20-F
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 20-F
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o
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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OR
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended April
30, 2007
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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OR
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o
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this
shell company report
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Commission file number: 0-49984
MITEL NETWORKS CORPORATION /
CORPORATION MITEL NETWORKS
(Exact name of Registrant as
specified in its charter)
MITEL NETWORKS CORPORATION
(Translation of
Registrants name into English)
Canada
(Jurisdiction of incorporation
or organization)
350 Legget Drive
Ottawa, Ontario, Canada K2K 2W7
(Address of principal executive
offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to
Section 12(g) of the Act:
Common Shares, Without Par Value
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None Indicate the number of
outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by
the annual report: 117,343,736 Common Shares, 20,000,000
Class A Convertible Preferred Shares, Series 1, and
67,789,300 Class B Convertible Preferred Shares,
Series 1.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark which financial statement item the
registrant has elected to follow.
Item 17 þ
Item 18 o
If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
Basis of
Presentation
The financial results of Mitel Networks Corporation
(Mitel, we, us,
our, or the Company) contained in this
Form 20-F
are reported in United States dollars and have been prepared in
compliance with accounting principles generally accepted in the
United States of America for the purposes of this annual report.
In this annual report, all dollar amounts are expressed in
United States dollars except where otherwise indicated.
Forward
Looking Information
Some of the statements in this annual report are forward-looking
statements that reflect our current views with respect to future
events and financial performance. Statements that include the
words may, should, could,
estimate, continue, expect,
intend, plan, predict,
potential, believe, project,
anticipate and similar statements of a
forward-looking nature, or the negatives of those statements,
identify forward-looking statements. Forward-looking statements
are subject to a variety of known and unknown risks,
uncertainties and other factors that could cause actual events
or results to differ from those expressed or implied by the
forward-looking statements, including, without limitation:
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our ability to achieve profitability in the future;
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our ability to achieve anticipated cost savings, revenue
enhancements and other benefits expected from our acquisition of
Inter-Tel;
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the continued development of the market opportunity for
IP-based
communications solutions and related services;
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technological developments and evolving industry standards;
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our dependence on a small number of outside contract
manufacturers to manufacture our products;
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our dependence on sole source and limited source suppliers for
key components;
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delay in the delivery of, or lack of access to, software or
other intellectual property licensed from our suppliers;
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our ability to protect our intellectual property and our
possible infringement of the intellectual property rights of
third parties;
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our reliance on our channel partners for the majority of our
sales;
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our solutions may contain design defects, errors, failures or
bugs;
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intense competition from our competitors, many of which have
greater financial resources;
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our reliance on strategic alliances;
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uncertainties arising from our foreign operations; and
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the fluctuations in our quarterly and annual revenues and
operating results.
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This list is not exhaustive of the factors that may affect any
of our forward-looking statements. In evaluating these
statements, you should carefully consider the risks outlined
under Item 3.D. Key Information Risk
Factors. The forward-looking statements contained in this
annual report are based on the beliefs, expectations and
opinions of management as of the date of this annual report. We
do not assume any obligation to update forward-looking
statements to reflect actual results or assumptions if
circumstances or managements beliefs, expectations or
opinions should change, unless otherwise required by law.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements.
2
TABLE OF
CONTENTS
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5
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5
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5
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5
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5
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6
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6
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6
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19
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19
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21
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31
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31
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32
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37
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57
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60
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60
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62
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62
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63
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63
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63
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69
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73
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74
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75
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77
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77
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78
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83
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83
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83
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84
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84
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84
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84
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84
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84
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84
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85
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3
Note to
Shareholders
On August 16, 2007, we announced the completion of its
acquisition of Inter-Tel (Delaware) Incorporated
(Inter-Tel), a full-service provider of business
communication solutions, for $25.60 per Inter-Tel share in cash
representing a total purchase price of approximately
$729 million. As a result of the acquisition, Inter-Tel is
now a wholly-owned subsidiary of Mitel.
Shareholders should note that, except as required by the
Form 20-F or otherwise noted herein, the disclosure
contained in this annual report describes Mitels business
operations through fiscal year-end (i.e., April 30, 2007)
and does not include or reflect changes resulting from the
Inter-Tel acquisition.
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Item 1.
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Identity
of Directors, Senior Management and Advisors
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Not applicable.
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Item 2.
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Offer
Statistics and Expected Timetable
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Not applicable.
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A.
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Selected
Financial Data
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The following sets forth selected financial information derived
from our audited consolidated financial statements as of and for
the fiscal years ended April 27, 2003 (fiscal
2003), April 25, 2004 (fiscal
2004), April 24, 2005 (fiscal 2005); for
the six day transition period from April 25, 2005 to
April 30, 2005 (the Transition Period); and for
the fiscal years ended April 30, 2006 (fiscal
2006) and April 30, 2007 (fiscal 2007).
The selected financial information may not be indicative of our
future performance and should be read in conjunction with
Item 5 Operating and Financial Review and
Prospects and the consolidated financial statements and
the notes attached to the financial statements included
elsewhere in this annual report. See Item 8 Financial
Information and Item 17 Financial
Statements.
STATEMENT
OF OPERATIONS DATA
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Fiscal Year
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Six Days
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Ended
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Ended
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Fiscal Year Ended
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April 27,
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April 25,
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April 24,
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April 30,
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April 30,
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April 30,
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2003
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2004
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2005
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2005
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2006
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2007
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(In millions, except share and per share data)
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Consolidated Statement of Operations Data
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Revenues
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$
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352.2
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$
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340.7
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$
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342.2
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$
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3.2
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$
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387.1
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$
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384.9
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Cost of revenues
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225.4
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202.9
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213.2
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2.4
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225.7
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225.1
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Gross margin
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126.8
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137.8
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129.0
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0.8
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161.4
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159.8
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Expenses Research and development
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41.2
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36.2
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41.4
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0.7
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44.1
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41.7
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Selling, general and administrative
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114.9
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111.4
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114.9
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1.8
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120.7
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123.5
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Special charges(1)
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13.7
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11.7
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10.6
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5.7
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9.3
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Litigation settlement
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16.3
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Initial public offering costs
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3.3
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Loss (gain) on disposal of assets
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0.6
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3.4
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(2.4
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(1.0
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)
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Amortization of acquired intangibles(2)
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29.1
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0.2
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Operating loss
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(72.1
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(22.3
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(41.3
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(1.7
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(6.7
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(33.3
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Other (income) expense, net
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0.9
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8.0
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7.5
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(0.1
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)
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39.8
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(0.1
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)
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Income tax (recovery) expense
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(2.9
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)
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0.3
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0.8
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(1.9
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)
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1.8
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Net loss
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$
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(70.1
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$
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(30.6
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$
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(49.6
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$
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(1.6
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$
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(44.6
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)
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$
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(35.0
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Net loss per common share Basic and diluted
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$
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(0.63
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$
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(0.26
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$
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(0.49
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$
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(0.01
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$
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(0.44
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$
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(0.36
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Weighted average number of Common Shares outstanding
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113,109,751
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127,831,211
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113,792,829
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117,149,933
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117,230,198
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117,336,927
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5
BALANCE
SHEET DATA
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As at
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As at
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As at
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As at
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As at
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As at
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April 27,
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April 25,
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April 24,
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April 30,
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April 30,
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April 30,
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2003
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2004
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2005
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2005
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2006
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2007
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(In millions)
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Consolidated Balance Sheet Data
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Cash and cash equivalents
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$
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22.3
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$
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26.7
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$
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9.7
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$
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46.6
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$
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35.7
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$
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33.5
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Other current assets
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120.6
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115.0
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117.5
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115.8
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130.8
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136.9
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Property and equipment
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25.3
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20.3
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20.9
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20.6
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17.4
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16.5
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Other assets
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7.3
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7.4
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8.5
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12.3
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15.9
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15.3
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Total assets
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$
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175.5
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$
|
169.4
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$
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156.6
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$
|
195.3
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$
|
199.8
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$
|
202.2
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Current liabilities
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$
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135.8
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$
|
103.2
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$
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115.8
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$
|
101.9
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$
|
126.0
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$
|
143.8
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Long-term debt
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23.1
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15.5
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20.2
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66.7
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56.7
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66.8
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Derivative instruments(3)(5)
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29.2
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38.0
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37.4
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75.9
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67.3
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Other long-term liabilities
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24.6
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24.8
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25.4
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25.1
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45.6
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55.4
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Redeemable shares(4)(5)
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29.0
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51.3
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57.2
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57.3
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|
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|
64.2
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|
|
|
71.5
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Capital stock
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|
183.4
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184.8
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|
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187.6
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|
|
|
187.6
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|
|
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188.8
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|
|
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189.1
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Other capital accounts
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(2.2
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)
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7.7
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14.7
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23.3
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(1.9
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)
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6.5
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Accumulated deficit
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(218.2
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)
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|
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(247.1
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|
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(302.3
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)
|
|
|
(304.0
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)
|
|
|
(355.5
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)
|
|
|
(398.2
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total liabilities and shareholders equity
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|
$
|
175.5
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|
|
$
|
169.4
|
|
|
$
|
156.6
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|
|
$
|
195.3
|
|
|
$
|
199.8
|
|
|
$
|
202.2
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(1) |
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Special charges related to restructuring activities, product
line exit and other loss accruals undertaken to improve our
operational efficiency and to realign our business. |
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(2) |
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Acquired intangible assets relating to the acquisition of the
Mitel name, certain assets and subsidiaries from Zarlink
Semiconductor Inc. in 2001 were fully amortized in 2004. |
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(3) |
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The derivative instruments related to our Class A
Series 1 Preferred Shares (the Series A
Preferred Shares) and the Class B Series 1
Preferred Shares (the Series B Preferred
Shares). The derivative instruments arose because a
portion of the redemption price of the Series A Preferred
Shares and Series B Preferred Shares is indexed to our
common share price and as required by SFAS 133 has been
bifurcated and accounted for separately. |
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(4) |
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Redeemable shares included 10,000,000 Common Shares (which are
redeemable by virtue of a shareholders agreement dated
April 23, 2004, as amended, among certain of our
shareholders and us), 20,000,000 Series A Preferred Shares
and 67,789,300 Series B Preferred Shares (See
Item 6.A. Directors, Senior Management and
Employees Directors and Senior Management). |
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(5) |
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On August 16, 2007, in conjunction with the Merger (as
defined below), we converted each existing Series A
Preferred Share into Common Shares and Class 1 Preferred
Shares, converted each existing Series B Preferred Share
into Common Shares and purchased for cancellation the redeemable
shares. |
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B.
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Capitalization
and Indebtedness
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Not applicable.
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C.
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Reasons
for the offer and use of proceeds
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Not applicable.
An investment in our Common Shares should be regarded as
highly speculative and is suitable only for those investors who
are able to sustain a total loss of their investment. You should
carefully consider the following risks, as
6
well as the other information contained in this annual
report, when evaluating us and our business and prospects. Any
of the following risks, as well as risks not currently known to
us, could materially and adversely affect our business, results
of operations or financial condition, and could result in a
complete loss of your investment.
Risks
Relating to our Business
We
have incurred net losses since our incorporation in 2001 and we
may not be profitable in the future.
We incurred a net loss of $35.0 million for fiscal 2007,
and net losses of $44.6 million, $49.6 million,
$30.6 million and $70.1 million in fiscal 2006, 2005,
2004 and 2003, respectively. We may not be able to achieve
profitability or, if achieved, may not be able to sustain
profitability. We have incurred restructuring charges in each of
the previous six fiscal years, and may incur additional
restructuring charges in the future. Our future success in
attaining profitability and growing our revenues and market
share for our solutions depends, among other things, upon our
ability to develop and sell solutions that have a competitive
advantage, to build our brand image and reputation, to attract
orders from new and existing customers and to reduce our costs
as a proportion of our revenue by, among other things,
increasing efficiency in design, component sourcing,
manufacturing and assembly cost processes.
We may
fail to realize the anticipated cost savings, revenue
enhancements and other benefits expected from our acquisition of
Inter-Tel.
As part of the integration of Mitel and Inter-Tel following the
acquisition, we are executing plans to consolidate sales,
operations and support functions, including optimization of our
supply chain and procurement structure, and to leverage our
research and development and services across a larger base.
These actions are expected to result in significant cost
savings, opportunities for revenue synergies and other
synergistic benefits.
Delays we encounter in the execution of our integration plans
could have a material adverse effect on our revenues, expenses,
operating results and financial condition. Although we expect
significant benefits to result from the acquisition, there can
be no assurance that we will actually realize these anticipated
benefits.
Achieving the benefits of the acquisition will depend in part
upon meeting the challenges inherent in the successful
combination and integration of global business enterprises of
the size and scope of Mitel and Inter-Tel and the possible
resulting diversion of management attention for an extended
period of time. There can be no assurance that we will meet
these challenges and that such diversion will not negatively
affect our operations.
Uncertainties
associated with our integration and cost-reduction plans may
cause a loss of employees and may otherwise materially adversely
affect our future business and operations.
Our success is dependent upon the services of a number of key
personnel throughout our organization, including members of our
senior management and software and engineering staff, as well as
the expertise of our directors. Competition for highly skilled
directors, management, research and development and other key
employees is intense in our industry and we may not be able to
attract and retain highly qualified directors, management,
research and development personnel and other key employees in
the future. Our current and prospective employees may continue
to experience uncertainty about their roles with us as we work
through our integration associated with the acquisition.
Further, management focus may be diverted in favour of
integration requirements. This may materially adversely affect
our ability to attract and retain key management, sales,
marketing, operations, technical support and other personnel.
Accordingly, no assurance can be given that we will be able to
attract or retain our key employees to the same extent that we
have been able to attract or retain our employees in the past.
7
business in Asia-Pacific from 1987 to 2000. He currently serves
on the board of directors of several companies, including Mart
Asia Ltd., March Networks Asia Pacific Limited, BreconRidge
Manufacturing Solutions Asia Ltd. and Vodatel Networks Holding
Ltd. Mr. Fung has a Bachelor of Applied Science in
Industrial Engineering Degree from the University of Toronto.
Norman Stout was appointed Chief Executive Officer of
Inter-Tel and a member of Inter-Tels Board of Directors on
February 22, 2006. He began his tenure at Inter-Tel in 1994
as a director. Four years later, he joined Inter-Tel as
executive vice president, chief administrative officer and
president of Inter-Tel Software and Services. Prior to joining
Inter-Tel, Mr. Stout was Chief Operating Officer of
Oldcastle Architectural Products and since 1996, Mr. Stout
also had served as President of Oldcastle Architectural West.
Mr. Stout held previous positions as President of Superlite
Block; Chief Financial Officer and Chief Executive Officer
(successively) of Boorhem-Fields, Inc. of Dallas, Texas; and as
a Certified Public Accountant with Coopers & Lybrand.
He currently serves on the board of Hypercom Corporation, a
public company headquartered in Phoenix, Arizona. Mr. Stout
holds a Bachelor of Business Administration degree in Accounting
from Texas A&M and an MBA from the University of Texas. He
currently holds the position of CEO, US.
Craig W. Rauchle was appointed President of Inter-Tel in
February 2005. He was appointed Chief Operating Officer of
Inter-Tel in August 2001 and served as its Executive Vice
President from December 1994 to February 2005. As President and
Chief Operating Officer of Inter-Tel, Mr. Rauchle was
responsible for Inter-Tels sales and support functions,
marketing, procurement, distribution and research and
development activities. He had been its Senior Vice President
and continued as President of Inter-Tel Technologies, Inc., its
wholly owned sales subsidiary. Mr. Rauchle joined Inter-Tel
in 1979 as Branch General Manager of the Denver Direct Sales
Office and in 1983 was appointed the Central Region Vice
President and subsequently the Western Regional Vice President.
From 1990 to 1992, Mr. Rauchle served as President of
Inter-Tel Communications, Inc. In 2006, he was elected to the
board of directors of iMergent. Mr. Rauchle holds a
Bachelor of Arts degree in Communications from the University of
Denver. He currently holds the position of President, US.
Douglas W. Michaelides joined us in January 2006 as
Vice-President, Marketing. From October 2003 to December 2005,
Mr. Michaelides was Senior Vice President, Marketing at MTS
Allstream Inc., one of Canadas largest business
telecommunications service providers. Before that he held
various positions over a period of 20 years in sales and
marketing at Nortel, culminating in the role of Vice President
and General Manager of the global professional services business
in 2001. Mr. Michaelides has a Bachelor of Science degree
in electrical engineering from the University of Toronto and an
MBA from York University (Toronto, Ontario, Canada).
Ronald G. Wellard joined us in December 2003 as
Vice-President, Research and Development and currently holds the
position of Vice-President of Product Development. Prior to July
2003, Mr. Wellard was a Vice-President at Nortel and
notably held the position of Product Development Director for
Meridian Norstar from 1994 to 1999. Mr. Wellard has a
Bachelor of Applied Science, Systems Design Engineering degree
from the University of Waterloo (Ontario, Canada).
8
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our contract manufacturers experiencing delays, disruptions or
quality control problems in their manufacturing operations;
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lead-times for required materials and components varying
significantly and being dependent on factors such as the
specific supplier, contract terms and the demand for each
component at a given time;
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overestimating our forecast requirements resulting in excess
inventory and related carrying charges;
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underestimating our requirements, resulting in our contract
manufacturers having inadequate materials and components
required to produce our products, or overestimating our
requirements, resulting in charges assessed by the contract
manufacturers or liabilities for excess inventory, each of which
could negatively affect our gross margins; and
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the possible absence of adequate capacity and reduced control
over component availability, quality assurances, delivery
schedules, manufacturing yields and costs.
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The addition of manufacturing locations or other contract
manufacturers would likely increase the complexity of our supply
chain management. If any of our contract manufacturers are
unable or unwilling to continue manufacturing our products in
required volumes and quality levels, we will have to identify,
qualify, select and implement acceptable alternative
manufacturers, which would likely be time consuming and costly.
In addition, alternate sources may not be available to us or may
not be in a position to satisfy our production requirements at
commercially reasonable prices and quality. Therefore, any
significant interruption in manufacturing would result in us
being unable to deliver the affected products to meet our
customer orders.
We
depend on sole source and limited source suppliers for key
components. If these components are not available on a timely
basis, or at all, we may not be able to meet scheduled product
deliveries to our customers.
We depend on sole source and limited source suppliers for key
components of our products. In addition, our contract
manufacturers often acquire these components through purchase
orders and may have no long-term commitments regarding supply or
pricing from their suppliers. Lead-times for various components
may lengthen, which may make certain components scarce. As
component demand increases and lead-times become longer, our
suppliers may increase component costs. We also depend on
anticipated product orders to determine our materials
requirements. Lead-times for limited-source materials and
components can be as long as six months, vary significantly and
depend on factors such as the specific supplier, contract terms
and demand for a component at a given time. From time to time,
shortages in allocations of components have resulted in delays
in filling orders. Shortages and delays in obtaining components
in the future could impede our ability to meet customer orders.
Any of these sole source or limited source suppliers could stop
producing the components, cease operations entirely, or be
acquired by, or enter into exclusive arrangements with, our
competitors. As a result, these sole source and limited source
suppliers may stop selling their components to our contract
manufacturers at commercially reasonable prices, or at all. Any
such interruption, delay or inability to obtain these components
from alternate sources at acceptable prices and within a
reasonable amount of time would adversely affect our ability to
meet scheduled product deliveries to our customers and reduce
margins realized.
Delay
in the delivery of, or lack of access to, software or other
intellectual property licensed from our suppliers could
adversely affect our ability to develop and deliver our
solutions on a timely and reliable basis.
Our business may be harmed by a delay in delivery of software
applications from one or more of our suppliers. Many of our
solutions are designed to include software or other intellectual
property licensed from third parties. It may be necessary in the
future to seek or renew licenses relating to various components
in our solutions. These licenses may not be available on
acceptable terms, or at all. Moreover, the inclusion in our
solutions of software or other intellectual property licensed
from third parties on a non-exclusive basis could limit our
ability to protect our proprietary rights to our solutions.
Non-exclusive licenses also allow our suppliers to develop
relationships with, and supply similar or the same software
applications to, our competitors. Software licenses could
terminate in the event of a bankruptcy or insolvency of a
software supplier or other third party licensor. We have not
entered into
9
source code escrow agreements with every software supplier or
third party licensor. In the event that software suppliers or
other third party licensors terminate their relationships with
us, are unable to fill our orders on a timely basis or the
licenses are otherwise terminated, we may be unable to deliver
the affected products to meet our customer orders.
Our
success is dependent on our intellectual property. Our inability
or failure to protect our intellectual property could seriously
harm our ability to compete and our financial
success.
Our success depends on the intellectual property in the
solutions and services that we develop and sell. We rely upon a
combination of copyright, patent, trade secrets, trademarks,
confidentiality procedures and contractual provisions to protect
our proprietary technology. Our present protective measures may
not be enforceable or adequate to prevent misappropriation of
our technology or independent third-party development of the
same or similar technology. Even if our patents are held valid
and enforceable, others may be able to design around these
patents or develop products competitive to our products but that
are outside the scope of these patents.
We make use of some open source software code under various open
source licenses available to the general public. A
characteristic of an open source license is that it does not
provide any indemnification to the licensee against third-party
claims of intellectual property infringement. Some open source
licenses require the licensee to disclose the licensees
source code derived from such open source code, and failure to
comply with the terms of such licenses can result in the
licensee being stopped from distributing products that contain
the open source code or being forced to freely disseminate
enhancements that were made to the open source code. Further,
the use of open source software in our solutions may expose
those solutions to security risks.
Many foreign jurisdictions offer less protection of intellectual
property rights than Canada and the United States, and the
protection provided to our proprietary technology by the laws of
these and other foreign jurisdictions may not be sufficient to
protect our technology. Preventing the unauthorized use of our
proprietary technology may be difficult, time consuming and
costly, in part because it may be difficult to discover
unauthorized use by third parties. Litigation may be necessary
to enforce our intellectual property rights, to protect our
trade secrets, to determine the validity and scope of our
proprietary rights, or to defend against claims of
unenforceability or invalidity. Any litigation, whether
successful or unsuccessful, could result in substantial costs
and diversion of management resources.
Our
business may be harmed if we infringe intellectual property
rights of third parties.
There is considerable patent and other intellectual property
development activity in our industry. Our success depends, in
part, upon our not infringing intellectual property rights owned
by others. Our competitors, as well as a number of individuals,
patent holding companies and consortiums, own, or claim to own,
intellectual property relating to our industry. Aggressive
patent litigation is not uncommon in our industry and can be
disruptive. We cannot determine with certainty whether any
existing third party patent, or the issuance of new third party
patents, would require us to alter our solutions, obtain
licenses or discontinue the sale of the affected applications
and products. We have received notices, and we may receive
additional notices, containing allegations that our solutions
are subject to patents or other proprietary rights of third
parties, including competitors, patent holding companies and
consortiums. In addition, in July 2007, one of our competitors
filed an answer and counterclaim in the United States District
Court for the Eastern District of Texas (and has moved to have
the case transferred to the Northern District of California)
alleging that we are infringing one of its patents and
requesting damages (treble damages in respect of alleged willful
infringement of the patent), injunctive relief, attorneys
fees, costs and expenses, and such further relief against us as
the court deems just and proper. See Item 8.A.
Financial Information Consolidated Statements
and Other Financial Information Legal
Proceedings for a more complete description of this
proceeding.
Our success also depends, in part, upon our customers
freedom to use our products. For example, certain claims have
been asserted against end-users within our industry and demands
for the payment of licensing fees have been made of end-users
who have implemented our solutions. We generally agree to
indemnify and defend our customers to the extent a claim for
infringement is brought against our customers with respect to
our solutions.
10
Infringement claims (or claims for indemnification resulting
from infringement claims) have been and may in the future be
asserted or prosecuted against us or our customers by third
parties. Some of these third parties, including competitors,
patent holding companies and consortiums, have, or have access
to, substantially greater resources than we do and may be better
able to sustain the costs of complex patent litigation. Whether
or not these claims have merit, we may be subject to costly and
time-consuming legal proceedings, and this could divert our
managements attention from operating our business. If
these claims are successfully asserted against us, we could be
required to pay substantial damages and could be prevented from
selling some or all of our solutions. In addition, an infringer
of a United States patent may be subject to treble damages and
attorneys fees if the infringement is found to be willful.
We may also be obligated to indemnify our business partners or
customers in any such litigation. Furthermore, in order to
resolve such proceedings, we may need to obtain licenses from
third parties or substantially modify or rename our solutions in
order to avoid infringement. Moreover, license agreements with
third parties may not include all intellectual property rights
that may be issued to or owned by the licensors, and future
disputes with these parties are possible. In addition, we might
not be able to obtain the necessary licenses on acceptable
terms, or at all, or be able to modify or rename our solutions
successfully. This could prevent us from selling some or all of
our solutions. Current or future negotiations with third parties
to establish license or cross license arrangements, or to renew
existing licenses, may not be successful and we may not be able
to obtain or renew a license on satisfactory terms, or at all.
If required licenses cannot be obtained, or if existing licenses
are not renewed, litigation could result. Any litigation
relating to intellectual property rights, whether or not
determined in our favor or settled by us, could at a minimum be
costly and would divert the attention and efforts of management
and our technical personnel. An adverse determination in any
litigation or proceeding could prevent us from making, using or
selling some or all of our solutions and subject us to damage
assessments.
We
rely on our channel partners for the majority of our sales, and
disruptions to, or our failure to effectively develop and
manage, our distribution channel and the processes and
procedures that support it could adversely affect our ability to
generate revenues.
Our future success is highly dependent upon establishing and
maintaining successful relationships with a variety of channel
partners. A substantial portion of our revenues is derived
through our channel partners, most of which also sell our
competitors products. Our revenues depend in part on the
performance of these channel partners. The loss of or reduction
in sales to these channel partners could materially reduce our
revenues. Our competitors may in some cases be effective in
causing resellers or potential resellers to favor their products
or prevent or reduce sales of our solutions. If we fail to
maintain relationships with these channel partners, fail to
develop new relationships with channel partners in new markets
or expand the number of channel partners in existing markets, or
if we fail to manage, train or provide appropriate incentives to
existing channel partners or if these channel partners are not
successful in their sales efforts, sales of our solutions may
decrease and our operating results would suffer.
The most likely potential channel partners for us are those
businesses engaged in the voice and data communications business
or the provision of communications software applications. Many
potential channel partners in the voice communications business
have established relationships with our competitors and may not
be willing to invest the time and resources required to train
their staff to effectively market our solutions and services.
Potential channel partners engaged in the data and software
applications communications businesses are less likely to have
established relationships with our competitors, but where they
are unfamiliar with the voice communications business, they may
require substantially more training and other resources to be
qualified to sell our solutions.
Design
defects, errors, failures or bugs, which may be
difficult to detect, may occur in our solutions.
We produce highly complex solutions that incorporate both
hardware and software. Our software may contain bugs
that can interfere with expected operations. Our pre-shipment
testing and field trial programs may not be adequate to detect
all defects in individual applications and products or
systematic defects that could affect numerous shipments, which
might interfere with customer satisfaction, reduce sales
opportunities or affect gross margins. In the past, we have had
to replace certain components and provide remediation in
response to the discovery of defects or bugs in
solutions that we had shipped. Any future remediation may have a
material impact
11
on our business. Our inability to cure an application or product
defect could result in the failure of an application or product
line, the temporary or permanent withdrawal from an application,
product or market, damage to our reputation, inventory costs, or
application or product re-engineering expenses. The sale and
support of applications and products containing defects and
errors may result in product liability claims and warranty
claims. Our insurance may not cover or may be insufficient to
cover claims that are successfully asserted against us or our
contracted suppliers and manufacturers.
We
face intense competition from many competitors and we may not be
able to compete effectively against these
competitors.
The market for our solutions is highly competitive. We compete
against many companies, including Alcatel-Lucent, Avaya Inc.,
Cisco Systems, Inc., NEC Corporation , Nortel Networks
Corporation, Panasonic Corporation, Shoretel, Inc., Siemens AG,
Toshiba Corporation and 3Com Corp. In addition, because the
market for our solutions is subject to rapidly changing
technologies, we may face competition in the future from
companies that do not currently compete in the business
communications market, including companies that currently
compete in other sectors of the information technology,
communications or software industries, mobile communications
companies, or communications companies that serve residential
rather than business customers.
Several of our existing competitors have, and many of our future
competitors may have, greater financial, personnel, research and
other resources, more well-established brands or reputations and
broader customer bases than we have. As a result, these
competitors may be in a stronger position to respond more
quickly to potential acquisitions and other market
opportunities, new or emerging technologies and changes in
customer requirements. Some of these competitors may also have
customer bases that are more geographically balanced than ours
and therefore may be less affected by an economic downturn in a
particular region. Competitors with greater resources may also
be able to offer lower prices, additional products or services
or other incentives that we cannot match or do not offer. In
addition, existing customers of data communications companies
that compete against us may be more inclined to purchase
business communications solutions from their current data
communications vendor than from us. Also, as voice and data
communications converge, we may face competition from systems
integrators that were traditionally focused on data network
integration. We cannot predict which competitors may enter our
markets in the future, what form the competition may take or
whether we will be able to respond effectively to the entry of
new competitors or the rapid evolution in technology and product
development that has characterized our markets. Competition from
existing and potential market entrants may take many forms,
including large bundled offerings that incorporate applications
and products similar to those that we offer. If our competitors
offer deep discounts on certain products or services in an
effort to recapture or gain market share, we may be required to
lower our prices or offer other favorable terms to compete
effectively, which would reduce our margins and could adversely
affect our operating results.
As
voice and data networks converge, we are likely to face
increased competition from companies in the information
technology, personal and business applications and software
industries.
The convergence of voice and data networks and their wider
deployment by enterprises has led information technology and
communication applications deployed on converged networks to
become more integrated. This integration has created an
opportunity for the leaders in information technology, personal
and business applications and the software that connects the
network infrastructure to those applications, to enter the
telecommunications market and offer products that compete with
our systems. Competition from these potential market entrants
may take many forms, and they may offer products and
applications similar to those we offer. Certain leaders in the
information technology, personal and business applications and
software industries, have substantial financial and other
resources that they could devote to this market.
If competitors from the information technology, personal and
business applications or software industries enter the
telecommunications market, the market for IP telecommunications
systems will become increasingly competitive.
12
If the solutions offered by competitors achieve substantial
market penetration, we may not be able to maintain or improve
our market position, and our failure to do so could materially
and adversely affect our business and results of operations.
Our
business may suffer if our strategic alliances are not
successful.
We have a number of strategic alliances and continue to pursue
strategic alliances with other companies in areas where
collaboration can produce industry advancement and acceleration
of new markets. The objectives and goals for a strategic
alliance can include one or more of the following: technology
exchange, product development, joint sales and marketing or
new-market creation. If a strategic alliance fails to perform as
expected or if the relationship is terminated, we could
experience delays in product availability or impairment of our
relationships with customers. In addition, we may face increased
competition if a third party acquires one or more of our
strategic partners or if our competitors enter into additional
successful strategic relationships.
Our
operations in international markets involve inherent risks that
we may not be able to control.
We do business in over 90 countries and are increasing our
activities in foreign jurisdictions. Accordingly, our future
results could be materially and adversely affected by a variety
of uncontrollable and changing factors relating to international
business operations, including:
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political or social unrest or economic instability in a specific
country or region;
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macroeconomic conditions adversely affecting geographies where
we do business;
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higher costs of doing business in foreign countries;
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infringement claims on foreign patents, copyrights, or trademark
rights;
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difficulties in managing operations across disparate geographic
areas;
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difficulties associated with enforcing agreements and
intellectual property rights through foreign legal systems;
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trade protection measures and other regulatory requirements
which may affect our ability to import or export our products
from or to various countries;
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adverse tax consequences;
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unexpected changes in legal and regulatory requirements;
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military conflict, terrorist activities, natural disasters and
widespread medical epidemics; and
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our ability to recruit and retain channel partners in foreign
jurisdictions.
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Our
competitive position may be affected by fluctuations in exchange
rates, and our current currency hedging strategy may not be
sufficient to counter such fluctuations.
A significant portion of our business is conducted, and a
substantial portion of our operating expenses are payable, in
currencies other than the U.S. dollar. Due to the
substantial volatility of currency exchange rates, we cannot
predict the effect of exchange rate fluctuations upon future
sales and expenses. We use financial instruments, principally
forward exchange contracts, in our management of foreign
currency exposure. These contracts primarily require us to
purchase and sell certain foreign currencies with or for
U.S. dollars at contracted rates. We may be exposed to a
credit loss in the event of non-performance by the
counterparties of these contracts. These financial instruments
may not adequately manage our foreign currency exposure. Our
results of operations could be adversely affected if we are
unable to successfully manage currency fluctuations in the
future.
13
Our
quarterly and annual revenues and operating results have
historically fluctuated, and the results of one period may not
provide a reliable indicator of our future
performance.
Our quarterly and annual revenues and operating results have
historically fluctuated and are not necessarily indicative of
results to be expected in future periods. A number of factors
may cause our financial results to fluctuate significantly from
period to period, including:
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the fact that an individual order or contract can represent a
substantial amount of revenues for that period;
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the size, timing and shipment of individual orders;
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changes in pricing or discount levels by us or our competitors;
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foreign currency exchange rates;
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the mix and volume of products sold by us;
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the timing of the announcement, introduction and delivery of new
products
and/or
product enhancements by us and our competitors; and
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general economic conditions.
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As a result of the above factors, a quarterly or yearly
comparison of our results of operations is not necessarily
meaningful.
Our
business requires a significant amount of cash, and we may
require additional sources of funds if our sources of liquidity
are unavailable or insufficient to fund our
operations.
Our working capital requirements and cash flows have
historically been, and our working capital requirements and cash
flows are expected to continue to be, subject to quarterly and
yearly fluctuations, depending on a number of factors. If we are
unable to manage fluctuations in cash flow, our business,
operating results and financial condition may be materially
adversely affected. Factors which could lead us to suffer cash
flow fluctuations include:
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the level of sales and the related margins on those sales;
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the collection of receivables;
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the timing and size of capital expenditures;
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the timing and size of purchase of inventory and related
components;
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costs associated with potential restructuring actions;
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the timing and volume of sales of leases to third party funding
sources;
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mergers and acquisitions; and
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customer financing obligations.
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In order to finance our business, we expect to use available
cash and to continue to have access to a $30 million
revolving credit facility. However, our ability to draw on this
facility will be conditioned upon our compliance with covenants
contained in the credit agreement. There can be no assurance
that we will be in compliance with the covenants required by our
lenders in the future.
We may need to secure additional sources of funding if our cash,
credit facility and borrowings are not available or are
insufficient to finance our business. We cannot provide any
assurance that such funding will be available on terms
satisfactory to us. In addition, any proceeds from the issuance
of equity or debt may be required to be used in whole or in
part, to make mandatory payments under our First
and/or
Second Lien Credit agreements. If we were to incur higher levels
of debt, we would require a larger portion of our operating cash
flow to be used to pay principal and interest on our
indebtedness. The increased use of cash to pay indebtedness
could leave us with insufficient funds to finance our operating
activities, such as research and development expenses and
capital expenditures. In addition, debt instruments may contain
covenants or other restrictions that affect our business
14
operations. If we were to raise additional funds by selling
equity securities, the relative ownership of our existing
investors could be diluted or the new investors could obtain
terms more favorable than previous investors.
The
exercise of conversion rights by one or more of our preferred
shareholders, warrant holders, and option holders, could
adversely affect the market value of our Common Shares as well
as our ability to complete any future equity
financing.
As at September 30, 2007, we had outstanding:
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307,087 Class 1 Preferred Shares (Class 1
Preferred Shares). These Class 1 Preferred Shares are
convertible into Common Shares at the option of the holders and
upon certain triggering events. The conversion ratio 767.08 was
as of September 28, 2007 and increases over time than one Common
Share for each Class 1 Preferred Share;
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Stock options to acquire 22,407,179 Common Shares; and
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Warrants to acquire up to an additional 81,505,385 Common Shares.
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The issuance of Common Shares upon the conversion of our
Preferred Shares or the exercise of certain warrants or stock
options may occur at a time when the conversion or exercise
price is below the market value of our Common Shares. Therefore,
the conversion or exercise of these securities will likely have
a dilutive effect on the value of our Common Shares. The
conversion or exercise of these securities will also result in
us having more Common Shares outstanding, which would have a
dilutive effect on our earnings per share. Furthermore, the
Class 1 Preferred Shares, warrants and stock options, as
well as the terms of these securities could materially impair
our future ability to raise capital through an offering of
equity securities. For additional information on these
conversion and exercise rights, see Item 10.B.
Additional Information Memorandum and Articles
of Incorporation Share Capital.
We
have a significant amount of debt, which contain customary
default clauses, a breach of which may result in acceleration of
the repayment of some or all of this debt.
On August 16, 2007, in connection with the acquisition of
Inter-Tel, we borrowed $300 million under a 7 year
term First Lien Credit Agreement and borrowed $130 million
under a 8 year Second Lien Credit Agreement. In addition,
as part of the transaction, we secured a 5 year,
$30 million revolving credit facility, which remained
unutilized as at September 30, 2007. All three of these
credit agreements have customary default clauses. In the event
we were to default on these credit agreements, and were unable
to cure the default, the repayment of one or more of these
credit agreements may be accelerated. If acceleration were to
occur, we would be required to secure alternative sources of
equity or debt financing to be able to repay the existing credit
facilities. Alternative financing may not be available on terms
satisfactory to us, or at all. If acceptable alternative
financing were unavailable, we would have to consider
alternatives to fund the repayment of the debt, which may
include the sale of part or all of the business, the sale of
which may occur at a distressed price.
We are
exposed to risks inherent in our defined benefit pension
plan.
We currently maintain a defined benefit pension plan, which was
closed to new employees in June 2001, for a number of our past
and present employees in the United Kingdom. The contributions
to fund benefit obligations under this plan are based on
actuarial valuations, which themselves are based on certain
assumptions about the long-term operation of the plan, including
employee turnover and retirement rates, the performance of the
financial markets and interest rates. If the actual operation of
the plan differs from these assumptions, additional
contributions by us may be required. As of April 30, 2007,
the projected benefit obligation of $173.9 million exceeded
the fair value of the plan assets of $123.4 million,
resulting in a pension liability of $50.5 million. Changes
to pension legislation in the United Kingdom may adversely
affect our funding requirements.
Transfer
pricing rules may adversely affect our income tax
expenses.
We conduct business operations in various jurisdictions and
through legal entities in Canada, the United States, the United
Kingdom, Barbados and elsewhere. We and certain of our
subsidiaries provide solutions and services to, and may from
time to time undertake certain significant transactions with,
other subsidiaries in different
15
jurisdictions. The tax laws of many of these jurisdictions,
including Canada, have detailed transfer pricing rules which
require that all transactions with non-resident related parties
be priced using arms length pricing principles, and
contemporaneous documentation must exist to support this
pricing. The taxation authorities in the jurisdictions where we
carry on business, including the Canada Revenue Agency, the
United States Internal Revenue Service and HM
Revenue & Customs in the United Kingdom, could
challenge our arms length related party transfer pricing
policies. International transfer pricing is an area of taxation
that depends heavily on the underlying facts and circumstances
and generally involves a significant degree of judgment. If any
of these taxation authorities are successful in challenging our
transfer pricing policies, our income tax expense may be
adversely affected and we could also be subjected to interest
and penalty charges. Any increase in our income tax expense and
related interest and penalties could have a significant impact
on our future earnings and future cash flows.
Future
changes in financial accounting standards could adversely affect
our reported results of operations.
A change in accounting policies could have a significant effect
on our reported results and may even affect our reporting of
transactions completed before the change is effective. New
pronouncements and varying interpretations of pronouncements
have occurred with frequency and may occur in the future.
Changes to existing rules or the questioning of current
practices may adversely affect our reported financial results or
the way we conduct our business.
Governmental
regulation could harm our operating results and future
prospects.
Governments in a number of jurisdictions in which we conduct
business have imposed export license requirements and
restrictions on the import or export of some technologies,
including some of the technologies used in our solutions.
Changes in these or other laws or regulations could adversely
affect our revenues. A number of governments also have laws and
regulations that govern technical specifications for the
provision of our solutions. Changes in these laws or regulations
could adversely affect the sales of, decrease the demand for and
increase the cost of, our solutions. For example, the Federal
Communications Commission may issue regulatory pronouncements
from time to time that may mandate new standards for our
equipment in the United States. These pronouncements could
require costly changes to our hardware and software.
Additionally, certain government agencies currently require
voice-over-Internet-Protocol products to be certified through a
lengthy testing process. Other government agencies may adopt
similar lengthy certification procedures which could delay the
delivery of our products and adversely affect our revenues.
Specifically, on January 5, 2005, Inter-Tel received court
approval of a civil settlement agreement (the Civil
Settlement) and a criminal plea agreement (the Plea
Agreement) with the United States of America, each dated
as of December 8, 2004 and disclosed on that same date. The
court approval of the Civil Settlement and Plea Agreement
resolved the investigation of the Department of Justice into the
participation of Inter-Tel Technologies, Inc.
(Technologies), a wholly-owned subsidiary of
Inter-Tel, in a federally administered
E-Rate
program to connect schools and libraries to the Internet.
In connection with the Civil Settlement, Technologies paid a
penalty of $6.7 million and forgave the collection of
certain accounts receivable of $0.3 million related to
Technologies participation in the
E-Rate
program. In connection with the Plea Agreement, Technologies
entered guilty pleas to charges of mail fraud and an antitrust
violation. Under the Plea Agreement, Technologies paid a fine of
$1.7 million and is observing a three-year probationary
period, which has, among other things, required Technologies to
implement a comprehensive corporate compliance program. The
existence and disclosure of the Civil Settlement and the Plea
Agreement may have already caused and may cause future harm to
Inter-Tel and, as a result of our acquisition of Inter-Tel, to
us.
Our
future success depends on our existing key
personnel.
Our success is dependent upon the services of key personnel
throughout our organization, including the members of our senior
management and software and engineering staff, as well as the
expertise of our directors. Competition for highly skilled
directors, management, research and development and other
employees is intense in our industry and we may not be able to
attract and retain highly qualified directors, management, and
research and development personnel and other key employees in
the future. In order to improve productivity, a portion of our
compensation to key employees and directors is in the form of
stock option grants, and as a consequence, a
16
depression in our value of our shares could make it difficult
for us to motivate and retain employees and recruit additional
qualified directors and personnel. The recent decision by the
Financial Accounting Standards Board regarding the accounting
treatment of stock options as compensation expense could lead to
a reduction in our use of stock options as an incentive and
retention tool. We currently do not maintain corporate life
insurance policies on the lives of our directors or any of our
key employees.
We may
make further strategic acquisitions in the future. We may not be
successful in operating or integrating these
acquisitions.
As part of our business strategy, we will consider further
acquisitions of, or significant investments in, businesses that
offer products, services and technologies complementary to ours.
These acquisitions could materially adversely affect our
operating results and the price of our Common Shares.
Acquisitions involve significant risks and uncertainties,
including:
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unanticipated costs and liabilities;
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difficulties in integrating new products, software, businesses,
operations, technology infrastructure and personnel in an
efficient and effective manner;
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difficulties in maintaining customer relations;
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the potential loss of key employees of the acquired businesses
or our key employees;
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the diversion of the attention of our senior management from the
operation of our daily business;
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the potential adverse effect on our cash position as a result of
all or a portion of an acquisition purchase price being paid in
cash;
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the potential issuance of securities that would dilute our
shareholders percentage ownership;
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the inability to maintain uniform standards, controls, policies
and procedures; and
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fluctuations in interests rates, and the timing and volume of
sales of leases to third party funding sources.
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Our inability to successfully operate and integrate newly
acquired businesses appropriately, effectively and in a timely
manner could have a material adverse effect on our ability to
take advantage of future growth opportunities and other advances
in technology, as well as on our revenues, gross margins and
expenses.
The
costs and risks associated with Sarbanes-Oxley regulatory
compliance may have a material adverse effect on
us.
We will be required to document and test our internal controls
over financial reporting pursuant to Section 404 of the
United States Sarbanes-Oxley Act of 2002, so that our management
can certify as to the effectiveness of our internal controls for
the year ended April 30, 2008. As a result, we will be
required to assess
and/or
improve our financial and managerial controls, reporting systems
and procedures, and we will incur substantial expenses to test
our systems and controls, incur expenses associated with an
independent registered accounting firm report on our controls,
as well as ongoing compliance costs. If our management is unable
to certify the effectiveness of our internal controls or if our
independent registered public accounting firm cannot render an
opinion on managements assessment and on the effectiveness
of our internal controls over financial reporting, or if
significant deficiencies or material weaknesses in our internal
controls are identified, we could be subject to regulatory
scrutiny and a loss of public confidence.
Business
interruptions could adversely affect our
operations.
Our operations are vulnerable to interruption by fire,
earthquake or other natural disaster, power loss, computer
viruses, security breaches, telecommunications failure,
quarantines, national catastrophe, terrorist activities, war and
other events beyond our control. We do not have a fully
implemented detailed business continuity plan. There can be no
assurance that the coverage or limits of our business
interruption insurance will be sufficient to compensate for any
losses or damages that may occur.
17
Risks
Related to an Investment in our Common Shares
There
are significant restrictions on the resale of our securities and
there can be no assurance as to when such restrictions will
cease to apply, if ever.
There is presently no public market through which our securities
may be sold or resold. Our securities are not listed for trading
on any stock exchange, and there is no guarantee that any such
listing will be completed in the future. None of our securities
have been registered under the United States Securities Act
of 1933 , as amended (the Securities Act) or the
securities laws of any of the states of the United States and
are restricted securities as defined under the rules
of the Securities Act, which may not be transferred to a
U.S. person except pursuant to registration under the
Securities Act, or pursuant to an available exemption from
registration under the Securities Act. Canadian provincial
securities laws also restrict the transfer of our securities,
unless an exemption from the prospectus requirements is
available in respect of such transfer, at least until the time
we become a reporting issuer in a province of Canada. In
addition, our articles currently contain restrictions on the
transfer of our Common Shares. Investors may be unable to
liquidate an investment in our securities, whether or not a
listing is subsequently affected. An investor should not
purchase our securities unless such investor is able to endure a
lack of liquidity
and/or
withstand a total loss of his or her investment.
Each
of Francisco Partners and Dr. Matthews is a significant
shareholder and each has the potential to exercise significant
influence over matters requiring approval by our
shareholders.
Francisco Partners group and Dr. Matthews group
beneficially hold 41.5% and 38.7%, respectively, of the voting
power of our share capital as of September 30, 2007, as
further disclosed in Item 7.A. Major Shareholders and
Related Party Transactions Major Shareholders
and Item 7.B. Major Shareholders and Related Party
Transactions Related Party Transactions.
Francisco Partners has the right to nominate four members to our
board of directors, Dr. Matthews has the right to nominate
three members and Dr. Matthews is also the chairman of our
board. Each of Francisco Partners and Dr. Matthews, given
the extent of their respective ownership positions, have the
potential to control matters requiring approval by shareholders,
including the election of directors, any amendments to our
articles of incorporation or by-laws, and significant corporate
transactions. Each of Francisco Partners and Dr. Matthews
may have interests that differ from the interests of our other
shareholders.
Each
of Francisco Partners and Dr. Matthews
ownership of our Common Shares, as well as provisions contained
in our articles of incorporation and Canadian law, may reduce
the likelihood of a change of control occurring and, as a
consequence, may deprive you of the opportunity to sell your
Common Shares at a control premium.
The voting power of Francisco Partners and Dr. Matthews,
respectively, under certain circumstances, could have the effect
of delaying or preventing a change of control and may deprive
our shareholders of the opportunity to sell their Common Shares
at a control premium. In addition, provisions of our articles of
incorporation and Canadian law may delay or impede a change of
control transaction. Our articles of incorporation permit us to
issue an unlimited number of common and preferred shares.
Limitations on the ability to acquire and hold our Common Shares
may be imposed under the Competition Act (Canada). This
legislation permits the Commissioner of Competition of Canada to
review any acquisition of or control over a significant interest
in us and grants the Commissioner jurisdiction to challenge such
an acquisition before the Canadian Competition Tribunal on the
basis that it would, or would be likely to, result in a
substantial prevention or lessening of competition in any market
in Canada. In addition, the Investment Canada Act
subjects an acquisition of control of a Canadian business
(as that term is defined therein) by a non-Canadian to
government review if the value of assets acquired as calculated
pursuant to the legislation exceeds a threshold amount. A
reviewable acquisition may not proceed unless the relevant
minister is satisfied that the investment is likely to be a net
benefit to Canada (see Item 10.B. Additional
Information Exchange Controls). Any of the
foregoing could prevent or delay a change of control and may
deprive our shareholders of the opportunity to sell their Common
Shares at a control premium.
18
You
may be unable to bring actions or enforce judgments against us,
certain of our directors and officers, certain of the selling
shareholders or our independent public accounting firm under
U.S. federal securities laws.
We are incorporated under the laws of Canada, and our principal
executive offices are located in Canada. A majority of our
directors and officers, certain of our significant shareholders
and our independent public accounting firm reside principally in
Canada and all or a substantial portion of our assets and the
assets of these persons are located outside the United States.
Consequently, it may not be possible for you to effect service
of process within the United States upon us or those persons.
Furthermore, it may not be possible for you to enforce judgments
obtained in U.S. courts based upon the civil liability
provisions of the U.S. federal securities laws or other
laws of the United States against us or those persons. There is
doubt as to the enforceability in original actions in Canadian
courts of liabilities based upon the U.S. federal
securities laws, and as to the enforceability in Canadian courts
of judgments of U.S. courts obtained in actions based upon
the civil liability provisions of the U.S. federal
securities laws.
U.S.
investors will suffer adverse United States federal income tax
consequences if we are characterized as a passive foreign
investment company.
If, for any taxable year, we are treated as a passive foreign
investment company, or PFIC, as defined under Section 1297
of the Internal Revenue Code, then U.S. Holders (see
Item 10.E. Additional Information
Taxation United States Federal Income Tax
Considerations) would be subject to adverse United States
federal income tax consequences. Rather than being subject to
these adverse tax consequences, U.S. Holders may be able to
make a mark-to-market election, which could require the
inclusion of amounts in income of a U.S. Holder annually,
even in the absence of distributions with respect to, or the
disposition of, our Common Shares. We do not believe that we are
a PFIC, nor do we anticipate that we will become a PFIC in the
foreseeable future. However, we cannot assure you that the
Internal Revenue Service will not successfully challenge our
position or that we will not become a PFIC in a future taxable
year, as PFIC status is re-tested each year and depends on our
assets and income in such year. For a more detailed discussion
of the PFIC rules, see Item 10.E. Additional
Information Taxation United States
Federal Income Tax Considerations Passive Foreign
Investment Company Considerations.
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Item 4.
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Information
on Mitel
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A.
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History
and Development of Mitel
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We were incorporated in Canada under the Canadian Business
Corporation Act (the CBCA) on January 12, 2001
by Zarlink Semiconductor Inc. (Zarlink) (formerly
Mitel Corporation) in order to reorganize its communications
systems division in contemplation of the sale of that business
to companies controlled by Dr. Matthews. In a series of
related transactions on February 16, 2001 and
March 27, 2001, we acquired from Zarlink the
Mitel name and substantially all of the assets
(other than Canadian real estate and most intellectual property
assets) and subsidiaries of the Zarlink communications systems
business. Our registered office and corporate headquarters are
located at 350 Legget Drive, Ottawa, Ontario, Canada, K2K 2W7,
Telephone:
(613) 592-2122,
Facsimile:
(613) 592-4784.
Significant
developments subsequent to fiscal 2006:
On May 9, 2006, we filed a registration statement on
Form F-1
with the Securities and Exchange Commission (the
SEC) to sell Common Shares in the United States and
a preliminary prospectus with the Canadian securities regulators
to sell Common Shares in Canada. We submitted a request to the
SEC to withdraw our registration statement on September 26,
2007. We withdrew our prospectus in Canada on April 27, 2007.
On June 23, 2006, one of our competitors, Avaya Inc., filed
a complaint in the United States District Court for the Eastern
District of Virginia alleging that we were infringing on certain
of its patents. On September 8, 2006 we filed a defence to
Avayas complaint and a counterclaim alleging that Avaya
was infringing on certain of our patents. Effective
February 1, 2007, we entered into a settlement whereby we
cross-licensed all of our patents and all of Avayas
patents filed prior to a specified date, the contents of which
are confidential. We agreed to make specified
19
up-front and past and ongoing royalty payments, based on certain
thresholds over a defined period. The legal actions have been
withdrawn in conjunction with this cross-licensing settlement.
On June 27, 2007 we filed a claim in U.S. District
Court for the Eastern District of Texas against ShoreTel Inc.
for patent infringement. ShoreTel filed an answer and
counterclaimed that we infringed one of its patents and is
seeking to have the action transferred to the Northern District
of California from the Eastern District of Texas. ShoreTel also
filed a defamation suit against us in the Ontario Superior Court
of Justice in Toronto, Ontario, Canada alleging inter alia
that we committed trade libel by issuing a press release
announcing the filing of the infringement case in the Eastern
District of Texas. We have answered the claim and are moving the
court to move the case to Ottawa, Ontario, Canada obtain a bond
to cover costs, and to stay the proceedings until the Texas case
is resolved in order to prevent unnecessary costs and
duplicative litigation. Decisions on the above motions are
pending before the court.
Subsequent to April 30, 2006, we implemented additional
restructuring actions that resulted in a special charge in the
quarter ending October 31, 2006. The restructuring involved
the termination of 104 employees around the world and the
consolidation of office locations in the United States.
On June 26, 2006, the parties to the 2004 Shareholders
Agreement executed an amendment under which each of them
consented to, and each of Zarlink and Power Technology
Investment Corporation (PTIC) agreed to defer their
respective put rights in connection with 10,000,000 Common
Shares and 16,000,000 Series B Preferred Shares,
respectively, from September 1, 2006 to May 1, 2007.
See Item 10.C. Additional Information
Material Contracts for a further description of the 2004
Shareholders Agreement.
On September 21, 2006, we closed a common share warrant
offering under which we sold 15,000 warrants to Wesley Clover
for total consideration of $15 million (the 2006
Warrants).
Pursuant to an Agreement and Plan of Merger (the Merger
Agreement) dated as of April 26, 2007 among Mitel,
Inter-Tel (Delaware), Incorporated (Inter-Tel) and
Arsenal Acquisition Corporation (Arsenal), a
wholly-owned subsidiary of Mitel, Mitel agreed to acquire
Inter-Tel for $25.60 per share, in cash, representing a total
purchase price of approximately $729 million (the
Merger). Pursuant to the Merger Agreement, Arsenal
merged with and into Inter-Tel and Mitel indirectly acquired all
of the outstanding stock of Inter-Tel such that Inter-Tel became
a wholly-owned subsidiary of Mitel. The Merger was subsequently
completed on August 16, 2007.
In order to complete the Merger, we obtained both equity and
debt financing commitments as described below.
First, Mitel received equity financing in the amount of
$263,087,000 from Francisco Partners II, L.P. on behalf of
Francisco Partners affiliated entities (Francisco
Partners) and Morgan Stanley Principal Investors Inc.
(collectively, the Investors). Pursuant to a
subscription agreement entered into between Mitel and the
Investors on August 16, 2007, the Investors made an
aggregate equity investment of $263,087,000 in us in exchange
for the issuance to the Investors of the Class 1 Preferred
Shares and warrants to acquire Common Shares of Mitel (the
Equity Financing).
Second, Morgan Stanley Senior Funding Inc. and Morgan Stanley
Senior Funding (Nova Scotia) Co. (collectively, and together
with their respective affiliates, Morgan Stanley)
arranged a syndicate of lenders to provide a secured first lien
term loan and revolving credit facilities and secured second
lien loan facility in the aggregate amount of $460 million
(collectively, the Debt Financing), as follows:
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$330 million in a senior secured first lien facility,
comprised of:
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(i) a $300 million term loan facility;
(ii) a $30 million revolving credit facility,
consisting of US and Canadian sub-facilities; and
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$130 million in a senior secured second lien facility.
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As a condition to completing each of the Equity Financing and
the Debt Financing, we took the following capital and debt
restructuring actions, with requisite shareholder approval, to:
(i) reduced the stated capital of the Series A
Preferred Shares and made a return of capital to the holder of
the Series A Preferred Shares;
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(ii) amended the conversion rights attaching to the
Series A Preferred Shares to provide that such
Series A Preferred Shares be convertible, at the option of
the holder thereof, into 0.000871 of a Class 1 Preferred
Share and 0.2679946 of a Common Share;
(iii) converted each existing Series A Preferred Share
into 0.000871 of a Class 1 Preferred Share and 0.2679946 of
a Common Share;
(iv) converted each existing Series B Preferred Share
into 1.682 Common Shares;
(v) deleted from the articles of the Corporation the
Class A Preferred Shares, the Class B Preferred
Shares, the Series A Preferred Shares and the Series B
Preferred Shares;
(vi) repaid all of the $55 million senior secured
convertible notes (the Convertible Notes) issued by
us on April 27, 2005;
(vii) purchased for cancellation certain Common Shares upon
the exercise of put rights held by Zarlink and PTIC;
(viii) terminated the put rights held by EdgeStone;
(ix) repurchased the 2006 Warrants issued to Wesley Clover
on September 21, 2006;
(x) terminated the Series 2 Warrants held by EdgeStone
(collectively, the Re-Organization
Transactions); and
(xi) issued Class 1 Shares and warrants to
purchase Common Shares to PTIC and Dr. Matthews.
International
Brotherhood of Electrical Workers
As a result of our acquisition of Inter-Tel, certain employees
have been transferred from our subsidiary Mitel Networks Inc.
(MNI) to an Inter-Tel subsidiary, Inter-Tel
Technologies, Inc. (ITT). Some of these employees,
while working for MNI, were represented by the International
Brotherhood of Electrical Workers (IBEW). Because
these MNI employees no longer work for MNI, there is no longer a
bargaining unit to be represented by the IBEW. Therefore, in
accordance with applicable U.S. federal labor law, MNI has
notified the IBEW that it no longer recognizes it as the
certified representative of its former employees.
Inter-Tel
Merger:
See Item 10.B. Additional Information
Memorandum and Articles of Incorporation Share
Capital. Unless otherwise indicated, disclosure in this
Item 4 has not been updated to include the impact of the
Inter-Tel acquisition.
We are a provider of unified communications solutions and
services for business customers. Our award winning Internet
Protocol, or IP, based communications solutions consist of a
combination of telephony hardware products, such as
communications platforms and desktop devices, and software
applications that integrate voice, video and data communications
with business applications and processes. We refer to these
hardware products and software applications as communications
solutions because they are configured to meet our
customers specific communications needs. We complement our
communications solutions with a range of services, including the
design of communications networks, implementation, maintenance,
training and support services. We believe that our
IP-based
communications solutions and services enable our customers to
realize significant cost benefits and to conduct their business
more effectively.
We have been a leading vendor of business communications systems
for over 25 years. Over the past six years, we have
invested heavily in the research and development of
IP-based
communications solutions to take advantage of the telephone
communications industry shift from legacy PBX systems to
IP-based
unified communications solutions. As a result of our efforts, we
have realigned our business and discontinued certain products
and activities relating to our legacy systems. In focusing our
investments on our
IP-based
communications solutions we have incurred losses in each of the
past five fiscal years, including net losses of $35 million
in fiscal 2007 and
21
$44.6 million in fiscal 2006. As at April 30, 2007, we
had an accumulated deficit of $398.2 million. However, we
believe our early and sustained investment in
IP-based
research and development, and our decision to concentrate our
efforts on this technology, has positioned us well to take
advantage of the industry shift to
IP-based
communications solutions. As a result of this strategic focus,
we have experienced significant growth in the sales of our
IP-based
communications solutions as businesses migrate from their legacy
systems. Our
IP-based
product revenues have increased by 60% since fiscal 2005.
Substantially all of our system shipments for the fiscal year
2007 were
IP-based
communications solutions.
Our IP-based
communications solutions are scalable, flexible, secure, easy to
deploy, manage and use, and are currently used by customers with
as few as 10 users in a single location to a customer with a
seamless multi-site network that supports over 40,000 users
today and has the capacity to grow to 65,000 users. Scalability
refers to how well a hardware or software system can adapt to
increased demands and is a very important feature because it
means customers can invest in a network with confidence that
they will not outgrow it. Through the use of open and defined
standards, our solutions can interoperate with various systems
supplied by other vendors, allowing our customers to migrate
their legacy systems towards an
IP-based
system at their own pace, and can also be aligned with our
customers business systems and processes. We offer
packaged software applications that are designed to solve
particular business communications challenges, including
applications for contact centers, mobility, teleworking,
messaging and collaboration. We also develop solutions that
focus on specific industries as well as custom software
applications that address the needs of specific customers. Our
customers include prominent hotel chains, governmental agencies,
retail chains, professional services firms, educational
establishments and healthcare providers worldwide. We operate
from over 40 locations around the world and we sell our
communications solutions through a distribution network of over
1,400 channel partners that includes wholesale distributors,
solutions providers, authorized resellers, communication
services providers, systems integrators, and other distribution
channels.
Our
Solutions
We have designed our IP solutions to perform as pure
IP-based
communications solutions and also as gateways to facilitate
interoperability with our customers existing voice
infrastructure and legacy devices.
Our product portfolio consists of communications platforms and
gateways (both of which manage call processing), a desktop
portfolio (such as phones, desktop PC applications, conference
units and operator consoles) and software applications (software
which typically enables specialized functionality such as
messaging, teleworking and collaboration). We complement these
products with a broad range of services.
We have won numerous awards for our product innovation,
industrial design and performance. Some of these awards include:
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Mitel Applications Suite: TMC Labs Innovation
Award (2007)
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Mitel Customer Interaction Solutions: IP
Contact Center Technology Pioneer Award (2007)
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Mitel Your Assistant, Quick Conference and 5340 IP
Phone: Communications Solutions Magazine, Product
of the Year (2006)
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Mitel Customer Interaction Solutions: Miercom
Best Supervisor Functions (2006)
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Mitel Customer Interaction Solutions: TMC Labs
Innovation Award (2006)
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Mitel Live Business Gateway: Internet
Telephony Product of the Year (2006)
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Mitel Customer Interaction Solutions: IP
Contact Center Technology Pioneer Award (2006)
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Mitel Navigator: Internet Telephony Product of
the Year (2005); and Frost & Sullivan Award for
Technology Innovation (2006)
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Mitel Customer Interaction Solutions/Mitel Contact Center
Solutions: Customer Value Enhancement Award
Contact Center Industry (2004); Customer Interaction Solutions
IP Contact Center Technology Pioneer Award (2005); and TMC Labs
Innovation Award (2005)
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Mitel Messaging Server: Internet Telephony
Product of the Year (2005)
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Mitel 3300 IP Communications Platform
(ICP): Rated Best
IP-PBX
Value, Mid-Size systems by Miercom (2005)
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Mitel SX-200 IP Communications Platform
(ICP): Rated Best in Test by Miercom
(2005)
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Mitel Your Assistant: Communications
Convergence, Visions of Convergence, Product of the Year (2004)
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We have made significant investments in the development of new
IP-based
communications solutions to meet the changing needs of our
customers and their migration to
IP-based
communication systems. Our commitment to the development of our
IP solutions has resulted in an IP communications portfolio that
we believe is among the broadest and most sophisticated in the
industry today.
