fv1za
As filed with the U.S. Securities and Exchange Commission on
July 5, 2006
Registration
No. 333-133947
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
Form F-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
MITEL NETWORKS CORPORATION
(Exact name of Registrant as specified in its charter)
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Canada |
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3661 |
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Not applicable |
(State or other jurisdiction of
incorporation or organization) |
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(Primary Standard Industrial
Classification Code Number) |
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(I.R.S. Employer
Identification No.) |
350 Legget Drive
Ottawa, Ontario
Canada K2K 2W7
(613) 592-2122
(Address, including zip code, and telephone number, including
area code, of
Registrants principal executive offices)
CT Corporation System
111 Eighth Avenue, 13th Floor
New York, New York 10011
(212) 894-8940
(Name, address, including zip code, and telephone number,
including area code, of
agent for service in the United States)
With copies to:
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Riccardo A. Leofanti, Esq.
Skadden, Arps, Slate,
Meagher & Flom LLP
Suite 1750, 222 Bay Street
Toronto, Ontario
Canada M5K 1J5
(416) 777-4700 |
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Craig Wright, Esq.
Osler, Hoskin & Harcourt LLP
Suite 1500, 50 OConnor Street
Ottawa, Ontario
Canada K1P 6L2
(613) 235-7234 |
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Christopher J. Cummings, Esq.
Shearman & Sterling LLP
Suite 4405
Commerce Court West
Toronto, Ontario
Canada M5L 1E8
(416) 360-8484 |
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David A. Chaikof, Esq.
Torys LLP
Suite 3000
79 Wellington Street West
Toronto, Ontario
Canada M5K 1N2
(416) 865-0040 |
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this registration
statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earliest effective registration statement for the same
offering. o
CALCULATION OF REGISTRATION FEE
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Proposed Maximum |
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Amount of |
Title of Each Class of |
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Aggregate Offering |
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Registration |
Securities to be Registered |
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Price(1)(2) |
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Fee(3) |
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Common Shares
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$150,000,000 |
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$16,050 |
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(1) |
Estimated solely for the purpose of computing the registration
fee pursuant to Rule 457(o) under the Securities Act of
1933 and based on a bona fide estimate of the public
offering price. |
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(2) |
Includes shares the underwriters have the option to purchase to
cover over-allotments,
if any. |
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(3) |
Previously paid. |
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The information
in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed
with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and we are
not soliciting offers to buy these securities in any
jurisdiction where the offer or sale is not
permitted.
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PROSPECTUS (Subject to
Completion)
Issued July 5, 2006
Shares
Mitel Networks Corporation
Common Shares
This is an initial public offering of our common shares in the
United States and Canada. We are
offering common
shares and the selling shareholders named in this prospectus are
offering common
shares. We will not receive any of the proceeds from the sale of
the common shares by the selling shareholders. No public market
currently exists for our shares. We anticipate that the initial
public offering price will be between
$ and
$ per
share.
We have applied for quotation of our common shares on the Nasdaq
Global Market and to list our common shares on the Toronto Stock
Exchange.
Investing in our common shares involves risks. See Risk
Factors beginning on page 8.
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Proceeds to | |
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Price to | |
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Underwriting | |
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Selling | |
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Public | |
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Commissions | |
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Proceeds to Us | |
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Shareholders | |
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Per Share
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$ |
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$ |
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$ |
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$ |
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Total
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$ |
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$ |
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$ |
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$ |
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We and the selling shareholders have granted the underwriters
the right to purchase up to an
additional common
shares to cover over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved these securities, or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated and RBC Capital Markets
Corporation expect to deliver the shares to purchasers
on ,
2006.
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Morgan Stanley
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RBC Capital Markets |
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Merrill Lynch & Co. |
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Joint Bookrunner
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Joint Bookrunner |
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Lead Manager |
Genuity Capital Markets
Thomas Weisel Partners LLC
National Bank Financial Inc.
The date of this prospectus
is ,
2006.
TABLE OF CONTENTS
You should rely only on the information contained in this
prospectus. We have not authorized anyone to provide you with
information different from that contained in this prospectus. We
and the selling shareholders are offering to sell, and seeking
offers to buy, common shares only in jurisdictions where offers
and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or any
sale of our common shares.
Until ,
2006, 25 days after the date of this prospectus, all
dealers that buy, sell or trade our common shares, whether or
not participating in this offering, may be required to deliver a
prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or
subscriptions.
For investors outside the United States and Canada.
Neither we nor any of the underwriters have done anything that
would permit this offering or possession or distribution of this
prospectus in any jurisdiction where action for that purpose is
required, other than in the United States and Canada. You are
required to inform yourselves about and to observe any
restrictions relating to this offering and the distribution of
this prospectus.
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PROSPECTUS SUMMARY
You should read the following summary together with the
entire prospectus, including the more detailed information in
our consolidated financial statements and related notes
appearing elsewhere in this prospectus. You should carefully
consider, among other things, the matters discussed in
Risk Factors. In this prospectus,
Mitel, we, us and
our refer to Mitel Networks Corporation, a Canadian
corporation, and its subsidiaries, unless the context requires
otherwise, and these terms do not include or refer to the
selling shareholders. We express all dollar amounts in this
prospectus in U.S. dollars, except where otherwise indicated.
References to $ are to U.S. dollars and references
to C$ are to Canadian dollars. See Exchange
Rate Information.
MITEL NETWORKS CORPORATION
Overview
We are a leading provider of integrated 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 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.
Historically, businesses have used a data network for their data
communications and a separate conventional telephony network for
their voice communications. Today, IP-based communications
systems enable businesses to address their voice, video and data
requirements using a single converged network.
Because converged networks have significant advantages over
maintaining separate voice and data networks, the global market
for business IP-based telephony products and services has grown
rapidly since 2002. Synergy Research Group, a technology market
research firm, estimates that IP-based telephony line shipments
grew by a compound annual growth rate of 68.7% from 2002 to
2005. Synergy estimates that IP-based telephony market revenues
will grow from approximately $3.8 billion worldwide in 2005
to over $10.6 billion by 2009, representing a compound
annual growth rate of 29.2%. In contrast, Synergy expects that
revenue from conventional telephony systems, often referred to
within our industry as legacy systems, will decline
at a compound annual rate of 40.9% from 2005 until 2009.
We have been a leading vendor of business communications systems
for over 25 years. Over the past five 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 systems to IP-based
systems. As a result of our efforts to realign our business to
discontinue certain activities relating to our legacy systems
and to focus our efforts on our IP-based communications
solutions we have incurred losses in each of the past five
fiscal years, including net losses of $44.6 million in
fiscal 2006 and $49.6 million in fiscal 2005. 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 48% in fiscal 2006 compared with
fiscal 2005 and 97% of our system shipments for the quarter
ended April 30, 2006 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 customers with
systems that support as many as 40,000 users in multiple
locations. 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. Our solutions can
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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 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
1,200 channel partners that includes wholesale distributors,
solutions providers, authorized resellers, communication
services providers, systems integrators, and other distribution
channels.
Our Competitive Strengths
Our key competitive strengths include the following:
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Focus on IP-based communications solutions. As a result
of our early and sustained investment in IP-based research and
development, we believe we have one of the broadest portfolios
of IP-based communications solutions in our industry and one of
the industrys highest ratios of IP-based product shipments
to that of legacy products. |
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Interoperable, scalable and flexible solutions that enable IP
adoption. Our IP-based communications solutions have been
designed to interoperate with most voice and data networks and
can be used by customers with as few as 10 users to as many as
65,000 users in a single network, which enables our customers to
migrate part or all of their voice communications towards a
converged IP-based solution at their own pace without worrying
that they will outgrow their communications system or lose their
investment in their existing legacy system. |
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Broad software capabilities that enable business process
improvements. Our solutions have significant embedded
software content, which increases the value of our hardware
offering to enable our customers to realize further business
process improvements. Our broad range of packaged software
offerings includes applications for contact centers, mobility,
teleworking, presence and collaboration, voice messaging,
unified communications, video conferencing and network
management. |
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Desktop portfolio focused on the user experience. We
provide advanced wired and wireless desktop devices to our
customers to address their specific needs regardless of whether
the user is in the office, at home or traveling. Our desktop
products have been recognized for their innovation, ease of use,
industrial design and functionality. |
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Communications solutions tailored to the needs of specific
industries. We have made significant investments to develop
an understanding of the particular business requirements of
specific industries and markets, including education,
government, healthcare, hospitality and retail, which have
enabled us to tailor specific communications solutions for those
industries. |
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Leadership in small and medium-sized business market. We
believe that our brand recognition and the flexibility of our
communications solutions have well positioned us to expand our
focus and addressable market from small and medium-sized
businesses to large enterprises. |
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Large, integrated distribution and strategic partner network.
We have developed a global sales and distribution network
with our channel partners that enables us to reach markets
around the world cost effectively, and have formed a network of
strategic partnerships and alliances that enables us to further
improve the functionality and features of our solutions through
joint research and development activities. |
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Our Strategy
Our strategy is to build from our leading position in the small
and medium-sized business market to also 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. We continue to increase our market share
in the large enterprise market, given the ability of our
solutions to accommodate up to 65,000 users in a single network
configuration. |
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Increase our focus on software applications. We expect to
continue to increase our research and development focus on
software applications, such as fixed-mobile convergence,
presence functionality and messaging, to enhance and
differentiate our solutions. |
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Provide a gradual migration path to IP for our customers and
those of our competitors. We continue to offer innovative,
interoperable, high quality products to help our customers, and
our competitors customers, transition from legacy systems
to a converged IP-based communications system at their own pace. |
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Expand our geographic presence and distribution capabilities.
We continue to strategically expand our geographic presence
to position ourselves for the growing global demand for IP-based
communications solutions. |
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Broaden and deepen our strategic partnerships and alliances.
We continue to attract new strategic partners and establish
new strategic alliances to provide us with access to customer
relationships, opportunities in new target markets, and
enhancement of our brand recognition. |
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Continue to leverage our operating model. We continue to
leverage our operating model by increasing our gross margins
through a continued focus on product cost reductions and growing
our revenues at a pace that exceeds the rate of growth of our
selling, general and administrative and research and development
expenses. |
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Risk Factors
We are subject to a number of risks and uncertainties that could
materially harm our business or inhibit our strategic plans.
Before investing in our common shares, you should carefully
consider the following:
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we have incurred net losses since our incorporation in 2001; |
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the development of the market opportunity for IP-based
communications solutions and related services may not develop as
we anticipate; |
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our solutions may fail to keep pace with technological
developments and evolving industry standards; |
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our dependence primarily upon one outside contract manufacturer
to manufacture our products; |
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our dependence on sole source and limited source suppliers for
key components; |
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the consequences of delays 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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we face intense competition from several competitors; |
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our reliance on strategic alliances; |
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uncertainties arising from our foreign operations; |
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the fluctuations in our quarterly and annual revenues and
operating results; and |
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the other factors described in the section entitled
Risk Factors starting on page 8, and other
information provided throughout this prospectus. |
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Our principal executive offices are located at 350 Legget
Drive, Ottawa, Ontario Canada K2K 2W7 and our telephone
number is
(613) 592-2122.
Throughout this prospectus,
IP-based
refers to our IP-based
solutions, which include pure IP communications solutions and
hybrid communications solutions in which our legacy products are
networked with our pure IP solutions, as part of our
customer migration strategy.
Throughout this prospectus we refer to packaged
software, which means software sold in a format that is
ready for use without customization, regardless of whether such
software is sold in a physical package, pre-installed or
downloaded electronically.
4
THE OFFERING
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Common shares offered by Mitel Networks Corporation |
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shares |
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Common shares offered by the selling shareholders |
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shares |
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Common shares to be outstanding following
the offering |
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shares |
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Use of Proceeds |
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We intend to use the net proceeds from this offering to fund
working capital; to expand our selling, marketing and global
support capabilities; to undertake research and development; and
for general corporate purposes, which may include acquisitions.
We will not receive any of the net proceeds from the sale of
common shares by the selling shareholders. See Use of
Proceeds. |
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Proposed Nasdaq Global Market Symbol |
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MITL |
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Proposed Toronto Stock Exchange Symbol |
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MIL |
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The number of common shares to be outstanding after this
offering is based
on shares
outstanding as of May 31, 2006 as adjusted by the
assumptions set out below but does not include:
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20,403,699 common shares issuable upon the exercise of
stock options outstanding under our stock option plan at a
weighted average exercise price of $1.08 per share, as of
May 31, 2006; |
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4,493,108 additional common shares reserved for issuance
under our stock option plan; |
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35,785,410 common shares issuable upon the exercise of
outstanding warrants held by Technology Partnerships Canada as
of May 31, 2006, which are exercisable for common shares
without the payment of any additional cash consideration; |
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16,500,000 common shares issuable upon the exercise of
outstanding warrants held by holders of our convertible notes at
an exercise price calculated in accordance with a formula based
on the market price of our common shares
(see Description of Convertible Notes
Noteholder Warrants); and |
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a number of common shares issuable upon the conversion of
outstanding convertible notes determined by dividing the
outstanding principal and accrued interest owing on each note by
a conversion price calculated in accordance with a formula based
on the market price of our common shares
(see Description of
Convertible Notes Convertible Notes). |
Unless we specifically state otherwise, all information in this
prospectus:
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assumes an initial public offering price of
$ per common share; |
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assumes conversion of all of our outstanding preferred shares
into an aggregate
of common shares,
which will occur in connection with the completion of this
offering; |
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assumes the exercise of the warrants held by a financing agent
and warrants issued in connection with our Class A
Series 1 Convertible and Redeemable Preferred Shares
(Series A Preferred Shares) into an aggregate
of 6,000,000 common shares, which will occur in connection with
the completion of this offering; |
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assumes no exercise by the underwriters of their
over-allotment option;
and |
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reflects, for all prior periods,
a for reverse
split of our common shares, which will occur prior to the
completion of this offering. |
See Description of Share Capital.
5
Summary Consolidated Financial Data
The following sets forth summary consolidated financial data
derived from (a) our audited consolidated financial
statements as of and for the fiscal years ended April 25,
2004, April 24, 2005 and April 30, 2006 which are
included elsewhere in this prospectus, (b) our audited
consolidated financial statements as of and for the fiscal years
ended April 28, 2002 and April 27, 2003 which are not
included in this prospectus, and (c) our audited
consolidated financial statements as of and for the
six-day transition
period ended April 30, 2005, which are included elsewhere
in this prospectus. The data set out below does not take into
account the conversion of our outstanding preferred shares into
common shares, the exercise of the warrants held by a financing
agent or the exercise of the warrants issued in connection with
our Series A Preferred Shares. On April 24, 2005, we
changed our fiscal year end from the last Sunday in April to
April 30. The change in our fiscal year end
(and resulting alignment of fiscal quarter ends)
permits us to better align our reporting results with industry
norms. Our consolidated financial statements are reported in
U.S. dollars and have been prepared in accordance with United
States generally accepted accounting principles, or U.S. GAAP.
Historical results do not necessarily indicate results expected
for any future period. You should read the following summary
consolidated financial data together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and related notes included elsewhere in
this prospectus. The pro forma balance sheet data below gives
effect to the conversion of all of our outstanding preferred
shares into common shares, and the exercise of the warrants held
by a financing agent and warrants issued in connection with our
Series A Preferred Shares, which will occur in connection
with the completion of this offering. The pro forma as adjusted
balance sheet data below also gives effect to our sale
of common
shares in this offering at an assumed initial public offering
price of
$ per
share, after deducting the underwriting commissions and
estimated offering expenses payable by us.
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Six Days | |
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Fiscal Year | |
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Fiscal Year Ended | |
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Ended | |
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Ended | |
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April 28, | |
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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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2002 | |
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2003 | |
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2004 | |
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2005 | |
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2006 | |
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Consolidated Statement of Operations Data
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Revenues
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$ |
358.0 |
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$ |
352.2 |
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$ |
340.7 |
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$ |
342.2 |
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$ |
3.2 |
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$ |
387.1 |
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Cost of revenues
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215.5 |
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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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Gross margin
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142.5 |
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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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Expenses
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Research and development
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59.1 |
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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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Selling, general and administrative
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141.9 |
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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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Special
charges(1)
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7.4 |
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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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Loss (gain) on disposal of assets
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1.5 |
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0.6 |
|
|
|
3.4 |
|
|
|
|
|
|
|
(2.4 |
) |
Amortization of acquired
intangibles(2)
|
|
|
43.8 |
|
|
|
29.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(111.2 |
) |
|
|
(72.1 |
) |
|
|
(22.3 |
) |
|
|
(41.3 |
) |
|
|
(1.7 |
) |
|
|
(6.7 |
) |
Other (income) expense, net
|
|
|
3.4 |
|
|
|
0.9 |
|
|
|
8.0 |
|
|
|
7.5 |
|
|
|
(0.1 |
) |
|
|
39.8 |
|
Income tax (recovery) expense
|
|
|
0.1 |
|
|
|
(2.9 |
) |
|
|
0.3 |
|
|
|
0.8 |
|
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(114.7 |
) |
|
$ |
(70.1 |
) |
|
$ |
(30.6 |
) |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(1.10 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
106,848,314 |
|
|
|
113,109,751 |
|
|
|
127,831,211 |
|
|
|
113,792,829 |
|
|
|
117,149,933 |
|
|
|
117,230,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(114.7 |
) |
|
$ |
(70.1 |
) |
|
$ |
(30.6 |
) |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
Add back: fair value adjustment on derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.3 |
|
|
|
0.1 |
|
|
|
32.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net
loss(3)
|
|
$ |
(114.7 |
) |
|
$ |
(70.1 |
) |
|
$ |
(30.6 |
) |
|
$ |
(44.3 |
) |
|
$ |
(1.5 |
) |
|
$ |
(12.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at April 30, 2006 |
|
|
|
|
|
|
|
Pro Forma |
|
|
Actual | |
|
Pro Forma | |
|
As Adjusted(4) |
|
|
| |
|
| |
|
|
|
|
(in millions) |
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
35.7 |
|
|
$ |
42.2 |
|
|
$ |
|
|
Working capital
|
|
|
40.5 |
|
|
|
47.0 |
|
|
|
|
|
Total assets
|
|
|
199.8 |
|
|
|
206.3 |
|
|
|
|
|
Total debt including capital leases
|
|
|
52.8 |
|
|
|
52.8 |
|
|
|
|
|
Derivative
instruments(5)
|
|
|
75.9 |
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
304.2 |
|
|
|
228.3 |
|
|
|
|
|
Redeemable
shares(6)
|
|
|
64.2 |
|
|
|
|
|
|
|
|
|
Total shareholders (deficit) equity
|
|
|
(168.6 |
) |
|
|
(22.0 |
) |
|
|
|
|
|
|
(1) |
Special charges relate to restructuring activities, product line
exit and other loss accruals undertaken to improve our
operational efficiency and to realign our business. |
|
(2) |
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. |
|
(3) |
We define adjusted net loss as net loss excluding the change in
the fair value of the derivative instruments. This definition
may not be comparable to similarly titled measures reported by
other companies. We are presenting adjusted net loss because we
believe it provides a more complete understanding of our
business than could be obtained without this disclosure, as it
eliminates a non-cash
charge that will be eliminated immediately following this
offering. The change in the fair value in derivative instruments
resulted from our issuance of convertible, redeemable preferred
shares that give holders the right, at any time after five
years, to require us to redeem these shares for cash. The
requirement to redeem these shares on an
as-if-converted-to-common share basis qualifies as an embedded
derivative. The embedded derivative is being marked to market
throughout the period to redemption with a non-cash charge being
reflected in our Consolidated Statement of Operations. Adjusted
net loss shows what our net income would have been without the
effect of this non-cash charge. We believe that this is a useful
measure to our investors as the convertible, redeemable
preferred shares will automatically convert into common shares
in connection with the closing of this offering with the result
being the elimination of this non-cash charge in the future. The
use of adjusted net loss has limitations and you should not
consider adjusted net loss in isolation from or as an
alternative to U.S. GAAP measures, such as net income or cash
flow statement data that are prepared in accordance with U.S.
GAAP, or as a measure of profitability or liquidity. |
|
(4) |
Assumes net proceeds to us from this offering of
$ million.
A $1.00 increase (decrease) in the assumed
initial public offering price of
$ per share
would increase (decrease) pro forma as adjusted cash and
cash equivalents, working capital, total assets and total
shareholders (deficit) equity by
$ million,
(i) assuming the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same and
(ii) after deducting estimated underwriting commissions and
estimated offering expenses payable by us. |
|
(5) |
The derivative instruments relate to the Series A Preferred
Shares and the Class B Series 1 Convertible and
Redeemable Preferred Shares (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. |
|
|
(6) |
Redeemable shares include 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. The right of the
holder to require us to redeem the 10,000,000 common shares
terminates upon the completion of this offering. The pro forma
columns reflect the termination of this right. |
|
7
RISK FACTORS
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 well as the other
information contained in this prospectus, 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 $44.6 million for the fiscal year
ended April 30, 2006, and net losses of $49.6 million,
$30.6 million, $70.1 million and $114.7 million
in fiscal 2005, 2004, 2003 and 2002, 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 five 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 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.
A key component of our strategy is our focus on the
development and marketing of
IP-based communications
solutions and related services, and this strategy may not be
successful or may adversely affect our business.
We are focused on the development and sales of
IP-based communications
solutions. Our operating results may be adversely affected if
the market opportunity for
IP-based communications
solutions and services does not develop in the way we
anticipate. IP-based
communications systems currently constitute a small percentage
of global installed large enterprise telephony systems. If
IP-based communications
does not gain widespread acceptance in the marketplace as an
alternative replacement option for traditional business
telephony systems, our overall revenues and operating results
will be adversely affected. Because this market opportunity is
in its early stages, we cannot predict whether:
|
|
|
|
|
the demand for IP-based
communications solutions and services will grow as fast as we
anticipate; |
|
|
|
continuing reductions in long-distance and local toll charges
may adversely affect sales of certain of our solutions to
customers focused on those cost savings; |
|
|
|
current or future competitors or new technologies will cause the
market to evolve in a manner different than we expect; |
|
|
|
other technologies will become more accepted or standard in our
industry; or |
|
|
|
we will be able to achieve a leadership or profitable position
as this opportunity develops. |
Our solutions may fail to keep pace with rapidly changing
technology and evolving industry standards.
The markets for our solutions are competitive and characterized
by rapidly changing technology, evolving industry standards,
frequent new product introductions, and short product life
cycles. Therefore, our operating results depend, among other
things, on existing and emerging markets, our ability to develop
and introduce new solutions and our ability to reduce the
production costs of existing solutions. The process of
developing new technology is complex and uncertain, and if we
fail to accurately predict and respond to our customers
changing needs and emerging technological trends, our business
could be harmed. We must commit significant resources to
developing new solutions before knowing whether our
8
investments will result in solutions the market will accept. The
success of new solutions depends on several factors, including
new application and product definition, component costs, timely
completion and introduction of these solutions, differentiation
of new solutions from those of our competitors, and market
acceptance of these solutions. We may not be able to
successfully identify new market opportunities for our
solutions, develop and bring new solutions to market in a timely
manner, or achieve market acceptance of our solutions.
Because we depend primarily upon one outside contract
manufacturer to manufacture our products, our operations could
be delayed or interrupted if we encounter problems with this
contractor.
We do not have any internal manufacturing capabilities, and we
rely upon a small number of contract manufacturers to
manufacture our products. Substantially all of our products are
currently manufactured by BreconRidge Manufacturing Solutions
Corporation (BreconRidge), a company of which Dr.
Terence H. Matthews, our principal shareholder and the Chairman
of our Board of Directors, owns an approximate 28.62% ownership
interest. Our manufacturing agreement with BreconRidge expires
on December 31, 2007, and may or may not be renewed. Our
ability to ship products to our customers could be delayed or
interrupted as a result of a variety of factors relating to our
contract manufacturers, in particular BreconRidge, including:
|
|
|
|
|
our contract manufacturers not being required to manufacture our
products on a long-term
basis in any specific quantity or at any specific price; |
|
|
|
our failure to effectively manage our contract manufacturer
relationships; |
|
|
|
our contract manufacturers experiencing delays, disruptions or
quality control problems in their manufacturing operations; |
|
|
|
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; |
|
|
|
overestimating our forecast requirements resulting in excess
inventory and related carrying charges; |
|
|
|
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 |
|
|
|
the possible absence of adequate capacity and reduced control
over component availability, quality assurances, delivery
schedules, manufacturing yields and costs. |
The addition of manufacturing locations or other contract
manufacturers would 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, an
alternate source 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
9
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 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
10
to discover unauthorized use by third parties. Litigation may be
necessary in the future 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 June 2006, one of our competitors filed a complaint
in the United States District Court for the Eastern District of
Virginia alleging that we are infringing on certain of its
patents and requesting damages (treble damages in respect of
alleged willful infringement of the patents), injunctive relief,
attorneys fees, costs and expenses, and such further
relief against us as the court deems just and proper. See
Business 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.
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 our competitors,
consortiums and holding companies, 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.
11
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 voice communications business or the data
communications business. 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 communications business 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. We have been using our
channel partners to sell our solutions to small and medium-sized
businesses. We cannot assure you that we will be able to develop
channel partners to sell to large enterprises or that our
existing channel partners will be effective in selling to large
enterprises.
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. Software can contain bugs that can
interfere with expected operations. Our preshipment testing
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 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 or product or market,
damage to our reputation, inventory costs, or application or
product reengineering 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 Cisco Systems, Inc., Nortel
Networks Corporation, Avaya Inc., 3Com Corp, Alcatel,
Inter-Tel, Incorporated
and Siemens AG. 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, and 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
12
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.
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. |
13
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.
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 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;
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general economic conditions. |
As a result of the above factors, a quarterly or yearly
comparison of our results of operations is not necessarily
meaningful.
We may require additional sources of funds if our sources of
liquidity are unavailable or insufficient to fund our
operations.
We may not be able to generate sufficient cash from our
operations to meet unanticipated working capital requirements,
support additional capital expenditures or take advantage of
acquisition opportunities. If we need to secure additional
sources of equity or debt financing, our ability to obtain
additional financing will be subject to a number of factors,
including market conditions and our operating performance.
Additional financing may not be available on terms satisfactory
to us, or at all. If we were to incur high 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 and capital expenditures. In addition,
debt instruments may contain covenants or other restrictions
that affect our business operations. If we 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 redemption rights by one or more of our
convertible noteholders would have a material adverse effect on
our cash flow and financial position.
Under the terms of our convertible notes, in the event of a
default, the holders of the convertible notes have the right to
require us to redeem all or a portion of the convertible notes
outstanding. The
14
maximum amount we would be required to pay the holders of the
convertible notes in the event of a default is $55 million
plus any accrued and unpaid interest. In addition, in the event
of a fundamental change that occurs prior to April 28,
2010, each convertible noteholder will have the option to either
convert all or a portion of the holders convertible notes
into common shares or obligate us to repurchase all or a portion
of the convertible notes and, in the former case, will also be
entitled to receive from us a premium in the form of additional
common shares or cash at our option. Under the terms of the
convertible notes, a fundamental change includes the sale of all
or substantially all of our property or assets, a change of
control, a shareholder-approved liquidation or dissolution, a
merger or acquisition, or the number of our common shares held
directly or indirectly by Dr. Matthews falling below
115,000,000 (subject to adjustments for stock splits,
consolidations or other similar adjustments). See
Description of Convertible Notes for a summary of
the principal terms of our convertible notes, including the
events of default.
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, 2006, the accumulated benefit obligation of
$144.3 million exceeded the fair value of the plan assets
of $104.2 million, resulting in a pension liability of
$40.1 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 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.
In particular, in December 2004 the Financial Accounting
Standards Board issued a statement requiring companies to record
stock option grants as compensation expense in their income
statements. This statement is effective beginning with our first
quarter of fiscal 2007. Our current methodology for expensing
stock options is based on, among other things, the historical
volatility of the underlying stock
15
and the expected life of our stock options. The adoption of this
accounting standard could negatively impact our profitability
and may adversely impact our stock price.
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 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.
Our future success depends on our existing key personnel.
Our success is dependent upon the services of a number of 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 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 depression in our
share price 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 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 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, and technology infrastructure 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; |
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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; and |
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the inability to maintain uniform standards, controls, policies
and procedures. |
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
16
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 and our independent registered public
accounting firm can render an opinion on managements
assessment and on the effectiveness of our internal controls
over financial reporting commencing with our annual report for
the fiscal year ended April 30, 2007. As a result, we will
be required to improve our financial and managerial controls,
reporting systems and procedures, and we will incur substantial
expenses to test our systems, 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 material weaknesses in our
internal controls are identified, we could be subject to
regulatory scrutiny and a loss of public confidence.
Risks Related to an Investment in our Common Shares
Our common share price will fluctuate and you may not be able
to sell your shares at or above the initial public offering
price.
There has been no public market for our common shares. We cannot
predict the extent to which investor interest will lead to the
development of an active and liquid trading market in our common
shares and it is possible that an active and liquid trading
market will not develop or be sustained. The initial public
offering price for our common shares will be negotiated among
us, the selling shareholders and the underwriters and may not be
indicative of the market price of the common shares that will
prevail in the trading market. The market price of our common
shares may decline below the initial public offering price and
you may not be able to sell your shares at or above the initial
offering price. Some companies that have had volatile market
prices for their securities have had securities class action
lawsuits filed against them. If a lawsuit were to be filed
against us, regardless of the outcome, it could result in
substantial costs and a diversion of managements attention
and resources.
The price of our common shares may fluctuate in response to a
number of events, including:
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our quarterly operating results; |
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sales of our common shares by principal shareholders; |
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future announcements concerning our or our competitors
businesses; |
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the failure of securities analysts to cover our company and/or
changes in financial forecasts and recommendations by securities
analysts; |
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actions of our competitors; |
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general market, economic and political conditions; and |
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natural disasters, terrorist attacks and acts of war. |
Future sales of a substantial amount of common shares may
depress the price of the common shares.
If our shareholders sell substantial amounts of our common
shares in the public market following this offering, the market
price of our common shares could decline. These sales also might
make it more difficult for us to sell equity or equity related
securities in the future at a time and price that we deem
appropriate. Upon the closing of this offering, we will have
outstanding common shares
(or common shares if the
over-allotment option
is exercised in full). All of the common shares sold in this
offering will be freely transferable without restriction or
further registration under the U.S. Securities Act of 1933, as
amended (the U.S. Securities Act). We and most of
our existing shareholders, directors and
17
management have agreed to a
lock-up,
pursuant to which neither we nor they will sell any shares
without the prior consent of the underwriters for 180 days
after the date of the underwriting agreement, subject to limited
exceptions, and a possible extension of up to 34 additional
days. These shareholders, however, may be released from their
lock-up agreements with
the agreement of the underwriters at any time and without
notice, which would allow for earlier sales of shares in the
public market. The underwriters have also agreed that certain of
our employees will each have 2,000 shares (subject to
adjustments for stock splits, consolidations or other similar
adjustments) released from their
lock-up agreements
after 90 days following the date of the underwriting
agreement. We expect
that of
the
remaining outstanding
common shares after this offering will be available for sale in
the public market following the expiration of the applicable
lock-up period, subject
to certain limitations imposed by applicable U.S. and Canadian
securities laws.
In addition, our articles of incorporation permit us to issue an
unlimited number of common and preferred shares. Substantial
amounts of our common shares are available for issuance subject
to applicable shareholder approval requirements. Our authorized
preferred shares are available for issuance, from time to time,
at the discretion of the board of directors without any further
vote or action by the common shareholders, which would dilute
the percentage ownership held by investors who purchase our
common shares in this offering. Furthermore, our board of
directors has the authority, subject to applicable Canadian
corporate law, to determine the rights, privileges, restrictions
and conditions attaching to any wholly unissued series of
preferred shares, and such rights may be superior to those of
our common shares.
Under the terms of our existing registration rights agreements,
we are required to file a shelf registration statement covering
resales of common shares issuable upon conversion of the
outstanding convertible notes and exercises of warrants held by
our noteholders and to have the registration statement declared
effective under the U.S. Securities Act prior to the expiry of
the lock-up agreements.
Consequently, following the expiration of the lock-up period,
our noteholders may exercise their warrants for up to a maximum
of 16,500,000 common shares and sell the underlying common
shares in the public markets. Following the expiration of the
lock-up period, our noteholders may also convert their
convertible notes and sell the underlying common shares in the
public markets. However, we are unable at this time to quantify
the maximum number of common shares issuable upon conversion of
the convertible notes as the conversion ratio depends on the
market price of our common shares following the expiry of the
lock-up period. See
Description of Convertible Notes Convertible
Notes Conversion. These sales, or the
expectation that these sales may occur, may decrease the market
price for our shares.
In addition, as of May 31, 2006, 20,403,699 common shares
were issuable upon exercise of stock options outstanding under
our stock option plan and an additional 4,493,108 common
shares were reserved for issuance under our stock option plan.
Subject to the lock-ups described above and limitations imposed
by U.S. and Canadian securities laws on resales, common shares
issued pursuant to exercises of these stock options will be
freely tradeable in the public markets. See Shares
Eligible for Future Sale.
Dr. Terence H. Matthews is a significant shareholder and
he has the potential to exercise significant influence over
matters requiring approval by our shareholders.
Dr. Matthews beneficially
owned %
of our common shares as of May 31, 2006. Based
on common
shares outstanding as of May 31, 2006, Dr. Matthews
will beneficially own
approximately % of our common
shares subsequent to this offering. Dr. Matthews is also
the Chairman of our board of directors. Dr. Matthews, given
the extent of his ownership position, has 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. Dr. Matthews may have
interests that differ from the interests of our other
shareholders.
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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 Dr. Matthews, 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. Our authorized
preferred shares are available for issuance from time to time at
the discretion of our board of directors, without shareholder
approval. Our board of directors has the authority, subject to
applicable Canadian corporate law, to determine the special
rights and restrictions granted to or imposed on any wholly
unissued series of preferred shares, and these rights, including
voting rights, may be superior to those of our common 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 Description of Share
Capital Ownership and 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.
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 the selling 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 (as defined in
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.
Currently, 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
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the PFIC rules, see United States Federal Income Tax
Considerations Passive Foreign Investment Company
Considerations.
You will suffer an immediate and substantial dilution in the
net tangible book value of the common shares you purchase.
The initial public offering price of our common shares is
substantially higher than the pro forma net tangible book value
per share of our outstanding common shares. You will experience
immediate dilution of approximately
$ in
the pro forma net tangible book value per common share from the
price you pay for the common shares. We have a large number of
outstanding options and warrants to purchase common shares with
exercise prices significantly below the estimated public
offering price for the common shares. We also have
$55 million aggregate principal amount of convertible notes
outstanding with conversion prices that may be below the
estimated public offering price for the common shares. To the
extent these securities are exercised, there will be further
dilution. See Dilution.
We will have broad discretion over the use of the net
proceeds from this offering. If we do not use the proceeds
effectively to develop and grow our business, an investment in
our common shares could suffer.
We intend to use the net proceeds of this offering to fund
working capital to assist us in implementing our growth
strategy, particularly in targeting medium to large enterprise
customers who require their communications solutions suppliers
to demonstrate adequate financial resources to address their
communications needs on an ongoing basis; to expand our selling,
marketing and global support capabilities; to increase market
share in our target vertical industry sectors and other
high-growth market
sectors; to expand our sales and support operations in North
America and selected markets in Latin America, Europe and the
Asia-Pacific region; to
pursue research and development programs designed to expand our
software applications and product portfolio to further address
the needs of our existing customers and to attract new
customers; and for general corporate purposes, which may include
acquisitions and enhancing our corporate infrastructure to
support our anticipated growth. You will not have the
opportunity to evaluate the economic, financial or other
information on which we base our decisions on how to use the net
proceeds we receive from this offering. We cannot assure you
that management will apply these funds effectively, nor can we
assure you that the net proceeds from this offering will be
invested to yield a favorable return.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under the captions Prospectus
Summary, Risk Factors, Dividend
Policy, Managements Discussion and Analysis of
Financial Condition and Results of Operations,
Business and elsewhere in this prospectus are
forward-looking statements that reflect our current views with
respect to future events and financial performance. Statements
that include the words may, will,
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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the 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 primarily upon one outside contract manufacturer
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; |
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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. |
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 Risk Factors. The forward-looking statements
contained in this prospectus are based on the beliefs,
expectations and opinions of management as of the date of this
prospectus. We do not assume any obligation to update
forward-looking statements 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.
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EXCHANGE RATE INFORMATION
The following table sets forth, for each period indicated, the
high and low exchange rates for Canadian dollars expressed in
U.S. dollars, the average of such exchange rates on the last day
of each month during such period, and the exchange rate at the
end of such period. These rates are based on the inverse noon
buying rate in The City of New York for cable transfers in
Canadian dollars as certified for customs purposes by the
Federal Reserve Bank of New York:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Days | |
|
Fiscal Year | |
|
|
Fiscal Year Ended | |
|
Ended | |
|
Ended | |
|
|
| |
|
| |
|
| |
|
|
April 28, | |
|
April 27, | |
|
April 28, | |
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Rate at the end of period
|
|
|
0.6397 |
|
|
|
0.6880 |
|
|
|
0.7314 |
|
|
|
0.8102 |
|
|
|
0.7957 |
|
|
|
0.8926 |
|
Average rate during period
|
|
|
0.6382 |
|
|
|
0.6491 |
|
|
|
0.7436 |
|
|
|
0.7866 |
|
|
|
0.8016 |
|
|
|
0.8429 |
|
Highest rate during period
|
|
|
0.6622 |
|
|
|
0.6909 |
|
|
|
0.7880 |
|
|
|
0.8493 |
|
|
|
0.8083 |
|
|
|
0.8926 |
|
Lowest rate during period
|
|
|
0.6200 |
|
|
|
0.6264 |
|
|
|
0.6895 |
|
|
|
0.7158 |
|
|
|
0.7957 |
|
|
|
0.7872 |
|
On July 5, 2006, the inverse of the noon buying rate was
$1.00 per US$0.8997.
USE OF PROCEEDS
We estimate that we will receive net proceeds of
$ million
from the sale of
the common
shares offered by us in this offering, based upon an assumed
initial public offering price of
$ per
share, after deducting estimated underwriting commissions and
estimated offering expenses payable by us. We will not receive
any proceeds from the sale of common shares being offered by the
selling shareholders. We intend to use the net proceeds of this
offering as follows:
|
|
|
|
|
to fund working capital to assist us in implementing our growth
strategy, particularly in targeting large enterprise customers
who require their communications solutions suppliers to
demonstrate adequate financial resources to address their
communications needs on an ongoing basis; |
|
|
|
|
to expand our selling, marketing and global support capabilities
through the development of direct marketing and brand awareness
programs, the recruitment of new channel partners, the opening
of new customer demonstration centers and the recruitment of
further sales staff; |
|
|
|
|
|
to pursue research and development programs designed to expand
our software applications and product portfolio and to enter
into new, or expand our existing, strategic alliances and
partnerships to further address the needs of our existing
customers and to attract new customers; and |
|
|
|
|
for general corporate purposes, which may include acquisitions. |
If the underwriters exercise their option to purchase additional
common shares in full, we estimate that the net proceeds to us
from the sale of the additional common shares to be sold by us
will be
$ million,
all of which will be used for general corporate purposes.
While we currently anticipate that we will use the net proceeds
of this offering as described above, we may re-allocate the net
proceeds from time to time depending upon market and other
conditions in effect at the time. Although we regularly evaluate
potential acquisition and investment opportunities, we have no
current arrangements or commitments with respect to any
particular transaction. In addition, to the extent the net
proceeds of this offering are greater or less than the estimated
amount, because either the offering does not price at the
midpoint of the estimated price range or the size of the
offering changes, the difference will increase or decrease the
amount of net proceeds available for general corporate purposes.
Pending their application, we intend to invest the net proceeds
in short-term, interest-bearing, investment grade securities.
22
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.
