property or the failure by the
Company to contest in good faith any such proceeding in
respect of the Company within 30 days of the date thereof or
the admission in writing of the Company of its inability to
pay its debts generally as they become due or the Company not
being permitted, pursuant to the solvency requirements of
applicable law, to redeem any Retracted Shares; or


(2) the insolvency or bankruptcy of Parent or the making by Parent
of an assignment for the benefit of creditors or the making by
Parent of a proposal pursuant to any


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bankruptcy or debtor relief legislation for the benefit of its
creditors or the filing by Parent of a notice of intention to
file a proposal or the making of authorization by Parent of
any bankruptcy proceeding, petition or application to any
tribunal for the appointment of a receiver or trustee for its
or for any substantial part of its property or the failure by
Parent to contest in good faith any such proceeding in respect
of Parent within 30 days of the date thereof or the admission
in writing of Parent of its inability to pay its debts
generally as they become due;


"LIQUIDATION CALL RIGHT" has the meaning ascribed thereto in the
Exchangeable Share Provisions;


"LIQUIDATION DATE" means the effective date of the liquidation,
dissolution or winding-up of the Company pursuant to Article 5 of the
Exchangeable Share Provisions;


"LIQUIDATION EVENT" has the meaning ascribed thereto in section
2.12(a);


"LIQUIDATION EVENT EFFECTIVE DATE" has the meaning ascribed thereto in
section 2.12(c);


"LIST" has the meaning ascribed thereto in section 4.9;


"NASDAQ" means the Nasdaq National Market;


"OFFICER'S CERTIFICATE" means, with respect to Parent or Company, as
the case may be, a certificate signed by any one of the Chairman of the
Board, a Vice-Chairman of the Board, the President, any Vice-President
or any other senior officer of Parent or Company, as the case may be;


"PARENT AFFILIATES" means Affiliates of Parent;


"PARENT COMMON SHARE" means a share of common stock, without par value,
in the capital of Parent as currently constituted;


"PARENT CONSENT" has the meaning ascribed thereto in section 4.5
hereof;


"PARENT MEETING" has the meaning ascribed thereto in section 4.5
hereof;


"PARENT SUCCESSOR" has the meaning ascribed thereto in section 10.1;


"PERSON" includes an individual, partnership, corporation, company,
unincorporated syndicate or organization, trust, trustee, executor,
administrator, other legal representative, and other entity, whether or
not having legal status;


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"REDEMPTION CALL RIGHT" has the meaning ascribed thereto in the
Exchangeable Share Provisions;


"RETRACTED SHARES" has the meaning ascribed thereto in section 2.7;


"RETRACTION CALL RIGHT" has the meaning ascribed thereto in the
Exchangeable Share Provisions;


"SUPPORT AGREEMENT" means that certain exchangeable share support
agreement made as of even date herewith between Company, CanCo and
Parent;


"TRUST" means the trust created by this Agreement;


"TRUST ESTATE" means the Voting Share, the Voting Rights, the Exchange
Right, the Automatic Exchange Rights, the Covenants and any other
securities and any money or other property which may be held by the
Trustee from time to time pursuant to this Agreement;


"TRUSTEE" means Montreal Trust Company of Canada and, subject to the
provisions of Article 8 hereof, includes any successor trustee;


"VOTING RIGHTS" means the voting rights attached to the Voting Share;
and


"VOTING SHARE" means the one share of Series A1 Special Voting
Preferred Stock of the Parent, issued by Parent to and deposited with
the Trustee, which entitles the holder of record to a number of votes
at meetings of holders of Parent Common Shares or upon any matters in
respect of which a Parent Consent is sought equal to that number of
votes that holders of the Exchangeable Shares outstanding from time to
time other than Exchangeable Shares held by Parent, its subsidiaries
and Affiliates would be entitled to if such Exchangeable Shares were
exchanged for Parent Common Shares.


1.2 INTERPRETATION NOT AFFECTED BY HEADINGS, ETC.


The division of this Agreement into Articles, sections and other portions and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. Unless otherwise indicated, all references to an "Article" or "section" followed by a number and/or a letter refer to the specified Article or section of this Agreement. The terms "this Agreement", "hereof", "herein" and "hereunder" and similar expressions refer to this Agreement and not to any particular Article, section or other portion hereof and include any agreement or instrument supplementary or ancillary hereto.


1.3 NUMBER, GENDER, ETC.


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Words importing the singular number only shall include the plural and VICE VERSA. Words importing any gender shall include all genders.