Platforms
and Gateways
Our IP communications products include the following platforms
and gateways:
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The Mitel 3300 IP Communications Platform
(ICP). The Mitel 3300 ICP, the
cornerstone of our
IP-based
communications product portfolio, is a converged communications
platform that supports our suite of advanced call processing and
related applications and
IP-enabled
desktop devices. Our call processing software supports over 500
networking and end user features and is available in up to
10 languages. The Mitel 3300 ICP has the flexibility
to operate as either a single site, distributed or hosted
solution and interoperates with a customers legacy
infrastructure. The Mitel 3300 ICP is scalable to serve
the needs of small and medium businesses with as few as 10
users, and large enterprises with as many as 65,000 users.
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The Mitel 3300 ICP also acts as an applications and
services gateway, allowing customers access to advanced
applications such as messaging, mobility and teleworking. With
the Mitel Live Business Gateway attributes enabled, the
applications and services gateway provides connectivity to
Microsofts Live Communications Server for our solutions
and the legacy infrastructure of competitors. The applications
and services gateway uses open industry standards to
interoperate with our and third party business applications and
devices.
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For customers with branch offices, we offer the ability to
either implement a Mitel 3300 ICP at each location or
allow users at a remote site to receive a hosted service from a
Mitel 3300 ICP situated elsewhere in the network (or a
combination of both options). Those customers using a hosted
model have access to the same software applications and services
as those situated at the office where the Mitel 3300 ICP
physically resides. The Mitel 3300 ICP can also be
implemented as a survivable gateway at a branch office such that
if the network to the office from which they are being hosted
becomes unavailable, then the local Mitel 3300 ICP
will provide the same services seamlessly until the network
connection is restored. We are able to distribute the features,
software applications and services normally only available at
larger corporate offices to any part of the network, addressing
the communications challenges facing organizations with
decentralized operations and personnel. This approach also
provides alternative network configurations for customers
concerned with disaster recovery and business continuity.
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Mitel Enterprise Manager. Our enterprise
management application allows our customers to administer and
control their network of Mitel 3300 ICPs and associated
applications and devices. This application allows our customers
to administer users, monitor and control telecommunication
spending as well as network monitoring, alarm handling and
troubleshooting. Our enterprise management application include
the following:
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Enterprise Manager. The Enterprise Manager
provides a single management interface to monitor and manage all
of the activities of the Mitel 3300 ICP and perform
day-to-day management tasks helping control costs by delivering
simplified PC-based administration.
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Remote Management. The Remote Management
capabilities allows the maintainer to access network and system
information and resolve issues remotely.
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23
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Integrated Management Applications. Integrated
Management Applications provides the ability to analyze the IP
networks capability to support IP communications. Voice
quality metrics and diagnostics can be used to test the network
capabilities and to help troubleshoot potential issues.
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Technology Interfaces. Recognizing that some
customers may have specialized requirements beyond our packaged
software products, we offer a wide range of technology
interfaces for specific enhancements. Open interfaces allow
integration to third party management solutions, such as those
from Microsoft and Hewlett Packard.
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Mitel SX-200 ICP. The Mitel SX-200 ICP
specifically addresses the North American market and
provides the features required by the smaller business market
and the hospitality industry. The Mitel SX-200 ICP
targets organizations with up to 600 users either at a
single location or in multiple locations and it supports
networking and interoperability with legacy Mitel SX-200
systems.
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Mitel 3600 Hosted IP Key System. The Mitel
3600 Hosted IP Key System is designed for businesses with
fewer than 20 employees. This product is sold through
service providers or channel partners who wish to offer a hosted
solution and eliminate the need for the platform to be located
and managed at the end-users office. The Mitel 3600
enables the features of a key telephone system to be
delivered as a service and works with our Mitel IP Phones.
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Desktop
Portfolio:
Our desktop portfolio includes a broad range of telephones,
consoles, conference units, soft phones (a software-only
implementation of an IP telephone that runs on a personal
computer) and ancillary devices that support our
IP-based
communications systems. We have been recognized by a number of
third parties as a leader in the design of desktop devices,
which have been acknowledged for their ease of use, aesthetics,
high quality and functionality.
Our IP-based
desktop products interoperate with all of our
IP-based
communications platforms and software applications. These
desktop products allow users access to advanced telephony
features and services such as integrated web browsing, enhanced
directory management, and visual voicemail, regardless of
whether they are in the office, at home or travelling.
Our latest desktop devices provide the capability to customize
the displays for particular industries or for customer specific
requirements. Functionality can be easily developed to display
web content, information or interactive services linked to
internal corporate systems (for example, conference room
bookings, emergency broadcasts or information queries). This
customization can be undertaken by a customer, a channel partner
or can be performed by our professional services organization.
In addition, this capability has been leveraged to deliver
out of the box applications from Mitels
product development group. The Mitel Intelligent Directory
application provides access to the corporate directory with
integrated presence capability. We also provide in-building
wireless devices which provide access to the majority of the
features of the Mitel 3300 ICP.
Applications
We offer a broad range of
IP-based
packaged software applications that are used by businesses
across a variety of industries. We also offer customized
software applications to businesses requiring highly tailored
solutions.
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Contact Center Applications. A contact center
is generally a dedicated function within a business that
typically serves as an inside sales help desk, providing
customer support, lead generation, emergency response, telephone
answering service, inbound response and outbound telemarketing.
In addition to delivering solutions to this requirement we have
developed capabilities in anticipation of trends in this sector.
This includes supporting integrated customer service groups for
staff in any location, including work at home agents. Also,
customer service organizations need to serve their clients via
any media a reality in todays consumer market.
To meet these requirements we provide sophisticated routing and
agent capabilities as well as a suite of web-based applications
for streamlining contact center management and reporting.
Customers can therefore choose to implement those elements that
are most relevant to their business needs. Our contact center
applications provide multimedia functionality incorporating
routing of an
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24
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inquiry to the first available agent or the agent that has been
idle for the longest period. Visibility of the presence and
availability of colleagues or resources can be provided by
integration with Microsoft Live Communications Server using the
Mitel Live Business Gateway to facilitate first call resolution.
An inquiry can be associated with an incoming call,
e-mail, fax
or webchat. Contact center agents are fully supported across a
centralized or multi-site environment including home working.
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Wireless Telephony Applications. We offer
wireless telephony applications for in-building mobility as well
as to enable the seamless convergence of in-building wired or
wireless networks with mobile cellular-based networks. Our
in-building wireless applications provide roaming users with the
majority of the features available on a desktop device including
extension-to-extension dialing, attendant functions, voice mail
and messaging as well as external calling. We use wireless
devices that work with other major manufacturers wireless
access points allowing customers the use of their existing
access point investment for in-building mobile telephony. We
also provide the functionality to pair a cellular phone with an
office extension or any other telephone such that each device
will ring simultaneously if the office extension is called. This
pairing significantly reduces the number of calls that are
missed. When a call is answered on a cellular phone it is still
presented at the office extension, which means that by pressing
a single key on the office telephone, the call can be moved from
the cellular phone to the office extension. This process can
also be achieved in reverse, so that an employee who may need to
leave for a meeting, can transfer the call from the office
extension to the cellular device. This feature reduces charges
and enables the user to operate with one phone number and one
voice mail box whether in the office, at home or traveling.
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Video Applications. Our video applications and
related devices provide businesses access to video conferencing
at the desktop or for dedicated conference rooms. Our video
conferencing solutions are easy to use and a conference call can
be established by simply dialing the number or extension of the
remote party from an IP telephone and then, once the telephone
call is established, pressing a single key on the handset to
transform the audio call into a video conference. Our video
applications and related devices also incorporate collaboration
tools, including those from Microsoft Office, that allow users
to share computer applications during conferences. Our solutions
can simultaneously support eight separate locations involved in
the video conference.
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Collaboration Tools. We offer a computer-based
collaboration, presence and contact management application
called Your Assistant that can optionally include a
softphone. The softphone provides a number of important features
of a Mitel desktop telephone on a personal computer, at the
users desk or from any location around the world where
there is access to the Internet. Your Assistant interacts
with the users contact database and offers secure instant
messaging capabilities, video conferencing, knowledge management
(automatic retrieval of pertinent files associated with the name
and number of the caller) and enables simplified drag and
drop call and conference call initiation by moving, with a
computer mouse, the name of a contact from a list or directory
into the communications window. Your Assistant also
enables the simple sharing of presentations, documents or
spreadsheets and also offers the ability to create a virtual
white board on each users computer screen for the purposes
of creating drawings, diagrams or for making notes. In addition,
a video conference can be established with a non-user of Your
Assistant by publishing the name of an Internet web page
associated with the conference call.
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Speech Enabled Messaging, Unified Messaging and Voice
Mail. Mitel NuPoint Messenger, our branded
integrated messaging application, provides a
scalable and reliable way to relay, store, and retrieve voice
messages using either a phone, fax machine, pager or personal
computer. NuPoint Messenger also allows users to have
their calls routed to them while they are travelling, or access
their voice or fax messages from their personal computer.
NuPoint Messenger provides a high availability and highly
scalable solution, which can be suitable as a carrier or large
enterprise solution. Our Mitel Messaging Server product
allows businesses to mix and match the requirements of
individual employees by supporting both unified messaging and
traditional voicemail on the same platform. Speech recognition
capability is integrated into the system giving users the
ability to control their messaging via speech enabled commands.
Messaging Server supports Microsoft Outlook/Exchange, IBM
Lotus/Domino and Novell GroupWise messaging environments. Our
messaging solutions also interoperate with Microsoft Live
Communications Server.
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25
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Teleworking. Our
IP-based
teleworker solution enables users to make secure and encrypted
IP phone calls from their home office or any remote office by
extending the features and functionality of an office telephone
over the Internet. As a result, long distance charges can be
significantly reduced or in some cases eliminated. As an option,
our Teleworker telephone can support an integral module that
allows the telephone to access the public switched telephone
network for making local calls and calls to emergency services
and to receive incoming calls. Customers can download reports
that provide detailed usage statistics on teleworker activity.
This information provides return on investment
feedback as a means of itemizing savings.
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Mitel Applications Suite. The Mitel
Applications Suite has been developed to make IP communications
applications, such as those listed above, easier to acquire,
implement and use. The product integrates the applications into
a single server or is integrated within the Mitel 3300 ICP
for certain users, unifies the management and provides users
with an integrated interface to access the functionality. This
allows these applications to be delivered cost effectively and
with simplicity to the small business market and is a unique and
differentiated offering. The first release of this product
integrates Teleworker, NuPoint Messenger and Mobile Extension
and other applications will follow.
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Our
Legacy Telephony Communication Solutions
In some developing countries and for specific applications there
is still a demand for legacy PBX systems. Our legacy
circuit-switched telephony portfolio includes the Mitel
SX-2000, a fully featured traditional communications
platform that addresses businesses with up to 20,000 users. This
system provides extensive features and functionality, allows
individual elements of the system to be distributed throughout
an organization, can support redundant hardware and software to
minimize system downtime and supports networking between
systems, based on industry standards, for seamless voice
communications between separate sites. The Mitel SX-2000
is complemented by a portfolio of digital telephones and a
suite of applications. We offer a simple migration path to IP
communications for our extensive base of customers with Mitel
SX-2000 and Mitel SX-200 PBX implementations using
the Mitel 3300 ICP and Mitel SX-200 ICP.
Our
Services
We complement our product offerings with a broad range of
services. Our services are delivered by both our channel
partners and us and extend from initial planning and design
through to implementation and support. Planning services include
needs assessments, site surveys, system configuration, network
design and project management. Implementation services include
IP-based
system and application implementations, advanced messaging
implementations and multi-site installations. Additional
services include resource coordination, project management,
contract administration, performance management, customized
applications development, technical support services, long-term
systems management service and training. Our support options are
flexible to meet the varied needs of our customers, including
warranty coverage, software support programs and maintenance
agreements. Our service offerings enable us to maintain and grow
our relationship with our customers and provide us with
recurring revenues.
Historically, legacy equipment maintenance was focused on
hardware and post implementation services. Dealing with a
service concern typically entailed the dispatch of a technician
to the customer site for diagnosis and repair or replacement of
defective hardware. In recent years, as our product mix has
transitioned towards
IP-based
communications solutions, the nature and delivery of our service
offerings has changed. Consultative service, pre-engineering,
planning and design have emerged as service opportunities. Post
implementation service has become more efficient with the
technology evolution, allowing the diagnosis (and in some cases,
the resolution) of customer outages or concerns conducted
remotely, more quickly and at a lower cost.
26
Business
Segments and Principal Markets
The following table sets forth total revenues by geographic
regions, both in dollars and as a percentage of total revenues,
for the fiscal years indicated:
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Six Days Ended
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Fiscal 2005
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April 30, 2005
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Fiscal 2006
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Fiscal 2007
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% of
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% of
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% of
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% of
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Revenues
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Revenues
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Revenues
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Revenues
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Revenues
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Revenues
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Revenues
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Revenues
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(In millions, except percentages)
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United States
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$
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153.5
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44.9
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%
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$
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1.8
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56.3
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%
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$
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178.5
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46.1
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%
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$
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161.6
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42.0
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%
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EMEA
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145.5
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42.5
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%
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1.0
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31.2
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%
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156.3
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40.4
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%
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162.4
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42.2
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%
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Canada and CALA
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37.2
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10.8
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%
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0.4
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12.5
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%
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43.6
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11.3
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%
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49.4
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12.8
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%
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Asia Pacific
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6.0
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1.8
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%
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%
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8.7
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2.2
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%
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11.5
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3.0
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%
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$
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342.2
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100.0
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%
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$
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3.2
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100.0
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%
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$
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387.1
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100.0
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%
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$
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384.9
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100.0
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%
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For further information regarding our reportable segments please
see Item 5 Operating and Financial Review and
Prospects.
Sales,
Marketing and Distribution
Our sales and marketing strategy leverages our own offices in 18
countries with the local presence and customer relationships of
over 1,400 channel partners servicing customers in more than 90
countries. Product fulfillment and order logistics for a portion
of our channel partners are generally performed in the United
States and Europe by our wholesale distributors. During fiscal
2007, our major distributors included GrayBar Electric Co.,
Inc., and Tech Data Corporation. Our channel partners are
supported by our internal teams of channel managers, systems
engineers, technical account managers and sales administrators.
To complement our channel partner network, we also provide
support to independent consultants who focus on assisting
companies with network design, implementation and vendor
selection. We believe our extensive channel partner network
allows us to effectively sell our solutions globally, without
the need to build dedicated in-house sales and service
capabilities in every geographic market. We continue to recruit
channel partners with a focus on growing market coverage,
supporting converged solutions and implementing applications
interoperation.
We do not employ a traditional direct versus indirect strategy,
under which a direct sales team may compete with indirect
channel partners for the same end user sales opportunity.
Instead, our own sales staff works directly with a prospective
customer or in coordination with a channel partner in defining
the scope, design and implementation of the solution. These
customers can decide to do business directly with us or through
a channel partner. Our sales staff is directed to operate a
channel-neutral selling approach. On a
case-by-case
basis we may close a sale on a direct basis, while utilizing one
of our channel partners for the purpose of fulfillment and
ongoing support. Conversely, channel partners may bring us sales
opportunities for which they see a greater likelihood of winning
the account if we take a lead role in the selling process.
Our marketing organization employs a comprehensive strategy to
enhance our brand, attract and retain channel partners,
differentiate our product offerings and develop solutions for
specific industry markets. Brand development is conducted
through advertising, media articles, trade conferences, product
placements, analyst relations and web content delivery. Our
channel marketing organization designs and administers the
channel program, benefits and incentives targeted at
competencies and quality in delivery of our solutions to the
market. Our solutions marketing organization develops materials
and programs for our portfolio of solutions that provide clear
business value to our target customers. Our vertical marketing
team understands the unique business needs and challenges of our
key vertical markets and tailors our solutions to address those
needs. We also operate 16 demonstration centers equipped with
our latest solutions. These centers are used by both our channel
partners and our own staff to demonstrate our solutions to
existing and prospective customers.
As at September 30, 2007, our sales and marketing force,
excluding Inter-Tel consisted of 373 employees.
27
Our
Strategy
Our strategy is to build from our leading position in the small
and medium-sized business market, to attract large enterprise
customers, increase our market share and generate attractive
returns for our shareholders. To accomplish these objectives, we
intend to:
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continue to expand our market focus through our highly scalable
solutions;
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seek opportunities to grow the business organically and through
acquisition;
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increase our focus on software applications;
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provide a gradual migration path to IP for our customers and
those of our competitors;
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expand our geographic presence and distribution capabilities;
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broaden and deepen our strategic partnerships and
alliances; and
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continue to leverage our operating model.
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Our growth strategy may also include the acquisition of
additional businesses, technologies, product lines or services
in the future and may also include the divestiture or downsizing
of product or service groups in order to permit us to focus on
what we believe are our core competencies.
Manufacturing
and Supply Chain Management
We outsource all of our manufacturing and certain of our supply
chain management and distribution functions. The outsourcing of
these functions allows us to:
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focus on the design, development, sales and support of our
products;
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leverage the scale and expertise of specialized contract
manufacturers;
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reduce manufacturing and supply chain risk;
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reduce distribution costs; and
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ensure competitive pricing and levels of service.
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We outsource our worldwide manufacturing and repair operations
primarily to BreconRidge and Flextronics Telecom Systems, Ltd.
(Flextronics) . BreconRidge is one of the
worlds top 50 electronics manufacturing services
companies. BreconRidge specializes in the communications,
industrial and consumer market sectors and provides many
services including design, process and test engineering
services, component sourcing, manufacturing,
repair/refurbishment and distribution services. BreconRidge has
more than 710,000 square feet of manufacturing capacity in
state-of-the-art facilities in Canada, the United States and
China. Flextronics has a network of facilities in over 30
countries on four continents. This global presence provides
design and engineering solutions that are vertically integrated
with manufacturing, logistics, and component technologies to
optimize customer operations by lowering costs and reducing time
to market.
The manufacturing of our products has been allocated among these
key suppliers to reduce the risks associated with using a single
supply source and to ensure competitive pricing and levels of
service. This approach also enables us to respond more rapidly
to increases in demand for our products. Our suppliers are
responsible for performing periodic market reviews to validate
proposed pricing actions.
We have an internal operations group which has the
responsibility of managing these contract manufacturing
relationships. Functions performed by our operations group
include:
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evaluating, selecting, pricing and negotiating contracts with
EMS suppliers;
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monitoring EMS supplier contract manufacturer performance
against established service level agreements;
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maintaining the authorized vendor list of component suppliers;
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managing finished goods inventory; and
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selecting outbound freight partners, shipping methods, remote
stocking strategies and shipping routes.
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28
In addition, we retain Lytica Inc., an independent contract
manufacturing consultancy, to assist us in assessing, on a
quarterly basis, if pricing from our manufacturers is at market
rates and if the level of service obtained from them is
comparable to their competitors.
Research
and Development
Since 2001, we have invested heavily in
IP-based
product research and development. This strategy has been based
on two key planning assumptions. First, we believed that the
shift in customer demand towards
IP-based
solutions would be one of the most significant technology
developments in the voice communications industry since digital
telephony displaced analog phone systems in the 1980s. Second,
we believed that the transition to
IP-based
solutions, when it did happen, would be rapid. Companies who did
not anticipate and proactively plan for this rapid technological
change would miss out on a significant market opportunity,
suffer significant customer and market share losses and damage
their potential for future revenue growth. Our new product
development programs are exclusively focused on developing
IP-based
solutions.
Accordingly, we have been executing an aggressive research and
development investment strategy, designed to position us with
one of the broadest portfolios of
IP-based
communications solutions in the industry. This strategy has been
reflected in our research and development expense levels, which
have ranged between 11% and 17% of revenues in the period from
fiscal 2001 through fiscal 2007. Our investment strategy has
positioned us with a broad range of feature-rich, scalable,
standards-based and interoperable
IP-based
solutions, that allow us to capitalize on our historical
strength in the small and medium-sized business market, and
expand our addressable market to larger enterprise customers.
This strategy has also allowed us to migrate our product
revenues over the past four years, from being predominantly
based on legacy circuit-switched technology to 93% IP products.
Our IP-based
product revenues have increased by 60% since fiscal 2005.
Additionally, less than 1% of our system shipments for the
fiscal year 2007 were legacy PBX systems. As a result, we
believe we have minimal exposure to continued erosion of legacy
product revenues.
Our research and development organization, excluding the
acquired Inter-Tel laboratories is based in Ottawa, Canada and
comprised of 292 personnel as of September 30, 2007,
almost all of whom are engaged in IP product design and
verification. Research and development personnel have an average
tenure with us of approximately 11 years, and bring
competencies in real time software, call control, telephony
applications and digital signal processing. Our ratio of
software to hardware engineers is approximately 5:1, reflecting
our focus on software in our core products and our growing suite
of applications. We also leverage external development
relationships with a number of third party software development
firms, both for specific software applications that we may brand
as Mitel products and for non-mission-critical development and
support. We target a major release cycle for our key products
every six to nine months.
The TPC Agreement, as last amended on October 31, 2006 (as
described in Item 10.C. Additional
Information Material Contracts TPC
Agreement requires us to invest an aggregate of
C$366.5 million worth of research and development over a
seven year period commencing on March 31, 2005, with a
minimum of C$45.8 million to be invested each year. We
spent C$52.2 and C$47.7 on research and development for both
years ended March 31, 2006 and March 31, 2007 and as
such we achieved the minimum requirement for the first and
second years of the seven-year period.
Intellectual
Property
We have over 650 patents and pending applications in the United
States, Canada and Europe, and in other countries around the
world, covering over 250 inventions. Approximately one third of
our patents and pending applications relate to IP telephony and
collaboration technology, while the balance cover industrial
designs (primarily in connection with our desktop devices) and
our legacy telephony communications solutions. Within the last
five years we have focused our intellectual property efforts on
seeking patent protection for our
IP-based
communications inventions and have a number of patents in the
areas of presence, collaboration and mobility.
Historically, our strategy has been to rely on our patent
portfolio primarily to counter any allegations of infringement
on the patents held by our competitors. Given the strength of
our IP-based
patent portfolio, we are developing a strategy to leverage these
assets by asserting our rights in certain patented technologies.
Certain
29
companies have engaged us to pro-actively license or purchase
patents within our portfolio and we will continue to encourage
others to do the same.
Effective February 1, 2007, Mitel and Avaya Inc. entered
into a settlement agreement with respect to worldwide mutual
cross licensing agreement covering all products and services of
each respective portfolios.
On June 27, 2007 we filed a lawsuit against ShoreTel Inc.
in the U.S. District Court for the Eastern District of
Texas, alleging infringement of four of our patents (we
subsequently added 2 additional patents to our claim). Given our
considerable investment in intellectual property in support of
our communications innovations, we intend to assert our rights
against those that infringe our intellectual property.
Our other intellectual property assets include industrial
designs, trademarks, proprietary software, copyrights, operating
and instruction manuals, trade secrets and confidential business
information.
Our solutions may contain software applications and hardware
components that are either developed and owned by us or licensed
to us by third parties. The majority of the software code
embodied in each of our core call-processing software,
IP-based
teleworker software, wireless telephony software applications,
integrated messaging and voicemail software and Microsoft
collaboration interfaces has been developed internally and is
owned by us.
In some cases, we have obtained a non-exclusive license from
third parties to use, integrate and distribute with our products
certain packaged software, as well as customized software. This
third-party software is either integrated into our own software
application or is sold as a separate self-contained application,
such as voicemail or unified messaging applications. The
majority of the software that we license is packaged software
that is made generally available and has not been customized for
our specific purpose. If any of these third-party licenses were
to terminate, our options would be to either license a
functionally equivalent software application or develop the
functionally equivalent software application ourselves.
We have also entered into a number of non-exclusive license
agreements with third parties to use, integrate and distribute
certain operating systems, digital signal processors and
semiconductor components as part of our
IP-based
communications platforms and
IP-based
desktop portfolio. If any of these third- party licenses were to
terminate, we would need to license functionally equivalent
technology from another supplier.
It is our general practice to include confidentiality and
non-disclosure provisions in the agreements entered into with
our employees, consultants, manufacturers, end-users, channel
partners and others to attempt to limit access to and
distribution of our proprietary information. In addition, it is
our practice to enter into agreements with employees that
include an assignment to us of all intellectual property
developed in the course of their employment.
Competition
Historically, our competition has come primarily from two groups
of vendors. The first group consists of traditional telephony
products companies such as Alcatel-Lucent, Avaya Inc., Cisco
Systems, Inc., NEC Corporation, Nortel Networks Corporation,
Panasonic Corporation, ShoreTel, Inc., Siemens AG, Toshiba
Corporation and 3Com Corp. When competing against these
companies we generally focus on the following factors:
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the quality of our IP product portfolio and richness of our
software applications;
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the useability of our software and its application to vertical
markets;
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the interoperability with equipment supplied by other vendors
and with legacy circuit-switched network equipment;
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the scalability and flexibility of our architecture, and the
ease of deployment in either a centrally-managed,
remotely-distributed or hosted architecture;
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the strength of our strategic alliances;
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the ease of doing business for our channel partners; and
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Our track record of customer focussed innovation.
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30
The second group of competitors consists of data product
companies such as Cisco, who, in recent years, have expanded
their offerings to include
IP-based
voice communications products. When competing against these
companies, we focus on our ability to migrate to
IP-based
solutions at a pace that makes sense for the customer and the
richness of our software applications, in addition to the other
factors listed above.
We also compete with a number of new startup companies who are
focused on the
IP-based
communications market. We compete against these new entrants by
leveraging our size, our extensive channel network, our large
installed based, our global presence and our deep knowledge of
telephony built on over 25 years of developing telephony
solutions.
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C.
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Organizational
Structure
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See Item 7.A. Major Shareholders and Related Party
Transactions Major Shareholders and
Item 7.B. Major Shareholders and Related Party
Transactions Related Party Transactions for a
discussion of our major shareholders and their related ownership
interest in Mitel.
We carry on our worldwide business directly and through our
subsidiaries. Our material subsidiaries as of October 23,
2007 are shown on the chart below, with the jurisdiction of
incorporation in parentheses:
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D.
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Property,
Plant and Equipment
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Leased
Facilities:
As of April 30, 2007, we did not own any real property but
leased the following:
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Area
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Expiration
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Location
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Purpose
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(In Square Feet)
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Date of Lease
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Ottawa, Canada
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Corporate Head Office(1)
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352,000
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February 15, 2011
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Caldicot, United Kingdom
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U.K. and EMEA Regional Headquarters
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45,000
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March 9, 2021
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Ottawa, Canada
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Office and Manufacturing Facilities(2)
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160,000
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February 15, 2011
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(1) |
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42,930 square feet sublet to an unrelated third party until
August 14, 2009. |
31
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(2) |
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Sublet to BreconRidge until August 31, 2006 See
Item 7.B. Major Shareholders and Related Party
Transactions Related Party Transactions
BreconRidge Manufacturing Solutions Corporation. An
aggregate of 80,246 square feet has subsequently been
sublet to two unrelated third parties until August 31, 2009
and January 3, 2008, respectively. |
The Ottawa facilities are leased from Brookstreet Research Park
Corporation, a company controlled by Dr. Matthews, under
terms and conditions reflecting what management believed were
prevailing market conditions at the time the lease was entered
into. See Item 7.B. Major Shareholders and Related
Party Transactions Related Party
Transactions Brookstreet Research Park
Corporation.
In addition to these significant properties as of April 30,
2007, we also operated a number of regional sales offices
throughout the world from leased facilities totaling, in the
aggregate, approximately 750,000 square feet, including
offices:
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throughout the United States (including New York City, Atlanta,
Chicago, Boston, Costa Mesa (California), Herndon (Virginia) and
Waukesha (Wisconsin));
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throughout Canada (including Toronto, Montreal, Calgary,
Winnipeg, Burnaby (British Columbia) and Halifax);
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throughout the United Kingdom (including London and Strathclyde
(Scotland));
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throughout Continental Europe, the Middle East and Africa
(including France, Germany, the Netherlands, Italy, Saudi
Arabia, Dubai and South Africa);
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in Asia-Pacific (including Hong Kong and Beijing (China),
Singapore and Sydney (Australia)); and
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in Latin America (including Mexico and Brazil).
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Item 5.
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Operating
and Financial Review and Prospects
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Managements
Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with our
consolidated financial statements and the notes to those
statements, as well as the other financial information appearing
elsewhere in this annual report. This annual report contains
forward-looking statements that involve risks and uncertainties
and that reflect estimates and assumptions. Our actual results
may differ materially from those indicated in forward-looking
statements. Factors that could cause our actual results to
differ materially from our forward-looking statements are
described in Item 3.D. Key Information
Risk Factors and elsewhere in this annual report.
Inter-Tel
Merger
On August 16, 2007, the Company announced the completion of
its acquisition of merger with Inter-Tel, a full-service
provider of business communications solutions, for $25.60 per
Inter-Tel share in cash representing a total purchase price of
approximately $729. As a result of the acquisition, Inter-Tel is
now a wholly-owned subsidiary of Mitel. The transaction was
funded by a combination of equity and debt financing and
resulted in significant changes to our debt and equity structure.
The transaction will be accounted for in our second quarter of
fiscal 2008 using the purchase method of accounting under
accounting principles generally accepted in the United States.
The deemed purchase price will be allocated to the underlying
tangible and identifiable assets and liabilities acquired based
on their respective fair values and any excess purchase price
allocated to goodwill.
With the exception of Item 5.B. Operating and
Financial Review and Prospects Liquidity and Capital
Resources and Item 5.D. Operating and Financial
Review and Prospects Trend Information, the
following discussion has not been updated to include the impact
of the acquisition on forward-looking information.
32
Overview
We are a provider of unified communications solutions and
services for business customers. Our Internet Protocol, or IP,
based communications solutions consist of a combination of
telephony hardware products, such as communications platforms
and desktop devices, and software applications that integrate
voice, video and data communications with business applications
and processes. We refer to these hardware products and software
applications as communications solutions because they are
configured to meet our customers specific communications
needs. We complement our communications solutions with a range
of services, including the design of communications networks,
implementation, maintenance, training and support services. We
believe that our
IP-based
communications solutions and services enable our customers to
realize significant cost benefits and to conduct their business
more effectively.
We were incorporated in Canada on January 12, 2001 by
Zarlink in order to reorganize its communications systems
division in contemplation of the sale of that business to
companies controlled by Dr. Matthews. In a series of related
transactions on February 16, 2001 and March 27, 2001,
we acquired from Zarlink the Mitel name and
substantially all of the assets (other than Canadian real estate
and most intellectual property assets) and subsidiaries of the
Zarlink communications systems business.
Over the past six years, we have invested heavily in the
research and development of
IP-based
communications solutions to take advantage of the telephone
communications industry shift from legacy PBX systems to
IP-based
unified communications solutions. As a result of our efforts, we
have realigned our business and discontinued certain products
and activities relating to our legacy systems. In focusing our
investments on our
IP-based
communications solutions we have incurred losses in each of the
past five fiscal years, including net losses of
$35.0 million in fiscal 2007 and $44.6 million in
fiscal 2006. As at April 30, 2007, we had an accumulated
deficit of $398.2 million. However, we believe our early
and sustained investment in
IP-based
research and development, and our decision to concentrate our
efforts on this other technology, has positioned us well to take
advantage of the industry shift to
IP-based
communications solutions. As a result of this strategic focus,
we have experienced significant growth in the sales of our
IP-based
communications solutions as businesses migrate from their legacy
systems. Our
IP-based
product revenues increased by 60% of total product
revenues over the past two years. Substantially all of our
system shipments for the quarter ended April 30, 2007 were
IP-based
communications solutions.
Comparability
of Periods
On April 24, 2005, we changed our fiscal year end from the
last Sunday in April to April 30 in each year. The selection of
the last Sunday in April as our fiscal year end typically
resulted in a fifty-two week year with four thirteen week
quarters. The change in the fiscal year end allows us to better
align our reporting results with those of our industry peers.
Results for the
six-day
transition period from April 25, 2005 to April 30,
2005 have not been included in this discussion and analysis as
it would not be meaningful to extrapolate this
six-day
period to forecast quarterly or annual operating results. In
light of our realignment of our business over the past six years
to focus on
IP-based
communications solutions, we believe that period-over-period
comparisons of our operating results are not necessarily
meaningful and should not be relied upon as being a good
indicator of our future performance.
Effective fiscal 2006, we changed our structure of reporting so
that the reportable segments are now represented by the
following four geographic areas: the United States; Canada and
Caribbean & Latin America (CALA); Europe, Middle
East & Africa (EMEA); and Asia-Pacific. These
reportable segments were determined in accordance with how
management views and evaluates our business. In previous years,
we reported our operations in two segments: the Communications
Solutions segment (Solutions) and the Customer
Services segment (Services). The results of
operations for fiscal 2005 have been restated to conform with
the new presentation.
Prior to May 1, 2006, our financial statements and those of
our subsidiaries were measured using their local currency as the
functional currency. Effective May 1, 2006, we changed the
Canadian parent companys functional currency from the
Canadian dollar to the US dollar as a result of a change in our
primary economic environment, where the majority of sales and
expenses now occur in US dollars. Our consolidated financial
statements continue to be prepared with US dollar reporting
currency using the current rate method. Assets and liabilities
of foreign operations are translated from foreign currencies
into US dollars at the exchange rates in effect at the balance
sheet
33
date while revenue and expense items are translated at the
weighted-average exchange rates for the period. The resulting
unrealized gains and losses have been included as part of the
cumulative foreign currency translation adjustment which is
reported as other comprehensive income.
Key
Performance Indicators
Key performance indicators that we use to manage our business
and evaluate our financial results and operating performance
include: revenues, gross margins, operating costs and cash flows.
Revenue performance is evaluated from both a geographical
perspective, in accordance with our reportable segments, and
from a revenue source perspective, that is product revenues and
service revenues. We evaluate revenue performance by comparing
the results to management forecasts and prior period performance.
Gross margins and operating costs are evaluated in similar
manners as actual performance is measured against both
management forecasts and prior period performance.
Cash flow from operations is the key performance indicator with
respect to cash flows. As part of monitoring cash flow from
operations, we also monitor our ability to collect accounts
receivable by measuring our days sales outstanding.
In addition to the above indicators, from time to time, we also
monitor performance in the following areas: status with our key
customers on a global basis; the achievement of expected
milestones of our key R&D projects; and the achievement of
our key strategic initiatives. In an effort to ensure we are
creating value for our customers and maintaining strong
relationships with those customers, we monitor the status of key
customer contracts and conduct regular customer satisfaction
surveys to monitor customer service levels. With respect to our
R&D projects, we measure content, quality and timeliness
against project plans.
Sources
of Revenues and Expenses
The following describes our sources of revenues and expenses.
Revenues
We generate our revenues principally from the sale of integrated
communications solutions and services to business customers with
these revenues being classified as product or service revenues.
Product revenues are comprised of revenues generated from the
sales of platforms and desktop devices, software applications
and other product-related revenues, while service revenues are
primarily comprised of revenues from maintenance and support,
managed services, installation and other professional services.
We sell our communications solutions and services through a
distribution network of channel partners that includes wholesale
distributors, solutions providers, authorized resellers,
communications service providers, systems integrators, and other
technology providers. We complement and support our channel
partners in selected markets using a sales model whereby our
sales staff works either directly with a prospective customer,
or in coordination with a channel partner in defining the scope,
design and implementation of the solution.
Software revenues are recognized when persuasive evidence of an
arrangement exists, delivery has occurred in accordance with the
terms and conditions of the contract, the fee is fixed or
determinable, and collection is reasonably assured. For software
arrangements involving multiple elements, revenues are allocated
to each element based on the relative fair value or the residual
method, as applicable, and using vendor specific objective
evidence of fair values, which is based on prices charged when
the element is sold separately. Revenues related to
post-contract support, including technical support and
unspecified
when-and-if
available software upgrades, is recognized ratably over the
post-contract support term for contracts that are greater than
one year. For contracts where the post-contract support period
is one year or less, the costs are deemed insignificant, and the
unspecified software upgrades are expected to be and
historically have been infrequent, revenues are recognized
together with the initial licensing fee and the estimated costs
are accrued.
We make sales to distributors and resellers based on contracts
with terms typically ranging from one to three years. For
products sold through these distribution channels, revenues are
recognized at the time the risk of loss is
34
transferred to distributors and resellers according to
contractual terms and if all contractual obligations have been
satisfied. These arrangements usually involve multiple elements,
including post-contract technical support and training. Costs
related to insignificant technical support obligations,
including second-line telephone support for certain products,
are accrued. For other technical support and training
obligations, revenues from product sales are allocated to each
element based on vendor specific objective evidence of relative
fair values, generally representing the prices charged when the
element is sold separately, with any discount allocated
proportionately. Revenues attributable to undelivered elements
are deferred and recognized upon performance or ratably over the
contract period.
Our standard warranty period extends fifteen months from the
date of sale and extended warranty periods are offered on
certain products. At the time product revenues are recognized,
an accrual for estimated warranty costs is recorded as a
component of cost of revenues based on prior claims experience.
Sales to our resellers do not provide for return or price
protection rights while sales to distributors provide for these
rights. Product return rights are typically limited to a
percentage of sales over a maximum three-month period. A reserve
for estimated product returns and price protection rights based
on past experience is recorded as a reduction of sales at the
time product revenues are recognized. For new distributors, we
estimate the product return provision using past return
experience with similar distribution partners operating in the
same regions. We offer various cooperative marketing programs to
assist our distribution channels to market our products.
Allowances for these programs are recorded as marketing expenses
at the time of shipment based on contract terms and prior claims
experience.
We also sell products, including installation and related
maintenance and support services, directly to end-user
customers. For products sold directly to end-user customers,
revenues are recognized at the time of delivery and at the time
risk of loss is transferred, based on prior experience of
successful compliance with customer specifications. Revenues
from installation are recognized when services are rendered and
when contractual obligations, including customer acceptance,
have been satisfied. Revenues are also derived from professional
service contracts with terms that typically range from two to
six weeks for standard solutions and for longer periods for
customized solutions. Revenues from customer support,
professional services and maintenance contracts are recognized
ratably over the contractual period, generally one year.
Billings in advance of services are included in deferred
revenues. Revenues from installation services provided in
advance of billing are included in unbilled accounts receivable.
Certain arrangements with end-user customers provide for free
customer support and maintenance services extending twelve
months from the date of installation. Customer support and
maintenance contracts are also sold separately. When customer
support or maintenance services are provided free of charge,
these amounts are unbundled from the product and installation
revenues at their fair market value based on the prices charged
when the element is sold separately and recognized ratably over
the contract period. Consulting and training revenues are
recognized upon performance.
We provide long-term system management services of communication
systems (Managed Services). Under these
arrangements, Managed Services and communication equipment are
provided to end-user customers for terms that typically range
from one to ten years. Revenues from Managed Services are
recognized ratably over the contract period. We retain title and
risk of loss associated with the equipment utilized in the
provision of the Managed Services. Accordingly, the equipment is
capitalized as part of property and equipment and is amortized
to cost of sales over the contract period.
Cost
of Revenues
Cost of revenues is comprised of product costs and service
costs. Product cost of revenues consists of cost of goods
purchased from third-party electronics manufacturing services,
or EMS suppliers, inventory provisions, engineering costs,
warranty costs and other supply chain management costs.
We outsource most of our worldwide manufacturing and repair
operations to BreconRidge. In addition to BreconRidge, we
outsource the manufacturing of a number of our
IP-based
platforms to Flextronics International in China and Plexus Corp.
of the United States, and also outsource certain desktop sets to
WKK Technology Ltd. in China. The manufacturing of our products
has been allocated among these key suppliers to reduce the risks
associated with using a single supply source. (See
Item 3.D. Key Information Risk
Factors Because we depend primarily upon one outside
contract manufacturer to manufacture our products, our
operations could be
35
delayed or interrupted if we encounter problems with this
contractor.) We retain Lytica Inc., an independent
contract manufacturing consultancy, to assist us in attempting
to confirm, on a quarterly basis, that pricing from BreconRidge,
Flextronics and WKK Technology Ltd. is at market rates and the
level of service obtained from them is comparable to their
competitors.
Service cost of sales is primarily comprised of labor costs
associated with maintenance and support, Managed Services,
installation and other professional services.
Research
and Development Expenses
Our product development programs are focused on developing
IP-based
communications solutions. Our research and development
organization is based in Ottawa, Canada and comprises over
300 personnel, almost all of whom are engaged in IP product
design and verification. We also leverage outsourced development
relationships with a number of third party software development
firms, for non-mission-critical development and support.
Research and development expenses consist primarily of salaries
and related expenses for engineering personnel, materials and
consumables and subcontract service costs.
Sales,
General and Administrative Expenses
Sales, general and administrative (SG&A),
expenses consist primarily of costs relating to our sales and
marketing activities, including salaries and related expenses,
advertising, trade shows and other promotional activities and
materials, administrative and financing functions, legal and
professional fees, insurance and other corporate and overhead
expenses.
Special
Charges
Special charges relate to restructuring activities, product line
exit and other loss accruals undertaken to improve our
operational efficiency and to realign our business to focus on
IP-based
communications solutions. Special charges consist primarily of
workforce reduction costs, lease termination obligations, assets
write-offs and legal costs. We reassess the accruals on a
regular basis to reflect changes in the timing or amount of
estimated restructuring and termination costs on which the
original estimates were based. New restructuring accruals or
reversals of previous accruals are recorded in the period of
change.
Other
Operating Expenses
Other expenses included as deductions against operating income
include gains or losses on sale of assets or operations.
36
The following table sets forth our audited consolidated
statement of operations data for the fiscal periods indicated:
STATEMENT
OF OPERATIONS DATA
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Six Days
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Year Ended
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Ended
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Year Ended
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April 27,
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April 25,
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April 24,
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April 30,
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April 30,
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April 30,
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2003
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2004
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2005
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2005
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2006
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2007
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(In millions of US dollars, except share and per share
data)
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Revenues
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$
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352.2
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$
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340.7
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$
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342.2
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$
|
3.2
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$
|
387.1
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$
|
384.9
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Cost of revenues
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225.4
|
|
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|
202.9
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|
213.2
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2.4
|
|
|
|
225.7
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|
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225.1
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Gross margin
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126.8
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137.8
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129.0
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0.8
|
|
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|
161.4
|
|
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159.8
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Research and development
|
|
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41.2
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|
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36.2
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|
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41.4
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0.7
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44.1
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|
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41.7
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Selling, general and administrative
|
|
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114.9
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|
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111.4
|
|
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|
114.9
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1.8
|
|
|
|
120.7
|
|
|
|
123.5
|
|
Special charges
|
|
|
13.7
|
|
|
|
11.7
|
|
|
|
10.6
|
|
|
|
|
|
|
|
5.7
|
|
|
|
9.3
|
|
Loss (gain) on disposal of assets
|
|
|
|
|
|
|
0.6
|
|
|
|
3.4
|
|
|
|
|
|
|
|
(2.4
|
)
|
|
|
(1.0
|
)
|
Litigation settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.3
|
|
Initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Amortization of acquired intangibles
|
|
|
29.1
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(72.1
|
)
|
|
|
(22.3
|
)
|
|
|
(41.3
|
)
|
|
|
(1.7
|
)
|
|
|
(6.7
|
)
|
|
|
(33.3
|
)
|
Other (income) expense, net
|
|
|
0.9
|
|
|
|
8.0
|
|
|
|
7.5
|
|
|
|
(0.1
|
)
|
|
|
39.8
|
|
|
|
(0.1
|
)
|
Income tax (recovery) expense
|
|
|
(2.9
|
)
|
|
|
0.3
|
|
|
|
0.8
|
|
|
|
|
|
|
|
(1.9
|
)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(70.1
|
)
|
|
$
|
(30.6
|
)
|
|
$
|
(49.6
|
)
|
|
$
|
(1.6
|
)
|
|
$
|
(44.6
|
)
|
|
$
|
(35.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share Basic and diluted
|
|
$
|
(0.63
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.36
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Common Shares outstanding (in
millions)
|
|
|
113.1
|
|
|
|
127.8
|
|
|
|
113.8
|
|
|
|
117.1
|
|
|
|
117.2
|
|
|
|
117.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
Fiscal
2007 as compared to Fiscal 2006
The following table sets forth our comparative results of
operations, both in dollars and as a percentage of total
revenues, for fiscal 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Amounts
|
|
|
Revenues
|
|
|
Amounts
|
|
|
Revenues
|
|
|
Amount
|
|
|
%
|
|
|
|
(In millions, except percentages)
|
|
|
Revenues
|
|
$
|
387.1
|
|
|
|
100.0
|
%
|
|
$
|
384.9
|
|
|
|
100.0
|
%
|
|
$
|
(2.2
|
)
|
|
|
(0.6
|
)%
|
Cost of revenues
|
|
|
225.7
|
|
|
|
58.3
|
%
|
|
|
225.1
|
|
|
|
58.5
|
%
|
|
|
(0.6
|
)
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
161.4
|
|
|
|
41.7
|
%
|
|
|
159.8
|
|
|
|
41.5
|
%
|
|
|
(1.6
|
)
|
|
|
(1.0
|
)%
|
Research and development
|
|
|
44.1
|
|
|
|
11.4
|
%
|
|
|
41.7
|
|
|
|
10.9
|
%
|
|
|
(2.4
|
)
|
|
|
(5.4
|
)%
|
Selling, general and administrative
|
|
|
120.7
|
|
|
|
31.1
|
%
|
|
|
123.5
|
|
|
|
32.0
|
%
|
|
|
2.8
|
|
|
|
2.3
|
%
|
Special charges(1)
|
|
|
5.7
|
|
|
|
1.5
|
%
|
|
|
9.3
|
|
|
|
2.4
|
%
|
|
|
3.6
|
|
|
|
63.2
|
%
|
Litigation settlement
|
|
|
|
|
|
|
0.0
|
%
|
|
|
16.3
|
|
|
|
4.3
|
%
|
|
|
16.3
|
|
|
|
|
*
|
Initial public offering costs
|
|
|
|
|
|
|
0.0
|
%
|
|
|
3.3
|
|
|
|
0.9
|
%
|
|
|
3.3
|
|
|
|
|
*
|
Loss (gain) on sale of manufacturing operations
|
|
|
(0.9
|
)
|
|
|
(0.2
|
)%
|
|
|
(1.0
|
)
|
|
|
(0.3
|
)%
|
|
|
(0.1
|
)
|
|
|
|
*
|
Gain on sale of assets
|
|
|
(1.5
|
)
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
1.5
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6.7
|
)
|
|
|
(1.7
|
)%
|
|
|
(33.3
|
)
|
|
|
(8.7
|
)%
|
|
|
(26.6
|
)
|
|
|
|
*
|
Interest expense
|
|
|
7.6
|
|
|
|
2.0
|
%
|
|
|
9.1
|
|
|
|
2.4
|
%
|
|
|
1.5
|
|
|
|
19.7
|
%
|
Mark-to-market adjustment on derivatives
|
|
|
32.6
|
|
|
|
8.4
|
%
|
|
|
(8.6
|
)
|
|
|
(2.2
|
)%
|
|
|
(41.2
|
)
|
|
|
|
*
|
Other (income) expense, net
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)%
|
|
|
(0.6
|
)
|
|
|
(0.2
|
)%
|
|
|
(0.2
|
)
|
|
|
|
*
|
Income tax (recovery) expense
|
|
|
(1.9
|
)
|
|
|
(0.5
|
)%
|
|
|
1.8
|
|
|
|
0.4
|
%
|
|
|
3.7
|
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(44.6
|
)
|
|
|
(11.5
|
)%
|
|
$
|
(35.0
|
)
|
|
|
(9.1
|
)%
|
|
$
|
9.6
|
|
|
|
(21.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
the comparison is not meaningful |
|
(1) |
|
Special charges relate to restructuring activities and other
loss accruals undertaken to improve our operational efficiency
and realign our business. |
Revenues:
Geographic
Segment Revenues:
Our reportable segments are represented by the following four
geographic sales regions:
|
|
|
|
|
the United States;
|
|
|
|
Europe, Middle East & Africa (EMEA);
|
|
|
|
Canada and Caribbean & Latin America (CALA); and
|
|
|
|
Asia Pacific.
|
38
These reportable segments were determined in accordance with how
our management views and evaluates our business. The following
table sets forth total revenues by geographic regions, both in
dollars and as a percentage of total revenues, for the fiscal
years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Amount
|
|
|
%
|
|
|
|
(In millions, except percentages)
|
|
|
United States
|
|
$
|
178.5
|
|
|
|
46.1
|
%
|
|
$
|
161.6
|
|
|
|
42.0
|
%
|
|
$
|
(16.9
|
)
|
|
|
(9.5
|
)%
|
EMEA
|
|
|
156.3
|
|
|
|
40.4
|
%
|
|
|
162.4
|
|
|
|
42.2
|
%
|
|
|
6.1
|
|
|
|
3.9
|
%
|
Canada and CALA
|
|
|
43.6
|
|
|
|
11.3
|
%
|
|
|
49.4
|
|
|
|
12.8
|
%
|
|
|
5.8
|
|
|
|
13.3
|
%
|
Asia Pacific
|
|
|
8.7
|
|
|
|
2.2
|
%
|
|
|
11.5
|
|
|
|
3.0
|
%
|
|
|
2.8
|
|
|
|
32.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
387.1
|
|
|
|
100.0
|
%
|
|
$
|
384.9
|
|
|
|
100.0
|
%
|
|
$
|
(2.2
|
)
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2007 revenues declined by $2.2 million, or
0.6%, compared to fiscal 2006.
Revenue in the United States declined by $16.9M, or 9.5%, as
compared to fiscal 2006. The decline in revenue is primarily
attributable to decreased product sales through both the
regions channel partners and direct sales offices. In
addition, the region experienced a decline in its service
revenue primarily due to decreased installation services that
are directly associated with the decline in product sales
through our direct sales offices.
Despite the revenue decrease in the United States, we
experienced revenue growth of $14.7 million for the fiscal
year ended April 30, 2007 across all of the other
geographical segments, with the most significant growth, in
absolute dollars, coming from EMEA and Canada and CALA.
Revenue growth of $6.1 million in EMEA is primarily
attributable to increased product sales through the
regions channel partners, specifically in the United
Kingdom and Continental Europe. However, revenue growth in the
region has been partially mitigated by a year-over-year decline
in the regions service business resulting primarily from a
decline in both maintenance and support and managed service
revenues.
Revenue growth of $5.8 million in the Canada and CALA
segment is primarily attributable to increased product sales
through channel partners and our direct sales offices in Canada.
The overall growth in global product sales as well as the
decline in global service revenues is addressed in greater
detail below.
The following table sets forth total revenues for groups of
similar products and services, both in dollars and as a
percentage of total revenues, for the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Amount
|
|
|
%
|
|
|
|
(In millions, except percentages)
|
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platforms and desktop appliances
|
|
$
|
204.3
|
|
|
|
52.8
|
%
|
|
$
|
201.4
|
|
|
|
52.3
|
%
|
|
$
|
(2.9
|
)
|
|
|
(1.4
|
)%
|
Software applications
|
|
|
34.2
|
|
|
|
8.8
|
%
|
|
|
38.4
|
|
|
|
10.0
|
%
|
|
|
4.2
|
|
|
|
12.3
|
%
|
Other(1)
|
|
|
22.0
|
|
|
|
5.7
|
%
|
|
|
23.8
|
|
|
|
6.2
|
%
|
|
|
1.8
|
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260.5
|
|
|
|
67.3
|
%
|
|
|
263.6
|
|
|
|
68.5
|
%
|
|
|
3.1
|
|
|
|
1.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and support
|
|
|
80.9
|
|
|
|
20.9
|
%
|
|
|
77.2
|
|
|
|
20.1
|
%
|
|
|
(3.7
|
)
|
|
|
(4.6
|
)%
|
Installation
|
|
|
24.6
|
|
|
|
6.4
|
%
|
|
|
21.2
|
|
|
|
5.5
|
%
|
|
|
(3.4
|
)
|
|
|
(13.8
|
)%
|
Managed services
|
|
|
9.2
|
|
|
|
2.4
|
%
|
|
|
7.7
|
|
|
|
2.0
|
%
|
|
|
(1.5
|
)
|
|
|
(16.3
|
)%
|
Professional and other services
|
|
|
11.9
|
|
|
|
3.0
|
%
|
|
|
15.2
|
|
|
|
3.9
|
%
|
|
|
3.3
|
|
|
|
27.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126.6
|
|
|
|
32.7
|
%
|
|
|
121.3
|
|
|
|
31.5
|
%
|
|
|
(5.3
|
)
|
|
|
(4.2
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
387.1
|
|
|
|
100.0
|
%
|
|
$
|
384.9
|
|
|
|
100.0
|
%
|
|
$
|
(2.2
|
)
|
|
|
(0.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
|
|
|
(1) |
|
Other products include mainly OEM products representing
approximately 6% of total revenues in both the fiscal year ended
April 30, 2006 and the fiscal year ended April 30,
2007. |
Product
Revenues:
Revenues from product sales were $263.6 million in the
fiscal year ended April 30, 2007 compared to
$260.5 million in fiscal 2006, representing an increase of
1.2%.
Revenues generated by sales of our communications platforms and
desktop devices decreased by $2.9 million or 1.4% on a
year-over-year basis. Despite the overall decline, sales of
IP-based
communication platforms and desktop devices increased by 4.5%,
or approximately $8 million, compared to fiscal 2006.
Consistent with recent periods, we continued to experience a
decrease in sales of our legacy communication platforms and
desktop devices with revenue from these products declining by
approximately $11 million on a year-over-year basis.
Revenues from the sale of legacy communication platforms and
desktop devices were less than 10% of total platform and desktop
appliances revenue in Fiscal 2007. The growth in
IP-based
communications platforms and desktop devices revenues has been
driven primarily by increased shipments of platforms and desktop
devices during Fiscal 2007. While we have experienced some
pricing adjustments on
IP-based
communication platforms and desktop devices compared to fiscal
2006, pricing changes have not had a significant impact on the
revenue growth for the year.
In addition to the growth in IP communication platforms and
desktop devices, we also experienced significant year-over-year
growth in software applications revenues, with software
applications revenues growing by $4.2 million or 12.3% in
fiscal 2007 compared to fiscal 2006.
IP-based
software applications represented over 95% of total software
applications revenues for fiscal 2007, an increase from
approximately 83% in fiscal 2006, and revenues from
IP-based
software applications increased in excess of 14% in comparison
to fiscal 2006. The growth in
IP-based
software applications revenues reflects (i) a
year-over-year increase in the rate of attachment of software
applications to the underlying platforms and desktop devices
(ii) approximately $0.6 million of revenue resulting
from the sale of IP applications introduced during fiscal 2007
and (iii) approximately $0.6 million of revenue
resulting from price increases on specific applications.
Other product revenues, which include mainly original equipment
manufacturer products that we re-sell, remained relatively
consistent as a percentage of sales in fiscal 2007 compared to
fiscal 2006.
Overall
IP-based
product revenues represented 93% of total product revenue for
fiscal 2007, an increase from 86% in fiscal 2006.
Service
Revenues:
Revenue from services sales was 31.5% of total revenues during
fiscal 2007, representing a decrease from 32.7% of total
revenues for fiscal 2006. This decrease is primarily
attributable to a decline in maintenance and support revenues of
$3.7 million, a decline in installation services revenues
of $3.4 million and a decline in revenues from Managed
Services contracts of $1.5 million.
The decline in maintenance and support revenues and revenues
from Managed Services contracts is due primarily to the decline
in revenue from the EMEA region due to increased market
competition. In fiscal 2007, maintenance and support revenues
and revenues from Managed Service contracts declined by
approximately $5.0 million over fiscal 2006 levels in the
EMEA region. We estimate that 85% of this decline was due to
contracts that were not renewed due to market competition, while
the rest of the decline is attributable to lower pricing on
services due to competitive market pressures.
The decline in installation services revenue was primarily
attributable to the decline in product sales via our direct
sales offices in the United States.
The overall decline in service revenues was partially mitigated
by an increase in professional and other service revenues of
$3.3 million which is primarily attributable to increased
training and professional services revenue in the United States
and United Kingdom.
40
We continue to generate more than 60% of our total service
revenues from the provision of fixed maintenance contracts.
Gross
Margin:
The following table sets forth gross margin, both in dollars and
as a percentage of revenues, for the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenue
|
|
|
Amount
|
|
|
Revenue
|
|
|
|
(In millions, except percentages)
|
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
260.5
|
|
|
|
100.0
|
%
|
|
$
|
263.6
|
|
|
|
100.0
|
%
|
Gross Margin
|
|
|
111.4
|
|
|
|
42.8
|
%
|
|
|
111.8
|
|
|
|
42.4
|
%
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
126.6
|
|
|
|
100.0
|
%
|
|
$
|
121.3
|
|
|
|
100.0
|
%
|
Gross Margin
|
|
|
50.0
|
|
|
|
39.5
|
%
|
|
|
48.0
|
|
|
|
39.6
|
%
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
387.1
|
|
|
|
100.0
|
%
|
|
$
|
384.9
|
|
|
|
100.0
|
%
|
Gross Margin
|
|
|
161.4
|
|
|
|
41.7
|
%
|
|
|
159.8
|
|
|
|
41.5
|
%
|
Gross margin declined to 41.5% of revenues for fiscal 2007
compared to 41.7% for fiscal 2006.
Products gross margin as a percentage of revenues decreased from
42.8% in fiscal 2006 to 42.4% in fiscal 2007. The decrease in
margin is primarily due to:
|
|
|
|
|
a 1.1% decline as a result of an individual project which
incurred a loss due primarily to the sale of original equipment
manufacturers products that were re-sold at a negative margin.
|
|
|
|
a 0.8% improvement as a result of (i) an improved mix of
software applications revenues as a total of product revenues as
software applications typically generate higher margins than
either communication platforms and desktop appliances or other
product revenues; and (ii) cost reductions on
communications platforms and desktop appliances resulting from
product re-design efforts and improved costs from electronic
contract manufacturers; and
|
|
|
|
a 0.3% decline as a result of temporary pricing promotions on
certain IP desktop appliances in fiscal 2007. Similar promotions
were not run during fiscal 2006.
|
Service margins improved marginally to 39.6% in fiscal 2007 from
39.5% in fiscal 2006. The slight improvement in service margins
was due primarily to the change in mix of service revenues, as
total service revenues contained a lower proportion of
relatively lower margin installation services revenue in fiscal
2007 compared to fiscal 2006.
Operating
Expenses
Research
and Development:
Research and development expenses decreased from 11.4% of total
revenues in fiscal 2006 to 10.8% in fiscal 2007, with spending
in absolute dollars declining by $2.4 million
year-over-year. The reduction in both absolute dollars and as a
percentage of revenue is attributed to restructuring actions
taken during fiscal 2007 to align our operating expense model
with current revenue levels.
Historically, we have invested between 11% and 17% of revenues
on research and development from fiscal 2002 through fiscal
2007, consistent with an aggressive research and development
investment strategy that has positioned us with a broad range of
feature- rich, scalable, standards-based and interoperable
IP-based
communication solutions.
41
The TPC Agreement, as last amended on October 31, 2006 (as
described under Item 10.C. Additional
Information Material Contracts TPC
Agreement) required us to invest an aggregate of
C$366.5 million worth of research and development over a
seven year period commencing on March 31, 2005, with a
minimum of C$45.8 million to be invested each year. We
spent C$52.2 and C$47.7 on research and development for both
years ended March 31, 2006 and March 31, 2007 and as
such we achieved the minimum requirement for the first and
second years of the seven-year period.
Selling,
General and Administrative:
SG&A expenses increased from 31.1% of total revenues in
fiscal 2006 to 32.0% in fiscal 2007, with spending in absolute
dollars growing by $2.8 million year-over-year. The
increase in both absolute dollars and as a percentage of
revenues is due primarily to strategic investments in various
sales initiatives in regions outside of the United States. In
addition, in fiscal 2007 we incurred $0.3 million in
incremental compensation expense associated with employee stock
option grants.
Special
Charges:
During the year ended April 30, 2007, we recorded net
special restructuring charges of $9.3 million related to
further cost reduction measures taken to align our operating
expense model with current revenue levels net of reversals of
prior years charges of $0.2 million resulting from
adjustments to original estimated severance costs. The net
restructuring charges included workforce reduction costs of
$8.9 million for employee severance and benefits and
associated legal costs incurred in the termination of
129 employees throughout the world. In addition, special
charges included $0.4 million of accreted interest costs
associated with excess facilities obligations and
$0.2 million in non-cancelable lease costs relating to
various sales office closures in the United States.
During fiscal 2006, we recorded special restructuring charges of
$5.7 million related to further cost reduction measures
taken to align our operating expense model with current revenue
levels, net of reversals of prior years charges of
$0.8 million resulting primarily from adjustments to
original lease termination obligations for excess space in
Canada and the United Kingdom. The net restructuring charges
included workforce reduction costs of $5.7 million relating
to employee severance and benefits and associated legal costs
incurred in the termination of 84 employees throughout the
world. In addition, special charges included $0.8 million
of accreted interest costs associated with excess facilities
obligations.
Litigation
Settlement:
On June 23, 2006, one of our competitors filed a complaint
in the United States District Court for the Eastern District of
Virginia alleging that we infringed on certain of its patents
and requested damages. On September 8, 2006 we filed a
defense to the competitors complaint and a counterclaim
alleging that the competitor is infringing upon certain of our
patents and also requested damages.
On March 19, 2007 an agreement was reached to settle all
litigation claims outside of court. Under the terms of the
settlement agreement, the competitor agreed to release us from
all past infringements and the parties have also entered into a
covenant to not sue each other for a period of 5 years from
the effective date. In accordance with SFAS No. 5,
Accounting for Contingencies, a one-time litigation settlement
charge of $16.3 million was recorded during fiscal 2007.
The litigation settlement amount is comprised of
$14.8 million, representing the present value of
$19.7 million payable over a five-year period and
discounted using an interest rate of 12%, plus $1.5 million
in legal costs.