23
CAPITALIZATION
The following table sets forth our cash and cash equivalents and
capitalization as of April 30, 2006:
|
|
|
|
|
on an actual basis; |
|
|
|
on a pro forma basis to give effect to the conversion of all of
our outstanding preferred shares into common shares, the
exercise of the warrants held by a financing agent and the
warrants issued in connection with our Series A Preferred
Shares and the creation of a new class of preferred shares,
issuable in series, all of which will occur prior to or in
connection with the completion of this offering; and |
|
|
|
on a pro forma basis as adjusted to give effect to the receipt
of approximately
$ million
in estimated net proceeds from this offering, after deducting
estimated underwriting commissions and estimated offering
expenses payable by us, and the application of these proceeds as
described under Use of Proceeds. |
The table should be read in conjunction with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and the related notes included elsewhere in
this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at April 30, 2006 | |
|
|
| |
|
|
|
|
Pro Forma | |
|
|
Actual | |
|
Pro Forma | |
|
as Adjusted(8) | |
|
|
| |
|
| |
|
| |
|
|
(in millions) | |
Cash and cash equivalents
|
|
$ |
35.7 |
|
|
$ |
42.2 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, including capital leases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
$ |
48.7 |
|
|
$ |
48.7 |
|
|
$ |
|
|
|
Capital leases
|
|
|
4.1 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52.8 |
|
|
|
52.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable shares and derivative instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common
shares(1)
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
Series A Preferred
Shares(2)
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
Series B Preferred
Shares(3)
|
|
|
36.9 |
|
|
|
|
|
|
|
|
|
|
Derivative
instruments(4)
|
|
|
75.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares(5)
|
|
$ |
188.8 |
|
|
$ |
285.1 |
|
|
$ |
|
|
|
New preferred
shares(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants(7)
|
|
|
47.9 |
|
|
|
46.8 |
|
|
|
|
|
|
Deferred stock-based compensation
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
Accumulated deficit
|
|
|
(355.5 |
) |
|
|
(304.1 |
) |
|
|
|
|
|
Accumulated comprehensive loss
|
|
|
(49.7 |
) |
|
|
(49.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(168.6 |
) |
|
|
(22.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capitalization
|
|
$ |
24.3 |
|
|
$ |
30.8 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The holder of 10,000,000 common shares has the right to require
us to redeem these common shares by virtue of a shareholders
agreement dated April 23, 2004, as amended, among certain
of our shareholders and us. This right terminates upon the
completion of this offering. |
|
|
(2) |
Unlimited shares authorized, 20,000,000 issued and outstanding,
actual; no shares authorized, issued or outstanding,
pro forma and pro forma as adjusted. The Series A
Preferred Shares will be converted in accordance with their
terms into common shares in connection with the completion of
this offering. |
|
(3) |
Unlimited shares authorized, 67,789,300 issued and outstanding,
actual; no shares authorized, issued or outstanding,
pro forma and pro forma as adjusted. The Series B
Preferred Shares will be converted in accordance with their
terms into common shares in connection with the completion of
this offering. |
24
|
|
(4) |
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. The Series A Preferred Shares and
the Series B Preferred Shares will be converted in
accordance with their terms into common shares in connection
with the completion of this offering. As a result of this
conversion the derivative instruments balance will
be reclassified into equity. |
|
|
(5) |
Unlimited shares authorized, 107,302,322 issued and outstanding,
actual; unlimited shares
authorized, shares
issued and outstanding, pro forma; unlimited shares
authorized, shares
issued and outstanding, pro forma as adjusted. |
|
|
(6) |
No shares authorized, issued and outstanding, actual; unlimited
shares authorized, no shares issued and outstanding, pro forma
and pro forma as adjusted. |
|
(7) |
The average weighted exercise price of the warrants is $0.57. |
|
|
(8) |
A $1.00 increase (decrease) in the assumed initial public
offering price of
$ per share
would increase (decrease) pro forma as adjusted cash and
cash equivalents and total shareholders deficiency by
$ million,
(i) assuming the number of shares offered by us, as set
forth on the cover page of this prospectus, remains the same and
(ii) after deducting estimated underwriting commissions and
estimated offering expenses payable by us. |
|
The table above does not include:
|
|
|
|
|
|
20,668,538 common shares issuable upon the exercise of stock
options outstanding under our stock option plan at a weighted
average exercise price of $1.06 per share, as of
April 30, 2006; |
|
|
|
|
|
4,234,331 additional common shares reserved for issuance under
our stock option plan, as of April 30, 2006; |
|
|
|
|
|
35,785,410 common shares issuable upon the exercise of
outstanding warrants by Technology Partnerships Canada as of
April 30, 2006, which are exercisable for common shares
without the payment of any additional cash consideration; |
|
|
|
|
16,500,000 common shares issuable upon the exercise of
outstanding warrants held by holders of the convertible notes at
an exercise price calculated in accordance with a formula based
on the market price of our common shares (see Description
of Convertible Notes Noteholder Warrants); and |
|
|
|
a number of common shares issuable upon the conversion of
outstanding convertible notes determined by dividing the
outstanding principal and accrued interest owing on each note by
a conversion price calculated in accordance with a formula based
on the market price of our common shares (see Description
of Convertible Notes Convertible Notes). |
25
DILUTION
If you invest in our common shares, your interest will be
immediately diluted to the extent of the difference between the
price per common share paid by you in this offering and the pro
forma net tangible book value per common share after the
offering. Pro forma net tangible book value per common share is
determined at any date by subtracting our total liabilities from
our total tangible assets and dividing the difference by the
number of common shares outstanding at that date, after giving
effect to the conversion of all of our outstanding preferred
shares into common shares and the exercise of the warrants held
by a financing agent and warrants issued in connection with our
Series A Preferred Shares, all of which will occur prior to
or in connection with the completion of this offering.
Our pro forma net tangible book value as
of was
approximately
$ million,
or
$ per
common share. After giving effect to this offering, based on an
assumed initial public offering price of
$ per
common share and after deducting estimated underwriting
commissions and estimated offering expenses payable by us, our
pro forma as adjusted net tangible book value as of
April 30, 2006 would have been approximately
$ million,
or
$ per
common share. This represents an immediate increase in pro forma
net tangible book value of
$ per
common share to our existing shareholders and an immediate
dilution of
$ per
common share to new investors purchasing common shares in this
offering.
The following table illustrates this substantial and immediate
dilution to new investors on a per share basis:
|
|
|
|
|
|
Assumed initial public offering price per common share
|
|
$ |
|
|
|
Pro forma net tangible book value per share as of April 30,
2006
|
|
$ |
|
|
|
Increase in pro forma net tangible book value per share
attributable to new investors in this offering
|
|
|
|
|
|
|
|
|
|
Pro forma as adjusted net tangible book value as of
April 30, 2006 after giving effect to this offering
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible book value per share to new
investors in this offering
|
|
$ |
|
|
|
|
|
|
If the underwriters exercise their option to purchase additional
common shares in this offering in full, our as adjusted pro
forma net tangible book value at April 30, 2006 would be
$ ,
or
$ per
common share, representing an immediate increase in pro forma
net tangible book value to our existing shareholders of
$ per
common share and an immediate dilution to new investors of
$ per
common share.
A $1.00 increase (decrease) in the assumed initial public
offering price of
$ per
share would increase (decrease) our pro forma as adjusted
net tangible book value after giving effect to this offering by
$ per
share and the dilution in pro forma net tangible book value per
share to new investors by
$ per
share, (i) assuming the number of shares offered by us, as
set forth on the cover page of this prospectus, remains the same
and (ii) after deducting the estimated underwriting
commissions and estimated offering expenses payable by us.
The following table sets forth as of April 30, 2006 on the
same pro forma basis described above:
|
|
|
|
|
the total number of common shares owned by existing shareholders
and to be owned by new investors purchasing common shares in
this offering; |
|
|
|
the total consideration paid by our existing shareholders and to
be paid by new investors purchasing common shares in this
offering; and |
|
|
|
the average price per common share paid by existing shareholders
and to be paid by new investors purchasing common shares in this
offering. |
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares | |
|
|
|
|
|
|
Purchased | |
|
Total Consideration | |
|
Average Price | |
|
|
| |
|
| |
|
Per Common | |
|
|
Number | |
|
Percent | |
|
Amount | |
|
Percent | |
|
Share | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Existing shareholders
|
|
|
|
|
|
|
|
% |
|
$ |
|
|
|
|
|
% |
|
$ |
|
|
New investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100 |
% |
|
$ |
|
|
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the underwriters over-allotment option is exercised in
full, the number of common shares held by the new investors will
increase
to ,
or %
of the total common shares outstanding after this offering.
A $1.00 increase (decrease) in the assumed initial public
offering price of
$ per
share would increase (decrease) total consideration paid by
new investors, total consideration paid by all shareholders and
average price per common share paid by all shareholders by
$ million,
$ million
and
$ ,
respectively, (i) assuming the number of shares offered by
us, as set forth on the cover page of this prospectus, remains
the same and (ii) after deducting the estimated
underwriting commissions and estimated offering expenses payable
by us.
The discussion and tables above exclude:
|
|
|
|
|
|
20,668,538 common shares issuable upon the exercise of
stock options outstanding under our stock option plan at a
weighted average exercise price of $1.06 per share, as of
April 30, 2006; |
|
|
|
|
|
4,234,331 additional common shares reserved for issuance
under our stock option plan, as of April 30, 2006; |
|
|
|
|
|
35,785,410 common shares issuable upon the exercise of
outstanding warrants by Technology Partnerships Canada as of
April 30, 2006, which are exercisable for common shares
without the payment of any additional cash consideration; |
|
|
|
|
16,500,000 common shares issuable upon the exercise of
outstanding warrants held by holders of the convertible notes at
an exercise price calculated in accordance with a formula based
on the market price of our common shares (see Description
of Convertible Notes Noteholder Warrants); and |
|
|
|
a number of common shares issuable upon the conversion of
outstanding convertible notes determined by dividing the
outstanding principal and accrued interest owing on each note by
a conversion price calculated in accordance with a formula based
on the market price of our common shares (see Description
of Convertible Notes Convertible Notes). |
If any of these options, warrants or convertible notes are
exercised or converted and the underlying common shares are
issued, there will be further dilution to new investors, which
may be significant. Our outstanding convertible notes and the
warrants held by holders of our outstanding convertible notes
are convertible and exercisable into common shares based on
conversion and exercise prices that are calculated in accordance
with formulae based on the market price of our common shares. We
are therefore unable to quantify at this time the further
dilution to new investors that will occur assuming the exercise
or conversion of all our options, warrants and convertible
notes. See Description of Convertible Notes
Convertible Notes and Noteholder
Warrants.
27
SELECTED CONSOLIDATED FINANCIAL DATA
The following sets forth selected consolidated financial
information derived from (a) our audited consolidated
financial statements as of and for the fiscal years ended
April 25, 2004, April 24, 2005, and April 30,
2006 which are included elsewhere in this prospectus,
(b) our audited consolidated financial statements as of and
for the fiscal year ended April 28, 2002 and April 27,
2003, which are not included in this prospectus, and
(c) our audited consolidated financial statements as of and
for the six-day
transition period ended April 30, 2005, which are included
elsewhere in this prospectus. The unaudited interim consolidated
financial statements include all normal recurring adjustments
that we consider necessary for a fair presentation of our
financial position and results of operations. The data set out
below does not take into account the conversion of our
outstanding preferred shares into common shares, the exercise of
the warrants held by a financing agent or the exercise of the
warrants issued in connection with our Series A Preferred
Shares. On April 24, 2005, we changed our fiscal year end
from the last Sunday in April to April 30. The change in
our fiscal year end (and resulting alignment of fiscal
quarter ends) permits us to better align our reporting
results with industry norms. Our consolidated financial
statements are reported in U.S. dollars and have been prepared
in accordance with United States generally accepted accounting
principles, or U.S. GAAP.
Historical results do not necessarily indicate results expected
for any future period. You should read the following selected
consolidated financial data together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations, and our consolidated
financial statements and the accompanying notes included
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Days | |
|
Fiscal Year | |
|
|
Fiscal Year Ended | |
|
Ended | |
|
Ended | |
|
|
| |
|
| |
|
| |
|
|
April 28, | |
|
April 27, | |
|
April 25, | |
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except share and per share data) | |
Consolidated Statement of Operations Data |
Revenues
|
|
$ |
358.0 |
|
|
$ |
352.2 |
|
|
$ |
340.7 |
|
|
$ |
342.2 |
|
|
$ |
3.2 |
|
|
$ |
387.1 |
|
Cost of revenues
|
|
|
215.5 |
|
|
|
225.4 |
|
|
|
202.9 |
|
|
|
213.2 |
|
|
|
2.4 |
|
|
|
225.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
142.5 |
|
|
|
126.8 |
|
|
|
137.8 |
|
|
|
129.0 |
|
|
|
0.8 |
|
|
|
161.4 |
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
59.1 |
|
|
|
41.2 |
|
|
|
36.2 |
|
|
|
41.4 |
|
|
|
0.7 |
|
|
|
44.1 |
|
Selling, general and administrative
|
|
|
141.9 |
|
|
|
114.9 |
|
|
|
111.4 |
|
|
|
114.9 |
|
|
|
1.8 |
|
|
|
120.7 |
|
Special
charges(1)
|
|
|
7.4 |
|
|
|
13.7 |
|
|
|
11.7 |
|
|
|
10.6 |
|
|
|
|
|
|
|
5.7 |
|
Loss (gain) on disposal of assets
|
|
|
1.5 |
|
|
|
|
|
|
|
0.6 |
|
|
|
3.4 |
|
|
|
|
|
|
|
(2.4 |
) |
Amortization of acquired
intangibles(2)
|
|
|
43.8 |
|
|
|
29.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(111.2 |
) |
|
|
(72.1 |
) |
|
|
(22.3 |
) |
|
|
(41.3 |
) |
|
|
(1.7 |
) |
|
|
(6.7 |
) |
Other (income) expense, net
|
|
|
3.4 |
|
|
|
0.9 |
|
|
|
8.0 |
|
|
|
7.5 |
|
|
|
(0.1 |
) |
|
|
39.8 |
|
Income tax (recovery) expense
|
|
|
0.1 |
|
|
|
(2.9 |
) |
|
|
0.3 |
|
|
|
0.8 |
|
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(114.7 |
) |
|
$ |
(70.1 |
) |
|
$ |
(30.6 |
) |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted |
|
$ |
(1.10 |
) |
|
$ |
(0.63 |
) |
|
$ |
(0.26 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
106,848,314 |
|
|
|
113,109,751 |
|
|
|
127,831,211 |
|
|
|
113,792,829 |
|
|
|
117,149,933 |
|
|
|
117,230,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Special charges relate to restructuring activities, product line
exit and other loss accruals undertaken to improve our
operational efficiency and to realign our business. |
|
(2) |
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. |
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As at | |
|
As at | |
|
As at | |
|
As at | |
|
As at | |
|
As at | |
|
|
April 28, | |
|
April 27, | |
|
April 25, | |
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2002 | |
|
2003 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions) | |
Consolidated Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
3.6 |
|
|
$ |
22.3 |
|
|
$ |
26.7 |
|
|
$ |
9.7 |
|
|
$ |
46.6 |
|
|
$ |
35.7 |
|
Other current assets
|
|
|
132.4 |
|
|
|
120.6 |
|
|
|
115.0 |
|
|
|
117.5 |
|
|
|
115.8 |
|
|
|
130.8 |
|
Property and equipment
|
|
|
29.7 |
|
|
|
25.3 |
|
|
|
20.3 |
|
|
|
20.9 |
|
|
|
20.6 |
|
|
|
17.4 |
|
Other assets
|
|
|
42.4 |
|
|
|
7.3 |
|
|
|
7.4 |
|
|
|
8.5 |
|
|
|
12.3 |
|
|
|
15.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
208.1 |
|
|
$ |
175.5 |
|
|
$ |
169.4 |
|
|
$ |
156.6 |
|
|
$ |
195.3 |
|
|
$ |
199.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$ |
138.9 |
|
|
$ |
135.8 |
|
|
$ |
103.2 |
|
|
$ |
115.8 |
|
|
$ |
101.9 |
|
|
$ |
126.0 |
|
Long-term debt
|
|
|
15.1 |
|
|
|
23.1 |
|
|
|
15.5 |
|
|
|
20.2 |
|
|
|
66.7 |
|
|
|
56.7 |
|
Derivative
instruments(3)
|
|
|
|
|
|
|
|
|
|
|
29.2 |
|
|
|
38.0 |
|
|
|
37.4 |
|
|
|
75.9 |
|
Other long-term liabilities
|
|
|
6.6 |
|
|
|
24.6 |
|
|
|
24.8 |
|
|
|
25.4 |
|
|
|
25.1 |
|
|
|
45.6 |
|
Redeemable
shares(4)
|
|
|
27.9 |
|
|
|
29.0 |
|
|
|
51.3 |
|
|
|
57.2 |
|
|
|
57.3 |
|
|
|
64.2 |
|
Capital stock
|
|
|
167.5 |
|
|
|
183.4 |
|
|
|
184.8 |
|
|
|
187.6 |
|
|
|
187.6 |
|
|
|
188.8 |
|
Other capital accounts
|
|
|
(0.9 |
) |
|
|
(2.2 |
) |
|
|
7.7 |
|
|
|
14.7 |
|
|
|
23.3 |
|
|
|
(1.9 |
) |
Accumulated deficit
|
|
|
(147.0 |
) |
|
|
(218.2 |
) |
|
|
(247.1 |
) |
|
|
(302.3 |
) |
|
|
(304.0 |
) |
|
|
(355.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$ |
208.1 |
|
|
$ |
175.5 |
|
|
$ |
169.4 |
|
|
$ |
156.6 |
|
|
$ |
195.3 |
|
|
$ |
199.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
The derivative instruments arose as 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. |
|
|
(4) |
Redeemable shares include 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. |
|
29
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 prospectus. This prospectus 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 Risk Factors and elsewhere in this
prospectus.
Overview
We are a leading provider of integrated communications solutions
and services for business customers. Our solutions include
products such as platforms, desktop appliances and software
applications. We complement our communications solutions with a
range of services including maintenance and support, managed
services, installation and other professional services. Our
IP-based communications
solutions integrate voice, video and data communications with
business applications and processes. We believe that these
solutions enable our customers to realize significant cost
benefits and to conduct their business more efficiently and
effectively.
We were incorporated in Canada 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.
Over the past five 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 digital telephony technology to new
IP-based platforms,
desktop devices and software applications. We have realigned our
business to discontinue certain activities relating to our
legacy solutions and to focus our sales and marketing efforts on
our IP-based
communications solutions. We have also undertaken certain cost
reduction measures, including staff reductions, to align our
operating expense model with current revenue levels while we
focused on developing a broad portfolio of
IP-based communications
solutions. As a result of these efforts to realign our business
to discontinue certain activities relating to our legacy systems
and to focus our efforts on our IP-based communications
solutions we have incurred losses in each of the past five
fiscal years, including net losses of $44.6 million in
fiscal 2006 and $49.6 million in fiscal 2005. However, we
believe that our early and sustained investment in
IP-based research and
development, and our decision to concentrate our efforts on this
new technology, have positioned us to take advantage of the
industry shift to
IP-based communications
solutions, as businesses migrate from their legacy systems. Our
IP-based product revenues increased by 48% in fiscal 2006
compared with fiscal 2005 and 97% of our system shipments for
the quarter ended April 30, 2006 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 (the Transition
Period) from April 25, 2005 to April 30, 2005
have been included in this discussion and analysis; however, 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 five years to focus on
IP-based
30
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 2005 and
2004 have been restated to conform with the new presentation.
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
31
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 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
32
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
Plexus Corp. of the United States and 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 Risk
Factors Because we depend primarily upon one outside
contract manufacturer to manufacture our products, our
operations could be 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, Plexus Corp. 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 325 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, or 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 and
amortization of acquired intangibles. Acquired intangible assets
were fully amortized in early fiscal 2004.
33
Results of Operations
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 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
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. |
34
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. |
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 | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2005 | |
|
2006 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
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.
We have experienced revenue growth for the fiscal year ended
April 30, 2006 across all geographical segments, with the
most significant growth, in absolute dollars, coming from the
United States and EMEA.
Revenue growth in the United States is primarily attributable to
increased product sales through both the regions channel
partners and direct sales offices. In addition, the region has
enjoyed significant growth in its service revenues primarily due
to increased installation services that are directly associated
with the growth in product sales through our direct sales.
Revenue growth 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 significant year-over-year decline in the
regions services business resulting from a decline in both
maintenance and support and Managed Service revenues. We
anticipate that our service revenues in the region will continue
to decline in the future due to increased market competition on
both maintenance and support and Managed Service contract
renewals.
The overall growth in global product sales as well as the
decline in maintenance and support and Managed Service revenues
is addressed in greater detail below.
We expect that we will continue to see greater than 80% of our
global revenues generated through the United States and EMEA
operating segments for the foreseeable future.
35
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 | |
|
Change | |
|
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
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 |
|
|
|
6.3 |
|
|
|
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 recent periods, we continued to experience a
decrease in sales of our legacy communication platforms and
desktop devices. 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 have experienced some pricing adjustments
on communication platforms and desktop devices compared to
fiscal 2005, pricing changes have not had a significant impact
on the revenue growth 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 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.
36
We anticipate that any future product revenue growth will be
primarily attributable to increased revenues from our IP-based
communication platforms, desktop devices and software
applications, offset by continued declines in legacy
communications platforms and desktop devices.
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 is 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 is 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 estimate that 70% 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 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 is primarily attributable to increased
product sales via our direct sales offices in the
United States.
We continue to generate more than 60% of our total service
revenues from the provision of fixed maintenance contracts.
Although we expect this level to continue, increased market
competition on the renewal of these maintenance contracts may
result in lower maintenance revenues and hence lower service
revenues in future periods.
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 is 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 |
37
|
|
|
|
|
|
business 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. |
|
Our margins may vary from period to period depending upon
region, distribution channel and product mix. We anticipate that
cost reductions resulting from re-design efforts and improved
manufacturing costs of our IP-based communications platforms and
desktop appliances will have a positive effect on product gross
margin in fiscal 2007. In addition, as we evolve our business
towards a higher proportion of software license and software
maintenance revenues, we expect that product gross margins will
also be favorably impacted, although we are not anticipating a
significant amount of software maintenance revenue in fiscal
2007.
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. While we cannot predict the extent to
which changes in service mix and competitive pressures will
continue to impact our service margin, we expect that service
margins will remain in the range of 38% to 41% of service
revenues in fiscal 2007.
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 spending
in absolute dollars growing by $2.7 million year-over-year.
The reduction as a percentage of revenues are primarily
attributable to the 13.1% year-over-year revenue increase, with
the absolute dollar increase being a continuation of our
strategic investment in the development and enhancement of our
IP-based communications
solutions.
Historically, we have invested between 11% and 17% of revenues
on research and development from fiscal 2002 through fiscal
2006, 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. We anticipate that we will
continue to invest in research and development at fiscal 2006
levels, at a minimum, in absolute dollars, for the foreseeable
future. These expenses may vary, however, as a percentage of
revenues.
Selling, General and
Administrative:
SG&A expenses decreased from 33.6% of total revenues in
fiscal 2005 to 31.1% in fiscal 2006, with spending in absolute
dollars growing by $5.8 million year-over-year. The
decrease as a percentage of sales is 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. We anticipate that
investment levels for SG&A will be, at a minimum, maintained
at existing levels, in absolute dollars, for the foreseeable
future provided our revenues increase.
Additionally, in fiscal 2007 we expect to incur incremental
expenses associated with Sarbanes-Oxley regulatory compliance
and additional compensation expense associated with employee
stock option grants. While it is difficult to estimate the
incremental expense associated with employee stock option
grants, we are currently estimating that third party costs
associated with preparing us for Sarbanes-Oxley compliance in
addition to ongoing compliance costs will be approximately
$1 million in fiscal 2007.
38
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.
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 long-term
promissory notes receivable, net of the long-term promissory
notes payable, were paid in full in February 2003, prior to the
original maturity date of August 31, 2003.
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 is shown as a gain on sale of
manufacturing operations in fiscal 2006.
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.
39
Interest Expense:
Interest expense was $7.6 million in fiscal 2006 compared
to $2.6 million in fiscal 2005. The primary reason for the
increased interest expense 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 is
currently dormant. 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, consists 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 is 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 use 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 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 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.
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. $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).
Upon completion of this offering the preferred shares will be
converted into common shares and the derivative instrument
balance and the cumulative mark-to-market adjustments will be
reclassified into equity. As a result, further mark-to-market
adjustments relating to the preferred shares will not be
required upon completion of this offering.
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 is due to deferred tax recoveries of
$2.8 million 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
40
be realized. During fiscal 2006, we determined that certain
deferred tax assets relating to our United States operations are
considered more likely than not to be realized and therefore
reduced our valuation allowance resulting in a deferred tax
recovery of $2.8 million.
Fiscal 2005 as compared to
Fiscal 2004 and the Transition Period
The following table sets forth our comparative results of
operations, both in dollars and as a percentage of total
revenues, for fiscal 2005 to fiscal 2004 and the Transition
Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal | |
|
|
|
|
|
Six days Ended | |
|
|
| |
|
|
|
|
|
| |
|
|
2004 | |
|
2005 | |
|
Change | |
|
April 30, 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
|
% of | |
|
|
Amounts | |
|
Revenues | |
|
Amounts | |
|
Revenues | |
|
Amount | |
|
% | |
|
Amounts | |
|
Revenues | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except percentages) | |
Revenues
|
|
$ |
340.7 |
|
|
|
100.0 |
% |
|
$ |
342.2 |
|
|
|
100.0 |
% |
|
$ |
1.5 |
|
|
|
0.4 |
% |
|
$ |
3.2 |
|
|
|
100.0 |
% |
Cost of revenues
|
|
|
202.9 |
|
|
|
59.6 |
|
|
|
213.2 |
|
|
|
62.3 |
|
|
|
10.3 |
|
|
|
5.1 |
|
|
|
2.4 |
|
|
|
75.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
137.8 |
|
|
|
40.4 |
|
|
|
129.0 |
|
|
|
37.7 |
|
|
|
(8.8 |
) |
|
|
(6.4 |
) |
|
|
0.8 |
|
|
|
25.0 |
|
Research and development
|
|
|
36.2 |
|
|
|
10.6 |
|
|
|
41.4 |
|
|
|
12.1 |
|
|
|
5.2 |
|
|
|
14.4 |
|
|
|
0.7 |
|
|
|
21.9 |
|
Selling, general and administrative
|
|
|
111.4 |
|
|
|
32.7 |
|
|
|
114.9 |
|
|
|
33.6 |
|
|
|
3.5 |
|
|
|
3.1 |
|
|
|
1.8 |
|
|
|
56.3 |
|
Special
charges(1)
|
|
|
11.7 |
|
|
|
3.4 |
|
|
|
10.6 |
|
|
|
3.1 |
|
|
|
(1.1 |
) |
|
|
(9.4 |
) |
|
|
|
|
|
|
|
|
Loss on sale of manufacturing operations
|
|
|
0.6 |
|
|
|
0.2 |
|
|
|
3.4 |
|
|
|
1.0 |
|
|
|
2.8 |
|
|
|
466.7 |
|
|
|
|
|
|
|
|
|
Amortization of acquired intangibles
(2)
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
(0.2 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(22.3 |
) |
|
|
(6.6 |
) |
|
|
(41.3 |
) |
|
|
(12.1 |
) |
|
|
(19.0 |
) |
|
|
85.2 |
|
|
|
(1.7 |
) |
|
|
(53.2 |
) |
Interest expense
|
|
|
4.3 |
|
|
|
1.3 |
|
|
|
2.6 |
|
|
|
0.8 |
|
|
|
(1.7 |
) |
|
|
(39.5 |
) |
|
|
|
|
|
|
0.0 |
|
Mark to market adjustment on derivatives
|
|
|
|
|
|
|
|
|
|
|
5.3 |
|
|
|
1.5 |
|
|
|
5.3 |
|
|
|
* |
|
|
|
0.1 |
|
|
|
3.1 |
|
Beneficial conversion feature on convertible debentures
|
|
|
3.1 |
|
|
|
0.9 |
|
|
|
|
|
|
|
|
|
|
|
(3.1 |
) |
|
|
* |
|
|
|
|
|
|
|
|
|
Other (income) expense, net
|
|
|
0.6 |
|
|
|
0.2 |
|
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
(1.0 |
) |
|
|
* |
|
|
|
(0.2 |
) |
|
|
(6.3 |
) |
Income tax (recovery) expense
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
0.8 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
166.7 |
|
|
|
|
|
|
|
0.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(30.6 |
) |
|
|
(9.1 |
)% |
|
$ |
(49.6 |
) |
|
|
(14.5 |
)% |
|
$ |
(19.0 |
) |
|
|
62.1 |
% |
|
$ |
(1.6 |
) |
|
|
(50.0 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* 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. |
|
(2) |
Acquired intangible assets relating to the acquisition of the
Mitel name, certain assets and subsidiaries from Zarlink in 2001
were fully amortized in 2004. |
Revenues:
Revenues increased by $1.5 million, or 0.4%, in fiscal 2005
over fiscal 2004. During the Transition Period we recorded
$3.2 million of revenues. Revenues for this Transition
Period are not considered reflective of revenues for an average
six-day period, as we tend to generate a larger proportion of
our revenues towards the latter portion of our fiscal periods.
41
Geographic
Segment Revenues:
The following table sets forth total sales by geographic
regions, both in dollars and as a percentage of total revenues,
for the fiscal periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal | |
|
Six days Ended | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
Change | |
|
April 30, 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
|
% of | |
|
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Amount | |
|
% | |
|
Revenues | |
|
Revenues | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except percentages) | |
United States
|
|
$ |
161.4 |
|
|
|
47.4 |
% |
|
$ |
153.5 |
|
|
|
44.9 |
% |
|
$ |
(7.9 |
) |
|
|
(4.9 |
)% |
|
$ |
1.8 |
|
|
|
56.3 |
% |
EMEA
|
|
|
140.5 |
|
|
|
41.2 |
|
|
|
145.5 |
|
|
|
42.5 |
|
|
|
5.0 |
|
|
|
3.6 |
|
|
|
1.0 |
|
|
|
31.2 |
|
Canada and CALA
|
|
|
33.4 |
|
|
|
9.8 |
|
|
|
37.2 |
|
|
|
10.8 |
|
|
|
3.8 |
|
|
|
11.4 |
|
|
|
0.4 |
|
|
|
12.5 |
|
Asia Pacific
|
|
|
5.4 |
|
|
|
1.6 |
|
|
|
6.0 |
|
|
|
1.8 |
|
|
|
0.6 |
|
|
|
11.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
340.7 |
|
|
|
100.0 |
% |
|
$ |
342.2 |
|
|
|
100.0 |
% |
|
$ |
1.5 |
|
|
|
0.4% |
|
|
$ |
3.2 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From an operating segment perspective, fiscal 2005 revenues
increased marginally over fiscal 2004 levels due primarily to
increased revenues from Canada and CALA and EMEA as revenues
through our channel partners in these regions increased on a
year-over-year basis.
The improved revenue performances in these regions were
partially offset by lower revenues in the United States, which
were primarily attributable to lower product and service
revenues resulting from the transition from legacy products and
services to emerging
IP-based communications
solutions and services.
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 periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal | |
|
Six days Ended | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
Change | |
|
April 30, 2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
% of | |
|
|
|
% of | |
|
|
|
|
|
% of | |
|
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Revenues | |
|
Amount | |
|
% | |
|
Revenues | |
|
Revenues | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except percentages) | |
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platforms and desktop appliances
|
|
$ |
168.1 |
|
|
|
49.3 |
% |
|
$ |
165.1 |
|
|
|
48.2 |
% |
|
$ |
(3.0 |
) |
|
|
(1.8 |
)% |
|
$ |
1.3 |
|
|
|
40.6 |
% |
|
Software applications
|
|
|
23.9 |
|
|
|
7.0 |
|
|
|
23.5 |
|
|
|
6.9 |
|
|
|
(0.4 |
) |
|
|
(1.7 |
) |
|
|
0.3 |
|
|
|
9.4 |
|
|
Other(1)
|
|
|
15.1 |
|
|
|
4.5 |
|
|
|
19.1 |
|
|
|
5.6 |
|
|
|
4.0 |
|
|
|
26.5 |
|
|
|
0.1 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207.1 |
|
|
|
60.8 |
|
|
|
207.7 |
|
|
|
60.7 |
|
|
|
0.6 |
|
|
|
0.3 |
|
|
|
1.7 |
|
|
|
53.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and support
|
|
|
95.4 |
|
|
|
28.0 |
|
|
|
85.3 |
|
|
|
24.9 |
|
|
|
(10.1 |
) |
|
|
(10.6 |
) |
|
|
1.2 |
|
|
|
37.5 |
|
|
Installation
|
|
|
15.8 |
|
|
|
4.6 |
|
|
|
22.1 |
|
|
|
6.5 |
|
|
|
6.3 |
|
|
|
39.9 |
|
|
|
0.1 |
|
|
|
3.1 |
|
|
Managed Services
|
|
|
10.6 |
|
|
|
3.1 |
|
|
|
10.9 |
|
|
|
3.2 |
|
|
|
0.3 |
|
|
|
2.8 |
|
|
|
0.2 |
|
|
|
6.3 |
|
|
Professional and other services
|
|
|
11.8 |
|
|
|
3.5 |
|
|
|
16.2 |
|
|
|
4.7 |
|
|
|
4.4 |
|
|
|
37.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133.6 |
|
|
|
39.2 |
|
|
|
134.5 |
|
|
|
39.3 |
|
|
|
0.9 |
|
|
|
0.7 |
|
|
|
1.5 |
|
|
|
46.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
340.7 |
|
|
|
100.0 |
% |
|
$ |
342.2 |
|
|
|
100.0 |
% |
|
$ |
1.5 |
|
|
|
0.4% |
|
|
$ |
3.2 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other products include mainly OEM products representing
approximately four percent, six percent and three percent of
total revenue in fiscal 2004, fiscal 2005, and the Transition
Period, respectively. |
42
Product Revenues:
Fiscal 2005 revenues from product sales was $207.7 million
or 60.7% of total revenues compared to $207.1 million or
60.8% of total revenues in fiscal 2004. The marginal increase in
product sales was primarily attributable to increased sales of
third party hardware platforms.
In fiscal 2005, revenues generated by communications platforms
and desktop devices, were down 2% over prior year levels.
Despite this nominal decline in overall sales, we continued to
see as expected, a significant shift in sales away from our
legacy communication platform products towards increased sales
of IP-based
communications solutions. In fiscal 2005 sales of
IP-based communication
platforms and desktop devices increased by 27% in comparison to
fiscal 2004 levels. This increase was in line with our strategy
to realign our efforts towards
IP-based communications
solutions.
Services Revenues:
Fiscal 2005 revenues from services sales was 39.3% of total
revenues consistent with fiscal 2004 as a percentage of total
revenues and marginally up by $0.9 million year-over-year.
Despite overall service revenues staying relatively unchanged,
we experienced a significant decline in maintenance and support
revenues due primarily to increased competition and pricing
pressures on maintenance and support contract renewals in the
EMEA region. Offsetting the decline in maintenance and support
revenues, was a year- over-year increase in both installation
services (attributable to higher product sales through our
global direct sales offices) and professional and other services.
Gross Margin:
The following table sets forth gross margins, both in dollars
and as a percentage of revenues, for the fiscal years indicated:
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|
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|
|
Fiscal | |
|
Six days Ended | |
|
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| |
|
| |
|
|
2004 | |
|
2005 | |
|
April 30, 2005 | |
|
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| |
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| |
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| |
|
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% of | |
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|
% of | |
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|
% of | |
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|
Amount | |
|
Revenues | |
|
Amount | |
|
Revenues | |
|
Amount | |
|
Revenues | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except percentages) | |
Products
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
207.1 |
|
|
|
100.0 |
% |
|
$ |
207.7 |
|
|
|
100.0 |
% |
|
$ |
1.7 |
|
|
|
100.0 |
% |
|
Gross Margin
|
|
|
81.4 |
|
|
|
39.3 |
|
|
|
75.8 |
|
|
|
36.5 |
|
|
|
0.1 |
|
|
|
5.9 |
|
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
133.6 |
|
|
|
100.0 |
% |
|
$ |
134.5 |
|
|
|
100.0 |
% |
|
$ |
1.5 |
|
|
|
100.0 |
% |
|
Gross Margin
|
|
|
56.4 |
|
|
|
42.2 |
|
|
|
53.2 |
|
|
|
39.6 |
|
|
|
0.7 |
|
|
|
46.7 |
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
340.7 |
|
|
|
100.0 |
% |
|
$ |
342.2 |
|
|
|
100.0 |
% |
|
$ |
3.2 |
|
|
|
100.0 |
% |
|
Gross Margin
|
|
|
137.8 |
|
|
|
40.4 |
|
|
|
129.0 |
|
|
|
37.7 |
|
|
|
0.8 |
|
|
|
25.0 |
|
Transition Period
The Transition Period gross margin, as a percentage of revenues,
was 25.0%. Gross margin for the Transition Period was negatively
impacted by both the relatively low level of revenues for the
period and the non-variable portion of cost of revenues during
the period.
Fiscal 2005 Compared to Fiscal
2004
Fiscal 2005 gross margin as a percentage of revenues decreased
to 37.7% of revenues compared to 40.4% of revenues in fiscal
2004.
43
Product gross margin as a percentage of revenues decreased from
39.3% in fiscal 2004 to 36.5% in fiscal 2005. The decline in
margin was primarily attributable to:
|
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|
|
a 1.5% decline as a result of increased freight and distribution
costs in fiscal 2005 compared to fiscal 2004; |
|
|
|
a 1.0% decline as a result of (i) a shift in our communication
platform sales mix whereby total communication platform sales
contained a higher proportion of lower margin small and medium
business platforms in fiscal 2005 compared to fiscal 2004; and
(ii) increased price competition on desktop devices
resulted in price reductions which contributed in reducing
overall desktop device margins; and |
|
|
|
a 0.3% decline as a result of higher inventory obsolescence
provisions recorded in fiscal 2005 compared to fiscal 2004 due
primarily to the end of life of our Mitel 3100 ICP
product. |
Service gross margin also declined year-over-year from 42.2% in
fiscal 2004 to 39.6% in fiscal 2005. The 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 2005 compared to fiscal 2004.
Operating Expenses
Research and Development:
Research and development expenses increased from 10.6% of total
revenues in fiscal 2004 to 12.1% of total revenues in fiscal
2005 with spending in absolute dollars increasing by
$5.2 million
year-over-year to
$41.4 million.
During the Transition Period, we recorded research and
development expenses of $0.7 million, or 21.9% of total
revenues, for the period.
Selling, General and
Administrative:
SG&A expenses increased from 32.7% of total revenues in
fiscal 2004 to 33.6% of total revenues in fiscal 2005, with
spending in absolute dollars growing by $3.5 million to
$114.9 million
year-over-year. The
increase in SG&A spending was due primarily to strategic
investment in marketing initiatives to improve our brand
identity and awareness in our key geographical markets.
Additionally, we continued to invest in the development of
channel relationships and expand our presence in Continental
Europe and the South Pacific. The overall spending growth was
partially offset by reduced SG&A spending resulting from
workforce reduction initiatives implemented in both fiscal 2005
and prior years relating to the centralization of various
general and administrative back-office functions.
During the Transition Period, we recorded SG&A expenses of
$1.8 million, or 56.3% of total revenues, for the period.
Special Charges:
Special charges as a percentage of revenues in fiscal 2005
decreased 0.3% compared to fiscal 2004 mainly as a result of
lower amounts being provided for non-cancelable lease costs
relating to excess facilities in fiscal 2005.
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
44
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.
No special charges were recorded during the Transition Period.
Loss 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.
Amortization of Acquired
Intangibles:
As part of the acquisition of the communications system business
from Zarlink in 2001, we recorded acquired intangible assets of
$92.2 million consisting of developed technology,
workforce, customer base and patents. Resulting amortization
expense amounted to $29.1 million and $0.2 million for
fiscal 2003 and fiscal 2004, respectively. Acquired intangible
assets were fully amortized in early fiscal 2004. Therefore, no
amortization expense was recorded in either the Transition
Period or fiscal 2005.
