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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of, September 2006
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Commission File Number 000-49984
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Mitel Networks Corporation
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(Translation of registrant's name into English)
350 Legget Drive, Ottawa, Ontario K2K 2W7
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(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40F:
Form 20-F X Form 40-F
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Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(1): _____
Indicate by check mark if the registrant is submitting the Form 6-K in
paper as permitted by Regulation S-T Rule 101(b)(7): _____
Indicate by check mark whether by furnishing the information contained
in this Form, the registrant is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes No X
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If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b): 82-______________
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DOCUMENTS INCLUDED AS PART OF THIS REPORT
Document
1 Audited consolidated financial statements for the fiscal
years ended April 25, 2004, April 24, 2005 and April 30, 2006
and for the six day period ended April 30, 2005.
2 Letter to Shareholders re. Annual and Special Meeting.
3 Management Proxy Circular.
4 Form of Proxy.
This Report on Form 6-K is incorporated by reference into: (i) the Registration
Statement on Form S-8 of the Registrant, which was originally filed with the
Securities and Exchange Commission on November 29, 2004 (File No. 333-120816);
and (ii) the Registration Statement on Form S-8 of the Registrant, which was
originally filed with the Securities and Exchange Commission on March 6, 2006
(File No. 333-132229).
DOCUMENT 1
MITEL NETWORKS
CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
(in accordance with US GAAP)
FOR THE FISCAL YEARS ENDED APRIL 25, 2004, April 24, 2005
and April 30, 2006 and FOR THE SIX DAY PERIOD ENDED APRIL 30, 2005
(Audited)
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{Logo Graphic Omitted] MITEL | it's about YOU
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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 and 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 Company's 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, and 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 Company's internal control
over financial reporting. Accordingly we express no such opinion.
On June 28, 2006 we reported separately to the shareholders of Mitel Networks
Corporation on our audits of financial statements for the same periods, prepared
in accordance with accounting principles generally accepted in the United States
of America. The attached financial statements also include Note 28,
reconciliation from US GAAP to Canadian GAAP.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Ottawa, Canada Independent Registered Chartered Accountants
August 3, 2006
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of US dollars, except share amounts)
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April 24, April 30, April 30,
2005 2005 2006
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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 $2.5, respectively) 71.1 66.9 79.7
Due from related parties 0.7 0.7 0.4
Inventories 17.1 17.4 23.6
Income tax receivable 1.4 1.4 -
Deferred tax asset - - 0.7
Other current assets 27.2 28.4 24.7
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127.2 162.4 166.5
Long-term receivables 0.4 0.4 0.4
Property and equipment 20.9 20.6 17.4
Goodwill 6.2 6.0 6.8
Intangible and other assets 1.9 5.9 6.6
Deferred tax asset - - 2.1
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$ 156.6 $ 195.3 $ 199.8
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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
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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
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199.4 231.1 304.2
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Commitments and contingencies
Redeemable common shares, without par value : 10,000,000 shares 18.2 18.2 18.7
authorized; issued and outstanding at April 24, 2005,
April 30, 2005 and April 30, 2006
Convertible, redeemable preferred shares, without par value - 39.0 39.1 45.5
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
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57.2 57.3 64.2
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Shareholders' deficiency:
Common shares, without par value - unlimited shares 187.6 187.6 188.8
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
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)
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(100.0) (93.1) (168.6)
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$ 156.6 $ 195.3 $ 199.8
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APPROVED BY THE BOARD
/s/ [illegible] , Director
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/s/ [illegible] , Director
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(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions of US dollars, except share and per share amounts)
Year Ended Year Ended Six Days Ended Year Ended
April 25, 2004 April 24, 2005 April 30, 2005 April 30, 2006
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Revenues:
Products $ 207.1 $ 207.7 $ 1.7 $ 260.5
Services 133.6 134.5 1.5 126.6
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340.7 342.2 3.2 387.1
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Cost of revenues:
Products 125.7 132.0 1.6 149.1
Services 77.2 81.2 0.8 76.6
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202.9 213.2 2.4 225.7
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Gross margin 137.8 129.0 0.8 161.4
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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)
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160.1 170.3 2.5 168.1
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Operating loss (22.3) (41.3) (1.7) (6.7)
Interest expense (4.3) (2.6) - (7.6)