Initial
Public Offering Costs:
On May 9, 2006, we initiated an initial public offering by
filing a registration statement on
Form F-1
under the United States Securities Act of 1933 to sell Common
Shares in the United States and a preliminary prospectus with
the Canadian securities regulators to sell Common Shares in
Canada. In fiscal 2006 and fiscal 2007, we incurred
$3.3 million in costs associated with the initial public
offering.
42
On April 26, 2007, we signed a definitive merger agreement
whereby we agreed to acquire Inter-Tel for $25.60 per Inter-Tel
share. It was our intention, upon the completion of the proposed
acquisition of Inter-Tel, to withdraw from the initial public
offering process. As a result, we expensed all costs incurred
associated with the initial pubic offering in fiscal 2007.
Costs incurred in fiscal 2006, totaling $1.6 million,
associated with the initial public offering were deferred on our
balance sheet as at April 30, 2006. There are no costs
associated with the initial public offering deferred on the
balance sheet as at April 30, 2007.
Gain on
Sale of Manufacturing Operations:
On August 31, 2001, we outsourced our manufacturing
operations, including the sale of related net assets and the
transfer of employees and certain liabilities to BreconRidge,
for total net consideration of $5.0 million in the form of
long-term promissory notes receivable of $5.4 million and
promissory notes payable of $0.4 million. The transaction
resulted in a loss on disposal of $1.5 million recorded in
fiscal 2002 operating expenses. The loss represented the excess
of the carrying value of the plant, equipment and manufacturing
workforce over the total net consideration.
The original loss on disposal recorded during fiscal 2002
contained estimates and assumptions regarding expected
subleasing income arising from premises that had been subleased
to BreconRidge pursuant to the disposal of the manufacturing
operations.
In fiscal 2006 and fiscal 2007, the future estimated operating
cost estimates for the premises were re-evaluated with the
result being a reversal of $0.9 million and
$1.0 million, respectively, of the loss on disposal
previously recognized. This reversal is shown as a gain on sale
of manufacturing operations in both fiscal 2006 and fiscal 2007.
Gain on
Sale of Assets:
On August 31, 2005, we sold land, building and fixed assets
in Caldicot, United Kingdom relating to our United Kingdom
subsidiary for net proceeds of $12.4 million, resulting in
a pre-tax gain of $7.3 million. The transaction included a
commitment for us to lease-back a portion of the property, which
requires us to defer a portion of the gain on sale equivalent to
the present value of the lease payments. As a result we entered
into a
6-month
interim lease and a
10-year
long-term lease for a portion of the property sold. Accordingly,
$5.8 million of the gain was deferred and is being
amortized over the combined
101/2-year
term of the leases. The remaining gain of $1.5 million was
recognized in the results of operations in fiscal 2006.
Interest
Expense:
Interest expense was $9.1 million in fiscal 2007 compared
to $7.6 million in fiscal 2006. The primary reason for the
increased interest expense was an incremental $0.8 million
in interest expense associated with the $55 million in
convertible notes due to a year over year increase in interest
rates and $0.5 million in interest expense associated with
the litigation settlement.
Other
(Income) Expense, Net:
Other (income) expense, on a net basis, consists primarily of
foreign exchange rate gains and losses, interest income and
amortization of the deferred gain on sale of the United Kingdom
assets. Other income, on a net basis, amounted to
$0.6 million in fiscal 2007 compared to $0.4 million
during fiscal 2006. The income recorded in fiscal 2007 is
primarily attributable to transactional foreign currency losses
of $0.3 million, interest income of $0.3 million and
$0.6 million of amortization associated with the deferred
gain on sale of assets. In comparison, other income in Fiscal
2006 was comprised of interest income of $0.7 million,
$0.3 million of amortization of the deferred gain on sale
of assets and transactional foreign currency losses of
$0.6 million. We use foreign currency forward contracts and
foreign currency swaps to minimize the short-term impact of
currency fluctuations on foreign currency receivables, payables
and inter-company balances.
43
Mark-to-Market
Adjustment on Derivatives:
In April 2004, we issued preferred shares. At any date after
five years from the original issuance date, or any date prior to
a partial sale event (as defined in the terms of the preferred
shares) other than a public offering, the holders of preferred
shares have a right to require us to redeem the preferred shares
for cash. The redemption amount is equal to the original issue
price of C$1.00 per preferred share multiplied by the number of
preferred shares outstanding, plus any declared but unpaid
dividends, plus the then current fair market value of the Common
Shares into which the preferred shares are convertible. As a
portion of the redemption price of the preferred shares is
indexed to our common share price, an embedded derivative exists
which must be accounted for separately under generally accepted
accounting principles.
In fiscal 2007, we recorded a non-cash gain of
$8.6 million, representing the mark-to-market adjustment on
the derivative instrument associated with our preferred shares.
During fiscal 2006, we recorded a non-cash expense of
$32.6 million.
The difference between the initial carrying amount of the
derivative and the redemption amount is being accreted over the
five-year period to redemption, with the accretion of the
derivative being recorded as a non-cash expense in our
consolidated statement of operations. In fiscal 2007, a fair
value gain of $8.6 million was recorded as a result of a
decrease in the fair value estimate of our Common Shares from
$1.38 at April 30, 2006 to $1.05 at April 30, 2007.
The decrease in the Common Shares resulted in a
$21.2 million gain which was partially offset by
$12.6 million of regular accretion expense.
Provision
for Income Taxes:
We recorded net income tax expense of $1.8 million for
fiscal 2007 compared to income tax recoveries of
$1.9 million for fiscal 2006. The net income tax expense
for fiscal 2007 reflects a current tax recovery of
$0.2 million offset by a deferred tax expense of
$2.0 million resulting from the reversal of deferred tax
recoveries relating to our United States operations that were
originally recorded in fiscal 2006. In assessing the
realizability of deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred
tax assets will not be realized. During fiscal 2006, we
determined that certain deferred tax assets relating to our
operations were more likely than not to be realized and as a
result recorded a deferred tax asset of $2.8 million. In
fiscal 2007, this assessment could no longer be supported as
there was uncertainty surrounding the Companys future
profitability. Accordingly, the $2.0 million balance that
remained unrealized was written off.
44
Fiscal
2006 as compared to Fiscal 2005
The following table sets forth our comparative results of
operations, both in dollars and as a percentage of total
revenues, for fiscal 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Amounts
|
|
|
Revenues
|
|
|
Amounts
|
|
|
Revenues
|
|
|
Amount
|
|
|
%
|
|
|
|
(In millions, except percentages)
|
|
|
Revenues
|
|
$
|
342.2
|
|
|
|
100.0
|
%
|
|
$
|
387.1
|
|
|
|
100.0
|
%
|
|
$
|
44.9
|
|
|
|
13.1
|
%
|
Cost of revenues
|
|
|
213.2
|
|
|
|
62.3
|
|
|
|
225.7
|
|
|
|
58.3
|
|
|
|
12.5
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
129.0
|
|
|
|
37.7
|
|
|
|
161.4
|
|
|
|
41.7
|
|
|
|
32.4
|
|
|
|
25.1
|
|
Research and development
|
|
|
41.4
|
|
|
|
12.1
|
|
|
|
44.1
|
|
|
|
11.4
|
|
|
|
2.7
|
|
|
|
6.5
|
|
Selling, general and administrative
|
|
|
114.9
|
|
|
|
33.6
|
|
|
|
120.7
|
|
|
|
31.1
|
|
|
|
5.8
|
|
|
|
5.0
|
|
Special charges(1)
|
|
|
10.6
|
|
|
|
3.1
|
|
|
|
5.7
|
|
|
|
1.5
|
|
|
|
(4.9
|
)
|
|
|
(46.2
|
)
|
Loss (gain) on sale of manufacturing operations
|
|
|
3.4
|
|
|
|
1.0
|
|
|
|
(0.9
|
)
|
|
|
(0.2
|
)
|
|
|
(4.3
|
)
|
|
|
*
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
(1.5
|
)
|
|
|
(0.4
|
)
|
|
|
(1.5
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(41.3
|
)
|
|
|
(12.1
|
)
|
|
|
(6.7
|
)
|
|
|
(1.7
|
)
|
|
|
34.6
|
|
|
|
*
|
|
Interest expense
|
|
|
2.6
|
|
|
|
0.8
|
|
|
|
7.6
|
|
|
|
2.0
|
|
|
|
5.0
|
|
|
|
192.3
|
|
Mark-to-market adjustment on derivatives
|
|
|
5.3
|
|
|
|
1.5
|
|
|
|
32.6
|
|
|
|
8.4
|
|
|
|
27.3
|
|
|
|
515.1
|
|
Other (income) expense, net
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
(0.4
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
*
|
|
Income tax expense
|
|
|
0.8
|
|
|
|
0.2
|
|
|
|
(1.9
|
)
|
|
|
(0.5
|
)
|
|
|
(2.7
|
)
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(49.6
|
)
|
|
|
(14.5
|
)%
|
|
$
|
(44.6
|
)
|
|
|
(11.5
|
)%
|
|
$
|
5.0
|
|
|
|
(10.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
the comparison is not meaningful |
|
(1) |
|
Special charges relate to restructuring activities, product line
exit and other loss accruals undertaken to improve our
operational efficiency and realign our business. |
Revenues:
The following table sets forth total revenues by geographic
regions, both in dollars and as a percentage of total revenues,
for the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Amount
|
|
|
%
|
|
|
|
(In millions, except percentages)
|
|
|
United States
|
|
$
|
153.5
|
|
|
|
44.9
|
%
|
|
$
|
178.5
|
|
|
|
46.1
|
%
|
|
$
|
25.0
|
|
|
|
16.3
|
%
|
EMEA
|
|
|
145.5
|
|
|
|
42.5
|
|
|
|
156.3
|
|
|
|
40.4
|
|
|
|
10.8
|
|
|
|
7.4
|
|
Canada and CALA
|
|
|
37.2
|
|
|
|
10.8
|
|
|
|
43.6
|
|
|
|
11.3
|
|
|
|
6.4
|
|
|
|
17.2
|
|
Asia-Pacific
|
|
|
6.0
|
|
|
|
1.8
|
|
|
|
8.7
|
|
|
|
2.2
|
|
|
|
2.7
|
|
|
|
45.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
342.2
|
|
|
|
100.0
|
%
|
|
$
|
387.1
|
|
|
|
100.0
|
%
|
|
$
|
44.9
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2006 revenues grew by $44.9 million, or
13.1%, compared to fiscal 2005.
The growth in revenue was shared across all geographical
segments, with the most significant growth, in absolute dollars,
coming from the United States and EMEA.
45
Revenue growth in the United States was primarily attributable
to increased product sales through both the regions
channel partners and direct sales offices. In addition, the
region enjoyed significant growth in its service revenues
primarily due to increased installation services that were
directly associated with the growth in product sales through our
direct sales.
Revenue growth in EMEA was primarily attributable to increased
product sales through the regions channel partners,
specifically in the United Kingdom and Continental Europe.
EMEAs revenue growth was however partially mitigated by a
significant year-over-year decline in the regions services
business resulting from a decline in both maintenance and
support and Managed Service revenues.
The following table sets forth total revenues for groups of
similar products and services, both in dollars and as a
percentage of total revenues, for the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Change
|
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Amount
|
|
|
%
|
|
|
|
(In millions, except percentages)
|
|
|
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platforms and desktop devices
|
|
$
|
165.1
|
|
|
|
48.2
|
%
|
|
$
|
204.3
|
|
|
|
52.8
|
%
|
|
$
|
39.2
|
|
|
|
23.7
|
%
|
Software applications
|
|
|
23.5
|
|
|
|
6.9
|
|
|
|
34.2
|
|
|
|
8.8
|
|
|
|
10.7
|
|
|
|
45.5
|
|
Other(1)
|
|
|
19.1
|
|
|
|
5.6
|
|
|
|
22.0
|
|
|
|
5.7
|
|
|
|
2.9
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207.7
|
|
|
|
60.7
|
|
|
|
260.5
|
|
|
|
67.3
|
|
|
|
52.8
|
|
|
|
25.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and support
|
|
|
85.3
|
|
|
|
24.9
|
|
|
|
80.9
|
|
|
|
20.9
|
|
|
|
(4.4
|
)
|
|
|
(5.2
|
)
|
Installation
|
|
|
22.1
|
|
|
|
6.5
|
|
|
|
24.6
|
|
|
|
6.4
|
|
|
|
2.5
|
|
|
|
11.3
|
|
Managed services
|
|
|
10.9
|
|
|
|
3.2
|
|
|
|
9.2
|
|
|
|
2.4
|
|
|
|
(1.7
|
)
|
|
|
(15.6
|
)
|
Professional and other services
|
|
|
16.2
|
|
|
|
4.7
|
|
|
|
11.9
|
|
|
|
3.0
|
|
|
|
(4.3
|
)
|
|
|
(26.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
134.5
|
|
|
|
39.3
|
|
|
|
126.6
|
|
|
|
32.7
|
|
|
|
(7.9
|
)
|
|
|
(5.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
342.2
|
|
|
|
100.0
|
%
|
|
$
|
387.1
|
|
|
|
100.0
|
%
|
|
$
|
44.9
|
|
|
|
13.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other products include mainly OEM products representing
approximately 5.5% of total revenues in both the fiscal year
ended April 24, 2005 and the fiscal year ended
April 30, 2006. |
Product
Revenues:
Revenues from product sales were $260.5 million in the
fiscal year ended April 30, 2006 compared to
$207.7 million in fiscal 2005, representing an increase of
25.4%.
Revenues generated by sales of our communications platforms and
desktop devices increased by $39.2 million or 23.7% on a
year-over-year basis. During fiscal 2006 sales of
IP-based
communication platforms and desktop devices increased by 45%, or
approximately $55.0 million, compared to fiscal 2005.
Consistent with prior years, in fiscal 2006 we continued to
experience a decrease in sales of our legacy communication
platforms and desktop devices while sales of our
IP-based
communications solutions increased. The overall growth in
communications platforms and desktop devices revenues has been
driven primarily by increased shipments of platforms and desktop
devices during fiscal 2006. While we experienced some pricing
adjustments on communication platforms and desktop devices
compared to fiscal 2005, pricing changes did not have a
significant impact on the revenue growth for fiscal 2006 over
fiscal 2005.
In addition to the growth in IP communication platforms and
desktop devices, we also experienced significant year-over-year
growth in software applications revenues, with software
applications revenues growing by $10.7 million or 45.5% in
fiscal 2006 compared to fiscal 2005.
IP-based
software applications represented over 80% of total software
applications revenues for fiscal 2006, an increase from
approximately 68% in fiscal 2005, and revenues from
IP-based
software applications increased in excess of 70% in comparison
to fiscal 2005. The growth
46
in IP-based
software applications revenues reflects (i) a
year-over-year increase in the rate of attachment of software
applications to the underlying platforms and desktop devices and
(ii) approximately $1.0 million of revenue resulting
from the sale of IP applications introduced during fiscal 2006.
Other product revenues, which include mainly original equipment
manufacturer products that we re-sell, remained relatively
consistent as a percentage of sales in fiscal 2006 compared to
fiscal 2005.
Overall
IP-based
product revenues represented 86% of total product revenue for
fiscal 2006, an increase from 73% in fiscal 2005. This increase
was in line with our continued strategy to realign our efforts
towards
IP-based
communications solutions.
Service Revenues:
Revenue from services sales was 32.7% of total revenues during
fiscal 2006, representing a decrease from 39.3% of total
revenues for fiscal 2005. This decrease was primarily
attributable to a decline in maintenance and support revenues of
$4.4 million, a decline in professional and other service
revenues of $4.3 million and a decline in revenues from
Managed Services contracts of $1.7 million.
The decline in maintenance and support revenues and revenues
from Managed Services contracts was due primarily to the decline
in revenue from the EMEA region due to increased market
competition. In fiscal 2006, maintenance and support revenues
and revenues from Managed Service contracts declined by
approximately $7.0 million over fiscal 2005 levels in the
EMEA region. We estimated that 70% of this decline was due to
contracts that were not renewed due to market competition, while
the rest of the decline was attributable to lower pricing on
services due to competitive market pressures.
The decline in professional and other services revenue was
driven primarily by a $3.0 million decrease in revenue as a
result of the sale of Edict Training Ltd., an 80% owned
subsidiary, during fiscal 2006.
The overall decline in service revenues was partially mitigated
by an increase in installation service revenues of
$2.5 million which was primarily attributable to increased
product sales via our direct sales offices in the
United States.
Gross
Margin:
The following table sets forth gross margin, both in dollars and
as a percentage of revenues, for the fiscal years indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
2005
|
|
|
2006
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
|
(In millions, except percentages)
|
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
207.7
|
|
|
|
100.0
|
%
|
|
$
|
260.5
|
|
|
|
100.0
|
%
|
Gross Margin
|
|
|
75.7
|
|
|
|
36.4
|
%
|
|
|
111.4
|
|
|
|
42.8
|
%
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
134.5
|
|
|
|
100.0
|
%
|
|
$
|
126.6
|
|
|
|
100.0
|
%
|
Gross Margin
|
|
|
53.3
|
|
|
|
39.6
|
%
|
|
|
50.0
|
|
|
|
39.5
|
%
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
342.2
|
|
|
|
100.0
|
%
|
|
$
|
387.1
|
|
|
|
100.0
|
%
|
Gross Margin
|
|
|
129.0
|
|
|
|
37.7
|
%
|
|
|
161.4
|
|
|
|
41.7
|
%
|
Gross margin improved to 41.7% of revenues for fiscal 2006
compared to 37.7% for fiscal 2005.
Products gross margin as a percentage of revenues increased from
36.4% in fiscal 2005 to 42.8% in fiscal 2006. The increase in
margin was primarily due to:
|
|
|
|
|
a 1.3% improvement as a result of (i) a shift in
communication platform sales mix whereby total communication
platform sales contained a higher proportion of higher margin
large enterprise business
|
47
|
|
|
|
|
platforms in fiscal 2006 versus fiscal 2005; (ii) an
improved mix of software applications revenues as a total of
product revenues as software applications typically generate
higher margins than either communication platforms and desktop
appliances or other product revenues; and (iii) cost
reductions on communications platforms and desktop appliances
resulting from product re-design efforts and improved costs from
electronic contract manufacturers; and
|
|
|
|
|
|
a 0.4% improvement as a result of lower inventory obsolescence
provisions recorded in fiscal 2006 compared to fiscal 2005 due
to the end of life of our Mitel 3100 ICP product in the
third quarter of fiscal 2005.
|
Service margins declined marginally to 39.5% in fiscal 2006 from
39.6% in fiscal 2005. The slight decrease in service margins was
due primarily to the change in mix of service revenues, as total
service revenues contained a higher proportion of lower margin
installation services and a lower proportion of relatively
higher margin maintenance and support services in fiscal 2006
compared to fiscal 2005.
Operating
Expenses
Research
and Development:
Research and development expenses decreased from 12.1% of total
revenues in fiscal 2005 to 11.4% in fiscal 2006, with an
absolute dollar growth in spending of $2.7 million
year-over-year. The reduction as a percentage of revenues was
primarily attributable to the 13.1% year-over-year revenue
increase, with the absolute dollar increase resulting from a
continuation of our strategic investment in the development and
enhancement of our
IP-based
communications solutions.
The TPC Agreement, as last amended on October 31, 2006 (as
described in Item 10.C. Additional
Information Material Contracts TPC
Agreement required us to invest an aggregate of
C$366.5 million worth of research and development over a
seven year period commencing on March 31, 2005, with a
minimum of C$45.8 million to be invested each year. We
spent C$52.2 and C$47.7 on research and development for both
years ended March 31, 2006 and March 31, 2007 and as
such we achieved the minimum requirement for the first and
second years of the seven-year period.
Selling,
General and Administrative:
SG&A expenses decreased from 33.6% of total revenues in
fiscal 2005 to 31.1% in fiscal 2006, with a growth in absolute
dollars of $5.8 million year-over-year. The decrease as a
percentage of sales was primarily attributable to the
year-over-year revenue increase combined with our continued
efforts to contain costs while making the appropriate
investments in sales and marketing efforts.
Special
Charges:
During the year ended April 30, 2006, we recorded net
special restructuring charges of $5.7 million related to
further cost reduction measures taken to align our operating
expense model with current revenue levels net of reversals of
prior years charges of $0.8 million resulting from
adjustments to original lease termination obligations for excess
space in Canada and the United Kingdom. The net restructuring
charges included workforce reduction costs of $5.7 million
for employee severance and benefits and associated legal costs
incurred in the termination of 84 employees throughout the
world. In addition, special charges included $0.8 million
of accreted interest costs associated with excess facilities
obligations.
During fiscal 2005, we recorded special restructuring charges of
$10.6 million related to further cost reduction measures
taken to align our operating expense model with current revenue
levels, net of reversals of prior years charges of
$0.3 million resulting primarily from adjustments to
original estimated severance costs. The net restructuring
charges included workforce reduction costs of $8.7 million
relating to employee severance and benefits and associated legal
costs incurred in the termination of 154 employees
throughout the world. Non-cancelable lease costs of
$1.3 million relating to excess facilities in certain
Canadian and United Kingdom offices and a loss on disposal of
capital assets of $0.9 million related to assets written
off as a result of the discontinuation of our ASIC design
program.
48
Gain on
Sale of Manufacturing Operations:
The original loss on disposal recorded during fiscal 2002
contained estimates and assumptions regarding expected
subleasing income arising from premises that had been subleased
to BreconRidge pursuant to the disposal of the manufacturing
operations. It became evident during both fiscal 2004 and fiscal
2005 that sublease income over the lease renewal period, which
was originally included in the estimated loss on disposal, would
no longer be realized. As a result, an amount of
$0.6 million and $3.4 million was recorded in fiscal
2004 and fiscal 2005, respectively, as an additional loss
arising on the disposal activity.
In fiscal 2006, the future estimated operating cost estimates
for the premises were re-evaluated with the result being a
reversal of $0.9 million of the loss on disposal previously
recognized. This reversal was shown as a gain on sale of
manufacturing operations in fiscal 2006.
Gain on
Sale of Assets:
As described above, the sale of the land, building and fixed
assets relating to our United Kingdom subsidiary occurred on
August 31, 2005. The sale and subsequent lease-back
transactions resulted in a $1.5 million gain that was
recognized immediately in the results of operations in fiscal
2006. The remaining balance of $5.8 million of the gain was
deferred and was set to amortize over the combined
101/2-year
term of the leases.
Interest
Expense:
Interest expense was $7.6 million in fiscal 2006 compared
to $2.6 million in fiscal 2005. The primary reason for the
increase was the interest associated with the convertible note
financing in the aggregate principal amount of
$55.0 million that was completed on April 27, 2005. In
comparison, the interest expense in the prior year consisted
primarily of mortgage interest associated with our facility in
the United Kingdom and the interest cost associated with our
accounts receivable securitization facility, which was dormant
in fiscal 2006. On August 31, 2005, we sold land, building
and fixed assets in the United Kingdom and used the proceeds to
discharge the balance of the associated mortgage of
$9.8 million. This reduction resulted in the elimination of
the associated interest expense on a go-forward basis.
Other
(Income) Expense, Net:
Other (income) expense, on a net basis, consisted primarily of
foreign exchange rate gains and losses, interest income and
amortization of the deferred gain on sale of the U.K. assets.
Other income, on a net basis, amounted to $0.4 million in
fiscal 2006 compared to $0.4 million during fiscal 2005.
The income recorded in fiscal 2006 was primarily attributable to
transactional foreign currency losses of $0.6 million,
interest income of $0.7 million and $0.3 million
amortization of the deferred gain on sale of assets compared
with interest income of $0.6 million being partially offset
by transactional foreign currency losses of $0.2 million in
fiscal 2005. We used foreign currency forward contracts and
foreign currency swaps to minimize the short-term impact of
currency fluctuations on foreign currency receivables, payables
and intercompany balances.
Mark-to-Market
Adjustment on Derivatives:
In fiscal 2006, we recorded a $32.6 million non-cash
expense, representing the mark-to-market adjustment on the
derivative instrument associated with our preferred shares.
During fiscal 2005, the non-cash expense amount was
$5.3 million. $22.0 million of the $32.6 million
adjustment in fiscal 2006 was directly attributable to an
increase in fair value estimate of our Common Shares from C$1.00
to C$1.55 (U.S.$0.87 to U.S.$1.38).
Provision
for Income Taxes:
We recorded net income tax recoveries of $1.9 million for
fiscal 2006 compared to income tax expense of $0.8 million
for fiscal 2005. The net change year-over-year of
$2.7 million was due to deferred tax recoveries of $2.8
million recorded in fiscal 2006. In assessing the realizability
of deferred tax assets, we considered whether it is more likely
than not that some portion or all of the deferred tax assets
will not be realized. During fiscal 2006, we
49
determined that certain deferred tax assets relating to our
United States operations were considered more likely than not to
be realized and therefore reduced our valuation allowance
resulting in a deferred tax recovery of $2.8 million.
Critical
Accounting Policies
The preparation of our consolidated financial statements and
related disclosures in conformity with U.S. GAAP requires
us to make estimates and assumptions about future events that
can have a material impact on the amounts reported in our
consolidated financial statements and accompanying notes. The
determination of estimates requires the use of assumptions and
the exercise of judgment and as such actual results could differ
from those estimated. Our significant accounting policies are
described in Note 2 of our audited consolidated financial
statements included elsewhere in this annual report. The
following critical accounting policies are those that we believe
require a high level of subjectivity and judgment and have a
material impact on our financial condition and operating
performance: revenue recognition, allowance for doubtful
accounts, provisions for inventory, provisions for product
warranties, long-lived asset depreciation, goodwill valuation,
special charges, contingencies, deferred taxes, pension and
post-retirement benefits, and derivative instruments.
Revenue Recognition:
For products sold through our network of channel partners,
wholesale distributors, solution providers, system integrators,
authorized resellers, and other technology providers,
arrangements usually involve multiple elements, including
post-contract technical support and training. We also sell
products and installation and related maintenance and support
services directly to customers. Due to the complexity of our
sales agreements, judgment is routinely applied principally in
the areas of customer acceptance, product returns, unbundling of
multiple element arrangements, and collectibility.
Our sales arrangements frequently include a contractual
acceptance provision that specifies certain acceptance criteria
and the period in which a product must be accepted or returned.
Consistent with SEC Staff Accounting Bulletin 101, we make
an assessment of whether or not these acceptance criteria will
be met by referring to prior experience in successfully
complying with customer specifications. In those cases where
experience supports that acceptance will be met, we recognize
revenue once delivery is complete, title and risk of loss has
passed, the fee is fixed and determinable and persuasive
evidence of an arrangement exists. The provision for estimated
sales returns is recorded as a reduction of revenues at the time
of revenue recognition. If our estimate of sales returns is too
low, additional charges will be incurred in future periods and
these additional charges could have a material adverse effect on
our results of operations. As a percentage of annual product
revenues the provision for sales returns was 0.9% at
April 30, 2007 compared to 1.3% at April 30, 2006.
Direct revenue sales are comprised of multiple elements which
consist of products, maintenance and installation services. We
unbundle these products, maintenance and installation services
based on vendor specific objective evidence with any discounts
allocated across all elements on a pro-rata basis.
Collectibility is assessed based primarily on the credit
worthiness of the customer as determined by credit checks and
analysis, as well as customer payment history. Different
judgments or different contract terms could adversely affect the
amount and timing of revenues recorded.
Allowance
for Doubtful Accounts:
Our allowance for doubtful accounts is based on our assessment
of the collectibility of customer accounts. A considerable
amount of judgment is required in order to make this assessment
including a detailed analysis of the aging of our accounts
receivable and the current credit worthiness of our customers
and an analysis of historical bad debts and other adjustments.
If there is a deterioration of a major customers credit
worthiness or actual defaults are higher than our historical
experience, our estimate of the recoverability of amounts due
could be adversely affected. We revisit our allowance for
doubtful accounts on a quarterly basis and adjust the estimate
to reflect actuals and change in expectations. As of
April 30, 2006 and April 30, 2007, the provision
represented 3% and 3% of gross receivables, respectively. It is
reasonably likely that this provision will not change
significantly in the future.
50
Inventory
Obsolescence:
In order to record inventory at the lower of cost or market, we
must assess our inventory valuation, which requires judgment as
to future demand. We adjust our inventory balance based on
economic considerations, historical usage, inventory turnover
and product life cycles through the recording of a write-down,
which is included in the cost of revenue. Assumptions relating
to economic conditions and product life cycle changes are
inherently subjective and have a significant impact on the
amount of the write-down.
As of April 30, 2006 and April 30, 2007, our inventory
has been written down by 10% and 15% respectively, of gross
inventory. Of the $1.5 million increase in the write-down
from April 30, 2006 to April 30, 2007, $0.9 is
attributable to an expected decrease in demand and forecasted
sales for specific product lines, including those which were
discontinued in fiscal 2006, and $0.4 is attributable to
write-downs required as a result of compliance with Regulations
and Directives regarding the Restriction of the Use of Certain
Hazardous Substances in electrical and electronic equipment in
the United Kingdom and the European Union.
If there is a sudden and significant decrease in demand for our
products, or a higher risk of inventory obsolescence because of
rapidly changing technology and customer requirements, we may be
required to increase our inventory write-downs and our gross
margin could be adversely affected.
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2006
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
0.9
|
|
|
$
|
3.6
|
|
Finished goods
|
|
|
25.2
|
|
|
|
20.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.1
|
|
|
|
26.1
|
|
Less: inventory write-down
|
|
|
(2.5
|
)
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23.6
|
|
|
$
|
19.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
%
|
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
Warranty
Provision:
We accrue warranty costs, as part of cost of revenues, based on
expected material and labour support costs. The cost to service
the warranty is estimated on the date of sale based upon
historical trends in the volume of product returns within a
warranty period and the cost to repair or replace the equipment.
If we experience an increase in warranty claims that is higher
than our past experience, or an increase in actual costs to
service the claims is experienced, gross margin could be
adversely affected. The warranty provision declined from
$2.0 million at April 30, 2006 to $1.8 million at
April 30, 2007. The decline is primarily due to a decrease
in warranty costs. Actual warranty costs for fiscal 2007 were in
line with our expectations but were lower than fiscal 2006 as
result of efforts made to reduce costs with warranty providers.
The following table provides a continuity of the warranty
provision over the past three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24,
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Balance, beginning of period
|
|
$
|
2.1
|
|
|
$
|
2.6
|
|
|
$
|
2.0
|
|
Warranty costs incurred
|
|
|
(1.0
|
)
|
|
|
(1.8
|
)
|
|
|
(1.2
|
)
|
Warranties issued
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.1
|
|
Other
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
2.6
|
|
|
$
|
2.0
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Lived
Assets:
We have recorded property, plant and equipment and intangible
assets at cost less accumulated amortization. The determination
of useful lives and whether or not these assets are impaired
involves significant judgment. We assess the impairment of
long-lived assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
51
In response to changes in industry and market conditions, we may
strategically realign our resources and consider restructuring,
disposing of or exiting businesses, which could result in an
impairment charge. We have not recorded any impairment charges
in fiscal 2006 or fiscal 2007 and do not expect any significant
future charges based on current information.
Goodwill:
We assess goodwill for impairment on an annual basis or more
frequently if circumstances warrant, as required by FASB
Statement No. 142 Goodwill and Other Intangible Assets
(SFAS 142). An impairment charge is recorded if
the implied fair value of goodwill of a reporting unit is less
than the book value of goodwill for that unit. We have four
geographic units that have assigned goodwill of
$6.8 million as of April 30, 2007. Quoted stock market
prices are not available for these individual reporting units.
Accordingly, consistent with SFAS 142, our methodology for
estimating the fair value of each reporting unit primarily
considers estimated future revenues and cash flows for those
reporting units along with many other assumptions. Future
revenue estimates inherently involve a significant amount of
judgment, and significant movements in revenues or changes in
the assumptions used may result in fluctuations in the value of
goodwill that is supported. The result of the most recent annual
impairment test suggests that the assumptions would need to
change significantly in order for an impairment to occur. There
have been no goodwill write-downs since the adoption of
SFAS 142.
Special
Charges:
We record restructuring, exit and other loss accruals when the
liability has been incurred. We reassess the accruals on a
quarterly basis to reflect changes in the timing or amount of
estimated restructuring and termination costs on which the
original estimates were based. New restructuring accruals or
reversals of previous accruals are recorded in the period of
change. Additional accruals for fiscal 2006 and fiscal 2007
resulted from new restructuring activities and severance costs.
No additions or reversals were made in fiscal 2007 as a result
of changes in estimates.
Lease
Termination Obligations:
Estimates used to establish reserves related to real estate
lease obligations have been reduced for sublease income that we
believe is probable. Because certain real estate lease
obligations extend through fiscal 2011, assumptions were made as
to the timing, availability and amount of sublease income that
we expect to receive. In making these assumptions, many
variables were considered such as the vacancy rates of
commercial real estate in local markets and the market rate for
sublease rentals. Because we are required to project sublease
income for many years into the future, estimates and assumptions
regarding the commercial real estate market that were used to
calculate future sublease income may be different from actual
sublease income. During the twelve months ended April 30,
2007 a reversal of $1.0 million, as compared to
$1.7 million in fiscal 2006, was made against our lease
termination obligation estimates as a result of changes in these
and other operating cost assumptions relating to the disposal of
manufacturing operations.
As of April 30, 2007, the combined balance relating to
lease termination obligations was $5.8 million. This
estimate will change as a result of actual results, the passage
of time and changes in assumptions regarding vacancy, market
rate, and operating costs.
Deferred
Taxes:
We recognize deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and
the tax bases of assets and liabilities. Significant management
judgment is required in determining any valuation allowance
recorded against our net deferred tax assets. We make an
assessment of the likelihood that our deferred tax assets will
be recovered from future taxable income, and to the extent that
recovery is not believed to be more likely than not, a valuation
allowance is recorded. We have incurred significant operating
losses since our incorporation in 2001. We believe there is no
assurance that we will be able to achieve profitability, or
that, if achieved, such profitability can be sustained. As a
result, there is uncertainty regarding the future utilization of
net deferred tax assets relating to most areas of the business
and consequently a valuation allowance has been recorded against
the entire $97.6 million net deferred tax assets at
April 30, 2007. The amount that had not
52
been provided for in fiscal 2006 related to three years of
unrestricted United States losses. At April 30, 2006, these
losses were believed to be recoverable since we had a history of
utilizing losses in the United States in the three prior
consecutive years, and expected to continue to use them. At
April 30, 2007 we no longer believe these losses are
recoverable, since there was uncertainty at the time regarding
the companys future profitability and going concern, and
so the deferred tax assets were written-off in fiscal 2007.
Pension
Costs:
Our U.K. subsidiary maintains a defined benefit pension plan.
Our defined benefit pension costs are developed from actuarial
valuations. Inherent in these valuations are key assumptions
provided by us to the actuaries, including discount rates,
expected return on plan assets and rate of compensation
increases. In estimating the rates and returns, we consider
current market conditions and anticipate how these will affect
discount rates, expected returns and rates of compensation
increases. Material changes in our pension benefit costs may
occur in the future as a result of changes to these assumptions
or from fluctuations in our related headcount or market
conditions.
During fiscal 2007 the pension liability recorded on our balance
sheet increased from $40.1 million to $50.5 million.
This increase is largely attributable to the Company adopting
the requirements of SFAS 158 in fiscal 2007. SFAS 158
requires that we recognize the underfunded status of a defined
benefit pension as a liability in our statement of financial
position and requires that we recognize changes in that funded
status in the year in which the changes occur through
comprehensive income. SFAS 158 also requires that we
measure the pension plan assets and obligations at the date of
our balance sheet, as opposed to our previous measurement date
of March 31. The effect of the initial adoption of
SFAS 158 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
|
|
|
|
April 30, 2007
|
|
|
SFAS 158
|
|
|
2007
|
|
|
|
Pre-SFAS 158
|
|
|
Adjustments
|
|
|
Post-SFAS 158
|
|
|
Pension liability
|
|
$
|
25.4
|
|
|
$
|
25.1
|
|
|
$
|
50.5
|
|
Accumulated deficit
|
|
$
|
(397.8
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(398.2
|
)
|
Accumulated other comprehensive loss
|
|
$
|
(31.9
|
)
|
|
$
|
(24.7
|
)
|
|
$
|
(56.6
|
)
|
Excluding the effects of SFAS 158 adoption as well as
foreign currency translations, there was in fact a significant
improvement in the underfunded status of the pension plan as
both the Projected Benefit Obligation and Accumulated Benefit
Obligation decreased by $6.2 million
(£3.1 million) and $18.6 million
(£9.3 million) respectively, while the fair value of
Plan Assets increased by $9.0 million
(£4.5 million). Had prior year comparatives been
restated to reflect the effects of SFAS 158 requirements,
the pension liability at April 30, 2006 would have been
$59.9 as compared to $50.5 at April 30, 2007.
The decrease in the benefit obligations is largely attributable
to a $15.5 million actuarial gain that is primarily driven
by an increase in the discount rate assumption from 5.00% in
2006 to 5.5% in 2007. The following assumptions were used in
valuing the liabilities and benefits under the pension plan:
|
|
|
|
|
|
|
April 30,
|
|
April 30,
|
|
|
2006
|
|
2007
|
|
Discount rate
|
|
5.00%
|
|
5.50%
|
Compensation increase rate
|
|
2.75%
|
|
3.00%
|
Inflation rate
|
|
2.75%
|
|
3.00%
|
Average remaining service life of employees
|
|
21 years
|
|
20 years
|
Stock
Based Compensation:
Effective May 1, 2005, we adopted SFAS 123(R), which
requires that we recognize compensation expense for the fair
value of stock options granted. In order to determine the
options fair value and quantify the expense, SFAS 123(R)
requires that we make subjective input assumptions regarding the
expected life of the options, expected volatility of the options
and other items. Based on the assumptions we made, share based
compensation increased our net loss by $0.3 for the year ended
April 30, 2007. We expect this expense to increase in
future years as
53
additional options are granted. Changes to the underlying
assumptions may have a significant impact on the underlying
value of the stock options, which could have a material impact
on our financial statements.
Derivative
Instruments:
Embedded derivatives exist in a number of our securities. We
issued convertible, redeemable preferred shares which have a
redemption value that is indexed to our common share price. This
redemption feature qualifies as a derivative instrument. Our
convertible notes contain a Make-Whole Premium (as
that term is defined in the Convertible Notes) and certain
redemption rights upon a Fundamental Change (as that
term is defined in the Convertible Notes). The Make Whole
Premium and redemption rights upon a Fundamental Change qualify
as derivative instruments. The embedded derivatives noted above
have to be accounted for separately under FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging
Activities. The embedded derivatives are then marked-to-market
with changes in the value recorded in our consolidated statement
of operations. Changes in key assumptions used in determining
the market value of the embedded derivatives, specifically,
assumptions used in: (a) present value calculations,
(b) movements in our future common share price,
(c) factors determining the likelihood of a Fundamental
Change and (d) factors determining the likelihood of both a
Fundamental Change and Make-Whole Premium, could have a material
impact on our financial statements.
Based on the above listed assumptions, the values of the
Make-Whole Premium and redemption feature derivatives at
April 30, 2007 were nominal and $67.3 million
respectively. The derivative relating to the redeemable
preferred shares reflects a discount rate of 17%, common share
fair value of $1.05, and a remaining term of two years.
The basis to support the significant redemption feature
valuation assumptions as of April 30, 2007 is as follows:
|
|
|
|
|
The discount rate is determined based on several factors
including our credit risk, cost of borrowing and liquidity risk.
These factors were taken into consideration when the original
discount rate was determined to be 17%. At the time the
redeemable preferred shares were issued, this rate was set to
exceed our cost of borrowing so that it would reflect a premium
for credit risk to maturity. As of April 30, 2007, we
believed that the rate of 17% continued to be appropriate since,
although the credit risk may have decreased due to the reduced
term to maturity, we did not have access to unsecured credit
facilities. As at year-end, there was also an impending
liquidity risk of the put options being exercised if the merger
transaction was not completed, thereby supporting that a
decrease in the rate is not required.
|
|
|
|
The fair value of the Common Shares at the time the redeemable
preferred shares were issued in April 2004 was determined to be
$0.87 (C$1.00). The fair value of the shares used in the
calculation of the fair value of the derivative at
April 30, 2007 was $1.05 (C$1.16).
|
|
|
|
At any time after five years, our preferred shareholders have
the right to require us to redeem the shares. Since the shares
were issued in April 2004, there were two years remaining as at
April 30, 2007.
|
The common share fair value is based on a number of highly
subjective qualitative and quantitative assumptions made by
management. In fiscal 2007, a fair value gain of $8.6 was
recorded as a result of a decrease in the fair value estimate of
our Common Shares from U.S.$1.38 at April 30, 2006 to
U.S$1.05 at April 30, 2007. The decrease in the Common
Shares resulted in a $21.2 gain and was partially offset by
$12.6 of regular accretion expense.
54
The following table highlights the sensitivity of the
derivatives fair value adjustment to changes in discount
rate and fair value assumptions:
|
|
|
|
|
|
|
Effect on Loss
|
|
|
|
Before Income Taxes
|
|
Change in Assumption
|
|
(Inncrease)/Decrease
|
|
|
|
(In millions)
|
|
|
1 percentage point increase in discount rate
|
|
$
|
1.1
|
|
1 percentage point decrease in discount rate
|
|
|
(1.2
|
)
|
1 cent increase in fair value of common share price
|
|
|
(0.6
|
)
|
1 cent decrease in fair value of common share price
|
|
|
0.6
|
|
The preferred shares were converted upon completion of the
Inter-Tel merger. As a result of this conversion the derivative
instruments balance was written off.
Determination
of Fair Market Value of our Common Shares
Prior to December 2005, the fair market value of our Common
Shares was determined by our board of directors with input from
management. All of the members of our board of directors during
this period were experienced in the technology industry and
certain members also had experience in the private equity
markets. Our directors valued our Common Shares by considering
objective and subjective factors including prices in arms-length
financing transactions involving our capital stock, the
non-liquid nature of our Common Shares, the superior rights and
preferences of our preferred shares, our operating results, our
prospects at the date of the respective grants and the
likelihood of achieving a liquidity event for our Common Shares
underlying the options, such as an initial public offering or
sale of the company, given prevailing market conditions.
In April 2004, we entered into a financing transaction where we
issued 20 million Series A Preferred Shares at a share
price of C$1.00 per share and five million warrants exercisable
at a price of C$1.25 each, for total consideration of
C$20 million. The Series A Preferred Shares were
convertible on a 1:1 basis for our Common Shares for a period of
two years, after which they are convertible into a certain
number of additional Common Shares depending upon the fair
market value of the Common Shares. The Series A Preferred
Shares also have certain liquidity preferences over our Common
Shares. In light of the April 2004 financing, our board of
directors set an exercise price at C$1.00 per common share for
the options granted on July 15, 2004 and July 26, 2004
(the exercise price being equal to the per share pricing of the
Series A Preferred Shares issued in April 2004). Given the
relatively short time from the April 2004 financing round our
board of directors determined that C$1.00 per common share was
not less than the fair market value of a common share,
especially given that the options were for Common Shares which
did not have the same liquidity preference as our Series A
Preferred Shares. Our board of directors continued to set the
exercise price at C$1.00 per common share for the options
granted from August 20, 2004 to December 8, 2005. The
valuation during this period was due to the boards
assessment of our financial performance during this period in
which we continued to incur net losses in each fiscal quarter.
Prior to December 2005, we did not obtain contemporaneous
valuations prepared by an unrelated valuation specialist at the
time of each stock option grant because we believed that our
board of directors and management possessed the requisite
valuation expertise to prepare a reasonable estimate of the fair
value of the underlying Common Shares at the time of each grant.
In December 2005, we decided to proceed with this offering in
the United States and Canada. As a result, our board of
directors and management decided to retain an unrelated
valuation firm to calculate the fair value of our Common Shares
as at the end of each quarter in fiscal 2006. Although we have
not proceeded with the offering, we continued to obtain
valuations from an unrelated valuation firm at the end of each
quarter in fiscal 2007. The fair value of the Common Shares
decreased from C$1.55 (U.S.$1.38) at April 30, 2006 to
C$1.16 (U.S.$1.05) at April 30, 2007.
As permitted by the AICPA Audit and Accounting Practice Aid
Valuation of Privately-Held Company Equity Securities
Issued as Compensation, the valuation firm estimated the
fair value of our common equity on a per share basis using a
probability weighted analysis of the present value of the
returns afforded to our common shareholders. In doing this
analysis, the valuation firm considered various scenarios
including the completion of a public offering, our continued
operation as a private company and an orderly liquidation of our
assets. The valuation firm then
55
adjusted the range of probabilities assigned to these scenarios
in each quarter as appropriate. In estimating the fair value of
the Common Shares on a going-concern basis, the valuation firm
determined that given the nature of our operations and the
availability of both historic and forecast financial
information, estimation of the value of the Common Shares on a
per share basis using the market approach methodologies and
income approach methodologies was appropriate. The market
approach was based on historical valuation multiples of
comparable publicly traded companies, and the income approach
was based on a discounted cash flow method applied to
managements projections.
Recent
Accounting Pronouncements
SFAS 155
In February 2006, the FASB issued SFAS 155 Accounting for
Certain Hybrid Financial Instruments, which eliminates the
exemption from applying SFAS 133 to interests in
securitized financial assets so that similar instruments are
accounted for similarly regardless of the form of the
instruments. SFAS 155 also gives entities the option of
applying fair value accounting to certain hybrid financial
instruments in their entirety if they contain embedded
derivatives that would otherwise require bifurcation under
SFAS 133. Under the new approach, fair value accounting
would replace the current practice of recording fair value
changes in earnings. The election of fair value measurement
would be allowed at acquisition, at issuance, or when a
previously recognized financial instrument is subject to a
remeasurement event. Adoption is effective for all financial
instruments acquired or issued after the beginning of an
entitys first fiscal year that begins after
September 15, 2006. The Company adopted the requirements of
SFAS 155 in the first quarter of fiscal 2008. The adoption
did not have a material effect on the consolidated financial
statements.
FIN 48
In June 2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income tax positions and refunds. The
interpretation prescribes a more-likely-than-not threshold and a
measurement attribute for the financial statement recognition
and measurement of a tax position taken or expected to be taken
in a tax return. FIN 48 also provides accounting guidance
on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
Differences between amounts currently recognized and those
determined under the new guidance will need to be recorded on
the date of adoption. We have adopted the provisions of
FIN 48 in the first quarter of fiscal 2008. The adoption
did not have a material effect on the consolidated financial
statements.
SFAS 157
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements,
(SFAS 157). This Standard defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for
fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. We are currently evaluating
the requirements of SFAS 157 and have not yet fully
determined the impact, if any, on the consolidated financial
statements.
SFAS 159
In February 2007, the FASB issued SFAS 159, The Fair
Value Option for Financial Assets and Financial
Liabilities Including an amendment of FASB Statement
No. 115 (SFAS 159), which allows
measurement at fair value of eligible financial assets and
liabilities that are not otherwise measured at fair value. If
the fair value option for an eligible item is elected,
unrealized gains and losses for that item shall be reported in
current earnings at each subsequent reporting date.
SFAS 159 also establishes presentation and disclosure
requirements designed to draw comparison between the different
measurement attributes the Company elects for similar types of
assets and liabilities. SFAS 159 is effective for fiscal
years beginning after November 15, 2007. We are currently
assessing the impact of SFAS 159 on the consolidated
financial statements.
56
|
|
B.
|
Liquidity
and Capital Resources
|
At April 30, 2007, our liquidity consisted of cash and cash
equivalents of $33.5 million; and an uncommitted agreement
with Wesley Clover, a company controlled by Dr. Matthews,
under which we could borrow up to $5 million, on an
unsecured basis, through the issuance of promissory notes. The
promissory notes bear interest at three month London Inter-Bank
Offer Rate (LIBOR) plus 5%. No amounts were
outstanding under the Wesley Clover agreement at April 30,
2007. As at April 30, 2007, we had no other bank credit
facilities available to us.
We have incurred significant operating losses since our
incorporation in 2001. As a result, we have generated negative
cash flows from operations, and had an accumulated deficit of
$398.2 million at April 30, 2007. Our primary source
of funds has been proceeds from the issuance of equity and debt
securities. From inception through April 30, 2007, we have
received net proceeds of $377.1 million from issuances of
our Common Shares, preferred shares, warrants, convertible
debentures and convertible notes.
The defined benefit pension plan in place for a number of our
past and present employees in the United Kingdom had an unfunded
pension liability of $50.5 million at April 30, 2007.
The contributions to fund the benefit obligations under this
plan are based on actuarial valuations, which themselves are
based on certain assumptions about the long term operations of
the plan, including employee turnover and retirement rates, the
performance of the financial markets and interest rates. A draft
actuarial valuation, as at August 1, 2006, for the purposes
of determining the funding requirements has been delivered to
the plan Trustees. In August 2007 we commenced negotiations with
the plan Trustees, concerning a new schedule of contributions
and expect to have agreed upon, and put in place, the new
schedule of contributions by the end of October 2007. Recent
changes in UK Pension Regulations now require that pension
deficits be amortized over shorter time periods, generally
10 years or less. We are presently amortizing the deficit
over 14 years. We expect that the outcome of our
negotiations with the Trustees will result in an amortization
period somewhere between 10 to 14 years. As a result we
expect our funding requirements to increase in future years. The
amount of the increase will depend upon the time period in which
the deficit is amortized. If the deficit were to continue to be
amortized over 14 years, we would expect our annual funding
requirement to be approximately $5.2 million. If the
deficit is amortized over 10 years, we would expect our
annual funding requirements to be approximately
$6.2 million. The actual amount of the annual funding will
depend upon the results of the negotiations with the trustees.
We expect to fund any future increase in the annual
contributions out of our expected future cash flows from
operations.
On August 16, 2007, in connection with the acquisition of
Inter-Tel, we issued $307.1 million in Class 1
Preferred Shares, received gross proceeds of $300 million
from a 7 year First Lien Credit Agreement and proceeds of
$130 million from a 8 year Second Lien Credit
Agreement. The combined proceeds, along with
$195.8 million of Inter-Tels cash, was
substantially used to consummate the purchase of Inter-Tel and
the Re-Organization Transactions set out in Item 4.A.
Information on Mitel History and Development
of Mitel. In addition, as part of the acquisition, we
secured a 5 year, $30 million revolving credit
facility, which remained unutilized at September 30, 2007.
Our source for cash in the future is expected to come from
operations and the $30 million revolving credit facility.
Our most significant source of cash from operations is expected
to be the collection of accounts receivable from our customers.
The primary use of cash is expected to include funding operating
expenses, working capital, capital expenditures, debt service
and other contractual obligations.
Based on our existing cash and cash equivalents, and the
availability of the $30 million revolving credit facility,
we believe that we will have sufficient liquidity to support our
business operations throughout the fiscal year ending
April 30, 2008. However, we may be required, or could
elect, to seek additional funding prior to that time. Our future
capital requirements will depend on many factors: our rate of
revenue growth, the timing and extent of spending to support
product development efforts and expansion of sales and
marketing, the timing of introductions of new products and
enhancements to existing products, and market acceptance of our
products. Additional equity or debt financing may not be
available on acceptable terms or at all. In addition, any
proceeds from the issuance of equity or debt may be required to
be used in whole or in part, to make mandatory payments under
our First and Second Lien Credit Agreements. We believe that our
sources of liquidity beyond April 30, 2008 will be our then
current cash balances, funds from operations and any borrowings
under our revolving credit facility.
57
Cash
Flows
Comparison
of fiscal 2007 to fiscal 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(2.3
|
)
|
|
$
|
(12.0
|
)
|
|
$
|
(9.7
|
)
|
Investing activities
|
|
|
3.7
|
|
|
|
(12.4
|
)
|
|
|
(16.1
|
)
|
Financing activities
|
|
|
(11.7
|
)
|
|
|
21.5
|
|
|
|
33.2
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
0.6
|
|
|
|
0.7
|
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(10.9
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
8.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
35.7
|
|
|
$
|
33.5
|
|
|
$
|
(2.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below is a summary of comparative results of cash flows and a
more detailed discussion of results for fiscal 2007 and fiscal
2006
Cash Used in Operating Activities:
Cash used in operating activities increased by $9.7 million
for fiscal 2007 compared to fiscal 2006. The most significant
factors contributing to this improvement were:
|
|
|
|
|
a $9.6 million decrease in the net loss;
|
|
|
|
a $25.5 million decrease in non cash expenses, comprised
mainly of:
|
|
|
|
|
|
a $41.2 million decrease in the fair value adjustment on
the derivative instrument;
|
|
|
|
a $5.6 million increase in deferred income tax expense,
which is a non-cash expense;
|
|
|
|
a $5.3 million decrease in unrealized foreign exchange net
losses;
|
|
|
|
$15.3 million of the Ayava litigation settlement was
non-cash; and
|
|
|
|
|
|
$14.0 million in cash provided by changes in non-cash
operating assets and liabilities.
|
Cash
Provided by (Used in) Investing Activities:
Investing activities used $12.4 million in cash for fiscal
2007 compared to generating $3.7 million in cash for fiscal
2006. The most significant factors contributing to the
$16.1 million change were:
|
|
|
|
|
We received $12.4 million less in proceeds on the sale of
assets in fiscal 2007 than we did in fiscal 2006, as a result of
the August 2005 sale of our Caldicot property; and
|
|
|
|
Our foreign exchange hedging activities used $4.0 million
more in fiscal 2007 than in fiscal 2006
|
Cash
Provided by (Used in) Financing Activities:
Financing activities provided $21.5 million in cash for
fiscal 2007 compared to using $11.7 million in cash for
fiscal 2006. The most significant factors contributing to the
$33.2 million change between the periods were:
|
|
|
|
|
in fiscal 2007 we raised $15 million through the issuance
of warrants to Wesley Clover (a corporation controlled directly
or indirectly by Dr. Matthews);
|
|
|
|
in fiscal 2007, we raised $10.9 million of proceeds upon
transferring our receivables to an unaffiliated financial
institution;
|
|
|
|
in fiscal 2006 we used $9.8 million to repay the mortgage
of the Caldicot property following its sale in August
2005; and
|
58
|
|
|
|
|
in fiscal 2007 we used $1.6 million to repay bank
indebtedness, whereas $0.7 million was provided in 2006 by
increasing bank indebtedness.
|
Comparison
of fiscal 2006 to fiscal 2005
Below is a summary of comparative results of cash flows and a
more detailed discussion of results for fiscal 2006 and fiscal
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal
|
|
|
|
|
|
|
2005
|
|
|
2006
|
|
|
Change
|
|
|
|
(In millions)
|
|
|
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(31.8
|
)
|
|
$
|
(2.3
|
)
|
|
$
|
29.5
|
|
Investing activities
|
|
|
(5.8
|
)
|
|
|
3.7
|
|
|
|
9.5
|
|
Financing activities
|
|
|
20.1
|
|
|
|
(11.7
|
)
|
|
|
(31.8
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
0.5
|
|
|
|
(0.6
|
)
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
(17.0
|
)
|
|
$
|
(10.9
|
)
|
|
$
|
6.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
9.7
|
|
|
$
|
35.7
|
|
|
$
|
26.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Used in Operating Activities:
Cash used in operating activities improved by $29.5 million
for fiscal 2006 compared to fiscal 2005. The most significant
factors contributing to this improvement were:
|
|
|
|
|
a $5.0 million decrease in the net loss;
|
|
|
|
a $27.3 million increase in the fair value adjustment on
the derivative instrument, which is a non-cash expense; and
|
|
|
|
a $4.1 million increase in unrealized foreign exchange net
losses.
|
The above factors were partially offset by a decline of
$1.3 million in non-cash movement of reserves, primarily
related to restructuring activities.
Cash
Provided by (Used in) Investing Activities:
Investing activities provided $3.7 million in cash for
fiscal 2006 compared to $5.8 million used in investing
activities for fiscal 2005. The most significant factors
contributing to the $9.5 million improvement were:
|
|
|
|
|
$12.4 million in proceeds resulting from the sale of our
Caldicot property in August 2005; and
|
|
|
|
$2.8 million in net proceeds resulting from net foreign
exchange gain on our hedging activities.
|
The above factors were offset by the following:
|
|
|
|
|
$4.3 million increase in additions to capital; and
|
|
|
|
$1.4 million increase in restricted cash.
|
Cash
Provided by (Used in) Financing Activities:
Financing activities used $11.7 million in cash for fiscal
2006 compared to providing $20.1 million in cash for fiscal
2005. The most significant factors contributing to the
$31.8 million change between the periods were:
|
|
|
|
|
the repayment of $9.8 million owed on our mortgage of the
Caldicot property following its sale in August 2005;
|
59
|
|
|
|
|
the $12.4 million proceeds received upon the issuance of
warrants to Technology Partnerships Canada in fiscal 2005
pursuant to research and development funding received from
Technology Partnerships Canada; and
|
|
|
|
cash provided by bank indebtedness was $8.2 million less in
fiscal 2006 compared to fiscal 2005.
|
|
|
C.
|
Research
and Development, Patents and Licenses, etc.
|
See Item 5.A. Operating and Financial Review and
Prospects Operating Results.
Historically, businesses have used a data network for their data
communications and a separate telephony network for their voice
communications. These legacy telephony networks are based on
circuit-switched technology and use proprietary operating
systems. These factors limit the manner in which legacy
telephony networks can interoperate with other business
applications or integrate with business processes. Legacy
telephony networks are relatively expensive to operate and
maintain since they require a separate physical network within
the business and a separate management system. Conversely, data
networks are
IP-based. By
using
IP-based
networks for voice communications and associated applications,
businesses can now address their voice, video and data
requirements using a single converged network. A
converged network has significant advantages over maintaining
one network for data communications and a separate network for
voice communications.
Communication services providers, or carriers, are also
embracing VoIP equipment as key elements of next-generation
converged carrier networks. We do not focus on carrier VoIP
infrastructure equipment or consumer VoIP equipment such as
residential VoIP phones. Rather, we focus on communications
solutions and services for business customers. However, our
systems are designed to interoperate with carriers
next-generation networks.
The global market for business IP telephony products and
services has grown rapidly since 2002. Synergy estimates that
enterprise IP telephony market revenues were approximately
$4.9 billion worldwide in 2006 and are expected to grow to
over $15.5 billion by 2011, representing a compound annual
growth rate of 25%. Much of this anticipated growth can be
attributed to the expected replacement of installed legacy
systems with new
IP-based
systems. Synergy forecasts that purchases of
IP-based
systems will comprise more than 96 percent of all
enterprise telephony purchases by 2011. As this replacement
cycle progresses, purchases of legacy circuit-switched telephony
systems are expected to decline at a compound annual rate of
40.3% from 2006 until 2011.
The largest geographic markets for business IP telephony are
North America and EMEA (Europe, Middle East and Africa), which
accounted for 45.7% and 36.2%, respectively, of the overall
global market for the three months ended June 30, 2007. The
Asia-Pacific region and Latin America currently represent small
but rapidly growing markets, with business
IP-based
systems sales in each region more than doubling in size since
2003.
According to InfoTech, a technology market research firm, as of
the end of 2006, over 60% of enterprises in the United States
(businesses with more than 500 employees) have already
commenced the deployment of IP communications and this will
reach 70% by 2008 while 40% small and medium-sized businesses
(those with up to 500 employees) have started
implementations increasing to 60% in 2008. However, according to
InfoTech the SMB market has been growing at a faster rate than
the enterprise segment, where the average annual growth rate has
been 44% compared to 32% respectively over the past two years.
This increase in the SMB segment is forecast to grow 30% over
the next five years in comparison to 14% in the enterprise
segment.
When adopting
IP-based
systems, industry analysts have indicated that medium to large
businesses prefer to purchase their
IP-based
communications solutions using a gradual migration approach
rather than being required to discard their existing network and
telephony infrastructure investments.
IP-based
systems are often adopted by businesses on a gradual basis,
either for new facilities, or initially for a limited user group
such as a functional department. Accordingly, many businesses
are installing voice communications systems that allow them to
migrate to IP over time. For these businesses, it is critical
that their
IP-based
systems are able to interoperate with their existing telephony
and data infrastructure. It is also critical that their
IP-based
systems be scalable so that they can grow along with their
business without the need to change existing telephony systems
or retrain staff. These systems also need to be flexible enough
to operate either at a central location, where the system will
support users in that
60
location and provide service to users in branch offices, or be
installed at each individual office that a business may have, or
a combination of both. In combination with flexibility, a
critical part of the system design is to ensure transparent
operation and accessibility is delivered to all users anywhere.
A single system serving all users or multiple systems in
different locations must operate as one communications service.
Initially, cost reductions were the primary reason for the
adoption of converged
IP-based
communications systems. These cost reductions can include:
|
|
|
|
|
the reduction or elimination of long distance and local toll
charges;
|
|
|
|
lower network maintenance expenses since physical moves,
additions and changes can be handled centrally in an
IP-based
network;
|
|
|
|
decreased network management staff requirements since both voice
and data communications are carried on a single network; and
|
|
|
|
lower cabling costs in new building construction since the same
cable carries both voice and data communications.
|
Businesses are now looking beyond cost savings to the
productivity benefits, improved customer interaction and other
business process improvements that
IP-based
communications can offer. Adopting a converged
IP-based
communications network allows businesses to distribute voice,
video and data to any part of their network, permitting
employees who are working from a branch office or from home or
those who are mobile, to access business software applications
as though they were in the office. This accessibility is
enhanced by new software applications that provide employees
with the ability to detect the presence and availability of a
colleague, team, supplier or customer on the network and allow
access to software applications that facilitate audio and video
conferencing and unified communications. Businesses also see
opportunities to more efficiently manage human resources by
allowing customer service staff, technical support and other
personnel to work from home, branch offices or from remote
locations around the world. Additionally, businesses can use
IP-based
communications to enhance their business continuity plans by
providing employees with access to information and services from
remote locations.
IP-based
communications allow businesses to implement
hot-desking, whereby an employee who is not
regularly in an office or who travels between office locations,
can login to their communications service and access their
personalized features, such as calling privileges, call logs,
pre-programmed speed dial keys and voicemail, from any telephone
that is associated with a hot-desk.
Additional business process opportunities arise with the
convergence of fixed and mobile communications that is possible
with
IP-based
communications. Worker mobility gives rise to a number of
opportunities and challenges for businesses. For example,
employees who are frequently out of their offices rely
extensively on their cellular phones, but these phones can be
costly and do not give the employees access to centralized
services such as office voicemail. Businesses are concerned
about the cost of airtime and long distance charges of cellular
devices, particularly when they are used within company
premises. Mobile workers are also frustrated with the need to
use multiple devices (as opposed to one phone that could be used
in the car, the office and at home) and the burden of managing
multiple voicemail accounts. Businesses are seeking
communications solutions that integrate fixed, wireless and
mobile networks in order to provide workers with advanced
IP-based
features from their mobile devices and remote locations in the
same manner as from their desk.