Interest Expense:
Interest expense was $2.6 million in fiscal 2005 compared
to $4.3 million in fiscal 2004, representing a decrease of
$1.7 million, as total borrowings declined year-over-year.
Other (Income) Expense, Net:
Other (income) expense, on a net basis, consists primarily
of foreign exchange rate gains and losses and interest income.
Other income, on a net basis, amounted to $0.4 million in
fiscal 2005 compared to other expense, on a net basis, of
$0.6 million in fiscal 2004. The income recorded in fiscal
2005 primarily resulted from interest income of
$0.6 million being partially offset by transactional
foreign currency losses of $0.2 million (compared with
transactional foreign currency losses of $1.0 million in
fiscal 2004), arising mainly from adverse movements between the
U.S. dollar and the Canadian dollar during the year. 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 intercompany balances.
During the Transition Period we recorded other income, on a net
basis, of $0.2 million due primarily to transactional
foreign currency gains.
Mark-to-Market Adjustment on
Derivatives:
During fiscal 2005, we recorded a $5.3 million non-cash
expense representing the
mark-to-market
adjustment on the derivative instrument associated with our
preferred shares.
During the Transition Period, we recorded a $0.1 million
non-cash expense representing the
mark-to-market
adjustment on the derivative instrument associated with our
preferred shares.
Beneficial Conversion Feature
on Convertible Debentures:
During fiscal 2004, we recorded a $3.1 million expense
representing the beneficial conversion feature on the conversion
of debentures. The debentures, which did not have a fixed
conversion price at the commitment date, were converted into
common shares at a price that was lower than the fair market
value of the common shares at the commitment date. As a result,
a non-cash expense representing the difference between the
effective conversion price and the fair market value of the
common shares was calculated and recorded as required by
generally accepted accounting principles.
45
Provision for Income Taxes:
We recorded income tax expense of $nil for the Transition Period
and $0.8 million for fiscal 2005. The income tax expense
was mainly as a result of our United States subsidiary being in
a taxable position in fiscal 2005.
In fiscal 2004 we recorded income tax expense, net of deferred
tax recoveries, of $0.3 million. The current income tax
expense amounted to $2.0 million, arising as a result of
our United Kingdom subsidiary being in a taxable position in
fiscal 2004. This tax expense was largely offset by deferred tax
recoveries arising from deductible taxable amounts available to
us of $1.7 million.
Quarterly Results of
Operations
The following sets forth unaudited consolidated statements of
operations data for our eight most recent quarters ended
April 30, 2006. This unaudited information has been
prepared on the same basis as our annual consolidated financial
statements appearing elsewhere in this prospectus and includes
all adjustments necessary to fairly present the unaudited
quarterly results. These adjustments consist only of normal
recurring adjustments. This information should be read in
conjunction with our consolidated financial statements and
related notes appearing elsewhere in this prospectus. The
operating results for any quarter are not necessarily indicative
of results for any future period.
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|
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|
|
Quarter Ended(1) | |
|
|
| |
|
|
Jul. 25, | |
|
Oct. 24, | |
|
Jan. 23, | |
|
Apr. 24, | |
|
Jul. 31, | |
|
Oct. 31, | |
|
Jan. 31, | |
|
Apr. 30, | |
|
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(in millions, except share and per share data, unaudited) | |
|
|
Revenues
|
|
$ |
82.4 |
|
|
$ |
84.1 |
|
|
$ |
84.6 |
|
|
$ |
91.1 |
|
|
$ |
91.7 |
|
|
$ |
95.9 |
|
|
$ |
97.6 |
|
|
$ |
101.9 |
|
Cost of revenues
|
|
|
49.0 |
|
|
|
52.5 |
|
|
|
55.2 |
|
|
|
56.5 |
|
|
|
53.8 |
|
|
|
56.0 |
|
|
|
55.7 |
|
|
|
60.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
33.4 |
|
|
|
31.6 |
|
|
|
29.4 |
|
|
|
34.6 |
|
|
|
37.9 |
|
|
|
39.9 |
|
|
|
41.9 |
|
|
|
41.7 |
|
Research and development
|
|
|
9.9 |
|
|
|
9.9 |
|
|
|
10.6 |
|
|
|
11.0 |
|
|
|
10.8 |
|
|
|
10.5 |
|
|
|
11.7 |
|
|
|
11.1 |
|
Selling, general and administrative
|
|
|
29.3 |
|
|
|
26.9 |
|
|
|
29.0 |
|
|
|
29.7 |
|
|
|
29.3 |
|
|
|
28.7 |
|
|
|
30.1 |
|
|
|
32.6 |
|
Special
charges(2)
|
|
|
1.9 |
|
|
|
0.5 |
|
|
|
4.7 |
|
|
|
3.5 |
|
|
|
1.8 |
|
|
|
1.5 |
|
|
|
0.9 |
|
|
|
1.5 |
|
Loss (gain) on sale of manufacturing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
(0.7 |
) |
|
|
(0.2 |
) |
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(7.7 |
) |
|
|
(5.7 |
) |
|
|
(14.9 |
) |
|
|
(13.0 |
) |
|
|
(4.0 |
) |
|
|
0.7 |
|
|
|
(0.1 |
) |
|
|
(3.3 |
) |
Other (income) expense, net
|
|
|
1.9 |
|
|
|
1.4 |
|
|
|
1.8 |
|
|
|
2.4 |
|
|
|
3.8 |
|
|
|
2.8 |
|
|
|
9.4 |
|
|
|
23.8 |
|
Income tax (recovery) expense
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.5 |
|
|
|
1.5 |
|
|
|
0.5 |
|
|
|
(4.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(9.8 |
) |
|
$ |
(7.3 |
) |
|
$ |
(16.9 |
) |
|
$ |
(15.6 |
) |
|
$ |
(8.3 |
) |
|
$ |
(3.6 |
) |
|
$ |
(10.0 |
) |
|
$ |
(22.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.10 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.16 |
) |
|
$ |
(0.15 |
) |
|
$ |
(0.08 |
) |
|
$ |
(0.05 |
) |
|
$ |
(0.10 |
) |
|
$ |
(0.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (in
millions)
|
|
|
111.7 |
|
|
|
111.7 |
|
|
|
114.6 |
|
|
|
117.2 |
|
|
|
117.1 |
|
|
|
117.3 |
|
|
|
117.2 |
|
|
|
117.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(9.8 |
) |
|
$ |
(7.3 |
) |
|
$ |
(16.9 |
) |
|
$ |
(15.6 |
) |
|
$ |
(8.3 |
) |
|
$ |
(3.6 |
) |
|
$ |
(10.0 |
) |
|
$ |
(22.7 |
) |
Add back: fair value adjustment on derivatives
|
|
|
1.3 |
|
|
|
1.2 |
|
|
|
1.4 |
|
|
|
1.4 |
|
|
|
1.5 |
|
|
|
1.6 |
|
|
|
8.6 |
|
|
|
20.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net
loss(3)
|
|
$ |
(8.5 |
) |
|
$ |
(6.1 |
) |
|
$ |
(15.5 |
) |
|
$ |
(14.2 |
) |
|
$ |
(6.8 |
) |
|
$ |
(2.0 |
) |
|
$ |
(1.4 |
) |
|
$ |
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
(1) |
Quarterly Results of Operations excludes the Transition Period
as the results for this period are not comparable. Results of
Operations for the Transition Period are included in the
April 30, 2005 audited financial statements. |
|
(2) |
Special charges relate to restructuring activities, product line
exit and other loss accruals undertaken to improve our
operational efficiency and realign our business. |
|
|
(3) |
We define adjusted net loss as net loss excluding the change in
the fair value of the derivative instruments. This definition
may not be comparable to similarly titled measures reported by
other companies. We are presenting adjusted net loss because we
believe it provides a more complete understanding of our
business than could be obtained without this disclosure, as it
eliminates a non-cash
charge that will be eliminated immediately following this
offering. The change in the fair value in derivative instruments
resulted from our issuance of convertible, redeemable preferred
shares that give holders the right, at any time after five
years, to require us to redeem these shares for cash. The
requirement to redeem these shares on an
as-if-converted-to-common share basis qualifies as an embedded
derivative. The embedded derivative is being marked to market
throughout the period to redemption with a non-cash charge being
reflected in our Consolidated Statement of Operations. Adjusted
net loss shows what our net income would have been without the
effect of this non-cash charge. We believe that this is a useful
measure to our investors as the convertible redeemable preferred
shares will automatically convert into common shares in
connection with the closing of this offering with the result
being the elimination of this non-cash charge in the future. The
use of adjusted net loss has limitations and you should not
consider adjusted net loss in isolation from or as an
alternative to U.S. GAAP measures, such as net income or cash
flow statement data that are prepared in accordance with U.S.
GAAP, or as a measure of profitability or liquidity. |
Internal Controls Over Financial Reporting
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 and our independent registered public
accounting firm can render an opinion on managements
assessment and on the effectiveness of our internal controls
over financial reporting commencing with our annual report for
the fiscal year ended April 30, 2007.
Liquidity and Capital Resources
As of April 30, 2006, we had cash and cash equivalents of
$35.7 million. Following the issuance of our convertible
notes in April 2005, we repaid and cancelled our credit facility
with Bank of Montreal. Following the sale of the land, building
and fixed assets in Caldicot, United Kingdom in August 2005, the
Barclays credit facilities, which were secured by the Caldicot
property, were repaid and cancelled.
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
$355.5 million at April 30, 2006. Our primary source
of funds has been proceeds from the issuance of equity and debt
securities. From inception through April 30, 2006, we have
received net proceeds of $362.0 million from issuances of
our common shares, preferred shares, warrants, convertible
debentures and convertible notes.
Our primary source for cash in the future is expected to come
from operations. 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. A secondary source of future cash proceeds is
expected to come from the exercise of stock options.
The outstanding convertible notes mature on April 28, 2010.
If the convertible notes have not been converted into common
shares by their maturity date, we will have to repay the note
holders the principal amount of $55.0 million. In addition,
repayment may be required prior to the maturity date in the
event of a default or fundamental change under the
convertible notes. The convertible notes contain customary
events of default, including, but not limited to, payment
defaults, breaches of agreements and conditions, covenant
defaults, cross defaults (including an event of default under
the TPC Agreement) and certain events of bankruptcy or
insolvency. A default by us in the performance of any covenant,
agreement or condition in the convertible notes will generally
not constitute an event of default, unless the default
continues, unremedied, for a period of 30 days after we
have been given notice of the default by a noteholder. Depending
upon our liquidity at the time of repayment, we may be required
to seek additional funding in order to meet our obligations with
respect to such a repayment of the convertible notes.
47
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 $40.1 million at April 30, 2006.
During fiscal 2007 we expect to make contributions of
$2.9 million to this pension plan. 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. The
next actuarial valuation for the purposes of determining the
funding requirements is due as at August 1, 2006 and we
expect to have a new schedule of contributions agreed upon and
put in place by the end of March 2007. Due to the increase of
$15.0 million in the unfunded pension liability during
fiscal 2006, 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 is
amortized over 15 years, which is our current practice, we
would expect our annual funding requirements to increase by
approximately $2.5 million. If the deficit is amortized
over 10 years, we would expect our annual funding
requirements to increase by approximately $4.5 million. The
actual amount of the increase in funding will depend upon the
results of the actuarial valuation due August 1, 2006,
which may or may not be consistent with our expectations. We
expect to fund the expected future increased annual
contributions out of our expected future cash flows from
operations.
Based on our existing cash and cash equivalents, and our
expected cash flows from operations, we believe that we will
have sufficient liquidity to support our business operations
throughout the fiscal year ending April 30, 2007. However,
in the absence of the proceeds raised in the offering we may be
required, or could elect, to seek additional funding prior to
that time. Our future capital requirements will depend on many
factors, including 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. In addition, although we do not
currently have arrangements or commitments with respect to any
particular acquisition, we may elect to seek additional funding
if we pursue an acquisition. Additional equity or debt financing
may not be available on acceptable terms or at all. We believe
that our sources of liquidity beyond April 30, 2007 will be
our then current cash balances, funds from operations and any
long-term credit facilities we may be able to arrange.
Cash Flows
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
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; |
|
|
|
|
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. |
|
49
Comparison of Fiscal 2004, Fiscal 2005 and the
Six-Day Period ended
April 30, 2005
Below is a summary of comparative cash flows and a more detailed
discussion of results for fiscal 2004, fiscal 2005 and the
Transition Period ended April 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Days | |
|
|
Fiscal | |
|
|
|
Ended | |
|
|
| |
|
2005 | |
|
April 30, | |
|
|
2004 | |
|
2005 | |
|
Change | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(in millions) | |
Net cash provided by (used in)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$ |
10.8 |
|
|
$ |
(31.8 |
) |
|
$ |
(42.6 |
) |
|
$ |
(1.2 |
) |
|
Investing activities
|
|
|
(6.3 |
) |
|
|
(5.8 |
) |
|
|
0.5 |
|
|
|
(1.1 |
) |
|
Financing activities
|
|
|
(2.0 |
) |
|
|
20.1 |
|
|
|
22.1 |
|
|
|
39.3 |
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1.9 |
|
|
|
0.5 |
|
|
|
(1.4 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$ |
4.4 |
|
|
$ |
(17.0 |
) |
|
$ |
(21.4 |
) |
|
$ |
36.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
26.7 |
|
|
$ |
9.7 |
|
|
$ |
(17.0 |
) |
|
$ |
46.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in) Operating Activities: |
Net cash used in operating activities was $1.2 million
during the Transition Period and $31.8 million for fiscal
2005. During fiscal 2004, $10.8 million in net cash was
generated by operating activities. The decline in cash generated
from operating activities in fiscal 2005 was due to higher
operating losses in fiscal 2005 driven primarily by lower gross
margins, our decision to increase investment in research and
development, and higher selling, general and administrative
expenses.
|
|
|
Cash Used in Investing Activities: |
Net cash used in investing activities was $1.1 million
during the Transition Period, primarily related to an increase
in restricted cash, and $5.8 million for fiscal 2005,
primarily related to capital expenditures on computer equipment
and realized foreign exchange gains and losses as a result of
hedging activities. During fiscal 2004, investing activities
consumed $6.3 million in cash, primarily related to capital
expenditures on computer equipment and realized foreign exchange
gains and losses as a result of hedging activities.
|
|
|
Cash Provided by (Used in) Financing Activities: |
Net cash provided by financing activities was $39.3 million
for the Transition Period and $20.1 million in fiscal 2005.
In fiscal 2004, $2.0 million was used in financing
activities. Cash flows from financing activities in the
Transition Period were mainly attributable to $55 million
gross proceeds from the issuance of the convertible notes and
$14.6 million used to repay bank indebtedness. Cash from
financing activities in fiscal 2005 was mainly attributable to
proceeds of $12.4 million from the issuance of warrants,
proceeds of $8.9 million as a result of an increase in bank
indebtedness, and proceeds of $3.5 million from the
issuance of common shares and payment of employee share purchase
loans offset by $4.7 million used to repay long term debt,
related party loans and share issuance costs. Cash from
financing activities in fiscal 2004 was mainly attributable to
net proceeds of $12.9 million from the issuance of
preferred shares, and proceeds of $9.8 million from the
issuance of warrants, offset by repayments of bank indebtedness,
related party loans, long-term debt and capital lease
obligations totaling $25.2 million.
50
The following table sets forth our contractual obligations as of
April 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
4.5 |
|
|
|
1.8 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
Operating lease
obligations(2)
|
|
|
73.7 |
|
|
|
15.6 |
|
|
|
27.5 |
|
|
|
21.4 |
|
|
|
9.2 |
|
Purchase
obligations(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan
contributions(4)
|
|
|
2.9 |
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
notes(5)
|
|
|
73.5 |
|
|
|
5.0 |
|
|
|
12.8 |
|
|
|
55.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$ |
154.6 |
|
|
$ |
25.3 |
|
|
$ |
43.0 |
|
|
$ |
77.1 |
|
|
$ |
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 defined benefit
pension plan over the next twelve months. Due to the increase of
$15.0 million in the unfunded pension liability during
fiscal 2006, 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 is
amortized over 15 years, which is our current practice, we
would expect our annual funding requirements to increase by
approximately $2.5 million. If the deficit is amortized
over 10 years, we would expect our annual funding
requirements to increase by approximately $4.5 million. |
|
|
(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%. |
Liabilities arising from the deficit in our defined benefit
pension plan are not included in the above table. We maintain a
defined benefit pension plan in the United Kingdom. As at
April 30, 2006, the accumulated benefit obligation of
$144.3 million exceeded the fair value of the plan assets
of $104.2 million, resulting in an unfunded status of
$40.1 million as recorded in our consolidated balance sheet
as of April 30, 2006.
Off-Balance Sheet Arrangements
We have the following material off balance sheet arrangements as
of April 30, 2006:
Letters of Credit:
We had $1.2 million in letters of credit outstanding as of
April 30, 2006.
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 $2.5 million as of April 30, 2006. Of this
amount, the amount relating to guarantees of our resellers
performance was $1.5 million as of April 30, 2006.
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.
51
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.
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 3 of our audited consolidated financial
statements included elsewhere in this prospectus. 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.
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 1.3% on April 30, 2006
compared to 0.9% at both April 24, 2005 and April 30, 2005.
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.
52
|
|
|
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, 2005, the provision
represented 3% and 4% of gross receivables, respectively. It is
reasonably likely that this provision will not change
significantly in the future.
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 24, 2005, April 30, 2005 and
April 30, 2006, our inventory has been written down by 9%,
8% and 10%, respectively, of gross inventory. The increase in
the write-down from April 30, 2005 to April 30, 2006
reflects an expected decrease in demand and forecasted sales for
certain product lines, including those which have been
discontinued in fiscal 2006, and also reflects additional
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Raw materials
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
Finished goods
|
|
|
17.8 |
|
|
|
18.1 |
|
|
|
25.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18.7 |
|
|
|
19.0 |
|
|
|
26.1 |
|
Less: inventory write-down
|
|
|
(1.6 |
) |
|
|
(1.6 |
) |
|
|
(2.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17.1 |
|
|
$ |
17.4 |
|
|
$ |
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9% |
|
|
|
8% |
|
|
|
10% |
|
|
|
|
|
|
|
|
|
|
|
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.
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
$2.6 million at the end of fiscal 2005 to $2.0 million
at April 30, 2006. The decline is primarily due to a
reversal in United Kingdom customer warranties relating to
a specific program that has ended. Actual warranty costs
for fiscal 2006 were higher than the previous year and higher
than our expectations. Efforts are being made to reduce these
costs for fiscal 2007 through negotiations for cost
53
reductions with warranty service providers. The following table
provides a continuity of the warranty provision over the past
three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 25, | |
|
April 24, | |
|
April 30, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Balance, beginning of period
|
|
$ |
1.9 |
|
|
$ |
2.1 |
|
|
$ |
2.6 |
|
Warranty costs incurred
|
|
|
(0.7 |
) |
|
|
(1.0 |
) |
|
|
(1.8 |
) |
Warranties issued
|
|
|
0.4 |
|
|
|
1.0 |
|
|
|
1.0 |
|
Other
|
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
2.1 |
|
|
$ |
2.6 |
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
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.
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 2005 or fiscal 2006 and do not expect any significant
future charges based on current information.
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, 2006. 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.
We record restructuring, exit and other loss accruals when the
liability has been incurred. 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. Additional accruals for fiscal 2006 and fiscal 2005
resulted from new restructuring activities and severance costs.
Reversals in the provision relate mostly to changes in lease
termination obligation estimates described below.
|
|
|
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
54
the commercial real estate market that were used to calculate
future sublease income may be different from actual sublease
income. During the nine months ended January 31, 2006
a reversal of $1.1 million was made against our lease
termination obligation estimates as a result of changes in these
and other operating cost assumptions. Of this amount
$0.4 million related to special charge reversals and
$0.7 million related to the loss reversal on the disposal
of manufacturing operations. As of January 31, 2006, the
combined balance relating to lease termination obligations was
$8.3 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.
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. With the exception of
our operations in the United States, 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 equal to
$81.5 million has been recorded against the
$84.3 million net deferred tax assets at April 30,
2006. The amount that has not been provided for relates to three
years of unrestricted United States losses. These losses are
believed to be recoverable since we have a history of utilizing
losses in the United States over the past three consecutive
years, and expect to continue to use them in each of the next
three years.
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.
The actuarial loss increased from $1.3 million in fiscal
2005 to $41.0 million in fiscal 2006 mainly due to changes
in assumptions used for disclosures at each measurement date.
The increase in the loss is primarily driven by the decrease in
discount rate assumption from 5.5% in 2005 to 5.0% in 2006,
which accounts for 66% of the increase. Increases in inflation
rate and compensation rate assumptions, as well as an expected
increase in mortality also contributed to the increased loss.
The following assumptions were used in valuing the liabilities
and benefits under the pension plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 25, | |
|
April 24, | |
|
April 30, | |
|
|
2004 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.50% |
|
|
|
5.50% |
|
|
|
5.00% |
|
Compensation increase rate
|
|
|
2.50% |
|
|
|
2.50% |
|
|
|
2.75% |
|
Investment returns assumption
|
|
|
7.75% |
|
|
|
7.75% |
|
|
|
7.25% |
|
Inflation rate
|
|
|
2.50% |
|
|
|
2.50% |
|
|
|
2.75% |
|
Average remaining service life of employees
|
|
|
20 years |
|
|
|
20 years |
|
|
|
21 years |
|
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
55
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, 2006 were nominal and $75.9 million
respectively. The derivative relating to the redeemable
preferred shares reflects a discount rate of 17%, common share
fair value of $1.38, and a remaining term of three years.
The common share fair value is based on a number of highly
subjective qualitative and quantitative assumptions made by
management. In fiscal 2006, a fair value adjustment of
$32.6 million was recorded in our consolidated statement of
operations. Of this amount, $22.0 million was directly
attributable to an increase in fair value estimate from C$1.00
to C$1.55 (U.S.$0.87 to U.S.$1.38).
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 |
|
(Increase)/Decrease | |
|
|
| |
|
|
(in millions) | |
1 percentage point increase in discount rate
|
|
$ |
1.9 |
|
1 percentage point decrease in discount rate
|
|
|
(2.0 |
) |
1 cent increase in fair value of common share price
|
|
|
(0.5 |
) |
1 cent decrease in fair value of common share price
|
|
|
0.5 |
|
The preferred shares will be converted in accordance with their
terms upon completion of this offering. As a result of this
conversion the derivative instruments balance will be
reclassified into equity.
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 venture capital
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
56
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. The exercise price
set by our board of directors for the options granted from
June 9, 2005 to December 8, 2005, was retrospectively
verified by the results of the arms-length valuation for the
quarters ended July 31, 2005 and October 31, 2005. Our
board of directors set exercise prices of C$1.16 and C$1.55 for
the options granted on March 8, 2006 and May 5, 2006,
respectively. These valuations were based on a contemporaneous
valuation by the valuation firm.
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 this offering, our continued
operation as a private company and an orderly liquidation of our
assets. The valuation firm then 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 123(R)
In December 2004, the FASB issued Statement No. 123
(revised 2004), Share-Based Payment
(SFAS 123R), which revises SFAS 123 and
supercedes APB 25. 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 statement is effective for us as of the beginning of
our fiscal 2007. We will be applying 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. As the
requirements of SFAS 123R depend on future awards,
modifications, repurchases or cancellations, the impact on our
consolidated financial statements when this statement becomes
effective is not yet fully determinable.
SFAS 151
In November 2004, the FASB issued Statement No. 151,
Inventory Costs (SFAS 151). SFAS 151
amends the guidance in ARB No. 43, Chapter 4,
Inventory Pricing, to clarify the types of costs
that should be expensed rather than capitalized as inventory.
Among other provisions, the new rule requires that items such as
idle facility expense, excessive spoilage, double freight, and
rehandling costs be recognized as current-period charges
regardless of whether they meet the criterion of so
abnormal as stated in ARB No. 43. Additionally,
SFAS 151 requires that the allocation of fixed production
overhead to
57
the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal
years beginning after June 15, 2005, or for our fiscal
2007. We are currently evaluating the requirements of
SFAS 151 and have not yet fully determined the impact, if
any, on the consolidated financial statements when this
statement becomes effective.
SFAS 153
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Non-monetary Assets. This standard
amended APB Opinion No. 29, Accounting for
Non-monetary Transactions, to eliminate the fair value
measurement exception for non-monetary exchanges of similar
productive assets and replaces it with a general exception for
exchanges of non-monetary assets that do not have commercial
substance. A non-monetary exchange has commercial substance if
the future cash flows of the entity are expected to change
significantly as a result of the exchange. This statement is
effective for all non-monetary asset exchanges completed by the
company starting fiscal 2007. We have not engaged in
non-monetary asset exchanges in the current period and the
provisions of SFAS No. 153 are not expected to have a
significant impact when this statement becomes effective.
SFAS 154
In May 2005, the FASB issued Statement No. 154, Accounting
Changes and Error Corrections a replacement of APB
Opinion No. 20 and FASB Statement No. 3. SFAS 154
replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements. SFAS 154 changes the requirements for
the accounting for, and reporting of, a change in accounting
principle. SFAS 154 requires that a voluntary change in
accounting principle be applied retrospectively with all prior
period financial statements presented using the new accounting
principle. SFAS 154 is effective for accounting changes and
corrections of errors in fiscal years beginning after
December 15, 2005. We will apply these requirements to
changes and correction of errors made after May 1, 2005.
FSP
SFAS 143-1
In June 2005, FASB issued FASB Staff Position (FSP)
SFAS No. 143-1,
Accounting for Electronic Equipment Waste
Obligations, to address the accounting for obligations
associated with the European Union Directive on Waste Electrical
and Electronic Equipment (the Directive). The
Directive concludes that commercial users are obligated to
retire, in an environmentally sound manner, specific assets that
qualify as historical waste. The FSP requires capital treatment
for this obligation and is to be adopted on the later of the
first reporting period ending after June 8, 2005 or the
date of adoption of the law by the applicable
EU-member country. The
Directive is currently under review in the United Kingdom and is
expected to be transposed into U.K. law in fiscal 2007. We will
continue to evaluate the impact as the United Kingdom and other
EU-member countries enact the legislation.
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. We are currently evaluating the
requirements of SFAS 155 and have not yet fully determined
the impact, if any, on the consolidated financial statements
when this statement becomes effective.
58
EITF 05-2
In June 2005,
EITF 05-2 The
Meaning of Conventional Convertible Debt Instrument
in Issue
No. 00-19
was issued and is to be applied to new instruments entered into
and instruments modified in periods beginning after
June 29, 2005. The new EITF clarifies that instruments that
are convertible into a fixed number of shares at the option of
the holder, based on the passage of time or a contingent event,
should be considered conventional for purposes of
applying
Issue 00-19. The
EITF also clarifies that convertible preferred stock with a
mandatory redemption date may qualify for the exception included
in paragraph 4 of
Issue 00-19 if the
economic characteristics indicate that the instrument is more
akin to debt than equity. The requirements of
EITF 05-2 have not
had an impact on the consolidated financial statements for the
applicable periods beginning after June 29, 2005.
Qualitative and Quantitative Disclosure 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
(DSU) plan for executives. Under the DSU plan, when
a participant ceases to be an executive of Mitel, the DSU plan
participant will receive a cash amount equal to the number of
DSUs 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
DSU plan participant ceases to be an executive of Mitel, or on a
later date selected by the DSU 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, 2006, a $1.00 increase in our common share price
would increase our net loss by $0.6 million.
(April 30, 2005 $0.5 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, 2006, a 5% appreciation in the
Canadian dollar against all currencies would have resulted in an
additional unrealizable loss of $6.4 million
(April 30, 2005 less than $0.05 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 London Inter-Bank Offer Rate or
LIBOR. Each adverse change in the LIBOR rate of 100
basis points would
59
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 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 interest rates on our obligations under capital leases are
fixed and therefore not subject to interest rate risk.
60
BUSINESS
Overview
We are a leading provider of integrated 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 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 five 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 systems to IP-based
systems. As a result of our efforts to realign our business to
discontinue certain activities relating to our legacy systems
and to focus our efforts on our IP-based communications
solutions we have incurred losses in each of the past five
fiscal years, including net losses of $44.6 million in
fiscal 2006 and $49.6 million in fiscal 2005. 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 48% in fiscal 2006 compared with
fiscal 2005 and 97% of our system shipments for the quarter
ended April 30, 2006 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 customers with
systems that support as many as 40,000 users in multiple
locations. 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. 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 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
1,200 channel partners that includes wholesale distributors,
solutions providers, authorized resellers, communication
services providers, systems integrators, and other distribution
channels.
Our Industry
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.
61
Communication services providers, or carriers, are also
embracing
voice-over-Internet
Protocol or 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 Research Group
estimates that IP telephony line shipments grew by a compound
annual growth rate of 68.7% from 2002 to 2005. Synergy estimates
that IP telephony market revenues were approximately
$3.8 billion worldwide in 2005 and are expected to grow to
over $10.6 billion by 2009, representing a compound annual
growth rate of 29.2%. 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 communications platforms
in 2006 will exceed those of legacy systems for the first time
in history and that
IP-based systems will
comprise over 90% of all enterprise telephony purchases by 2009.
As this replacement cycle progresses, purchases of legacy
circuit-switched
telephony systems are expected to decline at a compound annual
rate of 40.9% from 2005 until 2009.
The largest geographic markets for business IP telephony are
North America and EMEA (Europe, Middle East and Africa), which
accounted for 46.5% and 35.5%, respectively, of the overall
global market for the twelve months ended December 31,
2005. 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, in the United
States the large enterprise market (businesses with more than
500 employees) represented 64% of total IP telephony
shipments, while the small and
medium-sized business
market (businesses with up to 500 employees) accounted for 36%
of total IP telephony shipments in 2005. However, InfoTech
expects the small and
medium-sized business
market to grow at a faster rate than the large enterprise
market and projects the small and medium-sized business market
to represent 43% of total
IP-based systems
shipments in the United States by 2010.
To date, the business IP telephony market has largely been
limited to early adopters. Most businesses have not yet migrated
to IP-based systems to
solve their voice communications needs. According to InfoTech,
only 36% of small and
medium-sized businesses
in the United States have adopted
IP-based systems but
this is expected to rise to 62% by 2009. Similarly, 73% of large
enterprise businesses in the United States are implementing
IP-based systems, a
figure which is expected to grow to 89% by 2009.
When adopting IP-based
systems, industry analysts have indicated that 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 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.
Initially, cost reductions were the primary reason for the
adoption of converged
IP-based communications
systems. These cost reductions can include:
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the reduction or elimination of long distance and local toll
charges; |
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lower network maintenance expenses since physical moves,
additions and changes can be handled centrally in an
IP-based network; |
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decreased network management staff requirements since both voice
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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 contact
center 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 access their personalized
features, such as
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 challenges and opportunities 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.
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.
Our Competitive Strengths
Our key competitive strengths include the following:
Focus on IP-based
communications solutions. We made the strategic decision to
invest heavily in the development of
IP-based communications
solutions over the last five years. We invested the necessary
capital, and absorbed the resulting operating losses, to finance
the development of
IP-based communications
solutions at a time when the majority of our revenues were still
based on the sale of legacy systems. As a result of our focus on
the IP-based
communications market, we believe we now have one of the
broadest portfolios of
IP-based communications
solutions in the industry. We also have one of the
industrys highest ratios of
IP-based product
shipments to that of legacy products, with over 95% of our
system shipments being IP platforms and 86% of our product
revenues coming from
IP-based solutions for
the year ended April 30, 2006. Synergy has predicted that
revenue from legacy
circuit-switched
telephony systems will decline at a compound annual rate of
40.9% from 2005 until 2009. Since only 5% of our product
shipments and 14% of our product revenues in the year ended
April 30, 2006 were derived from sales of legacy systems,
we are better positioned than many of our competitors to
withstand the expected further decline in the market for legacy
systems.
Interoperable, scalable and flexible solutions that enable IP
adoption. Our
IP-based communications
solutions allow our customers to migrate part or all of their
voice communications towards a converged
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IP-based solution at
their own pace and not be forced to discard their investment in
legacy systems or change to a particular vendors data
infrastructure. This gradual migration is possible because our
IP-based communications
solutions are compatible with industry standards and can
interoperate with most voice and data networks. Our
IP-based communications
platforms and gateways can scale from as few as 10 users to as
many as 65,000 users in a single network configuration. In
developing our applications we use open standards and
communications protocols that allow for the seamless integration
of converged voice, video and data applications.
Broad software capabilities that enable business process
improvements. Our solutions have significant embedded
software content which increases the value of the hardware
offering to our customers. In addition, our solutions are
differentiated by a broad set of packaged software applications
that help our customers optimize business processes, whether
addressing the needs of the individual, a work group or the
business as a whole. Our range of packaged software offerings
includes applications for contact centers, mobility,
teleworking, presence and collaboration, voice messaging,
unified communications, video conferencing and network
management.
Desktop portfolio focused on the user experience. Our
wired and wireless desktop devices are designed to present
advanced desktop devices to the user and to address their
specific needs regardless of whether they are in the office, at
home or traveling. Our desktop products have been recognized for
their innovation, ease of use, industrial design and
functionality.
Communications solutions tailored to the needs of specific
industries. We offer solutions that are designed
specifically to meet the needs of particular industries and
markets such as education, government, healthcare, hospitality
and retail. We have made significant investments in developing
our understanding of the unique business requirements of our
target markets and translating that knowledge into specific
solutions. Examples of this industry expertise include a low
cost hospitality IP telephone designed specifically for hotel
guestrooms; a virtual concierge software application that serves
as an in-room butler at
five star properties; a retail
point-of-sale IP phone;
and a student outreach solution that provides direct
communication between teachers and parents. As a result, we have
established significant market share in these target industries.
We are extending our focus to address other markets such as the
financial services industry.
Leadership in small and medium-sized business market. We
have been recognized for our leadership in the small and
medium-sized business
market (fewer than 100 users), most recently by InfoTech as the
largest provider of
IP-based communications
solutions to this market in the United States in 2005. In the
United Kingdom, MZA, a market research firm, recognized us
as the leading provider of IP desktop communications solutions
in the small business market (fewer than 100 users) and the
second largest provider in the
medium-sized business
market (fewer than 250 users) for 2005. With our brand
recognition and the scalability of our
IP-based communications
solutions, we believe we are well positioned to expand our focus
and addressable market from small and
medium-sized businesses
to large enterprises. We now have many large enterprise
customers, the largest of which requires us to support as many
as 40,000 users.
Large, integrated distribution and strategic partner
network. We have developed a global sales and distribution
network with our channel partners and have formed a network of
strategic partnerships and alliances. We believe that our
channel partner network enables us to reach markets around the
world cost effectively. We have substantial distribution
capabilities in North America and the United Kingdom, and we are
increasing our distribution presence in other regions. Our
distribution network consists of over 1,200 channel
partners across more than 90 countries. Where appropriate,
we assist our channel partners with our sales force and service
organization. We also support our channel partners in their
sales activities through our channel managers, systems
engineers, technical account managers and sales administrators
and offer them a variety of services and software tools to
assist them both before and after a sale. We supplement our
distribution network through a variety of joint-selling and
cross-selling initiatives with our strategic partners, resulting
in increased sales and enhanced brand recognition. Our strategic
partner network also enables us to further improve the
functionality and features of our solutions through joint
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research and development activities. We have entered into
strategic alliances for the provision of certain converged
networks with Hewlett-Packard and Foundry Networks. At the
software applications level, we have entered into an agreement
with Microsoft to integrate Microsoft Office Live Communications
Server and Microsoft Office Communicator applications with our
Mitel Live Business Gateway. This interoperability will
allow our customers to access our call processing features from
within the Microsoft Office system and enhances our messaging
and contact center applications by allowing Microsofts
applications to show presence and availability.
Our Strategy
Our strategy is to build from our leading position in the small
and medium-sized
business market to also 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. We have established a leading position
in the small and
medium-sized business
market. We continue to expand our market focus beyond small and
medium-sized businesses
by building on and replicating this success in the large
enterprise market given the ability of our solutions to scale up
to 65,000 users in a single network configuration. In order to
target large enterprise customers, we intend to continue to
invest in our brand awareness and to use our sales force and
service organization to complement our channel partners
capabilities and enable us to fully address the complex
requirements of these larger organizations. |
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Increase our focus on software applications. Our packaged
software applications have become key components of our
IP-based communications
solutions and differentiate us from many of our competitors.
These software applications can be sold either as
stand-alone products or
as part of an overall solution. As a result, we are able to
focus our sales and marketing activities on addressing the
complete needs of a customer, to propose a specific application
for a particular purpose or a combination of both. These
applications provide recurring revenues from license and
maintenance fees. We expect to continue to increase our research
and development focus on software applications, such as
fixed-mobile convergence, presence functionality and messaging,
to enhance and differentiate our solutions. In addition, we plan
to continue to work closely with our customers to develop
customized software applications that deliver a competitive
advantage to them. |
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Provide a gradual migration path to IP for our customers and
those of our competitors. Our
IP-based solutions are
designed for interoperability with our legacy systems and we
will continue to offer our customers, and our competitors
customers, a seamless and gradual migration path from their
legacy voice systems to our converged voice, video and data
communications solutions. We intend to continue to offer
innovative, high quality products to help our customers
transition to a converged
IP-based communications
system at their own pace. |
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Expand our geographic presence and distribution capabilities.
We are strategically expanding our geographic presence to
position ourselves for the growing global demand for IP-based
communications solutions. We currently have offices in
17 countries and more than 1,200 channel partners
operating in over 90 countries. Our near-term focus is to
build upon our current geographic presence, particularly in
North America where we have recently invested in new customer
demonstration facilities, secured a major new distributor and
recruited a number of senior industry sales executives. We will
also consider expansion into emerging growth markets on a
case-by-case basis, particularly where our customer
opportunities justify the establishment of a local presence. |
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Broaden and deepen our strategic partnerships and
alliances. Our customers require solutions that are cost
effective, specific to their industry and that can provide them
with a competitive advantage. We intend to continue to attract
and recruit new strategic partners and to establish new
strategic alliances to provide us with access to customer
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opportunities in new target markets, to enhance our brand
recognition and to strengthen our solutions by adding new
features and functionality. |
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Continue to leverage our operating model. Our operating
model creates two opportunities for leverage. The first
opportunity is to increase our gross margins. We believe that
with the strength of our software applications portfolio, our
business will continue to evolve towards a higher proportion of
software license and maintenance revenues with correspondingly
higher margins. We believe that our software licensing process
will facilitate this transition because it is sophisticated, yet
simple for our channel partners to use. We also intend to
increase our gross margins with a continued focus on product
cost reduction through design changes, strategic supplier
management and innovative distribution strategies. The second
opportunity for leverage is the potential to grow our revenues
at a pace that exceeds the rate of growth of our selling,
general and administrative and research and development
expenses. We believe this is possible due largely to the
benefits of scale that we expect to leverage in our operating
model. |
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), desktop devices
(such as phones, 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 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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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) |
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
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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. |
The diagram below depicts how the Mitel 3300 ICP can
be used either for providing call processing features and
functions or, as an applications and services gateway, for the
delivery of advanced applications. The purpose of deploying the
Mitel 3300 ICP with embedded applications and services is to
minimize the number of separate servers that may otherwise be
required and to simplify the management of the applications.
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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, |
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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 applications
allow our customers to control their network of Mitel
3300 ICPs and associated applications and devices.
These applications allow our customers to monitor and control
telecommunication spending as well as network monitoring, alarm
handling and troubleshooting. Our enterprise management
applications include the following: |
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Enterprise Manager. The Enterprise Manager suite 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 suite allows the
maintainer to access network and system information and resolve
issues remotely. |
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Integrated Management Applications. The Integrated
Management Applications suite 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.
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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. This customization can be undertaken by a
customer, a channel partner or can be performed by our
professional services organization.