1.4 DATE FOR ANY ACTION


If any date on which any action is required to be taken under this Agreement is not a Business Day, such action shall be required to be taken on the next succeeding Business Day.


ARTICLE 2


EXCHANGE RIGHT AND AUTOMATIC EXCHANGE


2.1 GRANT OF THE EXCHANGE RIGHTS


Parent hereby grants to the Trustee as trustee for and on behalf of, and for the use and benefit of, the Beneficiaries (i) the right (the "EXCHANGE RIGHT"), upon the occurrence and during the continuance of an Insolvency Event, to require Parent to purchase from each or any Beneficiary all or any part of the Exchangeable Shares held by the Beneficiary, and (ii) the Automatic Exchange Rights, all in accordance with the provisions of this Agreement and the Exchangeable Share Provisions, as the case may be. Parent hereby acknowledges receipt from the Trustee as trustee for and on behalf of the Beneficiaries of valuable consideration (and the adequacy thereof) for the grant of the Exchange Right and the Automatic Exchange Rights by Parent to the Trustee. During the term of the Trust and subject to the terms and conditions of this Agreement, the Trustee shall possess and be vested with full legal ownership of the Exchange Right and the Automatic Exchange Rights and shall be entitled to exercise all of the rights and powers of an owner with respect to the Exchange Right and the Automatic Exchange Rights, provided that the Trustee shall:


(1) hold the Exchange Right and the Automatic Exchange Rights and
the legal title thereto as trustee solely for the use and
benefit of the Beneficiaries in accordance with the provisions
of this Agreement; and


(2) except as specifically authorized by this Agreement, have no
power or authority to exercise or otherwise deal in or with
the Exchange Right or the Automatic Exchange Rights, and the
Trustee shall not exercise any such rights for any purpose
other than the purposes for which this Trust is created
pursuant to this Agreement.


The Exchange Right and the Automatic Exchange Rights shall terminate on the fifth anniversary of the date hereof, or such earlier date as there are no holders of Exchangeable Shares other than Parent, CanCo, Company or their respective Affiliates.


2.2 GENERAL EXERCISE OF EXCHANGE RIGHT


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The Exchange Right shall be and remain vested in and exercisable by the Trustee. Subject to section 6.17, the Trustee shall exercise the Exchange Right only:


(1) on the basis of instructions received pursuant to this Article
2 from Beneficiaries entitled to instruct the Trustee as to
the exercise thereof; and


(2) to the extent that no such instructions are received from a
Beneficiary with respect to the Exchange Right, the Trustee
shall not exercise or permit the exercise of the Exchange
Right.


2.3 LEGENDED SHARE CERTIFICATES


Company will cause each certificate representing Exchangeable Shares to bear an appropriate legend notifying the Beneficiaries of:


(1) their right to instruct the Trustee with respect to the
exercise of the Exchange Right in respect of the Exchangeable
Shares held by a Beneficiary;


(2) the Automatic Exchange Rights, if applicable;


(3) their right to instruct the Trustee with respect to the
exercise of the Beneficiary Votes; and


(4) a legend to the effect that:


"THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH
SECURITIES MAY NOT BE TRANSFERRED, SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED UNLESS (i) A REGISTRATION STATEMENT
UNDER THE ACT IS IN EFFECT WITH RESPECT TO THE SECURITIES OR
(ii) THERE IS AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER
THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii) THERE IS AN
OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT SUCH
TRANSFER MAY BE MADE PURSUANT TO RULE 144 OR RULE 144A OF THE
ACT."; and


(5) any other legend required by the Commissioner of Corporations
of the State of California or such as are required or as may
be reasonably necessary having regard to the provisions of any
state, provincial, local or foreign law governing such
securities.


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The Trustee shall have no duty under this Agreement to monitor or enforce compliance by the Company with the aforesaid legending requirements.


2.4 PURCHASE PRICE


The purchase price payable by Parent for each Exchangeable Share to be purchased by Parent under the Exchange Right shall be an amount per share equal to:


(1) the Current Market Price of a Parent Common Share on the last
Business Day prior to the day of closing of the purchase and
sale of such Exchangeable Share under the Exchange Right,
which shall be satisfied in full by Parent causing to be sent
to such holder one Parent Common Share (subject to adjustment
in accordance with Section 11.1 of the Exchangeable Share
Provisions), plus


(2) to the extent not paid by Company, an additional amount
equivalent to:


(1) the full amount of all declared and unpaid dividends
on each such Exchangeable Share held by such holder
on any dividend record date which occurred prior to
the closing of the purchase and sale plus


(2) the full amount of all dividends declared on Parent
Common Shares which have not been declared on
Exchangeable Shares in accordance with Section 3.1 of
the Exchangeable Share Provisions (provided that if
the date for any such declared and unpaid dividends
occurs on or after the day of closing of such
purchase and sale the purchase price shall not
include such additional amount equivalent to such
declared and unpaid dividends).