As businesses make their IP migration decisions based on the
potential for business process improvements, they are also
looking for advanced software applications and functionality
specific to their particular industry. Vendors of
IP-based
communications solutions that are able to offer software
applications that are tailored to the specific needs of the
customers industry will benefit from new, typically
higher-margin, software revenue streams.
The business communications business is highly competitive.
Competition is a significant factor and, given that many of our
competitors have greater financial and other resources, and can
impact our financial results.
61
|
|
E.
|
Off-Balance
Sheet Arrangements
|
We have the following material off balance sheet arrangements as
of April 30, 2007:
Letters
of Credit:
We had $0.4 million in letters of credit outstanding as of
April 30, 2007.
Bid
and Performance Related Bonds:
We enter into bid and performance related bonds related to
various customer contracts. Potential payments due under these
may be related to our performance
and/or our
resellers performance under the applicable contract. The
total maximum potential amount of future payments we could be
required to make under bid and performance related bonds,
excluding letters of credit, was $3.6 million as of
April 30, 2007. Of this amount, the amount relating to
guarantees of our resellers performance was
$2.3 million as of April 30, 2007. Historically, we
have not made any payments and we do not anticipate that we will
be required to make any material payments under these types of
bonds.
Intellectual
Property Indemnification Obligations:
We enter into agreements on a regular basis with customers and
suppliers that include limited intellectual property
indemnification obligations that are customary in the industry.
These obligations generally require us to compensate the other
party for certain damages and costs incurred as a result of
third party intellectual property claims arising from these
transactions. The nature of these intellectual property
indemnification obligations prevents us from making a reasonable
estimate of the maximum potential amount we could be required to
pay to our customers and suppliers. Historically, we have not
made any significant indemnification payments under such
agreements and no amount has been accrued in the consolidated
financial statements with respect to these obligations.
|
|
F.
|
Tabular
Disclosure of Contractual Obligations
|
The following table sets forth our contractual obligations as of
April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
After
|
|
Contractual Obligations
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years
|
|
|
|
(In millions)
|
|
|
Long-term debt obligations(1)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease obligations(1)
|
|
|
4.4
|
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
0.4
|
|
|
|
|
|
Operating lease obligations(2)
|
|
|
64.9
|
|
|
|
16.1
|
|
|
|
27.2
|
|
|
|
13.0
|
|
|
|
8.6
|
|
Purchase obligations(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan Contributions(4)
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
18.7
|
|
|
|
3.8
|
|
|
|
7.5
|
|
|
|
7.4
|
|
|
|
|
|
Convertible notes(5)
|
|
|
67.9
|
|
|
|
4.7
|
|
|
|
63.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
140.2
|
|
|
$
|
25.8
|
|
|
$
|
92.4
|
|
|
$
|
13.4
|
|
|
$
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the principal and interest payments for the loans.
Interest on these loans ranges from 1.3% to 11.8%, as described
in our consolidated financial statements. |
|
(2) |
|
Operating lease obligations exclude payments to be received by
us under sublease arrangements. |
|
(3) |
|
Represents primarily our obligation to acquire capital equipment
from BreconRidge pursuant to the supply agreement between us and
BreconRidge dated August 31, 2001. |
|
(4) |
|
Represents the estimated contribution to our U.K. defined
benefit pension plan over the next twelve months. We expect our
funding requirements to increase in future years. The amount of
the increase will depend upon the |
62
|
|
|
|
|
time period in which the deficit is amortized. If the deficit
were to continue to be amortized over 14 years, we would
expect our annual funding requirement to be approximately
$5.2 million. If the deficit is amortized over
10 years, we would expect our annual funding requirements
to be approximately $6.2 million. The actual amount of the
annual funding will depend upon the results of the negotiations
with the trustees. We expect to fund any future increase in the
annual contributions out of our expected future cash flows from
operations. Liabilities arising from the deficit in our defined
benefit pension plan are not included in the above table. As at
April 30, 2007, the projected benefit obligation of
$173.9 million exceeded the fair value of the plan assets
of $123.4 million, resulting in an unfunded status of
$50.5 million as recorded in our consolidated balance sheet
as of April 30, 2007. |
|
(5) |
|
Represents the principal balance on maturity of the convertible
notes and an estimate of the variable interest payable on the
convertible notes. The interest is based on a spread over LIBOR
of 500 basis points prior to an initial public offering and
250 basis points subsequent to an initial public offering.
For the purposes estimating the variable interest, LIBOR has
been assumed to be 5%. Immediately prior to the completion of
our acquisition of Inter-Tel, we entered into an agreement
with the Noteholders to prepay the principal balance for an
aggregate amount of $66 million plus accrued and unpaid
interest (see Item 10.C. Additional Information Material
Contracts Senior Secured Convertible Note
Transaction. |
Obligations arising from research and development spending
commitments under the TPC Agreement (See Item 10.C.
Additional Information Material
Contracts TPC Agreement) are not included in
the above table. The TPC Agreement, as last amended on
October 31, 2006, requires us to invest an aggregate of
C$366.5 million worth of research and development over a
seven year period commencing on March 31, 2005, with a
minimum of C$45.8 million to be invested each year. Our
spending on research and development for both years ended
March 31, 2006 and March 31, 2007 exceeded
C$45.8 million and as such we achieved the minimum
requirement for the first and second years of the seven-year
period.
Please see Item 3.D. Key Information Risk
Factors and Item 10.B. Additional
Information Memorandum and Articles of
Incorporation for information concerning certain
conversion and redemption rights of those of our shareholders
who hold Preferred Shares, the exercise of which, in certain
circumstances, could have a material adverse impact on our cash
flow and operations.
Please also see Item 3.D. Key Information
Risk Factors and Item 10.C. Additional
Information Material Contracts, for further
information concerning the conversion rights of the holders of
certain warrants convertible or exchangeable into Common Shares.
The exercise of these rights, in certain circumstances, could
have a material adverse impact on our cash flow and operations.
Please see Forward Looking Information on
page 2 of this annual report.
|
|
Item 6.
|
Directors,
Senior Management and Employees
|
|
|
A.
|
Directors
and Senior Management
|
Our directors are either elected annually by the shareholders at
the annual meeting of shareholders or, subject to our articles
of incorporation and applicable law, appointed by our board of
directors between annual meetings. Each director holds office
until the close of the next annual meeting of our shareholders
or until he or she ceases to be a director by operation of law,
or until his or her removal or resignation becomes effective.
Please see also Item 6.C. Directors, Senior
Management and Employees Board Practices, and
Item 10.B. Additional Information
Memorandum and Articles of Incorporation for additional
information concerning board practices and election of directors.
Pursuant to the shareholders agreement dated April 23,
2004, as amended, (the 2004
Shareholders Agreement) between us, Wesley Clover,
Zarlink, PTIC, Dr. Matthews, Celtic Tech Jet Limited
(CTJL), and EdgeStone Capital Equity
Fund II-B
GP, Inc., as agent for EdgeStone Capital Equity
Fund II-A,
L.P. and its parallel investors, and EdgeStone Capital Equity
Fund II Nominee, Inc., as nominee for EdgeStone Capital
Equity
Fund II-A,
L.P. and its parallel investors (collectively
EdgeStone), Edgestone was entitled to nominate two
directors to the Board.
63
Gilbert S. Palter and Guthrie S. Stewart were the nominees of
EdgeStone. The parties to the 2004 Shareholders Agreement
agreed, among other matters, to act and vote from time to time
so that on any election of directors by our shareholders, the
EdgeStone nominees were elected. Currently, four of the eight
members of our board of directors, namely, Dr. Matthews,
Peter Charbonneau, Gilbert Palter and Guthrie Stewart, are also
members of the board of directors of BreconRidge. Guthrie
Stewart is also the chairman of the board of BreconRidge.
On August 16, 2007 (as described in Item 10.C.
Additional Information Material
Contracts 2007 Shareholders Agreement), we
replaced the 2004 Shareholders Agreement by entering into
an agreement with Wesley Clover, PTIC, Dr. Matthews, CTJL,
EdgeStone, Morgan Stanley Principal Investments, Inc.
(Morgan Stanley) and Arsenal Holdco I, S.A.R.L.
and Arsenal Holdco II, S.A.R.L. (Francisco
Partners) (the 2007 Shareholders Agreement).
Francisco Partners is entitled to nominate four directors to the
Board. Benjamin H. Ball, David T. ibnAle, Thomas L. Ludwig and
Norman Stout are the four nominees of Francisco Partners.
Dr. Matthews is also entitled to nominate three directors
to the Board. Dr. Matthews nominees include himself
as well as Donald W. Smith and Peter D. Charbonneau. The parties
to the 2007 Shareholders Agreement agreed, among other
matters, to act and vote from time to time so that on any
election of directors by our shareholders, the nominees of both
Francisco Partners and Dr. Matthews are elected. We intend
to hold a shareholder meeting on October 23, 2007, in which
these nominees are nominated for election to our board of
directors.The parties have agreed to nominate Jean-Paul Cossart
as an independent director. Currently, three of the nine members
of our board of directors, namely, Dr. Matthews, Peter
Charbonneau and Gilbert Palter, are also members of the board of
directors of BreconRidge.
See Item 10.C. Additional Information
Material Contracts 2007 Shareholders
Agreement for further discussion of the
2007 Shareholders Agreement.
64
The following table sets forth information with respect to our
directors and executive officers as of September 30, 2007.
|
|
|
|
|
|
|
|
|
Name and Municipality of Residence
|
|
Age
|
|
Position
|
|
Principal Occupation
|
|
Dr. Terence H. Matthews(1)
Ottawa, Ontario, Canada
|
|
|
64
|
|
|
Chairman of the Board
|
|
Chairman of the Board of Mitel Chairman of the Board of March
Networks
|
Donald W. Smith Ottawa,
Ontario, Canada
|
|
|
59
|
|
|
Chief Executive Officer and Director
|
|
Chief Executive Officer of Mitel
|
Peter D. Charbonneau(2)
Ottawa, Ontario, Canada
|
|
|
54
|
|
|
Lead Director
|
|
General Partner of Skypoint Capital Corporation
|
Kirk K. Mandy
Ottawa, Ontario, Canada
|
|
|
51
|
|
|
Director
|
|
Chief Executive Officer of Zarlink
|
Gilbert S. Palter
Toronto, Ontario, Canada
|
|
|
42
|
|
|
Director
|
|
Chief Investment Officer and Managing Partner of EdgeStone
Capital Partners, L.P.
|
Guthrie J. Stewart
Montréal, Quebec, Canada
|
|
|
52
|
|
|
Director
|
|
Partner of EdgeStone Capital Partners, L.P.
|
Paul A.N. Butcher
Ottawa, Ontario, Canada
|
|
|
45
|
|
|
President and Chief Operating Officer and Director
|
|
President and Chief Operating Officer of Mitel
|
Steven E. Spooner
Ottawa, Ontario, Canada
|
|
|
49
|
|
|
Chief Financial Officer
|
|
Chief Financial Officer of Mitel
|
Graham Bevington
Chepstow, Wales
|
|
|
47
|
|
|
Vice President and Managing Director, Europe, Middle East and
Africa Region
|
|
Vice President and Managing Director, Europe, Middle East and
Africa Region of Mitel
|
Norman Stout
Phoenix, Arizona, US
|
|
|
50
|
|
|
Chief Executive Officer, Mitel US
|
|
Chief Executive Officer, Mitel US
|
Craig Rauchle
Phoenix, Arizona, US
|
|
|
52
|
|
|
President, Mitel US
|
|
President, Mitel US
|
Roger K. Fung
Hong Kong, China
|
|
|
55
|
|
|
Vice President and Managing Director, Asia-Pacific Region
|
|
Vice President and Managing Director, Asia-Pacific Region of
Mitel
|
Douglas W. Michaelides(3)
Ottawa, Ontario, Canada
|
|
|
46
|
|
|
Vice President, Global Marketing
|
|
Vice President, Global Marketing of Mitel
|
Ronald G. Wellard
Ottawa, Ontario, Canada
|
|
|
49
|
|
|
Vice President, Product Development
|
|
Vice President, Product Development of Mitel
|
|
|
|
(1) |
|
Dr. Matthews routinely invests in and sits as a director on
the boards of businesses that are at an early stage of
development and that, as a result, involve substantial risks.
Dr. Matthews was a director of Ironbridge Networks
Corporation, which went into receivership in January 2001 and
West End Systems Corporation, which went into receivership in
February 1999. |
|
(2) |
|
Mr. Charbonneau was a director of METConnex Inc., which
filed a notice of intention to file for bankruptcy protection on
September 28, 2006. He resigned from the board in June 2007. |
|
(3) |
|
Mr. Michaelides was employed by Nortel Networks Corporation
(Nortel) in the area of sales and marketing prior to
October 2003. In that time, he became subject to a management
cease trade order regarding the securities of Nortel issued by
the Ontario Securities Commission, resulting from a failure by
Nortel to file its financial statements as required. The cease
trade order was revoked on June 21, 2005. |
Executive officers are appointed by the board of directors to
serve, subject to the discretion of the board of directors,
until their successors are appointed.
65
Dr. Terence H. Matthews is our founder, Chairman,
and a shareholder. Dr. Matthews has been involved with us
and previously with Mitel Corporation (now Zarlink), for over
18 years. In 1972, he co-founded Mitel Corporation and
served as its President until 1985 when British
Telecommunications plc bought a controlling interest in the
company. In 2001, companies controlled by Dr. Matthews
purchased a controlling interest in Mitel Corporations
communications systems division and the Mitel
trademarks to form Mitel. Between 1986 and 2000,
Dr. Matthews founded Newbridge Networks Corporation and
served as its Chief Executive Officer and Chairman.
Dr. Matthews is also the founder of Celtic House Venture
Partners, an early stage technology venture capital firm with
offices in Canada and the United Kingdom, which invests in high
technology companies. Dr. Matthews is also the founder and
Chairman of Wesley Clover Corporation, a world class investment
group with offices in the United Kingdom, Canada and Australia
with investments in telecommunications, real estate and leisure.
In addition, Dr. Matthews currently serves on the board of
directors of a number of high technology companies, including
BreconRidge and is Chairman of March Networks Corporation,
Newport Networks Corporation and Bridgewater Systems
Corporation. Dr. Matthews holds an honors degree in
electronics from the University of Wales, Swansea and is a
Fellow of the Institute of Electrical Engineers and of the Royal
Academy of Engineering. He has been awarded honorary doctorates
by several universities, including the University of Wales,
Glamorgan and Swansea, and Carleton University in Ottawa. In
1994, he was appointed an Officer of the Order of the British
Empire, and in the Queens Birthday Honours 2001, he was
awarded a Knighthood.
Donald W. Smith joined us in April 2001 as Chief
Executive Officer and a member of our board of directors.
Mr. Smith has more than 30 years of experience in the
communications technology industry, including over six years at
Mitel Corporation (now Zarlink) which he joined in 1979 as a
Product Manager and left in 1986, after over four years at the
Executive Vice President level. In 1996, Mr. Smith founded
and was President and Chief Executive Officer of Cambrian
Systems Corporation, a company focusing on metro optical
systems. In December 1998, Cambrian Systems was acquired by
Nortel Networks Corporation and from then until January 2000,
Mr. Smith was Vice President and General Manager of OPTera
Solutions, a division of Nortel. In January 2000, Mr. Smith
was promoted to President of Optical Internet, Nortel.
Mr. Smith holds a Bachelor of Science degree in Engineering
from Imperial College, London University (U.K.).
Peter D. Charbonneau is a General Partner at Skypoint
Capital Corporation, an early-stage technology venture capital
firm, a position he has held since January 2001. From June 2000
to December 2000, Mr. Charbonneau was an Executive Vice
President of March Networks Corporation. Previously, he spent
13 years at Newbridge Networks Corporation acting in
numerous capacities including as Chief Financial Officer,
Executive Vice President, President and Chief Operating Officer
and Vice Chairman. He also served as a member of
Newbridges board of directors between 1996 and 2000.
Mr. Charbonneau was appointed to our board of directors on
February 16, 2001 and currently serves on the board of
directors of a number of other technology companies, including
BreconRidge, March Networks Corporation, True Context
Corporation and Galazar Networks Inc. Mr. Charbonneau holds
a Bachelor of Science degree from the University of Ottawa and
an MBA from University of Western Ontario (London, Ontario,
Canada). He has been a member of the Institute of Chartered
Accountants of Ontario since 1979 and in June 2003 was elected
by the Council as a Fellow of the Institute in recognition of
outstanding career achievements and leadership contributions to
the community and to the profession.
Kirk K. Mandy is President and Chief Executive Officer of
Zarlink, a position he has held since February 17, 2005.
Mr. Mandy has been associated with Zarlink, formerly known
as Mitel Corporation, for 21 years. During this time, he
oversaw Mitel Corporations strategic decision to focus on
semiconductors, and the subsequent divestiture of the
communications systems division to Mitel in 2001. Between May
2001 and February 2005, he was an independent management
consultant and Vice Chairman of Zarlinks board of
directors. From July 1998 to February 2001 he was the President
and Chief Executive Officer of Mitel Corporation. From 1992 to
1998, Mr. Mandy was Vice President and General Manager of
Mitel Corporations semiconductor division. He was
appointed to our board of directors in July 2002 and currently
serves on the board of directors of Zarlink, Epocal Corporation,
Photwatt Technologies and is the Chairman of The Armstrong
Monitoring Corporation. Mr. Mandy has also served on the
board of directors of Strategic Microelectronics Corporation,
the Canadian Advanced Technology Association, Canadian
Microelectronics Corp., the Ottawa Center for Research and
Innovation and Micronet Technology. Mr. Mandys more
than 25 years of experience in the telecommunications
industry includes past Chairman of the Telecommunications
Research Center of Ontario, Past Co-Chairman of the National
Research
66
Councils Innovation Forum and past Co-Chairman of the
Ottawa Partnership. Mr. Mandy is a graduate of Algonquin
College (Ottawa, Ontario, Canada).
Gilbert S. Palter is the Chief Investment Officer and
Managing Partner of EdgeStone Capital Partners, L.P., a Canadian
private equity firm. Mr. Palter has held this position
since 1999, prior to which he was the founder, Chief Executive
Officer and Managing Director of Eladdan Capital Partners, Inc.,
a private equity fund targeting middle-market Canadian and
U.S. companies. Mr. Palter held the position of
Vice-President at Smith Barney Canada Inc. in 1995 and was
Associate Managing Director of Clairvest Group Inc., a
TSX-listed private equity fund, from 1993 to 1994. He was
appointed to our board of directors on April 23, 2004 and
is also a member of the board of directors of a number of
companies, including BreconRidge and Eurospec Manufacturing
Inc., Stephensons Rental Services Inc. and the Continental
Group and is Chairman of Specialty Catalog Corp. He is a former
Chairman of Hair Club Group Inc., Trimaster Manufacturing Inc.,
BFI Canada Inc. and Farley Windows Inc. and was previously a
director of Xantrex Technology Inc. Mr. Palter holds
Bachelor of Computer Science and Economics degrees from the
University of Toronto (Ontario, Canada) and an MBA from Harvard
Business School.
Guthrie J. Stewart has been a partner of EdgeStone
Capital Partners, L.P., a Canadian private equity firm, since
October 2001. He has more than 15 years of experience in
executive management and corporate development. From 1992 to
2000, Mr. Stewart held various executive positions within
the Teleglobe Inc. group, including President and Chief
Executive Officer of Teleglobe Canada Inc., Canadas
international telecommunication carrier. Prior to that, he was a
founding officer of B.C.E. Mobile Communications Inc.
Mr. Stewart was appointed to our board of directors on
April 23, 2004 and is also a member of the board of
directors of MRRM Inc., Eurospec Manufacturing Inc., New Food
Classics, the GBC North American Growth Fund Inc. and
Chairman of BreconRidge. Mr. Stewart studied honours
science at Queens University (Kingston, Ontario, Canada),
and holds an LL.B. from Osgoode Hall Law School (Toronto,
Ontario, Canada) and an MBA from INSEAD (Fontainebleau, France).
Paul A.N. Butcher has worked with us and previously with
Mitel Corporation (now Zarlink) for over 15 years. Since
February 16, 2001, Mr. Butcher has been our President
and Chief Operating Officer. He was a member of our board of
directors from February 2001 until recently. From 1998 until
February 2001, he was Senior Vice President and General Manager
of Mitel Communication Systems, a division of Mitel Corporation,
and from 1997 until 1998, Mr. Butcher was Managing Director
for the Europe, Middle East and Africa region of Mitel
Corporation where he focused on developing and delivering
converged voice and data communications systems and applications
for enterprises. Mr. Butcher has considerable international
experience, including several European-based assignments as
Marketing Director and General Manager of Mitel Communication
Systems. He currently serves on the board of directors of
Natural Convergence Inc. Mr. Butcher holds a Hi Tech
Diploma from Reading College of Art and Technology (U.K.).
Steven E. Spooner joined us in June 2003 as Chief
Financial Officer. Mr. Spooner has more than 23 years
of financial, administrative and operational experience with
companies in the high technology and telecommunications sectors.
Between April 2002 and June 2003, he was an independent
management consultant for various technology companies. From
February 2000 to March 2002, Mr. Spooner was President and
Chief Executive Officer of Stream Intelligent Networks Corp., a
competitive access provider and supplier of point-to-point high
speed managed bandwidth. From February 1995 to February 2000,
Mr. Spooner served as Vice President and Chief Financial
Officer of CrossKeys Systems Corporation, a publicly traded
company between 1997 and 2001. Prior to that, Mr. Spooner
was Vice President Finance and Corporate Controller of SHL
Systemhouse Inc., also a publicly traded company.
Mr. Spooner held progressively senior financial management
responsibilities at Digital Equipment for Canada Ltd. from 1984
to 1990 and at Wang Canada Ltd. from 1990 to 1992. He is a
Chartered Accountant (Ontario 1982) and an honours Commerce
graduate of Carleton University (Ottawa, Ontario, Canada).
Graham Bevington has been our Vice-President and Managing
Director of the Europe, Middle East and Africa Region since
February 2001. Between January 2000 and February 2001,
Mr. Bevington held the same position for Mitel Corporation.
From 1997 until December 1999, he was Managing Director at
DeTeWe Limited. From 1986 until 1997, Mr. Bevington was
Sales Director at Shipton DeTeWe Limited.
Roger K. Fung joined us in 2002 as Vice-President and
Managing Director, Asia-Pacific Region. From 2000 until 2002,
Mr. Fung was employed by March Networks Corporation in a
similar capacity. Prior to this he was a founding member of
Newbridge Networks Asia Ltd., where he served as President
Asia-Pacific, helping to build the
67
business in Asia-Pacific from 1987 to 2000. He currently serves
on the board of directors of several companies, including Mart
Asia Ltd., March Networks Asia Pacific Limited, BreconRidge
Manufacturing Solutions Asia Ltd. and Vodatel Networks Holding
Ltd. Mr. Fung has a Bachelor of Applied Science in
Industrial Engineering Degree from the University of Toronto.
Norman Stout was appointed Chief Executive Officer of
Inter-Tel and a member of Inter-Tels Board of Directors on
February 22, 2006. He began his tenure at Inter-Tel in 1994
as a director. Four years later, he joined Inter-Tel as
executive vice president, chief administrative officer and
president of Inter-Tel Software and Services. Prior to joining
Inter-Tel, Mr. Stout was Chief Operating Officer of
Oldcastle Architectural Products and since 1996, Mr. Stout
also had served as President of Oldcastle Architectural West.
Mr. Stout held previous positions as President of Superlite
Block; Chief Financial Officer and Chief Executive Officer
(successively) of Boorhem-Fields, Inc. of Dallas, Texas; and as
a Certified Public Accountant with Coopers & Lybrand.
He currently serves on the board of Hypercom Corporation, a
public company headquartered in Phoenix, Arizona. Mr. Stout
holds a Bachelor of Business Administration degree in Accounting
from Texas A&M and an MBA from the University of Texas. He
currently holds the position of CEO, US.
Craig W. Rauchle was appointed President of Inter-Tel in
February 2005. He was appointed Chief Operating Officer of
Inter-Tel in August 2001 and served as its Executive Vice
President from December 1994 to February 2005. As President and
Chief Operating Officer of Inter-Tel, Mr. Rauchle was
responsible for Inter-Tels sales and support functions,
marketing, procurement, distribution and research and
development activities. He had been its Senior Vice President
and continued as President of Inter-Tel Technologies, Inc., its
wholly owned sales subsidiary. Mr. Rauchle joined Inter-Tel
in 1979 as Branch General Manager of the Denver Direct Sales
Office and in 1983 was appointed the Central Region Vice
President and subsequently the Western Regional Vice President.
From 1990 to 1992, Mr. Rauchle served as President of
Inter-Tel Communications, Inc. In 2006, he was elected to the
board of directors of iMergent. Mr. Rauchle holds a
Bachelor of Arts degree in Communications from the University of
Denver. He currently holds the position of President, US.
Douglas W. Michaelides joined us in January 2006 as
Vice-President, Marketing. From October 2003 to December 2005,
Mr. Michaelides was Senior Vice President, Marketing at MTS
Allstream Inc., one of Canadas largest business
telecommunications service providers. Before that he held
various positions over a period of 20 years in sales and
marketing at Nortel, culminating in the role of Vice President
and General Manager of the global professional services business
in 2001. Mr. Michaelides has a Bachelor of Science degree
in electrical engineering from the University of Toronto and an
MBA from York University (Toronto, Ontario, Canada).
Ronald G. Wellard joined us in December 2003 as
Vice-President, Research and Development and currently holds the
position of Vice-President of Product Development. Prior to July
2003, Mr. Wellard was a Vice-President at Nortel and
notably held the position of Product Development Director for
Meridian Norstar from 1994 to 1999. Mr. Wellard has a
Bachelor of Applied Science, Systems Design Engineering degree
from the University of Waterloo (Ontario, Canada).
68
The following table sets forth a summary of compensation paid
during the fiscal year ended April 30, 2007 to our Chief
Executive Officer, Chief Financial Officer and our three next
most highly compensated executive officers (the Named
Executive Officers):
Summary
Compensation Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Compensation
|
|
|
|
|
|
|
|
|
|
|
Securities Underlying Options
|
|
|
|
|
|
|
Annual Compensation
|
|
and Deferred Share Units
|
|
All Other
|
|
|
Name and Principal Position
|
|
Salary
|
|
Bonus
|
|
Granted
|
|
Compensation
|
|
|
|
Donald W. Smith
|
|
$
|
662,375
|
|
|
|
|
|
|
|
600,000 Common Shares
|
|
|
$
|
10,549(3
|
)
|
|
|
|
|
|
|
|
|
Chief Executive Officer (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul A.N. Butcher
|
|
$
|
440,518
|
|
|
|
|
|
|
|
449,746 Common Shares
|
|
|
$
|
21,926(4
|
)
|
|
|
|
|
|
|
|
|
President and Chief Operating Officer (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven E. Spooner
|
|
$
|
285,586
|
|
|
$
|
26,373
|
|
|
|
400,000 Common Shares
|
|
|
$
|
10,549(5
|
)
|
|
|
|
|
|
|
|
|
Chief Financial Officer (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Graham Bevington
|
|
$
|
382,736
|
|
|
|
|
|
|
|
84,000 Common Shares
|
|
|
$
|
38,138(6
|
)
|
|
|
|
|
|
|
|
|
Vice President and Managing Director, Europe,
Middle East and Africa Region (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Roger K. Fung
|
|
$
|
272,208
|
|
|
|
|
|
|
|
30,000 Common Shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vice President and Managing Director Asia-Pacific Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Compensation paid in Canadian dollars, but converted to U.S.
dollars at the average of the noon buying rates per Federal
Reserve Bank of New York for fiscal 2007 of C$1.00 = $0.8791. |
|
(2) |
|
Compensation paid in British Pounds Sterling, but converted to
U.S. dollars at the average of the noon buying rates per Federal
Reserve Bank of New York for fiscal 2006 of GBP £1.00 =
$1.911. |
|
(3) |
|
Mr. Smiths other compensation is a car allowance of
$10,549. |
|
(4) |
|
Mr. Butchers other compensation is comprised of a car
allowance of $15,824 and a company contribution to our Deferred
Share Unit Plan of $6,102. |
|
(5) |
|
Mr. Spooners other compensation is a car allowance of
$10,549. |
|
(6) |
|
Mr. Bevingtons other compensation is a car allowance
of $22,964 and a company contribution to a defined benefit plan
of $14,575. |
69
The following table sets forth information regarding options for
the purchase of Common Shares granted during the fiscal year
ended April 30, 2007 to our directors and Named Executive
Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market Value
|
|
|
|
|
|
|
Number of
|
|
|
Percent of
|
|
|
Exercise
|
|
|
of
|
|
|
|
|
|
|
Common
|
|
|
Total Option
|
|
|
Price
|
|
|
Common
|
|
|
|
|
|
|
Shares
|
|
|
s
|
|
|
Per Common
|
|
|
Shares
|
|
|
|
|
|
|
Underlying
|
|
|
Granted to
|
|
|
Share
|
|
|
Underlying
|
|
|
|
|
|
|
Options
|
|
|
Employees in
|
|
|
($/Common
|
|
|
Options on
|
|
|
Expiration
|
|
Name
|
|
Granted(1)
|
|
|
Fiscal Year
|
|
|
Share)(2)
|
|
|
Date of Grant(3)
|
|
|
Date
|
|
|
Donald W. Smith
|
|
|
600,000
|
|
|
|
10.19
|
%
|
|
$
|
1.06
|
|
|
|
|
|
|
|
1-Feb-12
|
|
Paul A.N. Butcher
|
|
|
400,000
|
|
|
|
6.79
|
%
|
|
$
|
1.06
|
|
|
|
|
|
|
|
1-Feb-12
|
|
Steven E. Spooner
|
|
|
400,000
|
|
|
|
6.79
|
%
|
|
$
|
1.06
|
|
|
|
|
|
|
|
1-Feb-12
|
|
Graham Bevington
|
|
|
4,000
|
|
|
|
0.07
|
%
|
|
$
|
1.40
|
|
|
|
|
|
|
|
8-Jun-11
|
|
|
|
|
80,000
|
|
|
|
1.36
|
%
|
|
$
|
1.06
|
|
|
|
|
|
|
|
1-Feb-12
|
|
Roger K. Fung
|
|
|
30,000
|
|
|
|
0.51
|
%
|
|
$
|
1.06
|
|
|
|
|
|
|
|
1-Feb-12
|
|
Dr. Terence H. Matthews
|
|
|
5,932
|
|
|
|
0.10
|
%
|
|
$
|
1.40
|
|
|
|
|
|
|
|
8-Jun-11
|
|
|
|
|
95,996
|
|
|
|
1.63
|
%
|
|
$
|
1.12
|
|
|
|
|
|
|
|
28-Mar-12
|
|
Peter D. Charbonneau
|
|
|
22,034
|
|
|
|
0.37
|
%
|
|
$
|
1.40
|
|
|
|
|
|
|
|
8-Jun-11
|
|
|
|
|
56,173
|
|
|
|
0.95
|
%
|
|
$
|
1.12
|
|
|
|
|
|
|
|
28-Mar-12
|
|
Kirk K. Mandy
|
|
|
20,339
|
|
|
|
0.35
|
%
|
|
$
|
1.40
|
|
|
|
|
|
|
|
8-Jun-11
|
|
|
|
|
51,748
|
|
|
|
0.88
|
%
|
|
$
|
1.12
|
|
|
|
|
|
|
|
28-Mar-12
|
|
Gilbert S. Palter
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guthrie J. Stewart
|
|
|
|
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The options vest as to 25% on the first anniversary of the date
of grant and as to an additional 25% each year thereafter. |
|
(2) |
|
Option exercise prices have been set in Canadian dollars but
converted to U.S. dollars at the noon buying rate per Federal
Reserve Bank of New York on April 30, 2007 of C$1.00 =
$0.90. |
|
(3) |
|
Values based on the midpoint of the public offering price range
set forth on the cover page of this prospectus. |
|
(4) |
|
Options to purchase 105,101 Common Shares have been granted to
EdgeStone Capital Equity Fund II Nominee, Inc. in
connection with Mr. Palter and Mr. Stewart acting as
directors of Mitel. |
Non-employee directors are reimbursed for out-of-pocket expenses
incurred in connection with attending board and committee
meetings. Directors are also eligible to participate in our
equity compensation plan.
Non-employee directors are compensated with either cash or stock
options in lieu of cash. The number of options granted is
calculated using the cash value divided by the Black-Scholes
value at the time of grant.
The remuneration for non-employee directors is based on the
following:
|
|
|
|
|
Annual service on the board of directors (other than the Chair)
|
|
C$
|
25,000
|
|
Annual service as the Chair of the board of directors
|
|
C$
|
100,000
|
|
Annual service as a member of the audit committee (other than
the Chair)
|
|
C$
|
10,000
|
|
Annual service as the Chair of the audit committee
|
|
C$
|
15,000
|
|
Annual service as a member of other standing committees
|
|
C$
|
7,500
|
|
Meeting fees (varies depending on whether in person, by
telephone and by committee)
|
|
C$
|
500-2,000
|
|
In addition, each of our non-employee directors is granted
options to purchase Common Shares annually at an exercise price
equal to the fair market value of those shares on the date of
grant.
We maintain directors and officers liability insurance in the
amount of $15,000,000 for the benefit of our directors and
officers. Our premium is $131,500 which covers the period from
November 1, 2006 to November 1, 2007. No portion of
the premium is paid by our directors and officers. The policy
contains a deductible ranging from
70
$50,000 to $75,000 depending upon the nature of the claim. Our
by-laws provide that we shall indemnify a director or officer
against liability incurred in such capacity including acting at
our request as director or officer of another corporation, to
the extent permitted by the CBCA. The policy contains a number
of exclusions and limitations to the coverage provided, as a
result of which we may, under certain circumstances, be
obligated to indemnify our directors or officers for certain
claims which do not fall within the coverage provided under the
policy. On June 10, 2004, the Board of Directors approved a
form of indemnification agreement and authorized us to enter
into indemnification agreements with each of the directors and
Steve Spooner (CFO), along with certain other corporate officers
designated from time to time by the board of directors.
Employment
Contracts:
Donald W. Smith. Effective as of May 5, 2006, the
Corporation executed an Agreement Amending the Amended and
Restated Employment Agreement with Mr. Smith.
Mr. Smith is employed for an indefinite term, subject to
termination in accordance with the terms of his employment
agreement, as amended. If Mr. Smith is terminated without
cause, he will receive a severance payment totaling
24 months salary and bonus compensation (paid over a
24-month
period), plus benefit continuation and continued vesting of
options for the same period. Upon death or disability,
Mr. Smith is entitled to a lump sum payment of one
years total salary plus bonus, and, in addition, continued
vesting of options for one year. Mr. Smith receives a base
salary of C$750,000, a monthly car allowance of C$1,000, stock
options, and fuel and maintenance reimbursement for one vehicle,
and he participates in the Corporations standard employee
benefit plans. Mr. Smith is also entitled to receive an
annual bonus payment in an amount determined by the Compensation
Committee of the Board of Directors of the Corporation.
Mr. Smiths employment agreement contains provisions
addressing confidentiality, non-disclosure, non-competition and
ownership of intellectual property. In the event of a change in
control there is accelerated vesting of 100% of any remaining
unvested options.
By way of a letter agreement between Mr. Smith and
Dr. Matthews dated March 1, 2002, as amended,
Dr. Matthews granted to Mr. Smith options to purchase
3,000,000 Common Shares of the Corporation with an exercise
price of C$3.50 from the holdings of Dr. Matthews. All of
these options have vested and none have been exercised. These
options to Mr. Smith expire on March 1, 2012.
Paul A.N. Butcher. Paul Butcher is employed as President
and Chief Operating Officer of the Corporation, reporting to the
Chief Executive Officer. Effective as of May 5, 2006, the
Corporation executed an Agreement Amending the Amended and
Restated Employment Agreement with Mr. Butcher.
Mr. Butcher is employed for an indefinite term, subject to
termination in accordance with the terms of his employment
agreement, as amended. If Mr. Butcher is terminated without
cause, he will receive a severance payment totaling
18 months salary and bonus compensation (paid over an
18-month
period), plus benefit continuation and continued vesting of
options for the same period. Upon death or disability,
Mr. Butcher is entitled to a lump sum payment of one
years total salary plus bonus, and, in addition,
accelerated vesting of 25% of any remaining unvested options.
Mr. Butcher receives a base salary of C$500,000, a monthly
car allowance of C$1,500, stock options, and fuel and
maintenance reimbursement for one vehicle, and he participates
in the Corporations standard employee benefit plans.
Mr. Butcher is also entitled to receive an annual bonus
payment in an amount determined by the Compensation Committee,
in its sole discretion. Mr. Butchers employment
agreement contains provisions addressing confidentiality,
non-disclosure, non-competition and ownership of intellectual
property. In the event of a change in control there is
accelerated vesting of 100% of any remaining unvested options.
By way of a letter agreement between Mr. Butcher and
Dr. Matthews dated March 1, 2002, as amended,
Dr. Matthews granted to Mr. Butcher options to
purchase 1,000,000 Common Shares of the Corporation with an
exercise price of C$3.50 from the holdings of Dr. Matthews.
All of these options have vested and none have been exercised.
These options to Mr. Butcher expire on March 1, 2012.
Steven E. Spooner. Steven Spooner is employed as Chief
Financial Officer of the Corporation, reporting to our Chief
Executive Officer. Effective as of January 1, 2006, the
Corporation executed an Employment Agreement with
Mr. Spooner under which he is employed for an indefinite
term, subject to termination in accordance with its terms. If
Mr. Spooner is terminated without cause, he will receive a
severance payment totaling 18 months salary and bonus
compensation (paid over an
18-month
period), plus benefit continuation and continued vesting of
options for
71
the same period. Upon death or disability, Mr. Spooner is
entitled to a lump sum payment of one years total salary
plus bonus, and, in addition, accelerated vesting of 25% of any
remaining unvested options. Mr. Spooner receives a base
salary of C$335,000, a monthly car allowance of C$1,000, stock
options, and fuel and maintenance reimbursement for one vehicle,
and he participates in the Corporations standard employee
benefit plans. Mr. Spooner is also entitled to receive an
annual bonus payment of up to 50% of his annual base salary, in
an amount determined by the Compensation Committee, in its sole
discretion. Mr. Spooners employment agreement
contains provisions addressing confidentiality, non-disclosure,
non-competition and ownership of intellectual property. In the
event of a change in control there is accelerated vesting of
100% of any remaining unvested options.
Graham Bevington. Graham Bevington is employed as our
Vice President and Managing Director, Europe, Middle East and
Africa Region, reporting to the President and Chief Operating
Officer. Mr. Bevington is employed for an indefinite term,
subject to termination in accordance with the terms of his
employment letter agreement, as amended. If Mr. Bevington
is terminated without cause, he will receive a minimum of six
months notice of termination. Mr. Bevington receives
a base salary of £113,400, a monthly car allowance of
$2,100, stock options, and fuel and maintenance reimbursement
for one vehicle, and he participates in our standard employee
benefit plans. Mr. Bevington is also entitled to receive an
annual bonus payment related to his achievement of defined
targets. Mr. Bevingtons employment agreement contains
provisions addressing confidentiality, non-disclosure,
non-competition and ownership of intellectual property.
Norman Stout. Mr. Stout is employed as the Chief
Executive Officer of Mitel US. Mr. Stout executed an
employment agreement on October 12, 2006 with Inter-Tel
with a term ending on August 1, 2009, unless the agreement
is earlier terminated. During the term of the agreement,
Mr. Stout is employed at his current annual salary of
$400,000 per year (Base Salary) and is entitled to
participate in any bonus or incentive plans made available by
the Board to senior management and any benefit plans applicable
to senior executives. If Mr. Stout terminates his
employment for good reason or Mr. Stout is terminated by
the Company without cause, Mr. Stout will receive a
severance payment equal to his Base Salary (at the date of
termination) for a period of 12 months or the remainder of
the term of the agreement, whichever is longer. Alternately, if
Mr. Stout is terminated without cause or Mr. Stout
terminates his employment for good reason, within 90 days
prior to a change of control or within 24 months following
a change of control, then Mr. Stout will receive, among
other things, (i) a lump-sum payment equal to his Base
Salary (at termination or immediately prior to the change of
control, whichever is greater) multiplied by 2.99 and
(ii) a lump sum payment equal to the average annual bonus
earned by him for the preceding five fiscal years, multiplied by
2.99. Mr. Stout is subject to restrictive covenants in the
agreement, including an
18-month
non-competition and non-solicitation period following
termination of his employment for any reason, and a perpetual
confidentiality agreement.
Our executive officers are eligible to receive incentive or
bonus compensation at the discretion of the Compensation
Committee based primarily on our financial performance, the
executives attainment of certain goals and objectives and
the compensation paid by comparable companies at a similar stage
of development.
Indebtedness
of Directors, Officers and Members of Senior
Management:
None of our directors or officers, and no associate or affiliate
of any of them, is or has been indebted to us at any time since
the beginning of fiscal 2007.
Pension
and Retirement Plans
We maintain defined contribution pension plans that cover
substantially all of our employees. We match the contributions
of participating employees to the defined contribution pension
plans on the basis and to the extent of the percentages
specified in each plan (ranging from 1% to 6%, depending on the
plan).
There were no material accrued obligations at the end of fiscal
2007 pursuant to these defined contribution pension plans.
Our United Kingdom subsidiary also maintains a defined benefit
pension plan. The defined benefit plan provides pension benefits
based on length of service and final average earnings. At
April 30, 2007, the projected benefit obligation of
$173.9 million exceeded the fair market value of the net
assets available to provide for these
72
benefits of $123.4 million, resulting in a
$50.5 million pension liability recorded in the
consolidated balance sheet as at April 30, 2007.
Deferred
Share Unit Plan
On December 9, 2004, we adopted a Deferred Share Unit Plan
in order to promote a greater alignment of interests among two
members of our senior management staff and our shareholders. Our
previous supplemental executive retirement plan was wound up and
terminated by us in favor of the deferred share unit plan.
Each deferred share unit entitles the holder to receive a cash
lump sum payment equal to the market value of our Common Shares
within one year of cessation of employment. Deferred share units
are not considered shares, nor is the holder of any deferred
share unit entitled to voting rights or any other rights
attaching to the ownership of shares. The number of deferred
share units that may be awarded to a participant in any calendar
year under our Deferred Share Unit Plan is equal to 15% of the
participants annual salary, less the maximum amount of the
participants eligible retirement savings plan
contributions in that particular taxable year. Within a year of
a participants cessation of employment with us, such
participant will receive a lump sum payment in cash having a
value equal to the number of deferred share units recorded on
his account multiplied by the market value of our Common Shares,
less any applicable withholding taxes. Our deferred share unit
plan is administered by our Compensation Committee.
Currently, Paul Butcher, our President and Chief Operating
Officer, is the only participant in our Deferred Share Unit
Plan. As at April 30, 2007, 390,358 deferred share units
have been awarded to Mr. Butcher under our Deferred Share
Unit Plan, of which 242,062 of those units represent the value
of his interest in our supplementary executive retirement plan
(being C$242,062), which was transferred by us to the deferred
share unit plan on May 31, 2005.
At April 30, 2007 we had recorded a liability of
$0.5 million in the consolidated balance sheet in respect
of our obligations under the Deferred Share Unit Plan.
Our board of directors currently consists of seven members. Our
articles of incorporation provide that the board of directors is
to consist of a minimum of three and a maximum of fifteen
directors as determined from time to time by the shareholders,
and permit the directors to appoint additional directors in
accordance with the CBCA within any fixed number from time to
time. Shareholders have authorized a fixed number of nine
directors. The term of office for each of the directors will
expire at the time of our next annual shareholders meeting.
Under the CBCA, one quarter of our directors must be resident
Canadians as defined in the CBCA.
There are no family relationships among any of our directors or
executive officers.
Board
Committees:
The standing committees of our board of directors consist of an
audit committee and a compensation committee. We intend to
create a nominating and corporate governance committee.
Audit Committee. Our audit committee is
comprised of Messrs. Charbonneau (who is also chairman of
the committee), Stewart and Mandy.
The principal duties and responsibilities of our audit committee
are to assist our board of directors in discharging its
oversight of:
|
|
|
|
|
the integrity of our financial statements and accounting and
financial process and the audits of our financial statements;
|
|
|
|
our compliance with legal and regulatory requirements;
|
|
|
|
our external auditors qualifications and independence;
|
|
|
|
the work and performance of our financial management, internal
auditor and external auditor; and
|
73
|
|
|
|
|
our system of disclosure controls and procedures and system of
internal controls regarding finance, accounting, legal
compliance, risk management and ethics established by management
and our board.
|
Our audit committee has access to all books, records, facilities
and personnel and may request any information about our company
as it may deem appropriate. It also has the authority to retain
and compensate special legal, accounting, financial and other
consultants or advisors to advise the committee.
Our audit committee also reviews and approves related party
transactions and prepares reports for the board of directors on
such related party transactions.
Compensation Committee. Our compensation
committee is comprised of Messrs. Stewart (who is also
chairman of the committee), Charbonneau and Mandy. The principal
duties and responsibilities of the compensation committee are to
assist our board of directors in discharging its oversight of:
|
|
|
|
|
compensation, development, succession and retention of the chief
executive officer and key employees;
|
|
|
|
the establishment of fair and competitive compensation and
performance incentive plans; and
|
|
|
|
the production of an annual report on executive compensation for
inclusion in our public disclosure documents.
|
Compensation Committee Interlocks and Insider
Participation. None of our executive officers
serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation
committee.
Other
Committees:
We have established a disclosure committee in accordance with
Sarbanes-Oxley legislation and with SEC regulations. Our
disclosure committee is comprised of our Senior Corporate
Counsel, Vice President of Strategic Marketing, Treasurer and
Chief Risk Manager, and Corporate Controller. The disclosure
committee is responsible for:
|
|
|
|
|
reviewing all forward-looking information in our continuous
disclosure documents;
|
|
|
|
implementation of the disclosure committee policy and the
education of employees, officers and directors on matters
related to the policy;
|
|
|
|
approving the designation of spokespersons;
|
|
|
|
ensuring that appropriate processes are in place to monitor our
corporate website;
|
|
|
|
ensuring that when a public disclosure requires corrections,
such correction is timely and made under the supervision of the
disclosure committee;
|
|
|
|
monitoring the integrity and effectiveness of our disclosure
controls and procedures on an ongoing basis and reporting
findings to the CEO and CFO;
|
|
|
|
reviewing and supervising the preparation of documentation that
are required to be or are voluntarily filed with a securities
commission, stock exchange or government under applicable
securities or corporate law including annual certifications,
annual reports filed with the SEC on
Form 20-F
and
6-K; and
|
|
|
|
evaluating the effectiveness of our disclosure controls and
procedures as of the end of each year end.
|
As of September 30, 2007, (taking into account our recent
acquisition of Inter-Tel, which closed on August 16,
2007) we had 3,256 employees of whom 767 were in
Canada, 1,908 were in the United States and 581 were in the
United Kingdom and other countries. We had 1,689, 1,652 and
1,518 employees at the end of fiscal year 2005, fiscal year
2006 and fiscal year 2007, respectively. In connection with our
transition to an
IP-based
communications company, we have streamlined and centralized our
back-end processes to improve operational efficiencies. We have
taken significant steps in hiring new or cross training existing
technical staff to meet the needs of the
IP-based
74
communications market. Annual revenues per employee during
fiscal 2005, fiscal 2006 and fiscal 2007 were $203,000, $234,000
and $254,000, respectively, reflecting our continuing focus on
improving operational efficiency.
We believe that our future success depends in large part on our
ability to attract and retain highly skilled managerial,
research and development, and sales and marketing personnel. Our
compensation programs include opportunities for regular annual
salary reviews, bonuses and stock options. Over 27.2% of our
employees are also common shareholders and over 44.5% of our
employees hold options to acquire our Common Shares. We believe
we have been successful in our efforts to recruit qualified
employees and believe relations with our employees are generally
positive.
The Dr. Matthews group beneficially holds 38.7% of the
voting power of our share capital, as further disclosed in
Item 7.A. Major Shareholders and Related Party
Transactions Major Shareholders.
Mr. Smith currently holds options to purchase 5,600,000
Common Shares. Of this amount, options to purchase 2,000,000
Common Shares were granted by us in accordance with our employee
stock option plan granted on July 26, 2004 with an exercise
price of C$1.00 per common share and 600,000 were granted on
February 1, 2007 with an exercise price of C$1.18 per
common share. The option to acquire the remaining 3,000,000
Common Shares, which have an exercise price of C$3.50 per common
share, are options to purchase outstanding Common Shares of
Mitel owned by Wesley Clover, which were granted to
Mr. Smith by Dr. Matthews on March 1, 2002. Upon
the exercise of these latter options, the proceeds of the
exercise would be paid directly to Wesley Clover. The options
granted by Wesley Clover on 3,000,000 of our Common Shares owned
by Wesley Clover were intended to provide an additional
incentive to Mr. Smith in connection with his employment by
us. Had such options been issued by us, the aggregate option
grant to Mr. Smith would have been an excessive drain on
the limited pool of shares set aside by us under our employee
stock option plan. The options granted to Mr. Smith on the
Common Shares currently held by Wesley Clover have all vested
and expire on March 1, 2012. As of September 30, 2007,
4,500,000 options at an exercise price ranging from C$1.00 to
C$3.50 per common share have vested. Mr. Smith has not
exercised any stock options to date.
Each of the management employees listed at Item 6.B.
Directors, Senior Management and Employees
Compensation beneficially own less than 1% of our Common
Shares or preferred shares.
Employee
Equity Compensation Plans:
2001
Stock Option Plan:
We adopted an employee stock option plan in March 2001 (the
2001 Stock Option Plan). Further amendments to the
2001 Stock Option Plan have been approved by our board of
directors from time to time in accordance with section 24
of the 2001 Stock Option Plan. The 2001 Stock Option Plan
provides for the grant of options to acquire Common Shares to
our employees, directors and consultants.
The 2001 Stock Option Plan provides that the compensation
committee of our board of directors has the authority to
determine the individuals to whom options will be granted, the
number of Common Shares subject to option grants and other terms
and conditions of option grants. The 2001 Stock Option Plan also
provides that, unless otherwise determined by the compensation
committee, one-quarter of the Common Shares that an option
holder is entitled to purchase become eligible for purchase on
each of the first, second, third and fourth anniversaries of the
date of grant, and that options expire on the fifth anniversary
of the date of grant. The 2001 Stock Option Plan provides that
in no event may an option remain exercisable beyond the tenth
anniversary of the date of grant. The 2001 Stock Option Plan
contains change of control provisions which accelerate vesting
of options under certain circumstances.
As at September 30, 2007, there are options to purchase
17,118,566 Common Shares.
Effective September 7, 2006, shares subject to outstanding
awards under the 2001 Stock Option Plan which lapse, expire or
are forfeited or terminated will no longer become available for
grants under this plan. Instead, new
75
stock options and other equity grants will be made under the
2006 Equity Incentive Plan (described below) which became
effective on September 7, 2006.
2006
Equity Incentive Plan:
Our 2006 equity incentive plan was approved by our shareholders
on September 7, 2006 (the 2006 Equity Incentive
Plan). No new options will be granted under the 2001 Stock
Option Plan and all future equity awards will be granted under
the new 2006 Equity Incentive Plan. All existing options that
have been previously granted under the 2001 Stock Option Plan
will continue to be governed under that plan until exercise,
termination or expiry.
The 2006 Equity Incentive Plan provides us with increased
flexibility and choice in the types of equity compensation
awards that we may grant, including options, deferred share
units, restricted stock units, performance share units and other
share-based awards. The principal purpose of the 2006 Equity
Incentive Plan is to assist us in attracting, retaining and
motivating key employees, directors, officers and consultants
through performance related incentives.
The aggregate number of Common Shares that may be issued under
the 2006 Equity Incentive Plan and all other security-based
compensation arrangements is 12% of the total number of Common
Shares outstanding from time to time. Common shares subject to
outstanding awards under this plan which lapse, expire or are
forfeited or terminated will, subject to plan limitations, again
become available for grants under this plan.
The 2006 Equity Incentive Plan contains an amendment provision
that allows our board of directors to amend the plan for a
number of purposes without notice or subsequent shareholder
approval including:
|
|
|
|
|
to amend general vesting provisions;
|
|
|
|
to amend the term of any option, subject to limits contained in
the plan;
|
|
|
|
to amend the provisions in the plan dealing with retirement,
death, disability or termination of participants;
|
|
|
|
to make amendments for the protection of participants in the
plan, including amendments resulting from changes in law in any
jurisdiction; and
|
|
|
|
to make amendments to cure or correct ambiguities, defects or
mistakes in the plan.
|
As at September 30, 2007, options to acquire 5,288,613
Common Shares are currently issued and outstanding under the
2006 Equity Incentive Plan.
As at September 30, 2007, options to acquire 22,407,179
Common Shares are currently issued and outstanding under both
the 2001 Stock Option Plan and the 2006 Equity Incentive Plan
representing approximately 5% of the outstanding shares
(calculated on an as if converted to Common Shares basis if the
Class 1 Preferred Shares were to be converted into Common
Shares using 767.08 to 1 (as set forth in the terms of the
conversion formula of the Class 1 Preferred Shares.)
76
|
|
Item 7.
|
Major
Shareholders and Related Party Transactions
|
The following table sets forth certain information as of
September 30, 2007 concerning the beneficial ownership of
our shares as to each person known to our management to be the
beneficial owner of 5% or more of our outstanding capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Amount Owned(1)
|
|
|
Percentage Held
|
|
|
|
Class 1
|
|
|
|
|
|
Voting
|
|
|
Class 1
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Power
|
|
|
Preferred
|
|
|
Common
|
|
|
Voting
|
|
|
|
Shares
|
|
|
Shares
|
|
|
(2)
|
|
|
Shares
|
|
|
Shares
|
|
|
Power(2)
|
|
|
Dr. Matthews Group(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Matthews
|
|
|
13,500
|
|
|
|
1,143,402
|
|
|
|
11,640,325
|
|
|
|
4.4
|
%
|
|
|
0.4
|
%
|
|
|
2.6
|
%
|
Celtic Tech Jet Corporation
|
|
|
0
|
|
|
|
4,555,169
|
|
|
|
4,555,169
|
|
|
|
0.0
|
%
|
|
|
1.6
|
%
|
|
|
1.0
|
%
|
Wesley Clover Corporation
|
|
|
0
|
|
|
|
158,790,234
|
|
|
|
158,790,234
|
|
|
|
0.0
|
%
|
|
|
55.9
|
%
|
|
|
35.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,500
|
|
|
|
164,488,805
|
|
|
|
174,985,728
|
(3)
|
|
|
4.4
|
%
|
|
|
57.9
|
%
|
|
|
38.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Francisco Partner Group(8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arsenal HoldCo I S.a.r.l
|
|
|
205,819
|
|
|
|
15,596,446
|
|
|
|
175,630,638
|
|
|
|
67.0
|
%
|
|
|
5.5
|
%
|
|
|
38.9
|
%
|
Arsenal HoldCo II S.a.r.l
|
|
|
13,928
|
|
|
|
1,055,429
|
|
|
|
11,885,153
|
|
|
|
4.6
|
%
|
|
|
0.4
|
%
|
|
|
2.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
219,747
|
|
|
|
16,651,875
|
|
|
|
187,515,791
|
(4)
|
|
|
71.6
|
%
|
|
|
5.9
|
%
|
|
|
41.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Her Majesty the Queen in Right of Canada
|
|
|
0
|
|
|
|
32,140,528
|
|
|
|
32,140,528
|
|
|
|
0.0
|
%
|
|
|
11.3
|
%
|
|
|
7.1
|
%
|
Morgan Stanley Principal Investments, Inc.
|
|
|
43,340
|
|
|
|
3,284,196
|
|
|
|
36,983,003
|
(5)
|
|
|
14.1
|
%
|
|
|
1.2
|
%
|
|
|
8.2
|
%
|
EdgeStone
|
|
|
19,000
|
|
|
|
10,450,299
|
|
|
|
25,223,493
|
(6)
|
|
|
6.2
|
%
|
|
|
3.7
|
%
|
|
|
5.6
|
%
|
PTIC
|
|
|
11,500
|
|
|
|
14,327,483
|
|
|
|
23,269,053
|
(7)
|
|
|
3.7
|
%
|
|
|
5.0
|
%
|
|
|
5.1
|
%
|
|
|
|
(1) |
|
Beneficial ownership is determined in accordance with SEC rules,
which generally attribute beneficial ownership of securities to
each person or entity who possesses, either solely or shared
with others, the power to vote or dispose of those securities.
These rules also treat as outstanding all shares that a person
would receive upon exercise of stock options or warrants, or
upon conversion of convertible securities held by that person
that are exercisable or convertible within 60 days of the
determination date. Shares issuable pursuant to exercisable or
convertible securities are deemed to be outstanding for
computing the percentage ownership of the person holding such
securities, but are not deemed outstanding for computing the
percentage ownership of any other person. |
|
(2) |
|
Percentage of Voting Power is calculated based on the beneficial
amount owned divided by total shares outstanding including
warrants, options or other convertible securities which are
exercisable or convertible within 60 days into our Common
Shares. For the purposes of calculating the percentage of Voting
Power, the Class 1 Preferred Shares convert into our Common
Shares on a 1 for 777.546 basis (after taking into consideration
the 8% per annum accretion, calculated to 60 days after the
determination date) |
|
(3) |
|
Includes the common share equivalent to 13,500 Class 1
Preferred Shares of 10,496,923 and 158,790,234 Common Shares
owned by Wesley Clover and the 4,555,169 Common Shares owned by
CTJL and 120,406 stock. |
|
(4) |
|
Includes the common share equivalent to 219,747 Class 1
Preferred Shares of 170,863,916 and 16,651,875 warrants that are
currently exercisable. |
|
(5) |
|
Includes the common share equivalent to 43,340 Class 1
Preferred Shares of 33,698,807 and 3,284,196 warrants that are
currently exercisable. |
|
(6) |
|
Includes the common share equivalent to 19,000 Class 1
Preferred Shares of 14,773,194 and 5,359,893 Common Shares and
90,406 options that are currently exercisable and 5,000,000
warrants that are currently exercisable. |
77
|
|
|
(7) |
|
Includes the common share equivalent to 11,500 Class 1
Preferred Shares of 8,941,570 and 13,456,042 Common Shares and
871,441 warrants that are currently exercisable. |
|
(8) |
|
The parties to the 2007 Shareholders Agreement agreed, among
other matters, to act and vote from time to time so that on any
election of directors by our shareholders, the Francisco
Partners and Matthews nominees are elected. See Item 10.C.
Additional Information Material
Contracts 2007 Shareholders Agreement for a
discussion of the 2007 Shareholders Agreement. |
Our major shareholders do not have different voting rights than
other shareholders. We are not aware of any arrangements, the
operation of which would result in a change in control of Mitel.
United
States Shareholders:
On September 30, 2007, we had 495 registered shareholders
with addresses in the United States holding approximately
5,149,443 Common Shares and three registered shareholders
holding 263,087 Class 1 Preferred Shares or combined on an
as if converted to Common Shares basis approximately 46.39% of
the total number of issued and outstanding shares. United States
residents also hold options to purchase 1,530,801 Common Shares.
Residents of the United States may beneficially own Common
Shares registered in the names of non-residents of the United
States.
B. Related
Party Transactions
Set forth below is a description of transactions between us and
persons or entities that are deemed to be related parties to us
for the period from April 30, 2004 to October 23, 2007.
BreconRidge
Manufacturing Solutions Corporation
We have or had the following agreements and related transactions
involving BreconRidge, a company in which, as of
September 30, 2007 (a) Dr. Matthews holds
approximately a 27.1% ownership interest, and (b) EdgeStone
holds approximately a 51.05% ownership interest. EdgeStone is
one of our shareholders and two of our directors are partners of
EdgeStone and directors of BreconRidge. One of these directors
is the Chairman of the BreconRidge board of directors.
Dr. Matthews and Mr. Charbonneau, who are members of
our board of directors, also sit on the BreconRidge board of
directors.
Outsourcing
of Manufacturing and Repair Operations
In connection with the sale of our manufacturing operations to
BreconRidge in 2001, we entered into a supply agreement with
BreconRidge dated August 30, 2001, as amended. Under this
agreement, BreconRidge has agreed to manufacture certain
products for us and to provide repair and related services under
terms and conditions reflecting what management believes were
prevailing market conditions at the time we entered into the
agreement. This agreement expires on December 31, 2007,
subject to automatic one year renewal periods.
The supply agreement with BreconRidge does not contain any
minimum purchase requirements. We periodically renegotiate
manufacturing pricing with BreconRidge and, where appropriate,
retain a consultant and obtain quotes for manufacturing from
independent manufacturers and for raw materials from suppliers.
Under the terms of the supply agreement, we are not obligated to
purchase products from BreconRidge in any specific quantity
unless and until a binding purchase order has been issued. We
may be obligated to purchase certain excess inventory levels
from BreconRidge that could result from our actual sales varying
from forecasts we provide. BreconRidge is required to purchase
our raw material inventory before turning to third party
suppliers for raw materials. During fiscal 2007, we purchased
$91.0 million of products and services from BreconRidge
(2005 $94.2 million; the Transition
Period $1.8 million; 2006
$101.4 million) and sold $2.1 million of raw material
inventory to BreconRidge (2005 $0.9 million;
the Transition Period $0.1 million;
2006 $0.4 million) under this agreement. As at
April 30, 2007, balances payable by us pursuant to this
agreement amounted to $24.2 million (2005
$15.4 million; 2006 $24.0 million) and
balances receivable by us pursuant to this agreement amounted to
$2.8 million (2005 $1.7 million;
2006 $0.7 million).
78
Pursuant to the terms of the supply agreement, we may supply to
or purchase from BreconRidge certain tools used in the
manufacturing process on a monthly basis. These manufacturing
tools are capitalized by us as part of fixed assets and are
depreciated over their estimated useful lives. During fiscal
2007, manufacturing tools purchased from BreconRidge pursuant to
the terms of the supply agreement amounted to $0.2 million
(2005 $0.2 million; the Transition
Period $nil; 2006 $0.9 million).
BreconRidge is prohibited from discontinuing or refusing to
manufacture our products for any reason other than an event of
force majeure or in the event of an uncured default by us. The
supply agreement may be terminated by either party at any time
after December 31, 2007 on not less than 180 days
prior notice or in the event of an uncured material breach by,
or change in control of, the other party.