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. We provide
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 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 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. The Mitel 3300 ICP can
also 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
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presented at the office extension, which means that by pressing
a single key on the 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 cellular long
distance and air time charges and enables the user to operate
with one phone number 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 the 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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Unified Messaging, Integrated Messaging and Voice Mail.
We offer a
speech-enabled
application called Unified Messaging that gives
users the ability to control their telephony functions through
voice-activated
commands. Unified Messaging supports conversational speech
recognition, recognizing entire sentences and not simply single
words, allowing users to answer or forward voice and
e-mail messages with
voice or text responses. 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
to 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 6510 Integrated Messaging
product allows businesses to mix and match the requirements of
individual employees by supporting both unified messaging and
traditional voicemail on the same platform. Our messaging
solutions interoperate with both Microsoft Live Communications
Server and Microsoft Outlook. |
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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, toll 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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Our Legacy Telephony Communication Solutions
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-200 is a
traditional
circuit-switched
telephony platform, with a number of key telephony features,
that addresses single site and small
multi-site businesses
with fewer than 400 users. Both the Mitel
SX-2000 and the
Mitel SX-200 are
complemented by a portfolio of digital telephones and a suite of
applications. We offer a simple migration path to
IP communications for customers with Mitel
SX-2000 and
Mitel SX-200
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 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. 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. Today, our product offerings are increasingly
software-based. This
fact, combined with efficiencies enabled from significant
systems and process investments, means that diagnosis (and in
some cases, the resolution) of customer outages or concerns can
often be done remotely, more quickly and at a lower cost.
Customers
We have shipped over 230,000 systems supporting the needs of
more than 20 million users to customers in over 90
countries during the past 25 years. Our largest end-user
customer represented no more than 4% of our revenues in fiscal
2004, fiscal 2005 and in fiscal 2006. Our
end-user customer base
reflects our historical strength in the small and
medium-sized business
sector as well as the addition of recent large enterprise
customers. Our largest deployment can support as many as
40,000 users.
The following chart provides examples of our end-user customer
base categorized by our key vertical markets:
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|
|
Education
|
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|
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|
Chicago Public Schools |
|
Glasgow Schools |
|
Michigan Technological University |
|
New York City Department of Education |
|
University of Ottawa |
|
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|
Financial Services
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|
Butterfield Bank |
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Coast Capital |
|
Eastwest Bank |
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New York Life Insurance |
|
Rabo Bank (U.K.) |
|
|
71
|
|
|
|
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|
Government
|
|
|
|
|
|
Arlington County |
|
Australian Customs and Immigration |
|
Canada Revenue Agency |
|
Foreign and Commonwealth Office (U.K.) |
|
HM Revenue and Customs |
|
Orange County Vector Control District |
|
Healthcare
|
|
|
|
|
|
Hotel-Dieu Hospital |
|
MedQuist |
|
Mohave Mental Health Clinic |
|
Queens Long Island Medical Group |
|
Sutter Health |
|
University College London Hospitals |
|
Hospitality
|
|
|
|
|
|
Choice Hotels |
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Ginn Clubs and Resorts |
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Hilton UK Hotels Ltd. |
|
Intercontinental Hotels |
|
Marriott |
|
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|
Retail
|
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|
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|
Arbys |
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Auchan |
|
Charlotte Russe |
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Claremont and May |
|
CompUSA |
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Other
|
|
|
|
|
|
Canary Wharf |
|
Courier Express |
|
Foundry Networks |
|
JCB |
|
LaFarge (France) |
|
Tele 2 Versatel (Netherlands) |
Our IP-based solutions
have been used by a wide variety of customers. The following
case studies provide examples of our customers and why they use
our solutions.
Customer Needs: CompUSA is one of the leading retailers
and resellers of personal
computer-related
hardware and software products and services. CompUSA operates
approximately 226 stores in 90 cities in the United States.
CompUSA was looking to achieve
lower-cost
communications and the ability to move voice, data and video on
a single easily-managed
network capable of implementing more advanced features.
The Solution: Because of our focus on the retail market,
CompUSA elected to implement one of our solutions that included
the Mitel 3300 ICP and Mitel IP Phones. This
resulted in low-cost
and reliable communications integrating the stores and
headquarters, connecting between the stores and linking the
company with customers and its many suppliers. Our solution
allows CompUSA to better serve its own customers, enhance the
productivity of its staff and improve dealings with suppliers.
JCB
Customer Needs: JCB is a manufacturer of construction
equipment. JCBs North American headquarters houses sales
and marketing office staff, a call center, warehouse employees
and a manufacturing shop floor. JCB needed a flexible, scalable
system that could handle its diverse communications needs and
anticipated growth.
The Solution: To address their needs, JCB selected a
wide-range of our
solutions, including the Mitel 3300 ICP, Mitel
Contact Centre Solution, Mitel Teleworker Solution,
and Mitel IP Phones and wireless phones. This solution
provided them with automated 24/7 contact center capabilities
with integration to customer relationship management, universal
messaging to integrate voice and electronic message management
and to seamlessly tie in remote and mobile employees to a
central phone system.
72
JCB was able to reduce its telecommunications costs by half and
realize cost savings from improved workflow, employee
productivity gains and a reduction in system maintenance.
Canary Wharf
Customer Needs: Canary Wharf in Londons Docklands
comprises a Grade A commercial business and leisure
complex. Canary Wharf is the location of a number of prestigious
tenants. Because of the
ever-changing nature of
the 86-acre complex, it
is essential that any data or telephony infrastructure be
resilient, scalable and flexible.
The Solution: Historically, telephony at Canary Wharf had
been based around the Mitel
SX-2000, which
offers feature-rich
voice communications, centralized management, high levels of
scalability and seamless networking capabilities. Canary
Wharfs migration to an
IP-based communications
system started with a new site housing the complexs Estate
Control Center which is responsible for monitoring the entire
complex. A Mitel 3300 ICP was chosen by the
management of Canary Wharf for its enhanced scalability and
flexibility and the Mitel Contact Center Solution was
implemented to provide the
help-desk team with a
way of managing call flows more efficiently using the advanced
functionality of IP telephony.
Courier Express
Customer Needs: Courier Express, a U.S. based company, is
one of the leading providers of freight and warehousing
services, consisting of a
six-office,
multi-warehouse
business that operates continuously. The company needed to
operate as a unified entity rather than as multiple regional
offices. Their old legacy phone system was one of the key
obstacles to achieving that goal, as each location had a
separate standalone phone system connected to an individual
telephone exchange not allowing Courier Express to function
effectively as a
multi-site operation.
The Solution: Courier Express implemented a solution
comprising the Mitel 3300 ICP, Mitel Teleworker
Solution, Mitel IP Phones and Mitel Contact Center
Solution which enabled it to centralize its operations.
Courier Express now enjoys significant cost savings on calls
between locations and functions as a single, seamless operation
that can easily support new employees and
home-based sales staff.
MedQuist
Customer Needs: MedQuist, a New Jersey-based company, is
one of the leading national providers of medical transcription
and healthcare documentation management services. MedQuist
wanted to reduce cost and increase employee productivity by
making it possible for more than 1,000 employees to work from
home. MedQuist also required a solution that would help them to
streamline business costs, improve customer service and provide
management reporting.
The Solution: MedQuist selected a number of our solutions
including the Mitel Teleworker Solution, Mitel Your
Assistant, the Mitel 3300 ICP and Mitel IP
Phones. These solutions have provided over
1,000 employees with the tools necessary to successfully
work from home. MedQuist estimates that our solutions will allow
it to dramatically reduce costs in many key areas. The
Teleworker Solution and Your Assistant applications will
enable MedQuist to interact with employees, monitor their
progress and maintain cohesive communications. Additionally, the
integration with Your Assistant gives MedQuist and its
employees a virtual and visual presence and availability at all
times.
Sales and Marketing
Our sales and marketing strategy leverages our own offices in
17 countries with the local presence and customer
relationships of over 1,200 channel partners servicing
customers in more than 90 countries. Product fulfillment
and order logistics for most of our channel partners are
generally performed in the United States and Europe by our
wholesale distributors, such as GrayBar Electric Co., Inc., Tech
Data Corporation, and Westcon Group, Inc. Our channel partners
are supported by our internal teams of channel managers, systems
engineers, technical account managers and sales administrators.
To complement
73
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 work either 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 are
directed to operate a
channel-neutral selling
approach and their compensation is identical whether the sale is
transacted directly or through a channel partner. 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 fulfilment 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 incentive
programs targeted at gaining mind share with our channel
partners. 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 April 30, 2006, our sales and marketing force
consisted of 386 employees.
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:
|
|
|
|
|
focus on the design, development, sales and support of our
products; |
|
|
|
leverage the scale and expertise of specialized contract
manufacturers; |
|
|
|
reduce manufacturing and supply chain risk; |
|
|
|
reduce distribution costs; and |
|
|
|
ensure competitive pricing and levels of service. |
We outsource most of our worldwide manufacturing and repair
operations to BreconRidge, one of the worlds top 50
electronics manufacturing services, or EMS, 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 is ISO 9001 certified and has more than
725,000 square feet of manufacturing capacity in
state-of-the-art
facilities in Canada, the United States, the United Kingdom and
China. In addition to BreconRidge, we outsource the
manufacturing of a number of our IP platforms to Plexus Corp. of
the United States and 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 and to ensure competitive pricing and levels of
service. This
74
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:
|
|
|
|
|
evaluating, selecting, pricing and negotiating contracts with
EMS suppliers; |
|
|
|
monitoring EMS supplier contract manufacturer performance
against established service level agreements; |
|
|
|
maintaining the authorized vendor list of component suppliers; |
|
|
|
managing finished goods inventory; and |
|
|
|
selecting outbound freight partners, shipping methods, remote
stocking strategies and shipping routes. |
In addition, we retain Lytica Inc., an independent contract
manufacturing consultancy, to assist us in assessing, on a
quarterly basis, if pricing from BreconRidge, Plexus Corp. and
WKK Technology Ltd. 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 development 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 2006 and will continue to be substantial for the
foreseeable future. As a percentage of revenues, this
expenditure has been significantly higher than many of our
competitors. 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 86% IP products in the quarter ended
April 30, 2006. As a result, we believe we have minimal
exposure to continued erosion of legacy product revenues.
Our research and development organization is based in Ottawa,
Canada and comprised of 339 personnel as of April 30,
2006, almost all of whom are engaged in IP product design
and verification. Research and development personnel have an
average tenure with us of approximately 9 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 outsourced 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.
75
The TPC Agreement (as described in Description of
Share Capital Warrants Technology
Partnerships Canada Warrants) requires us to conduct a
five year aggregate of C$400 million worth of research and
development over the five year period commencing on
March 31, 2005, with a minimum of C$50 million per
year. A default under the TPC Agreement would also be a
default under the terms of our convertible notes. We have
initiated discussions with the Canadian Government seeking an
amendment to this agreement to extend the term over which the
aggregate amount of C$400 million must be expended on
research and development. However, no assurance can be given
that a satisfactory amendment will be obtained. We believe
that we will meet the minimum annual spending requirements. If
we fail to meet the five year aggregate spending requirement,
the earliest date that we would be in default would be
March 31, 2010. We would then have 30 days, or until
April 30, 2010, to cure the default, which is three days
after the date on which the convertible notes mature.
Consequently a default under the TPC Agreement related to the
five year spending obligation would have no consequences with
respect to the cross default provision in the convertible notes.
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. In fiscal 2006, for instance, we filed 18 new
patent applications for
IP-based communications
inventions. We have a number of patents in the areas of
presence, collaboration and mobility communications.
Historically, our strategy has been to rely on our patent
portfolio primarily to counter against 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.
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
76
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.
Employees
As of April 30, 2006, we had 1,652 employees of whom
863 were in Canada, 291 were in the United States and 498 were
in the United Kingdom and other countries. We had 1,849, 1,689
and 1,652 employees at the end of fiscal year 2004, fiscal
year 2005 and fiscal year 2006, 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 communications market. Annual
revenues per employee during fiscal 2004, fiscal 2005 and fiscal
2006 were $184,000, $203,000 and $234,000, respectively,
reflecting our continuing focus on improving operational
efficiency.
We have a long-standing
positive working relationship with the International Brotherhood
of Electrical Workers with respect to approximately
100 U.S. field technicians who perform installation,
maintenance and systems changes. Our current contract with this
union expires after September 30, 2007, with options to
renew for additional
one-year periods.
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 60% of our
employees are also common shareholders and over 95% 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.
Competition
Historically, our competition has come primarily from two groups
of vendors. The first group consists of traditional telephony
products companies such as Avaya, Nortel, Alcatel, Siemens and
InterTel. 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; |
|
|
|
the useability of our software and their application to vertical
markets; |
|
|
|
the interoperability with equipment supplied by other vendors
and with legacy circuit-switched network equipment; |
|
|
|
the scalability and flexibility of our architecture, and the
ease of deployment in either a
centrally-managed,
remotely-distributed or
hosted architecture; |
|
|
|
the strength of our strategic alliances; and |
|
|
|
the ease of doing business for our channel partners. |
The second group of competitors consists of data product
companies such as Cisco and 3Com, 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.
77
Properties
We do not own any real property. The following table outlines
significant properties that we currently lease:
|
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|
Area | |
|
Expiration | |
Location |
|
Purpose | |
|
(in square feet) | |
|
date of Lease | |
|
|
| |
|
| |
|
| |
Ottawa, Canada
|
|
|
Corporate Head Office |
|
|
|
512,000 |
|
|
|
February 15, 2011 |
|
Caldicot, United Kingdom
|
|
|
U.K. and EMEA Regional Headquarters |
|
|
|
45,000 |
|
|
|
March 9, 2021 |
|
Ottawa, Canada
|
|
|
Office and Manufacturing Facilities(1) |
|
|
|
160,000 |
|
|
|
February 15, 2011 |
|
|
|
(1) |
Sublet to BreconRidge until August 31, 2006 See
Certain Relationships and Related Party
Transactions BreconRidge Manufacturing Solutions
Corporation. |
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 Certain Relationships and Related Party
Transactions Brookstreet Research Park
Corporation.
In addition to these significant properties, we also support a
number of regional sales offices throughout the world from
leased facilities totaling, in the aggregate, approximately
750,000 square feet, including offices:
|
|
|
|
|
throughout the United States (including New York City, Atlanta,
Chicago, Boston, Orlando (Florida), Costa Mesa (California),
Herndon (Virginia) and Waukesha (Wisconsin)); |
|
|
|
throughout Canada (including Toronto, Montreal, Calgary,
Winnipeg, Burnaby (British Columbia) and Halifax); |
|
|
|
throughout the U.K. (including London and Strathclyde
(Scotland)); |
|
|
|
throughout Continental Europe, the Middle East and Africa
(including France, Germany, the Netherlands, Italy, Saudi
Arabia, Dubai and South Africa); |
|
|
|
in Asia-Pacific
(including Hong Kong and Beijing (China), Singapore and Sydney
(Australia)); and |
|
|
|
in Mexico City. |
We believe that these facilities are adequate for our immediate
needs and that additional space would be available if needed to
accommodate any expansion.
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 prospectus, except for the complaint
outlined below, which we are still in the process of assessing,
we are not party to any litigation that we believe is material
to our business.
In June 2006, one of our competitors filed a complaint in the
United States District Court for the Eastern District of
Virginia alleging that we are infringing on certain of its
patents and requesting damages (treble damages for our alleged
willful infringement of the patents), injunctive relief,
attorneys fees, costs and expenses, and such further
relief against us as the court deems just and proper. The
plaintiff also filed
78
a complaint in the United States District Court for the District
of New Jersey seeking a declaratory judgment that certain of our
patents are not being infringed by the plaintiff or are invalid.
We have not yet been served with a copy of either complaint. The
plaintiff has not asserted any particular amount of damages in
its complaint. Consequently, we are unable to determine the
amount of damages that might be awarded or whether we would be
able to continue to use the technology that the plaintiff
alleges infringes the patents at suit in the event we are found
liable for infringement of the plaintiffs patents. We
intend to vigorously defend our company against these
complaints. See Risk Factors Our business may
be harmed if we infringe intellectual property rights of third
parties.
Corporate Structure
We were incorporated under the Canada Business Corporations
Act on January 12, 2001 by 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 dated February 16, 2001 and
March 27, 2001, we acquired the Mitel name and
substantially all of the assets and subsidiaries of the Zarlink
communications systems business (other than Canadian real estate
and certain intellectual property assets) from Zarlink. Part of
the intellectual property assets relating to the Zarlink
communications systems business were transferred to Mitel
Knowledge Corporation, a company controlled by
Dr. Matthews, and subsequently transferred to us. The
intellectual property assets relating to the Zarlink
communications systems business that we have not acquired are
licensed to us from Zarlink pursuant to the Intellectual
Property License Agreement described below under Certain
Relationships and Related Party Transactions Zarlink
Semiconductor Inc. Intellectual Property License
Agreement.
We carry on our worldwide business directly and through our
subsidiaries. Our material subsidiaries are shown on the chart
below, with the jurisdiction of incorporation in parentheses:
Head and Registered Office
Our head and registered office is located at 350 Legget
Drive, Ottawa, Ontario Canada K2K 2W7 and our telephone
number is
(613) 592-2122.
79
MANAGEMENT
Executive Officers and Directors
The following table sets forth information with respect to our
directors and executive officers.
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Name and Municipality of Residence |
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Age | |
|
Position |
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Principal Occupation |
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| |
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Dr. Terence H.
Matthews(1)
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63 |
|
|
Chairman of the Board |
|
Chairman of the Board of Mitel; |
Ottawa, Ontario, Canada
|
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|
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|
Chairman of the Board of March Networks |
|
Donald W. Smith
|
|
|
58 |
|
|
Chief Executive Officer and |
|
Chief Executive Officer of Mitel |
Ottawa, Ontario, Canada
|
|
|
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Director |
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Paul A.N. Butcher
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44 |
|
|
President and Chief Operating |
|
President and Chief Operating |
Ottawa, Ontario, Canada
|
|
|
|
|
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Officer and Director |
|
Officer of Mitel |
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Peter D. Charbonneau
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|
52 |
|
|
Director and Vice |
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General Partner of Skypoint |
Ottawa, Ontario, Canada
|
|
|
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|
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Chairman of Mitel |
|
Capital Corporation |
|
Kirk K. Mandy
|
|
|
50 |
|
|
Director |
|
Chief Executive Officer of |
Ottawa, Ontario, Canada
|
|
|
|
|
|
|
|
Zarlink |
|
Gilbert S. Palter
|
|
|
40 |
|
|
Director |
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Chief Investment Officer and |
Toronto, Ontario, Canada
|
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Managing Partner of EdgeStone |
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|
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|
|
|
Capital Partners, L.P. |
|
Guthrie J. Stewart
|
|
|
50 |
|
|
Director |
|
Partner of EdgeStone Capital |
Montréal, Quebec, Canada
|
|
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|
|
|
Partners, L.P. |
|
Steven E. Spooner
|
|
|
48 |
|
|
Chief Financial Officer |
|
Chief Financial Officer of Mitel |
Ottawa, Ontario, Canada
|
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Graham Bevington
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46 |
|
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Vice President and Managing |
|
Vice President and Managing |
Chepstow, Wales
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|
|
Director, Europe, Middle East |
|
Director, Europe, Middle East |
|
|
|
|
|
|
and Africa Region |
|
and Africa Region of Mitel |
|
Roger K. Fung
|
|
|
53 |
|
|
Vice President and Managing |
|
Vice President and Managing |
Hong Kong, China
|
|
|
|
|
|
Director, Asia-Pacific Region |
|
Director, Asia-Pacific Region of Mitel |
|
Douglas W.
Michaelides(2)
|
|
|
45 |
|
|
Vice President, Marketing |
|
Vice President, Marketing of |
Ottawa, Ontario, Canada
|
|
|
|
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|
|
Mitel |
|
Ronald G. Wellard
|
|
|
48 |
|
|
Vice President, Product |
|
Vice President, Product |
Ottawa, Ontario, Canada
|
|
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|
|
Development |
|
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. 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. |
|
We intend to appoint additional directors following completion
of the offering to meet the independence requirements of the
Nasdaq Global Market, rules and regulations of the Securities
and Exchange Commission (the SEC) and guidelines of
the Canadian provincial securities regulatory authorities.
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.
80
Dr. Terence H. Matthews is our founder, Chairman,
and currently our majority 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 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, Convedia 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 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 Networks. In January 2000,
Mr. Smith was promoted to President of Optical Internet,
Nortel Networks. Mr. Smith holds a Bachelor of Science
degree in Engineering from Imperial College, London University
(U.K.).
Paul A.N. Butcher has worked with us and previously with
Mitel Corporation for over 15 years. Since
February 16, 2001, Mr. Butcher has been our President
and Chief Operating Officer and a member of our board of
directors. 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. and Versatel Networks Inc. Mr. Butcher
holds a Hi Tech Diploma from Reading College of Art and
Technology (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, METConnex Inc. 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
81
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
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 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, Eurospec Manufacturing Inc. and KyberPass
Corporation 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., 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).
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
82
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 business in Asia-Pacific from
1987 to 2000. He currently serves on the board of directors of
several companies, including Mart Asia Ltd. and Vodatel Networks
Holding Ltd. Mr. Fung has a Bachelor of Applied Science in
Industrial Engineering Degree from the University of Toronto.
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 Networks Corporation, 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 Networks
Corporation 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).
Board of Directors
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 one and a maximum of
10 directors as determined from time to time by the
shareholders, and permit the directors to appoint additional
directors in accordance with the Canada Business Corporations
Act (CBCA) within any fixed number from time to
time authorized by the shareholders. Shareholders have
authorized a fixed number of eight directors. We currently
have one vacancy on our board. 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.
Committees of the Board
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 effective
upon the completion of this offering. We intend to appoint
additional directors in order to satisfy the independence
requirements of the Nasdaq Global Market, rules and regulations
of the SEC and guidelines of the Canadian provincial securities
regulatory authorities.
Audit Committee. Upon completion of the offering, our
audit committee will be comprised of
Messrs. , and .
Our board of directors has determined that each of these
directors currently meets the independence requirements of the
Nasdaq Global Market, the Canadian provincial securities
regulatory authorities and the rules and regulations of the SEC.
83
The principal duties and responsibilities of our audit committee
are to assist our board of directors in discharging its
oversight of:
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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 |
|
|
|
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. , and .
The principal duties and responsibilities of the compensation
committee are to assist our board of directors in discharging
its oversight of:
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|
compensation, development, succession and retention of the chief
executive officer and key employees; |
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|
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. |
Nominating and Corporate Governance Committee. We expect
that our nominating and corporate governance committee will be
comprised of
Messrs. , and .
The principal duties and responsibilities of the nominating and
corporate governance committee will be to assist our board of
directors as follows:
|
|
|
|
|
to identify candidates for membership on our board of directors
and to recommend for election to our board of directors
qualified director candidates; |
|
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|
to develop and recommend to our board of directors, and
implement and assess, effective corporate governance principles;
and |
|
|
|
to oversee and assess the functioning of our board and
committees of the board of directors. |
Director Compensation
Our directors who are not also employees 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.
84
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.
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.
Executive Compensation
The following table sets forth a summary of compensation paid
during the fiscal year ended April 30, 2006 to our Chief
Executive Officer, Chief Financial Officer and our three next
most highly compensated executive officers (the Named
Executive Officers). Kevin E. Bowyer, one of our
Named Executive Officers, was terminated on May 2, 2006 and is
no longer an executive officer.
Summary Compensation Table
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Long Term Compensation | |
|
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|
|
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| |
|
|
|
|
Annual Compensation | |
|
Securities Underlying Options | |
|
|
|
|
| |
|
and Deferred Share Units | |
|
All Other | |
Name And Principal Position |
|
Salary | |
|
Bonus | |
|
Granted | |
|
Compensation | |
|
|
| |
|
| |
|
| |
|
| |
Donald W. Smith Chief Executive
Officer(1)
|
|
$ |
630,927 |
|
|
|
|
|
|
|
|
|
|
$ |
10,080 |
(4) |
Paul A.N. Butcher President and Chief Operating
Officer(1)
|
|
$ |
420,924 |
|
|
|
|
|
|
|
59,700 Common Shares |
|
|
$ |
31,080 |
(5) |
Steven E. Spooner Chief Financial
Officer(1)
|
|
$ |
231,001 |
|
|
$ |
84,000 |
|
|
|
575,000 Common Shares |
|
|
$ |
10,080 |
(6) |
Graham Bevington Vice President and Managing
Director, Europe, Middle East and Africa
Region(2)
|
|
$ |
260,031 |
|
|
|
|
|
|
|
150,000 Common Shares(8 |
) |
|
$ |
37,538 |
(7) |
Kevin E. Bowyer President,
Mitel Networks,
Inc.(3)
|
|
$ |
175,000 |
|
|
|
223,375 |
|
|
|
150,000 Common Shares |
|
|
$ |
8,000 |
|
|
|
|
(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 2006 of
C$1.00 = $0.84. |
|
|
|
(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 = $1.78. |
|
|
|
(3) |
Mr. Bowyers other compensation for fiscal 2006 was a car
allowance of $8,000. |
|
|
|
(4) |
Mr. Smiths other compensation is a car allowance of
$10,080. |
|
|
|
(5) |
Mr. Butchers other compensation is comprised of a car
allowance of $15,120 and a company contribution to our Deferred
Share Unit Plan of $15,960. |
|
|
|
(6) |
Mr. Spooners other compensation is a car allowance of
$10,080. |
|
|
|
(7) |
Mr. Bevingtons other compensation is a car allowance
of $22,964 and a company contribution to a defined benefit plan
of $14,575. |
|
|
|
(8) |
These options were conditional on certain financial targets
which were not met and in accordance with the terms of their
grant, these options were cancelled on June 8, 2006. |
|
85
Option Grants In the Last Fiscal Year
The following table sets forth information regarding options for
the purchase of common shares granted during the fiscal year
ended April 30, 2006 to our directors and Named Executive
Officers.
|
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|
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|
Number of | |
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|
|
Common | |
|
Percent of | |
|
Exercise Price | |
|
Market Value of | |
|
|
|
|
Shares | |
|
Total Options | |
|
Per Common | |
|
Common Shares | |
|
|
|
|
Underlying | |
|
Granted to | |
|
Share | |
|
Underlying | |
|
|
|
|
Options | |
|
Employees in | |
|
($/Common | |
|
Options on | |
|
|
Name |
|
Granted(1) | |
|
Fiscal Year | |
|
Share)(2) | |
|
Date of Grant(3) | |
|
Expiration Date | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Donald W. Smith
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paul A.N. Butcher
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven E. Spooner
|
|
|
575,000 |
|
|
|
11.58 |
% |
|
$ |
0.89 |
|
|
|
|
|
|
|
July 27, 2010 |
|
Graham Bevington
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|
|
150,000 |
(5) |
|
|
3.02 |
% |
|
$ |
0.89 |
|
|
|
|
|
|
|
July 27, 2010 |
|
Kevin E. Bowyer
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|
|
150,000 |
|
|
|
3.02 |
% |
|
$ |
0.89 |
|
|
|
|
|
|
|
July 27, 2010 |
|
Dr. Terence H. Matthews
|
|
|
78,947 |
|
|
|
1.59 |
% |
|
$ |
0.89 |
|
|
|
|
|
|
|
July 27, 2010 |
|
Peter D. Charbonneau
|
|
|
102,447 |
|
|
|
2.06 |
% |
|
$ |
0.89 |
|
|
|
|
|
|
|
July 27, 2010 |
|
Kirk K. Mandy
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|
|
77,342 |
|
|
|
1.56 |
% |
|
$ |
0.89 |
|
|
|
|
|
|
|
July 27, 2010 |
|
Gilbert S. Palter
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|
(4) |
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|
|
|
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|
|
|
|
|
|
|
|
|
Guthrie J. Stewart
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|
|
|
(4) |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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, 2006 of
C$1.00 = $0.89. |
|
|
(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 78,290 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. Mr. Palter is the Chief Investment
Officer and Managing Partner and Mr. Stewart is a Partner
of EdgeStone Capital Partners, L.P. |
|
|
|
(5) |
These options were cancelled on June 8, 2006. |
|
Options Held and Fiscal Year-End Option Values
The following table shows the number of options to purchase
common shares held by our Named Executive Officers. The value of
unexercised in-the-money options of those persons has been based
on an estimated initial public offering price of
$ per
share.
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|
Number of Common Shares | |
|
Value of Unexercised | |
|
|
underlying Unexercised Options at | |
|
In-the-Money Options at | |
|
|
April 30, 2006 | |
|
April 30, 2006 | |
|
|
| |
|
| |
Name |
|
Vested | |
|
Unvested | |
|
Vested | |
|
Unvested | |
|
|
| |
|
| |
|
| |
|
| |
Donald W. Smith
|
|
|
3,500,000 |
(1) |
|
|
1,500,000 |
|
|
$ |
|
|
|
$ |
|
|
Paul A.N. Butcher
|
|
|
1,375,000 |
(2) |
|
|
1,125,000 |
|
|
|
|
|
|
|
|
|
Steven E. Spooner
|
|
|
106,250 |
|
|
|
893,750 |
|
|
|
|
|
|
|
|
|
Graham Bevington
|
|
|
100,000 |
|
|
|
450,000 |
(3) |
|
|
|
|
|
|
|
|
Kevin E. Bowyer
|
|
|
37,500 |
|
|
|
262,500 |
(4) |
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes 3,000,000 options to acquire common shares granted to
Mr. Smith from the holdings of Dr. Matthews at an
exercise price of C$3.50 ($3.11 based on the noon buying rate
per Federal Reserve Bank of New York on April 30, 2006
of C$1.00 = U.S.$0.89). |
|
|
|
(2) |
Includes 1,000,000 options to acquire common shares granted to
Mr. Butcher from the holdings of Dr. Matthews at an
exercise price of C$3.50 ($3.11 based on the noon buying rate
per Federal Reserve Bank of New York on April 30, 2006
of C$1.00 = U.S.$0.89). |
|
|
|
(3) |
On July 27, 2005 Mr. Bevington was granted
150,000 options with an exercise price of C$1.00 ($0.89
based on the noon buying rate per Federal Reserve Bank of New
York on April 30, 2006 of C$1.00 = $0.89). On
June 8, 2006, these 150,000 options were cancelled. |
|
|
|
(4) |
On May 2, 2006, Mr. Bowyer was terminated and all of his
262,500 unvested options were cancelled. |
|
86
Stock Option and Other Compensation Plans
2001 Employee Stock Option
Plan
Our 2001 stock option plan was initially approved by our
shareholders on March 6, 2001. All of (a) our
non-employee directors, (b) our full-time employees and
officers, (c) employees, officers and directors of any of
our subsidiaries and affiliates, and (d) any of our
consultants and consultant companies are eligible to participate
in the stock option plan. There are no other service
requirements or prerequisites to participation in the stock
option plan.
A total of 25,000,000 common shares are authorized for issuance
under the stock option plan. As of May 31, 2006, there were
outstanding options to purchase 20,403,699 common shares and the
availability to issue further options to purchase
4,493,108 shares under our stock option plan. Appropriate
adjustments will be made to the number of authorized shares
under our stock option plan and to the shares subject to
outstanding awards in the event of any reorganization,
recapitalization, share split, dividend or other change in our
capital structure in order to account for the changed
circumstances.
Shares subject to outstanding awards under the stock option plan
which lapse, expire or are forfeited or terminated will again
become available for grants under the stock option plan. The
stock option plan contains change of control provisions which
accelerate vesting of options under certain circumstances. No
acceleration to the vesting of any of our outstanding options
will occur as a result of the completion of this offering.
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
2006 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, 2006, the accumulated benefit obligation of
$144.3 million exceeded the fair market value of the net
assets available to provide for these benefits of
$104.2 million, resulting in a $40.1 million pension
liability recorded in the consolidated balance sheet as at
April 30, 2006.
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.
87
Currently, Paul Butcher, our President and Chief Operating
Officer, is the only executive officer to participate in our
deferred share unit plan. One other member of our senior
management staff also participates in our deferred share unit
plan. As at April 30, 2006, 340,612 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, 2006 we had recorded a liability of
$0.8 million in the consolidated balance sheet in respect
of our obligations under the Deferred Share Unit Plan.
Options
The following chart sets out, as of April 30, 2006,
information regarding outstanding options granted under our
stock option plan during the fiscal years 2004, 2005 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares | |
|
Exercise | |
|
|
|
|
Fiscal Year | |
|
underlying | |
|
Price ($) per | |
|
Expiration | |
Category |
|
of grant(1) | |
|
Options Granted | |
|
Common Share(2) | |
|
Date | |
|
|
| |
|
| |
|
| |
|
| |
All of our executive officers and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
past executive officers (17)
|
|
|
2004 |
|
|
|
76,000 |
|
|
$ |
0.89 |
|
|
|
2009 |
|
|
|
|
2005 |
|
|
|
5,854,132 |
|
|
$ |
0.89 |
|
|
|
2010 |
|
|
|
|
2006 |
|
|
|
1,633,894 |
|
|
$ |
0.89 |
|
|
|
2011 |
|
All of our directors and past directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
who are not also executive officers (4)
|
|
|
2004 |
|
|
|
52,000 |
|
|
$ |
0.89 |
|
|
|
2009 |
|
|
|
|
2005 |
|
|
|
131,868 |
|
|
$ |
0.89 |
|
|
|
2010 |
|
|
|
|
2006 |
|
|
|
224,974 |
|
|
$ |
0.89 |
|
|
|
2011 |
|
All of our other employees or past
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
employees (1,643)
|
|
|
2004 |
|
|
|
241,000 |
|
|
$ |
0.89 |
|
|
|
2009 |
|
|
|
|
2005 |
|
|
|
7,851,609 |
|
|
$ |
0.89 |
|
|
|
2010 |
|
|
|
|
2006 |
|
|
|
2,744,050 |
|
|
$ |
0.89 |
|
|
|
2011 |
|
|
|
|
2006 |
|
|
|
210,400 |
|
|
$ |
1.03 |
|
|
|
2011 |
|
All of our consultants (13)
|
|
|
2004 |
|
|
|
|
|
|
$ |
0.89 |
|
|
|
2009 |
|
|
|
|
2005 |
|
|
|
203,021 |
|
|
$ |
0.89 |
|
|
|
2010 |
|
|
|
|
2006 |
|
|
|
115,932 |
|
|
$ |
0.89 |
|
|
|
2011 |
|
|
|
|
2006 |
|
|
|
36,483 |
|
|
$ |
1.03 |
|
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grand Total
|
|
|
|
|
|
|
19,375,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
No options were granted during the Transition Period. |
|
|
(2) |
Options are granted with an exercise price in Canadian dollars
but converted to U.S. dollars at the noon buying rate per
Federal Reserve Bank of New York on April 30, 2006 of
C$1.00 = $0.89. |
|
Employment Agreements
Donald W. Smith. Donald Smith is employed as our Chief
Executive Officer, reporting to the Chairman of our board of
directors. Effective as of April 17, 2001, we executed an
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 totalling
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 our standard employee
benefit plans. Mr. Smith is also entitled to receive an
annual bonus payment in an amount determined by the Compensation
Committee. Mr. Smiths employment agreement contains
provisions addressing confidentiality, non-
88
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 of our common shares 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 our
President and Chief Operating Officer, reporting to our Chief
Executive Officer. Effective as of February 16, 2001, we
executed an 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
totalling 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 our 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 of our common shares 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.
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.
Steven E. Spooner. Steven Spooner is employed as our
Chief Financial Officer, reporting to our Chief Executive
Officer. Effective as of January 1, 2006, we 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 totalling
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. 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$300,000, a monthly
car allowance of C$1,000, stock options, and fuel and
maintenance reimbursement for one vehicle, and he participates
in our 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.
89
Kevin Bowyer. Kevin Bowyer was employed as President of
Mitel Networks, Inc. from March 14, 2005 until May 1,
2006, reporting to our Chief Operating Officer. Effective as of
February 21, 2005, we executed an Employment Agreement with
Mr. Bowyer under which he was employed at will for an
indefinite term. Mr. Bowyer received a base salary of
$175,000, a monthly car allowance of $667, stock options, and
fuel and maintenance reimbursement for one vehicle, and he
participated in our standard employee benefit plans.
Mr. Bowyer was also eligible for an annualized target
incentive bonus of $175,000 related to his achievement of
defined revenue targets, pursuant to our Sales Incentive
Compensation Plan for fiscal year 2006. Mr. Bowyers
employment agreement contains provisions addressing
confidentiality, non-disclosure, non-solicitation and ownership
of intellectual property. Upon Mr. Bowyers
termination, he received $45,750.
Our executive officers are eligible to receive incentive or
bonus compensation in 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.
90
CERTAIN RELATIONSHIPS AND 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.
BreconRidge Manufacturing Solutions Corporation
We have or had the following agreements and related transactions
involving BreconRidge, a company in which, as of May 31,
2006 (a) Dr. Matthews holds approximately a 28.62%
ownership interest, and (b) EdgeStone holds approximately a
48.42% 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.
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 2006, we purchased
$101.4 million of products and services from BreconRidge
(2004 $84.9 million; 2005
$94.2 million; the Transition Period
$1.8 million) and sold $0.4 million of raw material
inventory to BreconRidge (2004 $2.7 million;
2005 $0.9 million; the Transition
Period $0.1 million) under this agreement. As
at April 30, 2006, balances payable by us pursuant to this
agreement amounted to $24.0 million (2005
$15.4 million) and balances receivable by us pursuant to
this agreement amounted to $0.7 million (2005
$1.7 million).
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
2006, manufacturing tools purchased from BreconRidge pursuant to
the terms of the supply agreement amounted to $0.9 million
(2004 $0.1 million; 2005
$0.2 million; the Transition Period $nil).
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. This offering will not
result in a change of control under the agreement.
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
91
consolidated statement of operations. During fiscal 2006 we
provided services valued at $0.5 million under these
agreements (2004 $3.3 million; 2005
$1.0 million; the Transition Period $nil).
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
expires on August 31, 2006. BreconRidge vacated the
premises in 2004 and we do not expect the sublease agreement
will be renewed. During fiscal 2006, we earned $2.2 million
of rental income for these leased premises (2004
$2.4 million; 2005 $2.0 million; the
Transition Period $nil).
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, the sublease was assigned to the new
owner and we no longer receive rental income. During fiscal
2006, we earned $0.6 million of rental income for the
leased premises (2004 $1.9 million;
2005 $1.6 million; the Transition
Period $nil).
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 believes 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 2006, we incurred
$6.5 million of rent expense for the leased premises
(2004 $6.7 million; 2005
$5.9 million; the Transition Period
$0.1 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
28.47% of the issued and outstanding shares, as of May 31,
2006, and of which he is the chairman of the 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. To date, we and March Networks
have not entered into any joint development agreements and we do
not anticipate that we will do so in the future. The alliance
agreement automatically terminated on March 31, 2005.
On October 10, 2002, we entered into the Technology
Partnerships Canada 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
Description of Share Capital
Warrants Technology Partnerships Canada
Warrants.
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.
During fiscal 2006, we purchased $0.3 million in products
and services (2004 $1.0 million;
2005 $0.4 million; the Transition
Period $nil) and earned
92
insignificant commissions (2004 insignificant;
2005 insignificant; Transition Period
nil) from March Networks under this agreement. This agreement
expired on October 31, 2005 and was not renewed.
Zarlink Semiconductor Inc.
We have or had during the past three years the following
agreements involving Zarlink, a company which
holds %
of our shares, as of May 31, 2006. 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 2006, we paid Zarlink less than $0.05 million for
supplies under this agreement (2004 less than
$0.05 million; 2005 less than
$0.05 million; the Transition Period $nil).
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.
|
|
|
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 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 |
93
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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. |
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, Encore Networks, Inc., Natural Convergence Inc. and
MKC Corporation. These companies develop technology that we
integrate with, distribute or sell alone or as part of our own
products.