Fair value adjustment on derivative 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
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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)
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Net loss $ (30.6) $ (49.6) $ (1.6) $ (44.6)
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Net loss per common share:
Basic and diluted $ (0.26) $ (0.49) $ (0.01) $ (0.44)
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Weighted-average number of common shares outstanding
Basic and diluted 127,831,211 113,792,829 117,149,933 117,230,198
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(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
(in millions of US dollars, except share amounts)
Accumulated
Common Shares Deferred Other Total
------------------------- Stock-based Accumulated Comprehensive Shareholders'
Shares Amount Warrants Compensation Deficit Income (Loss) Deficiency
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Balances at April 27, 2003 101,400,213 183.4 $ 17.6 $ (0.4) $ (218.2) $ (19.4) $ (37.0)
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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 share - - - - (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
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101,782,757 $ 184.8 $ 29.8 $ (0.2) $ (216.5) $ (19.4) $ (21.5)
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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
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Comprehensive loss - - - - (30.6) (2.5) (33.1)
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Balances at April 25, 2004 101,782,757 184.8 $ 29.8 $ (0.2) $ (247.1) $ (21.9) $ (54.6)
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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)
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107,149,933 $ 187.6 $ 40.2 $ (0.4) $ (252.7) $ (21.9) $ (47.2)
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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
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Comprehensive loss - - - - (49.6) (3.2) (52.8)
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Balances at April 24, 2005 107,149,933 $ 187.6 $ 40.2 $ (0.4) $ (302.3) $ (25.1) $ (100.0)
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(The accompanying notes are an integral part of these consolidated financial statements)
Accumulated
Common Shares Deferred Other Total
------------------------- Stock-based Accumulated Comprehensive Shareholders'
Shares Amount Warrants Compensation Deficit Income (Loss) Deficiency
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Balances at April 24, 2005 107,149,933 $ 187.6 $ 40.2 $ (0.4) $ (302.3) $ (25.1) $ (100.0)
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Issuance of warrants - - 7.7 - - - 7.7
Accretion of interest on
redeemable common
and preferred shares - - - - (0.1) - (0.1)
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107,149,933 $ 187.6 $ 47.9 $ (0.4) $ (302.4) $ (25.1) $ (92.4)
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Net loss - - - - (1.6) - (1.6)
Other comprehensive income:
Foreign currency
translation adjustments - - - - - 0.9 0.9
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Comprehensive loss - - - - (1.6) 0.9 (0.7)
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Balances at April 30, 2005 107,149,933 $ 187.6 $ 47.9 $ (0.4) $ (304.0) $ (24.2) $ (93.1)
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Common shares issued:
Exercise of stock options 58,174 0.2 - - - - 0.2
Professional services received 132,261 0.l - - - - 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)
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107,302,322 $ 188.8 $ 47.9 $ (0.1) $ (310.9) $ (24.2) $ (98.5)
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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)
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Comprehensive loss - - - - (44.6) (25.5) (70.1)
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Balance at April 30, 2006 107,302,322 $ 188.8 $ 47.9 $ (0.1) $ (355.5) $ (49.7) $ (168.6)
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(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of US dollars)
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Year Ended Year Ended Six Days Ended Year Ended
April 25, 2004 April 24, 2005 April 30,2005 April 30, 2006
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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)
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Net cash provided by (used in) operating activities 10.8 (31.8) (1.2) (2.3)
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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
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Net cash provided by (used in) investing activities (6.3) (5.8) (1.1) 3.7
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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) - -
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Net cash provided by (used in) financing activities (2.0) 20.1 39.3 (11.7)
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Effect of exchange rate changes on cash and cash equivalents 1.9 0.5 (0.1) (0.6)
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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
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Cash and cash equivalents, end of period $ 26.7 $ 9.7 $ 46.6 $ 35.7
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(The accompanying notes are an integral part of these consolidated financial statements)
MITEL NETWORKS CORPORATION
(incorporated under the laws of Canada)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of US dollars, except share and per share amounts)
1. BACKGROUND AND NATURE OF OPERATIONS
Mitel Networks Corporation (the "Company") is a leading provider of
integrated communications solutions and services for business
customers. Through direct and indirect channels as well as strategic
technology partnerships, the Company currently serves a wide range of
industry vertical markets, including the education, government,
healthcare, hospitality and retail in the United States ("US"), Europe,
Middle East and Africa, Canada, Caribbean and Latin America, and
Asia-Pacific regions.