Management
Services:
On August 30, 2001, we also entered into service agreements
with BreconRidge to provide facilities management services for
the period covering the term of the premise lease agreements
(described below), as well as human resources and information
systems support services. Amounts charged to BreconRidge were
equal to, and recorded as a reduction of, the costs incurred to
provide the related services in the consolidated statement of
operations. During fiscal 2007 we provided services valued at
$0.2 million under these agreements (2005
$1.0 million; the Transition Period $nil;
2006 $0.5 million).
Leased
Property:
On August 31, 2001, we entered into a sublease agreement,
as sublessor, with BreconRidge for certain office and
manufacturing facilities in Ottawa totaling approximately
160,000 square feet, under terms and conditions reflecting
what management believed were prevailing market conditions at
the time the sublease was entered into. The sublease agreement
expired on August 31, 2006. BreconRidge vacated the
premises in 2004 and the sublease agreement has not been
renewed. Accordingly, during fiscal 2007, the company no longer
earned any rental income for these leased premises
(2005 $2.0 million; the Transition
Period $nil; 2006 $0.5 million).
On August 31, 2001, we entered into a sublease agreement,
as sublessor, with BreconRidge for certain office and
manufacturing space located in Caldicot, United Kingdom totaling
94,161 square feet under terms and conditions reflecting
what management believed were prevailing market conditions at
the time the sublease was entered into. On August 31, 2005,
we sold the Caldicot property, and the sublease was assigned to
the new owner. Accordingly, during fiscal 2007, we no longer
received any rental income for the leased premises
(2005 $1.6 million; the Transition
Period $nil; 2006 $0.6 million).
Brookstreet
Research Park Corporation
Our Corporate Head Offices (located in Ottawa, Canada) totaling
approximately 512,000 square feet are leased from
Brookstreet Research Park Corporation (formerly known as Mitel
Research Park Corporation), a company controlled by
Dr. Matthews, under terms and conditions reflecting what
management believed were prevailing market conditions at the
time the lease was entered into, for a period of 10 years,
expiring on February 15, 2011. During fiscal 2007, we
incurred $6.6 million of rent expense for the leased
premises (2005 $5.9 million; the Transition
Period $0.1 million; 2006
$6.5 million).
March
Networks Corporation
We have, or during the past three years have had, the following
agreements involving March Networks, a company in which
Dr. Matthews owned directly or indirectly approximately
19.0% of the issued and outstanding shares, as of
June 20, 2007, and of which he is the chairman of the board
of directors. Mr. Charbonneau, one of our directors, also
sits on March Networks board of directors.
On September 21, 2001, we entered into an alliance
agreement, as amended, with March Networks Corporation. The
alliance agreement contemplated that we and March Networks would
enter into subsequent joint development agreements for the
development of future products. No joint development agreements
were entered into and the alliance agreement automatically
terminated on March 31, 2005.
79
On October 10, 2002, we entered into the TPC Agreement with
Her Majesty the Queen in Right of Canada, Mitel Knowledge
Corporation and March Networks pursuant to which we and March
Networks agreed to carry out a research and development project
in consideration of a grant by Industry Canada in the amount of
the lesser of (i) 25% of project cost elements incurred by
us, March Networks and Mitel Knowledge Corporation and
(ii) C$60 million. See Item 10.C.
Additional Information Material
Contracts TPC Agreement.
We also entered into a referral and teaming agreement effective
as of October 31, 2003, as amended, with March Networks
pursuant to which we have agreed to sell March Networks
products in return for the payment by March Networks of a
commission to us equal to 10% of each sale of March
Networks products made through our channel partners. This
agreement expired on October 31, 2005 and was not renewed.
During fiscal 2007, we sold $0.1 million and purchased
$0.1 million in products and services (2005
$nil and $0.4 million; the Transition Period
$nil; 2006 $nil and $0.3 million) from March
Networks under this agreement.
Zarlink
Semiconductor Inc.
We have or had during the past three years the following
agreements involving Zarlink, a company which no longer holds
any ownership interest in Mitel as of September 30, 2007,
but did hold 4.87% of our shares prior to August 16, 2007.
The CEO and President of Zarlink, Kirk Mandy, sits on our board
of directors.
Supply
Agreement:
In connection with the acquisition of the Mitel name, certain
assets and subsidiaries from Zarlink, we entered into a
non-exclusive supply agreement dated February 16, 2001, as
amended, with Zarlink pursuant to which Zarlink has agreed to
supply semiconductor components to us under terms and conditions
reflecting what management believes were prevailing market
conditions at that time. The initial term of the agreement is
10 years with subsequent automatic annual renewals. During
fiscal 2007, we paid Zarlink less than $0.05 million for
supplies under this agreement (2005 less than
$0.05 million; the Transition Period $nil;
2006 less than $0.05 million).
Under the terms of the supply agreement, Zarlink is obligated to
place into escrow all of its know-how, improvements and new
technology with respect to the manufacture of hybrid devices and
IP-based
communications products that are purchased by us. The escrowed
materials are to be released to us in the event of bankruptcy,
receivership, issuance of a last-time buy notification,
discontinuance of manufacture, transfer of the hybrid or
IP communications business in whole or in part to another
party (if the party fails to assume the obligations of Zarlink
with respect to the hybrid or
IP-based
communications products), or a material breach of the agreement
by Zarlink which remains uncured for 30 days.
Under the terms of the supply agreement, Zarlink granted us a
non-exclusive license in the Zarlink intellectual property,
Zarlink improvements and Zarlink-developed new technology
relating to the supplied components. We have the limited right
to grant sublicenses only to semiconductor second source
suppliers for the manufacture of hybrid and semiconductor
components which incorporate our intellectual property.
Other
Supply Arrangements:
During fiscal 2007, we indirectly, through our contract
manufacturers, including BreconRidge, purchased
$5.1 million in supplies from Zarlink (2005 (including the
Transition Period) $6.6 million;
2006 $7.4 million). See Item 7.B.
Major Shareholders and Related Party
Transactions Related Party Transactions
BreconRidge Manufacturing Solutions Corporation.
Intellectual
Property License Agreement:
In connection with the acquisition of the Mitel name, certain
assets and subsidiaries from Zarlink, we entered into an
intellectual property license agreement dated February 16,
2001 with Zarlink pursuant to which Zarlink licensed to us
certain intellectual property retained by Zarlink at the time
the communications systems business of Zarlink was sold to us.
Under this agreement, Zarlink granted us a non-personal,
limited, assignable, royalty free, perpetual, irrevocable,
non-exclusive, worldwide license, including the right to
sublicense, the licensed intellectual
80
property to make, use, have made, develop, offer for sale, or
otherwise exploit the licensed products which utilize or embody
the licensed intellectual property. We are restricted from
sublicensing the licensed intellectual property to allow the
manufacture of semiconductors, other than for use in our
business, and from granting a license assigning or granting a
security interest in any of the licensed intellectual property
to a third party involved in the research and development or
sale of products or services that are competing with our own.
If Zarlink is wound up or takes any material steps with regard
to bankruptcy proceedings or otherwise ceases to carry on
business, the agreement provides that all right, title and
interest in and to the licensed intellectual property will be
transferred over to us.
We were also a party to the following agreements with Zarlink,
which have terminated:
|
|
|
|
|
a non-competition and non-solicitation agreement among us,
Zarlink and its subsidiaries, Wesley Clover, and
Dr. Matthews, dated February 16, 2001; and
|
|
|
|
a lease between us and Zarlink Semiconductor Limited, a
subsidiary of Zarlink, for premises in Caldicot, United Kingdom,
which we assigned in connection with the sale of the Caldicot
property on August 31, 2005.
|
Wesley
Clover Corporation
Dr. Matthews wholly-owns directly or indirectly Wesley
Clover Corporation. During fiscal 2007, we paid
$0.2 million to Wesley Clover for various services and sold
$0.2 million of various products and services to Wesley Clover
(2005 less than $0.05 million; the Transition
Period $nil; 2006 less than
$0.05 million).
On September 21, 2006, we closed a common share warrant
offering under which we sold warrants to Wesley Clover for total
consideration of $15 million. As part of the
Re-Organization Transactions, on August 16, 2007, these
warrants were purchased for cancellation and Dr. Matthews
was issued warrants to purchase Common Shares as described in
Item 10.C. Material Contracts
Warrants and 13,500 Class 1 Preferred Shares.
Other
Transactions
We have entered into technology transfer, technology licensing
and distribution agreements with each of the following companies
related to Dr. Matthews under terms reflecting what
management believes were prevailing market conditions at the
time the agreements were entered into: NewHeights Software
Corporation, MKC Corporation, Encore Networks, Inc. and
Natural Convergence Inc. These companies develop technology that
we integrate with, distribute or sell alone or as part of our
own products.
|
|
|
|
|
NewHeights Software (a corporation formerly controlled by Owen
Matthews, who is related to Dr. Matthews) may have been
deemed a related party because Dr. Matthews indirectly owns
approximately 40% of Counterpath Solutions, which closed
its acquisition of NewHeights on August 2, 2007. During
fiscal 2007, we paid NewHeights $2.2 million in software
royalties relating to a customized desktop communication
management software application which we integrate and
distribute as Your Assistant (2005
$0.8 million; the Transition Period $nil;
2006 $2.6 million). We also received
$0.1 million of rental and other income from NewHeights
during fiscal 2007 (2005 $0.1 million; the
Transition Period $nil;
2006 $0.1 million).
|
|
|
|
Encore Networks may be deemed to be a related party because
Dr. Matthews directly or indirectly owns approximately 70%
of that company. During fiscal 2007, we paid Encore less than
$0.05 million for the purchase of certain signaling
conversion hardware and software which we distribute as part of
our product line and for other services (2005 $nil;
the Transition Period $nil; 2006
$0.2 million). We also received $0.2 million of other
income from Encore Networks during fiscal 2007 (2005
$0.1 million; the Transition Period $nil;
2006 $0.1 million).
|
|
|
|
MKC Corporation may be deemed to be a related party because
Dr. Matthews directly or indirectly owns approximately 82%
of that company, prior to September 1, 2006 when MKC
Corporation merged with NewHeights Software. During fiscal 2007,
we paid MKC $nil for the purchase of SIP-based equipment and
software components (2005 $0.1 million; the
Transition Period $0.1 million;
2006 $nil). On
|
81
|
|
|
|
|
April 1, 2006, we entered into a purchase and sale
agreement whereby we purchased certain SIP-based IP assets from
MKC. The purchase price for the assets is payable in the form of
a royalty equal to $0.50 for each Mitel SIP-enabled IP desktop
device we sell over the next five years, up to a maximum royalty
value, in the aggregate, of C$1.3 million. During fiscal
2007, we recorded royalties payable to MKC of $0.1 million
relating to this agreement.
|
|
|
|
|
|
Natural Convergence may be deemed to be a related party because
Dr. Matthews directly or indirectly owns approximately
20% of that company. During fiscal 2007, we paid Natural
Convergence $2.1 million for a non-exclusive, worldwide
software license and other hardware and software products
associated with our Mitel 3600 Hosted IP Key System
product (2005 $0.1 million; the Transition
Period $nil;
2006 0.8 million). On April 25, 2006,
we entered into an agreement with Natural Convergence to
purchase certain pre-paid software licenses associated with our
3600 Hosted IP Key System product. Under the agreement, we
agreed to purchase $1.2 million worth of software licenses,
payable in four equal instalments of $0.3 million per
quarter over the course of our fiscal 2007. At our option, we
may instead use any unpaid instalments to invest in certain
secured debentures of Natural Convergence which are
(a) repayable to us (plus a credit fee of 25% per annum of
any outstanding principal) on the earlier of December 31,
2006, or on the occurrence of certain events, or
(b) automatically convertible into preferred shares of
Natural Convergence on the occurrence of certain events. If we
exercise the option to invest in the convertible debentures of
Natural Convergence, we are also entitled to receive a warrant
of Natural Convergence entitling us to acquire a number of
Common Shares of Natural Convergence equal to the dollar amount
of our investment divided by $1.00, at an exercise price per
common share of C$0.0001. In May 2006, we purchased
$0.3 million in pre-paid software licenses under the
agreement. In August 2006 and November 2006, we exercised our
option under the agreement and used the second and third
installment payments to purchase a total of $0.6 million of
Natural Convergence convertible debentures. In November 2006,
Natural Convergence completed a qualifying financing of
$10.0 million of Class C Preferred Shares and so our
entire $0.6 million balance of debentures and
$0.1 million accrued interest was automatically converted
into Class C Preferred Shares of Natural Convergence at a
5% discount. In February 2007, we invested our fourth and final
installment payment in $0.3 million of Class C
Preferred Shares and exercised the warrants we received in
connection with the convertible debentures. At April 30,
2007 we held 8,467,523 of Class C Preferred Shares and
600,000 Common Shares in Natural Convergence, representing an
aggregate ownership of 5.6%.
|
In addition to the license and financing agreement, we also
purchased $2.1 million of products and services from
Natural Convergence during fiscal 2007 (2005 $nil;
the Transition Period $nil; 2006
$0.3 million).
In addition, we purchased services from the following companies
related to Dr. Matthews:
|
|
|
|
|
CTJL may be deemed to be a related party because
Dr. Matthews directly or indirectly wholly owns that
company. During fiscal 2007, we paid $0.1 million to CTJL
for chartered plane rentals (2005 less than
$0.05 million; the Transition Period $nil;
2006 less than $0.05 million).
|
|
|
|
Brookstreet Hotel Corporation may be deemed to be a related
party because Dr. Matthews directly or indirectly wholly
owns that company. During fiscal 2007, we paid $0.2 million
to Brookstreet Hotel for accommodations and meeting space
(2005 less than $0.05 million; the Transition
Period $nil;
2006 $0.2 million).
|
|
|
|
The Celtic Manor Resort Limited may be deemed to be a related
party because Dr. Matthews directly or indirectly wholly
owns that company. During fiscal 2007, we paid less than
$0.05 million to The Celtic Manor Resort Limited for
accommodations and meeting space (2005
$0.3 million; the Transition Period $nil;
2006 $0.1 million).
|
|
|
|
Bridgewater Systems Corporation may be deemed to be a related
party because Dr. Matthews directly or indirectly owns
approximately 12% of that company. During fiscal 2007, there
were no sales made to Bridgewater (2005 $nil; the
Transition Period $nil; 2006
$0.1 million).
|
In the normal course of business, we may enter into purchase and
sale transactions with other companies related to
Dr. Matthews under terms reflecting what management
believes are then-prevailing market conditions.
82
The audit committee reviews and approves related party
transactions to ensure that the terms are fair and reasonable to
us and to ensure that corporate opportunities are not usurped.
The audit committee provides a report to the board of directors
which includes:
|
|
|
|
|
a summary of the nature of the relationship with the related
party and the significant commercial terms of the transaction
such as price and total value;
|
|
|
|
the parties to the transaction;
|
|
|
|
an outline of the benefits to us of the transaction;
|
|
|
|
whether terms are at market and whether they were negotiated at
arms length; and
|
|
|
|
for related party transactions involving our officers or
directors, whether there has been any loss of a corporate
opportunity.
|
By way of letter agreements between Dr. Matthews and each
of Mr. Donald Smith, our Chief Executive Officer, and
Mr. Paul Butcher, our President and Chief Operating
Officer, dated, in each case, March 1, 2002, as amended,
Dr. Matthews granted to Mr. Smith options to purchase
3,000,000 of our Common Shares and to Mr. Butcher options
to purchase 1,000,000 of our Common Shares owned by
Dr. Matthews. Any proceeds on the exercise of these options
will be payable by Mr. Smith and Mr. Butcher to
Dr. Matthews and not to us. The options granted to
Mr. Smith and Mr. Butcher expire on March 1,
2012. A similar agreement was entered into between
Mr. Peter Charbonneau, one of our directors, and
Dr. Matthews on February 16, 2001, as amended, for
900,000 of our Common Shares owned by Dr. Matthews. These
options granted to Mr. Charbonneau expire on
February 16, 2011. As of September 30, 2007, all of
these options had vested and none had been exercised.
Registration
Rights
In connection with the acquisition of Inter-Tel on
August 16, 2007, we entered into a registration rights
agreement with the Investors, Dr. Matthews, EdgeStone and
other shareholders in which we agreed to make certain
arrangements with respect to the registration
and/or the
qualification for distribution of the shares held by such
shareholders under the applicable securities laws of the United
States
and/or
Canada. Mr. Palter, who is a director of ours, is the
Managing Partner of EdgeStone. See Item 10.C.
Additional Information Material
Contracts Registration Rights Agreement.
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C.
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Interests
of Experts and Counsel
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Not applicable.
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Item 8.
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Financial
Information
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A.
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Consolidated
Statements and Other Financial Information
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Our Financial Statements, which are set forth in the
accompanying index to Consolidated Financial Statements included
in this annual report, are filed as a part of this annual report
pursuant to Item 17 Financial Statements.
Legal
Proceedings
We are involved in legal proceedings, as well as demands, claims
and threatened litigation, that arise in the normal course of
our business. In particular, as is common in our industry, we
have received notices alleging that we infringe patents
belonging to various third parties. These notices are dealt with
in accordance with our internal procedures, which include
assessing the merits of each notice and seeking, where
appropriate, a business resolution. Where a business resolution
cannot be reached, litigation may be necessary. The ultimate
outcome of any litigation is uncertain, and regardless of
outcome, litigation can have an adverse impact on our business
because of defense costs, negative publicity, diversion of
management resources and other factors. Our failure to obtain
any necessary license or other rights on commercially reasonable
terms, or otherwise, or litigation arising out of intellectual
property claims could materially adversely affect our business.
As of the date of this document, we are not party to any
litigation that we believe is material to our business other
than litigation set at in Item 4.A. Information of
Mitel History and Development of Mitel
Significant Developments Subsequent to Fiscal 2006.
83
Dividend
Policy
We currently intend to retain any future earnings to fund the
development and growth of our business and we do not currently
anticipate paying dividends on our Common Shares. Any
determination to pay dividends to holders of our Common Shares
in the future will be at the discretion of our board of
directors and will depend on many factors, including our
financial condition, earnings, legal requirements and other
factors as the board of directors deems relevant. In addition,
our outstanding convertible notes limit our ability to pay
dividends and we may in the future become subject to debt
instruments or other agreements that further limit our ability
to pay dividends.
Please refer to Item 4.A. Information on
Mitel History and Development of Mitel
Significant Developments Subsequent to Fiscal 2006 for a
discussion of the Merger, Equity Financing, Debt Financing and
Re-Organization Transactions.
Other than as set forth in Item 4.A. Information on
Mitel History and Development of Mitel and
Item 10.C. Additional Information
Material Contracts no other significant changes have
occurred since the date of the audited consolidated financial
statements included in Item 17 Financial
Statements. For further information concerning the
subsequent event transactions, please see Note 29 to the
Financial Statements.
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Item 9.
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The
Offer and Listing
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A.
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Offer
and Listing Details
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Our Common Shares and preferred shares are not listed for
trading on any stock exchange or any other regulated market and,
under our articles, are subject to restrictions on transfer.
None of our securities have been registered under the United
States Securities Act of 1933 , as amended, or any state
securities laws, or qualified under the securities laws of
Canada or any province of Canada, or the securities laws of any
other country or governmental subdivision of any such country.
The terms of our articles of incorporation also prohibit any
transfer of shares without consent of our board of directors.
Therefore, there are significant restrictions on the resale of
our shares. Please also see Item 3.D. Key
Information Risk Factors and Item 10.B.
Additional Information Memorandum and Articles
of Incorporation for further information concerning our
Common Shares and preferred shares, including share transfer
restrictions.
Not applicable.
Our Common Shares and preferred shares are not listed for
trading on any United States, Canadian or other stock exchange.
Although we have recently filed a registration statement with
the SEC and a preliminary prospectus with the Ontario Securities
Commission, there is no guarantee that any such listing will be
completed in the future. There is currently no market through
which our Common Shares or preferred shares may be sold or
resold. The terms of our articles of incorporation also prohibit
any transfer of shares without the consent of our board of
directors and transfer of the shares may be subject to
additional restrictions under applicable securities law. Please
also see Item 3.D. Key Information Risk
Factors and Item 10.B. Additional
Information Memorandum and Articles of
Incorporation for further information concerning our
Common Shares and preferred shares, including share transfer
restrictions.
Not applicable.
Not applicable.
84
Not applicable.
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Item 10.
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Additional
Information
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Not applicable.
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B.
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Memorandum
and Articles of Incorporation
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We are incorporated under the CBCA under company number
385460-4.
The date of incorporation is January 12, 2001.
In June 2004, our board of directors approved the repeal of our
former general operating by-laws and adopted By-law No. 1A,
a new by-law relating generally to the transactions of our
business and affairs. On July 15, 2004, at a meeting of the
shareholders, our shareholders ratified the repeal of the
previous general operating by-laws and the adoption of By-law
No. 1A.
On June 28, 2006, our board of directors approved:
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amendments to By-Law No. 1A which reflect our current
corporate governance structure and enhanced practices including
an increase in the quorum requirement for meetings of
shareholders as well as current provisions of the CBCA; and
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amendments to our articles of incorporation to (a) increase
the minimum number of directors from one (1) to three
(3) and the maximum number of directors from ten
(10) to fifteen (15) in order to support any future
increases in the size of the board of directors, and (b) to
change our name from Mitel Networks Corporation to
Mitel Corporation.
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On September 7, 2006, at a meeting of the shareholders, our
shareholders ratified the amendments to By-Law No. 1A and
the amendments to our articles of incorporation. On
October 12, 2006, we filed articles of amendment increasing
the minimum number of directors from one (1) to three
(3) and the maximum number of directors from ten
(10) to fifteen (15). The amendment to our corporate name
has not yet been implemented, and therefore articles of
amendment in this regard have not yet been filed.
On August 16, 2007, we amended our articles of
incorporation to create two new classes of shares: Class 1
Convertible Preferred Shares and Class 2 Preferred Shares.
We also amended the articles to delete the authorized and
unissued Class A Convertible Preferred Shares (including
the Class A Convertible Preferred Shares,
Series 1) and Class B Convertible Preferred
Shares (including the Class B Convertible Preferred Shares,
Series 1).
Our certificate and articles of incorporation do not contain any
limitations on our objects or purposes. The following is a
summary of certain provisions of our certificate and articles of
incorporation:
Meetings
of Shareholders:
Subject to the CBCA, our annual meeting of shareholders is held
on such day and at such time in each year as our board of
directors, or the chairperson of the board, or in the
chairpersons absence, the lead director, or in lead
directors absence, the chief executive officer or, in the
chief executive officers absence, the president or, in the
presidents absence, a vice-president shall be chairperson,
may from time to time determine, for the purpose of considering
the financial statements and reports required by the CBCA to be
placed before the annual meeting, electing directors, appointing
auditors and for the transaction of such other business as may
properly be brought before the meeting. Pursuant to subsections
133(b) and 155(1) of the CBCA, we must hold the annual meeting
of our shareholders at least once every year and not later than
fifteen months after the preceding ordinary general meeting. We
must place before the shareholders at every annual meeting
comparative financial statements for the immediately preceding
financial year along with the report of the auditor.
85
In accordance with subsection 143 of the CBCA the holders of not
less than five percent of our issued and outstanding shares that
carry the rights to vote may requisition our board of directors
(by sending the requisition to each director and to our
registered office) to call a meeting of shareholders for the
purposes stated in the requisition. Upon the requisition of
shareholders, our board of directors shall proceed to convene
the meeting or meetings to be held in the manner set forth in
our by-laws or the CBCA, as applicable. The requisition shall
state the business to be transacted at the meeting.
Subject to the CBCA, notice of the time and place of each
meeting of shareholders shall be sent not less than 21 days
nor more than 60 days before the meeting to each
shareholder entitled to vote at the meeting, to each director
and to our auditor. If a meeting of shareholders is adjourned
for less than 30 days it is not necessary to give notice of
the adjourned meeting other than by announcement at the earliest
meeting that is adjourned.
A quorum of shareholders is present at a meeting of our
shareholders if the holders of 20% of the shares entitled to
vote at the meeting are present in person or represented by
proxy, provided that a quorum shall not be less than two persons.
Section 137 of the CBCA prescribes the method under which
proposals may be made by shareholders entitled to vote. The
shareholder must submit to us a notice of any matter that the
person proposes to raise at the meeting. We are required to set
out the proposal in the management proxy circular and the
proposing shareholder may request to include a supporting
statement. If we do not include the proposal in the management
proxy circular, we must send a notice of refusal to the
proposing shareholder including the reasons why the proposal
will not be included. Either the shareholder
and/or us
may apply to the courts claiming aggrievance.
Directors:
At least twenty-five per cent of our board of directors must be
resident Canadians. However, if we have less than four
directors, at least one director must be a resident Canadian.
Our board of directors shall manage or supervise the management
of our business and affairs. Section 122 of the CBCA states
that each of our directors and officers shall act honestly and
in good faith with a view to our best interests and to exercise
care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Subject to our by-laws and
articles, our board of directors may fix the remuneration of the
members of our board of directors.
No director or officer shall be liable for: (a) the acts,
receipts, neglects or defaults of any other director, officer,
employee or agent of ours or any other person; (b) any
loss, damage or expense happening to us through the
insufficiency or deficiency of title to any property acquired
by, for, or on behalf of us, or for the insufficiency or
deficiency of any security in or upon which any of the moneys of
us shall be loaned out or invested; (c) any loss or damage
arising from the bankruptcy, insolvency or tortuous act of any
person, firm or company, including any person, firm or company
with whom any moneys, securities or other assets belonging to us
shall be lodged or deposited; (d) any loss, conversion,
misapplication or misappropriation of or any damage resulting
from any dealings with any moneys, securities or other assets
belonging to us; (e) any other loss, damage or misfortune
whatever which may happen in the execution of the duties of our
directors or officers respective office or in
relation to their respective office, relieve a director or
officer from the duty to act in accordance with the CBCA or
relieve such director or officer from liability for a breach of
the CBCA.
We are required to indemnify our directors and officers, a
former director or officer of ours or another individual who
acts or acted at our request as a director or officer, or an
individual acting in a similar capacity, of another entity
against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably
incurred by such individual in respect of any civil, criminal or
administrative, investigative or other proceeding (a
proceeding) in which the individual is involved
because of that association with us or other entity. We may not
indemnify an individual in connection with the previous sentence
unless the individual: (a) acted honestly and in good faith
with a view to our best interests or that of another entity for
which the individual acted as a director or officer or in a
similar capacity at our request, as the case may be; and
(b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, had
reasonable grounds for believing that his conduct was lawful.
86
A director or officer of ours who is a party to a material
transaction or material contract, or proposed material
transaction or material contract with us, is a director or an
officer of, or acts in a capacity similar to a director or
officer of, or has a material interest in any person who is a
party to a material transaction or material contract or proposed
material transaction or material contract with us shall disclose
the nature and extent of
his/her
interest at the time and in the manner provided in the CBCA.
Except as provided in the CBCA, no such director of ours shall
vote on any resolution to approve any transaction. If a material
transaction or material contract is made between us and one or
more of our directors or officers, or between us and another
person of which a director or officer of us is a director or
officer or in which
he/she has a
material interest, the transaction is neither void nor voidable
by reason only of that relationship, or by reason only that a
director with an interest in the transaction or contract is
present at or is counted to determine the presence of a quorum
at a meeting of our board of directors or committee of our board
of directors that authorized the transaction, if the director or
officer disclosed
his/her
interest in accordance with the provisions of the CBCA and the
transaction or contract was approved by our board of directors
or our shareholders and it was reasonable and fair to us at the
time it was approved.
Share
Capital:
Pursuant to our articles of incorporation, as amended, our
authorized capital consists of an unlimited number of Common
Shares without par value, and, as described below, an unlimited
number of Class 1 Convertible Preferred Shares (or
Class 1 Preferred Shares, as they are referred
to in this annual report), issuable in series, and Class 2
Preferred Shares (or Class 2 Preferred Shares,
as they are referred to in this annual report), issuable in
series. Each common share ranks equally as to dividends, voting
rights and as to the distribution of assets on
winding-up
for liquidation. Holders of Common Shares are entitled to one
vote for each share held of record on all matters to be acted
upon by the shareholders.
The articles also provide that none of our shares may be
transferred without the consent of our board of directors
evidenced by a resolution passed by them and recorded in our
books.
By-law No. 1A provides that, subject to the CBCA and our
articles, shares may be issued at such times and to such persons
and for such consideration as our board of directors may
determine.
The rights, privileges, restrictions and conditions attached to
the Class 1 Preferred Shares and the Class 2 Preferred
Shares are set out in the Articles of Amendment dated
August 16, 2007 and attached as Exhibit 1.6.
The following summarizes the key rights, privileges,
restrictions and conditions attached to the Class 1
Preferred Shares and Class 2 Preferred Shares:
Class 1
Preferred Shares:
(a) Issue Price $1,000.00 per
Class 1 Preferred Share.
(b) Conversion, Liquidation and
Redemption Value For the purposes of
calculating the conversion ratio for the purpose of conversion
of the Class 1 Preferred Shares into Common Shares, the
value of each Class 1 Preferred Share is initially equal to
$1,000 per share but will increase at the rate of 8% per annum
(the Accreted Value). Accordingly, after one year
following the date of issuance of the Class 1 Preferred
Shares, the Accreted Value per share will be $1,080. For the
purposes of calculating (i) the liquidation preference
attributable to the Class 1 Preferred Shares; and
(ii) the redemption amount for the Class 1 Preferred
Shares, the value of each Class 1 Preferred Share is
initially be equal to $970.35 per share but will increase at the
rate of 8% per annum (the Net Accreted Value).
Accordingly, after one year following the date of issuance of
the Class 1 Preferred Shares, the Net Accreted Value per
share will be approximately $1,047.98.
(c) Conversion Each Class 1
Preferred Share is convertible, in whole or in part, at the
holders option, at any time into a number of Common Shares
equivalent to the Accreted Value of such Class 1 Preferred
Share divided by $1.3161, subject to adjustment. Accordingly, on
the date the Class 1 Preferred Shares are issued, each
Class 1 Preferred Share is convertible into 759.8207 Common
Shares. On the date that is one year following the date of
issuance of the Class 1 Preferred Shares, assuming no other
adjustments are applicable, each Class 1 Preferred Share
will be convertible into 820.6063 Common Shares.
87
(d) Ranking The Class 1
Preferred Shares will, with respect to dividend rights and
rights on liquidation, rank prior to the Class 2 Preferred
Shares, the Common Shares and to all other classes or series of
our equity securities.
(e) Dividends The holders of the
Class 1 Preferred Shares are entitled to receive, if, as
and when declared by the Board of Directors out of monies
properly applicable to the payment of dividends, the amount of
any dividends that the holders of Class 1 Preferred Shares
would have received by way of dividends paid on the Common
Shares had they converted their Class 1 Preferred Shares
into Common Shares.
(f) Liquidation Preference In the
event of any liquidation, winding up or change of control of the
Corporation, the holders of the Class 1 Preferred Shares
will be entitled to receive, in preference to the holders of the
Class 2 Preferred Shares and the Common Shares, a per share
amount equal to the greater of: (i) the Net Accreted Value;
and (ii) the value per share of the Common Shares into
which the Class 1 Preferred Shares are convertible
immediately prior to such liquidation, winding up or change of
control, plus, in each case, any declared but unpaid dividends
(the Terminal Redemption Value). The holders of
Class 1 Preferred Shares shall have the right to convert
their shares into Common Shares immediately prior to a
liquidation, winding up or change of control.
(g) Voluntary Redemption after Five
Years The Class 1 Preferred Shares are
not redeemable by the Corporation or the holders prior to the
fifth anniversary of the issuance of the Class 1 Preferred
Shares. The Class 1 Preferred Shares are redeemable on or
after the fifth anniversary (plus one day) of the issuance of
the Class 1 Preferred Shares at the option of a majority of
the holders at the Net Accreted Value, or at our option at the
Terminal Redemption Value. Payment of redemption amounts
will be subject to any restrictions pursuant to the Debt
Financing.
(h) Mandatory Redemption after Seven
Years The Class 1 Preferred Shares are
subject to mandatory redemption on the seventh anniversary of
the issuance of the Class 1 Preferred Shares for an amount
in cash per Class 1 Preferred Share equal to the Terminal
Redemption Value. Payment of redemption amounts will be
subject to any restrictions pursuant to the Debt Financing.
(i) Mandatory Conversion The
Corporation has the right to require the conversion of the
issued and outstanding Class 1 Preferred Shares into Common
Shares at the then-applicable conversion ratio immediately prior
to, and conditional upon, the closing of a public offering in
which the aggregate gross cash proceeds to the Corporation are
not less than $100,000,000 and in which the Common Shares are
listed on one or more stock exchanges (which includes the
Toronto Stock Exchange and the Nasdaq Stock Market), provided
that the value per Class 1 Preferred Share on an
as-converted to Common Shares basis is equal or greater than:
(a) 150% of the Net Accreted Value if the public offering is
completed within one year after the issuance of the Class 1
Preferred Shares; (b) 175% of the Net Accreted Value if the
public offering is completed after the first anniversary but on
or before the end of the second anniversary of the issuance of
the Class 1 Preferred Shares; or (c) 200% of the Net
Accreted Value if the public offering is completed after the
second anniversary of the issuance of the Class 1 Preferred
Shares.
(j) Anti-dilution Provision The
Class 1 Preferred Shares contain customary anti-dilution
protections, including weighted-average price protection.
(k) Voting Rights The
Class 1 Preferred Shares vote together with the Common
Shares and not as a separate class except as otherwise required
by law. Each Class 1 Preferred Share entitles the
Class 1 Preferred Holder to the number of votes per share
equal to the number of Common Shares that would be issuable on
conversion of such Class 1 Preferred Share.
(l) Protective Provisions For so
long as any Class 1 Preferred Shares remain outstanding,
the Corporation will not, without the consent of the holders of
a majority of the Class 1 Preferred Shares (i) create
or issue (by merger, reclassification or otherwise) any new
class or series of shares having rights, preferences or
privileges senior to or on parity with the Class 1
Preferred Shares, (ii) issue any additional Class 1
Preferred Shares, (iii) change the rights, privileges,
restrictions or conditions of the Class 1 Preferred Shares,
(iv) increase or decrease the authorized number of Common
Shares or Class 1 Preferred Shares, or (v) declare any
dividends on any class of shares.
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Class 2
Preferred Shares:
(a) Directors Authority to Issue One or More
Series Our directors may, at any time and
from time to time, issue the Class 2 Preferred Shares in
one or more series.
(b) Terms of Each Series Our
directors shall fix the number of shares in particular series of
series being issued and shall determine, subject to any
limitations set out in the our articles, the designation,
rights, privileges, restrictions and conditions attaching to the
shares of such series.
(c) Ranking of the Class 2 Preferred
Shares No rights, privileges, restrictions
or conditions attaching to a series of Class 2 Preferred
Shares shall confer upon a series a priority over any other
series of Class 2 Preferred Shares in respect of the
payment of dividends or return of capital in the event of the
liquidation, dissolution or winding up of the Corporation. The
Class 2 Preferred Shares of each series shall rank on a
parity with the Class 2 Preferred Shares of every other
series with respect to priority in the payment of dividends and
the return of capital in the event of the liquidation,
dissolution or winding up of the Corporation, whether voluntary
or involuntary, or any other return of capital of the
Corporation among its shareholders for the purpose of winding up
its affairs.
(d) Priority The Class 2
Preferred Shares shall rank junior to the Class 1 Preferred
Shares, but shall be entitled to priority as hereinafter
provided over the Common Shares and any other shares of any
other class of the Corporation ranking junior to the
Class 2 Preferred Shares, with respect to the return of
capital, the distribution of assets and the payment of declared
but unpaid dividends in the event of the liquidation,
dissolution or winding up of the Corporation, whether voluntary
or involuntary, or any other distribution of the assets of the
Corporation among its shareholders for the purpose of winding up
its affairs. The Class 2 Preferred Shares shall rank junior
to the Class 1 Convertible Preferred Shares, but shall be
entitled to priority over the Common Shares and any other shares
of any other class of the Corporation ranking junior to the
Class 2 Preferred Shares with respect to priority in the
payment of any dividends.
(e) Liquidation Preference In the event of
the liquidation, dissolution or winding up of the Corporation,
the holders of the Class 2 Preferred Shares of any series
shall be entitled, after payment or provision for payment of the
debts and other liabilities of the Corporation as may be
required by law:
(i) to receive in respect of the shares of such series,
prior to any distribution to the holders of Common Shares, the
amount, if any, provided for in the rights, privileges,
restrictions and conditions attached to the shares of such
series; and
(ii) if and to the extent provided in the rights,
privileges, restrictions and conditions attached to the shares
of such series, to share in the remaining assets of the
Corporation (subject to the rights, if any, of holders of any
other class or series of shares of the Corporation to first
receive payment of amounts in such event, if and to the extent
provided in the rights, privileges, restrictions and conditions
attached to any such shares).
(f) Other Preferences The
Class 2 Preferred Shares of any series may also be given
such other preferences, not inconsistent with the articles of
the Corporation over the Common Shares and any other shares of
the Corporation ranking junior to the Class 2 Preferred
Shares as may be determined in the case of such series of
Class 2 Preferred Shares in accordance with
paragraph 3 hereof.
(g) Conversion Right The
Class 2 Preferred Shares of any series may be made
convertible into or exchangeable for Common Shares of the
Corporation.
(h) Redemption Right The
Class 2 Preferred Shares of any series may be made
redeemable, in such circumstances, at such price and upon such
other terms and conditions, and with such priority, as may be
provided in the rights, privileges, restrictions and conditions
attached to the shares of such series.
(i) Dividends We may at any time
and from time to time declare and pay a dividend on the
Class 2 Preferred Shares of any series without declaring or
paying any dividend on the Common Shares or any other shares of
any other class of the Corporation ranking junior to the
Class 2 Preferred Shares. The rights, privileges,
restrictions and conditions attached to the Class 2
Preferred Shares of any series may include the right to receive
a dividend concurrently with any dividend declared on any other
class or series of shares of the Corporation, to be calculated
in
89
the manner set forth in the rights, privileges, restrictions and
conditions attached to the shares of such series of Class 2
Preferred Shares.
(j) Voting Rights Except as may
be otherwise provided in our articles or as otherwise required
by law or in accordance with any voting rights which may from
time to time be attached to any series of Class 2 Preferred
Shares, the holders of Class 2 Preferred Shares as a class
shall not be entitled as such to receive notice of, nor to
attend or vote at any meeting of the shareholders of the
Corporation.
(k) Variation of Rights The
rights, privileges, restrictions and conditions attaching to the
Class 2 Preferred Shares as a class may be added to,
amended or removed at any time with such approval as may then be
required by law to be given by the holders of the Class 2
Preferred Shares as a class.
Please refer to Item 10.C. Material
Contracts Warrants and Material
Contracts TPC Agreement for a description of
warrants and Item 6.E. Share Ownership for a
description of equity compensation plans.
The following summary of our material agreements, which
agreements are filed as exhibits to this annual report, does not
purport to be complete and are subject to, and qualified in its
entirety by reference to, all the provisions of those agreements.
Sale
and Lease-Back of Caldicot Property:
On August 31, 2005, Mitel Networks Limited entered into a
Contract for the Sale of Freehold Land and Building Subject to
Leases and the Leaseback of Part of Building (the Caldicot
Property Sale Agreement) with Robert Hitchens Limited
(Hitchens), a development corporation, whereby
Hitchens purchased the Caldicot Property for
£7,082,000 million. Under the terms of the Caldicot
Sale Agreement, Mitel Networks Limited leased back from Hitchens
approximately 46,000 square feet of the Caldicot Property
for a term of fifteen (15) years at an annual base rent of
£407,000. On the tenth anniversary of the lease term Mitel
Networks Limited may, at its option and without penalty, elect
to terminate the lease.
Merger
Agreement:
Pursuant to an Agreement and Plan of Merger dated as of
April 26, 2007 among us, Inter-Tel and Arsenal Acquisition
Corporation, a wholly-owned subsidiary of Mitel, we agreed to
acquire Inter-Tel for $25.60 per share, in cash, representing a
total purchase price of approximately $729 million (the
Merger). Pursuant to the Merger Agreement, Arsenal
was merged with and into Inter-Tel and we indirectly acquired
all of the outstanding stock of Inter-Tel such that Inter-Tel
became a wholly-owned subsidiary of Mitel. The Merger closed on
August 16, 2007.
In order to effect the Re-Organization Transactions described in
Item 4.A. Information on Mitel
History and Development of Mitel, we undertook negotiations with
the holders of various rights and entered into various
agreements with certain of our shareholders, as follows:
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In order to effect a return of capital on Series A
Preferred Shares, the conversion of the Series A Preferred
Shares into Class 1 Preferred Shares and Common Shares and
the termination of the Series 2 Warrants, each as described
in Item 4.A. Information on Mitel
History and Development of Mitel, we entered into a Return of
Capital, Voting and Conversion Agreement with EdgeStone (the
EdgeStone Return of Capital, Voting and Conversion
Agreement).
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In order to effect the conversion of the PTIC Series B
Preferred Shares and repurchase one-half of the Common Shares
issued to PTIC upon such conversion, as described above, we
entered into a Common Share Repurchase, Voting and Conversion
Agreement with PTIC (the PTIC Common Share Repurchase,
Voting and Conversion Agreement).
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In order to effect the repurchase of the Zarlink Common Shares,
as described above, we entered into a Common Share Repurchase
and Voting Agreement with Zarlink (the Zarlink Common
Share Repurchase and Voting Agreement).
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In order to effect the conversion of the Wesley Clover
Series B Preferred Shares and the repurchase for
cancellation and termination of the Matthews Warrants, as
described above, we entered into a Warrant Repurchase, Voting,
and Conversion Agreement with Dr. Matthews, Wesley Clover
and CTJL (the Matthews Warrant Repurchase, Voting and
Conversion Agreement).
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In connection with and as a condition of the Equity Financing,
each of Zarlink, PTIC, EdgeStone, Dr. Matthews, Wesley
Clover and CTJL agreed to enter into a termination agreement
(the Termination Agreement) which terminated the
existing shareholders agreement, as amended, and the existing
registration rights agreement, to which agreements they were
each a party, as described in our 2006 20-F filing. We entered
into a new shareholders agreement and a new registration rights
agreement with certain shareholders as set out below.
2007
Shareholders Agreement:
We entered into a 2007 Shareholders Agreement on August 16,
2007 with the Investors, Dr. Matthews, Wesley Clover
Corporation, CTJL and PTIC and EdgeStone. The 2007 Shareholders
Agreement contains provisions relating to the entitlement of
Arsenal and Matthews to appoint directors to the Board, and
various other provisions respecting the management of the
Corporation and dealings with the securities of the Corporation
held by the Shareholders which are parties to the 2007
Shareholders Agreement. Wesley Clover and CTJL are corporations
controlled directly or indirectly by Dr. Matthews. Arsenal
is controlled directly or indirectly by Francisco Partners.
Please see Item 3.D. Key Information Risk
Factors. Item 5.F. Operating and Financial
Review and Prospects Tabular Disclosure of
Contractual Obligations and Item 6.A. Directors,
Senior Management and Employees Directors and Senior
Management for further information concerning the equity
financing and the 2007 Shareholders Agreement.
Registration
Rights Agreement:
Pursuant to the registration rights agreement dated
August 16, 2007 (the Registration Rights
Agreement) among us and the Investors, Dr. Matthews,
Wesley Clover, CTJL, PTIC and EdgeStone, the holders of
registration rights under this agreement are entitled to the
registration
and/or the
qualification for distribution of the shares held by such
shareholders under the applicable securities laws of the United
States
and/or
Canada.
Convertible
Notes:
Senior
Secured Convertible Note Transaction:
On April 27, 2005, we completed a convertible debt
financing transaction, in which we issued and sold
$55.0 million in aggregate principal amount of convertible
notes and warrants to purchase 16.5 million of our Common
Shares. In addition to the Re-Organization Transactions
described above, we refinanced the $55,000,000 principal amount
of the convertible notes (as described in our 2006 20-F filing)
by prepaying the convertible notes immediately prior to the
completion of the Merger. The convertible notes were not
prepayable without the consent of the Noteholders before
maturity and did not mature until April 2009. We undertook
renegotiations with the Noteholders in order to obtain the
consent of the Noteholders to prepay the Convertible Notes, to
terminate the existing registration rights agreement with the
holders of the convertible notes, and to obtain the Noteholders
consent to complete the Equity Financing, the Debt Financing and
the Merger. Following these renegotiations, we entered into an
agreement with the Noteholders to prepay the convertible notes
immediately prior to the completion of the Merger in the
aggregate amount of $66,000,000, plus accrued and unpaid
interest. In addition, the terms of the warrants originally
issued to the Noteholders on August 27, 2005 (as described
in our 2006 20-F filing) were amended and restated on
August 16, 2007: (i) to extend the expiration date of
these warrants to August 16, 2012; (ii) to reduce the
exercise price of these warrants to $1.2771; and (iii) to
change the anti-dilution protection rights contained in these
warrants to a weighted average anti-dilution formula.
Debt
Financing:
On August 16, 2007, we entered into senior secured lien
loan facilities with certain lenders, including
Morgan Stanley and Merrill Lynch.
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First Lien Facility: We entered into a
senior secured first lien loan facility in an aggregate amount
of $275,000,000 provided by the Initial Lenders and certain
other financial institutions (the First Lien
Lenders), which facility consists of a $245,000,000 term b
loan facility (the Term Loan Facility), which
matures on August 16, 2014 and a $30,000,000 revolving
credit facility which matures on August 16, 2012 (the
Revolving Credit Facility, together with the Term
Loan Facility, the First Lien Facilities). The
Revolving Credit Facility is comprised of a U.S. revolving
credit facility (the U.S. Revolving Credit
Facility) and a Canadian revolving credit Facility (the
Canadian Revolving Credit Facility).
Second Lien Facility: We entered into a
senior secured second lien loan facility in an aggregate amount
of $185,000,000 which matures on August 16, 2015 (the
Second Lien Facility, together with the First Lien
Facilities, the Facilities) provided by the Initial
Lenders and certain other financial institutions (the
Second Lien Lenders, together with the First Lien
Lenders, the Lenders).
Default: The Facilities contain
customary events of default, including but not limited to
payment defaults, breaches of agreements and conditions,
covenant defaults, cross defaults and certain events of
bankruptcy or insolvency.
Pledge, Security and Guarantee: The
Facilities, and our performance under them are, subject to
certain exceptions, secured by a security interest over our
assets and certain stock and assets of our subsidiaries, as
evidenced by certain pledge agreements, security agreements,
guarantees, debentures and other related security documents
provided by such entities in favor of the lenders.
Equity
Financing:
Subscription Agreement: On August 16,
2007, we completed an equity financing transaction pursuant to
which, and in accordance with the terms and conditions of the
Class 1 Convertible Preferred Share Subscription Agreement
(the Subscription Agreement) entered into between
us, Arsenal Holdco I, s.a.r.l, Arsenal Holdco II,
s.a.r.l. and Morgan Stanley Principal Investors Inc.
(collectively the Investors), pursuant to which we:
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Issued and sold to the Investors 263,087 Class 1 Preferred
Shares at a purchase price of $1,000 per share.
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Issued and sold to the Investors, for the aggregate price of
$0.01, warrants to purchase 19,936,071 Common Shares at an
exercise price set out above under the heading
Warrants.
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Please see Item 3.D. Key Information Risk
Factors and Item 5.F. Operating and Financial
Review and Prospects Tabular Disclosure of
Contractual Obligations for further information concerning
the Equity Financing.
Please see Item 5.F. Operating and Financial Review
and Prospects Tabular Disclosure of Contractual
Obligations and Item 7.B. Major Shareholders
and Related Party Transactions Related Party
Transactions for further information.
Warrants:
On August 16, 2007, we issued warrants to acquire
21,830,508 of our Common Shares in the aggregate to the
Investors, PTIC and Dr. Matthews.
Each warrant may only be exercised, and shall automatically be
exercised, upon the occurrence of certain Exercise
Events (as defined in the warrant and described below),
but in no event later than August 16, 2012. The number of
Common Shares obtainable upon exercise of each warrant is based
on the specific Exercise Event. In addition, if these warrants
are exercised in connection with an initial public offering (as
defined in the warrant), the holder will receive additional
warrants. The warrants contain customary anti-dilution
provisions for stock splits, dividends, subdivisions and
combinations.
Warrants will only be exercised (and shall be exercised
automatically) upon any of the following events (each an
Exercise Event):
(a) Immediately prior to the completion of a qualified
initial public offering (as defined in the amended Articles of
Amendment filed as Exhibit 1.6); or
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(b) in the event of a transaction which results in all or
substantially all of the Common Shares being acquired for cash
consideration (whether effected by amalgamation, statutory
arrangement or other similar transactions); or
(c) August 16, 2012.
The number of our Common Shares issuable on the exercise of each
warrant shall equal:
where
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Y =
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the number of warrant shares in respect of which the net
issuance election is being made.
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A =
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the Fair Market Value (as defined in the warrant) of
one Common Share as at the time the net issuance election is
made.
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B =
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the Exercise Price (initially $1.32, as adjusted to the date of
calculation)
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Inter-Tel
Agreements:
Inter-Tel, Incorporated Tax Deferred Savings Plan and
Retirement Trust. Inter-Tel entered into the Plan
on December 1, 1984, as amended. This Plan is designated as
a profit sharing plan with a Section 401(k) cash or
deferred arrangement for all purposes under the Code and ERISA.
Agreements
with Related Parties and Others:
Derivative contract between us and JPMorgan Chase Bank,
N.A.: We have entered into a derivative
contract dated September 25, 2005 with JPMorgan Chase Bank,
N.A., in order to limit the impact of changes in LIBOR on
interest expense related to our convertible notes for the period
commencing November 1, 2005 to November 1, 2007. The
derivative contract, based on $55 million, effectively
provides a cap on LIBOR of 5.27% and a floor on LIBOR of 4.00%
Please see Item 7.B. Major Shareholders and Related
Party Transactions Related Party Transactions
and Item 4.A. Information on
Mitel History and Development of Mitel for other Material Contracts with Related Parties and Others.
Agreements
with Key Employees:
Please see Item 6.B. Directors, Senior Management and
Employees Compensation for a description of
other Material Employment Contracts.
TPC
Agreement, as amended:
On October 10, 2002 we entered into an agreement with Mitel
Knowledge, March Networks and Her Majesty the Queen in Right of
Canada, (as amended, the TPC Agreement), which
provided for financing of up to the lesser of 25% of project
cost elements incurred by us, March Networks and Mitel Knowledge
and C$60 million for certain research and development
activities over a three-year period. The financing was provided
through the Technology Partnerships Canada program, which is an
initiative of the Government of Canada that is designed to
promote economic growth in Canada through strategic investment
in technological research, development and innovation. We have
submitted claims for an aggregate of C$55 million of
research and development activities under the TPC Agreement.
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In exchange for the funds received by us under the TPC
Agreement, we were required to issue warrants to the Government
of Canada during the term of the TPC Agreement. The warrants are
exercisable on a one-for-one basis for Common Shares for no
additional consideration.
The number of warrants issued in each year was equal to the
amount of contributions paid to us under the TPC Agreement in
the immediately preceding
12-month
period, divided by the fair market value of our Common Shares as
of the applicable date.
Please see Item 5.A. Operating and Financial Review
and Prospects Operating Results for further
information concerning the TPC Agreement.
Agreement
between Mr. Peter Charbonneau and
Dr. Matthews:
By way of letter agreements between Dr. Matthews and
Mr. Peter Charbonneau, one of our directors, dated
February 16, 2001, as amended, Dr. Matthews granted to
Charbonneau options to purchase 900,000 of our Common Shares
owned by Dr. Matthews. Any proceeds on the exercise of
these options will be payable by Mr. Charbonneau to
Dr. Matthews and not to us. These options granted to
Mr. Charbonneau expire on February 16, 2011. As of
September 30, 2006, all of these options had vested and
none had been exercised.
Limitations on the ability to acquire and hold our Common Shares
may be imposed by the Competition Act (Canada). This
legislation permits the Commissioner of Competition of Canada
(the Commissioner) to review any acquisition of
control over or of a significant interest in us. This
legislation grants the Commissioner jurisdiction, for up to
three years, to challenge this type of acquisition before the
Canadian Competition Tribunal on the basis that it would, or
would be likely to, substantially prevent or lessen competition
in any market in Canada.
This legislation also requires any person who intends to acquire
our Common Shares to file a notification with the Canadian
Competition Bureau if certain financial thresholds are exceeded
and if that person would hold more than 35% of our Common
Shares. If a person already owns 35% or more of our Common
Shares, a notification must be filed when the acquisition of
additional shares would bring that persons holdings to
over 50%. Where a notification is required, the legislation
prohibits completion of the acquisition until the expiration of
a statutory waiting period, unless the Commissioner provides
written notice that she does not intend to challenge the
acquisition.
There is no limitation imposed by Canadian law or our articles
of incorporation on the right of non-residents to hold or vote
our Common Shares, other than those imposed by the Investment
Canada Act.
The Investment Canada Act requires any person that is not
a Canadian as defined in the Investment Canada
Act who acquires control of an existing Canadian business,
where the acquisition of control is not a reviewable
transaction, to file a notification with Industry Canada. The
Investment Canada Act generally prohibits the
implementation of a reviewable transaction by a non-Canadian
unless, after review, the Minister responsible for the
Investment Canada Act is satisfied that the investment is
likely to be of net benefit to Canada. Under the Investment
Canada Act the acquisition of control of us (either through
the acquisition of our Common Shares or all or substantially all
our assets) by a non-Canadian who is a World Trade Organization
member country investor, including U.S. investors, would be
reviewable only if the value of our assets was equal to or
greater than a specified amount. The specified amount for 2007
is C$281 million. The threshold amount is subject to an
annual adjustment on the basis of a prescribed formula in the
Investment Canada Act to reflect changes in Canadian
gross domestic product. For non-World Trade Organization member
investors, the corresponding threshold is C$5 million.
The acquisition of a majority of the voting interests of an
entity is deemed to be acquisition of control of that entity.
The acquisition of less than a majority but one-third or more of
the voting shares of a corporation or of an equivalent undivided
ownership interest in the voting shares of the corporation is
presumed to be an acquisition of control of that corporation
unless it can be established that, on the acquisition, the
corporation is not controlled in fact by the acquiror through
the ownership of voting shares. The acquisition of less than
one-third of the voting
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shares of a corporation is deemed not to be acquisition of
control of that corporation. Certain transactions in relation to
our Common Shares would be exempt from review from the
Investment Canada Act including:
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the acquisition of our Common Shares by a person in the ordinary
course of that persons business as a trader or dealer in
securities;
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the acquisition or control of us in connection with the
realization of security granted for a loan or other financial
assistance and not for any purpose related to the provisions of
the Investment Canada Act ; and
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the acquisition or control of us by reason of an amalgamation,
merger, consolidation or corporate reorganization following
which the ultimate direct or indirect control in fact of us,
through the ownership of voting interests, remains unchanged.
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There is no law, governmental decree or regulation in Canada
that restricts the export or import of capital, or which would
affect the remittance of dividends or other payments by us to
non-resident holders of our Common Shares, other than
withholding tax requirements.
UNITED
STATES FEDERAL INCOME TAX CONSIDERATIONS
This section summarizes the material United States federal
income tax consequences to U.S. Holders (as
defined below) of the ownership and disposition of our Common
Shares. This section assumes that you hold your Common Shares as
capital assets within the meaning of Section 1221 of the
U.S. Internal Revenue Code of 1986, as amended (the
Code) and that the Company is not a controlled
foreign corporation within the meaning of Section 957
of the Code. This section does not purport to be a complete
analysis of all of the potential United States federal income
tax considerations that may be relevant to particular holders of
our Common Shares in light of their particular circumstances nor
does it deal with United States federal income tax consequences
applicable to holders subject to special tax rules, including
banks, brokers, dealers in securities or currencies, traders in
securities that elect to use a mark-to-market method of
accounting for their securities holdings, tax-exempt entities,
insurance companies, regulated investment companies, persons
liable for alternative minimum tax, persons that actually or
constructively own 10% or more of our Common Shares, persons
that hold Common Shares as part of a straddle or a hedge,
constructive sale, synthetic security, conversion or other
integrated transaction, holders that acquired Common Shares
through the exercise of employee stock options or otherwise as
compensation for services, partnerships and other pass-through
entities, and persons whose functional currency is not the
United States dollar. In addition, this discussion does not
address the tax consequences of the ownership and disposition of
our Common Shares arising under the tax laws of any state,
locality or foreign jurisdiction.
If any entity that is classified as a partnership for United
States federal income tax purposes holds Common Shares, the tax
treatment of its partners will generally depend upon the status
of the partner and the activities of the partnership.
Partnerships and other entities that are classified as
partnerships for United States federal income tax purposes and
persons holding Common Shares through a partnership or other
entity classified as a partnership for United States federal
income tax purposes are urged to consult their tax advisors.
This section is based on the Code, the Treasury regulations
thereunder (the Treasury Regulations), published
rulings, court decisions and administrative interpretations, all
as currently in effect. These laws are subject to change, repeal
or revocation possibly on a retroactive basis so as to result in
United States federal income tax consequences different from
those discussed below.
For purposes of this discussion, you are a
U.S. Holder if you are a beneficial owner of
Common Shares and you are for United States federal income tax
purposes (i) a citizen or individual resident of the United
States, (ii) a corporation or other entity taxable as a
corporation created or organized under the laws of the United
States or any political subdivision thereof, (iii) an
estate whose income is subject to United States federal income
tax regardless of its source, or (iv) a trust (a) if a
United States court can exercise primary supervision over the
trusts administration and one or more United States
persons are authorized to control all substantial decisions of
the trust or (b) that has a valid election in effect under
applicable Treasury Regulations to be treated as a United States
person.
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This summary does not discuss United States federal income tax
consequences to any beneficial owner of Common Shares that is
not a U.S. Holder. Each U.S. Holder is urged to
consult with its own tax advisor regarding the tax consequences
of the acquisition, ownership and disposition of Common Shares,
including the effects of federal, state, local, foreign, and
other tax laws.
Taxation
of Dividends
We currently do not anticipate paying dividends on our Common
Shares. However, in the event we do pay dividends, and provided
we are not a passive foreign investment company, discussed
below, you must include in your gross income as ordinary income
the gross amount of any dividend paid by us out of our current
or accumulated earnings and profits (as determined for United
States federal income tax purposes), including the amount of any
Canadian taxes withheld from this dividend. You must include the
dividend in income when you receive the dividend, actually or
constructively. The dividend will not be eligible for the
dividends-received deduction generally allowed to United States
corporations in respect of dividends received from other United
States corporations. Distributions in excess of our current and
accumulated earnings and profits (as determined for United
States federal income tax purposes), including the amount of any
Canadian taxes withheld from the distributions, will be treated
as a non-taxable return of capital to the extent of your
adjusted basis in the Common Shares and as a capital gain to the
extent it exceeds your basis. If you are a non-corporate
U.S. Holder, including an individual, dividends you receive
in taxable years beginning before January 1, 2011, may be
subject to United States federal income tax at lower rates than
other types of ordinary income, generally 15%, provided certain
holding period and other requirements are satisfied. These
requirements include (a) that we are a qualified
foreign corporation, and (b) that you not treat the
dividend as investment income for purposes of the
investment interest deduction rules. Provided that we are not
treated as a passive foreign investment company, described
below, we believe that we are a qualified foreign
corporation. U.S. Holders should consult their own
tax advisors regarding the application of these rules.
If you are entitled to benefits under the Canada-United States
Income Tax Convention, dividends you receive with respect to
Common Shares will be subject to Canadian withholding tax at the
rate of 15%. Additionally, such dividends will be treated as
foreign source income for foreign tax credit limitation
purposes. Accordingly, any Canadian tax withheld may, subject to
certain limitations, be claimed as a foreign tax credit against
your United States federal income tax liability or may be
claimed as a deduction for United States federal income tax
purposes. For taxable years beginning before January 1,
2007, dividends will generally be passive income or
financial services income and, for taxable years
beginning after December 31, 2006, will be passive
category income or general category income for
foreign tax credit purposes. The rules relating to foreign tax
credits are complex and the availability of a foreign tax credit
depends on numerous factors. You should consult your own tax
advisors concerning the application of the United States foreign
tax credit rules to your particular situation.
Taxation
of Dispositions
Provided that we are not a passive foreign investment company,
discussed below, upon a sale or other disposition of Common
Shares, you will recognize capital gain or loss for United
States federal income tax purposes equal to the difference
between the amount that you realize and your adjusted tax basis
in your Common Shares. Your adjusted tax basis in our Common
Shares generally will be the cost to you of such shares. Capital
gain of a non-corporate U.S. Holder, including an
individual, is generally taxed at a maximum rate of 15% if the
property has been held for more than one year. The deductibility
of capital losses is subject to limitations. The gain or loss
will be gain or loss from sources within the United States for
foreign tax credit limitation purposes.
Conversion
of Canadian Dollars
The amount of a distribution paid in Canadian dollars generally
will be equal to the U.S. dollar value, based on the
exchange rate of such distribution on the date of receipt. A
U.S. Holder that does not convert Canadian dollars received
as a distribution into U.S. dollars on the date of receipt
generally will have a tax basis in such Canadian dollars equal
the U.S. dollar value of such Canadian dollars on the date
the Canadian dollars are received. Upon any subsequent exchange
of such Canadian dollars for U.S. dollars, a
U.S. Holder will recognize foreign currency gain or loss,
which is treated as ordinary income or loss, equal to the
difference, if any, between the U.S. Holders tax
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basis for the Canadian dollars and the amount of
U.S. dollars received. Such gain or loss will be gain or
loss from sources within the United States for foreign tax
credit limitation purposes. U.S. Holders that receive
Canadian dollars upon the disposition of our Common Shares
should consult their own tax advisors with respect to the
U.S. federal income tax consequence to them of receiving
Canadian dollars given their particular situation.
Passive
Foreign Investment Company Considerations
Special United States federal income tax rules apply to United
States persons owning shares of a passive foreign investment
company (PFIC). We do not believe that we are a
PFIC, nor do we anticipate that we will become a PFIC in the
foreseeable future. Our expectation is based in part on
projections of the income and value of our assets and
outstanding equity during the year, the amount of proceeds of
any initial public offering of our Common Shares we may
undertake, and our anticipated use of such proceeds, and the
other cash that we will hold and generate in the ordinary course
of our business. However, there can be no assurance that the IRS
will not successfully challenge our position or that we will not
become a PFIC in a future taxable year, as PFIC status is
re-tested
each year and depends on our assets and income in such year.