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NewHeights Software (a corporation controlled by Owen Matthews,
who is related to Dr. Matthews) may be deemed a related
party because Dr. Matthews indirectly owns approximately 16% of
that company. During fiscal 2006, we paid NewHeights
$2.6 million in software royalties relating to a customized
desktop communication management software application which we
integrate and distribute as Your Assistant
(2004 $0.3 million; 2005
$0.8 million; the Transition Period $nil). We
also received $0.1 million of rental and other income from
NewHeights during fiscal 2006 (2004 $nil;
2005 $0.1 million; the Transition
Period $nil). |
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Encore Networks may be deemed to be a related party because Dr.
Matthews directly or indirectly owns approximately 74% of that
company. During fiscal 2006, we paid Encore $0.2 million
for the purchase of certain signaling conversion hardware and
software which we distribute as part of our product line and for
other services (2004 $nil; 2005 $nil;
the Transition Period $nil). We also received
$0.1 million of other income from Encore Networks during
fiscal 2006 (2004 $0.1 million;
2005 $0.1 million; the Transition
Period $nil). |
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MKC Corporation may be deemed to be a related party because Dr.
Matthews directly or indirectly owns approximately 82% of that
company. During fiscal 2006, we paid MKC $nil for the purchase
of SIP-based equipment and software components (2004
$0.1 million; 2005 $0.1 million; the
Transition Period $0.1 million). On
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
2006, we recorded royalties payable to MKC of less than
$0.05 million relating to this agreement. |
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Natural Convergence may be deemed to be a related party because
Dr. Matthews directly or indirectly owns approximately 12% of
that company. During fiscal 2006, we paid Natural Convergence
$0.8 million for a non-exclusive, worldwide software
license and other hardware and software products associated with
our Mitel 3600 Hosted IP Key System product
(2004 $nil; 2005 $0.1 million; the
Transition Period $nil). |
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In addition, we purchased services from the following companies
related to Dr. Matthews:
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Celtic Tech Jet Limited may be deemed to be a related party
because Dr. Matthews directly or indirectly wholly owns
that company. During fiscal 2006, we paid less than
$0.05 million to Celtic Tech Jet Limited for chartered
plane rentals (2004 less than $0.05 million;
2005 less than $0.05 million; the Transition
Period $nil). |
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Brookstreet Hotel Corporation may be deemed to be a related
party because Dr. Matthews directly or indirectly wholly
owns that company. During fiscal 2006, we paid $0.2 million
to Brookstreet Hotel Corporation for accommodations and meeting
space (2004 $0.1 million; 2005 less
than $0.05 million; the Transition Period $nil). |
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94
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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 2006, we paid $0.1 million
to The Celtic Manor Resort Limited for accommodations and
meeting space (2004 $0.3 million;
2005 $0.3 million; the Transition
Period $nil). |
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Wesley Clover Corporation may be deemed to be a related party
because Dr. Matthews directly or indirectly wholly owns
that company. During fiscal 2006, we paid less than
$0.05 million to Wesley Clover Corporation for various
services (2004 less than $0.05 million;
2005 less than $0.05 million; the Transition
Period $nil). |
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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 2006 we sold
$0.1 million of communications equipment to Bridgewater
(2004 $nil; 2005 $nil; the Transition
Period $nil). |
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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. 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:
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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; |
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the parties to the transaction; |
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an outline of the benefits to us of the transaction; |
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whether terms are at market and whether they were negotiated at
arms length; and |
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for related party transactions involving our officers or
directors, whether there has been the loss of a corporate
opportunity. |
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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 May 31, 2006, all of these
options had vested and none had been exercised.
Registration Rights
In connection with a financing on April 23, 2004, we
entered into a registration rights agreement with EdgeStone,
Dr. Matthews 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 and
Mr. Stewart who are directors of Mitel are the Managing
Partner and a Partner of EdgeStone, respectively. See
Description of Share Capital Registration
Rights.
95
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information regarding the
beneficial ownership of our common shares on May 31, 2006
and after giving effect to the completion of this offering and
shows the number of shares and percentage of outstanding common
shares owned by:
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each person or entity who is known by us to own beneficially 5%
or more of our common shares; |
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each of the other selling shareholders; |
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each member of our board of directors; |
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each of the Named Executive Officers; and |
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all members of our board of directors and our executive officers
as a group. |
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, which in the case of the following table is
May 31, 2006. 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. The percentage of
beneficial ownership for the following table is based
on common
shares outstanding as of May 31, 2006,
and common
shares outstanding immediately after the completion of this
offering, assuming no exercise of the underwriters
over-allotment option. Immediately prior to the closing of this
offering,
approximately %
of the common shares will be held by residents of the United
States and there will
be shareholders
of record in the United States. To our knowledge, except as
indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the
table have sole voting and investment power with respect to all
common shares shown as beneficially owned by them.
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Common Shares to be Sold | |
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Before this Offering | |
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in this Offering | |
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After this Offering | |
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Name and Address of Beneficial Owner(1) |
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Number | |
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% | |
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Number | |
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Number | |
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% | |
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Five Percent Shareholders:
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Dr. Terence H.
Matthews(2)
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EdgeStone Capital Equity Fund II Nominee,
Inc.(3)
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Technology Partnerships
Canada(4)
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Power Technology Investment
Corporation(5)
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Other Selling Shareholders:
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Zarlink Semiconductor Inc.
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Executive Officers and Directors:
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Dr. Terence H.
Matthews(2)
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Donald W.
Smith(6)
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Paul A.N.
Butcher(7)
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Peter D.
Charbonneau(8)
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Kirk K.
Mandy(9)
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Gilbert S.
Palter(3)
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Guthrie J.
Stewart(3)
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Steven E.
Spooner(10)
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Graham
Bevington(11)
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Roger K.
Fung(12)
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All directors and executive officers as a group
(12 persons)(13)
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96
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* |
Less than 1%. |
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(1) |
Except as otherwise indicated, the address for each beneficial
owner is c/o Mitel Networks Corporation, 350 Legget Drive,
Ottawa, Ontario, Canada K2K 2W7. |
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(2) |
Of this total, 90,000,000 common shares are registered in the
name of Wesley Clover Corporation, 4,555,169 common shares are
registered in the name of Celtic Tech Jet Limited
and common
shares are registered in the name of Dr. Matthews, and
105,293 common shares are issuable upon the exercise of
options at exercise prices ranging from C$1.00 to C$2.75. |
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(3) |
EdgeStone is the beneficial owner
of common
shares. Gilbert Palter and Guthrie Stewart, partners of
EdgeStone, each have voting and investment power over the common
shares owned by Edgestone and therefore each beneficially own
the common shares held by Edgestone. This total includes 49,791
options at an exercise price of C$1.00 that were granted to
EdgeStone for director services provided by Mr. Palter and
Mr. Stewart. The address for EdgeStone, Mr. Palter and
Mr. Stewart is c/o EdgeStone Capital Partners, L.P., The
Exchange Tower, Suite 600, 130 King Street West, Toronto,
Ontario, Canada M5X 1A6. |
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(4) |
The common shares are issuable upon the exercise of warrants
pursuant to the agreement entered into with Her Majesty the
Queen in Right of Canada. The address for Technology
Partnerships Canada is 10th Floor, 300 Slater Street,
Ottawa, Ontario, Canada K1A 0C8. There are a total of
35,785,410 warrants outstanding, of which 22,360,455 are
exercisable within 60 days of the determination date. |
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(5) |
Power Technology Investment Corporation is a wholly owned
subsidiary of Power Corporation of Canada. According to public
filings, Paul Desmarais exercises control over 63% of the votes
over Power Corporation of Canada. The address for Power
Technology Investment Corporation is 751 Square Victoria,
Montreal, Quebec, Canada, H2Y 3J3. |
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(6) |
Includes options to acquire 3,000,000 common shares granted to
Mr. Smith from the holdings of Dr. Matthews at an
exercise price of C$3.50, and 1,000,000 common shares issuable
upon the exercise of options at an exercise price of C$1.00. |
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(7) |
Includes options to acquire 1,000,000 common shares granted to
Mr. Butcher from the holdings of Dr. Matthews at an
exercise price of C$3.50, and 750,000 common shares issuable
upon the exercise of options at an exercise price of C$1.00. |
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(8) |
Of this
total, common
shares are registered to Peter Charbonneau Trust #2, a trust of
which Mr. Charbonneau is the sole trustee,
and common
shares are registered to Mr. Charbonneaus wife, Joan
Charbonneau. Includes options to acquire 900,000 common shares
granted to Mr. Charbonneau from the holdings of
Dr. Matthews at an exercise price of C$3.50 and options to
acquire 114,710 common shares from us at exercise prices ranging
from C$1.00 to C$2.75. |
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(9) |
Includes 86,192 common shares which are issuable upon the
exercise of options at exercise prices ranging from C$1.00 to
C$2.75. |
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(10) |
Of this total, 76,500 common shares are registered to the
Spooner Children Trust, a trust of which Mr. Spooner is one
of three trustees, and 306,250 common shares issuable upon the
exercise of options at an exercise price of C$1.00. |
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(11) |
Includes 212,000 common shares which are issuable upon the
exercise of options at an exercise price of C$1.00. |
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(12) |
Includes 50,000 common shares which are issuable upon the
exercise of options at an exercise price of C$2.75. |
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(13) |
Includes options to acquire 3,000,000 common shares,
1,000,000 common shares and 900,000 common shares
granted from the holdings of Dr. Matthews to
Mr. Smith, Mr. Butcher and Mr. Charbonneau,
respectively. Also includes 2,774,855 common shares
issuable upon the exercise of options that are exercisable
within 60 days of the determination date. |
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97
DESCRIPTION OF SHARE CAPITAL
General
The following is a summary of the rights of our common shares
and preferred shares as set forth in our articles of
incorporation and corporate by-laws and certain related sections
of the Canada Business Corporations Act, or CBCA. For
more detailed information, please see our articles of
incorporation and corporate by-laws.
Our share capital consists of outstanding common shares,
Series A Preferred Shares and Series B Preferred
Shares. All information in this prospectus assumes that all of
the Series A Preferred Shares and Series B Preferred
Shares have been converted into common shares, which will occur
in connection with the completion of this offering. Effective on
completion of the offering we will reorganize our share capital
to consist of an unlimited number of common shares, each without
par value and an unlimited number of preferred shares, issuable
in series, each without par value.
Immediately following the closing of this offering, assuming the
offering size set forth on the cover of this prospectus, we
expect to
have issued
and outstanding common shares and no preferred shares.
Immediately following the closing of this offering, we also
expect to have
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outstanding vested and unvested options granted pursuant to our
stock option plan to acquire 20,403,699 common shares and
options available for issue under our stock option plan to
acquire 4,493,108 common shares; |
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outstanding warrants held by Technology Partnerships Canada to
acquire a total of 35,785,410 common shares without the payment
of any additional cash consideration; |
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outstanding warrants held by holders of our convertible notes
which convert to 16,500,000 common shares at an exercise price
calculated in accordance with a formula based on the market
price of our common shares (see Description of
Convertible Notes Noteholder Warrants); and |
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outstanding convertible notes which convert to a number of
common shares determined by dividing the outstanding principal
and accrued interest owing on each note by a conversion price
calculated in accordance with a formula based on the market
price of our common shares (see Description of
Convertible Notes Convertible Notes). |
Common Shares
The holders of our common shares are entitled to one vote for
each share held at any meeting of shareholders. Subject to the
prior rights of the holders of our preferred shares, the holders
of our common shares are entitled to receive dividends as and
when declared by our board of directors. Subject to the prior
payment to the holders of our preferred shares, in the event of
our liquidation, dissolution or
winding-up or other
distribution of our assets among our shareholders, the holders
of our common shares are entitled to share pro rata in the
distribution of the balance of our assets. Upon completion of
the offering, there will be no preemptive, redemption, purchase
or conversion rights attaching to the common shares. Our common
shares are issued in fully registered form. As of May 31,
2006 approximately %
of our common shares were held by residents of the United States
and there were 488 shareholders of record in the United States.
Preferred Shares
Our preferred shares may be issued in one or more series. Our
board of directors may amend our articles of incorporation to
fix the authorized number of preferred shares in, and to
determine the designation of the shares of, each series and to
designate rights, privileges, restrictions and conditions
attaching to the shares of each series, including voting rights.
Any series of preferred shares is also subject to the rights
attached to our preferred shares as a class.
98
Our preferred shares are entitled to preference over our common
shares with respect to the payment of dividends and the
distribution of our assets, whether voluntary or involuntary, or
in the event of any other distribution of our assets among our
shareholders for the purpose of
winding-up our affairs.
Where we do not pay cumulative dividends in full with respect to
a series of our preferred shares, the shares of all series of
our preferred shares will participate ratably with respect to
the accumulated dividends in accordance with the amounts that
would be payable on those shares if all the accumulated
dividends were paid in full. Where amounts payable are not paid
in full on our
winding-up, or on the
occurrence of any other event as a result of which the holders
of the shares of all series of our preferred shares are entitled
to a return of capital, the shares of all series of our
preferred shares will participate ratably in a return of capital
in respect of our preferred shares as a class in accordance with
the amounts that would be payable on the return of capital if
all amounts so payable were paid in full.
We may not create or issue any shares ranking senior to any
outstanding series of our preferred shares with respect to the
payment of dividends or the distribution of assets in the event
of our liquidation, dissolution or
winding-up, whether
voluntary or involuntary, or in the event of any other
distribution of our assets among our shareholders for the
purpose of winding-up
our affairs, without first receiving the approval of the holders
of that outstanding series of our preferred shares given by a
resolution passed at a meeting by the affirmative vote of not
less than two-thirds of
the votes cast at that meeting.
The rights of holders of our preferred shares to receive notice
of, to attend or to vote at any meetings of our shareholders
will be set out in the rights and restrictions attaching to each
series of our preferred shares. The rights attached to our
preferred shares as a class may be amended with, in addition to
any approval that may then be prescribed by applicable law, the
approval of the registered holders of the preferred shares given
by a resolution passed at a meeting by the affirmative vote of
not less than
two-thirds of the votes
cast at such meeting.
The issuance of preferred shares and the terms selected by our
board of directors could decrease the amount of earnings and
assets available for distribution to holders of our common
shares or adversely affect the rights and powers, including the
voting rights, of the holders of our common shares without any
further vote or action by the common shareholders. Any series of
preferred shares issued by the board of directors could have
priority over the common shares in terms of dividend or
liquidation rights or both. The issuance of preferred shares, or
the issuance of rights to purchase preferred shares, could make
it more difficult for a third party to acquire a majority of our
outstanding voting shares and thereby have the effect of
delaying, deferring or preventing a change of control of us or
an unsolicited acquisition proposal or of making the removal of
management more difficult. Additionally, the issuance of
preferred shares may have the effect of decreasing the market
price of our common shares.
We have no current intention to issue any preferred shares.
Warrants
Technology Partnerships Canada Warrants
On October 10, 2002 we entered into an agreement with Mitel
Knowledge Corporation, March Networks Corporation 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 Corporation 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
submitted claims for an aggregate of C$55 million of
research and development activities under the TPC Agreement.
In exchange for the funds received by us under the TPC
Agreement, we were required, as of September 30th in each
of 2002, 2003, 2004, and 2005 to issue warrants to the
Government of Canada. The warrants are exercisable on a
one-for-one basis for
common shares for no additional consideration.
99
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. We have, to date, issued 35,785,410 warrants
which are exercisable into a total of 35,785,410 common shares.
As at April 30, 2006, there remained (pending submission of
our final project report to TPC) C$1.6 million in funding
receivable by us. Upon submission of our final report to TPC in
September 2006 and upon receipt by us of the remaining
contribution amount, we will issue additional warrants to TPC
equal to the C$1.6 million of funding received divided by
the fair market value of our common shares. The warrants have no
expiry date.
The following table provides details of the warrants issued (or
issuable) to TPC pursuant to the TPC Agreement:
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Funding Period | |
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Common shares subject to Warrants | |
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Funding Received | |
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Funding Receivable | |
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From |
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To | |
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C$ | |
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C$ | |
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Date | |
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Number | |
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Oct 2001
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Aug 2002 |
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17,002,119 |
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Sept 30, 2002 |
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6,182,588 |
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Sept 2002
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Jul 2002 |
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13,608,760 |
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Sept 30, 2003 |
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6,804,380 |
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Aug 2003
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Jun 2004 |
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13,862,943 |
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Sept 30, 2004 |
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13,862,943 |
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Jul 2004
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Jan 2005 |
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8,935,499 |
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Sept 30, 2005 |
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8,935,499 |
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Feb 2005
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Apr 2005 |
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1,570,108 |
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To be issued when funding received |
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53,409,321 |
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1,570,108 |
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35,785,410 |
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Convertible Noteholder Warrants |
On April 27, 2005, we completed a convertible debt
financing transaction pursuant to which we issued $55 million
aggregate principal amount of convertible notes and warrants to
purchase up to, in the aggregate, 16.5 million of our
common shares. These warrants have an exercise price (subject to
applicable adjustments) (a) prior to the last day of the
first 10 trading days following the date of expiry of the
lock-up restrictions
entered into by a convertible noteholder in connection with this
offering, of $1.50 per common share, and (b) thereafter,
the lower of (i) $1.50 per common share and (ii) the
average closing price for the 10 day trading period
immediately following the date of expiry of such
lock-up restrictions,
which shall be no less than the greater of (A) $1.29 per common
share, and (B) 80% of the price per common share in this
offering. The warrants expire on April 27, 2009. See
Description of Convertible Notes Noteholder
Warrants.
Limitations on Liability and Indemnification of Directors and
Officers
Under the CBCA, we may indemnify our current or former directors
or officers 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 the individual in
respect of any civil, criminal, administrative, investigative or
other proceeding in which the individual is involved because of
his or her association with us or another entity. The CBCA also
provides that we may also advance moneys to a director, officer
or other individual for costs, charges and expenses reasonably
incurred in connection with such a proceeding.
However, indemnification is prohibited under the CBCA unless the
individual:
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acted honestly and in good faith with a view to our best
interests, or the best interests of the other entity for which
the individual acted as director or officer or in a similar
capacity at our request; |
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in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, the individual had
reasonable grounds for believing that his or her conduct was
lawful; and |
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was not judged by the court or other competent authority to have
committed any fault or omitted to do anything that the
individual ought to have done. |
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Our by-laws require us to indemnify each of our current or
former directors or officers and each 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 the
individual in respect of any civil, criminal, administrative,
investigative or other proceeding in which the individual is
involved because of his or her association with us or another
entity.
Our by-laws authorize us to purchase and maintain insurance for
the benefit of each of our current or former directors or
officers and each person who acts or acted at our request as
a director or officer, or an individual acting in
a similar capacity, of another entity.
We have entered into indemnity agreements with our directors and
certain officers which provide, among other things, that we will
indemnify, including but not limited to the indemnity under the
CBCA, him or her for losses reasonably incurred by reason of
being or having been a director or officer; provided that, we
shall not indemnify such individual if, among other things, he
or she did not act honestly and in good faith with a view to our
best interests and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, the
individual did not have reasonable grounds for believing that
his or her conduct was lawful and in so acting was in breach of
the obligations under the indemnity agreement.
At present, we are not aware of any pending or threatened
litigation or proceeding involving any of our directors,
officers, employees or agents in which indemnification would be
required or permitted.
Other Important Provisions of Our Articles of
Incorporation
The following is a summary of certain other important provisions
of our articles of incorporation, by-laws and certain related
sections of the CBCA. Please note that this is only a summary
and is not intended to be exhaustive. For further information
please refer to the full version of our articles of
incorporation and by-laws.
Stated Objects or Purposes
Our articles of incorporation do not contain stated objects or
purposes and do not place any limitations on the business that
we may carry on.
Directors
Power to vote on matters in which a director is materially
interested. The CBCA states that a director must disclose to
us, in accordance with the provisions of the CBCA, the nature
and extent of an interest that the director has in a material
contract or material transaction, whether made or proposed, with
us, if the director is a party to the contract or transaction,
is a director or an officer or an individual acting in a similar
capacity, of a party to the contract or transaction, or has a
material interest in a party to the contract or transaction.
A director who holds an interest in respect of any material
contract or transaction into which we have entered or propose to
enter is not entitled to vote on any directors resolution
to approve that contract or transaction, unless the contract or
transaction:
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relates primarily to the directors remuneration as a
director, officer, employee or agent of us or an affiliate; |
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is for indemnity or insurance otherwise permitted under the
CBCA; or |
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is with an affiliate. |
Directors power to determine the remuneration of
directors. The CBCA provides that the remuneration of our
directors, if any, may be determined by our directors subject to
our articles of
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incorporation and by-laws. That remuneration may be in addition
to any salary or other remuneration paid to any of our employees
who are also directors.
Retirement or non-retirement of directors under an age limit
requirement. Neither our articles of incorporation nor the
CBCA impose any mandatory age-related retirement or
non-retirement requirement for our directors. However, our board
of directors has adopted Corporate Governance Guidelines which
stipulate that no person shall be appointed or elected as a
director once the person has reached 75 years of age.
Number of shares required to be owned by a director.
Neither our articles of incorporation nor the CBCA provide that
a director is required to hold any of our shares as a
qualification for holding his or her office. Our board of
directors has discretion to prescribe minimum share ownership
requirements for directors.
Action Necessary to Change the Rights of Holders of Our
Shares
Our shareholders can authorize the alteration of our articles of
incorporation to create or vary the special rights or
restrictions attached to any of our shares by passing a special
resolution. However, a right or special right attached to any
class or series of shares may not be prejudiced or interfered
with unless the shareholders holding shares of that class or
series to which the right or special right is attached consent
by a separate special resolution. A special resolution means a
resolution passed by: (a) a majority of not less than
two-thirds of the votes cast by the applicable class or series
of shareholders who vote in person or by proxy at a meeting, or
(b) a resolution consented to in writing by all of the
shareholders entitled to vote holding the applicable class or
series of shares.
Shareholder Meetings
We must hold an annual general meeting of our shareholders at
least once every year at a time and place determined by our
board of directors, provided that the meeting must not be held
later than 15 months after the preceding annual general
meeting. A meeting of our shareholders may be held anywhere in
Canada, or provided that shareholders agree, anywhere outside
Canada.
Our directors may, at any time, call a meeting of our
shareholders. Shareholders holding not less than 5% of our
issued voting shares may also cause our directors to call a
shareholders meeting.
A notice to convene a meeting, specifying the date, time, and
location of the meeting, and, where a meeting is to consider
special business, the general nature of the special business,
must be sent to shareholders, to each director and the auditor
not less than 21 days prior to the meeting, although, as a
result of applicable securities laws, the time for notice is
effectively longer. Under the CBCA, shareholders entitled to
notice of a meeting may waive or reduce the period of notice for
that meeting, provided applicable securities laws are met. The
accidental omission to send notice of any meeting of
shareholders to, or the non-receipt of any notice by, any person
entitled to notice does not invalidate any proceedings at that
meeting.
A quorum for meetings is two persons present and holding, or
represented by proxy, 20% of the issued shares entitled to be
voted at the meeting. If a quorum is not present at the opening
of the meeting, the shareholders may adjourn the meeting to a
fixed time and place but may not transact any further business.
Holders of our common shares are entitled to attend meetings of
our shareholders. Except as otherwise provided with respect to
any particular series of preferred shares, and except as
otherwise required by law, the holders of our preferred shares
are not entitled as a class to receive notice of, or to attend
or vote at any meetings of our shareholders. Our directors, our
secretary (if any), our auditor and any other persons invited by
our chairman or directors or with the consent of those at the
meeting are entitled to attend at any meeting of our
shareholders but will not be counted in the quorum or be
entitled to vote at the meeting unless he or she is a
shareholder or proxyholder entitled to vote at the meeting.
102
Change of Control
Our articles of incorporation do not contain any change of
control limitations with respect to a merger, acquisition or
corporate restructuring that involves us.
Shareholder Ownership Disclosure
Although applicable securities laws regarding shareholder
ownership by certain persons require disclosure, our articles of
incorporation do not provide for any ownership threshold above
which shareholder ownership must be disclosed.
Ownership and Exchange Controls
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 20% of our common
shares. If a person already owns 20% 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 2006
is C$265 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 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. |
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.
Registration Rights
2005 Registration Rights
Agreement
Pursuant to the registration rights agreement dated
April 27, 2005, (the 2005 Registration Rights
Agreement) among us, Highbridge International LLC,
Marathon Special Opportunity Master Fund, Ltd. and Fore Master
Convertible Fund, Ltd., the holders of registration rights under
this agreement are entitled to the rights described below.
General Registration Rights. Promptly following the
closing of this offering, we will prepare and file a resale
shelf registration statement with respect to the registrable
common shares (the common shares issuable upon conversion of our
convertible notes and the 16,500,000 common shares issuable upon
exercise of our warrants) under this agreement and use our
reasonable best efforts to cause the resale shelf registration
statement to become effective within 180 days to permit
resales by the holders upon the expiry of the 180 day
lock-up period. If the
resale shelf registration statement has not been declared
effective by the SEC within 180 days following completion
of this offering, we will be required to make additional
interest payments on any outstanding convertible notes held by
the holders who asked to have their registrable shares included
in the resale shelf registration statement.
Piggyback Registration Rights. If the resale shelf
registration statement has not been declared effective, and we
register any other securities for public sale on another
registration statement, the holders will have the right to
include their common shares in the other registration statement.
After we complete this offering, we will not register any shares
for the benefit of any person other than ourselves before we
register the registrable shares held by the holders under the
resale shelf registration statement.
Termination. The rights under this agreement terminate on
April 27, 2007.
2004 Registration Rights
Agreement
Pursuant to the registration rights agreement dated
April 23, 2004 (the 2004 Registration Rights
Agreement), among us and EdgeStone Capital Equity
Fund II-B GP, Inc., Mitel Systems Corporation, Mitel
Knowledge Corporation, Zarlink Semiconductor Inc., Power
Technology Investment Corporation, and Wesley Clover
Corporation, the holders of registration rights under this
agreement are entitled to the rights described below.
Demand Registration Rights. At any time after
180 days following the closing date of this offering, the
holders of at least 10,000,000 of the common shares having
registration rights (as adjusted for share splits,
consolidation and other similar events) can request that we
register all or a portion of their shares, so long as the
minimum offering amount for any demand registration is
C$8,000,000 (or C$5,000,000 in the case of a short-form
registration statement on
Form F-3 or
S-3). We will not be
required to file more than one registration statement pursuant
to these demand registration rights within any 12 month
period and will be required to file no more than two
registration statements in response to these demand registration
rights.
Piggyback Registration Rights. Holders have the right to
include their shares in this offering. Additionally, if we
register any securities for public sale after this offering
pursuant to any registration
104
statement, including pursuant to the 2005 Registration Rights
Agreement, the holders will have the right to include their
common shares in the registration statement.
Canadian Offerings. The holders also have rights with
respect to demand and piggyback registrations in Canada, which
rights are substantially similar to those described in the
paragraphs above, with appropriate changes to recognize the
differences between U.S. and Canadian offerings.
Termination. The rights under this agreement terminate
five years following the date of this offering.
Expenses
We will pay all expenses incurred in connection with
registration statements filed pursuant to the registration
rights agreements described above up to a maximum of $25,000 per
registration statement or Canadian prospectus, except for
underwriting discounts and commissions and applicable transfer
taxes, which will be paid by the selling shareholders.
Lock-up Agreements
Holders of the registration rights under the registration rights
agreements described above have agreed not to sell any of their
common shares for 180 days following the date of the
underwriting agreement in connection with this offering. See
Shares Eligible for Future Sale.
Listing
We have applied for quotation of our common shares on the Nasdaq
Global Market and to list our common shares on the Toronto Stock
Exchange.
Transfer Agent, Registrar and Auditor
Computershare Investor Services Inc., located in Toronto,
Ontario is the transfer agent and registrar for our common
shares in Canada. Computershare Trust Company, Inc.,
located in Golden, Colorado, is the transfer agent and registrar
for our common shares in the United States.
Deloitte & Touche LLP, located in Ottawa, Ontario is our
independent auditor.
105
DESCRIPTION OF CONVERTIBLE NOTES
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.
Convertible Notes
Each of the convertible notes issued and sold to the noteholders
contains identical terms and conditions, although the principal
amount may vary between noteholders. The convertible notes
mature on April 28, 2010 and accrue interest, payable
semi-annually in arrears, (a) prior to the consummation of
this offering, at the London Inter-Bank Offer Rate plus 5%, and
(b) following consummation of this offering, at London
Inter-Bank Offer Rate plus 2.5%.
Each noteholder is entitled to convert any portion of the
balance of the principal and accrued interest outstanding on its
convertible note into our common shares, with the number of
common shares to be received being determined by dividing the
outstanding principal and accrued interest owing on each
convertible note by a conversion price (the Conversion
Price) calculated (subject to applicable adjustments)
following completion of this offering on the basis of a formula
that is 110% of the lower of (a) the price per common share
in this offering, and (b) the higher of (i) the
average 10-day trading
price of our common shares on the Nasdaq Global Market
immediately following the date of expiry of the lock-up
restrictions entered into by a noteholder in connection with
this offering and (ii) 80% of the price per common share in
this offering.
The convertible notes 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. A default in the
performance by us of any covenant, agreement or condition in the
convertible notes will generally not constitute an event of
default unless the default continues, unremedied, for a period
of 30 days after we have been given notice of the default
by a noteholder. In the event of an uncured default under the
convertible notes, the noteholders have the right to accelerate
and require us to redeem all or any portion of the convertible
notes at a price equal to the principal plus accrued interest of
the convertible notes then outstanding.
In the event of a fundamental change that occurs prior to the
maturity date, each noteholder will have the option to either
convert all or a portion of its convertible note into our common
shares or obligate us to repurchase all or a portion of the
convertible note principal and accrued interest. In the event of
conversion, each convertible noteholder will receive a number of
common shares determined by dividing the outstanding principal
and accrued interest owing on the convertible note(s) by the
Conversion Price. Under the terms of the convertible notes, a
fundamental change includes the sale of all or substantially all
of our property or assets, a change of control, shareholder
approved liquidation or dissolution, a merger or acquisition, or
the number of shares in our capital held directly or indirectly
by Dr. Matthews falling below 115,000,000 (subject to
adjustments for stock splits, consolidations or other similar
adjustments).
In addition, each noteholder that converts in connection with a
fundamental change which occurs on or after November 1,
2007 will be entitled to receive a make-whole premium in the
form of additional common shares or cash. The make-whole premium
is determined based on the amount by which the share price at
the time of the fundamental change exceeds the price per share
under the offering. The amount of
106
the make-whole premium decreases (i) the larger the
increase in the share price from the price per share under the
offering, and (ii) the longer the period of time that has
passed from the date of the closing of the offering. The amount
will be zero on or after May 1, 2010. The maximum amount
payable in respect of the make whole payment would represent an
additional 23% of the common shares otherwise issuable to such
holder on conversion or the equivalent value in cash.
Noteholder Warrants
The noteholder warrants have an exercise price (subject to
applicable adjustments) (a) prior to the last day of the
first 10 trading days following the date of expiry of the
lock-up restrictions entered into by a noteholder in connection
with this offering, of $1.50 per common share, and
(b) thereafter, the lower of (i) $1.50 per common
share and (ii) the average closing price for the
10-day trading period
immediately following the date of expiry of such lock-up
restrictions which shall be no less than the greater of
(A) $1.29 per common share, and (B) 80% of the price
per common share in this offering. The noteholder warrants
expire on April 27, 2009. Each of the warrants has been
issued and sold to the noteholders on identical terms and
conditions, although the number of warrants granted may vary
between noteholders.
Registration Rights Agreement:
In connection with the convertible debt financing, we entered
into the 2005 Registration Rights Agreement. Pursuant to the
2005 Registration Rights Agreement, we agreed to make certain
arrangements with respect to the registration of the shares
issuable (after conversion of the convertible notes and exercise
of the warrants) to the noteholders under the applicable
securities laws of the United States. See Description of
Share Capital Registration Rights.
107
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there was no public market for our
common shares. Future sales or the availability for sale of
substantial amounts of our common shares in the public market
could adversely affect prevailing market prices and could impair
our ability to raise capital through future sales of our
securities.
Upon completion of this offering, a total
of of
our common shares will be outstanding, assuming no exercise of
the underwriters over-allotment option. All of
the common
shares sold in this offering will be freely tradable without
restriction or further registration under the
U.S. Securities Act, unless held by our
affiliates, as that term is defined in Rule 144
under the U.S. Securities Act.
For the reasons set forth below, we expect that the following
shares will be eligible for sale in the public market at the
following times:
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Number of Shares | |
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Eligible for Sale in | |
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U.S. Public Market | |
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On the date of this prospectus
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Shares sold in this offering |
90 days after the date of this prospectus
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Aggregate number of shares released from the lock-up agreements
of employees |
180 Days after the date of this prospectus
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Lock-up agreements expire |
As of May 31, 2006, 103,193 common shares had been issued
under our employee stock purchase plan, 20,403,699 common
shares were issuable upon exercise of vested and unvested stock
options outstanding under our stock option plan and an
additional 4,493,108 common shares were reserved for
issuance under our stock option plan. Subject to the lock-up
agreements described below and limitations imposed by
U.S. and Canadian securities laws on resales by our
affiliates, common shares already issued pursuant to these plans
or issuable upon exercises of these stock options will be freely
tradeable in the public markets.
The holders of our convertible notes and warrants outstanding as
of the closing of this offering, all of our officers and
directors and certain shareholders and option holders, have
entered into lock-up agreements under which they have generally
agreed, subject to certain exceptions, not to offer or sell any
common shares or securities convertible into or exchangeable or
exercisable for common shares for a period of at least
180 days from the date of the underwriting agreement
without the prior written consent of the underwriters. However,
the underwriters have agreed that certain of our employees will
each have 2,000 shares (subject to adjustment for stock splits,
consolidations or other similar adjustments) released from their
lock-up agreements after 90 days following the date of the
underwriting agreement. In addition, in respect of the
convertible noteholders, the underwriters have agreed that the
lock-up agreements will terminate on the occurrence of certain
events, including an event of default under the convertible
notes. We may also grant new options under our stock option plan
and issue and sell our common shares upon the exercise of
options outstanding at the time of the pricing of this offering.
See Underwriters.
Under the terms of the 2005 Registration Rights Agreement, we
are required to file a shelf registration statement covering
resales of common shares issuable upon exercises of noteholder
warrants to purchase up to 16,500,000 of our common shares and
resales of common shares issuable upon conversion of the
outstanding convertible notes. We must use our best efforts to
have the shelf registration statement declared effective under
the U.S. Securities Act within 180 days following the
completion of this offering. The number of common shares
issuable upon the conversion of the convertible notes will be
calculated in accordance with the formula set out above (see
Description of Convertible Notes Convertible
Notes Conversion). In addition, the parties to
the 2004 Registration Rights Agreement will have the right to
include their shares in the shelf registration statement to the
extent they do not register their common shares in this
offering. Consequently, following the expiration of the lock-up
period, our noteholders may convert their convertible notes, and
parties to both registration rights agreements may
108
exercise their warrants and sell the underlying common shares
and/or sell certain common shares they currently own in the
public markets, which may further decrease the market price for
our shares. See Description of Share Capital
Registration Rights.
Rule 144
In general, under Rule 144, as currently in effect, any
person, including an affiliate, who has beneficially owned our
common shares for a period of at least one year is entitled to
sell, within any three-month period, a number of such shares
that does not exceed the greater of:
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1% of the then outstanding common shares, which will equal
approximately common
shares after this offering; and |
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the average weekly trading volume in the common shares on the
Nasdaq Global Market during the four calendar weeks preceding
the date on which the notice of the sale is filed with the SEC. |
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Sales under Rule 144 are also subject to provisions
relating to notice, manner of sale, volume limitations and the
availability of current public information about us. Under
Rule 144(k), a person who is not deemed to have been one of
our affiliates at any time during the 90 days preceding a
sale or at the time of such sale, and who has beneficially owned
the shares for at least two years, including the holding period
of any prior owner other than an affiliate, is
entitled to sell the shares without complying with the manner of
sale, public information, volume limitation or notice provisions
of Rule 144.
Canadian Resale Restrictions
Under the securities laws of the provinces and territories of
Canada, a person who owns our common shares, or securities
convertible into our common shares (other than options granted
to our directors, officers, employees and consultants),
distributed by us more than four months prior to the date of
this prospectus will generally be able to freely sell those
common shares, or the common shares issued upon the conversion
of such convertible securities, in Canada following the date of
this prospectus. To the extent that such common shares or
convertible securities were distributed by us during the four
months preceding the date of this prospectus, those common
shares, or the common shares issued upon the conversion of those
convertible securities, may not be resold, except under a
prospectus or an exemption from the prospectus requirement,
until four months have passed since the date of distribution of
those securities by us, at which time such a person will
generally be able to freely sell those common shares in Canada.
Any of our directors, officers, employees and consultants who
purchased common shares from us either directly or pursuant to
the exercise of options granted at any time prior to the date of
this prospectus will generally be able to freely resell those
common shares in Canada following the date of this prospectus.
Any sales of our common shares in Canada will be subject to the
terms of applicable
lock-up agreements.
There are additional restrictions on the ability of
control block holders of our common shares to
dispose of the common shares they hold. A control block holder
is any person, company or combination of persons or companies
holding a sufficient number of our common shares to affect
materially the control of Mitel, and any person, company or
combination holding more than 20 percent of our outstanding
common shares will, in the absence of evidence to the contrary,
be deemed to affect materially the control of Mitel. It is
expected that on the closing of the offering Dr. Matthews
will be a control block holder of our common shares.
109
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 acquisition, 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). 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, 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, 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 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, existing and proposed
Treasury regulations thereunder, 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.
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
110
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 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.
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 currently 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 value of our outstanding equity during the
year and the proceeds of the initial public offering of our
common shares 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
111
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 earnings or gain is
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 gain 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 any such income or loss amounts. |
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.
Conversion of Canadian Dollars
The tax basis of Canadian dollars received by a U.S. Holder
will equal the U.S. dollar equivalent of such Canadian
dollars at the exchange rate on the date the Canadian dollars
are received (or, in the case of a U.S. Holder using
the accrual method of accounting that has not made the election
described above, on the date the U.S. Holder had a right to
receive the Canadian dollars). 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 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.
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 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. |
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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in certain circumstances, fail to comply with other applicable
requirements of the backup withholding rules. |
A U.S. Holder who does not provide a correct taxpayer
identification number may be subject to penalties imposed by the
IRS.
112
If backup withholding applies to you, 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.
113
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR U.S.
HOLDERS
This section summarizes the principal Canadian federal income
tax considerations generally applicable to a purchaser who
acquires as beneficial owner, common shares pursuant to this
offering and (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 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.
114
UNDERWRITERS
Under the terms and subject to the conditions contained in an
underwriting agreement
dated ,
2006, the underwriters named below, for whom Morgan Stanley
& Co. Incorporated and RBC Capital Markets Corporation are
acting as representatives, have severally agreed to purchase,
and we and the selling shareholders have agreed to sell to them,
the number of common shares indicated below:
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Number of | |
Name |
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Shares | |
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Morgan Stanley & Co. Incorporated
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RBC Capital Markets Corporation
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Merrill Lynch, Pierce, Fenner & Smith Incorporated
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Genuity Capital Markets G.P.
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Thomas Weisel Partners LLC
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National Bank Financial Inc.
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Total
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The underwriters are offering the common shares subject to their
acceptance of the shares from us and the selling shareholders
and subject to prior sale. The underwriting agreement provides
that the obligations of the several underwriters to pay for and
accept delivery of the common shares offered by this prospectus
are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The obligations of the
underwriters under the underwriting agreement may be terminated
at their discretion on the basis of their assessment of any
material and adverse change in the state of the financial
markets and may also be terminated upon the occurrence of
certain stated events. Subject to the terms and provisions of
the underwriting agreement, the underwriters are obligated to
take and pay for all of the common shares offered by this
prospectus if any such shares are taken. However, the
underwriters are not required to take or pay for the shares
covered by the underwriters over-allotment option
described below.
This offering is being made concurrently in the United States
and in all of the provinces and territories of Canada. The
common shares will be offered in the United States through the
underwriters, either directly or indirectly, through their
respective U.S. broker-dealer affiliates or agents. The common
shares will be offered in each of the provinces and territories
of Canada through those underwriters or their Canadian
affiliates who are registered to offer the common shares for
sale in such provinces and territories and such other registered
dealers as may be designated by the underwriters. Subject to
applicable law, the underwriters may offer the common shares
outside of the United States and Canada.