The purchase price for each such Exchangeable Share so purchased may be satisfied only by Parent issuing and delivering or causing to be delivered to the Trustee, on behalf of the relevant Beneficiary, one Parent Common Share (subject to adjustment in accordance with Section 11.1 of the Exchangeable Share Provisions) and on the applicable payment date a cheque for the balance, if any, of the purchase price without interest (but less any amounts withheld pursuant to section 2.13). Upon payment by Parent of such purchase price, the relevant Beneficiary shall cease to have any right to be paid any amount in respect to declared and unpaid dividends on each such Exchangeable Share by Company or Parent.


2.5 EXERCISE INSTRUCTIONS


Subject to the terms and conditions herein set forth, a Beneficiary shall be entitled, upon the occurrence and during the continuance of an Insolvency Event, to exercise the Exchange Right with respect to all or any part of the Exchangeable Shares registered in the name of such Beneficiary on


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the register of holders of Exchangeable Shares maintained by the registrar or transfer agent of the Exchangeable Shares. To cause the exercise of the Exchange Right by the Trustee, the Beneficiary shall deliver to the Trustee, in person or by certified or registered mail, at its principal stock transfer office in the City of Toronto, Ontario or at such other places in Canada as the Trustee may from time to time designate by written notice to the Beneficiaries, the certificates representing the Exchangeable Shares which such Beneficiary desires Parent to purchase, duly endorsed in blank for transfer, and accompanied by such other documents and instruments as may reasonably be requested by Parent or the Trustee and as may otherwise be required to effect a transfer of Exchangeable Shares under the BUSINESS CORPORATIONS ACT (Ontario) (or such other corporate statute under which Company is subject) and the by-laws of Company together with:


(1) a duly completed form of notice of exercise of the Exchange
Right contained on the reverse of or attached to the
Exchangeable Share certificates, stating


(1) that the Beneficiary thereby instructs the Trustee to
exercise the Exchange Right so as to require Parent
to purchase from the Beneficiary the number of
Exchangeable Shares specified therein,


(2) that such Beneficiary has good title to and owns all
such Exchangeable Shares to be acquired by Parent
free and clear of all liens, claims and encumbrances,


(3) the names in which the certificates representing
Parent Common Shares issuable in connection with the
exercise of the Exchange Right are to be issued and
the addresses of record (including postal codes) for
such holders; and


(4) the address to which the new certificates or cheques,
as the case may be, should be delivered if different
from the address specified in section 2.5(a)(iii)
above; and


(2) payment (or evidence satisfactory to Company and Parent of
payment) of the taxes (if any) payable as contemplated by
section 2.9 or 2.13 of this Agreement.


If only a part of the Exchangeable Shares represented by any certificate or certificates delivered to Parent are to be purchased by Parent under the Exchange Right, a new certificate for the balance of such Exchangeable Shares shall be issued to the holder at the expense of Company.


2.6 DELIVERY OF PARENT COMMON SHARES AND CHEQUES; EFFECT OF EXERCISE


Promptly after receipt of the certificates representing the Exchangeable Shares which the Beneficiary desires Parent to purchase under the Exchange Right, together with such documents and instruments of transfer and a duly completed form of notice of exercise of the Exchange Right (and payment of taxes, if any, payable as contemplated by section 2.9 or 2.13 or evidence thereof), duly