A
non-U.S. corporation
will be classified as a PFIC for United States federal income
tax purposes in any taxable year in which, after applying
relevant look-through rules with respect to the income and
assets of subsidiaries, either at least 75% of its gross income
is passive income, or on average at least 50% of the
gross value of its assets is attributable to assets that produce
passive income or are held for the production of passive income.
For this purpose, passive income generally includes, among other
things, dividends, interest, certain rents and royalties and
gains from the disposition of passive assets.
Certain excess distributions, as defined in
Section 1291 of the Code, received in respect of stock of a
PFIC and dispositions of stock of a PFIC are subject to the
highest rate of tax on ordinary income in effect and to an
interest charge based on the value of the tax deferred during
the period during which the shares were owned. Rather than being
subject to this tax regime, you may make:
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a qualified electing fund election (a QEF
election), as defined in the Code, to be taxed currently
on your pro rata portion of our ordinary earnings and net
capital gain, whether or not such amounts are distributed in the
form of dividends or otherwise, or
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a mark-to-market election and thereby agree for the
year of the election and each subsequent tax year to recognize
ordinary income or loss (but only to the extent of prior
ordinary gain) based on the increase or decrease in market value
for such taxable year. Your tax basis in our Common Shares would
be adjusted to reflect these income or loss amounts.
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In order for you to be able to make a QEF election, we would
have to provide certain information regarding your pro rata
shares of our ordinary earnings and net capital gain. We
currently do not intend to provide such information. In order
for you to be able to make a mark-to-market election, our Common
Shares must be marketable. Our Common Shares will be
marketable as long as they remain regularly traded
on a national securities exchange, such as the Nasdaq Global
Market.
U.S. Holders should consult their own tax advisors with
respect to the PFIC issue and its potential application to their
particular situation.
Information
Reporting and Backup Withholding
If you are a non-corporate U.S. Holder, information
reporting requirements on Internal Revenue Service
(IRS) Form 1099 will generally apply to:
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dividend payments or other taxable distributions made to you
within the United States, and
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the payment of proceeds to you from the sale of Common Shares
effected at a United States office of a broker unless you come
within certain categories of exempt recipients.
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Additionally, backup withholding may apply to such payments if
you are a non-corporate U.S. Holder that does not come
within certain categories of exempt recipients and you:
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fail to provide an accurate taxpayer identification number,
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are notified by the IRS that you have failed to report all
interest and dividends required to be shown on your United
States federal income tax returns, or
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otherwise fail to comply with other applicable requirements of
the backup withholding rules.
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A U.S. Holder who does not provide a correct taxpayer
identification number may be subject to penalties imposed by the
IRS.
If backup withholding applies to you, the prescribed percentage
(currently 28%) of the gross amount of any payments to you with
respect to our Common Shares will be withheld and paid over to
the IRS. Any amounts withheld from payments to you under the
backup withholding rules will be allowed as a credit against
your United States federal income tax liability and may entitle
you to a refund, provided the required information is timely
furnished to the IRS. You should consult your tax advisor
regarding the application of backup withholding in your
particular situation, the availability of an exemption from
backup withholding and the procedure for obtaining such an
exemption, if available.
CANADIAN
FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS
This section summarizes the principal Canadian federal income
tax considerations generally applicable to a beneficial owner of
Common Shares (a) who, at all relevant times and for the
purposes of the Income Tax Act (Canada) (the Tax
Act), is not resident and is not deemed to be resident in
Canada, deals at arms length and is not affiliated with
us, holds the Common Shares as capital property and does not use
or hold and is not deemed to use or hold, the Common Shares in
the course of carrying on, or otherwise in connection with, a
business in Canada, and (b) who, at all relevant times and
for the purposes of the Canada-United States Income Tax
Convention (the Treaty), is a resident of the United
States, and who otherwise qualifies for the full benefits of the
Treaty (a U.S. Holder). Special rules not
discussed in this summary may apply to a U.S. Holder that
is an insurer that carries on business in Canada and elsewhere.
This summary is based on the current provisions of the Tax Act
and the regulations thereunder in force at the date hereof,
specific proposals to amend the Tax Act or regulations
thereunder that have been publicly announced by the Minister of
Finance (Canada) prior to the date hereof (the Proposed
Amendments), the current provisions of the Treaty and
counsels understanding of the current administrative
practices of the Canada Revenue Agency published in writing
prior to the date hereof. It has been assumed that the Proposed
Amendments will be enacted in the form proposed, however, no
assurances can be given that the Proposed Amendments will be
enacted as proposed or at all. The summary does not take into
account or anticipate any changes in law or administrative or
assessing practice whether by legislative, regulatory,
administrative or judicial action nor does it take into account
tax legislation or considerations of any provincial,
territorial, U.S. or other foreign income tax
jurisdictions, which may differ significantly from those
discussed herein.
This summary is of a general nature and is not exhaustive of all
possible Canadian federal income tax consequences. It is not
intended as legal or tax advice to any particular holder of
Common Shares and should not be so construed. The tax
consequences to any particular holder of Common Shares will vary
according to the status of that holder as an individual, trust,
corporation or member of a partnership, the jurisdictions in
which that holder is subject to taxation and, generally, that
holders particular circumstances. Each holder should
consult the holders own tax advisor with respect to the
income tax consequences applicable to the holders own
particular circumstances.
Taxation
of Dividends
Dividends paid or credited on the Common Shares or deemed to be
paid or credited on the Common Shares by us to a
U.S. Holder are subject to Canadian withholding tax. Under
the Treaty, the rate of withholding tax on
98
dividends paid or credited to a U.S. Holder that is the
beneficial owner of the dividends is generally reduced to 15% of
the gross dividend.
Disposition
of Common Shares
A U.S. Holder is not subject to tax under the Tax Act in
respect of a capital gain realized on the disposition of a
common share unless such share is taxable Canadian
property to the U.S. Holder for purposes of the Tax
Act and the U.S. Holder is not entitled to relief under the
Treaty.
Generally, our Common Shares will not constitute taxable
Canadian property to a U.S. Holder at a particular time
provided that (i) our Common Shares are listed on a
prescribed stock exchange (which includes both the Nasdaq Global
Market and the Toronto Stock Exchange) and (ii) at any time
during the
60-month
period ending at the time of disposition, the U.S. Holder
or persons with whom the U.S. Holder did not deal at
arms length (or the U.S. Holder together with such
persons) have not owned 25% or more of our issued shares of any
class or series. In the case of a U.S. Holder to whom
Common Shares represent taxable Canadian property, by reason of
the Treaty, no tax under the Tax Act will be payable on a
capital gain realized on a disposition of such shares unless, at
the time of disposition, the value of such shares is derived
principally from real property situated in Canada. We believe
that the value of our Common Shares is not derived principally
from real property situated in Canada, and that no tax would
therefore be payable under the Tax Act on a capital gain
realized today by a U.S. Holder on a disposition of Common
Shares.
|
|
F.
|
Dividends
and Paying Agents
|
Not applicable.
Not applicable.
We are subject to the informational requirements of the United
States Securities Exchange Act of 1934, as amended, such
as to file reports and other information with the SEC.
Shareholders may read and copy any of our reports and other
information at, and obtain copies upon payment of prescribed
fees from, the Public Reference Room maintained by the SEC at
100 F Street N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public
Reference Room by calling the SEC at
1-800-SEC-0330.
We are not required to file reports and other information with
any securities commissions in Canada.
As a foreign private issuer, we are exempt from the rules under
the United States Securities Exchange Act of 1934, as amended,
prescribing the furnishing and content of proxy statements to
shareholders. We have included in this annual report certain
information disclosed in our proxy statement prepared under
applicable Canadian law.
We will provide without charge to each person, including any
beneficial owner, on the written or oral request of such person,
a copy of any or all documents referred to above which have been
or may be incorporated by reference in this annual report (not
including exhibits to such incorporated information that are not
specifically incorporated by reference into such information).
Requests for such copies should be directed to us at the
following address: Mitel Networks Corporation, 350 Legget Drive,
Ottawa, Ontario, Canada, K2K 2W7 Attention: Corporate Secretary,
telephone number:
613-592-2122.
|
|
I.
|
Subsidiary
Information
|
Not applicable.
99
|
|
Item 11.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
Market risk is the risk of loss in our future earnings due to
adverse changes in financial markets. We are exposed to market
risk from changes in our common share price, foreign exchange
rates and interest rates. Inflation has not had a significant
impact on our results of operations.
Equity
Price Risk:
On December 9, 2004 we adopted a deferred share unit plan
for executives. Under the Deferred Share Unit Plan, when a
participant ceases to be an executive of Mitel, the Deferred
Share Unit Plan participant will receive a cash amount equal to
the number of deferred share units in his or her account
multiplied by the weighted average trading price of our Common
Shares on the Toronto Stock Exchange on the five trading days
immediately preceding the date the Deferred Share Unit Plan
participant ceases to be an executive of Mitel, or on a later
date selected by the Deferred Share Unit Plan participant, which
shall in any event be a date prior to the end of the following
calendar year. The obligation to pay the cash amount that is
indexed to the weighted average trading price of our Common
Shares and recorded as a liability in our financial statements,
is marked-to-market in each reporting period, with changes in
the obligation recorded in our consolidated statement of
operations. As of April 30, 2007, a $1.00 increase in our
common share price would increase our net loss by
$0.6 million. (April 30, 2006
$0.6 million).
Foreign
Currency Risk:
To manage our foreign currency risk, we use derivative financial
instruments including foreign exchange forward contracts and
foreign exchange swap contracts from time to time, that have
been authorized pursuant to policies and procedures approved by
our board of directors. We do not hold or issue financial
instruments for trading or speculative purposes. We currently
use foreign currency forward and swap contracts to reduce our
exposure to foreign currency risk.
The fair value of our foreign currency forward contract and swap
contracts is sensitive to changes in foreign currency exchange
rates. As of April 30, 2007, a 5% appreciation in the
U.S. dollar against all currencies would have resulted in
an additional unrealizable loss of $0.5 million
(April 30, 2006 a 5% appreciation in the
Canadian dollar would result in an additional unrealizable loss
of $6.4 million). We believe that the established hedges
are effective against our foreign currency denominated assets
and liabilities. As a result, any potential future losses from
these hedges being marked-to-market would be largely offset by
gains or losses on the underlying hedged positions.
Interest
Rate Risk:
In accordance with our corporate policy, cash equivalent and
short-term investment balances are primarily comprised of
high-grade commercial paper and money market instruments with
original maturity dates of less than three months. Due to the
short-term maturity of these investments, we are not subject to
significant interest rate risk.
We are exposed to interest rate risk on our convertible notes
which bear interest based on the LIBOR. Each adverse change in
the LIBOR rate of 100 basis points would result in an
additional $0.6 million in interest expense per year.
In September 2005, we entered into a derivative contract with JP
Morgan Chase Bank, N.A., in order to limit the impact of changes
in LIBOR on our interest expense for the period commencing
November 1, 2005 and ending November 1, 2007. This
derivative contract effectively provides a cap on LIBOR of 5.27%
and a floor on LIBOR of 4.00% until November 1, 2007 on a
notional amount of $55 million.
The interest rates on our obligations under capital leases are
fixed and therefore not subject to interest rate risk.
On August 16, 2007, in connection with the acquisition of
Inter-Tel, we borrowed $300 million under a 7 year
First Lien Credit Agreement and $130 million from a
8 year Second Lien Credit Agreement. Both of these credit
facilities bear interest based on LIBOR Each adverse change in
the LIBOR rate of 100 basis points would result in an
additional $4.3 million in interest expense per year.
100
In addition, as part of the Inter-Tel transaction, we secured a
5 year, $30 million revolving credit facility, which
remained unutilized at September 30, 2007. This revolving
credit facility bears interest based on LIBOR. Each adverse
change in the LIBOR rate of 100 basis points would result
in an additional $0.3 million in interest expense per year,
if the facility were fully utilized.
On August 16, 2007, the convertible notes were repaid in
full.
|
|
Item 12.
|
Description
of Securities Other than Equity Securities
|
Not applicable.
|
|
Item 13.
|
Defaults,
Dividend Arrearages and Delinquencies
|
Not applicable.
|
|
Item 14.
|
Material
Modifications to the Rights of Security Holders and Use of
Proceeds
|
Not applicable.
|
|
Item 15.
|
Controls
and Procedures
|
Our management carried out an evaluation, with the participation
of the CEO and CFO, of the effectiveness of our disclosure
controls and procedures as of April 30, 2007. Based upon
that evaluation, our CEO and CFO concluded that our disclosure
controls and procedures were effective to ensure that
information required to be disclosed by Mitel in reports that it
files or submits under the United States Securities Exchange
Act of 1934 (the Act) is recorded, processed,
summarized and reported, within the time period specified in the
rules and forms of the SEC.
For purposes of this section, the term disclosure controls and
procedures means controls and other procedures of an issuer that
are designed to ensure that information required to be disclosed
by the issuer in the reports that it files or submits under the
Act (15 U.S.C. 78a et seq.) is recorded, processed,
summarized and reported, within the time periods specified in
the Commissions rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by
an issuer in the reports that it files or submits under the Act
is accumulated and communicated to the issuers management,
including its principal executive and principal financial
officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure.
There has not been any change in our internal control over
financial reporting in connection with the evaluation required
by
Rule 13A-15(d)
under the Act that occurred during the fiscal year ended
April 30, 2007 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
|
|
A.
|
Audit
Committee Financial Expert
|
Our board of directors has determined that Peter Charbonneau,
chair of the audit committee of our board of directors, is an
audit committee financial expert as defined by the SEC, and is
independent as defined in the listing standards of the Nasdaq.
We have adopted a code of ethics that applies to all of its
employees, including our CEO, CFO and Controller. We will
provide without charge to each person, on the written or oral
request of such person, a copy of such code of ethics. Requests
for such copies should be directed to us at the following
address: Mitel Networks Corporation, 350 Legget Drive,
Ottawa, Ontario, Canada, K2K 2W7 Attention: Corporate Secretary,
telephone number:
101
613-592-2122.
As of the date hereof, there has not been any amendment or
waiver of any provision of the code of ethics.
|
|
C.
|
Principal
Accountant and Fees
|
Aggregate audit fees, audit-related fees, tax fees and the
aggregate of all other fees billed to us by
Deloitte & Touche LLP during fiscal 2007 and
fiscal 2006 amounted to the following:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007
|
|
|
Fiscal 2006
|
|
|
|
|
$
|
|
|
|
$
|
|
|
Audit Fees
|
|
|
780,840
|
|
|
|
741,259
|
|
Audit-Related Fees
|
|
|
45,618
|
|
|
|
85,561
|
|
Tax Fees
|
|
|
28,921
|
|
|
|
205,889
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
855,379
|
|
|
|
1,032,709
|
|
|
|
|
|
|
|
|
|
|
Audit fees relate to the audit of our annual consolidated
financial statements and unconsolidated statutory financial
statements. In 2006, the audit fees also include securities work
relating to the filing of our preliminary prospectus.
Audit-related fees relate to the audit of our defined benefit
and defined contribution pension plans in Canada, the United
States, and United Kingdom. It also includes fees for accounting
consultations and advisory services with respect to
Sarbanes-Oxley internal controls and disclosure assistance.
Tax fees relate to assistance with tax compliance, expatriate
tax return preparation, tax planning and various tax advisory
services. Also includes advisory services relating to
intercompany loan agreements and services performed with respect
to stock option cancellation and regrant. In fiscal 2007, this
also includes support services relating to the Inter-Tel merger.
Audit
committee pre-approval process:
From time to time, our management recommends to and requests
approval from the audit committee for audit and non-audit
services to be provided by our auditors. The audit committee
considers such requests on a quarterly basis, and if acceptable,
pre-approves such audit and non-audit services. During such
deliberations, the audit committee assesses, among other
factors, whether the services requested would be considered
prohibited services as contemplated by the SEC, and
whether the services requested and the fees related to such
services could impair the independence of the auditors.
Since the implementation of the audit committee pre-approval
process in December 2003, all audit and non-audit services
rendered by our auditors have been pre-approved by the audit
committee.
|
|
D.
|
Exemptions
from the Listing Standards for Audit Committees
|
Not applicable.
|
|
E.
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
The following chart sets forth the number of our Common Shares
repurchased and the average price paid by us for those shares,
broken out on a month to month basis during fiscal 2007 (except
from January 1, 2007 to September 20, 2007 in which
there were no equity issuances), and up to and including
September 30, 2007.
102
Repurchases during this period were largely made in connection
with the forgiveness of certain outstanding share purchase loans
of employees who are no longer employed by us (largely due to
cost reduction programs):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(d) Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
Number (or
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
|
|
|
Dollar
|
|
|
|
|
|
|
|
|
|
(c) Total
|
|
|
Value) of
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
(or Units)
|
|
|
|
|
|
|
|
|
|
(or Units)
|
|
|
that may
|
|
|
|
|
|
|
|
|
|
Purchased
|
|
|
yet be
|
|
|
|
(a) Total
|
|
|
(b) Average
|
|
|
as Part
|
|
|
Purchased
|
|
|
|
Number of
|
|
|
Price
|
|
|
of Publicly
|
|
|
Under the
|
|
|
|
Shares (or
|
|
|
Paid per
|
|
|
Announced Plans
|
|
|
Plans or
|
|
Period
|
|
Units) Purchased
|
|
|
Share (or Units)
|
|
|
or Programs
|
|
|
Programs
|
|
|
May 1 to May 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 1 to June 30, 2006
|
|
|
1,733
|
|
|
C$
|
4.00
|
|
|
|
|
|
|
|
|
|
July 1 to July 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 1 to August 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1 to September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1 to October 31, 2005
|
|
|
6,388
|
|
|
C$
|
1.00
|
|
|
|
|
|
|
|
|
|
November 1 to November 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 1 to December 31, 2006
|
|
|
5,739
|
|
|
C$
|
1.00
|
|
|
|
|
|
|
|
|
|
January 1 to September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
13,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 17.
|
Financial
Statements
|
Our consolidated financial statements commence on
page F-1
of this annual report. These financial statements are expressed
in United States dollars and were prepared in accordance with
U.S. GAAP.
|
|
Item 18.
|
Financial
Statements
|
Not applicable, as we have elected to provide financial
statements pursuant to Item 17 Financial
Statements.
|
|
|
|
|
|
1
|
.
|
|
Articles of Incorporation and bylaws as currently in effect:
|
|
1
|
.1
|
|
Articles of Incorporation and amendments thereto prior to
April 22, 2004(4)
|
|
1
|
.2
|
|
Articles of Amendment dated April 22, 2004(4)
|
|
1
|
.3
|
|
Articles of Amendment dated April 23, 2004(4)
|
|
1
|
.4
|
|
Articles of Amendment dated October 12, 2006(10)
|
|
1
|
.5
|
|
Bylaws(4), as amended on September 7, 2006(10)
|
|
1
|
.6
|
|
Articles of Amendment dated August 16, 2007(11)
|
|
1
|
.7
|
|
Articles of Amendment dated August 16, 2007
|
|
2
|
.
|
|
Instruments defining the rights of holders of equity securities
being registered:
|
|
2
|
.1
|
|
See Articles of Incorporation described above in
Exhibit 1.1, Articles of Amendment dated April 22,
2004 described above in Exhibit 1.2, Articles of Amendment
dated April 23, 2004 described above in Exhibit 1.3
and Articles of Amendment dated October 12, 2006 described
above in Exhibit 1.4, Articles of Amendment dated
August 16, 2007 described above in Exhibit 1.6 and
Articles of Amendment dated August 16, 2007 described above
in Exhibit 1.7
|
|
2
|
.2
|
|
Specimen Common Share certificate(1)
|
|
2
|
.3
|
|
Specimen Series A Share certificate(4)
|
103
|
|
|
|
|
|
2
|
.4
|
|
Specimen Series B Share certificate(4)
|
|
2
|
.5
|
|
Specimen Class 1 Share Certificate
|
|
2
|
.6
|
|
Securities Purchase Agreement between Mitel and the Noteholders,
dated April 27, 2005(11)++
|
|
2
|
.7
|
|
Form of Note (See Exhibit 2.6 above)
|
|
2
|
.8
|
|
General Security Agreement between Mitel and Highbridge (as a
secured party, and also in its capacity as Collateral Agent (now
BNY) on behalf of the Noteholders), dated April 27, 2005(5)
|
|
2
|
.9
|
|
Guaranty and Security Agreement between MNI and Highbridge (as a
secured party, and also in its capacity as Collateral Agent (now
BNY) on behalf of the Noteholders), dated April 27,
2005(11)++
|
|
2
|
.10
|
|
Pledge Agreement between MNL and Highbridge (as a secured party,
and also in its capacity as Collateral Agent (now BNY) on behalf
of the Noteholders), dated April 27, 2005(5)
|
|
2
|
.11
|
|
Charge Over Book Debts and Cash at Bank between MNL and
Highbridge (as a secured party, and also in its capacity as
Collateral Agent (now BNY) on behalf of the Noteholders), dated
April 27, 2005(10)++
|
|
2
|
.12
|
|
Guarantee and Indemnity between MNL and Highbridge (as a secured
party, and also in its capacity as Collateral Agent (now BNY) on
behalf of the Noteholders), dated April 27, 2005(5)
|
|
2
|
.13
|
|
Mortgage Debenture between MNL and Highbridge (as a secured
party, and also in its capacity as Collateral Agent (now BNY) on
behalf of the Noteholders), dated April 27, 2005(5)
|
|
2
|
.14
|
|
Guarantee and Security Agreement between MNOL and Highbridge (as
a secured party, and also in its capacity as Collateral Agent
(now BNY) on behalf of the Noteholders), dated June 30,
2005(5)
|
|
2
|
.15
|
|
Deed of Guarantee and Subordination between MNIL, MNOL and
Highbridge (as a secured party, and also in its capacity as
Collateral Agent (now BNY) on behalf of the Noteholders), dated
June 30, 2005(5)
|
|
2
|
.16
|
|
Deed of Guarantee and Subordination between MNIL, MNOL and BNY,
dated July 15, 2005(5)
|
|
2
|
.17
|
|
Intellectual Property Security Agreement between Mitel and BNY,
effective from April 27, 2005(5)
|
|
2
|
.18
|
|
Class A Convertible Preferred Share Subscription Agreement
between Mitel and EdgeStone dated April 23, 2004(10)++
|
|
2
|
.19
|
|
Form of Warrant (See Exhibit 2.18 above)(10)
|
|
2
|
.20
|
|
Securities Purchase Agreement between Mitel and Wesley Clover
Corporation dated September 21, 2006(10)++
|
|
2
|
.21
|
|
Form of Warrant (See Exhibit 2.20 above)(10)
|
|
2
|
.22
|
|
Termination Agreement between Mitel, Zarlink, PTIC EdgeStone,
Dr. Matthews, Wesley Clover and CTJL dated August 16,
2007(13)
|
|
2
|
.23
|
|
First Lien Credit Agreement among Mitel, Mitel US Holdings Inc.,
certain lenders, Morgan Stanley Senior Funding, Inc., Morgan
Stanley & Co, Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated dated August 16,
2007++
|
|
2
|
.24
|
|
Second Lien Credit Agreement among Mitel, Mitel US Holdings
Inc., certain lenders, Morgan Stanley Senior Funding, Inc.,
Morgan Stanley & Co, Incorporated and Merrill Lynch,
Pierce, Fenner & Smith Incorporated dated
August 16, 2007++
|
|
2
|
.25
|
|
Class I Convertible Preferred Share Subscription Agreement
among Mitel, Arsenal Holdco I, s.a.r.l., Arsenal Holdco II,
s.a.r.l. and Morgan Stanley Principal Investors Inc. dated
August 16, 2007++
|
|
2
|
.26
|
|
Form of Warrant granted to Arsenal Holdco I, s.a.r.l.,
Arsenal Holdco II, s.a.r.l., Morgan Stanley Principal Investors
Inc., PTIC and Dr. Matthews(11)
|
|
2
|
.27
|
|
Shareholder Agreement among Mitel, PTIC, Dr. Matthews,
Wesley Clover, CTJL, EdgeStone, Arsenal Holdco I, s.a.r.l.,
Arsenal Holdco II, s.a.r.l. and Morgan Stanley Principal
Investors Inc. dated August 16, 2007(13)
|
|
2
|
.28
|
|
Registration Rights Agreement among Mitel, Arsenal
Holdco I, s.a.r.l., Arsenal Holdco II, s.a.r.l. and Morgan
Stanley Principal Investors Inc. dated August 16, 2007(13)
|
|
4
|
.
|
|
Material contracts:
|
|
4
|
.1
|
|
Cap/Floor Collar Transaction Agreement between Mitel and
JPMorgan Chase Bank N.A. dated October 3, 2005(5)
|
|
4
|
.2
|
|
ISDA Master Agreement between Mitel and JPMorgan Chase Bank N.A.
dated September 25, 2005(5)
|
|
4
|
.3
|
|
Contract for the Sale of Freehold Land and Building Subject to
Leases and the Leaseback of Part of Building between MNL and
Hitchens effective August 31, 2005(5)
|
104
|
|
|
|
|
|
4
|
.4
|
|
Securities Purchase Agreement between Mitel and the Noteholders,
dated April 27, 2005 (See Exhibit 2.6 above) (10)++
|
|
4
|
.5
|
|
Form of Note (See Exhibit 2.7 above)
|
|
4
|
.6
|
|
Form of Warrant(10), as amended on August 16, 2007
|
|
4
|
.7
|
|
Registration Rights Agreement between Mitel and the Noteholders,
dated April 27, 2005(5)
|
|
4
|
.8
|
|
General Security Agreement between Mitel and Highbridge (as a
secured party, and also in its capacity as Collateral Agent (now
BNY) on behalf of the Noteholders), dated April 27, 2005
(See Exhibit 2.8 above)
|
|
4
|
.9
|
|
Guaranty and Security Agreement between MNI and Highbridge (as a
secured party, and also in its capacity as Collateral Agent (now
BNY) on behalf of the Noteholders), dated April 27, 2005
(See Exhibit 2.9 above)++
|
|
4
|
.10
|
|
Pledge Agreement between MNL and Highbridge (as a secured party,
and also in its capacity as Collateral Agent (now BNY) on behalf
of the Noteholders), dated April 27, 2005 (See
Exhibit 2.10 above)
|
|
4
|
.11
|
|
Charge Over Book Debts and Cash at Bank between MNL and
Highbridge (as a secured party, and also in its capacity as
Collateral Agent (now BNY) on behalf of the Noteholders), dated
April 27, 2005 (See Exhibit 2.11 above)++
|
|
4
|
.12
|
|
Guarantee and Indemnity between MNL and Highbridge (as a secured
party, and also in its capacity as Collateral Agent (now BNY) on
behalf of the Noteholders), dated April 27, 2005 (See
Exhibit 2.12 above)
|
|
4
|
.13
|
|
Mortgage Debenture between MNL and Highbridge (as a secured
party, and also in its capacity as Collateral Agent (now BNY) on
behalf of the Noteholders), dated April 27, 2005 (See
Exhibit 2.13 above)
|
|
4
|
.14
|
|
Guarantee and Security Agreement between MNOL and Highbridge (as
a secured party, and also in its capacity as Collateral Agent
(now BNY) on behalf of the Noteholders), dated June 30,
2005 (See Exhibit 2.14 above)
|
|
4
|
.15
|
|
Deed of Guarantee and Subordination between MNIL, MNOL and
Highbridge (as a secured party, and also in its capacity as
Collateral Agent (now BNY) on behalf of the Noteholders), dated
June 30, 2005 (See Exhibit 2.15 above)
|
|
4
|
.16
|
|
Deed of Guarantee and Subordination between MNIL, MNOL and BNY,
dated July 15, 2005 (see Exhibit 2.16 above)
|
|
4
|
.17
|
|
Intellectual Property Security Agreement between Mitel and BNY,
effective from April 27, 2005 (see Exhibit 2.17 above)
|
|
4
|
.18
|
|
Union Agreement between MNSI (now MNI as a result of the merger
of MNI and MNSI) and IBEW dated October 1, 2004++
|
|
4
|
.19
|
|
Deferred Share Unit Plan (DSU Plan) for Executives effective
December 9, 2004(5)
|
|
4
|
.20
|
|
Shareholders Agreement between Mitel, Mitel Knowledge, PTIC,
Zarlink, Mitel Systems (now Wesley Clover), WCC (now Wesley
Clover), EdgeStone, and Dr. Matthews, dated April 23,
2004(2) , as amended on June 26, 2006(10)
|
|
4
|
.21
|
|
Class A Convertible Preferred Share Subscription Agreement
between Mitel and EdgeStone dated April 23, 2004 (see
Exhibit 2.18 above)++
|
|
4
|
.22
|
|
Registration Rights Agreement between Mitel, Mitel Knowledge,
PTIC, Zarlink, EdgeStone, Mitel Systems (now Wesley Clover) and
WCC (now Wesley Clover), dated April 23, 2004(2)
|
|
4
|
.23
|
|
Receivables Purchase Agreement between Mitel, MNI and MNSI, and
The Canada Trust Company, effective date of April 16,
2004++(4)
|
|
4
|
.24
|
|
Amended and Restated Credit Agreement between Mitel, the Lenders
from time to time and Bank of Montreal as Administrative Agent
dated April 21, 2004(4) ++, as amended July 24,
2004(4) , as further amended February 7, 2005(5)
|
|
4
|
.25
|
|
Loan Agreement between MNL and Export Development Canada dated
March 4, 2003, as amended(3)
|
|
4
|
.26
|
|
Chattel Mortgage Loan Agreement between MNL and Barclays Bank
PLC dated October 22, 2001(1)
|
|
4
|
.27
|
|
Chattel Mortgage Loan Agreement between MNL and Barclays Bank
PLC dated April 25, 2003(3)
|
|
4
|
.28
|
|
Business Overdraft and Ancillary Facility Agreement between MNL
and Barclays Bank PLC dated August 30, 2002(3)
|
|
4
|
.29
|
|
Supply Agreement between Mitel and its subsidiaries and
BreconRidge and its subsidiaries dated
|
|
|
|
|
August 30, 2001(1)+, and related amendment dated
February 27, 2003(3) +
|
105
|
|
|
|
|
|
4
|
.30
|
|
Amendment to the Supply Agreement between Mitel and its
subsidiaries and BreconRidge and its subsidiaries dated
February 27, 2003(3)
|
|
4
|
.31
|
|
Sublease Agreement between Mitel and BreconRidge dated
August 31, 2001 and First Amendment of Sublease Agreement
between Mitel and BreconRidge dated May 31, 2002(1) +
|
|
4
|
.32
|
|
Supply Agreement between Mitel and Zarlink (formerly Mitel
Corporation) dated February 16, 2001 and related amendment
dated October 24, 2001(1) +, amended by Amending Agreement
dated April 23, 2004(4)
|
|
4
|
.33
|
|
Intellectual Property License Agreement between Mitel and
Zarlink (formerly Mitel Corporation) dated February 16,
2001(1) +
|
|
4
|
.34
|
|
Amendment to the Intellectual Property License Agreement between
Mitel and Zarlink dated October 24, 2001(1)
|
|
4
|
.35
|
|
Non Competition and Non Solicitation Agreement between Zarlink
(formerly Mitel Corporation), Mitel Semiconductor V.N. Inc.,
Mitel Semiconductor Limited, Mitel Semiconductor Inc., 3755461
Canada Inc. (now Wesley Clover), Mitel and MRPC dated
February 16, 2001(1)
|
|
4
|
.36
|
|
Lease Agreement between Mitel and MRPC dated March 27,
2001(1)
|
|
4
|
.37
|
|
Contract for the Sale of Freehold Land and Building Subject to
Leases and the Leaseback of Part of the Building, dated
August 24, 2005(7)
|
|
4
|
.38
|
|
Lease Agreement between Mitel Networks Limited and Breconridge
Manufacturing Solutions Limited, dated September 14, 2001(7)
|
|
4
|
.38
|
|
Strategic Alliance Agreement between Mitel and March Networks
dated September 21, 2001(1), as amended September 20,
2003(4) , and September 20, 2004(5)
|
|
4
|
.39
|
|
Integrated Communications Solutions R&D Project Agreement
between Mitel, Mitel Knowledge, March Networks and Her Majesty
the Queen in Right of Canada dated October 10, 2002(1) +,
as amended on March 27, 2003(4), May 2, 2004(10),
September 16, 2004(10), June 27, 2005(10), and
October 3, 2005(10), respectively
|
|
4
|
.40
|
|
CIBC Warrant, dated April 29, 2004(7), as amended(10)
|
|
4
|
.41
|
|
Employee Stock Option Plan, dated March 6, 2001, as
amended(6)
|
|
4
|
.42
|
|
2004 U.S. Employee Stock Purchase Plan(8)
|
|
4
|
.43
|
|
Form of Global Mitel Employment Agreement(7)
|
|
4
|
.44
|
|
2006 Equity Incentive Plan(10)
|
|
4
|
.45
|
|
Amended and Restated Employment Contract between the Registrant
and Donald Smith, dated April 17, 2001 (the Smith
Employment Contract)(7)
|
|
4
|
.46
|
|
Agreement Amending the Smith Employment Contract, dated
May 5, 2006(7)
|
|
4
|
.47
|
|
Amended and Restated Employment Contract between the Registrant
and Paul Butcher, dated February 16, 2001 (the
Butcher Employment Contract)(7)
|
|
4
|
.48
|
|
Agreement Amending the Butcher Employment Contract, dated
May 5, 2006(7)
|
|
4
|
.49
|
|
Employment Contract, dated January 1, 2006, between the
Registrant and Steven Spooner(7)
|
|
4
|
.50
|
|
Employment Contract, dated August 31, 1999, between the
Registrant and Graham Bevington (the Bevington Employment
Contract)(7)
|
|
4
|
.51
|
|
Alterations to the Bevington Employment Contract, dated
July 20, 2001(7)
|
|
4
|
.52
|
|
Employment Contract, dated February 21, 2005, between Mitel
and Kevin Bowyer(7)
|
|
4
|
.53
|
|
Letter agreement, dated March 1, 2002, between Terence H.
Matthews and Paul Butcher (the Butcher Letter
Agreement)(9)
|
|
4
|
.54
|
|
Amendment No. 1 to the Butcher Letter Agreement, dated
May 1, 2006(9)
|
|
4
|
.55
|
|
Letter agreement, dated March 1, 2002, between Terence H.
Matthews and Donald Smith (the Smith Letter
Agreement)(9)
|
|
4
|
.56
|
|
Amendment No. 1 to the Smith Letter Agreement, dated
May 1, 2006(9)
|
|
4
|
.57
|
|
Letter agreement, dated May 1, 2006, between Terence H.
Matthews and Peter D. Charbonneau(9)
|
|
4
|
.58
|
|
Securities Purchase Agreement between Mitel and Wesley Clover
Corporation dated September 21, 2006 (see Exhibit 2.20
above)++
|
|
4
|
.59
|
|
Share Charge between MNHL and Highbridge (as a secured party,
and also in its capacity as Collateral Agent (now BNY) on behalf
of the Noteholders), dated June 7, 2005(10)
|
106
|
|
|
|
|
|
4
|
.60
|
|
Tri-Party Agreement between MNOL, MNIL and MNL dated
June 30, 2005(10)
|
|
4
|
.61
|
|
Real Property Loan Facility between MNL and Barclays Bank PLC
dated December 13, 2001, secured by a legal charge dated
January 24, 2002(1)
|
|
4
|
.62
|
|
Merger Agreement among Mitel, Inter-Tel (Delaware), Incorporated
and Arsenal Acquisition Corporation dated April 26, 2007(12)
|
|
4
|
.63
|
|
Class I Convertible Preferred Share Subscription Agreement
among Mitel, Arsenal Holdco I, s.a.r.l., Arsenal Holdco II,
s.a.r.l. and Morgan Stanley Principal Investors Inc. dated
August 16, 2007 (see Exhibit 2.23 above)++
|
|
4
|
.64
|
|
Form of Warrant granted to Arsenal Holdco I, s.a.r.l.,
Arsenal Holdco II, s.a.r.l., Morgan Stanley Principal Investors
Inc., PTIC and Dr. Matthews (see Exhibit 2.24 above)
|
|
4
|
.65
|
|
Shareholder Agreement among Mitel, PTIC, Dr. Matthews,
Wesley Clover, CTJL, EdgeStone, Arsenal Holdco I, s.a.r.l.,
Arsenal Holdco II, s.a.r.l. and Morgan Stanley Principal
Investors Inc. dated August 16, 2007 (see Exhibit 2.25
above)
|
|
4
|
.66
|
|
Registration Rights Agreement among Mitel, Arsenal
Holdco I, s.a.r.l., Arsenal Holdco II, s.a.r.l. and Morgan
Stanley Principal Investors Inc. dated August 16, 2007 (see
Exhibit 2.26 above)
|
|
4
|
.67
|
|
Return of Capital, Voting and Conversion Agreement between Mitel
and EdgeStone dated June 22, 2007(14)
|
|
4
|
.68
|
|
Common Share Repurchase, Voting and Conversion Agreement between
Mitel and PTIC dated August 15, 2007
|
|
4
|
.69
|
|
Common Share Repurchase and Voting Agreement between Mitel and
Zarlink dated May 30, 2007
|
|
4
|
.70
|
|
Warrant Repurchase, Voting and Conversion Agreement between
Mitel, Dr. Matthews, Wesley Clover and CTJL dated
August 15, 2007(13)
|
|
4
|
.71
|
|
Termination Agreement between Mitel, Zarlink, PTIC EdgeStone,
Dr. Matthews, Wesley Clover and CTJL dated August 16,
2007 (see Exhibit 2.22 above)
|
|
4
|
.72
|
|
First Lien Credit Agreement among Mitel, Mitel US Holdings Inc.,
certain lenders, Morgan Stanley Senior Funding, Inc., Morgan
Stanley & Co, Incorporated and Merrill Lynch, Pierce,
Fenner & Smith Incorporated dated August 16, 2007
(see Exhibit 2.23 above)++
|
|
4
|
.73
|
|
Second Lien Credit Agreement among Mitel, Mitel US Holdings
Inc., certain lenders, Morgan Stanley Senior Funding, Inc.,
Morgan Stanley & Co, Incorporated and Merrill Lynch,
Pierce, Fenner & Smith Incorporated dated
August 16, 2007 (see Exhibit 2.24 above)++
|
|
4
|
.74
|
|
Employment Contract dated October 12, 2006 between
Inter-Tel (Delaware), Incorporated and Norman Stout (15)
|
|
4
|
.75
|
|
Form of Key Employee Tier 1 Change of Control Severance
Agreement(16)
|
|
4
|
.76
|
|
Inter-Tel, Incorporated Tax Deferred Savings Plan and Retirement
Trust(17)
|
|
8
|
.1
|
|
Subsidiaries of Mitel Networks Corporation
|
|
12
|
.1
|
|
Certification by CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
12
|
.2
|
|
Certification by CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
13
|
.1
|
|
Certification by CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
13
|
.2
|
|
Certification by CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
99
|
.1
|
|
Auditors Consent
|
|
|
|
(1) |
|
Filed as an exhibit to the Registration Statement on
Form 20-F,
as amended (File
No. 0-49984)
of Mitel and incorporated herein by reference. |
|
(2) |
|
Filed on May 3, 2004 as an exhibit to a Schedule 13D
(Mitel as issuer) by EdgeStone Capital Equity
Fund II-A,
L.P.; EdgeStone Capital Equity
Fund II-US,
L.P.; EdgeStone Capital Equity
Fund II-US-Inst.,
L.P.; National Bank Financial & Co. Inc.; EdgeStone
Capital Equity
Fund II-A
GP, L.P.; EdgeStone Capital Equity Fund II US GP, L.P.;
EdgeStone Capital Equity
Fund II-US-Inst.
GP, L.P.; EdgeStone Capital Equity
Fund II-A
GP, Inc.; EdgeStone Capital Equity
Fund II-US
Main GP, Inc.; EdgeStone Capital Equity
Fund II-US-Inst.
GP, Inc.; Samuel L. Duboc; Gilbert S. Palter; Bryan W. Kerdman;
Sandra Cowan; and EdgeStone Capital Equity
Fund II-B
GP, Inc. and incorporated herein by reference. |
|
(3) |
|
Filed on August 1, 2003 as an exhibit to the annual report
on
Form 20-F
of Mitel for the year ended April 27, 2003 and incorporated
herein by reference. |
107
|
|
|
(4) |
|
Filed on August 31, 2004 as an exhibit to the annual report
on
Form 20-F
of Mitel for the year ended April 25, 2004, and
incorporated herein by reference. |
|
(5) |
|
Filed on October 24, 2005 as an exhibit to the annual
report on
Form 20-F
of Mitel for the year ended April 24, 2005 and the
transition period ended April 30, 2005 and incorporated
therein by reference. |
|
(6) |
|
Filed as an exhibit to the
Form S-8
of the Registrant, dated March 6, 2006, filed with the
Commission on March 6, 2006 and incorporated therein by
reference. |
|
(7) |
|
Filed as an exhibit to the
Form F-1
of the Registrant, dated May 9, 2006, filed with the
Commission on May 9, 2006 and incorporated therein by
reference. |
|
(8) |
|
Filed as an exhibit to the
Form S-8
of the Registrant, dated November 29, 2004, filed with the
Commission on November 29, 2004 and incorporated therein by
reference. |
|
(9) |
|
Filed as an exhibit to Amendment No. 1 to the
Schedule 13D (the Registrant as issuer) filed with the
Commission on May 5, 2006 by Terence H. Matthews, Wesley
Clover Corporation and Celtic Tech Jet Limited and incorporated
therein by reference. |
|
(10) |
|
Filed on October 30, 2006 as an exhibit to the annual
report on
Form 20-F
of Mitel for the year ended April 30, 2006 and incorporated
therein by reference. |
|
(11) |
|
Filed as an exhibit to Amendment No. 2 to the
Schedule 13D (the Registrant as issuer) filed with the
Commission on August 27, 2007 by Arsenal Holdco I,
S.A.R.L., Arsenal Holdco II, S.A.R.L., Francisco Partners GP II
(Cayman), L.P., Francisco Partners GP II Management (Cayman)
Limited, Francisco Partners Gp II, L.P., Francisco
Partners II (Cayman), L.P., and Francisco Partners Parallel
Fund II, L.P. and incorporated therein by reference. |
|
(12) |
|
Filed as an exhibit to the
Form 8-K
of Inter-Tel (Delaware), Incorporated filed with the Commission
on April 26, 2007 and incorporated therein by reference. |
|
(13) |
|
Filed as an exhibit to Amendment No. 2 to the
Schedule 13D (the Registrant as issuer) filed with the
Commission on September 28, 2007 by Terence H. Matthews,
Wesley Clover Corporation and Celtic Tech Jet Limited and
incorporated therein by reference. |
|
(14) |
|
Filed on August 28, 2007 as an exhibit to Amendment
No. 2 of Schedule 13D (Mitel as issuer) by EdgeStone
Capital Equity
Fund II-A,
L.P.; EdgeStone Capital Equity Fund II-US, L.P.; EdgeStone
Capital Equity
Fund II-US-Inst.,
L.P.; National Bank Financial & Co. Inc.; EdgeStone
Capital Equity
Fund II-A
GP, L.P.; EdgeStone Capital Equity Fund II US GP, L.P.;
EdgeStone Capital Equity
Fund II-US-Inst.
GP, L.P.; EdgeStone Capital Equity
Fund II-A
GP, Inc.; EdgeStone Capital Equity
Fund II-US
Main GP, Inc.; EdgeStone Capital Equity
Fund II-US-Inst.
GP, Inc.; Samuel L. Duboc; Gilbert S. Palter; Bryan W. Kerdman;
Sandra Cowan; and EdgeStone Capital Equity
Fund II-B
GP, Inc. and incorporated herein by reference. |
|
(15) |
|
Filed as an exhibit to the
Form 8-K
of Inter-Tel (Delaware), Incorporated filed with the Commission
on October 16, 2007 and incorporated therein by reference. |
|
(16) |
|
Filed as an exhibit to the
Form 10-K
of Inter-Tel (Delaware), Incorporated filed with the Commission
for the year ended December 31, 2003 and incorporated
therein by reference. |
|
(17) |
|
Filed as an exhibit to the
Form 10-K
of Inter-Tel (Delaware), Incorporated filed with the Commission
for the year ended November 30, 1984 and incorporated
therein by reference. |
|
+ |
|
Portions of this document have been granted Confidential
Treatment by the Secretary of the Securities and Exchange
Commission. |
|
++ |
|
Portions of this document are subject to a pending Confidential
Treatment Request filed with the Secretary of the Securities and
Exchange Commission and have been filed separately with the
Securities and Exchange Commission. |
108
Index
to Financial Statements
Our Audited Consolidated Financial Statements for Fiscal 2005,
the Transition Period, Fiscal 2006 and Fiscal 2007:
|
|
|
|
|
Independent Auditors Report Deloitte &
Touche LLP
|
|
|
F-2
|
|
Consolidated Balance Sheets
|
|
|
F-3
|
|
Consolidated Statements of Operations
|
|
|
F-4
|
|
Consolidated Statements of Shareholders Equity
|
|
|
F-5
|
|
Consolidated Statement of Cash Flows
|
|
|
F-7
|
|
Notes to Consolidated Financial Statements
|
|
|
F-8
|
|
Financial Statement Schedules:
|
|
|
|
|
(Note: Schedules other than that listed below are omitted as
they are not applicable or not required, or the information is
included in the consolidated financial statements or notes
thereto)
|
|
|
|
|
Schedule II Valuation of Qualifying Accounts
|
|
|
F-49
|
|
109
SIGNATURE
The registrant hereby certifies that it meets all of the
requirements for filing on
Form 20-F
and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.
MITEL NETWORKS CORPORATION
Name: Donald W. Smith
|
|
|
|
Title:
|
Chief Executive Officer
|
Date: October 23, 2007
110
|
|
|
|
|
MITEL NETWORKS CORPORATION |
CONSOLIDATED FINANCIAL STATEMENTS
(in accordance with US GAAP)
FOR THE FISCAL YEARS ENDED April 24, 2005, April 30, 2006 and April 30, 2007 and FOR THE SIX DAY
PERIOD ENDED APRIL 30, 2005
(Audited)
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS
To the Board of Directors and Shareholders of Mitel Networks Corporation:
We have audited the consolidated balance sheets of Mitel Networks Corporation and subsidiaries as
of April 30, 2006 and 2007 and the related consolidated statements of operations, shareholders
deficiency and comprehensive loss and cash flows for each of the years ended April 24, 2005, April
30, 2006, April 30, 2007 and the six day period ended April 30, 2005. These financial statements
are the responsibility of the Companys management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards and the
standards of the Public Company Accounting Oversight Board (United States). These standards require
that we plan and perform the audit to obtain reasonable assurance whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all material respects,
the financial position of Mitel Networks Corporation and subsidiaries as of April 30, 2006 and 2007
and the results of their operations and cash flows for each of the years ended April 24, 2005,
April 30, 2006, April 30, 2007 and the six day period ended April 30, 2005 in accordance with
accounting principles generally accepted in the United States of America.
The Company is not required to have, nor were we engaged to perform, an audit of internal control
over financial reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Companys internal control
over financial reporting. Accordingly, we express no such opinion.
|
|
|
|
|
|
Ottawa, Canada
June 19, 2007, except for Notes 28 and 29, which are at October 10,2007
|
|
Deloitte & Touche LLP Licensed
Public Accountants |
COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES OF AMERICA
REPORTING DIFFERENCE
The standards of the Public Company Accounting Oversight Board (United States) require the addition
of an explanatory paragraph (following the opinion paragraph) when there are changes in accounting
principles that have a material effect on the comparability of the Companys financial statements,
such as the changes described in Notes 2(r) and 25 to the financial statements. Our report to the
Board of Directors and Shareholders of Mitel Networks Corporation dated June 19, 2007 with respect
to the consolidated financial statements is expressed in accordance with Canadian reporting
standards which do not require a reference to such changes in accounting principles in the
auditors report when the change is properly accounted for and adequately disclosed in the
financial statements.
In the United States, reporting standards for auditors require the addition of an explanatory
paragraph (following the opinion paragraph) when the financial statements are affected by
conditions and events that cast substantial doubt on the companys ability to continue as a going
concern, such as those described in Note 2(b) to the financial statements. Our report to the Board
of Directors and Shareholders dated June 19, 2007 is expressed in accordance with Canadian
reporting standards which do not permit a reference to such events and conditions in the auditors
report when these are adequately disclosed in the financial statements.
|
|
|
|
|
|
Ottawa, Canada
June 19, 2007, except for Notes 28 and 29, which are at October 10,2007
|
|
Deloitte & Touche LLP Licensed
Public Accountants |
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of US dollars, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
April 30, 2006 |
|
April 30, 2007 |
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
35.7 |
|
|
$ |
33.5 |
|
Restricted cash |
|
|
1.7 |
|
|
|
3.6 |
|
Accounts receivable (net of allowance of $2.5 and $2.5, respectively) |
|
|
79.7 |
|
|
|
81.7 |
|
Due from related parties |
|
|
0.4 |
|
|
|
0.8 |
|
Inventories |
|
|
23.6 |
|
|
|
19.8 |
|
Income tax receivable |
|
|
|
|
|
|
0.8 |
|
Deferred tax asset |
|
|
0.7 |
|
|
|
|
|
Other current assets |
|
|
24.7 |
|
|
|
30.2 |
|
|
|
|
|
166.5 |
|
|
|
170.4 |
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
1.0 |
|
Long-term receivables |
|
|
0.4 |
|
|
|
0.9 |
|
Property and equipment |
|
|
17.4 |
|
|
|
16.5 |
|
Goodwill |
|
|
6.8 |
|
|
|
6.8 |
|
Intangible and other assets |
|
|
6.6 |
|
|
|
6.6 |
|
Deferred tax asset |
|
|
2.1 |
|
|
|
|
|
|
|
|
$ |
199.8 |
|
|
$ |
202.2 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS DEFICIENCY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Bank indebtedness |
|
$ |
2.1 |
|
|
$ |
0.5 |
|
Accounts payable and accrued liabilities |
|
|
73.3 |
|
|
|
98.7 |
|
Income and other taxes payable |
|
|
1.7 |
|
|
|
0.1 |
|
Deferred revenue |
|
|
23.1 |
|
|
|
19.6 |
|
Due to related parties |
|
|
24.2 |
|
|
|
23.0 |
|
Current portion of long-term debt |
|
|
1.6 |
|
|
|
1.9 |
|
|
|
|
|
126.0 |
|
|
|
143.8 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
2.5 |
|
|
|
2.1 |
|
Long-term portion of lease termination obligations |
|
|
5.5 |
|
|
|
3.7 |
|
Litigation settlement obligation |
|
|
|
|
|
|
10.8 |
|
Convertible notes |
|
|
48.7 |
|
|
|
50.2 |
|
Derivative instruments |
|
|
75.9 |
|
|
|
67.3 |
|
Deferred gain |
|
|
5.5 |
|
|
|
4.9 |
|
Pension liability |
|
|
40.1 |
|
|
|
50.5 |
|
|
|
|
|
304.2 |
|
|
|
333.3 |
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common shares, without par value : 10,000,000 shares
authorized; issued and outstanding at April 30, 2006 and April 30, 2007 |
|
|
18.7 |
|
|
|
19.0 |
|
Convertible, redeemable preferred shares,
without par value unlimited shares authorized; issued and outstanding: Series A: 20,000,000 shares at April 30,
2006, and April 30, 2007; Series B: 67,789,300 shares at April 30,
2006 and April 30, 2007 |
|
|
45.5 |
|
|
|
52.5 |
|
|
|
|
|
64.2 |
|
|
|
71.5 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders deficiency: |
|
|
|
|
|
|
|
|
Common shares, without par value
unlimited shares authorized:, 107,302,322, and 107,344,086 issued and outstanding at April 30, 2006, and
April 30, 2007 |
|
|
188.8 |
|
|
|
189.1 |
|
Warrants |
|
|
47.9 |
|
|
|
62.9 |
|
Deferred stock-based compensation |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Additional paid-in capital |
|
|
|
|
|
|
0.3 |
|
Accumulated deficit |
|
|
(355.5 |
) |
|
|
(398.2 |
) |
Accumulated other comprehensive loss |
|
|
(49.7 |
) |
|
|
(56.6 |
) |
|
|
|
|
(168.6 |
) |
|
|
(202.6 |
) |
|
|
|
$ |
199.8 |
|
|
$ |
202.2 |
|
|
|
|
|
|
|
APPROVED BY THE BOARD |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
|
|
Director |
(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions of US dollars, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Six Days Ended |
|
Year Ended |
|
Year Ended |
|
|
April 24, 2005 |
|
April 30, 2005 |
|
April 30, 2006 |
|
April 30, 2007 |
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
$ |
207.7 |
|
|
$ |
1.7 |
|
|
$ |
260.5 |
|
|
$ |
263.6 |
|
Services |
|
|
134.5 |
|
|
|
1.5 |
|
|
|
126.6 |
|
|
|
121.3 |
|
|
|
|
|
342.2 |
|
|
|
3.2 |
|
|
|
387.1 |
|
|
|
384.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products |
|
|
132.0 |
|
|
|
1.6 |
|
|
|
149.1 |
|
|
|
151.8 |
|
Services |
|
|
81.2 |
|
|
|
0.8 |
|
|
|
76.6 |
|
|
|
73.3 |
|
|
|
|
|
213.2 |
|
|
|
2.4 |
|
|
|
225.7 |
|
|
|
225.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
129.0 |
|
|
|
0.8 |
|
|
|
161.4 |
|
|
|
159.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
114.9 |
|
|
|
1.8 |
|
|
|
120.7 |
|
|
|
123.5 |
|
Research and development |
|
|
41.4 |
|
|
|
0.7 |
|
|
|
44.1 |
|
|
|
41.7 |
|
Special charges |
|
|
10.6 |
|
|
|
|
|
|
|
5.7 |
|
|
|
9.3 |
|
Litigation settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.3 |
|
Initial public offering costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.3 |
|
Loss (gain) on sale of manufacturing operations |
|
|
3.4 |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
(1.0 |
) |
Gain on sale of assets |
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
170.3 |
|
|
|
2.5 |
|
|
|
168.1 |
|
|
|
193.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(41.3 |
) |
|
|
(1.7 |
) |
|
|
(6.7 |
) |
|
|
(33.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(2.6 |
) |
|
|
|
|
|
|
(7.6 |
) |
|
|
(9.1 |
) |
Fair value adjustment on derivative instruments |
|
|
(5.3 |
) |
|
|
(0.1 |
) |
|
|
(32.6 |
) |
|
|
8.6 |
|
Other income |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(48.8 |
) |
|
|
(1.6 |
) |
|
|
(46.5 |
) |
|
|
(33.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax expense (recovery) |
|
|
0.8 |
|
|
|
|
|
|
|
0.9 |
|
|
|
(0.2 |
) |
Deferred income tax expense (recovery) |
|
|
|
|
|
|
|
|
|
|
(2.8 |
) |
|
|
2.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
|
$ |
(35.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(0.49 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.44 |
) |
|
$ |
(0.36 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
|
113,792,829 |
|
|
|
117,149,933 |
|
|
|
117,230,198 |
|
|
|
117,336,927 |
|
|
(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIENCY AND COMPREHENSIVE LOSS
(in millions of US dollars, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred |
|
|
|
|
|
Accumulated Other |
|
Total |
|
|
Common Shares |
|
|
|
|
|
Stock-based |
|
Accumulated |
|
Comprehensive |
|
Shareholders |
|
|
Shares |
|
Amount |
|
Warrants |
|
Compensation |
|
Deficit |
|
Income (Loss) |
|
Deficiency |
|
Balances at April 25, 2004 |
|
|
101,782,757 |
|
|
$ |
184.8 |
|
|
$ |
29.8 |
|
|
$ |
(0.2 |
) |
|
$ |
(247.1 |
) |
|
$ |
(21.9 |
) |
|
$ |
(54.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and employee loans |
|
|
5,601,870 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.6 |
|
Professional services received |
|
|
153,616 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Exchange of common shares for Series B
convertible, redeemable preferred shares |
|
|
(364,156 |
) |
|
|
(0.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.5 |
) |
Common share issue costs |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
Share purchase loans |
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.3 |
) |
Share purchase loan repayments |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Shares repurchased |
|
|
(24,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.4 |
|
Amortization of deferred stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
Accretion of interest on redeemable common and
preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.6 |
) |
|
|
|
|
|
|
(5.6 |
) |
|
|
|
|
107,149,933 |
|
|
$ |
187.6 |
|
|
$ |
40.2 |
|
|
$ |
(0.4 |
) |
|
$ |
(252.7 |
) |
|
$ |
(21.9 |
) |
|
$ |
(47.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49.6 |
) |
|
|
|
|
|
|
(49.6 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.6 |
) |
|
|
(5.6 |
) |
Minimum pension liability adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
2.4 |
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49.6 |
) |
|
|
(3.2 |
) |
|
|
(52.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at April 24, 2005 |
|
|
107,149,933 |
|
|
$ |
187.6 |
|
|
$ |
40.2 |
|
|
$ |
(0.4 |
) |
|
$ |
(302.3 |
) |
|
$ |
(25.1 |
) |
|
$ |
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of warrants |
|
|
|
|
|
|
|
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.7 |
|
Accretion of interest on redeemable common and
preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
107,149,933 |
|
|
$ |
187.6 |
|
|
$ |
47.9 |
|
|
$ |
(0.4 |
) |
|
$ |
(302.4 |
) |
|
$ |
(25.1 |
) |
|
$ |
(92.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6 |
) |
|
|
|
|
|
|
(1.6 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.9 |
|
|
|
0.9 |
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.6 |
) |
|
|
0.9 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at April 30, 2005 |
|
|
107,149,933 |
|
|
$ |
187.6 |
|
|
$ |
47.9 |
|
|
$ |
(0.4 |
) |
|
$ |
(304.0 |
) |
|
$ |
(24.2 |
) |
|
$ |
(93.1 |
) |
|
(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIENCY AND COMPREHENSIVE LOSS
(in millions of US dollars, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
Deferred |
|
|
|
|
|
Accumulated Other |
|
Total |
|
|
Common Shares |
|
|
|
|
|
paid-in |
|
Stock-based |
|
Accumulated |
|
Comprehensive |
|
Shareholders |
|
|
Shares |
|
Amount |
|
Warrants |
|
Capital |
|
Compensation |
|
Deficit |
|
Income (Loss) |
|
Deficiency |
|
Balances at April 30, 2005 |
|
|
107,149,933 |
|
|
$ |
187.6 |
|
|
$ |
47.9 |
|
|
$ |
|
|
|
$ |
(0.4 |
) |
|
$ |
(304.0 |
) |
|
$ |
(24.2 |
) |
|
$ |
(93.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
58,174 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Professional services received |
|
|
132,261 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Fair value adjustment relating to stock option plan |
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Share purchase loan repayments |
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.1 |
|
Shares repurchased |
|
|
(38,046 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred stock-based compensation |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Accretion of interest on redeemable common and
preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.9 |
) |
|
|
|
|
|
|
(6.9 |
) |
|
|
|
|
107,302,322 |
|
|
$ |
188.8 |
|
|
$ |
47.9 |
|
|
$ |
|
|
|
$ |
(0.1 |
) |
|
$ |
(310.9 |
) |
|
$ |
(24.2 |
) |
|
$ |
(98.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44.6 |
) |
|
|
|
|
|
|
(44.6 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.9 |
) |
|
|
(10.9 |
) |
Minimum pension liability adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(14.6 |
) |
|
|
(14.6 |
) |
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(44.6 |
) |
|
|
(25.5 |
) |
|
|
(70.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at April 30, 2006 |
|
|
107,302,322 |
|
|
$ |
188.8 |
|
|
$ |
47.9 |
|
|
$ |
|
|
|
$ |
(0.1 |
) |
|
$ |
(355.5 |
) |
|
$ |
(49.7 |
) |
|
$ |
(168.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options |
|
|
45,624 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Professional services received |
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued |
|
|
|
|
|
|
|
|
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.0 |
|
Share purchase loan repayments |
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Shares repurchased |
|
|
(13,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
Accretion of interest on redeemable common and
preferred shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.3 |
) |
|
|
|
|
|
|
(7.3 |
) |
|
|
|
|
107,344,086 |
|
|
$ |
189.1 |
|
|
$ |
62.9 |
|
|
$ |
0.3 |
|
|
$ |
(0.1 |
) |
|
$ |
(362.8 |
) |
|
$ |
(49.7 |
) |
|
$ |
(160.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35.0 |
) |
|
|
|
|
|
|
(35.0 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
1.2 |
|
Minimum pension liability adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.6 |
|
|
|
16.6 |
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(35.0 |
) |
|
|
17.8 |
|
|
|
(17.2 |
) |
|
Adoption of SFAS 158 pension liability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
(24.7 |
) |
|
|
(25.1 |
) |
Balance at April 30, 2007 |
|
|
107,344,086 |
|
|
$ |
189.1 |
|
|
$ |
62.9 |
|
|
$ |
0.3 |
|
|
$ |
(0.1 |
) |
|
$ |
(398.2 |
) |
|
$ |
(56.6 |
) |
|
$ |
(202.6 |
) |
|
(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of US dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
Six Days Ended |
|
Year Ended |
|
Year Ended |
|
|
April 24, 2005 |
|
April 30, 2005 |
|
April 30, 2006 |
|
April 30, 2007 |
|
CASH PROVIDED BY (USED IN) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
|
$ |
(35.0 |
) |
Adjustments to reconcile net loss to net cash from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and depreciation |
|
|
8.9 |
|
|
|
0.2 |
|
|
|
10.2 |
|
|
|
9.8 |
|
Amortization of deferred gain |
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.6 |
) |
Fair value adjustment on derivative instruments |
|
|
5.3 |
|
|
|
0.1 |
|
|
|
32.6 |
|
|
|
(8.6 |
) |
Accretion of convertible notes to redemption value |
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
1.5 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
(2.8 |
) |
|
|
2.8 |
|
Loss (gain) on sale of manufacturing operations |
|
|
3.4 |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
(1.0 |
) |
Loss (gain) on sale of business and assets |
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
Unrealized foreign exchange loss (gain) |
|
|
(2.0 |
) |
|
|
(0.9 |
) |
|
|
2.1 |
|
|
|
(3.2 |
) |
Non-cash movements in provisions |
|
|
5.5 |
|
|
|
|
|
|
|
4.2 |
|
|
|
4.1 |
|
Non-cash portion of litigation settlement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.3 |
|
Change in non-cash operating assets and liabilities, net |
|
|
(3.3 |
) |
|
|
1.0 |
|
|
|
(3.1 |
) |
|
|
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(31.8 |
) |
|
|
(1.2 |
) |
|
|
(2.3 |
) |
|
|
(12.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to capital and intangible assets |
|
|
(4.5 |
) |
|
|
(0.1 |
) |
|
|
(8.8 |
) |
|
|
(7.1 |
) |
(Increase) decrease in restricted cash |
|
|
0.9 |
|
|
|
(1.0 |
) |
|
|
(0.5 |
) |
|
|
(1.9 |
) |
Proceeds on sale of assets |
|
|
|
|
|
|
|
|
|
|
12.4 |
|
|
|
|
|
Realized foreign exchange loss on hedging activities |
|
|
(8.4 |
) |
|
|
|
|
|
|
(8.0 |
) |
|
|
(3.9 |
) |
Realized foreign exchange gain on hedging activities |
|
|
6.2 |
|
|
|
|
|
|
|
8.6 |
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(5.8 |
) |
|
|
(1.1 |
) |
|
|
3.7 |
|
|
|
(12.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in bank indebtedness |
|
|
8.9 |
|
|
|
(14.6 |
) |
|
|
0.7 |
|
|
|
(1.6 |
) |
Deferred financing costs |
|
|
|
|
|
|
(0.4 |
) |
|
|
(1.8 |
) |
|
|
(2.1 |
) |
Proceeds from issuance of convertible notes |
|
|
|
|
|
|
54.3 |
|
|
|
|
|
|
|
|
|
Repayment of long-term debt |
|
|
(4.4 |
) |
|
|
|
|
|
|
(11.9 |
) |
|
|
(1.0 |
) |
Proceeds from transfer of receivables |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.9 |
|
Proceeds from issuance of warrants |
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
|
15.0 |
|
Proceeds from issuance of common shares |
|
|
2.4 |
|
|
|
|
|
|
|
0.2 |
|
|
|
0.1 |
|
Proceeds from repayments of employee share purchase loans |
|
|
1.1 |
|
|
|
|
|
|
|
1.1 |
|
|
|
0.2 |
|
Share issue costs |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
20.1 |
|
|
|
39.3 |
|
|
|
(11.7 |
) |
|
|
21.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
0.5 |
|
|
|
(0.1 |
) |
|
|
(0.6 |
) |
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents |
|
|
(17.0 |
) |
|
|
36.9 |
|
|
|
(10.9 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period |
|
|
26.7 |
|
|
|
9.7 |
|
|
|
46.6 |
|
|
|
35.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
9.7 |
|
|
$ |
46.6 |
|
|
$ |
35.7 |
|
|
$ |
33.5 |
|
|
(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of US dollars, except share and per share amounts)
1. |
|
BACKGROUND AND NATURE OF OPERATIONS |
Mitel Networks Corporation (the Company) is a leading provider of integrated communications
solutions and services for business customers. Through direct and indirect channels as well
as strategic technology partnerships, the Company currently serves a wide range of industry
vertical markets, including the education, government, healthcare, hospitality and retail in
the United States (US), Europe, Middle East and Africa, Canada, Caribbean and Latin
America, and Asia-Pacific regions.