The underwriters initially propose to offer part of the common
shares directly to the public at the public offering price
listed on the cover page of this prospectus and part to certain
dealers at a price that represents a concession not in excess of
$ a
share under the public offering price. Any underwriter may
allow, and such dealers may re-allow, a concession not in excess
of
$ a
share to other underwriters or to certain dealers. The public
offering price for the common shares offered in the United
States is payable in U.S. dollars and the public offering price
for the common shares offered in Canada is payable in Canadian
dollars. The Canadian dollar amount is the equivalent of the
U.S. price of the common shares based on the prevailing
U.S.-Canadian dollar exchange rate on the date of the
underwriting agreement. After the initial offering of the common
shares, the offering price and other selling terms may from time
to time be varied by the representatives of the underwriters.
We and the selling shareholders have granted to the underwriters
an option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate
of additional
common shares
( common
shares from us and common shares from the selling
shareholders) at the public offering price listed on the cover
page of this prospectus, less underwriting discounts and
commissions. The underwriters may exercise this option solely
for the purpose of covering over-allotments, if any, made in
connection with the offering of the common shares offered by
this prospectus. To the
115
extent the option is exercised, each underwriter will become
obligated, subject to certain conditions, to purchase
approximately the same percentage of the additional common
shares as the number listed next to the underwriters name
in the preceding table bears to the total number of common
shares listed next to the names of all underwriters in the
preceding table.
The following table shows the per share and total underwriting
discounts and commissions to be paid by us and the selling
shareholders assuming no exercise and full exercise of the
underwriters
over-allotment option
to
purchase additional
shares from us and the selling shareholders.
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Total | |
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Per | |
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No | |
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Full | |
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Share | |
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Exercise | |
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Exercise | |
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Public offering price
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$ |
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$ |
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$ |
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Underwriting discounts and commissions to be paid by:
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Us
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$ |
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$ |
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$ |
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Selling shareholders
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$ |
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$ |
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$ |
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Proceeds before expenses to us
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$ |
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$ |
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$ |
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Proceeds before expenses to the selling shareholders
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$ |
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$ |
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$ |
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The estimated offering expenses payable by us, in addition to
the underwriting discounts and commissions, are approximately
$ million.
We have applied for quotation of our common shares on the Nasdaq
Global Market and to list our common shares on the Toronto Stock
Exchange.
We and all of our directors and officers and certain holders of
our outstanding common shares, warrants and convertible notes
have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated and RBC Capital Markets
Corporation on behalf of the underwriters, neither we nor they
will during the period ending 180 days after the date of
the underwriting agreement:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, or
demand or exercise any rights to (except with respect to holders
of registration rights pursuant to the 2004 Registration Rights
Agreement and the 2005 Registration Rights Agreement) file any
registration statement with the SEC relating to the offering of,
any common shares or any securities convertible into or
exercisable or exchangeable for our common shares; |
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common shares; or |
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announce any intention to do any of the foregoing |
whether any such transaction described above is to be settled by
delivery of common shares or such other securities, in cash or
otherwise. The underwriters have agreed that our employees
(other than directors and officers) will each have
2,000 shares (subject to adjustment for stock splits,
consolidations or other similar adjustments) released from the
lock-up
90 days after the date of the underwriting agreement.
The 180-day
restrictions described in the immediately preceding paragraph do
not apply to (a) transactions relating to common shares or
other securities acquired in open market transactions after the
completion of this offering; (b) transfers of common shares
or any security convertible into common shares as a bona fide
gift or gifts; (c) distributions of common shares or any
security convertible into common shares to limited partners or
shareholders of the transferor, or in the case of certain
shareholders, to their affiliates; (d) transactions
effected in accordance with our recapitalization described in
this prospectus; (e) tenders of common shares made in
response to a bona fide third party
take-over bid made to
all holders of common shares or similar acquisition transaction;
or (f) any transfer to an immediate family member or an
entity of which the transferor or an immediate family member of
the transferor is
116
the sole beneficiary; provided, that in the case of any
transfer or distribution pursuant to clause (b), (c)
or (f), each donee, distributee or transferee agrees in
writing to be bound by the transfer restrictions described
above; and further provided that no filing by any party under
the Securities Exchange Act of 1934, as amended or the
Securities Act (Ontario) shall be required or shall be
voluntarily made in connection with subsequent sales of common
shares or other securities acquired in open market transactions
described in clause (a) or in connection with transfers of
the employee shares released after 90 days as set out in
the preceding paragraph.
The 180-day restricted period (or 90-day restricted period for
up to 2,000 shares of certain employees) described above
will be extended if:
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during the last 17 days of the 180-day restricted period
(or 90-day restricted period for up to 2,000 shares of
certain employees) we issue an earnings release or material news
or a material event relating to us occurs, or |
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prior to the expiration of the 180-day restricted period (or
90-day restricted
period for up to 2,000 shares of certain employees), we
announce that we will release earnings results during the 16-day
period beginning on the last day of the 180-day period, |
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day period beginning
on the issuance of the earnings release or the occurrence of the
material news or material event.
In the case of the convertible noteholders, the underwriters
have agreed that the lock-up agreements with those holders will
terminate on the occurrence of certain events, including
(i) if the underwriters grant a release of any securities
from the terms of a lock-up agreement with a holder of more than
2.5% of our shares and a release of a similar proportion of each
convertible noteholders securities is not offered to such
noteholder, or (ii) upon the occurrence of an event of
default under the convertible notes.
In order to facilitate the offering of our common shares, the
underwriters may engage in transactions that stabilize, maintain
or otherwise affect the price of the common shares.
Specifically, the underwriters may sell more shares than they
are obligated to purchase under the underwriting agreement,
creating a short position. A short sale is covered
if the short position is no greater than the number of shares
available for purchase by the underwriters under the
over-allotment option.
The underwriters can close out a covered short sale by
exercising the
over-allotment option
or purchasing shares in the open market. In determining the
source of shares to close out a covered short sale, the
underwriters will consider, among other things, the open market
price of shares compared to the price available under the
over-allotment option.
The underwriters may also sell shares in excess of the
overallotment option, creating a naked short
position. The underwriters must close out any naked short
position by purchasing shares in the open market. A naked short
position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of
our common shares in the open market after pricing that could
adversely affect investors who purchase in this offering. As an
additional means of facilitating this offering, the underwriters
may bid for, and purchase, our common shares in the open market
to stabilize the price of the common shares. The underwriting
syndicate may also reclaim selling concessions allowed to an
underwriter or dealer for distributing our common shares in the
offering, if the syndicate repurchases previously distributed
common shares to cover syndicate short positions, or to
stabilize the price of our common shares.
The underwriters may also impose a penalty bid. This occurs when
a particular underwriter repays to the underwriters a portion of
the underwriting commission received by it because Morgan
Stanley & Co. Incorporated and RBC Capital Markets
Corporation have repurchased our common shares sold by or for
the account of such underwriter in stabilizing or short covering
transactions.
In accordance with policy statements of the provincial
securities commissions, the underwriters may not, throughout the
period of distribution, bid for or purchase the shares.
Exceptions, however, exist where the bid or purchase is not made
to create the appearance of active trading in, or rising prices
of, the common shares. These exceptions include a bid or
purchase permitted under the
by-laws and rules of
117
applicable regulatory authorities and the Toronto Stock Exchange
relating to market stabilization and passive market making
activities and a bid or purchase made for and on behalf of a
customer where the order was not solicited during the period of
distribution. Subject to the foregoing and applicable laws, in
connection with the offering and pursuant to the first exception
mentioned above, the underwriters may overallot or effect
transactions that stabilize or maintain the market price of the
shares at levels other than those which might otherwise prevail
on the open market. Any of the foregoing activities may have the
effect of preventing or slowing a decline in the market price of
the common shares. They may also cause the price of the common
shares to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The
underwriters may conduct these transactions on the Nasdaq Global
Market, the Toronto Stock Exchange, in the over the counter
market or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
We and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the U.S. Securities Act and applicable securities laws in
the provinces and territories of Canada.
A prospectus in electronic format may be made available by one
or more of the underwriters. The representatives may agree to
allocate a number of shares to underwriters for sale to their
online brokerage account holders. The representatives will
allocate shares to underwriters that may make Internet
distributions on the same basis as other allocations. In
addition, shares may be sold by the underwriters to securities
dealers who resell to online brokerage account holders.
Pricing of the Offering
Prior to this offering, there has been no public market for the
common shares. The initial public offering price will be
determined by negotiations among us, the selling shareholders
and the representatives. Among the factors considered in
determining the initial public offering price will be our future
prospects and future prospects of our industry in general, our
sales, earnings and other financial and operating information in
recent periods, and the price-earnings ratios, market prices of
securities and financial and operating information of companies
engaged in activities similar to ours.
The estimated initial public offering price range set forth on
the cover page of this preliminary prospectus is subject to
change as a result of market conditions and other factors.
Directed Share Program
At our request, the underwriters have reserved up
to common
shares,
or %
of the shares offered by this prospectus, for sale under a
directed share program to our employees and related parties,
immediate family members and entities of which employees or
family members are the sole beneficiaries. Our officers and
directors are not eligible to participate in this program. All
of the persons purchasing the reserved shares must commit to
purchase upon the date of this prospectus but no later than the
close of business on the day following that date. The number of
shares available for sale to the general public will be reduced
to the extent these persons purchase the reserved shares. Shares
committed to be purchased by directed share program participants
which are not so purchased will be reallocated for sale to the
general public in this offering. All sales of shares pursuant to
the directed share program will be made at the initial public
offering price set forth on the cover page of this prospectus,
and all such shares will be subject to the 180-day restrictions
described above in this section.
Relationships
Certain affiliates of the underwriters have performed commercial
banking services for us and our affiliates from time to time for
which they received their customary fees and expenses. The
underwriters may, from time to time, engage in transactions and
perform services for us, our subsidiaries or our affiliates in
the ordinary course of their business.
118
Expenses of Issuance and Distribution
The following table sets forth the estimated expenses payable by
us in connection with this offering and the distribution of the
common shares sold in this offering (excluding underwriting
commissions):
|
|
|
|
|
Nature of Expense |
|
Amount | |
|
|
| |
Securities and Exchange Commission Registration Fee
|
|
$ |
|
|
Canadian Securities Regulatory Authorities Filing Fees
|
|
|
|
|
National Association of Securities Dealers Filing Fee
|
|
|
|
|
Nasdaq Global Market Listing Fee
|
|
|
|
|
Toronto Stock Exchange Listing Fee
|
|
|
|
|
Accounting Fees and Expenses
|
|
|
|
|
Legal Fees and Expenses
|
|
|
|
|
Printing Expenses
|
|
|
|
|
Blue Sky Qualification Fees and Expenses
|
|
|
|
|
Transfer Agent and Registrar Fee
|
|
|
|
|
Additional D&O Insurance Premiums
|
|
|
|
|
|
|
|
|
Miscellaneous
|
|
|
|
|
|
|
|
|
TOTAL
|
|
$ |
|
|
|
|
|
|
European Economic Area
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive, each underwriter
has represented and agreed that with effect from and including
the date on which the Prospectus Directive is implemented in
that Member State it has not made and will not make an offer of
common shares to the public in that Member State, except that it
may, with effect from and including such date, make an offer of
common shares to the public in that Member State:
|
|
|
|
(a) |
at any time to legal entities which are authorized or regulated
to operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities; |
|
|
(b) |
at any time to any legal entity which has two or more of
(1) an average of at least 250 employees during the
last financial year; (2) a total balance sheet of more than
43,000,000 and
(3) an annual net turnover of more than
50,000,000, as
shown in its last annual or consolidated accounts; or |
|
|
(c) |
at any time in any other circumstances which do not require the
publication by us of a prospectus pursuant to Article 3 of
the Prospectus Directive. |
For the purposes of the above, the expression an offer of
common shares to the public in relation to any common
shares in any Member State means the communication in any form
and by any means of sufficient information on the terms of the
offer and the common shares to be offered so as to enable an
investor to decide to purchase or subscribe the common shares,
as the same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive 2003/71/EC
and includes any relevant implementing measure in that Member
State.
119
United Kingdom
Each underwriter has represented and agreed that it has only
communicated or caused to be communicated and will only
communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of Section 21 of the Financial Services and Markets Act
2000) in connection with the issue or sale of the common shares
in circumstances in which Section 21(1) of such Act does
not apply to us and it has complied and will comply with all
applicable provisions of such Act with respect to anything done
by it in relation to any common shares in, from or otherwise
involving the United Kingdom.
120
LEGAL MATTERS
The validity of the issuance of the common shares will be passed
upon for us by Osler, Hoskin & Harcourt LLP. Certain U.S.
legal matters relating to this offering will be passed upon for
us by Skadden, Arps, Slate, Meagher & Flom LLP. Certain
legal matters relating to this offering will be passed upon for
the underwriters by Shearman & Sterling LLP and Torys LLP.
Kent H.E. Plumley, a partner of Osler, Hoskin & Harcourt
LLP, has also served as our General Counsel and Corporate
Secretary since December 2003. The partners and associates of
Osler, Hoskin & Harcourt LLP, collectively, beneficially
own, directly and indirectly, less than 1% of our outstanding
common shares. The partners and associates of Torys LLP,
collectively, beneficially own, directly and indirectly, less
than 1% of our outstanding common shares.
EXPERTS
Our consolidated financial statements included in this
prospectus have been audited by Deloitte & Touche LLP, an
independent registered chartered accounting firm, as stated in
their reports appearing herein and have been included in
reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form F-1 with the
SEC regarding this offering. This prospectus, which is part of
the registration statement, does not contain all of the
information included in the registration statement, and you
should refer to the registration statement and its exhibits to
read that information.
Any statement in this prospectus about any of our contracts or
other documents is not necessarily complete. If the contract or
document is filed as an exhibit to the registration statement,
the contract or document is deemed to modify the description
contained in this prospectus. You must review the exhibits
themselves for a complete description of the contract or
document. You may review a copy of the registration statement,
including the exhibits and schedules filed with it, at the
public reference facilities maintained by the SEC at 100 F
Street, N.E., Washington, D.C. 20549. Copies of all or a part of
the registration statement may be obtained from this office
after payment at prescribed rates. You may call the SEC at
1-800-SEC-0330 for further information on the public reference
rooms. You may also obtain a free copy of the registration
statement, including the schedules and exhibits, from the SEC
website at www.sec.gov.
We are required to file reports and other information with the
SEC pursuant to the Exchange Act. As a foreign private issuer,
we are exempt from the U.S. rules under the Exchange Act
prescribing the furnishing and content of proxy statements and
our officers, directors and principal shareholders are exempt
from the reporting and short-swing profit recovery provisions
contained in Section 16 of the Exchange Act. Under the
Exchange Act, as a foreign private issuer, we are not required
to publish financial statements as frequently or as promptly as
United States companies.
We will also be subject to the full informational requirements
of the securities commissions in all provinces and territories
of Canada. You are invited to read and copy any reports,
statements or other information, other than confidential
filings, that we intend to file with the Canadian provincial
securities commissions. These filings are electronically
available from the Canadian System for Electronic Document
Analysis and Retrieval (SEDAR) at www.sedar.com, the
Canadian equivalent of the SEC electronic document gathering and
retrieval system.
121
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
MITEL NETWORKS CORPORATION
|
|
|
|
|
Consolidated Financial Statements
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
F-1
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,
April 30, 2005, April 24, 2005 and the related
consolidated statements of operations, shareholders
deficiency and cash flows for each of the years ended
April 30, 2006, April 24, 2005 and April 25, 2004
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 about 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, April 30, 2005, April 24, 2005 and the results
of their operations and cash flows for each of the years ended
April 30, 2006, April 24, 2005 and April 25, 2004
and the six day period ended April 30, 2005 in conformity
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 its internal control over financial
reporting. Our audit 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.
|
|
|
|
|
/s/ Deloitte & Touche
LLP
|
Ottawa, Canada |
|
Deloitte & Touche LLP |
June 28, 2006 |
|
Independent Registered Chartered Accountants |
F-2
Mitel Networks Corporation
(incorporated under the laws of Canada)
Consolidated Balance Sheets
(in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma | |
|
|
|
|
|
|
|
|
April 30, | |
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
2006 | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
(Unaudited) | |
|
|
| |
|
| |
|
| |
|
| |
ASSETS |
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
9.7 |
|
|
$ |
46.6 |
|
|
$ |
35.7 |
|
|
|
|
|
|
Restricted cash
|
|
|
|
|
|
|
1.0 |
|
|
|
1.7 |
|
|
|
|
|
|
Accounts receivable (net of allowance of $3.0, $3.0, and $2.5,
respectively)
|
|
|
71.1 |
|
|
|
66.9 |
|
|
|
79.7 |
|
|
|
|
|
|
Due from related parties
|
|
|
0.7 |
|
|
|
0.7 |
|
|
|
0.4 |
|
|
|
|
|
|
Inventories
|
|
|
17.1 |
|
|
|
17.4 |
|
|
|
23.6 |
|
|
|
|
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
Income tax receivable
|
|
|
1.4 |
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
Other current assets
|
|
|
27.2 |
|
|
|
28.4 |
|
|
|
24.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127.2 |
|
|
|
162.4 |
|
|
|
166.5 |
|
|
|
|
|
Long-term receivables
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
Property and equipment
|
|
|
20.9 |
|
|
|
20.6 |
|
|
|
17.4 |
|
|
|
|
|
Goodwill
|
|
|
6.2 |
|
|
|
6.0 |
|
|
|
6.8 |
|
|
|
|
|
Intangible and other assets
|
|
|
1.9 |
|
|
|
5.9 |
|
|
|
6.6 |
|
|
|
|
|
Deferred tax asset
|
|
|
|
|
|
|
|
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
156.6 |
|
|
$ |
195.3 |
|
|
$ |
199.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE SHARES AND SHAREHOLDERS
DEFICIENCY |
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank indebtedness
|
|
$ |
15.8 |
|
|
$ |
1.2 |
|
|
$ |
2.1 |
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
53.6 |
|
|
|
55.8 |
|
|
|
73.3 |
|
|
|
|
|
|
Income and other taxes payable
|
|
|
2.2 |
|
|
|
2.2 |
|
|
|
1.7 |
|
|
|
|
|
|
Deferred revenue
|
|
|
25.5 |
|
|
|
25.9 |
|
|
|
23.1 |
|
|
|
|
|
|
Due to related parties
|
|
|
15.9 |
|
|
|
14.0 |
|
|
|
24.2 |
|
|
|
|
|
|
Current portion of long-term debt
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115.8 |
|
|
|
101.9 |
|
|
|
126.0 |
|
|
|
|
|
Long-term debt
|
|
|
11.8 |
|
|
|
11.8 |
|
|
|
2.5 |
|
|
|
|
|
Long-term portion of lease termination obligations
|
|
|
8.4 |
|
|
|
8.3 |
|
|
|
5.5 |
|
|
|
|
|
Convertible notes
|
|
|
|
|
|
|
46.6 |
|
|
|
48.7 |
|
|
|
|
|
Derivative instruments
|
|
|
38.0 |
|
|
|
37.4 |
|
|
|
75.9 |
|
|
|
|
|
Deferred gain
|
|
|
|
|
|
|
|
|
|
|
5.5 |
|
|
|
|
|
Pension liability
|
|
|
25.4 |
|
|
|
25.1 |
|
|
|
40.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
199.4 |
|
|
|
231.1 |
|
|
|
304.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable common shares, without par value : 10,000,000 shares
authorized; issued and outstanding at April 24, 2005,
April 30, 2005 and April 30, 2006 pro forma
( )
|
|
|
18.2 |
|
|
|
18.2 |
|
|
|
18.7 |
|
|
|
|
|
Convertible, redeemable preferred shares, without par
value unlimited shares authorized; issued and
outstanding: Series A: 20,000,000 shares at April 24,
2005, April 30, 2005 and April 30, 2006;
Series B: 67,789,300 shares at April 24, 2005,
April 30, 2005 and April 30, 2006 pro forma
( )
|
|
|
39.0 |
|
|
|
39.1 |
|
|
|
45.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57.2 |
|
|
|
57.3 |
|
|
|
64.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders deficiency:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares, without par value unlimited shares
authorized;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107,149,933, 107,149,933 and 107,302,322 issued and outstanding
at April 24, 2005, April 30, 2005 and April 30,
2006 pro forma
( ) |
|
|
187.6 |
|
|
|
187.6 |
|
|
|
188.8 |
|
|
|
|
|
|
Warrants
|
|
|
40.2 |
|
|
|
47.9 |
|
|
|
47.9 |
|
|
|
|
|
|
Deferred stock-based compensation
|
|
|
(0.4 |
) |
|
|
(0.4 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
Accumulated deficit
|
|
|
(302.3 |
) |
|
|
(304.0 |
) |
|
|
(355.5 |
) |
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(25.1 |
) |
|
|
(24.2 |
) |
|
|
(49.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100.0 |
) |
|
|
(93.1 |
) |
|
|
(168.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
156.6 |
|
|
$ |
195.3 |
|
|
$ |
199.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APPROVED BY THE BOARD
/s/ Peter D. Charbonneau, Director
/s/ Donald W. Smith, Director
(The accompanying notes are an integral part of these
consolidated financial statements)
F-3
Mitel Networks Corporation
(incorporated under the laws of Canada)
Consolidated Statements of Operations
(in millions, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
|
|
|
|
| |
|
Six Days Ended | |
|
Year Ended | |
|
|
April 25, | |
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$ |
207.1 |
|
|
$ |
207.7 |
|
|
$ |
1.7 |
|
|
$ |
260.5 |
|
|
Services
|
|
|
133.6 |
|
|
|
134.5 |
|
|
|
1.5 |
|
|
|
126.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
340.7 |
|
|
|
342.2 |
|
|
|
3.2 |
|
|
|
387.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
125.7 |
|
|
|
132.0 |
|
|
|
1.6 |
|
|
|
149.1 |
|
|
Services
|
|
|
77.2 |
|
|
|
81.2 |
|
|
|
0.8 |
|
|
|
76.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202.9 |
|
|
|
213.2 |
|
|
|
2.4 |
|
|
|
225.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
137.8 |
|
|
|
129.0 |
|
|
|
0.8 |
|
|
|
161.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
111.4 |
|
|
|
114.9 |
|
|
|
1.8 |
|
|
|
120.7 |
|
|
Research and development
|
|
|
36.2 |
|
|
|
41.4 |
|
|
|
0.7 |
|
|
|
44.1 |
|
|
Special charges
|
|
|
11.7 |
|
|
|
10.6 |
|
|
|
|
|
|
|
5.7 |
|
|
Loss (gain) on sale of manufacturing operations
|
|
|
0.6 |
|
|
|
3.4 |
|
|
|
|
|
|
|
(0.9 |
) |
|
Amortization of acquired intangibles
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
160.1 |
|
|
|
170.3 |
|
|
|
2.5 |
|
|
|
168.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(22.3 |
) |
|
|
(41.3 |
) |
|
|
(1.7 |
) |
|
|
(6.7 |
) |
Interest expense
|
|
|
(4.3 |
) |
|
|
(2.6 |
) |
|
|
|
|
|
|
(7.6 |
) |
Fair value adjustment on derivatives instruments
|
|
|
|
|
|
|
(5.3 |
) |
|
|
(0.1 |
) |
|
|
(32.6 |
) |
Beneficial conversion feature on convertible debentures
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
(0.6 |
) |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(30.3 |
) |
|
|
(48.8 |
) |
|
|
(1.6 |
) |
|
|
(46.5 |
) |
Current income tax expense (recovery)
|
|
|
2.0 |
|
|
|
0.8 |
|
|
|
|
|
|
|
0.9 |
|
Deferred income tax recovery
|
|
|
(1.7 |
) |
|
|
|
|
|
|
|
|
|
|
(2.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(30.6 |
) |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$ |
(0.26 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
127,831,211 |
|
|
|
113,792,829 |
|
|
|
117,149,933 |
|
|
|
117,230,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma net loss per common share (note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unaudited pro forma weighted average common share outstanding
(note 2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of these
consolidated financial statements)
F-4
Mitel Networks Corporation
(incorporated under the laws of Canada)
Consolidated Statements of Shareholders Deficiency
(in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Shares | |
|
|
|
Deferred | |
|
|
|
Other | |
|
Total | |
|
|
| |
|
|
|
Stock-based | |
|
Accumulated | |
|
Comprehensive | |
|
Shareholders | |
|
|
Shares | |
|
Amount | |
|
Warrants | |
|
Compensation | |
|
Deficit | |
|
Income (Loss) | |
|
Deficiency | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Balances at April 27, 2003
|
|
|
101,400,213 |
|
|
$ |
183.4 |
|
|
$ |
17.6 |
|
|
$ |
(0.4 |
) |
|
$ |
(218.2 |
) |
|
$ |
(19.4 |
) |
|
$ |
(37.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of convertible debentures
|
|
|
5,445,775 |
|
|
|
8.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.3 |
|
|
Conversion of related party loans
|
|
|
20,448,875 |
|
|
|
31.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.0 |
|
|
Professional services received
|
|
|
33,591 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
Exercise of stock options
|
|
|
5,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reallocation of share issue costs to convertible, redeemable
preferred shares
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
Exchange of common shares for convertible, redeemable preferred
shares
|
|
|
(25,530,494 |
) |
|
|
(38.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38.7 |
) |
Share purchase loan repayments
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
Shares repurchased
|
|
|
(21,153 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
Beneficial conversion feature on Series A preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
1.4 |
|
Deemed dividend relating to beneficial conversion feature on
Series A preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.4 |
) |
|
|
|
|
|
|
(1.4 |
) |
Stock-based dividends
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
Issuance of warrants
|
|
|
|
|
|
|
|
|
|
|
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.2 |
|
Amortization of deferred stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Accretion of interest on redeemable common and preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.3 |
) |
|
|
|
|
|
|
(1.3 |
) |
Beneficial conversion feature on convertible debentures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101,782,757 |
|
|
$ |
184.8 |
|
|
$ |
29.8 |
|
|
$ |
(0.2 |
) |
|
$ |
(216.5 |
) |
|
$ |
(19.4 |
) |
|
$ |
(21.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30.6 |
) |
|
|
|
|
|
|
(30.6 |
) |
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.0 |
) |
|
|
(6.0 |
) |
|
Minimum pension liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30.6 |
) |
|
|
(2.5 |
) |
|
|
(33.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of these
consolidated financial statements)
F-5
Mitel Networks Corporation
(incorporated under the laws of Canada)
Consolidated Statements of Shareholders
Deficiency (Continued)
(in millions, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
Common Shares | |
|
|
|
Deferred | |
|
|
|
Other | |
|
Total | |
|
|
| |
|
|
|
Stock-based | |
|
Accumulated | |
|
Comprehensive | |
|
Shareholders | |
|
|
Shares | |
|
Amount | |
|
Warrants | |
|
Compensation | |
|
Deficit | |
|
Income (Loss) | |
|
Deficiency | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of these
consolidated financial statements)
F-6
Mitel Networks Corporation
(incorporated under the laws of Canada)
Consolidated Statements of Cash Flows
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Six Days | |
|
Year | |
|
|
| |
|
Ended | |
|
Ended | |
|
|
April 25, | |
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2004 | |
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
CASH PROVIDED BY (USED IN)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(30.6 |
) |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
|
Adjustments to reconcile net loss to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization and depreciation
|
|
|
11.8 |
|
|
|
8.9 |
|
|
|
0.2 |
|
|
|
10.2 |
|
|
|
Amortization of deferred gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
Fair value adjustment on derivative instruments
|
|
|
|
|
|
|
5.3 |
|
|
|
0.1 |
|
|
|
32.6 |
|
|
|
Beneficial conversion feature on convertible debentures
|
|
|
3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of convertible notes to redemption value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
Stock-based compensation
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
Deferred income taxes
|
|
|
(1.5 |
) |
|
|
|
|
|
|
|
|
|
|
(2.8 |
) |
|
|
Special charges
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on sale of manufacturing operations
|
|
|
0.6 |
|
|
|
3.4 |
|
|
|
|
|
|
|
(0.9 |
) |
|
|
Loss (gain) on sale of business and assets
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
(1.5 |
) |
|
|
Unrealized foreign exchange loss (gain)
|
|
|
(2.9 |
) |
|
|
(2.0 |
) |
|
|
(0.9 |
) |
|
|
2.1 |
|
|
|
Non-cash movements in provisions
|
|
|
5.1 |
|
|
|
5.5 |
|
|
|
|
|
|
|
4.2 |
|
|
|
Change in non-cash operating assets and liabilities, net
|
|
|
24.6 |
|
|
|
(3.3 |
) |
|
|
1.0 |
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
10.8 |
|
|
|
(31.8 |
) |
|
|
(1.2 |
) |
|
|
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to capital and intangible assets
|
|
|
(3.7 |
) |
|
|
(4.5 |
) |
|
|
(0.1 |
) |
|
|
(8.8 |
) |
|
(Increase) decrease in restricted cash
|
|
|
|
|
|
|
0.9 |
|
|
|
(1.0 |
) |
|
|
(0.5 |
) |
|
Proceeds on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.4 |
|
|
Realized foreign exchange loss on hedging activities
|
|
|
(6.7 |
) |
|
|
(8.4 |
) |
|
|
|
|
|
|
(8.0 |
) |
|
Realized foreign exchange gain on hedging activities
|
|
|
4.1 |
|
|
|
6.2 |
|
|
|
|
|
|
|
8.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(6.3 |
) |
|
|
(5.8 |
) |
|
|
(1.1 |
) |
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in bank indebtedness
|
|
|
(19.0 |
) |
|
|
8.9 |
|
|
|
(14.6 |
) |
|
|
0.7 |
|
|
Deferred financing costs
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
(1.8 |
) |
|
Proceeds from issuance of convertible notes
|
|
|
|
|
|
|
|
|
|
|
54.3 |
|
|
|
|
|
|
Proceeds from issuance of convertible, redeemable preferred
shares
|
|
|
15.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of related party loans payable
|
|
|
(1.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(5.2 |
) |
|
|
(4.4 |
) |
|
|
|
|
|
|
(11.9 |
) |
|
Proceeds from issuance of warrants
|
|
|
9.8 |
|
|
|
12.4 |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common shares
|
|
|
0.1 |
|
|
|
2.4 |
|
|
|
|
|
|
|
0.2 |
|
|
Proceeds from repayments of employee share purchase loans
|
|
|
0.4 |
|
|
|
1.1 |
|
|
|
|
|
|
|
1.1 |
|
|
Share issue costs
|
|
|
(2.1 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(2.0 |
) |
|
|
20.1 |
|
|
|
39.3 |
|
|
|
(11.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
1.9 |
|
|
|
0.5 |
|
|
|
(0.1 |
) |
|
|
(0.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
4.4 |
|
|
|
(17.0 |
) |
|
|
36.9 |
|
|
|
(10.9 |
) |
Cash and cash equivalents, beginning of period
|
|
|
22.3 |
|
|
|
26.7 |
|
|
|
9.7 |
|
|
|
46.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$ |
26.7 |
|
|
$ |
9.7 |
|
|
$ |
46.6 |
|
|
$ |
35.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(The accompanying notes are an integral part of these
consolidated financial statements)
F-7
Mitel Networks Corporation
(incorporated under the laws of Canada)
Notes to the Consolidated Financial Statements
(in millions, 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 education, government, healthcare,
hospitality and retail, in the United States (U.S.),
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 U.S. 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
the 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) 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.
c) 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.
Estimates and assumptions are used for, but not limited to, the
determination of the allowance for doubtful accounts, inventory
allowances, special charges, depreciation and amortization,
warranty costs, sales returns, pension costs, taxes, loss
contingencies, goodwill and impairment assessments, and the
valuation of stock options, shares, 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.
F-8
d) Reporting
Currency and Foreign Currency Translation
Reporting Currency
During fiscal 2004, the Company adopted the U.S. dollar as its
reporting currency. As a result of the change in reporting
currency, the financial statements for all periods presented
were translated from Canadian dollars to U.S. dollars in
accordance with the Financial Accounting Standards Board
(FASB) Statement No. 52, Foreign Currency
Translation. Income statement balances were translated using
weighted-average
exchange rates over the relevant periods, assets and liabilities
were translated at the exchange rate as of the balance sheet
dates, and shareholders deficiency balances were
translated at the exchange rates in effect on the date of each
transaction. The Company made this change to enhance the
communication of its financial results with its shareholders and
potential investors using the currency that is familiar to both
groups. This presentation is also more consistent with the
presentation of the financial results of its industry
counterparts and competitors. There has been no change in the
functional currencies used in preparing these consolidated
financial statements.
Foreign Currency
Translation
The financial statements of the parent company and its
subsidiaries are measured using their local currency as the
functional currency. Assets and liabilities of the
Companys foreign operations are translated from foreign
currencies into U.S. dollars at the exchange rates in effect at
the balance sheet date while revenue, expenses and cash flow
amounts are translated at weighted-average exchange rates for
the period. The resulting unrealized gains or losses are
recorded as a component of accumulated other comprehensive
income (loss) in shareholders deficiency until there
is a reduction in the net investment in a foreign operation.
Other monetary assets and liabilities, which are denominated in
currencies foreign to the local currency of any subsidiary, are
translated to the local currency at the exchange rates in effect
at the balance sheet date, and transactions included in earnings
are translated at weighted-average exchange rates during the
period. Exchange gains and losses resulting from the translation
of these accounts are included in other income (expense), net,
in the Consolidated Statements of Operations.
e) 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 typically 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,
F-9
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. At the time product revenue is
recognized an accrual for estimated warranty costs is recorded
as a component of cost of sales based on prior claims
experience. 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 typically 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 the contractual
period, generally one year. Billings in advance of services are
included in deferred revenues. 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.
f) 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.
g) Restricted
Cash
Restricted cash represents cash provided to support letters of
credit outstanding and to support certain of the Companys
credit facilities.
F-10
h) 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.
i) Securitizations
and Transfers of Financial Instruments
The Company entered into a Receivables Purchase and Sale
Agreement on April 16, 2004, whereby non-interest bearing
trade receivables are transferred to a securitization trust.
These transfers are accounted for as sales when the Company is
considered to have surrendered control over the transferred
receivables and receives proceeds from the trust, other than a
beneficial interest in the assets sold. Losses on these
transactions are recognized as other expenses at the date of the
receivables sale, and are dependent in part on the previous
carrying amount of the receivables transferred which is
allocated between the receivables sold and the retained
interest, based on their relative fair value at the date of
transfer. Fair value is generally estimated based on the present
value of expected future cash flows using managements best
estimates of key assumptions such as discount rates, weighted
average life of accounts receivable, and credit loss ratios. A
servicing liability is recognized on the date of the transfer
and amortized to income over the expected life of the
transferred receivables. As of April 24, 2005,
April 30, 2005 and April 30, 2006, there were no
securitized receivables outstanding.
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) 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.
l) 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
F-11
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.
m) 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 will be
marked to market throughout the period to redemption with
changes in value recorded in the Consolidated Statements of
Operations.
n) 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.
o) 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.
F-12
p) 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 Company periodically
assesses, and adjusts as necessary, the minimum pension
liability recorded on the Consolidated Balance Sheet to equal
the amount by which the accumulated benefit obligation exceeds
the fair value of the plan assets.
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.
The Company uses a March 31 measurement date for its defined
benefit pension plan.
q) 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. The Company accounts for 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. Had compensation cost for
the Companys stock option plan been determined as
prescribed by SFAS 123, pro forma net loss and pro forma
net loss per share would have been as follows, using the
following weighted-average assumptions:
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Year Ended | |
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6 Days Ended | |
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Year Ended | |
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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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2004 | |
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2005 | |
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2005 | |
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2006 | |
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| |
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| |
|
| |
Net loss available to common shareholders, as reported
(Note 22)
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|
$ |
(33.4 |
) |
|
$ |
(55.2 |
) |
|
$ |
(1.7 |
) |
|
$ |
(51.5 |
) |
Estimated additional stock-based compensation
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|
|
(1.6 |
) |
|
|
(1.5 |
) |
|
|
|
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss available to common shareholders
|
|
$ |
(35.0 |
) |
|
$ |
(56.7 |
) |
|
$ |
(1.7 |
) |
|
$ |
(53.4 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, as reported basic and diluted
|
|
$ |
(0.26 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.44 |
) |
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|
|
|
|
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|
|
|
|
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|
Pro forma net loss per share basic and diluted
|
|
$ |
(0.27 |
) |
|
$ |
(0.50 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.46 |
) |
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|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
3.7 |
% |
|
|
3.8 |
% |
|
|
3.8 |
% |
|
|
3.6 |
% |
Dividends
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected life of the options
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|
5 years |
|
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|
5 years |
|
|
|
5 years |
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|
5 years |
|
Pro forma results disclosed are based on the provisions of
SFAS 123 using a minimum value option pricing model, which
assumes no volatility, to calculate the fair value of stock
options. Changes in the subjective input assumptions can
materially affect the fair value estimate, and therefore the
model used above does not necessarily provide reliable pro forma
results.
r) 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
F-13
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.
s) 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.
t) 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. Advertising costs are
recorded in selling, general and administrative expenses. During
fiscal 2006, the Company incurred $10.3 in advertising costs
(2004 $8.1; 2005 $9.4; Transition
Period $0.2).
u) Product
Warranties
The Companys product warranties are generally for periods
up to fifteen months but can be extended up to five years. 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.
v) Recent
Accounting Pronouncements
In November 2004, the FASB issued Statement No. 151,
Inventory Costs (SFAS 151).
SFAS 151 amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the
types of costs that should be expensed rather than capitalized
as inventory. Among other provisions, the new rule requires that
items such as idle facility expense, excessive spoilage, double
freight, and rehandling costs be recognized as current-period
charges regardless of whether they meet the criterion of
so abnormal as stated in ARB No. 43.
Additionally, SFAS 151 requires that the allocation of
fixed production overhead to the costs of conversion be based on
the normal capacity of the production facilities. SFAS 151
is effective for fiscal years beginning after June 15,
2005, or for the Companys fiscal 2007 year end. The
Company is currently evaluating the requirements of
SFAS 151 and has not yet fully determined the impact, if
any, on the consolidated financial statements.
In December 2004, the FASB issued Statement No. 123
(revised 2004), Share-Based Payment (SFAS 123R),
which revises SFAS 123 and supercedes APB 25.
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 statement
is effective for the Company as of the beginning of fiscal 2007.
The Company will be applying 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. As the requirements of
SFAS 123R depend on future awards, modifications,
repurchases or cancellations, the impact on the Companys
consolidated financial statements when this becomes effective is
not yet fully determinable.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Non-monetary Assets. This standard amended APB
Opinion No. 29, Accounting for Non-monetary
Transactions, to eliminate the fair value measurement
exception for non-monetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
non-monetary assets that do not have commercial substance. A
non-monetary exchange has commercial substance if the future
cash flows of the entity are expected to
F-14
change significantly as a result of the exchange. This statement
is effective for all non-monetary asset exchanges completed by
the Company starting fiscal 2007. The Company generally does not
engage in significant non-monetary asset exchanges and the
provisions of SFAS No. 153 are not expected to have a
significant impact on the Company.
In May 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections
a replacement of APB Opinion No. 20 and FASB Statement
No. 3. SFAS 154 replaces APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154
requires retrospective application to prior periods
financial statements of changes in accounting principle, unless
it is impracticable to do so, in which case other alternatives
are required. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after
December 15, 2005, or for the Companys fiscal
2007 year end. The Company is currently evaluating the
requirements of SFAS 154 and has not yet fully determined
the impact, if any, on the consolidated financial statements.
In June 2005, FASB issued FASB Staff Position (FSP)
SFAS No. 143-1, Accounting for Electronic Equipment
Waste Obligations, to address the accounting for obligations
associated with the European Union Directive on Waste Electrical
and Electronic Equipment (the Directive). The
Directive concludes that commercial users are obligated to
retire, in an environmentally sound manner, specific assets that
qualify as historical waste. The FSP requires capital treatment
for this obligation and is to be adopted on the later of the
first reporting period ending after June 8, 2005 or the
date of adoption of the law by the applicable EU-member country.