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endorsed for transfer to Parent, the Trustee shall notify Parent and Company of its receipt of the same, which notice to Parent and Company shall constitute exercise of the Exchange Right by the Trustee on behalf of the holder of such Exchangeable Shares, and Parent shall immediately thereafter deliver or cause to be delivered to the Trustee, for delivery to the Beneficiary of such Exchangeable Shares (or to such other persons, if any, properly designated by such Beneficiary), the number of Parent Common Shares issuable in connection with the exercise of the Exchange Right, and on the applicable payment date cheques for the balance, if any, of the total purchase price therefor without interest (but less, in each case, any amounts withheld pursuant to section 2.13); provided, however, that no such delivery shall be made unless and until the Beneficiary shall have paid (or provided evidence satisfactory to Company and Parent of the payment of) the taxes (if any) payable as contemplated by section 2.9 or 2.13 of this Agreement. Immediately upon the giving of notice by the Trustee to Parent and Company of the exercise of the Exchange Right, as provided in this section 2.6, the closing of the transaction of purchase and sale contemplated by the Exchange Right shall be deemed to have occurred, and the Beneficiary of such Exchangeable Shares shall be deemed to have transferred to Parent all of its right, title and interest in and to such Exchangeable Shares and in the related interest in the Trust Estate and shall cease to be a holder of such Exchangeable Shares and shall not be entitled to exercise any of the rights of a holder in respect thereof, other than the right to receive such Beneficiary's proportionate part of the total purchase price therefor, unless the requisite number of Parent Common Shares (together with a cheque for the balance, if any, of the total purchase price therefor) is not allotted, issued and delivered by Parent to the Trustee, for delivery to such Beneficiary (or to such other persons, if any, properly designated by such Beneficiary), within five Business Days of the date of the giving of such notice by the Trustee, in which case the rights of the Beneficiary shall remain unaffected until such Parent Common Shares are so allotted, issued and delivered by Parent and any such cheque is so delivered and paid. Concurrently with such Beneficiary ceasing to be a holder of Exchangeable Shares, the Beneficiary (or such other persons, if any, properly designated by such Beneficiary) shall be considered and deemed for all purposes to be the holder of the Parent Common Shares to be delivered to it or them pursuant to the Exchange Right.


2.7 EXERCISE OF EXCHANGE RIGHT SUBSEQUENT TO RETRACTION


In the event that a Beneficiary has exercised its right under Article 6 of the Exchangeable Share Provisions to require Company to redeem any or all of the Exchangeable Shares held by the Beneficiary (the "RETRACTED SHARES") and is notified by Company pursuant to section 6.6 of the Exchangeable Share Provisions that Company will not be permitted as a result of solvency requirements of applicable law to redeem all such Retracted Shares, and provided that CanCo shall not have exercised the Retraction Call Right with respect to the Retracted Shares and that the Beneficiary has not revoked the retraction request delivered by the Beneficiary to Company pursuant to section 6.7 of the Exchangeable Share Provisions, the retraction request will constitute and will be deemed to constitute notice from the Beneficiary to the Trustee instructing the Trustee to exercise the Exchange Right with respect to those Retracted Shares which Company states that it is unable to redeem. In any such event, Company hereby agrees with the Trustee and in favour of the


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Beneficiary immediately to notify the Trustee of such prohibition against Company redeeming all of the Retracted Shares (indicating specifically the extent and impact of such prohibition) and immediately to forward or cause to be forwarded to the Trustee all relevant materials delivered by the Beneficiary to Company or to the transfer agent of the Exchangeable Shares (including without limitation a copy of the retraction request delivered pursuant to section 6.1 of the Exchangeable Share Provisions) in connection with such proposed redemption of the Retracted Shares and the Trustee will thereupon exercise the Exchange Right with respect to the Retracted Shares that Company has stated that it is not permitted to redeem and will require the Parent to purchase such shares in accordance with the provisions of this Article 2.


2.8 FRACTIONAL SHARES; OFFICER'S CERTIFICATE


In connection with any purchase or exchange of Exchangeable Shares pursuant to this Agreement (including, without limitation, an automatic exchange), (a) no certificates representing fractional Parent Common Shares shall be delivered to holders of Exchangeable Shares, and (b) Parent shall provide to the Trustee an Officer's Certificate setting forth the calculation of the purchase price for each Exchangeable Share purchased or exchanged (or a formula for determining the purchase price for each such Exchangeable Share purchased or exchanged).


2.9 STAMP OR OTHER TRANSFER TAXES


Upon any sale of Exchangeable Shares to Parent pursuant to the Exchange Right or the Automatic Exchange Rights, the share certificate or certificates representing Parent Common Shares, and the cheque, if any, to be delivered in connection with the payment of the total purchase price therefor shall be issued in the name of the Beneficiary of the Exchangeable Shares so sold or in such names as such Beneficiary may otherwise direct in writing without charge to the holder of the Exchangeable Shares so sold; provided, however, that such Beneficiary:


(1) shall pay (and neither Parent nor Company nor Trustee shall be
required to pay) any documentary, stamp, transfer or other
taxes that may be payable in respect of any transfer,
including those involved in the issuance or delivery of such
shares to a person other than such Beneficiary; and


(2) shall have evidenced to th ...