The Company was incorporated under the Canada Business Corporations Act on January 12, 2001.
On February 16, 2001, the Company acquired the Mitel name and substantially all of the
assets (other than Canadian real estate and most intellectual property assets) and
subsidiaries of the Communications Systems Division of Zarlink Semiconductor Inc.
(Zarlink), formerly Mitel Corporation.
These consolidated financial statements have been prepared by the Company in accordance with
US generally accepted accounting principles (GAAP) and the rules and regulations of the
U.S. Securities and Exchange Commission (the SEC) for the preparation of financial
statements.
Amounts less than fifty thousand dollars are deemed to be insignificant in these financial
statements.
a) Fiscal Year End
On April 24, 2005, the Company changed its fiscal year end from the last Sunday in April to
April 30. The change in fiscal year end allows the Company to better align its reporting
results with those of its industry peers. Results for the six-day transition period
(Transition Period) from April 25, 2005 to April 30, 2005 have been included pursuant to
Rule 13a-10 of the Securities Exchange Act of 1934, as amended.
b) Going Concern
The accompanying financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements for the years ended April 24, 2005,
Transition Period, April 30, 2006 and April 30, 2007, the company incurred losses of $49.6,
$1.6, $44.6 and $35.0 respectively. As well, the put options issued in connection with the
10,000,000 common shares (see Note 19) and 16,000,000 Series B Preferred Shares (see Note 20)
financing were set to mature on May 1, 2007. As described in Note 19, the 10,000,000 common
shares are redeemable for cash at a price of $2.85 Canadian dollars (C$) per share
representing a total of $25.8. These factors raise substantial doubt as to the Companys
ability to continue as a going concern. The financial statements do not include any
adjustments relating to the recoverability of assets and classifications of liabilities that
might be necessary should the Company be unable to continue as a going concern.
It is managements plan to finance its operations for the foreseeable future primarily with
the proceeds received from investors as a result of the proposed transaction described in
Note 28, or to proceed with the initial public offering that was initiated on May 9, 2006
when the Company filed a registration statement on Form F-1 under the Securities Act of 1933
to sell common shares in the United States and a preliminary prospectus with the Canadian
securities regulators to sell common shares in Canada.
Aside from the preliminary IPO filings and the Merger agreement described in Note 28, there
are no formal agreements in place as at the date of finalization of these financial
statements that guarantee additional financing will be received. As such, there can be no
assurance that additional financing will be available on terms satisfactory to the Company.
c) Basis of Consolidation
The consolidated financial statements include the accounts of the Company and of its
majority-owned subsidiary companies. Intercompany transactions and balances have been
eliminated on consolidation.
d) Use of Estimates
The preparation of the Companys consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and expenses during
the reporting periods.
8
Estimates and assumptions are used for, but not limited to, the determination of the
allowance for doubtful accounts, inventory allowances, special charges, warranty costs, sales
returns, pension costs, taxes, goodwill and impairment assessments, and the valuation of
stock options, warrants and derivatives. Estimates and assumptions are reviewed periodically
and the effects of revisions are reflected in the consolidated financial statements in the
period that they are determined to be necessary. In the opinion of management, these
consolidated financial statements reflect all adjustments necessary to present fairly the
results for the periods presented. Actual results and outcomes could differ from these
estimates.
e) Change in Functional Currency and Foreign Currency Translation
Prior to May 1, 2006, the financial statements of the parent company and its subsidiaries
were measured using their local currency as the functional currency. Effective May 1, 2006,
the parent company changed its functional currency from the Canadian dollar to the U.S.
dollar as a result of a change in the parent companys primary economic environment, where
the majority of sales and expenses now occur in the U.S. dollar. The consolidated financial
statements of the Company continue to be prepared with U.S. dollar reporting currency using
the current rate method. Assets and liabilities of foreign operations are translated from
foreign currencies into U.S. dollars at the exchange rates in effect at the balance sheet
date while revenue and expense items are translated at the weighted-average exchange rates
for the period. The resulting unrealized gains and losses have been included as part of the
cumulative foreign currency translation adjustment which is reported as other comprehensive
income.
Monetary assets and liabilities denominated in currencies foreign to the functional currency
of each entity, are translated into functional currency using exchange rates in effect at the
balance sheet date. All other assets and liabilities are translated at the exchange rates
prevailing at the date the assets were acquired or the liabilities incurred. Revenue and
expense items are translated at the average exchange rate for the period. Foreign exchange
gains and losses resulting from the translation of these accounts are included in the
determination of income for the period. During fiscal 2007, the Company recorded a foreign
exchange loss of $0.3 (2005 $0.2 loss; Transition Period $0.3 gain; 2006 $0.4 gain).
f) Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery
has occurred, title and risk of loss have been transferred to the customer, the fee is fixed
or determinable, and collection is reasonably assured.
Software revenue is recognized when persuasive evidence of an arrangement exists, delivery
has occurred in accordance with the terms and conditions of the contract, the fee is fixed or
determinable, and collection is reasonably assured. For software arrangements involving
multiple elements, revenue is allocated to each element based on the relative fair value or
the residual method, as applicable, and using vendor specific objective evidence of fair
values, which is based on prices charged when the element is sold separately. Revenue related
to post-contract support (PCS), including technical support and unspecified when-and-if
available software upgrades, is recognized ratably over the PCS term for contracts that are
greater than one year. For contracts where the post contract period is one year or less, the
costs are deemed insignificant, and the unspecified software upgrades are expected to be and
historically have been infrequent, revenue is recognized together with the initial licensing
fee and the estimated costs are accrued.
Indirect channels
The Company makes sales to distributors and resellers based on contracts with terms ranging
from one to three years. For products sold through these distribution channels, revenue is
recognized at the time the risk of loss is transferred to distributors and resellers
according to contractual terms and if all contractual obligations have been satisfied. These
arrangements usually involve multiple elements, including post-contract technical support and
training. Costs related to insignificant technical support obligations, including
second-line telephone support for certain products, are accrued. For other technical support
and training obligations, revenue from product sales is allocated to each element based on
vendor specific objective evidence of relative fair values, generally representing the prices
charged when the element is sold separately, with any discount allocated proportionately.
Revenue attributable to undelivered elements is deferred and recognized upon performance or
ratably over the contract period.
The Companys standard warranty period extends fifteen months from the date of sale and
extended warranty periods are offered on certain products. Sales to the Companys resellers
do not provide for return or price protection rights while sales to distributors provide for
such rights. Product return rights are typically limited to a percentage of sales over a
maximum three-month period. A reserve for estimated product returns and price protection
rights based on past experience is recorded as a reduction of sales at the time product
revenue is recognized. The Company offers various cooperative marketing programs to assist
its distribution channels to market the Companys products. Allowances for such programs are
recorded as marketing expenses at the time of shipment based on contract terms and prior
claims experience.
Direct channels
The Company sells products, including installation and related maintenance and support
services, directly to customers. For products sold through direct channels, revenue is
recognized at the time of delivery and at the time risk of loss is transferred, based on
prior experience of successful compliance with customer specifications. Revenue from
installation is recognized as services are rendered and when contractual obligations,
including customer acceptance, have been satisfied. Revenue is also derived from
professional service contracts with terms that range from two to six weeks for standard
solutions and for longer periods for customized solutions. Revenue from customer support,
professional services and maintenance contracts is recognized ratably over
9
the contractual period, generally one year. Billings in advance of services are included in
deferred revenue. Revenue from installation services provided in advance of billing is
included in unbilled accounts receivable.
Certain arrangements with direct customers provide for free customer support and maintenance
services extending twelve months from the date of installation. Customer support and
maintenance contracts are also sold separately. When customer support or maintenance
services are provided free of charge, such amounts are unbundled from the product and
installation revenue at their fair market value based on the prices charged when the element
is sold separately and recognized ratably over the contract period. Consulting and training
revenues are recognized upon performance.
The Company provides long-term outsourcing services of communication systems. Under these
arrangements, systems management services (Managed Services) and communication equipment
are provided to customers for terms that typically range from one to ten years. Revenue from
Managed Services is recognized ratably over the contract period. The Company retains title
and risk of loss associated with the equipment utilized in the provision of the Managed
Services. Accordingly, the equipment is capitalized as part of property and equipment and is
amortized to cost of sales over the contract period.
g) Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments that have terms to maturity of three
months or less at the time of acquisition, and generally consist of cash on hand and
marketable securities. Cash equivalents are carried at cost, which approximates their fair
value.
h) Restricted Cash
Restricted cash represents cash provided to support letters of credit outstanding and to
support certain of the Companys credit facilities.
i) Allowance for Doubtful Accounts
The allowance for doubtful accounts represents the Companys best estimate of probable losses
that may result from the inability of its customers to make required payments. The Company
regularly reviews accounts receivable and uses judgment to assess the collectibility of
specific accounts and based on this assessment, an allowance is maintained for those accounts
that are deemed to be uncollectible. For the remaining amounts that are not specifically
identified as being uncollectible, an allowance is estimated based on the aging of the
accounts, the Companys historical collection experience, and other currently available
evidence.
j) Inventories
Inventories are valued at the lower of cost (calculated on a first-in, first-out basis) or
net realizable value for finished goods, and current replacement cost for raw materials. The
Company provides inventory allowances based on estimated excess and obsolete inventories.
k) Transfer of Receivables
Transfers of accounts receivable are accounted for as sales if the terms of the transfer meet
the criteria for surrender of control under FASB Statement of Financial Accounting Standard
(SFAS) No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. The Company entered into an agreement on April 30, 2007
under which it sold $12.8 of its non-interest bearing trade accounts receivable to an
unaffiliated financial institution at a rate of 7.5% on CAD receivables and 10.25% on USD
receivables. The Company is not considered to have ceded control over the transferred
receivables, and so the transfer has not been accounted for as a sale.
l) Property and Equipment
Property and equipment are initially recorded at cost. Depreciation is provided on a
straight-line basis over the anticipated useful lives of the assets. Estimated lives range
from three to ten years for equipment and twenty-five years for buildings. Amortization of
leasehold improvements is computed using the shorter of the remaining lease terms or five
years. The Company performs reviews for the impairment of property and equipment in
accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144) whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is assessed based on the
carrying value of the asset and its fair value, which is generally determined based on the
discounted cash flows expected to result from the use and the eventual disposal of the asset.
An impairment loss is recognized when the carrying amount is not recoverable and exceeds
fair value.
Assets leased on terms that transfer substantially all of the benefits and risks of ownership
to the Company are accounted for as capital leases, as though the asset had been purchased
outright and a liability incurred. All other leases are accounted for as operating leases.
10
m) Goodwill and Intangible Assets
Intangible assets include patents, trademarks, and acquired technology. Amortization is
provided on a straight-line basis over five years for patents and over two years for other
intangible assets with finite useful lives. The Company periodically evaluates intangible
assets for impairment in accordance with SFAS 144 whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability is
assessed based on the carrying value of the asset and its fair value, which is generally
determined based on the discounted cash flows expected to result from the use and the
eventual disposal of the asset. An impairment loss is recognized when the carrying amount is
not recoverable and exceeds fair value.
Goodwill represents the excess of the purchase price over the estimated fair value of net
tangible and intangible assets acquired in business combinations. The Company reviews the
carrying value of goodwill on an annual basis in accordance with FASB Statement No. 142,
Goodwill and Other Intangible Assets (SFAS 142). Under SFAS 142 goodwill is not amortized,
but is subject to annual impairment tests, or more frequently if circumstances indicate that
it is more likely than not that the fair value of the reporting unit is below its carrying
amount. The Company, upon completion of its annual goodwill impairment tests, determined
that no impairments existed as of the balance sheet dates.
n) Derivative Financial Instruments
The Company uses derivatives, including foreign currency forward and swap contracts, to
minimize the short-term impact of currency fluctuations on foreign currency receivables and
payables. These financial instruments are recorded at fair market value with the related
foreign currency gains and losses recorded in other income (expense), net, in the
Consolidated Statements of Operations. The Company does not hold or issue derivative
financial instruments for speculative or trading purposes. The Company also utilizes
non-derivative financial instruments including letters of credit and commitments to extend
credit.
As explained in Note 20, the Company has issued convertible, redeemable preferred shares to
investors. The preferred shares give the investors the right, at any time after five years
to redeem the shares for cash. The redemption amount is equal to the original issue price of
$1.00 per preferred share times the number of Series A and Series B Preferred Shares
outstanding, plus any declared but unpaid dividends, plus the then current fair market value
of the common shares into which the Series A and Series B Preferred Shares are convertible.
The requirement to redeem the shares on an as-if-converted-to-common share basis qualifies as
an embedded derivative under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities (SFAS 133). Accordingly, the proceeds received from the issuance of
the preferred shares were allocated between the embedded derivative and the preferred shares.
The embedded derivative is then marked to market throughout the period to redemption with
changes in value recorded in the Consolidated Statements of Operations.
In addition, the make whole premium on the convertible notes and the redemption rights upon a
Fundamental Change as described further in Note 16, qualify as a derivative, which is marked
to market throughout the period to redemption with changes in value recorded in the
Consolidated Statements of Operations.
o) Income Taxes
Income taxes are accounted for using the asset and liability method. Under this approach,
deferred tax assets and liabilities are determined based on differences between the carrying
amounts and the tax basis of assets and liabilities, and are measured using enacted tax rates
and laws. Deferred tax assets are recognized only to the extent that it is more likely than
not, in the opinion of management, that the future tax assets will be realized in the future.
p) Research and Development
Research costs are charged to expense in the periods in which they are incurred. Software
development costs are deferred and amortized when technological feasibility has been
established, or otherwise, are expensed as incurred. The Company has not deferred any
software development costs to date.
q) Defined Benefit Pension Plan
Pension expense under the defined benefit pension plan is actuarially determined using
the projected benefit method prorated on service, and managements best estimate assumptions.
Pension plan assets are valued at fair value. The excess of any cumulative net actuarial
gain (loss) over ten percent of the greater of the benefit obligation and the fair value of
plan assets is amortized over the average remaining service period of active employees. The
over-funded or under-funded status of the defined benefit pension plan is recognized as an
asset or liability, respectively, on the balance sheet, with an offsetting adjustment made to
accumulated other comprehensive income. Effective fiscal 2007, the Company measures its plan
assets and obligations at the year-end balance sheet date.
The discount rate assumptions used reflect prevailing rates available on high-quality,
fixed-income debt instruments. The rate of compensation increase is another significant
assumption used for pension accounting and is determined by the Company, based upon its
long-term plans for such increases.
11
r) Stock-Based Compensation Plan
The Company has a stock-based compensation plan described in Note 22. The Company generally
grants stock options for a fixed number of shares to employees and non-employees with an
exercise price equal to the fair market value of the shares at the date of grant.
Prior to May 1, 2006, the Company accounted for employee stock option grants in accordance
with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations. Under APB 25, options granted to employees and
directors will result in the recognition of compensation expense only if the exercise price
is lower than the market price of common shares on the date of grant. Under FASB Statement
No. 123, Accounting for Stock-Based Compensation (SFAS 123), the Company recognizes
compensation expense in connection with grants to non-employees and former employees by
applying the fair value based method of accounting and also applies variable plan accounting
to such unvested grants.
On May 1, 2006, the Company adopted Statement No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which revises SFAS 123 and supercedes APB 25, and also applied the provisions
of SAB 107 in its adoption of SFAS 123R. SFAS 123R requires all share-based payments to
employees, including grants of stock options, to be recognized in the financial statements
based on their fair values. The Company has applied the provisions of this statement
prospectively to new awards and to awards modified, repurchased, or cancelled after May 1,
2006 with the associated compensation expense being recognized on a straight-line basis over
the requisite service period for the entire award. In accordance with the prospective method,
the consolidated financial statements for prior periods have not been restated to reflect,
and do not include, the impact of SFAS 123R.
Share-based compensation expense is based on a fair value estimate made on the grant-date
using the Black-Scholes option-pricing model for each award, net of estimated forfeitures,
and is recognized over the employees requisite service period, which is generally the
vesting period. Forfeitures are estimated based on the Companys historical rates of
forfeiture. In the Companys pro-forma information, required under SFAS 123 for periods prior
to fiscal 2007, the Company accounted for forfeitures as they occurred.
In accordance with SFAS 123(R) and SAB 107, the Company is no longer able to use the minimum
value method of measuring equity share options and so has estimated the volatility of its
stock using historical volatility of comparable public companies. The Company will continue
to use the volatility of comparable companies until historical volatility is relevant to
measure expected volatility for future option grants.
The assumptions used in the Black Scholes option-pricing model are summarized as follows:
|
|
|
|
|
|
|
April 30, 2007 |
Risk-free interest rate |
|
|
4.1 |
% |
Dividends |
|
|
0 |
% |
Expected volatility |
|
|
86.6 |
% |
Annual forfeiture rate |
|
|
15 |
% |
Expected life of the options |
|
5 years |
|
Fair value per option |
|
$ |
0.77 |
|
Based on these assumptions, share based compensation expense reduced the Companys results of
operations by $0.3 for the year ended April 30, 2007. Changes in the subjective input
assumptions can, however, materially affect the fair value estimate, and therefore the model
used above does not necessarily provide reliable results.
s) Net Loss per Common Share
Basic loss per common share is computed using the weighted-average number of common shares
outstanding during the period, with net loss adjusted for the impact of accreted interest on
redeemable shares. Diluted loss per common share is computed using the treasury stock method
and assumes that, if a dilutive effect is produced, all dilutive securities had been
exercised at the later of the beginning of the fiscal period and the security issue date.
t) Other Comprehensive Loss
Other comprehensive loss is recorded directly to a separate section of shareholders
deficiency in accumulated other comprehensive loss and includes unrealized gains and losses
excluded from the Consolidated Statements of Operations. These unrealized gains and losses
consist of foreign currency translation adjustments, which are not adjusted for income taxes
since they primarily relate to indefinite investments in non-Canadian subsidiaries and
minimum pension liability adjustments.
u) Advertising Costs
The cost of advertising is expensed as incurred, except for cooperative advertising
obligations, which are expensed at the time the related sales are recognized and the
advertising credits are earned. Cooperative advertising obligations are classified as a
revenue reduction or cost of sale in accordance with EITF 01-9, Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of the Vendors Products). Advertising
costs are recorded in selling, general and administrative expenses. During fiscal 2007, the
Company incurred $8.3 in advertising costs (2005 $9.4; Transition Period $0.2; 2006 -
$10.3). During fiscal 2007, the Company incurred $3.3 in cooperative advertising obligations
(2005 $2.9; Transition Period $nil; 2006 $4.6).
12
v) Product Warranties
The Companys product warranties are generally for periods up to fifteen months. At the time
revenue is recognized, a provision for estimated warranty costs is recorded as a component of
cost of sales. The warranty accrual represents the Companys best estimate of the costs
necessary to settle future and existing claims on products sold as of the balance sheet date
based on the terms of the warranty, which vary by customer and product, historical product
return rates and estimated average repair costs. The Company periodically assesses the
adequacy of its recorded warranty provisions and adjusts the amounts as necessary.
w) Recent Accounting Pronouncements
In February 2006, the FASB issued SFAS 155 Accounting for Certain Hybrid Financial
Instruments, which eliminates the exemption from applying SFAS 133 to interests in
securitized financial assets so that similar instruments are accounted for similarly
regardless of the form of the instruments. SFAS 155 also gives entities the option of
applying fair value accounting to certain hybrid financial instruments in their entirety if
they contain embedded derivatives that would otherwise require bifurcation under SFAS 133.
Under the new approach, fair value accounting would replace the current practice of recording
fair value changes in earnings. The election of fair value measurement would be allowed at
acquisition, at issuance, or when a previously recognized financial instrument is subject to
a remeasurement event. Adoption is effective for all financial instruments acquired or issued
after the beginning of an entitys first fiscal year that begins after September 15, 2006.
The Company is currently evaluating the requirements of SFAS 155 and does not expect its
adoption to have a material effect on the consolidated financial statements.
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income tax positions and refunds. The interpretation prescribes a
more-likely-than-not threshold and a measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
FIN 48 also provides accounting guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. The Company is required
to adopt the provisions of FIN 48 in fiscal 2008 and is currently assessing the impact of the
adoption on the consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements, (SFAS 157). This Standard defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles and expands disclosures
about fair value measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years. The Company is currently
evaluating the requirements of SFAS 157 and has not yet fully determined the impact, if any,
on the consolidated financial statements.
In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an amendment of FASB Statement No. 115 (SFAS 159), which
allows measurement at fair value of eligible financial assets and liabilities that are not
otherwise measured at fair value. If the fair value option for an eligible item is elected,
unrealized gains and losses for that item shall be reported in current earnings at each
subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements
designed to draw comparison between the different measurement attributes the Company elects
for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently assessing the impact of SFAS 159 on its
financial statements.
Effective fiscal 2007, the Company adopted FASB statements No. 151 Inventory Costs, No. 153
Exchanges of Non-Monetary Assets, No. 154 Accounting Changes and Error Corrections, No.
158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, and
No. 123R Share Based Payment, as well as Staff Accounting Bulletin No. 108, Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements (SAB 108). and FASB Staff Position (FSP) SFAS No. 143-1,
Accounting for Electronic Equipment Waste Obligations. With the exception of SFAS 123R (see
Note 2 r) and SFAS 158 (see Note 25), the adoption of these accounting pronouncements did not
have a material impact on the Companys results of operations, financial condition or cash
flows.
x) Comparative Figures
Effective fiscal 2006, the Company revised its allocation of revenues and cost of revenues
between product and service groups and as a result restated its 2005 consolidated financial
statements, including comparative figures. The revision resulted in a reclassification of
$24.7 and $0.1 from product revenues to service revenues, and also resulted in a
reclassification of $20.4 and $0.1 from product cost of revenues to service cost of revenues
for 2005 and the Transition Period respectively.
3. |
|
RELATED PARTY TRANSACTIONS |
As at April 30, 2006 and April 30, 2007, amounts receivable from related parties were $0.4
and $0.8, and amounts payable to related parties were $24.2 and $23.0 respectively.
Significant related party transactions with companies controlled by or related to Dr. Terence
Matthews (the Principal Shareholder), not otherwise disclosed in the financial statements,
include the following:
13
Disposal of manufacturing operations
On August 31, 2001, the Company recorded a loss on the sale of its manufacturing operations,
comprising plant, equipment, workforce and certain liabilities to BreconRidge Manufacturing
Solutions Corporation (BreconRidge), a company in which the Principal Shareholder holds a
significant interest. During fiscal 2004, BreconRidge vacated premises that had been
subleased from the Company pursuant to the disposal of the manufacturing operations. It
became evident therefore that sublease income over the lease renewal period, which was
originally included in the estimated loss on disposal, will no longer be realized. As a
result, additional expenses of $3.4 was recorded in the fiscal 2005 Consolidated Statements
of Operations as an additional loss arising on the disposal activity. In fiscal 2006, a
reversal of $0.9 was recorded against the loss to reflect the receipt of new information that
had a favorable impact on operating cost assumptions and corresponding estimates. In fiscal
2007, Mitel successfully subleased certain areas of the vacated premises to new tenants, and
as a result, recorded a reversal of $1.0 against the loss.
In connection with the disposal of the manufacturing operations, the Company entered into a
supply agreement dated August 31, 2001 whereby BreconRidge will provide certain products and
services under terms and conditions reflecting prevailing market conditions at the time the
agreement was entered into. The term of the agreement is six years and will be, unless
otherwise terminated, automatically renewed on the same terms and conditions for additional
consecutive one-year periods. Under the terms of the supply agreement, BreconRidge is
required to purchase the Companys raw material inventory, before turning to third party
suppliers for raw material procurement. During fiscal 2007, the Company purchased $91.0 of
products and services (2005 $94.2; Transition Period $1.8; 2006 $101.4) and sold $2.1
of raw material inventory (2005 $0.9; Transition Period $0.1; 2006 $0.4) under this
agreement. As of April 30, 2007, balances payable pursuant to this agreement amounted to
$24.2 (April 30, 2006 $24.0) and balances receivable pursuant to this agreement amounted to
$2.8 (April 30, 2006 $0.7).
Under the terms of the supply agreement, the Company is required to purchase from BreconRidge
certain tools used in the manufacturing process. These manufacturing tools are capitalized
as part of fixed assets and are depreciated over their estimated useful lives. During fiscal
2007, manufacturing tools purchased from BreconRidge amounted to $0.2 (2005 $0.2;
Transition Period $nil; 2006 $0.9).
On August 31, 2001, the Company also entered into service agreements with BreconRidge to
provide facilities management services for the period covering the term of the premise lease
agreements, as well as human resource and information systems support services. Amounts
charged to BreconRidge were equal to, and recorded as a reduction of, the costs incurred to
provide the related services in the Consolidated Statements of Operations. During fiscal
2007, the Company provided services valued at $0.2 under these agreements (2005 $1.0;
Transition Period $nil; 2006 $0.5).
Leased properties
In March 2001 the Company and Brookstreet Research Park Corporation (formerly known as Mitel
Research Park Corporation), a company controlled by the Principal Shareholder entered into a
lease agreement for its Ottawa-based headquarter facilities, under terms and conditions
reflecting prevailing market conditions at the time the lease was entered into. The lease
agreement is for 10 years expiring in March 2011.
On August 31, 2001, the Company entered into sublease agreements with BreconRidge for certain
office and manufacturing facilities in Ottawa and in the United Kingdom (U.K.) under terms
and conditions reflecting prevailing market conditions at the time the leases were entered
into. The sublease agreement was amended on May 31, 2002 to increase leased space. The
Ottawa sublease agreement is for a term of five years expiring on August 31, 2006. In August
2005, the building in the U.K. was sold to an unrelated third party. In August 2006, the
Ottawa sublease expired and was not renewed. Accordingly, the Company no longer receives
rental income from BreconRidge for either facilities in the U.K. or Ottawa.
See Note 17 for disclosure of related party rental expense, sublease income, committed future
minimum lease payments and future sublease income. As of April 30, 2007, balances due to the
company controlled by the Principal Shareholder and related to the lease agreement amounted
to $0.6 (April 30, 2006 $0.4).
Financing
In addition to the warrants described in Note 21, during fiscal 2007, the Company borrowed
funds to fund short term working capital requirements from Wesley Clover Corporation, a
company controlled by the Principal Shareholder. The promissory notes bore interest at
three-month LIBOR plus 5% and the interest expense incurred on these related party loans
during the year amounted to $0.1. The amount borrowed never exceeded $5.0 at any one time,
all funding was repaid within the year and there was no balance payable at April 30, 2007.
Prepaid License and Investment Agreement
On April 25, 2006, the Company entered into an agreement with Natural Convergence Inc
(NCI), a company in which the Principal Shareholder has an ownership interest, to purchase
prepaid software licenses and convertible debentures for a combined total of $1.2. The
secured convertible debentures were (a) repayable to debenture holders (plus a credit fee of
25% per annum of any outstanding principal) on the earlier of December 31, 2006, or on the
occurrence of certain events, or (b) automatically convertible into preferred shares of NCI
upon the closing of a qualifying financing of no less than $6.0. The convertible debentures
were also
14
issued with warrants to acquire a number of common shares of NCI equal to the dollar amount
of the investment divided by $1.00, at an exercise price per common share of C$0.0001.
Under this agreement, the Company purchased $0.3 of prepaid software licenses and $0.9 of
convertible debentures during fiscal 2007. The $0.3 of prepaid licenses is included in other
current assets at April 30, 2007. Since NCI had completed a qualifying financing of $10.0 in
November 2006, the Companys entire $0.9 balance of debentures and $0.1 accrued interest was
automatically converted into NCI Class C Preferred Shares at a 5% discount in accordance with
the terms of the agreement. Following the conversion, and upon exercising its warrants, the
Company received 8,467,523 Class C Preferred Shares and acquired 600,000 common shares. At
April 30, 2007, the Company had a combined ownership of 5.6% in NCI but did not exert
significant influence over NCI. Accordingly, the $1.0 investment recorded on the balance
sheet at April 30, 2007 has been accounted for using the cost method.
In addition to the license and financing agreement described above, the Company also
purchased $2.1 of products and services from NCI for the year ended April 30, 2007 (2005 -
$nil; Transition Period $nil; 2006 $0.3). The related net balance payable at April 30,
2007 was $0.5 (April 30, 2006 $0.2).
Other
In September 2001, the Company entered into a strategic alliance agreement and a global
distribution agreement with March Networks Corporation (March Networks), a company
controlled by the Principal Shareholder, to broaden its product portfolio and its
distribution channel. Under the terms of the agreement, the parties agree to cooperate in
the performance of joint development activities and each party will bear its own costs
arising in connection with the performance of its obligations. Both parties will share
common costs incurred in the performance of joint activities. During fiscal 2007, the
Company purchased $0.1 of products and services (2005 $0.4; Transition Period $nil; 2006
$0.3) from March Networks and had a balance payable recorded in the due to related parties
pursuant to this agreement in the amount of $nil (April 30, 2006 $0.1).
Other sales to and purchases from companies related to the Principal Shareholder and arising
in the normal course of the Companys business were $0.6 and $3.0 respectively for the year
ended April 30, 2007 (2005 $0.4 and $1.2, respectively; Transition period insignificant;
2006 $0.4 and $3.6 respectively). The net balances payable as a result of these
transactions was $0.8 at April 30, 2007 (April 30, 2006 $0.8).
During fiscal 2005 the Company recorded pre-tax special charges of $10.6. The components of
the charge include $8.7 of employee severance and benefits incurred in the termination of 154
employees around the world, $1.3 of non-cancelable lease costs related to excess facilities,
$0.9 of assets written off as a result of the Companys discontinuation of its ASIC design
program, and a reversal of prior years charges of $0.3.
During fiscal 2006 the Company implemented additional restructuring actions which resulted in
pre-tax special charges of $5.7. The components of the charge include $5.7 of employee
severance and benefits incurred in the termination of 84 employees around the world, $0.8 of
accreted interest related to lease termination obligation and a reversal of $0.8 related to a
new sublease of a facility previously provided for in special charges. Payment of the
workforce reduction liabilities was completed during fiscal 2007. The lease termination
obligation incurred in prior fiscal years continues to be reduced over the remaining term of
the leases. Accordingly, a balance of $3.1 representing the long-term portion of the lease
obligation has been recorded under long term liabilities.
During fiscal 2007, the Company recorded pre-tax special charges of $9.3 as a result of
continuing efforts to improve the Companys operational efficiency and realign its business
to focus on IP-based communications solutions. The components of the charge include $8.7 of
employee severance and benefits incurred in the termination of 129 employees around the
world, $0.4 of accreted interest related to lease termination obligations and $0.2 related to
additional lease terminations in the period. Payment of workforce reduction liabilities is
expected to be complete within the next twelve months. The lease termination obligation
incurred in prior fiscal years continues to be reduced over the remaining term of the leases.
Accordingly, a balance of $3.0 representing the long-term portion of the lease obligation has
been recorded under long term liabilities.
15
The following table summarizes details of the Companys special charges and related reserve
during fiscal 2006 and fiscal 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease |
|
|
|
|
|
|
|
|
Workforce |
|
Termination |
|
Assets Written |
|
|
|
|
Description |
|
Reduction |
|
Obligation |
|
Off |
|
Legal Costs |
|
Total |
|
Balance of provision as of April 25, 2004 |
|
$ |
2.1 |
|
|
$ |
5.3 |
|
|
$ |
|
|
|
$ |
0.4 |
|
|
$ |
7.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges |
|
|
8.7 |
|
|
|
1.3 |
|
|
|
0.9 |
|
|
|
|
|
|
|
10.9 |
|
Adjustments |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
Cash payments |
|
|
(8.9 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
(0.4 |
) |
|
|
(10.5 |
) |
Assets written off |
|
|
|
|
|
|
|
|
|
|
(0.9 |
) |
|
|
|
|
|
|
(0.9 |
) |
Foreign currency impact |
|
|
0.4 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of provision as of April 24, 2005 |
|
$ |
2.0 |
|
|
$ |
5.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments |
|
|
(0.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
Foreign currency impact |
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of provision as of April 30, 2005 |
|
$ |
1.8 |
|
|
$ |
5.6 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
7.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges |
|
|
5.7 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
6.5 |
|
Adjustments |
|
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
|
|
|
|
(0.8 |
) |
Cash payments |
|
|
(6.0 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
(7.3 |
) |
Foreign currency impact |
|
|
0.2 |
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of provision as of April 30, 2006 |
|
$ |
1.7 |
|
|
$ |
4.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charges |
|
|
8.7 |
|
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
9.3 |
|
Cash payments |
|
|
(9.5 |
) |
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
(10.5 |
) |
Foreign currency impact |
|
|
0.3 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance of provision as of April 30, 2007 |
|
$ |
1.2 |
|
|
$ |
4.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5.2 |
|
|
5. |
|
SEGMENT INFORMATION |
|
|
|
General description |
|
|
|
Mitels portfolio of solutions provide advanced voice, video and data communications
platforms, desktop phones and Internet appliances, applications for customer relationship
management and mobility, messaging and multimedia collaboration. |
|
|
|
In years previous to fiscal 2006, the Company reported its operations in two segments: the
Communications Solutions segment (Solutions) and the Customer Services segment
(Services). Effective fiscal 2006, Mitel changed its structure of reporting so that the
reportable segments are now represented by the following four geographic areas: United
States, Canada and Caribbean & Latin America (CALA), Europe, Middle East & Africa (EMEA), and
Asia Pacific. These reportable segments were determined in accordance with how management
views and evaluates the Companys business. The results of operations for 2005 have been
restated to conform with the new presentation. |
|
|
|
The Companys Chief Executive Officer (CEO) has been identified as the chief operating
decision maker as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information. The CEO evaluates the performance of the segments and allocates
resources based on information provided by the Companys internal management system. The
primary financial measure used by the CEO is the contribution margin, which includes segment
revenues less the related cost of sales and direct selling costs. The Company does not
allocate research and development, marketing, general and administrative expenses,
amortization, stock-based compensation expense and one-time charges to its segments as
management does not use this information to measure the performance of the operating
segments. These unallocated expenses are included in shared and unallocated costs in the
reconciliation of operating results. In addition, total asset information by segment is not
presented because the CEO does not use such segmented measures to allocate resources and
assess performance. Inter-segment sales are based on fair market values and are eliminated
on consolidation. With the exception of contribution margin defined above, the accounting
policies of reported segments are the same as those described in the summary of significant
accounting policies. |
16
|
|
Business segments |
|
|
|
Financial information by geographic area for fiscal years 2005, 2006 and 2007, and the
Transition Period under the new basis of reporting is summarized below. External revenues are
attributed to geographic area based on sales office location. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United |
|
Canada and |
|
|
|
|
|
|
|
|
|
Corporate |
|
|
|
|
States |
|
CALA |
|
EMEA |
|
Asia Pacific |
|
and Other |
|
Total |
|
Fiscal 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
153.5 |
|
|
$ |
37.2 |
|
|
$ |
145.5 |
|
|
$ |
6.0 |
|
|
$ |
|
|
|
$ |
342.2 |
|
|
Contribution Margin |
|
|
59.5 |
|
|
|
13.7 |
|
|
|
39.7 |
|
|
|
|
|
|
|
|
|
|
|
112.9 |
|
Shared and unallocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154.2 |
) |
|
|
(154.2 |
) |
|
Operating earnings (loss) |
|
$ |
59.5 |
|
|
$ |
13.7 |
|
|
$ |
39.7 |
|
|
$ |
|
|
|
$ |
(154.2 |
) |
|
$ |
(41.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1.8 |
|
|
$ |
0.4 |
|
|
$ |
1.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.2 |
|
|
Contribution Margin |
|
|
0.5 |
|
|
|
|
|
|
|
(0.3 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
0.1 |
|
Shared and unallocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.8 |
) |
|
|
(1.8 |
) |
|
Operating earnings (loss) |
|
$ |
0.5 |
|
|
$ |
|
|
|
$ |
(0.3 |
) |
|
$ |
(0.1 |
) |
|
$ |
(1.8 |
) |
|
$ |
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
178.5 |
|
|
$ |
43.6 |
|
|
$ |
156.3 |
|
|
$ |
8.7 |
|
|
$ |
|
|
|
$ |
387.1 |
|
|
Contribution Margin |
|
|
73.9 |
|
|
|
17.1 |
|
|
|
52.1 |
|
|
|
0.6 |
|
|
|
|
|
|
|
143.7 |
|
Shared and unallocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150.4 |
) |
|
|
(150.4 |
) |
|
Operating earnings (loss) |
|
$ |
73.9 |
|
|
$ |
17.1 |
|
|
$ |
52.1 |
|
|
$ |
0.6 |
|
|
$ |
(150.4 |
) |
|
$ |
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
161.6 |
|
|
$ |
49.4 |
|
|
$ |
162.4 |
|
|
$ |
11.5 |
|
|
$ |
|
|
|
$ |
384.9 |
|
|
Contribution margin |
|
|
63.0 |
|
|
|
20.0 |
|
|
|
51.2 |
|
|
|
1.9 |
|
|
|
|
|
|
|
136.1 |
|
Shared and unallocated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(169.4 |
) |
|
|
(169.4 |
) |
|
Operating earnings (loss) |
|
$ |
63.0 |
|
|
$ |
20.0 |
|
|
$ |
51.2 |
|
|
$ |
1.9 |
|
|
$ |
(169.4 |
) |
|
$ |
(33.3 |
) |
|
|
|
Product information |
|
|
|
Effective fiscal 2006, the Company revised the allocation of revenues between its product and
service groups. The following table sets forth the net revenues for groups of similar
products and services by period under the revised basis of reporting: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
2005 |
|
Period |
|
2006 |
|
2007 |
|
Products: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platforms and desktop appliances |
|
$ |
165.1 |
|
|
$ |
1.3 |
|
|
$ |
204.3 |
|
|
$ |
201.4 |
|
Applications |
|
|
23.5 |
|
|
|
0.3 |
|
|
|
34.2 |
|
|
|
38.4 |
|
|
Other (1) |
|
|
19.1 |
|
|
|
0.1 |
|
|
|
22.0 |
|
|
|
23.8 |
|
|
|
|
|
207.7 |
|
|
|
1.7 |
|
|
|
260.5 |
|
|
|
263.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and support |
|
|
85.3 |
|
|
|
1.2 |
|
|
|
80.9 |
|
|
|
77.2 |
|
Installation |
|
|
22.1 |
|
|
|
0.1 |
|
|
|
24.6 |
|
|
|
21.2 |
|
Managed services |
|
|
10.9 |
|
|
|
0.2 |
|
|
|
9.2 |
|
|
|
7.7 |
|
Professional services |
|
|
16.2 |
|
|
|
|
|
|
|
11.9 |
|
|
|
15.2 |
|
|
|
|
|
134.5 |
|
|
|
1.5 |
|
|
|
126.6 |
|
|
|
121.3 |
|
|
Total |
|
$ |
342.2 |
|
|
$ |
3.2 |
|
|
$ |
387.1 |
|
|
$ |
384.9 |
|
|
|
|
|
(1) |
|
Other products include mainly OEM products representing approximately six
percent, three percent, six percent and six percent of total revenue in fiscal 2005,
Transition Period, fiscal 2006 and fiscal 2007 respectively. |
17
|
|
Geographic information |
|
|
|
Revenues from external customers are attributed to the following countries based on location
of the customers. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
2005 |
|
Period |
|
2006 |
|
2007 |
|
Canada |
|
$ |
26.5 |
|
|
$ |
0.3 |
|
|
$ |
30.9 |
|
|
$ |
37.6 |
|
United States |
|
|
155.3 |
|
|
|
1.8 |
|
|
|
178.9 |
|
|
|
161.9 |
|
United Kingdom |
|
|
127.3 |
|
|
|
1.0 |
|
|
|
130.2 |
|
|
|
129.0 |
|
Other foreign countries |
|
|
33.1 |
|
|
|
0.1 |
|
|
|
47.1 |
|
|
|
56.4 |
|
|
|
|
$ |
342.2 |
|
|
$ |
3.2 |
|
|
$ |
387.1 |
|
|
$ |
384.9 |
|
|
|
|
Geographic long-lived asset information is based on the physical location of the assets as of
the end of each fiscal period. The following table sets forth long-lived assets by
geographic areas: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2006 |
|
April 30, 2007 |
|
|
|
|
|
|
|
|
|
|
Intangible |
|
|
|
|
|
|
|
|
|
Intangible |
|
|
Property and |
|
|
|
|
|
and Other |
|
Property and |
|
|
|
|
|
and Other |
|
|
Equipment |
|
Goodwill |
|
Assets |
|
Equipment |
|
Goodwill |
|
Assets |
|
Canada |
|
$ |
10.4 |
|
|
$ |
4.2 |
|
|
$ |
6.6 |
|
|
$ |
11.6 |
|
|
$ |
4.2 |
|
|
$ |
6.6 |
|
United States |
|
|
1.0 |
|
|
|
0.9 |
|
|
|
|
|
|
|
1.1 |
|
|
|
0.9 |
|
|
|
|
|
United Kingdom |
|
|
5.0 |
|
|
|
1.7 |
|
|
|
|
|
|
|
3.6 |
|
|
|
1.7 |
|
|
|
|
|
Other foreign countries |
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17.4 |
|
|
$ |
6.8 |
|
|
$ |
6.6 |
|
|
$ |
16.5 |
|
|
$ |
6.8 |
|
|
$ |
6.6 |
|
|
|
|
Concentrations |
|
|
|
The Company sells its products and services to a broad set of enterprises ranging from large,
multinational enterprises, to small and mid-sized enterprises, government agencies, health
care organizations and schools. Management believes that the Company is exposed to minimal
concentration risk since the majority of its business is conducted with companies within
numerous industries. The Company performs periodic credit evaluations of its customers
financial condition and generally does not require collateral for its accounts receivable.
In some cases, the Company will require payment in advance or security in the form of letters
of credit or third-party guarantees. For the period ended April 30, 2007, sales of $48.4
were made to one customer in the United States and accounted for more than 10 percent of the
Companys revenue. No other single customer accounted for more than 10 percent of the
Companys revenue for the periods ended April 24, 2005, April 30, 2006 and April 30, 2007 and
the Transition Period. |
|
|
|
As a result of the disposal of the manufacturing operations described in Note 3, BreconRidge
manufactures substantially all of the Companys products. The Company is not obligated to
purchase products from BreconRidge in any specific quantity, except as the Company outlines
in forecasts or orders for products required to be manufactured by BreconRidge. In addition,
the Company may be obligated to purchase certain excess inventory levels from BreconRidge
that could result from the Companys actual sales of product varying from forecast. As of
April 30, 2007, there was excess inventory of $4.0 (2006 $0.9) for which the Company was
liable, and has been recorded in the due to related parties amount. The Companys supply
agreement with BreconRidge results in a concentration that, if suddenly eliminated, could
have an adverse effect on the Companys operations. While the Company believes that
alternative sources of supply would be available, disruption of its primary source of supply
could create a temporary, adverse effect on product shipments. |
6. |
|
DIVESTITURES |
|
|
|
Sale of Edict Training Ltd. |
|
|
|
On October 7, 2005, the Company completed the sale of its 8,000 shares, or eighty-percent
ownership interest, in Edict for consideration of £0.2, or $0.3 to be applied against amounts
due from Edict Training Ltd. The transaction resulted in an insignificant loss, which was
recorded in other income/expense. As a result of this transaction, the Company no longer
holds any equity interest in Edict. The costs incurred in connection with this disposal were
considered nominal. |
18
|
|
Revenues and net loss relating to Edict for the period from May 1, 2005 until the date of
disposal amounted to $0.4 and $0.6 respectively ($3.4 and $1.6 for fiscal 2005). The
following details the carrying value of Edicts major classes of assets and liabilities as at
the date of disposal: |
|
|
|
|
|
|
|
October 7, |
|
|
2005 |
|
Assets
|
|
|
|
|
Cash |
|
$ |
0.1 |
|
Accounts receivable |
|
|
0.3 |
|
Fixed assets |
|
|
|
|
Due to affiliates (net) |
|
|
1.0 |
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(0.6 |
) |
Deferred revenue |
|
|
(0.5 |
) |
|
|
|
$ |
0.3 |
|
|
|
|
Sale of U.K. land and building |
|
|
|
On August 31, 2005, the Company sold land and building relating to its U.K. subsidiary for
cash consideration of $12.4 (£7.1), resulting in a pre-tax gain of $7.3 (£4.2). The
transaction included a commitment for the Company to lease back a portion of the property,
which provided the Company with more than a minor part but less than substantially all of the
use of the property, and thereby qualified the transaction as a sale-leaseback arrangement
under SFAS 13. As a result, the Company entered into a 6-month interim lease and a 10-year
long-term lease for a portion of the property sold. Accordingly, $5.8 of the gain has been
deferred and will be amortized over the combined term of the leases (10 1/2 years). The
remaining gain of $1.5 was recognized immediately at the time of the sale and included in
gain on sale of assets. The deferred and unamortized balance at April 30, 2006 and April 30,
2007 was $5.5 and $4.9 respectively. The provision for income taxes in fiscal 2006 relating
to the sale of the land and buildings was $0.9 (£0.6). |
7. |
|
RECEIVABLES PURCHASE AGREEMENT |
|
|
|
On April 30, 2007, the Company entered into an agreement under which it sold $12.8 of its
non-interest bearing trade accounts receivable to an unaffiliated financial institution at a
rate of 7.5% on Canadian dollar receivables and 10.25% on US dollar receivables. Under the
Agreement, the Company will continue to service, administer and collect the pool of accounts
receivable without a fee, on behalf of the purchaser and, in certain events of breach can be
required to repurchase the receivables. The Agreement is guaranteed by the Companys
principal shareholder, for which a fee of $0.012 was paid, and $1.9 was recorded as
restricted cash in connection with the agreement. The Company is not considered to have ceded
control over the transferred receivables, and so the transfer has not been accounted for as a
sale. The agreement does not provide the financial institution with the right to pledge or
resell the transferred receivables. |
|
8. |
|
OTHER CURRENT ASSETS |
|
|
|
The following are included in other current assets as of April 30, 2006 and April 30, 2007. |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Prepaid expenses |
|
$ |
13.6 |
|
|
$ |
14.3 |
|
Other receivables |
|
|
9.5 |
|
|
|
11.7 |
|
Deferred charges |
|
|
1.6 |
|
|
|
4.2 |
|
|
|
|
$ |
24.7 |
|
|
$ |
30.2 |
|
|
|
|
Included in deferred charges is $2.1 relating to the financing described in Note 28. Included
in other receivables are unbilled receivables of $9.5 as of April 30, 2007 (2006 $6.5). |
|
9. |
|
INVENTORIES |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Raw materials |
|
$ |
0.9 |
|
|
$ |
2.4 |
|
Finished goods |
|
|
22.7 |
|
|
|
17.4 |
|
|
|
|
$ |
23.6 |
|
|
$ |
19.8 |
|
|
19
10. |
|
PROPERTY AND EQUIPMENT |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Cost: |
|
|
|
|
|
|
|
|
Equipment |
|
$ |
68.8 |
|
|
$ |
69.9 |
|
|
|
|
|
68.8 |
|
|
|
69.9 |
|
|
Less accumulated depreciation |
|
|
|
|
|
|
|
|
Equipment |
|
|
51.4 |
|
|
|
53.4 |
|
|
|
|
|
51.4 |
|
|
|
53.4 |
|
|
|
|
$ |
17.4 |
|
|
$ |
16.5 |
|
|
|
|
As of April 30, 2007, equipment included leased assets with cost of $6.2 (2006 $4.6) and
accumulated depreciation of $2.8 (2006 $1.3) and equipment utilized in the provision of
Managed Services (see Note 2(f)) with cost of $7.5 (2006 $8.0) and accumulated depreciation
of $6.6 (2006 $6.7). Depreciation expense recorded in fiscal 2007 amounted to $7.1 (2005
$7.6; Transition Period $0.2; 2006 $8.6). |
|
11. |
|
GOODWILL |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Balance, beginning of the period |
|
$ |
6.0 |
|
|
$ |
6.8 |
|
Foreign currency impact |
|
|
0.8 |
|
|
|
|
|
|
Balance, end of period |
|
$ |
6.8 |
|
|
$ |
6.8 |
|
|
|
|
The Company performs its impairment tests of goodwill annually on January 31 in accordance
with SFAS 142, Goodwill and Other Intangible Assets. The Company concluded that there was
no impairment since the fair value determination of the reporting units were found to exceed
the carrying values in fiscal 2006 and fiscal 2007. |
|
12. |
|
INTANGIBLE AND OTHER ASSETS |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Cost: |
|
|
|
|
|
|
|
|
Patents, trademarks and other |
|
$ |
5.4 |
|
|
$ |
6.9 |
|
Deferred debt issue costs |
|
|
4.5 |
|
|
|
5.0 |
|
|
|
|
|
9.9 |
|
|
|
11.9 |
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
|
|
Patents, trademarks and other |
|
|
2.5 |
|
|
|
3.6 |
|
Deferred debt issue costs |
|
|
0.8 |
|
|
|
1.7 |
|
|
|
|
|
3.3 |
|
|
|
5.3 |
|
|
|
|
$ |
6.6 |
|
|
$ |
6.6 |
|
|
|
|
Amortization of intangible and other assets was $0.7, $nil, $1.7 and $1.9 each of fiscal
2005, Transition Period, fiscal 2006, and fiscal 2007 respectively. Deferred debt issue costs
will be amortized over 5 years of which $1.7 has been amortized to date. The estimated
amortization expense related to intangible assets in existence as of April 30, 2007, over the
next five years is as follows: fiscal 2008 $2.4; fiscal 2009 $1.7; fiscal 2010 $1.5;
fiscal 2011 $0.5 and fiscal 2012 $0.5. The Company does not allocate intangible assets
to its segments, as management does not use this information to measure the performance of
the operating segments. |
|
13. |
|
BANK INDEBTEDNESS |
|
|
|
The Companys UK subsidiary has indemnity facilities totaling $1.9 (£1.0) available for
letters of credit and other guarantees, $0.9 of which has been drawn at April 30, 2007 (April
30, 2006 $0.8). The indemnity and credit facilities are unsecured. |
|
|
|
Amounts appearing in bank indebtedness as of April 30, 2006 and April 30, 2007 represent
credit book balances resulting from an excess of outstanding checks over funds on deposit
where a right of offset does not exist. |
20
14. |
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Trade payable |
|
$ |
21.0 |
|
|
$ |
40.0 |
|
Employee-related payables |
|
|
11.6 |
|
|
|
14.0 |
|
Restructuring, warranty and other provisions |
|
|
5.7 |
|
|
|
5.1 |
|
Receivables purchase obligation |
|
|
|
|
|
|
12.8 |
|
Other accrued liabilities |
|
|
35.0 |
|
|
|
26.8 |
|
|
|
|
$ |
73.3 |
|
|
$ |
98.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
|
|
Capital leases, at interest rates
varying from 1.3% to 11.8%, payable
in monthly installments, with
maturity dates ranging from 8 to 36
months, secured by the leased assets |
|
$ |
4.1 |
|
|
$ |
4.0 |
|
|
|
|
|
|
|
4.1 |
|
|
|
4.0 |
|
Less: current portion |
|
|
1.6 |
|
|
|
1.9 |
|
|
|
|
|
|
$ |
2.5 |
|
|
$ |
2.1 |
|
|
|
|
|
|
Interest expense related to long-term debt, including obligations under capital leases, was
$0.2 in fiscal 2007 (2005 $1.0; Transition Period insignificant; 2006 $0.5). Future
minimum lease payments as of April 30, 2007 under capital leases total $4.4 of which $2.0,
$1.6, $0.4 and $0.4 relate to fiscal years 2008 to 2011, respectively. Interest costs of
$0.4 are included in the total future lease payments. |
16. |
|
CONVERTIBLE NOTES |
|
|
|
Senior Secured Convertible Notes |
|
|
|
On April 27, 2005, the Company issued Senior Secured Convertible Notes, with attached
warrants, for gross proceeds of $55.0 to a group of private investors (Holders). The notes
mature on April 28, 2010 and accrue interest, payable semi-annually in arrears, at LIBOR plus
5.0% for any period prior to the consummation of a Qualified IPO, LIBOR plus 2.5% for any
period following the consummation of a Qualified IPO and LIBOR plus 10.0% on or after the
30 month anniversary of the issuance date of the convertible notes if a Qualified
IPO has not been consummated. At any time on or after the consummation of a Qualified IPO or
upon the occurrence of a Fundamental Change, the Holders of the notes are entitled to convert
any portion of the outstanding principal and accrued and unpaid interest into common shares
of the Company with the number of common shares to be received being calculated based on a
formula that considers the fair value of the common shares in the case of an IPO and, in the
case of a Fundamental Change, is based on $1.50 per common share subject to adjustment for a
Make-Whole Premium. The Make-Whole Premium, which is based on the effective date of the
Fundamental Change, the current fair value of the Companys common shares and whether the
Fundamental Change occurs Pre-IPO or Post-IPO may be settled in cash, by delivery of common
shares or a combination thereof at the option of the Company. The determination of the
Make-Whole Premium is not based on interest rates or credit risk and therefore is not
considered clearly and closely related to the host instrument and qualifies as an embedded
derivative under SFAS 133. Accordingly, the fair value of the embedded derivative is
required to be recorded at fair value separate from the debt host. As at April 30, 2007
management has determined the fair value of the derivative instrument to be nominal. |
|
|
|
At any time commencing on or after the later of (i) May 1, 2008 and (ii) the 18 month
anniversary of the Lock-Up Expiration Date provided that on each of the 10 consecutive
trading days, the closing sale price per share is at least 200% of the conversion price of
the notes, the Company has the right to redeem all or any portion of the principal remaining
under the notes at a redemption price equal to the principal plus interest accrued to the
date of redemption plus the net present value of the remaining interest payments to April 28,
2010. In the Event of Default, Holders of the notes may accelerate and require the Company
to redeem all or any portion of the notes held including accrued and unpaid interest. Upon
the occurrence of a Fundamental Change, the Company shall irrevocably offer to repurchase all
or a portion of the note at a price equal to (i) 125% of the principal of the notes (plus
accrued and unpaid interest) if the Fundamental Change occurs during 18 months after issuance
but prior to the consummation of a Qualified IPO, (ii) 120% of the principal of the notes
(plus accrued and unpaid interest) if the Fundamental Change occurs following the 18 months
after issuance but prior to the consummation of a Qualified IPO or (iii) 100% of the
principal of the notes (plus accrued and unpaid interest) if the Fundamental Change occurs
following the consummation of a Qualified IPO. A Fundamental Change includes a consolidation
or merger, sale, transfer or assignment of all or substantially all of the Companys assets,
a purchase of more than 50% of the Companys outstanding common shares, consummation of a
stock purchase agreement or other business combination, or reorganization, recapitalization
or reclassification of the common shares of the Company, or any event that results in the
Principal Shareholder beneficially owning in aggregate less than 115 million of the issued
and outstanding shares in the capital of the Company. |
21
|
|
As a redemption upon the occurrence of a Fundamental Change in the 18 months after issuance
but prior to the consummation of a Qualified IPO could result in (1) the Holder doubling its
initial rate of return on the debt host and (2) the rate of return is at least twice what
would otherwise be the market return for a contract that has the same terms and credit risk
as the debt host contract, the redemption feature is not considered to be clearly and closely
related to the debt host and requires separate accounting from the debt host under the
provisions of FAS 133. At April 30, 2006 management has assigned nominal value to the
derivative instrument. At April 30, 2007 the right to receive this rate of return no longer
exists since the 18-month period after issuance has lapsed. |
|
|
|
The Holders of the notes have no voting rights and all payments due under this note shall
rank pari passu with all additional notes and, prior to the consummation of a Qualified IPO,
shall not be subordinate to any indebtedness of the Company. The notes are secured by a
first priority, perfected security interest over the assets of the Company and over the
assets and stock of specific subsidiaries. |
|
|
|
In conjunction with the issuance of the Senior Secured Convertible notes, the Company issued
16.5 million warrants, which are described further in Note 21. The gross proceeds from the
financing were allocated between the notes and the warrants based on their relative fair
values. Debt issue costs of $4.5 were incurred in connection with the financing transaction,
and have been recorded as a deferred charge within the Intangible and Other Assets balance in
the Consolidated Balance Sheet. |
|
|
|
The following table summarizes the allocation of the convertible notes among its different
elements and movement in the carrying value of the convertible notes: |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Balance, beginning of period |
|
$ |
46.6 |
|
|
$ |
48.7 |
|
Accretion of convertible notes to redemption value |
|
|
1.5 |
|
|
|
1.5 |
|
Foreign currency impact |
|
|
0.6 |
|
|
|
|
|
|
Balance, end of period |
|
$ |
48.7 |
|
|
$ |
50.2 |
|
|
|
|
Convertible Debentures |
|
|
|
On August 16, 2002, the Company closed a private offering of debentures convertible into
shares of the Company that resulted in total cash proceeds of $6.5. In fiscal 2004, the
entire carrying value of the debentures and accrued interest of $9.3 was converted into
5,445,775 common shares of the Company at C$2.00 per common share. In fiscal 2004 and fiscal
2005, the common shares were converted into 10,891,550 Series B preferred shares. As the
Company determined that the fair value of the Series B preferred shares to be equivalent to
the fair value of the common shares, there was no gain or loss recorded on the exchange. |
17. |
|
COMMITMENTS AND GUARANTEES |
|
|
|
Operating leases |
|
|
|
The Company leases certain equipment and facilities under 3rd party operating leases. The
Company is also committed under related party leases and subleases for certain facilities
(see Note 3). Rental expense and income on operating leases were as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
2005 |
|
Period |
|
2006 |
|
2007 |
|
Rental expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arms-length |
|
$ |
8.3 |
|
|
$ |
|
|
|
$ |
8.1 |
|
|
$ |
12.2 |
|
Related party |
|
|
5.9 |
|
|
|
0.1 |
|
|
|
6.5 |
|
|
|
6.6 |
|
|
Total |
|
$ |
14.2 |
|
|
$ |
0.1 |
|
|
$ |
14.6 |
|
|
$ |
18.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arms-length |
|
$ |
0.6 |
|
|
$ |
|
|
|
$ |
0.2 |
|
|
$ |
1.9 |
|
Related party |
|
|
3.6 |
|
|
|
|
|
|
|
2.8 |
|
|
|
0.7 |
|
|
Total |
|
$ |
4.2 |
|
|
$ |
|
|
|
$ |
3.0 |
|
|
$ |
2.6 |
|
|
|
|
Future operating minimum lease payments and future sublease income are as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Lease Payments |
|
Future Lease Income |
Fiscal year |
|
Arms-length |
|
Related Party |
|
Arms-length |
|
Related Party |
|
2008 |
|
$ |
8.0 |
|
|
$ |
8.1 |
|
|
$ |
1.9 |
|
|
$ |
0.1 |
|
2009 |
|
|
6.5 |
|
|
|
8.1 |
|
|
|
1.1 |
|
|
|
|
|
2010 |
|
|
4.5 |
|
|
|
8.1 |
|
|
|
0.5 |
|
|
|
|
|
2011 |
|
|
3.4 |
|
|
|
6.8 |
|
|
|
0.1 |
|
|
|
|
|
2012 |
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Thereafter |
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
33.8 |
|
|
$ |
31.1 |
|
|
$ |
3.6 |
|
|
$ |
0.1 |
|
|
|
|
22
|
|
Guarantees |
|
|
|
The Company has the following major types of guarantees that are subject to the accounting
and disclosure requirements of FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45): |
|
|
|
Product warranties |
|
|
|
The Company provides all customers with standard warranties on hardware and software for
periods up to fifteen months. The following table details the changes in the warranty
liability: |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Balance, beginning of period |
|
$ |
2.6 |
|
|
$ |
2.0 |
|
Warranty costs incurred |
|
|
(1.8 |
) |
|
|
(1.2 |
) |
Warranties issued |
|
|
1.0 |
|
|
|
1.1 |
|
Other |
|
|
0.2 |
|
|
|
(0.1 |
) |
|
Balance, end of period |
|
$ |
2.0 |
|
|
$ |
1.8 |
|
|
|
|
Intellectual property indemnification obligations |
|
|
|
The Company enters on a regular basis into agreements with customers and suppliers that
include limited intellectual property indemnification obligations that are customary in the
industry. These guarantees generally require the Company to compensate the other party for
certain damages and costs incurred as a result of third party intellectual property claims
arising from these transactions. The nature of these intellectual property indemnification
obligations prevents the Company from making a reasonable estimate of the maximum potential
amount it could be required to pay to its customers and suppliers. Historically, the Company
has not made any significant indemnification payments under such agreements and no amount has
been accrued in the consolidated financial statements with respect to these guarantees. |
|
|
|
Bid and performance related bonds |
|
|
|
The Company enters into bid and performance related bonds related to various customer
contracts. Performance related bonds usually have a term of twelve months and bid bonds
generally have a much shorter term. Potential payments due under these may be related to the
Companys performance and/or the Companys resellers performance under the applicable
contract. Under FIN 45, the Company must measure and recognize a liability equal to the fair
value of bid and performance related bonds involving the performance of the Companys
resellers. At April 30, 2006 and April 30, 2007 the liability recognized in accounts payable
and accrued liabilities related to these bid and performance related bonds, based on past
experience and managements best estimate, was insignificant. At April 30, 2007, the total
maximum potential amount of future payments the Company could be required to make under bid
and performance related bonds was $3.6 (2006 $2.5). |
18. |
|
CONTINGENCIES |
|
|
|
On June 23, 2006, one of the Companys competitors filed a complaint in the United States
District Court for the Eastern District of Virginia alleging that the Company is infringing
on certain of its patents and requested damages. On September 8, 2006 the Company filed a
defense to the competitors complaint and a counterclaim alleging that the competitor is
infringing on certain of the Companys patents and also requested damages. |
|
|
|
The competitor had also filed a complaint in the United States District Court for the
District of New Jersey seeking a declaratory judgment that certain of the Companys patents
are not being infringed by them or are invalid. |
|
|
|
During fiscal 2007, the Company and the competitor both expressed willingness to settle all
litigation claims outside of court, and a final agreement was reached on March 19, 2007.