The Directive is currently under review in the United Kingdom
and is expected to be transposed into U.K. law in fiscal 2007.
The Company will continue to evaluate the impact as the U.K. and
other EU-member countries enact the legislation.
In June 2005, EITF 05-2 The Meaning of Conventional
Convertible Debt Instrument in Issue No. 00-19 was
issued and is to be applied to new instruments entered into and
instruments modified in periods beginning after June 29,
2005. The new EITF clarifies that instruments that are
convertible into a fixed number of shares at the option of the
holder, based on the passage of time or a contingent event,
should be considered conventional for purposes of
applying Issue 00-19. The EITF also clarifies that convertible
preferred stock with a mandatory redemption date may qualify for
the exception included in paragraph 4 of Issue 00-19 if the
economic characteristics indicate that the instrument is more
akin to debt than equity. The Company is currently evaluating
the requirements of EITF 05-2 and has not yet fully determined
the impact, if any, on the consolidated financial statements.
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 has not yet fully determined
the impact, if any, on the consolidated financial statements.
(w) Unaudited
Pro Forma Information
The pro forma balance sheet information assumes the following
upon completion of the initial public offering:
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|
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|
|
10,000,000 issued and outstanding, redeemable common shares
converted into common shares with the rights of the holder to
require us to redeem the common shares terminating upon the
completion of this offering; |
F-15
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|
|
|
20,000,000 issued and outstanding, Series A, convertible,
redeemable preferred shares will be converted in accordance with
their terms into common shares in connection with the completion
of this offering; |
|
|
|
67,789,300 issued and outstanding, Series B convertible,
redeemable preferred shares will be converted in accordance with
their terms into common shares in connection with the completion
of this offering; |
|
|
|
5,000,000 warrants to be exercised in accordance with their
terms in connection with the completion of this offering; and |
|
|
|
1,000,000 warrants to be exercised in accordance with their
terms just prior to the completion of this offering. |
(x) Unaudited
Pro Forma Net Loss Per Share
Pro forma basic and diluted net loss per ordinary share is
computed by dividing net loss by the weighted average number of
common shares outstanding plus the number of common shares
resulting from the following:
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|
|
|
|
conversion of the redeemable common shares, the Series A
convertible, redeemable preferred shares and the Series B
convertible, redeemable preferred shares upon completion of this
offering; |
|
|
|
exercise of 5,000,000 warrants upon completion of this
offering; and |
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|
exercise of 1,000,000 warrants just prior to the completion of
this offering. |
(y) 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 $23.8, $24.7, and $0.1 from product
revenues to service revenues, and also resulted in a
reclassification of $21.9, $20.4, and $0.1 from product cost of
revenues to service cost of revenues for 2004, 2005 and the
Transition Period respectively.
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|
3. |
Related Party Transactions |
As at April 24, 2005, April 30, 2005 and
April 30, 2006, amounts receivable from related parties
were $0.7, $0.7 and $0.4, and amounts payable to related parties
were $15.9, $14.0 and $24.2 respectively. Significant related
party transactions with companies controlled by or related to
Dr. Terence H. Matthews (the Principal Shareholder),
not otherwise disclosed in the financial statements, include the
following:
Disposal of manufacturing
operations
On August 31, 2001, the Company sold 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, for total net
consideration of $5.0 in the form of long-term promissory notes
receivable of $5.4 and promissory notes payable of $0.4. During
fiscal 2004, BreconRidge vacated premises that had been
subleased from the Company pursuant to the disposal of the
manufacturing operations. It therefore became evident at that
point 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, additional expenses of $0.6
and $3.4 were recorded in the fiscal 2004 and 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 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
F-16
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
2006, the Company purchased $101.4 of products and services
(2004 $84.9; 2005 $94.2; Transition
Period $1.8) and sold $0.4 of raw material inventory
(2004 $2.7; 2005 $0.9; Transition
Period $0.1) under this agreement. As of
April 30, 2006, balances payable pursuant to this agreement
amounted to $24.0 (April 24, 2005 $17.1;
April 30, 2005 $15.4) and balances receivable
pursuant to this agreement amounted to $0.7 (April 24,
2005 $1.6; April 30, 2005 $1.7).
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 2006 manufacturing tools purchased
from BreconRidge amounted to $0.9 (2004 $0.1;
2005 $0.2; Transition Period $nil).
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 2006 the Company provided services
valued at $0.5 under these agreements (2004 $3.3;
2005 $1.0; Transition Period $nil).
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. Accordingly, the Company no longer receives rental income
from BreconRidge for facilities under the U.K. sublease
agreement.
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, 2006, balances due
to the company controlled by the Principal Shareholder and
related to the lease agreement amounted to $0.4 (April 24,
2005 insignificant; April 30, 2005
insignificant).
Financing
During fiscal 2003, the Company borrowed funds to finance its
operations from Wesley Clover Corporation, a company controlled
by the Principal Shareholder. The loans bore interest at prime
and the interest expense incurred on these related party loans
amounted to $0.6 and $0.7 in fiscal 2003 and 2004,
respectively.
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
F-17
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 2006, the
Company purchased $0.3 of products and services
(2004 $1.0; 2005 $0.4; Transition
Period $nil) from March Networks and had a balance
payable recorded in the due to related parties pursuant to this
agreement in the amount of $0.1 (April 24, 2005
insignificant; April 30, 2005 insignificant).
Other sales to and purchases from companies related to the
Principal Shareholder and arising in the normal course of the
Companys business were $0.4 and $3.9 respectively for the
year ended April 30, 2006 (2004 $0.3 and $0.7,
respectively; 2005 $0.4 and $1.2, respectively;
Transition Period insignificant). The net balances
payable as a result of these transactions was $0.8 at
April 30, 2006 (April 24, 2005 $0.3;
April 30, 2005 $nil).
4. Special Charges
During fiscal 2004, the Company implemented workforce reduction
programs in an effort to realign spending levels with the lower
sales volumes. Accordingly, pre-tax special charges of $11.7,
net of reversals of prior years charges of $0.3, were
recorded in fiscal 2004. The components of the fiscal 2004
charges include $8.5 of employee severance and benefits and
associated legal costs incurred in the termination of 196
employees throughout the world, $3.2 of non-cancelable lease
costs related to excess facilities and $0.3 of loss on disposal
of capital assets. The lease termination obligation will be
reduced over the remaining term of the leases, which range from
one year to ten years. Accordingly, the long-term portion of
lease termination obligation has been recorded under long term
liabilities.
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. Payment of workforce reduction liabilities are expected
to be completed within the next twelve months. The lease
termination obligations incurred in prior fiscal years will be
reduced over the remaining term of the leases, which range from
one year to nine years. Accordingly, the long-term portion of
lease termination obligation has been recorded under long term
liabilities.
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 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 $3.1 representing the long-term
portion of the lease obligation has been recorded under long
term liabilities.
F-18
The following table summarizes details of the Companys
special charges and related reserve during fiscal 2005 and
fiscal 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease | |
|
|
|
|
|
|
|
|
Workforce | |
|
Termination | |
|
Assets | |
|
Legal | |
|
|
Description |
|
Reduction | |
|
Obligation | |
|
Written Off | |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 previous years, 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 and 2004 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
F-19
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.
Business segments
Financial information by geographic area for fiscal years 2004,
2005, and 2006 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canada | |
|
|
|
|
|
|
|
|
|
|
|
|
and | |
|
|
|
Asia | |
|
Corporate | |
|
|
|
|
United States | |
|
CALA | |
|
EMEA | |
|
Pacific | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Fiscal 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$ |
161.4 |
|
|
$ |
33.4 |
|
|
$ |
140.5 |
|
|
$ |
5.4 |
|
|
$ |
|
|
|
$ |
340.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contribution margin
|
|
|
60.8 |
|
|
|
7.9 |
|
|
|
34.9 |
|
|
|
0.1 |
|
|
|
|
|
|
|
103.7 |
|
|
Shared and unallocated costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(126.0 |
) |
|
|
(126.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
|
$ |
60.8 |
|
|
$ |
7.9 |
|
|
$ |
34.9 |
|
|
$ |
0.1 |
|
|
$ |
(126.0 |
) |
|
$ |
(22.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150.4 |
) |
|
|
(150.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss)
|
|
$ |
73.9 |
|
|
$ |
17.1 |
|
|
$ |
52.1 |
|
|
$ |
0.6 |
|
|
$ |
(150.4 |
) |
|
$ |
(6.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
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 | |
|
|
|
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Platforms and desktop appliances
|
|
$ |
168.1 |
|
|
$ |
165.1 |
|
|
$ |
1.3 |
|
|
$ |
204.3 |
|
|
Applications
|
|
|
23.9 |
|
|
|
23.5 |
|
|
|
0.3 |
|
|
|
34.2 |
|
|
Other(1)
|
|
|
15.1 |
|
|
|
19.1 |
|
|
|
0.1 |
|
|
|
22.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
207.1 |
|
|
|
207.7 |
|
|
|
1.7 |
|
|
|
260.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maintenance and support
|
|
|
95.4 |
|
|
|
85.3 |
|
|
|
1.2 |
|
|
|
80.9 |
|
|
Installation
|
|
|
15.8 |
|
|
|
22.1 |
|
|
|
0.1 |
|
|
|
24.6 |
|
|
Managed services
|
|
|
10.6 |
|
|
|
10.9 |
|
|
|
0.2 |
|
|
|
9.2 |
|
|
Professional services
|
|
|
11.8 |
|
|
|
16.2 |
|
|
|
|
|
|
|
11.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133.6 |
|
|
|
134.5 |
|
|
|
1.5 |
|
|
|
126.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
340.7 |
|
|
$ |
342.2 |
|
|
$ |
3.2 |
|
|
$ |
387.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Other products include mainly OEM products representing
approximately four percent, six percent, three percent and six
percent of total revenue in fiscal 2004, fiscal 2005, the
Transition Period and fiscal 2006 respectively. |
Geographic
information
Revenue from external customers are attributed to the following
countries based on location of the customers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition | |
|
|
|
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Canada
|
|
$ |
25.2 |
|
|
$ |
26.5 |
|
|
$ |
0.3 |
|
|
$ |
30.9 |
|
United States
|
|
|
162.8 |
|
|
|
155.3 |
|
|
|
1.8 |
|
|
|
178.9 |
|
United Kingdom
|
|
|
124.2 |
|
|
|
127.3 |
|
|
|
1.0 |
|
|
|
130.2 |
|
Other foreign countries
|
|
|
28.5 |
|
|
|
33.1 |
|
|
|
0.1 |
|
|
|
47.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
340.7 |
|
|
$ |
342.2 |
|
|
$ |
3.2 |
|
|
$ |
387.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 24, 2005 | |
|
|
| |
|
|
Property and | |
|
|
|
Intangible and | |
|
|
Equipment | |
|
Goodwill | |
|
Other Assets | |
|
|
| |
|
| |
|
| |
Canada
|
|
$ |
9.5 |
|
|
$ |
3.8 |
|
|
$ |
1.9 |
|
United States
|
|
|
0.9 |
|
|
|
0.8 |
|
|
|
|
|
United Kingdom
|
|
|
10.2 |
|
|
|
1.6 |
|
|
|
|
|
Other foreign countries
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20.9 |
|
|
$ |
6.2 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
F-21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2005 | |
|
April 30, 2006 | |
|
|
| |
|
| |
|
|
Property and | |
|
|
|
Intangible and | |
|
Property and | |
|
|
|
Intangible and | |
|
|
Equipment | |
|
Goodwill | |
|
Other Assets | |
|
Equipment | |
|
Goodwill | |
|
Other Assets | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Canada
|
|
$ |
9.3 |
|
|
$ |
3.6 |
|
|
$ |
5.9 |
|
|
$ |
10.4 |
|
|
$ |
4.2 |
|
|
$ |
6.6 |
|
United States
|
|
|
0.9 |
|
|
|
0.9 |
|
|
|
|
|
|
|
1.0 |
|
|
|
0.9 |
|
|
|
|
|
United Kingdom
|
|
|
10.1 |
|
|
|
1.5 |
|
|
|
|
|
|
|
5.0 |
|
|
|
1.7 |
|
|
|
|
|
Other foreign countries
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20.6 |
|
|
$ |
6.0 |
|
|
$ |
5.9 |
|
|
$ |
17.4 |
|
|
$ |
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. No single customer accounted for more
than 10 percent of the Companys revenue for the
periods ended April 25, 2004, April 24, 2005, the
Transition Period and April 30, 2006.
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, 2006, there was excess inventory
of $0.9 (2005 $0.6; Transition Period
$0.6) 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.
F-22
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 was $5.5. Provision for income taxes
relating to the sale of the land and buildings was $1.0
(£0.6).
7. Securitization of Accounts Receivable
On April 16, 2004, the Company entered into a Receivables
Purchase Agreement (the Agreement). Under the
Agreement, the Company may sell up to $38.9 of non-interest
bearing trade accounts receivable to an unaffiliated financial
institution on a revolving basis. The Company retains an
interest in the transferred accounts receivable equal to the
amount of the required reserve amount and continues to service,
administer and collect the pool of accounts receivable on behalf
of the purchaser and receives a fee for performance of these
services. The Companys interest in collections is
subordinated to the purchasers interest.
Effective December 1, 2004 the Company was not in
compliance with certain covenants required under the terms of
the facility and ceased to sell receivables into the facility.
As of April 24, 2005, April 30, 2005, and
April 30, 2006, the outstanding balance of the securitized
receivables, the interest retained by the Company in the
transferred receivables, and the servicing liability outstanding
were all $nil.
For fiscal 2005, Transition Period and fiscal 2006, the Company
recognized a pre-tax loss of $0.3, $nil, and $nil respectively
relating to the sale of receivables. There were no securitized
receivables outstanding at the end of each of the three periods.
F-23
The table below outlines the proceeds received from and amounts
paid to the securitization trust for the period ended
April 24, 2005, April 30, 2005 and April 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended | |
|
Six Days Ended |
|
Year Ended |
|
|
April 24, 2005 | |
|
April 30, 2005 |
|
April 30, 2006 |
|
|
| |
|
|
|
|
Receipts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables sold
|
|
$ |
64.8 |
|
|
$ |
|
|
|
$ |
|
|
|
Less dilutions
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
Less loss on sale of receivables
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds on sale of receivables
|
|
|
62.6 |
|
|
|
|
|
|
|
|
|
Service revenue
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
Disbursements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding of reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62.5 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
8. Other Current Assets
The following are included in other current assets as of
April 24, 2005, April 30, 2005 and April 30, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Prepaid expenses
|
|
$ |
14.9 |
|
|
$ |
15.7 |
|
|
$ |
13.6 |
|
Other receivables
|
|
|
12.3 |
|
|
|
12.7 |
|
|
|
9.5 |
|
Deferred charges
|
|
|
|
|
|
|
|
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
27.2 |
|
|
$ |
28.4 |
|
|
$ |
24.7 |
|
|
|
|
|
|
|
|
|
|
|
Deferred charges relate to costs incurred by the Company in
connection with the filing of its F-1 registration statement
under the Securities Act of 1933 (see note 28). Included in
other receivables are unbilled receivables of $6.5 as of April
30, 2006 (2005 $9.4; Transition Period
$9.1)
9. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Raw materials
|
|
$ |
0.7 |
|
|
$ |
0.7 |
|
|
$ |
0.9 |
|
Finished goods
|
|
|
16.4 |
|
|
|
16.7 |
|
|
|
22.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17.1 |
|
|
$ |
17.4 |
|
|
$ |
23.6 |
|
|
|
|
|
|
|
|
|
|
|
F-24
10. Property and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
0.6 |
|
|
$ |
0.6 |
|
|
$ |
|
|
|
Buildings
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
|
|
|
Equipment
|
|
|
61.6 |
|
|
|
61.0 |
|
|
|
68.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.2 |
|
|
|
66.6 |
|
|
|
68.8 |
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings
|
|
|
0.4 |
|
|
|
0.4 |
|
|
|
|
|
|
Equipment
|
|
|
45.9 |
|
|
|
45.6 |
|
|
|
51.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46.3 |
|
|
|
46.0 |
|
|
|
51.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20.9 |
|
|
$ |
20.6 |
|
|
$ |
17.4 |
|
|
|
|
|
|
|
|
|
|
|
As of April 30, 2006, equipment included leased assets with
cost of $4.6 (2005 $2.9; Transition
Period $2.9) and accumulated depreciation of $1.3
(2005 $0.4; Transition Period $0.4) and
equipment utilized in the provision of Managed Services (see
Note 2(e)) with cost of $8.0 (2005 $10.9;
Transition Period $10.8) and accumulated
depreciation of $6.7 (2005 $7.9; Transition
Period $7.8). Depreciation expense recorded in
fiscal 2006 amounted to $8.6 (2004 $10.8;
2005 $7.6; Transition Period $0.2).
11. Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Balance, beginning of the period
|
|
$ |
5.6 |
|
|
$ |
6.2 |
|
|
$ |
6.0 |
|
Foreign currency impact
|
|
|
0.6 |
|
|
|
(0.2 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of the period
|
|
$ |
6.2 |
|
|
$ |
6.0 |
|
|
$ |
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 reportable segments were found to exceed
the carrying values in fiscal 2005, Transition Period and fiscal
2006.
12. Intangible and Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents, trademarks and other
|
|
$ |
3.5 |
|
|
$ |
3.6 |
|
|
$ |
5.4 |
|
|
Deferred debt issue costs
|
|
|
|
|
|
|
3.9 |
|
|
|
4.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
7.5 |
|
|
|
9.9 |
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents, trademarks and other
|
|
|
1.6 |
|
|
|
1.6 |
|
|
|
2.5 |
|
|
Deferred debt issue costs
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.6 |
|
|
|
1.6 |
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1.9 |
|
|
$ |
5.9 |
|
|
$ |
6.6 |
|
|
|
|
|
|
|
|
|
|
|
F-25
Amortization of intangible and other assets was $0.2, $0.7, $nil
and $1.7 in each of fiscal 2004, fiscal 2005, Transition Period
and fiscal 2006, respectively. Deferred debt issue costs will be
amortized over 5 years of which $0.8 has been amortized to
date. The estimated amortization expense related to intangible
assets in existence as of April 30, 2006, over the next
five years is as follows: fiscal 2007 $2.0; fiscal
2008 $2.0; fiscal 2009 $1.6; fiscal
2010 $1.0; and fiscal 2011 $nil. 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.
As of April 24, 2005, the Company had a 364 day
revolving credit facility of $20.3 (C$25.0) that was repaid in
full on April 27, 2005 and cancelled as of that date. The
facility bore interest at the prime rate or U.S. base rate plus
1.5 percent or LIBOR or Bankers Acceptances plus
2.5 percent, with interest payable monthly, and was secured
by a general assignment of substantially all the Companys
accounts receivable and a general security interest in the
remaining assets of the Company. The credit facility was also
personally guaranteed by the Principal Shareholder. The credit
facility was to mature on June 30, 2005 and contained
certain restrictions and financial covenants. The Company was
not in compliance with certain of these financial covenants
during the year ended April 24, 2005, however the bank
provided a consent and waiver of the non-compliance for those
financial covenants. As at year end April 24, 2005, the
Company was in compliance with these financial covenants. As of
April 24, 2005, the Company had outstanding cash borrowings
of $15.7 under this facility and $0.8 was committed under letter
of credit arrangements.
As of April 30, 2006, the Companys U.K. subsidiary
has indemnity facilities totalling $1.8 (£1.0) available
for letters of credit and other guarantees, $0.8 of which has
been drawn at April 30, 2006 (April 30,
2005 $0.9). The indemnity and credit facilities are
unsecured. On January 31, 2006, the company cancelled its
overdraft facility (April 30, 2005 $1.9)
Amounts appearing in bank indebtedness as of April 30, 2005
and April 30, 2006 represent credit book balances resulting
from an excess of outstanding checks over funds on deposits
where a right of offset does not exist.
|
|
14. |
Accounts Payable and Accrued Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Trade payable
|
|
$ |
18.0 |
|
|
$ |
14.9 |
|
|
$ |
21.0 |
|
Employee-related payables
|
|
|
9.3 |
|
|
|
11.1 |
|
|
|
11.6 |
|
Restructuring, warranty and other provisions
|
|
|
6.3 |
|
|
|
6.2 |
|
|
|
5.7 |
|
Other accrued liabilities
|
|
|
20.0 |
|
|
|
23.6 |
|
|
|
35.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53.6 |
|
|
$ |
55.8 |
|
|
$ |
73.3 |
|
|
|
|
|
|
|
|
|
|
|
F-26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Capital leases, at interest rates varying from 1.3% to 11.8%,
payable in monthly installments, with maturity dates ranging
from 28 to 36 months, secured by the leased assets
|
|
$ |
3.2 |
|
|
$ |
3.2 |
|
|
$ |
4.1 |
|
Chattel mortgage loan, bearing interest at 6.3%, payable in
monthly installments and due in April 2006, secured by
certain U.K. equipment
|
|
|
0.6 |
|
|
|
0.6 |
|
|
|
|
|
Mortgage loan, bearing interest at 7.4% until
December 2006, with an option to select a fixed or variable
interest rate thereafter, payable in quarterly installments of
$0.6 (£0.3) fixed until December 2006 with the balance
due in December 2011, secured by the U.K. real estate
properties
|
|
|
10.8 |
|
|
|
10.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.6 |
|
|
|
14.6 |
|
|
|
4.1 |
|
Less: current portion
|
|
|
2.8 |
|
|
|
2.8 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11.8 |
|
|
$ |
11.8 |
|
|
$ |
2.5 |
|
|
|
|
|
|
|
|
|
|
|
Pursuant to the terms of the building mortgage agreement, the
Companys U.K. subsidiary must comply with certain
financial covenants. At April 24, 2005 and April 30,
2005, the subsidiary was in compliance with these financial
covenants. The mortgage loan was repaid and cancelled in August
2005 following the sale of the U.K. land and building, as
described in Note 6.
Interest expense related to long-term debt, including
obligations under capital leases, was $0.5 in fiscal 2006
(2004 $1.3; 2005 $1.0; Transition
Period insignificant). Future minimum lease payments
as of April 30, 2006 under capital leases total $4.5 of
which $1.8, $1.7, $1.0 and $nil relate to fiscal years 2007 to
2010, respectively. Interest costs of $0.4 are included in the
total future lease payments.
|
|
|
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, 2006 management has determined the
fair value of the derivative instrument to be nominal.
F-27
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.
As a redemption upon the occurrence of a fundamental change,
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.
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:
|
|
|
|
|
|
|
|
|
|
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2006 | |
|
|
| |
|
| |
Balance, beginning of period
|
|
$ |
|
|
|
$ |
46.6 |
|
Proceeds on issuance of convertible notes
|
|
|
55.0 |
|
|
|
|
|
Less: amount allocated to warrants
|
|
|
(7.7 |
) |
|
|
|
|
Accretion of convertible notes to redemption value
|
|
|
|
|
|
|
1.5 |
|
Foreign currency impact
|
|
|
(0.7 |
) |
|
|
0.6 |
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
46.6 |
|
|
$ |
48.7 |
|
|
|
|
|
|
|
|
F-28
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. The maturity date of
the convertible debentures was July 27, 2003 and was
extended to October 31, 2003 during fiscal 2004. The
debentures provided for interest to accrue at the rate of 6.5%
per annum payable on the maturity date or upon conversion of the
debentures and accrued interest into common shares of the
Company.
On October 31, 2003 the Company reached an agreement with
the debenture holders whereby the entire carrying value of the
debentures of $8.3 was converted to 5,445,775 common shares of
the Company at C$2.00 per common share. As the conversion price
was lower than the fair market value of the Companys
common shares of C$2.75 per share on the commitment date
(August 16, 2002), a beneficial conversion feature was
triggered resulting in a non-cash expense of $3.1 recorded in
the fiscal 2004 Consolidated Statements of Operations.
In April 2004, 5,081,619 of the common shares issued upon
conversion of the debentures were exchanged for 10,163,238
Series B Preferred Shares of the Company. During fiscal
2005, the remaining 364,156 common shares issued to the
convertible debenture holders upon conversion were exchanged for
728,312 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 third
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 | |
|
|
|
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Rental expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arms-length
|
|
$ |
8.6 |
|
|
$ |
8.3 |
|
|
$ |
|
|
|
$ |
8.1 |
|
|
Related party
|
|
|
6.7 |
|
|
|
5.9 |
|
|
|
0.1 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
15.3 |
|
|
$ |
14.2 |
|
|
$ |
0.1 |
|
|
$ |
14.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arms-length
|
|
$ |
0.1 |
|
|
$ |
0.6 |
|
|
$ |
|
|
|
$ |
0.2 |
|
|
Related party
|
|
|
4.3 |
|
|
|
3.6 |
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
4.4 |
|
|
$ |
4.2 |
|
|
$ |
|
|
|
$ |
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | |
|
|
| |
|
| |
|
| |
|
| |
2007
|
|
$ |
7.6 |
|
|
$ |
8.0 |
|
|
$ |
|
|
|
$ |
0.9 |
|
2008
|
|
|
6.4 |
|
|
|
8.0 |
|
|
|
0.1 |
|
|
|
0.2 |
|
2009
|
|
|
5.1 |
|
|
|
8.0 |
|
|
|
0.1 |
|
|
|
0.2 |
|
2010
|
|
|
3.7 |
|
|
|
8.0 |
|
|
|
|
|
|
|
0.2 |
|
2011
|
|
|
3.0 |
|
|
|
6.7 |
|
|
|
|
|
|
|
0.1 |
|
Thereafter
|
|
|
9.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
35.0 |
|
|
$ |
38.7 |
|
|
$ |
0.2 |
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-29
Capital expenditures
As of April 30, 2006, capital expenditure commitments to
BreconRidge are $nil (2005 $0.1; Transition
Period $nil).
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.
Customers can upgrade the standard warranty and extend the
warranty up to five years on certain products. The following
table details the changes in the warranty liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Balance, beginning of period
|
|
$ |
2.1 |
|
|
$ |
2.6 |
|
|
$ |
2.6 |
|
Warranty costs incurred
|
|
|
(1.0 |
) |
|
|
|
|
|
|
(1.8 |
) |
Warranties issued
|
|
|
1.0 |
|
|
|
|
|
|
|
1.0 |
|
Other
|
|
|
0.5 |
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
2.6 |
|
|
$ |
2.6 |
|
|
$ |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
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 24, 2005, April 30,
2005 and April 30, 2006 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, 2006, the total maximum potential amount of
future payments the Company could be required to make under bid
and performance related bonds was $2.5 (2005 $5.3;
Transition Period $5.4).
18. Contingencies
The Company is party to a small number of 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
F-30
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. The
put date has been subsequently deferred to May 1, 2007 (see
note 28). Accordingly, 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
$1.8 (2005 $1.3; Transition Period $1.3)
accreted for the excess of the redemption amount over the
original carrying value was recorded as of April 30, 2006.
The accreted amount is recorded as an increase in accumulated
deficit.
On April 23, 2004 another shareholder holding 4,000,000
redeemable common shares of the Company reached an agreement
with the Company whereby all 4,000,000 redeemable common shares
were exchanged for 16,000,000 Class B Series 1
Convertible and Redeemable Preferred Shares (Series B
Preferred Shares) of the Company at their then fair value
of C$1.00 per preferred share. As a result of the exchange, the
carrying value of the redeemable common shares of $12.5,
including accreted interest, was reclassified from redeemable
common shares to convertible, redeemable preferred shares, all
within the mezzanine section of the Consolidated Balance Sheets.
The following table summarizes the changes in redeemable common
shares during the years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Balance, beginning of the period
|
|
$ |
17.8 |
|
|
$ |
18.2 |
|
|
$ |
18.2 |
|
Interest accreted during the period
|
|
|
0.4 |
|
|
|
|
|
|
|
0.5 |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$ |
18.2 |
|
|
$ |
18.2 |
|
|
$ |
18.7 |
|
|
|
|
|
|
|
|
|
|
|
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 24, 2005, April 30, 2005, and
April 30, 2006. 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
F-31
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.
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 24, 2005, April 30, 2005 and April 30, 2006
management has estimated that the fair market value of the
preferred shares was C$1.00, C$1.00 and C$2.55 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
$17.3 as of April 30, 2006 (April 24, 2005
$8.7; April 30, 2005 $8.6), 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 and fiscal 2006, the amount of
accreted interest was $1.2, insignificant and $1.6, 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.
F-32
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 holders
of Series B Preferred Shares has the 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 share, plus interest accrued at an annual rate of
seven percent commencing on August 31, 2001 and
compounded semi-annually. The put date has been subsequently
deferred to May 1, 2007 (see note 28).
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 24, 2005,
April 30, 2005 and April 30, 2006 management has
estimated that the fair market value of the preferred shares was
C$1.00, C$1.00 and C$2.55 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
$58.6 as of April 30, 2006 (April 24, 2005
$29.3; April 30, 2005 $28.8) 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 2005, Transition
Period and fiscal 2006, the amount of accreted interest was
$4.0, $0.1 and $4.8, respectively. Similar to the Series A
Preferred Shares, the derivative component relating to the
Series B Preferred 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 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 25, 2004
|
|
$ |
5.8 |
|
|
$ |
27.7 |
|
|
$ |
33.5 |
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in exchange for common shares
|
|
|
|
|
|
|
0.5 |
|
|
|
0.5 |
|
|
Less: amount allocated to derivative instrument
|
|
|
|
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
Accreted interest
|
|
|
1.2 |
|
|
|
4.0 |
|
|
|
5.2 |
|
|
|
|
|
|
|
|
|
|
|
Carrying value as of April 24, 2005
|
|
$ |
7.0 |
|
|
$ |
32.0 |
|
|
$ |
39.0 |
|
|
|
|
|
|
|
|
|
|
|
Transition Period
|
|
|
|
|
|
|
|
|
|
|
|
|
Accreted interest
|
|
|
|
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
F-33
21. Warrants
The following table outlines the carrying value of warrants
outstanding as of April 24, 2005, April 30, 2005 and
April 30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
i) Warrants issued/issuable in connection with
government funding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of the period
|
|
$ |
28.7 |
|
|
$ |
39.1 |
|
|
$ |
39.1 |
|
|
Government funding received in period warrants issued
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
Government funding received in period no warrants
issued
|
|
|
7.2 |
|
|
|
|
|
|
|
|
|
|
Accrued government funding receivable no warrants
issued
|
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of the period
|
|
|
39.1 |
|
|
|
39.1 |
|
|
|
39.1 |
|
ii) Warrants issued in connection with Series A
Preferred Shares
|
|
|
1.0 |
|
|
|
1.0 |
|
|
|
1.0 |
|
iii) Warrants issued to financing agent
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
iv) Warrants issued in connection with Senior Secured
Convertible Notes
|
|
|
|
|
|
|
7.7 |
|
|
|
7.7 |
|
|
|
|
|
|
|
|
|
|
|
Total warrants outstanding
|
|
$ |
40.2 |
|
|
$ |
47.9 |
|
|
$ |
47.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 has 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 of 2003, 2004 and 2005 is 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 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. The remaining
$1.3 of government funding recorded in fiscal 2005 continues to
be receivable at April 30, 2006. |
|
|
|
|
|
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 |
|
F-34
|
|
|
|
|
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. |
|
|
|
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. |
|
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 2006, the Company issued 132,261 shares
(2004 33,591; 2005 153,616) for total
consideration of $0.1 (2004 $0.1; 2005
$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.
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.
Share Purchase Loans
As part of the fiscal 2005 equity offering described above, the
Company implemented an Employee Stock Purchase Plan allowing
U.S. 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-U.S. employees were
provided with the ability to acquire shares under similar terms
and conditions. As of April 24, 2005 and April 30,
2005, outstanding
F-35
employee share purchase loans receivable, in the amount of $1.2
and $1.2 respectively were recorded against shareholders
deficiency. Repayments against the loans were made during fiscal
2006 and the balance remaining at April 30, 2006 was $0.3.
Stock Option Plan
In March 2001, the Companys shareholders approved the
Mitel Networks Corporation Employee Stock Option Plan (the
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. The number of common shares available for grant
under the Plan at April 30, 2006 was 4,234,331
(2005 6,481,401; Transition Period
6,504,794).
On December 23, 2003 the Company put forth an offer to all
eligible employees to exchange all of their outstanding,
unexercised options to purchase common shares of the Company, in
exchange for grants of new options. All of the 10,373,302
options tendered in the exchange were cancelled on
January 23, 2004. An equal number of new options were
granted to the participating employees on July 26, 2004.
The new options vest in four equal installments commencing one
year from the date of grant, and have an exercise price of
C$1.00 per share, the fair value of the Companys common
stock on the date of grant.
Following is a summary of the Companys stock option
activity and related information. The exercise price of stock
options was based on prices in Canadian dollars translated at
the year-end exchange rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2004 | |
|
Fiscal 2005 | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Exercise | |
|
Number of | |
|
Exercise | |
|
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period:
|
|
|
16,037,154 |
|
|
$ |
2.59 |
|
|
|
4,482,264 |
|
|
$ |
2.77 |
|
|
Granted
|
|
|
1,337,087 |
|
|
$ |
1.76 |
|
|
|
15,220,873 |
|
|
$ |
0.81 |
|
|
Exercised
|
|
|
(5,950 |
) |
|
$ |
2.57 |
|
|
|
|
|
|
$ |
|
|
|
Forfeited
|
|
|
(1,527,436 |
) |
|
$ |
2.58 |
|
|
|
(725,856 |
) |
|
$ |
1.54 |
|
|
Expired
|
|
|
(985,289 |
) |
|
$ |
2.69 |
|
|
|
(497,279 |
) |
|
$ |
2.84 |
|
|
Cancelled
|
|
|
(10,373,302 |
) |
|
$ |
2.51 |
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period:
|
|
|
4,482,264 |
|
|
$ |
2.50 |
|
|
|
18,480,002 |
|
|
$ |
1.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable
|
|
|
2,462,636 |
|
|
$ |
2.59 |
|
|
|
3,017,863 |
|
|
$ |
2.82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the period
using the minimum value option pricing model
|
|
|
|
|
|
$ |
0.29 |
|
|
|
|
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition Period | |
|
Fiscal 2006 | |
|
|
| |
|
| |
|
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Exercise | |
|
Number of | |
|
Exercise | |
|
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
Outstanding options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period:
|
|
|
18,480,002 |
|
|
$ |
1.20 |
|
|
|
18,456,249 |
|
|
$ |
1.34 |
|
|
Granted
|
|
|
|
|
|
$ |
|
|
|
|
5,227,233 |
|
|
$ |
0.90 |
|
|
Exercised
|
|
|
|
|
|
$ |
|
|
|
|
(58,174 |
) |
|
$ |
2.81 |
|
|
Forfeited
|
|
|
(15,153 |
) |
|
$ |
1.69 |
|
|
|
(879,766 |
) |
|
$ |
1.27 |
|
|
Expired
|
|
|
(8,600 |
) |
|
$ |
2.96 |
|
|
|
(2,077,004 |
) |
|
$ |
3.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period:
|
|
|
18,456,249 |
|
|
$ |
1.19 |
|
|
|
20,668,538 |
|
|
$ |
1.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of options exercisable
|
|
|
3,102,973 |
|
|
$ |
2.78 |
|
|
|
4,947,519 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options granted during the year
using the minimum value option pricing model
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of options outstanding as of April 30, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2006 | |
|
|
| |
|
|
Total outstanding | |
|
Total exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
|
Remaining | |
|
|
|
Remaining | |
|
|
Number of | |
|
Contractual | |
|
Number of | |
|
Contractual | |
Exercise Price |
|
Shares | |
|
Life | |
|
Shares | |
|
Life | |
|
|
| |
|
| |
|
| |
|
| |
$0.89
|
|
|
18,759,480 |
|
|
|
3.6 years |
|
|
|
3,598,095 |
|
|
|
3.4 years |
|
$1.04
|
|
|
246,883 |
|
|
|
4.9 years |
|
|
|
1,250 |
|
|
|
4.9 years |
|
$1.79
|
|
|
164,500 |
|
|
|
2.6 years |
|
|
|
82,750 |
|
|
|
2.6 years |
|
$2.45
|
|
|
724,500 |
|
|
|
1.6 years |
|
|
|
492,249 |
|
|
|
1.6 years |
|
$3.57
|
|
|
773,175 |
|
|
|
0.7 years |
|
|
|
773,175 |
|
|
|
0.7 years |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,668,538 |
|
|
|
|
|
|
|
4,947,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
Earnings (loss) per
share
The following table sets forth the computation of basic and
diluted loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition | |
|
|
|
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Net loss, as reported
|
|
$ |
(30.6 |
) |
|
$ |
(49.6 |
) |
|
$ |
(1.6 |
) |
|
$ |
(44.6 |
) |
Stock-based dividend
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Accreted interest on redeemable shares
|
|
|
(1.3 |
) |
|
|
(5.6 |
) |
|
|
(0.1 |
) |
|
|
(6.9 |
) |
Deemed dividend relating to beneficial conversion feature on
Series A preferred shares
|
|
|
(1.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss available to common shareholders
|
|
$ |
(33.4 |
) |
|
$ |
(55.2 |
) |
|
$ |
(1.7 |
) |
|
$ |
(51.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding during the
period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share basic and diluted
|
|
|
127,831,211 |
|
|
|
113,792,829 |
|
|
|
117,149,933 |
|
|
|
117,230,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.26 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.44 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Stock options
|
|
|
19,888 |
|
|
|
|
|
|
|
|
|
|
|
1,624,155 |
|
Warrants
|
|
|
11,278,329 |
|
|
|
28,475,127 |
|
|
|
28,686,974 |
|
|
|
37,695,141 |
|
Convertible debentures
|
|
|
2,029,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible, redeemable preferred shares
|
|
|
477,047 |
|
|
|
87,789,300 |
|
|
|
87,789,300 |
|
|
|
82,820,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,804,375 |
|
|
|
116,264,427 |
|
|
|
116,476,274 |
|
|
|
122,139,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2006, 20,668,538 stock options were excluded
from the above computation of diluted EPS because they were
anti-dilutive (2004 4,277,764; 2005
18,480,002; Transition Period 18,456,249).
Stock-based
Compensation
During fiscal 2006, the Company granted stock options to acquire
132,000 common shares (2004 nil; 2005
145,604; Transition Period nil) stock options 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, 2005 and
April 30, 2006. The following assumptions were used:
five-year life,
interest rate of 3.84 percent, volatility of
100 percent and no dividends. Unvested stock options
granted to
non-employees must be
accounted for based on variable plan accounting. Under variable
plan accounting, compensation expense is measured as of each
reporting date as the amount equal to the change in fair value
of the stock options. Deferred stock compensation of $0.1 was
recorded in fiscal 2006 and is being amortized over the vesting
period of four years from the date of grant, with $0.1
(2004 $0.2; 2005 insignificant;
Transition
F-38
Period $nil) amortized into selling, general and
administrative expense for fiscal 2006. The amount of deferred
stock compensation expense to be recorded in future periods
could decrease if options for which accrued but unvested
compensation has been recorded are forfeited.
During fiscal 2006, there were no (2004 88,000;
2005 nil; Transition Period nil) stock
options granted to employees of the Supplier and other companies
controlled by the Principal Shareholder. The fair market value
of the unvested stock options at the grant date was determined
to be $nil (2004 $0.1; 2005 $nil;
Transition Period $nil) based on a Black-Scholes
model and recognized as a dividend to the Principal Shareholder.
Performance-Based Stock
Options
On July 27, 2005, the shareholders of Mitel approved
2,810,000 performance-based stock option awards to acquire
2,810,000 common shares to selected key employees. These options
contingently vest upon the achievement of certain targets in
accordance with the normal four-year vesting term. As the number
of common shares that the holders will be entitled to is
unknown, the options are considered variable plan awards as
defined by APB 25. Consistent with these requirements, the
valuation of the performance-based stock options must be
remeasured for changes in the market price of the underlying
stock at the end of each reporting period and charged to expense
over the four-year vesting period. The expense amount recorded
for the year ended April 30, 2006 was $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, 2006 there were 601,547 DSUs awarded to
executives with a fair value of $0.9 recorded as a liability
(2005 280,912 DSUs and $0.4 recorded as a
liability). The compensation expense recorded in fiscal 2006 to
reflect a change in common share fair value was $0.3
(2005 $nil; Transition Period $nil).
23. Other Income (Expense), Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition | |
|
|
|
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Foreign exchange gains (losses), net
|
|
$ |
(1.0 |
) |
|
$ |
(0.1 |
) |
|
$ |
0.2 |
|
|
$ |
(0.6 |
) |
Interest income
|
|
|
0.4 |
|
|
|
0.5 |
|
|
|
|
|
|
|
0.7 |
|
Amortization of gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.6 |
) |
|
$ |
0.4 |
|
|
$ |
0.2 |
|
|
$ |
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
24. Income Taxes
Details of income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition | |
|
|
|
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Loss before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
$ |
(10.0 |
) |
|
$ |
(24.8 |
) |
|
$ |
(0.2 |
) |
|
$ |
(35.0 |
) |
|
Foreign
|
|
|
(20.3 |
) |
|
|
(24.0 |
) |
|
|
(1.4 |
) |
|
|
(11.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(30.3 |
) |
|
$ |
(48.8 |
) |
|
$ |
(1.6 |
) |
|
$ |
(46.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) recovery:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
$ |
|
|
|
$ |
0.8 |
|
|
$ |
|
|
|
$ |
1.2 |
|
|
|
Foreign
|
|
|
(2.0 |
) |
|
|
(1.6 |
) |
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.0 |
) |
|
|
(0.8 |
) |
|
|
|
|
|
|
(0.9 |
) |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canadian
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
Foreign
|
|
|
1.7 |
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(0.3 |
) |
|
$ |
(0.8 |
) |
|
$ |
|
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | |
|
|
|
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Expected tax rate
|
|
|
36.3 |
% |
|
|
36.0 |
% |
|
|
36.0 |
% |
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax benefit
|
|
$ |
12.8 |
|
|
$ |
17.5 |
|
|
$ |
0.6 |
|
|
$ |
16.7 |
|
Foreign tax rate differences
|
|
|
(9.1 |
) |
|
|
(7.9 |
) |
|
|
(0.5 |
) |
|
|
(7.4 |
) |
Tax effect of temporary differences and losses not recognized
|
|
|
(5.9 |
) |
|
|
(12.2 |
) |
|
|
(0.1 |
) |
|
|
(1.6 |
) |
Use of losses not previously recognized
|
|
|
|
|
|
|
9.3 |
|
|
|
|
|
|
|
5.2 |
|
Permanent differences
|
|
|
0.1 |
|
|
|
(7.0 |
) |
|
|
|
|
|
|
(12.4 |
) |
Tax refunds and other adjustments related to prior years
|
|
|
1.8 |
|
|
|
(0.5 |
) |
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (expense) recovery
|
|
$ |
(0.3 |
) |
|
$ |
(0.8 |
) |
|
$ |
|
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-40
The tax effect of components of the deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$ |
75.1 |
|
|
$ |
74.3 |
|
|
$ |
55.5 |
|
|
Allowance for doubtful accounts
|
|
|
2.3 |
|
|
|
2.3 |
|
|
|
3.0 |
|
|
Inventory
|
|
|
0.9 |
|
|
|
0.9 |
|
|
|
(0.5 |
) |
|
Restructuring and other accrued liabilities
|
|
|
3.3 |
|
|
|
3.3 |
|
|
|
5.1 |
|
|
Pension
|
|
|
7.9 |
|
|
|
7.8 |
|
|
|
2.7 |
|
|
Lease obligations and long-term debt
|
|
|
1.1 |
|
|
|
1.1 |
|
|
|
1.3 |
|
|
Property and equipment
|
|
|
3.8 |
|
|
|
3.6 |
|
|
|
6.8 |
|
|
Intangible and other assets
|
|
|
7.1 |
|
|
|
7.1 |
|
|
|
10.4 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
101.5 |
|
|
|
100.4 |
|
|
|
84.3 |
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets net of total deferred tax
liabilities
|
|
|
101.5 |
|
|
|
100.4 |
|
|
|
84.3 |
|
Valuation allowance
|
|
|
(101.5 |
) |
|
|
(100.4 |
) |
|
|
(81.5 |
) |
|
|
|
|
|
|
|
|
|
|
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 determined that certain deferred
tax assets relating to its U.S. operations are considered more
likely than not to be realized and therefore reduced its
valuation allowance.
The Company and its subsidiaries had the following tax loss
carry forwards and tax credits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, 2005 | |
|
April 30, 2005 | |
|
April 30, 2006 | |
|
|
| |
|
| |
|
| |
|
|
Tax | |
|
Tax | |
|
Tax | |
|
Tax | |
|
Tax | |
|
Tax | |
Year of Expiry |
|
Losses | |
|
Credits | |
|
Losses | |
|
Credits | |
|
Losses | |
|
Credits | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
5.3 |
|
|
|
|
|
|
|
4.8 |
|
|
|
|
|
|
|
0.6 |
|
|
|
|
|
2009
|
|
|
3.8 |
|
|
|
|
|
|
|
3.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
52.0 |
|
|
|
|
|
|
|
51.0 |
|
|
|
|
|
|
|
32.6 |
|
|
|
|
|
2011
|
|
|
65.6 |
|
|
|
|
|
|
|
65.6 |
|
|
|
|
|
|
|
58.3 |
|
|
|
|
|
2012-2022
|
|
|
119.6 |
|
|
|
20.4 |
|
|
|
118.5 |
|
|
|
20.3 |
|
|
|
136.3 |
|
|
|
24.6 |
|
Indefinite
|
|
|
74.3 |
|
|
|
|
|
|
|
74.3 |
|
|
|
|
|
|
|
44.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
320.6 |
|
|
|
20.4 |
|
|
|
317.2 |
|
|
|
20.3 |
|
|
|
272.5 |
|
|
|
24.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These tax loss carry forwards relate to operations in Canada,
the U.S., 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.
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.
F-41
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. The most recent actuarial valuation of the plan was
performed as of March 31, 2006.
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. As a result
of the change in assumptions, the Company increased its minimum
pension liability, the amount by which the accumulated benefit
obligation exceeds the fair value of the plan assets, by
£9.4 (2005 £1.3). After the effects of
foreign currency translation of British Pounds to US dollars,
the overall pension liability increased by $15.0 to $40.1
(2005 decrease of $0.6 to $25.4, the Transition
Period decrease of $0.3 to $25.1). The adjustment
has been recorded as an increase to the pension liability and an
increase to accumulated other comprehensive loss on the
Consolidated Balance Sheet.
F-42
United Kingdom Defined
Benefit Pension Plan
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 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Change in accrued pension benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
|
$ |
103.4 |
|
|
$ |
103.4 |
|
|
$ |
121.8 |
|
|
Service cost
|
|
|
1.8 |
|
|
|
1.8 |
|
|
|
1.1 |
|
|
Interest cost
|
|
|
5.9 |
|
|
|
5.9 |
|
|
|
6.2 |
|
|
Plan participants contributions
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
1.2 |
|
|
Actuarial loss
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
41.0 |
|
|
Benefits paid
|
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
|
(2.3 |
) |
|
Foreign exchange
|
|
|
8.8 |
|
|
|
8.6 |
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of period
|
|
|
121.8 |
|
|
|
121.6 |
|
|
|
164.1 |
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of period
|
|
|
66.1 |
|
|
|
66.1 |
|
|
|
82.8 |
|
|
Actual return on plan assets
|
|
|
7.8 |
|
|
|
7.8 |
|
|
|
22.3 |
|
|
Employer contributions
|
|
|
2.6 |
|
|
|
2.6 |
|
|
|
3.6 |
|
|
Employee contributions
|
|
|
1.5 |
|
|
|
1.5 |
|
|
|
1.2 |
|
|
Benefits paid
|
|
|
(0.9 |
) |
|
|
(0.9 |
) |
|
|
(2.3 |
) |
|
Foreign exchange
|
|
|
5.8 |
|
|
|
5.8 |
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of period
|
|
|
82.9 |
|
|
|
82.9 |
|
|
|
104.2 |
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
|
(38.9 |
) |
|
|
(38.7 |
) |
|
|
(59.9 |
) |
Unrecognized net actuarial loss
|
|
|
13.5 |
|
|
|
13.6 |
|
|
|
19.8 |
|
|
|
|
|
|
|
|
|
|
|
Net pension benefit liability
|
|
$ |
(25.4 |
) |
|
$ |
(25.1 |
) |
|
$ |
(40.1 |
) |
|
|
|
|
|
|
|
|
|
|
The companys Benefit Obligation (BO) for its
significant plans is disclosed above. SFAS No. 132(R)
requires that companies disclose the aggregate BO and plan
assets of plans in which the BO exceeds the plan assets. Similar
disclosure is required for all plans in which the accumulated
benefit obligation (ABO) exceeds plan assets. The
following table provides information with respect to our BO and
ABO which are in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Projected benefit obligation
|
|
$ |
121.8 |
|
|
$ |
121.6 |
|
|
$ |
164.1 |
|
Accumulated benefit obligation
|
|
|
108.3 |
|
|
|
108.0 |
|
|
|
144.3 |
|
Fair value of plan assets
|
|
|
82.9 |
|
|
|
82.9 |
|
|
|
104.2 |
|
The Companys net periodic benefit cost was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition |
|
|
|
|
2004 | |
|
2005 | |
|
Period |
|
2006 | |
|
|
| |
|
| |
|
|
|
| |
Current service cost defined contribution
|
|
$ |
1.5 |
|
|
$ |
1.7 |
|
|
$ |
|
|
|
$ |
1.9 |
|
Current service cost defined benefit
|
|
|
3.6 |
|
|
|
1.8 |
|
|
|
|
|
|
|
1.1 |
|
Interest cost
|
|
|
5.1 |
|
|
|
5.9 |
|
|
|
|
|
|
|
6.2 |
|
Expected return on plan assets
|
|
|
(3.9 |
) |
|
|
(5.5 |
) |
|
|
|
|
|
|
(6.1 |
) |
Recognized actuarial loss
|
|
|
1.3 |
|
|
|
1.3 |
|
|
|
|
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
7.6 |
|
|
$ |
5.2 |
|
|
$ |
|
|
|
$ |
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
The following assumptions were used to determine the periodic
pension expense and the net present value of the accrued pension
benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 24, | |
|
April 30, | |
|
April 30, | |
|
|
2005 | |
|
2005 | |
|
2006 | |
|
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.5% |
|
|
|
5.5% |
|
|
|
5.0% |
|
Compensation increase rate
|
|
|
2.5% |
|
|
|
2.5% |
|
|
|
2.75% |
|
Investment returns assumption
|
|
|
7.75% |
|
|
|
7.75% |
|
|
|
7.25% |
|
Inflation rate
|
|
|
2.50% |
|
|
|
2.50% |
|
|
|
2.75% |
|
Average remaining service life of employees
|
|
|
20 years |
|
|
|
20 years |
|
|
|
21 years |
|
Estimated Future Benefit
Payments
The table below reflects the total pension benefits expected to
be paid in future years.
|
|
|
|
|
|
|
Benefit Payments | |
|
|
| |
2007
|
|
|
1.3 |
|
2008
|
|
|
1.4 |
|
2009
|
|
|
1.5 |
|
2010
|
|
|
1.7 |
|
2011
|
|
|
1.8 |
|
2012-2016
|
|
|
11.2 |
|
Contributions
The Company expects contributions of $2.9 to its pension plan in
2007.
Plan Assets
The Companys pension plan weighted-average asset
allocations at April 30, 2005 and April 30, 2006 and
target allocations for 2007, by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2006 | |
|
2007 | |
|
|
Actual | |
|
Actual | |
|
Target | |
|
|
| |
|
| |
|
| |
Equities
|
|
|
79 |
% |
|
|
81 |
% |
|
|
80 |
% |
Bonds
|
|
|
20 |
% |
|
|
18 |
% |
|
|
20 |
% |
Cash
|
|
|
1 |
% |
|
|
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, 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
F-44
and amounted to $3.7 classified as accounts payable and accrued
liabilities at April 30, 2006. At April 24, 2005 and
April 30, 2005, $0.1 and $0.3 was classified as other
current assets respectively, and $0.1 and $0.1 classified as
accounts payable and accrued liabilities, respectively. 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 $55.1
(2005 $55.4). 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 24, 2005 | |
|
April 30, 2005 | |
|
April 30, 2006 | |
|
|
| |
|
| |
|
| |
|
|
Carrying | |
|
Fair | |
|
Carrying | |
|
Fair | |
|
Carrying | |
|
Fair | |
|
|
Amount | |
|
Value | |
|
Amount | |
|
Value | |
|
Amount | |
|
Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term receivables
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
|
$ |
0.4 |
|
Long-term debt
|
|
$ |
14.6 |
|
|
$ |
14.6 |
|
|
$ |
14.6 |
|
|
$ |
14.6 |
|
|
$ |
4.1 |
|
|
$ |
4.1 |
|
Convertible notes
|
|
$ |
|
|
|
$ |
|
|
|
$ |
46.6 |
|
|
$ |
55.4 |
|
|
$ |
48.7 |
|
|
$ |
55.1 |
|
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 Companys orientation is
global with 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 U.S.
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.
F-45
The foreign exchange contracts outstanding at April 30,
2006 are due to mature in May 2006. As of April 30, 2006,
other income (expense), net included a net unrealized loss of
$3.7 (2004 gain of $0.2; 2005
insignificant gain; Transition Period $0.2) for
changes in the fair value of foreign exchange contracts. As at
April 30, 2006, the Company had outstanding foreign
exchange contracts requiring it (i) to exchange British
Pounds for Canadian dollars with aggregate notional amounts of
C$13.2 (2005 C$nil), (ii) to exchange
U.S. dollars for Canadian dollars with a notional amount of
C$83.9 (2005 C$17.2), and (iii) to exchange
Euro dollars for Canadian dollars with aggregate notional
amounts of C$11.4 (2005 C$10.3).
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 24, 2005, April 30, 2005
and April 30, 2006, 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, 2006 (April 30,
2005 $1.6). The estimated fair value of letters of
credit, which is equal to the fees paid to obtain the
obligations, was insignificant as of April 24, 2005,
April 30, 2005 and April 30, 2006.
F-46
|
|
27. |
Supplementary Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transition | |
|
|
|
|
2004 | |
|
2005 | |
|
Period | |
|
2006 | |
|
|
| |
|
| |
|
| |
|
| |
Change in non-cash operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$ |
(5.2 |
) |
|
$ |
7.5 |
|
|
$ |
4.0 |
|
|
$ |
(12.4 |
) |
|
Other receivables
|
|
|
7.3 |
|
|
|
(7.3 |
) |
|
|
(0.9 |
) |
|
|
5.2 |
|
|
Inventories
|
|
|
8.4 |
|
|
|
(4.2 |
) |
|
|
(0.6 |
) |
|
|
(8.0 |
) |
|
Income tax receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
Long-term receivables
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
Accounts payable and accrued liabilities
|
|
|
0.9 |
|
|
|
6.6 |
|
|
|
(0.6 |
) |
|
|
8.7 |
|
|
Long term portion of lease termination obligations
|
|
|
2.6 |
|
|
|
(1.2 |
) |
|
|
|
|
|
|
(2.3 |
) |
|
Deferred revenue
|
|
|
0.7 |
|
|
|
(2.8 |
) |
|
|
0.5 |
|
|
|
(2.5 |
) |
|
Change in Pension liability
|
|
|
1.6 |
|
|
|
0.9 |
|
|
|
|
|
|
|
(1.7 |
) |
|
Due to related parties
|
|
|
5.1 |
|
|
|
0.5 |
|
|
|
(1.5 |
) |
|
|
9.5 |
|
|
Income and other taxes payable
|
|
|
2.8 |
|
|
|
(3.3 |
) |
|
|
0.1 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24.6 |
|
|
$ |
(3.3 |
) |
|
$ |
1.0 |
|
|
$ |
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments
|
|
$ |
3.8 |
|
|
$ |
1.8 |
|
|
$ |
|
|
|
$ |
2.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax payments
|
|
$ |
|
|
|
$ |
3.5 |
|
|
$ |
|
|
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure of non-cash activities during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit note received in exchange for sale of Edict
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.3 |
|
|
Convertible debentures converted to common shares
|
|
$ |
8.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Related party loans converted to common shares
|
|
$ |
31.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Exchange of common shares for convertible, redeemable preferred
shares
|
|
$ |
38.7 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Adjustment to minimum pension liability
|
|
$ |
(3.5 |
) |
|
$ |
2.4 |
|
|
$ |
|
|
|
$ |
(15.0 |
) |
|
Warrants issued in connection with financing
|
|
$ |
1.0 |
|
|
$ |
|
|
|
$ |
7.7 |
|
|
$ |
|
|
|
Warrants issued to placement agent
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Issuance of shares in exchange for services
|
|
$ |
0.1 |
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
0.1 |
|
|
Stock-based dividends
|
|
$ |
0.1 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Deemed dividend relating to beneficial conversion feature on
Series A preferred shares
|
|
$ |
1.4 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Accretion of interest on redeemable common and preferred shares
|
|
$ |
1.3 |
|
|
$ |
5.6 |
|
|
$ |
0.1 |
|
|
$ |
6.9 |
|
|
Common shares issued in exchange for employee loans
|
|
$ |
|
|
|
$ |
1.3 |
|
|
$ |
|
|
|
$ |
|
|
On May 9, 2006, 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. After completion of the initial public offering, all
outstanding Series A and Series B Preferred Shares
will automatically convert into common shares; warrants held by
a financing agent and warrants issued in connection with the
Series A Preferred Shares will be exercised; and the
redemption right attached to the Redeemable Common Shares will
terminate. The derivative liability balance recorded in
connection with the issuance of Series A and Series B
Preferred Shares will also be reclassified to equity as a result
of the offering and the subsequent Preferred Shares conversion.
The impact of these conversions is summarized and presented in
the pro forma balance sheet information.
F-47
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 requesting damages
(treble damages in respect of alleged willful infringement of
the patents), injunctive relief, attorneys fees, costs and
expenses, and such further relief against us as the court deems
just and proper. The plaintiff 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 the plaintiff
or are invalid. The Company has not yet been served with a copy
of either complaint. The plaintiff has not asserted any
particular amount of damages in its complaint. Consequently, the
Company is not able to determine the amount of damages that
might be awarded in the event the Company is found liable for
infringement of the plaintiffs patents or whether the
Company would be able to continue to use the technology that the
plaintiff alleges infringes the patents at suit. The Company
intends to vigorously defend itself against these complaints.
On June 26, 2006 an amendment to the shareholders
agreement was executed by the parties to the agreement which
defers the put date in connection with 10,000,000 common shares
(see note 19) and 16,000,000 Series B Preferred Shares
(see note 20) from September 1, 2006 to May 1,
2007.
F-48
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 6. Indemnification of Directors and
Officers
Our by-laws require us
to indemnify each current or former director or officer who acts
or acted at our request as a director or officer or in a similar
capacity of our company or another entity at our request. We
will indemnify him or her against all cost, charges and expenses
reasonably incurred in respect of any civil, criminal or
administrative proceeding in which such individual is involved
because of that association with us or another entity. However,
we shall not indemnify such individual if, among other things,
he or she did not act honestly and in good faith with a view to
our best interests and, in the case of a criminal or
administrative action or proceeding that is enforced by a
monetary penalty, the individual had reasonable grounds for
believing that his or her conduct was lawful.
Our by-laws authorize
us to purchase and maintain insurance for the benefit of each of
our current or former directors or officers and each person who
acts or acted at our request as a director or officer of a body
corporate of which we are or were a shareholder or creditor, and
their heirs and legal representatives. We have purchased
director and officer liability insurance.
We have entered into indemnity agreements with our directors and
certain officers which provide, among other things, that we will
indemnify him or her to the fullest extent permitted by law from
and against all losses that a director or officer may reasonably
suffer, sustain or incur by reason of such individual being or
having been a director or officer, provided that we shall not
indemnify such individual if, among other things, he or she did
not act honestly and in good faith with a view to our best
interests and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, the
individual had reasonable grounds for believing that his or her
conduct was lawful.
Item 7. Recent Sales of Unregistered
Securities
Set forth below is information regarding securities sold by us
since April 1, 2003 which were not registered under the
U.S. Securities Act.
(a) Issuances and Sales of Convertible Notes and
Warrants
As part of a financing through the Technology Partnerships
Canada program, we issued to the Government of Canada a warrant
to purchase 6,804,380 common shares on September 30, 2003
for the aggregate sum of C$13,608,760, a warrant to purchase
13,862,943 common shares on September 30, 2004 for the
aggregate sum of C$13,862,943 and a warrant to purchase
8,935,499 common shares on September 30, 2005 for the
aggregate sum of C$8,935,499. The warrants are exercisable on a
one-for-one basis for common shares for no additional
consideration. These transactions were exempt under
Regulation S under the U.S. Securities Act.
On April 23, 2004, we issued and sold to Edgestone, for the
aggregate sum of C$1.00, a Series 1 warrant to purchase
5,000,000 common shares at an exercise price of C$1.25 per
share. We also issued and sold to Edgestone, for the aggregate
sum of C$1.00, a Series 2 warrant to purchase common
shares, in order to provide Edgestone with certain anti-dilution
protection upon the occurrence of certain events relating to the
exercise of certain put rights under our shareholders agreement.
These transactions were exempt under Regulation S under the
U.S. Securities Act.
On April 29, 2004, we issued to CIBC World Markets Inc. a
warrant to purchase 1,000,000 common shares for the aggregate
sum of C$1,000,000. This transaction was exempt under
Regulation S under the U.S. Securities Act.
On April 27, 2005, we completed a convertible debt
financing transaction with four U.S. investors pursuant to
which we issued and sold to them senior secured convertible
notes for the aggregate sum of $55,000,000, and warrants to
purchase up to, in the aggregate, 16,500,000 common shares. This
transaction
II-1
was exempt under section 4(2) of the U.S. Securities
Act and Rule 506 of Regulation D promulgated
thereunder.
(b) Issuances and Sales of Preferred Shares
On April 23, 2004, we issued and sold to Edgestone
20,000,000 Series A Preferred Shares at an aggregate
purchase price of C$20,000,000. This transaction was exempt
under Regulation S under the U.S. Securities Act.
On April 23, 2004, 20,448,875 common shares held by
Wesley Clover, which had been issued by Mitel Networks in
October 2003 upon the conversion of certain promissory notes
previously issued by Mitel in favor of Wesley Clover, were
exchanged on a
one-to-two basis for an
aggregate of 40,897,750 Series B Preferred Shares.
This transaction was exempt under Regulation S under the
U.S. Securities Act.
On April 23, 2004, 4,000,000 common shares held by
PTIC were exchanged on a one-to-four basis for
16,000,000 Series B Preferred Shares. This transaction
may not be deemed a sale, and was otherwise exempt
from registration under Section 3(a)(9) of the
U.S. Securities Act.
On April 23, 2004, 5,081,619 common shares (originally
issued in October 2003 as part of the conversion of debentures
for 5,445,775 common shares) were exchanged on a
one-to-two basis for
10,163,238 Series B Preferred Shares. During fiscal
2005, the remaining 364,156 common shares held by the debenture
holders were exchanged for 728,312 Series B Preferred
Shares. These transactions may not be deemed to be
sales, and were otherwise exempt from registration
under Section 3(a)(9) of the U.S. Securities Act.
(c) Issuances of Common Shares
On October 31, 2003, we issued 20,448,875 common shares
upon the conversion of C$31.0 million of promissory notes
previously issued by us in favor of Wesley Clover during 2002
and 2003. This transaction was exempt under Regulation S
under the U.S. Securities Act.
During Fiscal 2004, we issued 5,445,775 common shares to our
debenture holders upon the conversion of the entire balance of
debentures outstanding of $8.3 million. This transaction
may not be deemed to be a sale, and was otherwise
exempt from registration under Section 3(a)(9) of the
U.S. Securities Act.
In November 2004, we closed a family and friends investment
round under which 4,881,773 common shares were purchased,
netting gross proceeds to us of $4,881,773 with loans to
eligible employees totaling, in the aggregate, $1,628,515. Of
the 4,881,773 common shares issued, 4,721,774 common shares were
issued to persons in Canada and in the United Kingdom and were
exempt under Regulation S under the U.S. Securities
Act, and 160,000 common shares were issued to accredited
investors in the United States pursuant to Section 4(2) of
the U.S. Securities Act and Rule 506 of
Regulation D promulgated thereunder.
(d) Employee benefit plans
Since April 1, 2003, we have granted an aggregate of
21,190,915 stock options under our stock option plan with
exercise prices ranging from C$1.00 to C$2.75. 64,424 common
shares have been issued pursuant to the exercise of 64,424
options since April 1, 2003. These transactions were either
registered on a
Form S-8 or exempt
under Regulation S, Rule 701 or Section 4(2) of
the U.S. Securities Act and Rule 506 of
Regulation D promulgated thereunder.
In November 2004, we conducted an issuer exchange offer in which
we offered re-priced options in exchange for the
then-outstanding options under our 2001 stock option plan. The
offer expired on January 23, 2004. Pursuant to the offer,
we accepted for exchange eligible options to purchase 10,373,302
common shares and granted 10,373,302 new options in exchange for
the eligible options accepted for
II-2
exchange. These transactions may not be deemed to be
sales, and were otherwise exempt from registration
under Section 3(a)(9) of the U.S. Securities Act.
Item 8. Exhibits
The exhibits listed in the exhibits index, appearing elsewhere
in this registration statement, have been filed as part of this
registration statement.
Item 9. Undertakings
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
U.S. Securities Act may be permitted to directors, officers, and
controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby further undertakes that:
|
|
|
For purposes of determining any liability under the U.S.
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the U.S.
Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective. |
|
|
For the purpose of determining any liability under the U.S.
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof. |
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe
that it meets all of the requirements for filing on
Form F-1 and has duly caused this Amendment No. 1 to
the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Ottawa,
Canada on July 5, 2006.
|
|
|
MITEL NETWORKS CORPORATION |
|
|
|
|
By: |
/s/ Steven E. Spooner
|
|
|
|
|
|
|
Steven E. Spooner |
|
|
|
Chief Financial Officer |
|
|
|
|
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 1 to the Registration Statement has been
signed by the following persons in the capacities indicated on
July 5, 2006. |
|
|
|
Name |
|
Title |
|
|
|
|
|
*
Donald W. Smith |
|
Chief Executive Officer
(Principal Executive Officer) and Director |
|
/s/ Steven E. Spooner
Steven E. Spooner |
|
Chief Financial Officer
(Principal Financial and Accounting Officer) |
|
*
Paul A.N. Butcher |
|
President and Chief Operating Officer and Director |
|
*
Dr. Terence H. Matthews |
|
Director |
|
*
Peter D. Charbonneau |
|
Director |
|
*
Kirk K. Mandy |
|
Director |
|
*
Gilbert S. Palter |
|
Director |
|
*
Guthrie J. Stewart |
|
Director |
|
*/s/
Steven E. Spooner
Steven E. Spooner |
|
Attorney-in-Fact |
II-4
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of the Securities Act of 1933, the
undersigned certifies that it is the duly authorized United
States representative of Mitel Networks Corporation and has duly
caused this Amendment No. 1 to the Registration Statement
to be signed on behalf of each of them by the undersigned,
thereunto duly authorized, in the City of Ottawa, Province of
Ontario, on July 5, 2006.
|
|
|
MITEL NETWORKS, INC. |
|
(Authorized United States Representative) |
|
|
|
|
By: |
/s/ Steven E. Spooner
|
|
|
|
|
|
Steven E. Spooner |
|
Director |
II-5
EXHIBIT INDEX
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
|
1 |
.1* |
|
Form of Underwriting Agreement |
|
3 |
.1* |
|
Restated Articles of Incorporation |
|
3 |
.2* |
|
By-laws |
|
4 |
.1* |
|
Form of Common Share Certificate |
|
5 |
.1* |
|
Opinion of Osler, Hoskin & Harcourt LLP regarding
legality |
|
10 |
.1 |
|
Form of Senior Secured Notes, dated April 27, 2005
(included in Exhibit 10.3) |
|
10 |
.2 |
|
Form of Noteholder Warrant, dated April 27, 2005 (included
in Exhibit 10.3) |
|
10 |
.3 |
|
Securities Purchase Agreement between the Registrant and
Highbridge International LLC (Highbridge),
Lakeshore International, Ltd. (Lakeshore), Marathon
Special Opportunity Master Fund, Ltd. (Marathon),
Fore Master Convertible Fund, Ltd. (together with Highbridge,
Lakeshore and Marathon, the Noteholders), dated
April 27, 2005
(6) |
|
10 |
.4 |
|
Registration Rights Agreement between the Registrant and the
Noteholders, dated April 27,
2005(6) |
|
10 |
.5 |
|
General Security Agreement between the Registrant and
Highbridge, dated April 27,
2005(6) |
|
10 |
.6 |
|
Pledge Agreement between Mitel Networks Limited and Highbridge,
dated April 27,
2005(6) |
|
10 |
.7 |
|
Charge Over Book Debts and Cash at Bank between Mitel Networks
Limited and Highbridge, dated April 27,
2005(6) |
|
10 |
.8 |
|
Guarantee and Indemnity between Mitel Networks Limited and
Highbridge, dated April 27,
2005(6) |
|
10 |
.9 |
|
Mortgage Debenture between Mitel Networks Limited and
Highbridge, dated April 27,
2005(6) |
|
10 |
.10 |
|
Guarantee and Security Agreement between Mitel Networks, Inc.
and Highbridge, dated April 27,
2005(6) |
|
10 |
.11 |
|
Guarantee and Security Agreement between Mitel Networks Overseas
Limited and Highbridge, dated June 30,
2005(6) |
|
10 |
.12 |
|
Deed of Guarantee and Subordination among Mitel Networks
International Limited, Mitel Networks Overseas Limited and
Highbridge, dated June 30,
2005(6) |
|
10 |
.13 |
|
Deed of Guarantee and Subordination among Mitel Networks
International Limited, Mitel Networks Overseas Limited and BNY
Trust Company of Canada, dated July 15,
2005(6) |
|
10 |
.14 |
|
Intellectual Property Security Agreement between the Registrant
and BNY Trust Company of Canada, effective April 27,
2005(6) |
|
10 |
.15** |
|
Series 1 Warrant, dated April 23, 2004 |
|
10 |
.16** |
|
Series 2 Warrant, dated April 23, 2004 |
|
10 |
.17 |
|
Registration Rights Agreement among the Registrant, EdgeStone
Capital Equity Fund II-B GP, Inc., EdgeStone Capital Equity Fund
II Nominee, Inc., Mitel Systems Corporation (now Wesley Clover
Corporation), Mitel Knowledge Corporation, Zarlink Semiconductor
Inc., Power Technology Investment Corporation, Wesley Clover
Corporation and Terence H. Matthews, dated April 23,
2004(7) |
|
10 |
.18 |
|
Class A Convertible Preferred Share Subscription Agreement among
the Registrant, EdgeStone Capital Equity Fund II-B GP, Inc. and
EdgeStone Capital Equity Fund II Nominee, Inc., dated
April 23,
2004(5) |
|
10 |
.19 |
|
Shareholders Agreement among the Registrant, EdgeStone Capital
Equity Fund II-B GP, Inc., EdgeStone Capital Equity Fund II
Nominee, Inc., Mitel Systems Corporation (now Wesley Clover
Corporation), Mitel Knowledge Corporation, Zarlink Semiconductor
Inc., Power Technology Investment Corporation, Wesley Clover
Corporation and Terence H. Matthews, dated April 23,
2004(7) |
|
10 |
.20 |
|
Integrated Communications Solutions R&D Project Agreement
among the Registrant, Mitel Knowledge Corporation, March
Networks Corporation, March Healthcare and Her Majesty the Queen
in Right of Canada (Contribution Agreement), dated
October 10,
2002(2) |
|
10 |
.21 |
|
Amendment No. 1 to the Contribution Agreement, dated March 27,
2003(4) |
II-6
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
|
10 |
.22 |
|
Amendment No. 2 to the Contribution Agreement, dated May 2,
2004(4) |
|
10 |
.23 |
|
Amendment No. 3 to the Contribution Agreement, dated September
16,
2004(4) |
|
10 |
.24 |
|
Amendment No. 4 to the Contribution Agreement, dated June 27,
2005(4) |
|
10 |
.25 |
|
Amendment No. 5 to the Contribution Agreement, dated October 3,
2005(4) |
|
10 |
.26** |
|
CIBC Warrant, dated April 29, 2004 |
|
10 |
.27 |
|
Employee Stock Option Plan, dated March 6, 2001, as
amended(8) |
|
10 |
.28 |
|
2004 U.S. Employee Stock Purchase
Plan(9) |
|
10 |
.29 |
|
Deferred Share Unit Plan for Executives, effective July 1,
2004(6) |
|
10 |
.30** |
|
Form of Officer and Director Indemnification Agreement |
|
10 |
.31 |
|
Amended and Restated Employment Contract between the Registrant
and Donald Smith, dated April 17, 2001 (the Smith
Employment
Contract)(1) |
|
10 |
.32 |
|
Agreement Amending the Smith Employment Contract, dated
May 5, 2006 |
|
10 |
.33 |
|
Amended and Restated Employment Contract between the Registrant
and Paul Butcher, dated February 16, 2001 (the
Butcher Employment
Contract)(1) |
|
10 |
.34 |
|
Agreement Amending the Butcher Employment Contract, dated
May 5, 2006 |
|
10 |
.35 |
|
Employment Contract, dated January 1, 2006, between the
Registrant and Steven Spooner |
|
10 |
.36 |
|
Employment Contract, dated August 31, 1999, between the
Registrant and Graham Bevington (the Bevington Employment
Contract) |
|
10 |
.36(a) |
|
Alterations to the Bevington Employment Contract, dated
July 20, 2001 |
|
10 |
.37 |
|
Form of Global Mitel Employment Agreement |
|
10 |
.38 |
|
Employment Contract, dated February 21, 2005, between the
Registrant and Kevin Bowyer |
|
10 |
.39 |
|
Letter agreement, dated March 1, 2002, between
Terence H. Matthews and Paul Butcher
(the Butcher Letter
Agreement)(10) |
|
10 |
.40 |
|
Amendment No. 1 to the Butcher Letter Agreement, dated
May 1,
2006(10) |
|
10 |
.41 |
|
Letter agreement, dated March 1, 2002, between
Terence H. Matthews and Donald Smith (the Smith
Letter Agreement)
(10) |
|
10 |
.42 |
|
Amendment No. 1 to the Smith Letter Agreement, dated
May 1,
2006(10) |
|
10 |
.43 |
|
Letter agreement, dated May 1, 2006, between
Terence H. Matthews and Peter D.
Charbonneau(10) |
|
10 |
.44 |
|
Union Agreement between Mitel Networks Solutions, Inc. and the
International Brotherhood of Electrical Workers, AFLCIO, dated
October 1,
2004(6) |
|
10 |
.45 |
|
Cap/Floor Collar Transaction Agreement between the Registrant
and JPMorgan Chase Bank, N.A., dated October 3,
2005(6) |
|
10 |
.46 |
|
ISDA Master Agreement between the Registrant and JPMorgan Chase
Bank, N.A., dated September 25,
2005(6) |
|
10 |
.47 |
|
Supply Agreement among the Registrant, Mitel Networks, Inc.,
Mitel Networks Limited, Ridgeway Research Corporation (now
Breconridge Manufacturing Solutions Corporation), Breconridge
Manufacturing Solutions, Inc., Breconridge Manufacturing
Solutions Limited (Supply Agreement), dated
August 30,
2001(1) |
|
10 |
.48 |
|
Amendment No. 1 to the Supply Agreement, dated February 27,
2003(5) |
|
10 |
.49 |
|
Supply Agreement between the Registrant and Mitel Corporation
(now Zarlink Semiconductor Inc.) (Supply Agreement),
dated February 16,
2001(1) |
|
10 |
.50 |
|
Amendment No. 1 to the Supply Agreement, dated October 24,
2001(1) |
|
10 |
.51 |
|
Amendment No. 2 to the Supply Agreement, dated April 23,
2004(4) |
|
10 |
.52 |
|
Receivables Purchase Agreement among the Registrant, Mitel
Networks, Inc. and Mitel Networks Solutions, Inc., The Canada
Trust Company and Efficient Capital Corporation, dated
April 16,
2004(4) |
|
10 |
.53 |
|
Intellectual Property License Agreement between the Registrant
and Mitel Corporation (now Zarlink Semiconductor Inc.)
(License Agreement), dated February 16,
2001(1) |
II-7
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
|
10 |
.54 |
|
Amendment No. 1 to the License Agreement, dated October 24,
2001(1) |
|
10 |
.55 |
|
Non Competition and Non Solicitation Agreement between Mitel
Corporation, Mitel Semiconductor V.N. Inc., Mitel Semiconductor
Limited, Mitel Semiconductor Inc., 3755461 Canada Inc., the
Registrant and Mitel Research Park Corporation, dated
February 16,
2001(1) |
|
10 |
.56 |
|
Strategic Alliance Agreement among the Registrant, Mitel
Networks Limited, Mitel Networks International Limited and March
Networks (Strategic Alliance Agreement), dated
September 21,
2001(1) |
|
10 |
.57 |
|
Amendment No. 1 to the Strategic Alliance Agreement, dated
September 20,
2003(4) |
|
10 |
.58 |
|
Amendment No. 2 to the Strategic Alliance Agreement, dated
September 20,
2004(6) |
|
10 |
.59 |
|
Contract for the Sale of Freehold Land and Building Subject to
Leases and the Leaseback of Part of the Building, dated
August 24,
2005(6) |
|
10 |
.60 |
|
Lease Agreement between Mitel Networks Limited and Breconridge
Manufacturing Solutions Limited, dated September 14,
2001(1) |
|
10 |
.61 |
|
Lease Agreement between the Registrant and Mitel Research Park
Corporation (now Brookstreet Research Park Corporation), dated
March 27,
2001(1) |
|
10 |
.62 |
|
Sublease Agreement between the Registrant and Ridgeway Research
Corporation (now Breconridge Manufacturing Services Corporation)
(Sublease), dated August 31,
2001(1) |
|
10 |
.63 |
|
Amendment No. 1 to the Sublease, dated May 31,
2002(1) |
|
23 |
.1 |
|
Consent of Deloitte & Touche LLP |
|
24 |
.1** |
|
Powers of Attorney |
|
|
* |
To be filed by amendment. |
|
|
(1) |
Incorporated by reference to the Registrants Registration
Statement on Form 20-F, filed with the Commission on
August 26, 2002. |
(2) |
Incorporated by reference to Amendment No. 1 to the
Registrants Registration Statement on Form 20-F,
filed with the Commission on December 13, 2002. |
(3) |
Incorporated by reference to the Registrants Annual Report
on Form 20-F, filed with the Commission on August 1,
2003. |
(4) |
Incorporated by reference to the Registrants Annual Report
on Form 20-F, filed with the Commission on August 31,
2004. |
(5) |
Incorporated by reference to Amendment No. 1 to the
Registrants Annual Report on Form 20-F, filed with
the Commission on December 23, 2004. |
(6) |
Incorporated by reference to the Registrants Annual Report
on Form 20-F, filed with the Commission on October 24,
2005. |
(7) |
Incorporated by reference to the Schedule 13D (the
Registrant as issuer) filed with the Commission on May 3,
2004 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. |
(8) |
Incorporated by reference to the
Form S-8 of the
Registrant, dated March 6, 2006, filed with the Commission
on March 6, 2006. |
(9) |
Incorporated by reference to the
Form S-8 of the
Registrant, dated November 29, 2004, filed with the
Commission on November 29, 2004. |
|
(10) |
Incorporated by reference 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. |
|
II-8