Under the terms of the settlement agreement, the competitor agreed to release the Company
from all past infringements and the parties have also entered into a covenant to not sue each
other for a period of 5 years from the effective date. In accordance with SFAS No. 5,
Accounting for Contingencies, a one-time litigation settlement charge of $14.8, representing
the present value of $19.7 payable over a 5-year period and discounted using an interest rate
of 12%, was recorded during the year ended April 30, 2007 in the consolidated statement of
operations. Also included in the litigation settlement charge of $16.3 are legal costs
incurred of $1.5. At April 30, 2007, $5.9 had been recorded in accounts payable and accrued
liabilities and $10.4 was recorded in the litigation settlement obligation. The litigation
settlement obligation also includes $0.4 of accrued interest. The first payment under the
settlement agreement was paid in the first quarter of fiscal 2008. |
|
|
|
A class action suit was certified on October 7, 2006 in the Ontario Superior Court of Justice
that covered a certain number of Mitels Canadian employees who were terminated in connection
with the restructuring activities in the quarter ending October 31, 2006. On February 28,
2007, the action was settled at mediation. An amount was accrued at the time when the loss
was determined to be both probable and estimable. |
23
|
|
On April 30, 2007, Mitel was made party to a class action lawsuit related to the proposed
merger described in Note 28. The complaint alleges that the Company aided and abetted
Inter-Tel in breaching their fiduciary duties of loyalty and due care by approving the merger
without regard to the fairness of the transaction to Inter-Tel stockholders. The plaintiff is
seeking an injunction to the consummation of the proposed merger. While the Company believes
the claims are without merit and intends to defend vigorously, Mitel cannot predict the
outcome of the lawsuit and the impact it could have on the merger. |
|
|
|
The Company is also party to a small number of other legal proceedings, claims or potential
claims arising in the normal course of its business. In the opinion of the Companys
management and legal counsel, any monetary liability or financial impact of such claims or
potential claims to which the Company might be subject after final adjudication would not be
material to the consolidated financial position of the Company, its results of operations, or
its cash flows. |
19. |
|
REDEEMABLE COMMON SHARES |
|
|
|
Pursuant to the shareholders agreement dated April 23, 2004, upon failure to complete an
initial public offering (IPO) of its common shares by September 1, 2006 (the put date),
Zarlink, a shareholder of the Company, has a right to require the Company to redeem for cash
all or part of its 10,000,000 common shares held in the Company at a price of C$2.85 per
common share which translates to a total cash outlay of $25.8 based on April 30, 2007 foreign
exchange rates. On June 26, 2006 the agreement was amended to extend the put date until May
1, 2007. Subsequent to year-end, the put date was again extended until the earlier of the
completion of the acquisition as described in Note 28, or November 2, 2007 (see Note 29). The
common shares held by Zarlink with an original carrying value of $16.9 are classified in the
mezzanine section of the Consolidated Balance Sheets as redeemable common shares. In
addition, an aggregate amount of $2.1 (2006 $1.8) accreted for the excess of the redemption
amount over the original carrying value was recorded as of April 30, 2007. The accreted
amount is recorded as an increase in accumulated deficit. |
|
|
|
The following table summarizes the changes in redeemable common shares during the years
presented: |
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Balance, beginning of the period |
|
$ |
18.2 |
|
|
$ |
18.7 |
|
Interest accreted during the period |
|
|
0.5 |
|
|
|
0.3 |
|
|
Balance, end of period |
|
$ |
18.7 |
|
|
$ |
19.0 |
|
|
20. |
|
CONVERTIBLE, REDEEMABLE PREFERRED SHARES |
|
|
Series A Preferred Shares |
|
|
On April 23, 2004 the Company issued 20,000,000 Class A Series 1 Convertible and Redeemable
Preferred Shares (Series A Preferred Shares) for cash consideration of C$1.00 per share
(USD equivalent of $0.73 per share), together with attached common stock purchase warrants.
As described further in Note 21, the warrants entitle the Series A holders to purchase
5,000,000 common shares of the Company at an exercise price of C$1.25 per share. The
warrants are immediately exercisable and expire 7 years from the original issuance date. The
fair value of the warrants on the date of issuance of $1.0 was allocated from the net
proceeds on sale of the shares and is recorded as a component of shareholders deficiency. |
|
|
|
The Series A Preferred Shares are subject to non-cumulative dividends as and when declared by
the Board of Directors of the Company. The amount, if any, of any such dividends is at the
absolute discretion of the Board. No dividends have been declared as of April 30, 2006 and
April 30, 2007. The holders of the Series A Preferred Shares are entitled to elect two
members of the Board of Directors of the Company, and at least one of the members of certain
committees of the Board of Directors, and are entitled to vote as a single class with each
share of Series B Preferred Shares and Common Shares. |
|
|
|
The Series A Preferred Shares are convertible at any time at the option of the holders
without payment of any additional consideration into common shares at a conversion value of
C$1.00 per share, plus any declared but unpaid dividends. The terms of the agreement provide
that, if the Company subsequently issues common shares or common share equivalents at a price
less than the conversion value in effect prior to such issuance (subject to certain excluded
transactions), the conversion value of the Series A Preferred Shares will be reduced
accordingly. The Series A Preferred Shares also have the following additional conversion
features: i) the shares will automatically convert into common shares upon the closing of a
qualified IPO or upon a vote or written consent of the majority of the Series A shareholders;
ii) if the Series A shareholders convert after 2 years from the original issue date, in
addition to the common shares otherwise issuable upon conversion, the Series A shareholders
will also receive, in respect of each share so converted, an additional number of common
shares equal to the issue price of C$1.00 per preferred share divided by the fair market
value of a common share on the date of conversion iii) if the shares are converted pursuant
to a non-qualified IPO within the first two years after the original issuance, the Series A
shareholders will receive an additional number of common shares based on a formula set out in
the articles of the Company which takes into consideration the relative value of the issue
price to the IPO price. As the fair market value of the common shares into which the Series
A Preferred Shares were convertible was greater than the effective conversion price for
accounting purposes, determined based on the gross proceeds less the fair value of the
warrants on the date of issuance, a deemed dividend for this excess of $1.4 was recorded as
an increase in the net loss attributable to common shareholders for the year ended April 25,
2004. |
24
|
|
At any date after 5 years from the original issuance date, or at any date prior to a partial
sale event other than a public offering, the majority holders of the Series A Preferred
Shares have a right to require the Company to redeem the shares for cash. The redemption
amount is equal to the original issue price of C$1.00 per preferred share times the number of
Series A Preferred Shares outstanding, plus any declared but unpaid dividends, plus the then
current fair market value of the common shares into which the Series A Preferred Shares are
convertible (other than common shares issuable under additional conversion features). The
Series A shareholders will also have a right to request the redemption of the Series A shares
upon the exercise of put rights by certain shareholders. In the event of an exercise of put
rights, the redemption amount will be equal to the original issue price of C$1.00 per
preferred share times the number of Series A Preferred Shares outstanding, plus any declared
but unpaid dividends, plus the issuance of the number of common shares into which the Series
A Preferred Shares are convertible. At April 30, 2006 and April 30, 2007 management has
estimated that the fair market value of the preferred shares was C$2.55 and C$2.16 per share,
respectively. |
|
|
|
As a portion of the redemption price of the preferred shares is indexed to the common share
price of the Company, an embedded derivative exists which has been bifurcated and accounted
for separately, under SFAS 133. The derivative component relating to the Series A Preferred
Shares was valued at $15.3 as of April 30, 2007 (April 30, 2006 $17.3), and is recorded as
a liability with the change in the value of the derivative being recorded as a non-cash
expense in the Consolidated Statements of Operations. The initial value of the Series A
Preferred Shares of $5.8, after allocation of proceeds between warrants and the derivative
instrument, is classified in the mezzanine section of the Consolidated Balance Sheet. The
difference between the initial carrying amount and the redemption amount is being accreted
over the five-year period to redemption. For fiscal 2005, Transition Period, fiscal 2006 and
fiscal 2007, the amount of accreted interest was $1.2, insignificant, $1.6 and $2.1
respectively. |
|
|
|
Series B Preferred Shares |
|
|
|
On April 23, 2004, pursuant to the issuance of the Series A Preferred Shares, certain common
shareholders of the Company exchanged 29,530,494 common shares for 67,060,988 Series B
Preferred Shares of the Company at C$1.00 per preferred share. During fiscal 2005, the
remaining 364,156 common shares issued to the convertible debenture holders (refer to Note
16) upon conversion were exchanged for 728,312 Series B preferred shares. |
|
|
|
The Series B Preferred Shares carry the same rights and privileges with respect to dividends
and votes as the Series A Preferred Shares, except that the Series B Preferred Shares rank
junior to the Series A Preferred Shares, but senior to the holders of common shares or any
other class of shares, in the event of payment of preferential amounts required upon a
liquidation or change of control. |
|
|
|
The Series B Preferred Shares carry the same conversion rights, and in the same conversion
amounts, as the Series A Preferred Shares. |
|
|
|
Pursuant to the shareholders agreement dated April 23, 2004, upon failure to complete an IPO
of its common shares by the put date, one of the Companys Series B Preferred Shareholders,
has a right to require the Company to redeem for cash all or part of its 16,000,000 Series B
Preferred Shares held in the Company at a price of C$1.00 per preferred share, plus interest
accrued at an annual rate of 7 percent commencing on August 31, 2001 and compounded
semi-annually. On June 26, 2006 the agreement was amended to extend the put date until May 1,
2007. No additional amendments have been made and so the put option on the preferred shares
can be exercised at any time after May 1, 2007. |
|
|
|
At any date after 5 years from the original issuance date, or at any date prior to a partial
sale event other than a public offering, the majority holders of the Series B Preferred
Shares have a right to require the Company to redeem the shares for cash. The redemption
amount is equal to the original issue price of C$1.00 per preferred share times the number of
Series B Preferred Shares outstanding, plus any declared but unpaid dividends, plus the then
current fair market value of the common shares into which the Series B Preferred Shares are
convertible (other than common shares issuable under additional conversion features). At
April 30, 2006 and April 30, 2007 management has estimated that the fair market value of the
preferred shares was C$1.00 and C$2.16 per share, respectively. |
|
|
|
As a portion of the redemption price of the preferred shares is indexed to the common share
price of the Company, an embedded derivative exists which has been bifurcated and accounted
for separately, under SFAS 133. The derivative component relating to the Series B Preferred
Shares was valued at $52.0 as of April 30, 2007 (April 30, 2006 $58.6) and is recorded as a
liability. The initial value of the Series B Preferred Shares of $27.7, after allocation of
proceeds to the derivative instrument, was classified in the mezzanine section of the
Consolidated Balance Sheet. The difference between the initial carrying amount and the
redemption amount is being accreted over the five-year period to redemption. For fiscal 2006
and fiscal 2007 the amount of accreted interest was $4.8 and 4.9 respectively. Similar to the
Series A Preferred Shares, the derivative component relating to the Series B Preferred Shares
is recorded as a liability with the change in the value of the derivative being recorded as a
non-cash expense in the Consolidated Statements of Operations. |
25
The following table summarizes the allocation of the convertible, redeemable preferred shares, net of share issue costs, among its different elements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A |
|
|
Series B |
|
|
Total |
|
|
|
|
Carrying value as of April 30, 2005 |
|
$ |
7.0 |
|
|
$ |
32.1 |
|
|
$ |
39.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Accreted interest |
|
|
1.6 |
|
|
|
4.8 |
|
|
|
6.4 |
|
|
|
|
Carrying value as of April 30, 2006 |
|
$ |
8.6 |
|
|
$ |
36.9 |
|
|
$ |
45.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Accreted interest |
|
|
2.1 |
|
|
|
4.9 |
|
|
|
7.0 |
|
|
|
|
Carrying value as of April 30, 2007 |
|
$ |
10.7 |
|
|
$ |
41.8 |
|
|
$ |
52.5 |
|
|
|
|
21. WARRANTS
The following table outlines the carrying value of warrants outstanding as of April 30, 2006
and April 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
|
April 30, |
|
|
|
2006 |
|
|
2007 |
|
|
|
|
i) Warrants issued/issuable in connection with government funding |
|
$ |
39.1 |
|
|
$ |
39.1 |
|
ii) Warrants issued in connection with Series A Preferred Shares |
|
|
1.0 |
|
|
|
1.0 |
|
iii) Warrants issued to financing agent |
|
|
0.1 |
|
|
|
0.1 |
|
iv) Warrants issued in connection with Senior Secured Convertible Notes |
|
|
7.7 |
|
|
|
7.7 |
|
v) Warrants issued to Wesley Clover Corporation |
|
|
|
|
|
|
15.0 |
|
|
|
|
Total warrants outstanding |
|
$ |
47.9 |
|
|
$ |
62.9 |
|
|
|
|
i) During fiscal 2003, the Company, in conjunction with the Partner Company and the Funding
Company, signed an agreement for funding from the Canadian Government for up to C$60.0 of the
Funding Companys, the Partner Companys and the Companys research and development
activities over a three-year period. Pursuant to the terms of the agreement, in exchange for
funding received from the Government of Canada, the Company committed to issue warrants to
Her Majesty the Queen in Right of Canada exercisable into common shares for no additional
consideration. The number of warrants to be issued on September 30 in each fiscal year was
determined based on the funding received and the fair market value of the common shares at
the date of issuance. The warrants have no expiry date.
As at April 25, 2004 the Company had issued warrants to acquire 12,986,968 common shares
pursuant to the above agreement. During fiscal 2005, an additional 13,862,943 warrants were
issued at the then fair value of C$1.00 per share, of which 11,481,109 warrants related to
$8.7 of government funding that was receivable and received during fiscal 2004, and the
remaining 2,381,834 relate to funding received during fiscal 2005. As at April 24, 2005 a
total of 26,849,911 warrants had been issued pursuant to the above agreement. Warrants
relating to the $7.2 of government funding received in fiscal 2005 totaled 12,887,440 and
were issued in fiscal 2006 in accordance with the terms of the agreement. Since the Company
had reached its maximum funding limit in fiscal 2005, no additional funding was received and
no additional warrants were issued in fiscal 2006 or fiscal 2007. As of April 30, 2007 there
are 37,355,518 warrants outstanding and no remaining amounts receivable (April 30, 2006
$1.3).
ii) In connection with the issuance of Series A Preferred Shares in fiscal 2004, the Company
issued to the holders of the Series A Preferred Shares warrants to acquire 5,000,000 common shares
of the Company. The warrants are exercisable at C$1.25 per common share and have a
seven year life. The warrants were valued using the Black-Scholes option pricing model with
the following assumptions: seven year life, interest rate of 4.37 percent, volatility of
forty percent and no dividends. The warrants are automatically exercisable based on a formula
in connection with a Qualified IPO.
iii) In connection with the issuance of Series A Preferred Shares in fiscal 2004, the Company
issued warrants to the placement agent to acquire 1,000,000 common shares of the Company, as
consideration for services rendered in connection with the financing transaction and
accounted for them as an issue cost. The fair value of the warrants was estimated based on
the fair value of services
received. The warrants are exercisable at C$1.00 per share and have a five year life. The
warrants expire in connection with a Qualified IPO.
26
iv) As described in Note 16, in connection with the issuance of the Senior Secured
Convertible Notes on April 27, 2005, the Company issued to the holders warrants to acquire
16,500,000 common shares of the Company. The warrants are exercisable at any time on or after
the earliest of the date of effectiveness of a Qualified IPO, the date of effectiveness of
any other public offering of the common shares or upon and following a fundamental change.
The warrants are exercisable at a price per share equal to the lower of (i) USD $1.50 and
(ii) the arithmetic average of the closing sales prices of the Companys shares during the
first 10 trading days following the date of expiry of any lock-up restrictions entered into
by the Company in connection with a Qualified IPO. The warrants expire the later of (i) the
4th anniversary of the issuance date and (ii) if a Qualified IPO occurs prior to
the 4th anniversary, the 1st anniversary of the effective date of the
Qualified IPO. The Holder may elect, in lieu of making the cash payment upon exercise of the
warrants, to receive the net number of common shares which equates to the excess of the
fair value of the common shares over its exercise price. The relative fair value of the
warrants on the date of issuance of $7.7 was allocated from the proceeds on the issuance of
the convertible notes and has been recorded as a component of shareholders deficiency. The
warrants were valued using the Black-Scholes option pricing model with the following
assumptions: five year life, interest rate of 3.83 percent, volatility of one hundred percent
and no dividends.
v) On September 21, 2006, the Company issued 15,000 warrants to Wesley Clover for an
aggregate purchase price of $15.0. Each of the warrants entitles the holder to purchase the
Companys common shares. The warrants are automatically exercisable, without the payment of
any additional consideration, at the time that is either (i) immediately prior to the
completion of an initial public offering (ii) immediately prior to a sale of all or
substantially all of the Companys equity to a purchaser for cash or for a mix of cash and shares
or (iii) immediately prior to a Fundamental Change as defined in Note 16, but in no
event later than September 21, 2008.
The warrants are exercisable at a price per share equal to the lesser of $1,000 divided by
(i) 85% of the US dollar price per common share being offered in the initial public offering
or upon the change of control event if it occurs in the first 12 months and increasing by 1
1/4% per month thereafter subject to a maximum additional discount of 15%, and (ii) $1.50. In
the event of a Fundamental Change, the warrants are exercisable at a price per share equal to
$1,000 divided by $1.50. The terms of the warrant do not limit the number of shares that are
issuable on conversion. If the settlement were to occur on April 30, 2007, for an event that
is either an initial public offering or change of control, excluding the effect of the
additional warrants described below, 16,806,723 common shares would be issued based on a
share price of $1.05. For each $0.01 dollar decrease in this share price, the Company would
be required to issue an additional 161,603 shares. If the settlement were to occur on April
30, 2007 as a result of a Fundamental Change event or expiry, 10,000,000 shares would be
issued based on a fixed share price of $1.50.
If the warrants are exercised as result of an initial public offering, the holder will
receive additional warrants (IPO Warrants) to purchase a variable number of common shares
that is equal to the number of common shares issued upon exercise of the warrants, at an
exercise price equal to the US dollar price per common share offered in the initial public
offering. The IPO Warrants expire on the date that is eighteen months following the
completion of an initial public offering.
Additionally, in the event of a subsequent offering, the warrant holders are entitled to
exchange the warrants for an equivalent monetary investment in any form of security which is
issued by way of a private placement within 120 days of the closing date. There were no
additional private placements or subsequent offerings prior to the expiration of this 120-day
period.
22. SHARE CAPITAL
The Companys authorized capital stock consists of an unlimited number of common shares, and
an unlimited number of Series A Preferred Shares and Series B Preferred Shares. The holders
of common shares are entitled to one vote per share and are entitled to dividends when and if
declared by the Board of Directors. The terms of the preferred shares are described further
in Note 20 of these financial statements.
During fiscal 2007, the Company issued 10,000 shares (2005 153,616; 2006 132,261) for
an insignificant amount of consideration (2005 $0.1; 2006 $0.1) in the form of
professional services received. The carrying value of the shares represents the fair market
value of the services received.
Equity offerings
On June 8, 2001, February 15, 2002 and on February 28, 2002, the Company completed three
equity offerings to certain employees and eligible investors. The Company issued 5,606,180
common shares for total consideration of $14.6, of which $8.8 was received in cash and $5.9
was covered by employee interest-free loans repayable to the Company over a two-year period
from the date of each offering. The repayment of certain of the loans was suspended during
fiscal 2003 and reinstated during fiscal 2004, fiscal 2005 and fiscal 2006. At April 30,
2007, there was only $0.1 remaining of employee loans receivable.
During fiscal 2005 the Company completed an equity offering to certain employees and eligible
investors. The Company issued 5,601,870 common shares at C$1.00 per share, for total
consideration of $4.6, of which $3.0 was received in cash and $1.6 was covered by employee
interest-free loans repayable to the Company over a maximum two-year period from the date of
the offering.
27
Share Purchase Loans
As part of the fiscal 2005 equity offering described above, the Company implemented an
Employee Stock Purchase Plan allowing US employees to purchase up to 2,000,000 common shares
of the Company through a single lump sum payment and/or a Company loan. Shares purchased
using company loans are secured by the underlying share, repayable by means of payroll
deduction over a maximum two year period and non-interest bearing unless there is a default
in payment, in which case the loan bears simple interest calculated at 10% per annum. Non-US
employees were provided with the ability to acquire shares under similar terms and
conditions. In fiscal 2005, outstanding employee share purchase loans receivable, in the
amount of $1.2 was recorded against shareholders deficiency. Repayments against the loans
were made during fiscal 2006 and fiscal 2007, and the balance remaining at April 30, 2007 was
$0.1 (April 30, 2006 $0.3).
Stock Option Plan
In March 2001, the Companys shareholders approved the Mitel Networks Corporation Employee
Stock Option Plan (the 2001 Stock Option Plan) applicable to the Companys employees,
directors, consultants and suppliers and authorized 25,000,000 shares for issuance
thereunder. The options are granted at no less than the fair market value of the common shares
of the Company on the date of grant and may generally be exercised in equal portions
during the years following the first, second, third and fourth anniversaries of the date of
grant, and expire on the earlier of the fifth anniversary and termination of employment.
Effective September 7, 2006, shares subject to outstanding awards under the 2001 Stock Option
Plan which lapse, expire or are forfeited or terminated will no longer become available for
grants under this plan. Instead, new stock options and other equity grants will be made under
the 2006 Equity Incentive Plan which was approved by the shareholders of Mitel and became
effective on September 7, 2006. All existing options that have been previously granted under
the 2001 Stock Option Plan will continue to be governed under that plan until exercised,
termination or expiry.
The 2006 Equity Incentive Plan permits grants of stock options, deferred share units,
restricted stock units, performance share units and other share-based awards. Under the new
plan, options are generally granted for a fixed number of shares with an exercise price equal
to the fair market value of the shares at the date of grant, and vest 25% each year over a
four year period on the anniversary date of the grant. The Companys Board of Directors has
the discretion to amend general vesting provisions and the term of any option, subject to
limits contained in the plan. The aggregate number of common shares that may be issued under
the 2006 Equity Incentive Plan is 12% of the total number of common shares outstanding from
time to time (less the issued options outstanding under the 2001 Stock Option Plan). Common
shares subject to outstanding awards under this new plan which lapse, expire or are forfeited
or terminated will, subject to plan limitations, again become available for grants under this
plan.
The number of common shares available for grant under the 2006 Equity Incentive Plan at April
30, 2007 was 2,028,666 options (2006 4,234,331 under the 2001 Stock Option Plan).
28
Following is a summary of the Companys stock option activity under both stock option plans
and related information. The exercise price of stock options was based on prices in Canadian
dollars translated at the year-end exchange rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005 |
|
|
|
|
|
Transition Period |
|
|
|
|
|
|
Weighted |
|
Aggregate |
|
|
|
|
|
Weighted |
|
Aggregate |
|
|
Number of |
|
Average |
|
Intrinsic |
|
Number of |
|
Average |
|
Intrinsic |
|
|
Shares |
|
Exercise Price |
|
Value |
|
Shares |
|
Exercise Price |
|
Value |
|
Outstanding options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period: |
|
|
4,482,264 |
|
|
$ |
2.77 |
|
|
$ |
|
|
|
|
18,480,002 |
|
|
$ |
1.22 |
|
|
$ |
|
|
Granted |
|
|
15,220,873 |
|
|
|
0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(725,856 |
) |
|
|
1.54 |
|
|
|
|
|
|
|
(15,153 |
) |
|
|
1.69 |
|
|
|
|
|
Expired |
|
|
(497,279 |
) |
|
|
2.84 |
|
|
|
|
|
|
|
(8,600 |
) |
|
|
2.96 |
|
|
|
|
|
|
Balance, end of period: |
|
|
18,480,002 |
|
|
$ |
1.22 |
|
|
$ |
|
|
|
|
18,456,249 |
|
|
$ |
1.19 |
|
|
$ |
|
|
|
Number of options exercisable |
|
|
3,017,863 |
|
|
$ |
2.82 |
|
|
$ |
|
|
|
|
3,102,973 |
|
|
$ |
2.78 |
|
|
$ |
|
|
|
Weighted average fair value
of options granted during
the period using the
Black-Scholes option pricing
model |
|
|
|
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2006 |
|
|
|
|
|
Fiscal 2007 |
|
|
|
|
|
|
Weighted |
|
Aggregate |
|
|
|
|
|
Weighted |
|
Aggregate |
|
|
Number of |
|
Average |
|
Intrinsic |
|
Number of |
|
Average |
|
Intrinsic |
|
|
Shares |
|
Exercise Price |
|
Value |
|
Shares |
|
Exercise Price |
|
Value |
|
Outstanding options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period: |
|
|
18,456,249 |
|
|
$ |
1.34 |
|
|
$ |
|
|
|
|
20,668,538 |
|
|
$ |
1.06 |
|
|
$ |
|
|
Granted |
|
|
5,227,233 |
|
|
|
0.90 |
|
|
|
|
|
|
|
6,123,177 |
|
|
|
1.13 |
|
|
|
|
|
Exercised |
|
|
(58,174 |
) |
|
|
2.81 |
|
|
|
|
|
|
|
(45,624 |
) |
|
|
1.18 |
|
|
|
|
|
Forfeited |
|
|
(879,766 |
) |
|
|
1.27 |
|
|
|
|
|
|
|
(1,356,657 |
) |
|
|
2.51 |
|
|
|
|
|
Expired |
|
|
(2,077,004 |
) |
|
|
3.07 |
|
|
|
|
|
|
|
(2,944,849 |
) |
|
|
0.94 |
|
|
|
|
|
|
Balance, end of period: |
|
|
20,668,538 |
|
|
$ |
1.06 |
|
|
$ |
|
|
|
|
22,444,585 |
|
|
$ |
1.02 |
|
|
$ |
|
|
|
Number of options exercisable |
|
|
4,947,519 |
|
|
$ |
1.48 |
|
|
$ |
|
|
|
|
8,115,722 |
|
|
$ |
1.04 |
|
|
$ |
|
|
|
Weighted average fair value
of options granted during
the period using the
Black-Scholes option pricing
model |
|
|
|
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
$ |
0.77 |
|
|
|
|
|
|
The aggregate intrinsic value of options exercised for fiscal 2005, Transition Period, fiscal
2006 and fiscal 2007 is $nil since the fair value of the options at the time of exercise was
equivalent to the exercise price.
29
A summary of options outstanding as at April 30, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding |
|
|
|
|
|
|
|
|
|
|
Total exercisable |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
|
|
|
|
|
Remaining |
|
|
Aggregate |
|
Exercise Price |
|
Number of Shares |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
|
Number of Shares |
|
|
Contractual Life |
|
|
Intrinsic Value |
|
|
$0.90 |
|
|
15,699,201 |
|
|
2.6 years |
|
|
2,298,520 |
|
|
|
7,320,196 |
|
|
2.5 years |
|
|
|
1,071,750 |
|
$1.02 |
|
|
62,987 |
|
|
4.4 years |
|
|
1,823 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.05 |
|
|
227,633 |
|
|
3.9 years |
|
|
418 |
|
|
|
58,532 |
|
|
3.9 years |
|
|
|
4,205 |
|
$1.07 |
|
|
4,047,900 |
|
|
4.8 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.12 |
|
|
546,305 |
|
|
4.9 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.40 |
|
|
1,042,247 |
|
|
4.1 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.81 |
|
|
141,562 |
|
|
1.6 years |
|
|
|
|
|
|
108,494 |
|
|
1.6 years |
|
|
|
|
|
$2.48 |
|
|
676,750 |
|
|
0.6 years |
|
|
|
|
|
|
628,500 |
|
|
0.6 years |
|
|
|
|
|
|
|
|
|
|
|
22,444,585 |
|
|
|
|
|
|
|
2,300,761 |
|
|
|
8,115,722 |
|
|
|
|
|
|
|
1,075,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options expected to vest as of April 30, 2007
|
|
|
|
|
|
|
19,077,897 |
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of outstanding and exercisable stock options represents the
amount by which the fair value of the common shares exceeds the exercise price of
in-the-money options. The amount is based on a fair value of $1.05, which is assumed to be
the price that would have been received by the option holders had all stock option holders
exercised and sold their options on April 30, 2007.
Earnings (loss) per share
The following table sets forth the computation of basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
Transition
Period |
|
2006 |
|
2007 |
|
Net loss, as reported |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
|
$ |
(35.0 |
) |
Accreted interest on redeemable shares |
|
|
(5.6 |
) |
|
|
(0.1 |
) |
|
|
(6.9 |
) |
|
|
(7.3 |
) |
|
Net loss available to common shareholders |
|
$ |
(55.2 |
) |
|
$ |
(1.7 |
) |
|
$ |
(51.5 |
) |
|
$ |
(42.3 |
) |
|
Weighted average number of common shares
outstanding during the period |
|
|
113,792,829 |
|
|
|
117,149,933 |
|
|
|
117,230,198 |
|
|
|
117,336,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic and diluted |
|
$ |
(0.49 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.44 |
) |
|
$ |
(0.36 |
) |
|
As a result of the net losses for each of the following periods, the following potentially
dilutive securities have not been included in the calculation of diluted loss per common
share, because to do so would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
|
(number of shares) |
|
2005 |
|
|
Period |
|
|
2006 |
|
|
2007 |
|
|
Stock options |
|
|
|
|
|
|
|
|
|
|
1,624,155 |
|
|
|
3,588,891 |
|
Warrants |
|
|
28,475,127 |
|
|
|
28,686,974 |
|
|
|
37,695,141 |
|
|
|
43,527,960 |
|
Convertible, redeemable preferred shares |
|
|
87,789,300 |
|
|
|
87,789,300 |
|
|
|
87,789,300 |
|
|
|
87,789,300 |
|
|
|
|
|
116,264,427 |
|
|
|
116,476,274 |
|
|
|
127,108,596 |
|
|
|
134,906,151 |
|
|
Options that are anti-dilutive because the exercise price is greater than the average market
price of the common shares, are not included in the computation of diluted earnings per
share. For fiscal 2007, 18,855,694 stock options were excluded from the above table because
they were anti-dilutive (2005 18,480,002; Transition Period 18,456,249; 2006
19,044,383). Additionally, warrants to acquire 16,500,000 common shares (2005 16,500,000;
Transition Period 16,500,000; 2006 16,500,000), which could potentially dilute basic
earnings per share in the future, were also excluded from the above table since they are
contingently issuable and since the conditions for issuance had not been met by the end of
the period.
30
Stock-based Compensation
During fiscal 2007, the Company granted stock options to acquire 300,000 common shares (2005
145,604; Transition Period nil; 2006 132,000) at an exercise price equal to the
market price of the common shares on the date of grant to consultants and advisory directors,
as well as employees who, subsequent to the options grants, became former employees of the
Company as a result of restructuring activities. The fair market value of these stock
options was determined using a Black-Scholes model based on the fair value of the common shares
at the vesting date and, for the unvested shares, as of April 30, 2006 and April 30,
2007. The following assumptions were used: five-year life, interest rate of 4.10 percent,
volatility of 86 percent and no dividends.
Performance-Based Stock Options
On July 27, 2005, the shareholders of Mitel approved 2,810,000 performance-based stock option
awards to selected key employees to acquire 2,810,000 common shares. The options were to vest
contingent upon the achievement of certain targets, as measured on April 30, 2006, in
accordance with the normal four-year vesting term. At the time of the grant, the options were
considered variable plan awards as defined by APB 25 and so were subject to remeasurement for
changes in the market price of the underlying stock at the end of each reporting period until
the measurement date. The measurement date was defined to be April 30, 2006, since it was
determined that the objectives had not been met as of that date. The options were formally
cancelled in fiscal 2007 and the expense amount recorded for the year ended April 30, 2007
was $nil (2006 0.1).
Deferred Share Unit Plans
In December 2004, Mitel granted deferred share units (DSUs) to certain executive members of
the Company. The number of DSUs that may be awarded to each participant is equal to 15% of
the participants annual salary less the maximum amount of the participants eligible
retirement savings plans contributions in that particular taxable year. Since the participant
will receive a lump sum payment in cash upon termination of employment, the award must be
classified as a liability and remeasured to reflect changes in the market price of the common shares
until settlement. For the year ended April 30, 2007 there were 390,358 DSUs awarded to
executives with a fair value of $0.5 recorded as a liability (2006 601,547 DSUs and $0.9
recorded as a liability). The compensation expense recorded in fiscal 2007 to reflect a
change in common share fair value was $0.2 (2005 $nil; Transition Period $nil; 2006 -
$0.3).
23. OTHER INCOME (EXPENSE), NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
2005 |
|
Period |
|
2006 |
|
2007 |
|
Foreign exchange gains (losses), net |
|
$ |
(0.1 |
) |
|
$ |
0.2 |
|
|
$ |
(0.6 |
) |
|
$ |
(0.3 |
) |
Interest income |
|
|
0.5 |
|
|
|
|
|
|
|
0.7 |
|
|
|
0.3 |
|
Amortization of gain on sale of assets |
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
0.6 |
|
|
|
|
$ |
0.4 |
|
|
$ |
0.2 |
|
|
$ |
0.4 |
|
|
$ |
0.6 |
|
|
24. INCOME TAXES
Details of income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
2005 |
|
Period |
|
2006 |
|
2007 |
|
Loss before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
$ |
(24.8 |
) |
|
$ |
(0.2 |
) |
|
$ |
(35.0 |
) |
|
$ |
(24.1 |
) |
Foreign |
|
|
(24.0 |
) |
|
|
(1.4 |
) |
|
|
(11.5 |
) |
|
|
(10.9 |
) |
|
|
|
$ |
(48.8 |
) |
|
$ |
(1.6 |
) |
|
$ |
(46.5 |
) |
|
$ |
(35.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) recovery: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
$ |
0.8 |
|
|
$ |
|
|
|
$ |
1.2 |
|
|
$ |
|
|
Foreign |
|
|
(1.6 |
) |
|
|
|
|
|
|
(2.1 |
) |
|
|
0.2 |
|
|
|
|
|
(0.8 |
) |
|
|
|
|
|
|
(0.9 |
) |
|
|
0.2 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Foreign |
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
(2.0 |
) |
|
|
|
$ |
(0.8 |
) |
|
$ |
|
|
|
$ |
1.9 |
|
|
$ |
(1.8 |
) |
|
31
The income tax (expense) recovery reported differs from the amount computed by applying the
Canadian rates to the loss before income taxes. The reasons for these differences and their
tax effects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
2005 |
|
Period |
|
2006 |
|
2007 |
|
Expected tax rate |
|
|
36.0 |
% |
|
|
36.0 |
% |
|
|
36.0 |
% |
|
|
36.0 |
% |
|
Expected tax benefit |
|
$ |
17.5 |
|
|
$ |
0.6 |
|
|
$ |
16.7 |
|
|
$ |
12.0 |
|
Foreign tax rate differences |
|
|
(7.9 |
) |
|
|
(0.5 |
) |
|
|
(7.4 |
) |
|
|
(5.2 |
) |
Tax effect of temporary differences and losses not
recognized |
|
|
(12.2 |
) |
|
|
(0.1 |
) |
|
|
(1.6 |
) |
|
|
(6.4 |
) |
Use of losses not previously recognized |
|
|
9.3 |
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
Recognize (write-off) deferred tax asset |
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
(2.0 |
) |
Permanent differences |
|
|
(7.0 |
) |
|
|
|
|
|
|
(12.4 |
) |
|
|
(2.4 |
) |
Tax refunds and other adjustments related to prior years |
|
|
(0.5 |
) |
|
|
|
|
|
|
1.4 |
|
|
|
2.2 |
|
|
Income tax (expense) recovery |
|
$ |
(0.8 |
) |
|
$ |
|
|
|
$ |
1.9 |
|
|
$ |
(1.8 |
) |
|
The tax effect of components of the deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30,
2006 |
|
April 30,
2007 |
|
Assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforwards |
|
$ |
55.5 |
|
|
$ |
67.7 |
|
Allowance for doubtful accounts |
|
|
3.0 |
|
|
|
0.6 |
|
Inventory |
|
|
(0.5 |
) |
|
|
0.6 |
|
Restructuring and other accrued liabilities |
|
|
5.1 |
|
|
|
11.0 |
|
Pension |
|
|
2.7 |
|
|
|
3.2 |
|
Lease obligations and long-term debt |
|
|
1.3 |
|
|
|
1.0 |
|
Property and equipment |
|
|
6.8 |
|
|
|
6.7 |
|
Intangible and other assets |
|
|
10.4 |
|
|
|
6.8 |
|
|
Total deferred tax assets |
|
|
84.3 |
|
|
|
97.6 |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets net of total deferred tax liabilities |
|
|
84.3 |
|
|
|
97.6 |
|
Valuation allowance |
|
|
(81.5 |
) |
|
|
(97.6 |
) |
|
Total deferred tax assets |
|
$ |
2.8 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets, the Company considers whether it is
more likely than not that some portion or all of the deferred tax assets will not be
realized. During fiscal 2006, the Company recorded a deferred tax asset relating to its U.S.
operations since these assets were considered more likely than not to be realized. In fiscal
2007, the deferred tax assets were no longer considered more likely than not to be realized
and so the Company increased its valuation allowance.
The Company and its subsidiaries had the following tax loss carry forwards and tax credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30,
2006 |
|
|
April 30,
2007 |
|
|
|
Tax |
|
|
Tax |
|
|
Tax |
|
|
Tax |
|
Year of Expiry |
|
Losses |
|
|
Credits |
|
|
Losses |
|
|
Credits |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
0.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
|
|
|
|
|
|
|
|
31.9 |
|
|
|
|
|
2011 |
|
|
32.6 |
|
|
|
|
|
|
|
55.6 |
|
|
|
|
|
2012 |
|
|
58.3 |
|
|
|
|
|
|
|
43.9 |
|
|
|
|
|
2013-2023 |
|
|
136.3 |
|
|
|
24.6 |
|
|
|
107.1 |
|
|
|
33.1 |
|
Indefinite |
|
|
44.7 |
|
|
|
|
|
|
|
54.5 |
|
|
|
|
|
|
Total |
|
|
272.5 |
|
|
|
24.6 |
|
|
|
293.0 |
|
|
|
33.1 |
|
|
These tax loss carry forwards relate to operations in Canada, the US, the U.K., Italy, Hong
Kong and Barbados. As a result of the acquisition of the Company on February 16, 2001, there
are restrictions on the use of certain of these losses to offset taxable income in future
periods.
The tax credits relate to the Canadian operations and may be used to offset future Canadian
federal income taxes payable.
32
The Company does not expect the unremitted earnings of its subsidiaries will be subject to
income tax or withholding taxes as it plans to reinvest the earnings of its subsidiaries
indefinitely. Accordingly, no provision has been made for potential income tax or
withholding taxes on repatriation of subsidiary earnings.
The Company is subject to ongoing examinations by certain taxation authorities of the
jurisdictions in which it operates. The Company regularly assesses the status of these
examinations and the potential for adverse outcomes to determine the adequacy of the
provisions for income taxes. The Company believes that it has adequately provided for tax
adjustments that are probable as a result of any ongoing or future examination.
25. PENSION PLANS
The Company and its subsidiaries maintain defined contribution pension plans that cover
substantially all employees. In addition, the Companys U.K. subsidiary maintains a defined
benefit pension plan. The Company matches the contributions of participating employees to the
defined contribution pension plans on the basis of the percentages specified in each plan.
The costs of the defined contribution pension plans are expensed as incurred. The defined
benefit plan provides pension benefits based on length of service and final average earnings.
The pension costs of the defined benefit pension plan are actuarially determined using the
projected benefits method pro-rated on services and managements best estimate of the effect
of future events. Pension plan assets are valued at fair value.
In June 2001, the defined benefit pension plan was closed to new employees and a defined
contribution option was introduced to members of the defined benefit pension plan. Members
were given the choice to continue in the defined benefit plan or transfer their assets to the
defined contribution plan.
In fiscal 2006, a change in valuation assumptions, in particular changes in discount rates
and increases in expected mortality rates, produced an unfavorable impact on the Companys
defined benefit pension plan assets and obligations for the year ended April 30, 2006. There
were no significant changes in assumptions in fiscal 2007 and the pension liability decreased
from £90.1 to £87.0 as a result of actuarial gains recognized in the year. Despite the
decrease, after the effects of foreign currency translation of British Pounds to US dollars,
the overall pension liability increased by $9.7 to $173.9.
United Kingdom Defined Benefit Pension Plan
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an
amendment of FASB Statement No. 87, 88, 106 and 132(R), (SFAS 158). SFAS 158 requires
companies to recognize a net liability or asset and an offsetting adjustment to accumulated
other comprehensive income to report the funded status of defined benefit pension and other
postretirement benefit plans. The standard also requires companies to measure plan assets and
obligations at their year-end balance sheet date. The Company is required to initially
recognize the funded status of its defined benefit pension plans and to provide the required
disclosures as of April 30, 2007. The requirement to measure plan assets and benefit
obligations as of the year-end date is not required until April 30, 2009, the Company has
however chosen to early adopt in fiscal 2007 and has measured its assets and liabilities at
April 30 rather than March 31.
The effect of the initial adoption of SFAS 158 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2007 |
|
SFAS 158 |
|
April 30, 2007 |
|
|
Pre-SFAS 158 |
|
Adjustments |
|
Post-SFAS 158 |
|
Pension liability |
|
$ |
25.4 |
|
|
$ |
25.1 |
|
|
$ |
50.5 |
|
Accumulated deficit |
|
$ |
(397.8 |
) |
|
$ |
(0.4 |
) |
|
$ |
(398.2 |
) |
Accumulated other comprehensive loss |
|
$ |
(31.9 |
) |
|
$ |
(24.7 |
) |
|
$ |
(56.6 |
) |
The decrease in minimum pension liability adjustment included in other comprehensive loss for
the year ended April 30, 2007 is $16.6 (2006 increase of $14.6).
The estimated portion of net gain or loss, net prior service cost, and transition obligation
remaining in other comprehensive loss that is expected to be recognized as a component of net
periodic benefit cost over the next fiscal year is £0.7 or $1.4. The net gain recognized in
other comprehensive loss is £9.8 or $18.6.
33
The actuarial present value of the accrued pension benefits and the net assets available to
provide for these benefits, at market value, were as follows:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Change in accrued pension benefits: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period |
|
$ |
121.8 |
|
|
$ |
164.1 |
|
Service cost |
|
|
1.1 |
|
|
|
1.5 |
|
Interest cost |
|
|
6.2 |
|
|
|
8.6 |
|
Plan participants contributions |
|
|
1.2 |
|
|
|
1.0 |
|
Actuarial (gain) loss |
|
|
41.0 |
|
|
|
(15.5 |
) |
Benefits paid |
|
|
(2.3 |
) |
|
|
(1.9 |
) |
Adjustment for change in measurement date |
|
|
|
|
|
|
0.4 |
|
Foreign exchange |
|
|
(4.9 |
) |
|
|
15.7 |
|
|
Benefit obligation at end of period |
|
|
164.1 |
|
|
|
173.9 |
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period |
|
|
82.8 |
|
|
|
104.2 |
|
Actual return on plan assets |
|
|
22.3 |
|
|
|
6.2 |
|
Employer contributions |
|
|
3.6 |
|
|
|
3.2 |
|
Employee contributions |
|
|
1.2 |
|
|
|
1.0 |
|
Benefits paid |
|
|
(2.3 |
) |
|
|
(1.9 |
) |
Foreign exchange |
|
|
(3.4 |
) |
|
|
10.7 |
|
|
Fair value of plan assets at end of period |
|
|
104.2 |
|
|
|
123.4 |
|
|
|
|
|
|
|
|
|
|
|
Funded status |
|
|
(59.9 |
) |
|
|
(50.5 |
) |
Unrecognized net actuarial loss |
|
|
19.8 |
|
|
|
|
|
|
Pension Liability |
|
|
(40.1 |
) |
|
|
(50.5 |
) |
|
The following table provides information with respect to the Companys Projected Benefit
Obligation and Accumulated Benefit Obligation, both of which are in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
April 30, |
|
April 30, |
|
|
2006 |
|
2007 |
|
Projected benefit obligation |
|
$ |
164.1 |
|
|
$ |
173.9 |
|
Accumulated benefit obligation |
|
|
144.3 |
|
|
|
148.8 |
|
Fair value of plan assets |
|
|
104.2 |
|
|
|
123.4 |
|
The Companys net periodic benefit cost was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
|
|
2005 |
|
Period |
|
2006 |
|
2007 |
|
Current service cost defined contribution |
|
$ |
1.7 |
|
|
$ |
|
|
|
$ |
1.5 |
|
|
$ |
1.5 |
|
Current service cost defined benefit |
|
|
1.8 |
|
|
|
|
|
|
|
1.1 |
|
|
|
1.5 |
|
Interest cost |
|
|
5.9 |
|
|
|
|
|
|
|
6.2 |
|
|
|
8.6 |
|
Expected return on plan assets |
|
|
(5.5 |
) |
|
|
|
|
|
|
(6.1 |
) |
|
|
(8.0 |
) |
Recognized actuarial loss |
|
|
1.3 |
|
|
|
|
|
|
|
1.1 |
|
|
|
2.1 |
|
|
Net periodic benefit cost |
|
$ |
5.2 |
|
|
$ |
|
|
|
$ |
3.8 |
|
|
$ |
5.7 |
|
|
The following assumptions were used to determine the periodic pension expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, |
|
April 30, |
|
April 30, |
|
|
2005 |
|
2006 |
|
2007 |
|
Discount rate |
|
|
5.5 |
% |
|
|
5.0 |
% |
|
|
5.0 |
% |
Compensation increase rate |
|
|
2.5 |
% |
|
|
2.75 |
% |
|
|
2.75 |
% |
Investment returns assumption |
|
|
7.75 |
% |
|
|
7.25 |
% |
|
|
7.25 |
% |
Inflation rate |
|
|
2.5 |
% |
|
|
2.75 |
% |
|
|
2.75 |
% |
Average remaining service life of employees |
|
20 years |
|
21 years |
|
20 years |
34
The following assumptions were used to determine the net present value of the accrued pension
benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, |
|
April 30, |
|
April 30, |
|
|
2005 |
|
2006 |
|
2007 |
|
Discount rate |
|
|
5.5 |
% |
|
|
5.0 |
% |
|
|
5.5 |
% |
Compensation increase rate |
|
|
2.5 |
% |
|
|
2.75 |
% |
|
|
3.00 |
% |
Inflation rate |
|
|
2.75 |
% |
|
|
2.75 |
% |
|
|
3.00 |
% |
Average remaining service life of employees |
|
20 years |
|
21 years |
|
20 years |
Estimated Future Benefit Payments
The table below reflects the total pension benefits expected to be paid in future years.
|
|
|
|
|
|
|
Benefit |
|
|
Payments |
|
2008 |
|
$ |
1.6 |
|
2009 |
|
|
1.7 |
|
2010 |
|
|
1.8 |
|
2011 |
|
|
2.0 |
|
2012 |
|
|
2.1 |
|
2013-2017 |
|
|
13.0 |
|
Contributions
The Company expects contributions of $3.0 to its pension plan in 2007.
Plan Assets
The Companys target allocation and actual pension plan asset allocation by asset category as
of April 30, 2006 and April 30, 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
2007 |
|
2007 |
|
|
Actual |
|
Actual |
|
Target |
|
Equities |
|
|
81 |
% |
|
|
81 |
% |
|
|
80 |
% |
Bonds |
|
|
18 |
% |
|
|
19 |
% |
|
|
20 |
% |
Cash |
|
|
1 |
% |
|
|
|
|
|
|
|
|
The investment objectives of the pension portfolio of assets (the Fund) are designed to
generate returns that will enable the Fund to meet its future obligations. The performance
benchmark for the investment managers is to earn in excess of the index return in those asset
categories, which are actively managed. In setting the overall expected rate of return, the
various percentages of assets held in each asset class together with the investment return
expected from that class are taken into account. For cash and bonds, the rate used is that
derived from an appropriate index at the valuation date. For equities, a model is used which
combines price inflation, dividend yield and an allowance for gross domestic product growth.
26. FINANCIAL INSTRUMENTS
Fair value
The Companys financial instruments include cash and cash equivalents, restricted cash, bank
indebtedness, accounts receivable, other receivables, long-term receivables, accounts
payable, amounts due to (from) related parties, long-term debt including convertible notes,
derivative instruments, foreign exchange forward contracts and foreign exchange swaps. Due
to the short-term maturity of cash and cash equivalents, restricted cash, accounts
receivable, bank indebtedness, amounts due to and due from related parties, and accounts
payable, the carrying value of these instruments is a reasonable estimate of their fair
value. Foreign exchange contracts are carried at fair value and amounted to $0.1 classified
as accounts payable and accrued liabilities and $0.2 classified as other current assets at
April 30, 2007 (April 30, 2006 $3.7 classified as accounts payable and accrued
liabilities). The fair value of the foreign exchange contracts reflects the estimated amount
that the Company would have been required to pay if forced to settle all outstanding
contracts at year-end. This fair value represents a point-in-time estimate that may not be
relevant in predicting the Companys future earnings or cash flows. The fair value of
long-term receivables and long-term debt was determined by discounting future cash receipts
and future payments of interest and principal, at estimated interest rates that would be
available to the Company at year-end. The fair value of financial instruments approximate
their carrying value, with the exception of convertible notes. The carrying value of the
convertible notes was determined based on the allocation of gross proceeds received between
the notes and the warrants based on their relative estimated fair values. The estimated
fair value of the convertible notes is
35
$55.2 (2006 $55.1). The fair value of derivative instruments is determined by management
and reflects the present value of the obligation and the likelihood of contingent events
occurring.
The following table summarizes the financial assets and liabilities for which fair values
differed from the carrying amount.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2006 |
|
April 30, 2007 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
|
Long-term receivables |
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
1.9 |
|
|
$ |
1.9 |
|
Long-term debt |
|
$ |
4.1 |
|
|
$ |
4.1 |
|
|
$ |
4.0 |
|
|
$ |
4.0 |
|
Convertible notes |
|
$ |
48.7 |
|
|
$ |
55.1 |
|
|
$ |
50.2 |
|
|
$ |
55.2 |
|
Credit risk
The Companys financial assets that are exposed to credit risk consist primarily of cash and
cash equivalents and accounts receivable and other receivables. Cash and cash equivalents
are invested in government and commercial paper with investment grade credit rating. The
Company is exposed to normal credit risk from customers. However, the Company has a large
number of diverse customers to minimize concentrations of credit risk.
Interest rate risk
The Company is exposed to interest rate risk on its credit facilities which bear interest
rates based on the prime rate, and is also exposed to risk on its convertible notes which
bear interest based on the London Inter-Bank Offer Rate or LIBOR. In September 2005, the
Company entered into a derivative contract to limit the impact of changes in LIBOR on
interest expense related to the convertible notes for the period commencing November 1, 2005
and ending November 1, 2007. This derivative contract effectively provides a cap on LIBOR of
5.27% and a floor on LIBOR of 4.00%. The Company is not exposed to other significant interest
rate risk due to the short-term maturity of its monetary assets and current liabilities.
Foreign currency risk
The Company is exposed to currency rate fluctuations related primarily to its future net cash
flows from operations in Canadian dollars, British pounds and Euros. The Company uses
foreign currency forward contracts and foreign currency swaps to minimize the short-term
impact of currency fluctuations on foreign currency receivables, payables and intercompany
balances. These contracts are not entered into for speculative purposes, and are not treated
as hedges for accounting purposes. Foreign currency contracts are recorded at fair market
value. Related foreign currency gains and losses are recorded in other expense, net, in the
consolidated statements of operations and offset foreign exchange gains or losses from the
revaluation of intercompany balances and other current assets and liabilities denominated in
currencies other than the functional currency of the reporting entity.
The foreign exchange contracts outstanding at April 30, 2007 are due to mature in June 2007.
As of April 30, 2007, other income (expense), net included a net unrealized gain of $3.8
(2005 insignificant gain; Transition Period $0.2; 2006 $3.7) for changes in the fair
value of foreign exchange contracts. As at April 30, 2007, the Company had outstanding
foreign exchange contracts requiring it (i) to exchange British Pounds for US dollars with
aggregate notional amounts of U$12.8 (2006 C$13.2), (ii) to exchange US dollars for
Canadian dollars with a notional amount of U$9.0 (2006 C$83.9), and (iii) to exchange Euro
dollars for US dollars with aggregate notional amounts of U$9.9 (2006 C$11.4).
Non-derivative and off-balance sheet instruments
Requests for providing commitments to extend credit and financial guarantees are reviewed and
approved by senior management. Management regularly reviews all outstanding commitments,
letters of credit and financial guarantees, and the results of these reviews are considered
in assessing the adequacy of the Companys reserve for possible credit and guarantee losses.
As of April 30, 2006 and April 30, 2007, there were no outstanding commitments to extend
credit to third parties or financial guarantees outstanding other than letters of credit.
Letters of credit amounted to $1.2 as of April 30, 2007 (April 30, 2006 $1.2). The
estimated fair value of letters of credit, which is equal to the fees paid to obtain the
obligations, was insignificant as of April 30, 2006 and April 30, 2007.
36
27. SUPPLEMENTARY CASH FLOW INFORMATION
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Transition |
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2005 |
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Period |
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2006 |
2007 |
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Change in non-cash operating assets and liabilities: |
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Accounts receivable |
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$ |
7.5 |
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$ |
4.0 |
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$ |
(12.4 |
) |
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$ |
1.6 |
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Other current assets |
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|
(7.3 |
) |
|
|
(0.9 |
) |
|
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5.2 |
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|
|
(3.9 |
) |
Inventories |
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|
(4.2 |
) |
|
|
(0.6 |
) |
|
|
(8.0 |
) |
|
|
1.0 |
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Income tax receivable |
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|
|
|
|
|
|
|
|
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1.2 |
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|
|
|
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Long-term receivables |
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|
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|
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(0.1 |
) |
|
|
(1.2 |
) |
Accounts payable and accrued liabilities |
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6.6 |
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|
|
(0.6 |
) |
|
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8.7 |
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|
|
12.9 |
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Long term portion of lease termination obligations |
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(1.2 |
) |
|
|
|
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|
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(2.3 |
) |
|
|
(0.9 |
) |
Deferred revenue |
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|
(2.8 |
) |
|
|
0.5 |
|
|
|
(2.5 |
) |
|
|
(4.6 |
) |
Change in pension liability |
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|
0.9 |
|
|
|
|
|
|
|
(1.7 |
) |
|
|
1.0 |
|
Due to related parties |
|
|
0.5 |
|
|
|
(1.5 |
) |
|
|
9.5 |
|
|
|
(1.8 |
) |
Income and other taxes payable |
|
|
(3.3 |
) |
|
|
0.1 |
|
|
|
(0.7 |
) |
|
|
(1.5 |
) |
|
|
|
$ |
(3.3 |
) |
|
$ |
1.0 |
|
|
$ |
(3.1 |
) |
|
$ |
2.6 |
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|
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|
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|
|
|
|
|
|
|
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Interest payments |
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$ |
1.8 |
|
|
$ |
|
|
|
$ |
2.6 |
|
|
$ |
5.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments |
|
$ |
3.5 |
|
|
$ |
|
|
|
$ |
1.4 |
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|
$ |
0.7 |
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|
Disclosure of non-cash activities during the period: |
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Credit note received in exchange for sale of Edict |
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$ |
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$ |
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$ |
0.3 |
|
|
$ |
|
|
Adjustment to minimum pension liability |
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$ |
2.4 |
|
|
$ |
|
|
|
$ |
(15.0 |
) |
|
$ |
16.6 |
|
Adoption of SFAS 158 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
25.1 |
|
Warrants issued in connection with financing |
|
$ |
|
|
|
$ |
7.7 |
|
|
$ |
|
|
|
$ |
|
|
Issuance of shares in exchange for services |
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
$ |
|
|
Accretion of interest on redeemable common and
preferred shares |
|
$ |
5.6 |
|
|
$ |
0.1 |
|
|
$ |
6.9 |
|
|
$ |
7.3 |
|
Common shares issued in exchange for employee loans |
|
$ |
1.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
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28. PROPOSED MERGER TRANSACTION
On April 26, 2007, the Company signed a definitive merger agreement whereby the Company will
acquire Inter-Tel (Delaware) Incorporated (Inter-Tel), a full-service provider of business
communications solutions, for US$25.60 per Inter-Tel share in cash representing a total
purchase price of approximately $729. The transaction closed on August 16, 2007 (see Note 29)
and was funded by a combination of equity and debt.
29. SUBSEQUENT EVENTS
On May 1, 2007, the Companys U.K. subsidiary served notice to its U.K. distributors of its
intention to terminate their distribution agreements in accordance with the terms of each
agreement. On June 11, 2007, the Company received a letter from two of the distributors
legal counsel alleging that the Company breached certain obligations under the agreement to
not solicit resellers, and interfered in the economic interests of the distributors. On July
12, 2007, a settlement agreement was reached with the U.K distributors without admission of
any liability by either party.
On May 30, 2007, the holders of the 10,000,000 redeemable common shares (see note 19) agreed
to conditionally extend the put option date from May 1, 2007 until the earlier of the
completion of the Inter-Tel acquisition described above, and November 2, 2007. The holders
also agreed to reduce the redemption price from C$2.85 per common share if the merger
transaction is completed. The put option extension and reduction in redemption price are
however conditional upon finalizing an amended shareholder agreement that would also extend
the put option date on the redeemable preferred shares (as described in Note 20) until the
earlier of the completion of the acquisition and November 2, 2007. These put option rights
were terminated upon completion of the merger transaction on August 16, 2007, as described
further below.
On June 27, 2007, the Company filed a suit against one of its competitors alleging that the
competitor infringed on a number of Mitels patents. The Company is seeking unspecified
monetary damages as well as a preliminary injunction. The competitor responded by filing a
counterclaim against the Company alleging that the Company infringed on one of its patents,
and also filed a related defamation suit in the Ontario Superior Court of Justice alleging
that Mitel committed trade libel by issuing a press release that announced the filing of the
infringement case in the Eastern District of Texas. Potential damages from the counterclaim
and defamation claim cannot be assessed at this time. The Company has analyzed the patent
asserted by the competitor and believes that both the counterclaim and defamation claims are
without merit and therefore intends to defend itself vigorously against both complaints.
37
On August 16, 2007, the Company completed its merger with Inter-Tel as described in note 28
and as a result, Inter-Tel is now a wholly-owned subsidiary of Mitel. In connection with the
merger, the Company issued $307.1 in new Series 1 preferred shares in exchange for cash
consideration, received gross cash proceeds of $300.0 from a seven year first lien credit
agreement and cash proceeds of $130.0 from an eight year second lien credit agreement. The
combined proceeds, along with $195.8 of Inter-Tels cash, was substantially used to
consummate the purchase of Inter-Tel, retire all existing convertible notes, fund secondary
selling by certain shareholders and terminate the put rights held by the holders of the
10,000,000 redeemable common shares and the redeemable preferred shares as described in Notes
19 and 20. Changes in the Companys capital structure are described in more detail as
follows:
|
i) |
|
each existing Series A Preferred Share (as described in Note 20) was amended and
converted into 0.000871 of a Class 1 Preferred Share and 0.2679946 of a Common Share,
the entire class of shares was subsequently deleted from the Companys articles of
incorporation; |
|
ii) |
|
each existing Series B Preferred Share (as described in Note 20) was converted
into 1.682 Common Shares and the entire class of shares was subsequently deleted from
the Companys articles of incorporation; |
|
iii) |
|
the $55.0 of convertible notes (as described in Note 16) were repaid with $66.0
of cash plus accrued interest |
|
iv) |
|
each existing redeemable common share (as described in Note 19) was purchased for
cancellation |
|
v) |
|
the warrants issued for $15.0 on September 21, 2006 (as described in Note 21 (v))
were repurchased for $20.0; |
The merger will be accounted for in the second quarter of fiscal 2008 in accordance with SFAS
141 Business Combinations, where the deemed purchase price will be allocated to the
underlying tangible and identifiable assets and liabilities acquired based on their
respective fair values and any excess purchase price allocated to goodwill.
In connection with the merger, in September 2007, the Company implemented restructuring
actions, which resulted in the termination of 221 employees of the combined Company around
the world. The restructuring actions will be accounted for in the second quarter of fiscal
2008.
38