The Company was incorporated under the Canada Business Corporations Act
on January 12, 2001. On February 16, 2001, the Company acquired the
"Mitel" name and substantially all of the assets (other than Canadian
real estate and most intellectual property assets) and subsidiaries of
the Communications Systems Division of Zarlink Semiconductor Inc.
("Zarlink"), formerly Mitel Corporation.
2. ACCOUNTING POLICIES
These consolidated financial statements have been prepared by the
Company in accordance with US generally accepted accounting principles
("GAAP") and the rules and regulations of the U.S. Securities and
Exchange Commission (the "SEC") for the preparation of financial
statements.
Amounts less than fifty thousand dollars are deemed to be insignificant
in these financial statements.
a) Fiscal Year End
On April 24, 2005, the Company changed its fiscal year end from the
last Sunday in April to April 30. The change in fiscal year end allows
the Company to better align its reporting results with those of its
industry peers. Results for the six-day transition period ("Transition
Period") from April 25, 2005 to April 30, 2005 have been included
pursuant to Rule 13a-10 of the Securities Exchange Act of 1934, as
amended.
b) 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 Company's 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.
d) Reporting Currency and Foreign Currency Translation
Reporting Currency
During fiscal 2004, the Company adopted the US 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 US 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.
8
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 Company's foreign operations are translated from
foreign currencies into US 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 ranging from one to three years. For products sold
through these distribution channels, revenue is recognized at the time
the risk of loss is transferred to distributors and resellers according
to contractual terms and if all contractual obligations have been
satisfied. These arrangements usually involve multiple elements,
including post-contract technical support and training. Costs related
to insignificant technical support obligations, including second-line
telephone support for certain products, are accrued. For other
technical support and training obligations, revenue from product sales
is allocated to each element based on vendor specific objective
evidence of relative fair values, generally representing the prices
charged when the element is sold separately, with any discount
allocated proportionately. Revenue attributable to undelivered elements
is deferred and recognized upon performance or ratably over the
contract period.
The Company's 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 Company's 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 Company's products. Allowances for such programs are
recorded as marketing expenses at the time of shipment based on
contract terms and prior claims experience.
Direct channels
The Company sells products, including installation and related
maintenance and support services, directly to customers. For products
sold through direct channels, revenue is recognized at the time of
delivery and at the time risk of loss is transferred, based on prior
experience of successful compliance with customer specifications.
Revenue from installation is recognized as services are rendered and
when contractual obligations, including customer acceptance, have been
satisfied. Revenue is also derived from professional service contracts
with terms that range from two to six weeks for standard solutions and
for longer periods for customized solutions. Revenue from customer
support, professional services and maintenance contracts is recognized
ratably over the contractual period, generally one year. Billings in
advance of services are included in deferred revenue. Revenue from
installation services provided in advance of billing is included in
unbilled accounts receivable.
Certain arrangements with direct customers provide for free customer
support and maintenance services extending twelve months from the date
of installation. Customer support and maintenance contracts are also
sold separately. When customer support or maintenance services are
provided free of charge, such amounts are unbundled from the product
and installation revenue at their fair market value based on the prices
charged when the element is sold separately and recognized ratably over
the contract period. Consulting and training revenues are recognized
upon performance.
9
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 Company's credit facilities.
h) Allowance for Doubtful Accounts
The allowance for doubtful accounts represents the Company's 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 Company's 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
management's 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
eventual disposal of the asset. An impairment loss is recognized when
the carrying amount is not recoverable and exceeds fair value.
10
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.
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
management's 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 employee stock option grants in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), and related interpretations. Under APB 25,
options granted to employees and directors will result in the
recognition of compensation expense only if the exercise price is lower
than the market price of common shares on the date of grant. Under FASB
Statement No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), the Company recognizes compensation expense in connection with
grants to non-employees and former employees by applying the fair value
based method of accounting and also applies variable plan accounting to
such unvested grants. Had compensation cost for the Company's 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:
11
Year Ended Year Ended 6 Days Ended Year Ended
April 25, April 24, April 30, April 30,
2004 2005 2005 2006
-------------------------------------------------------------------------------------------------------------------
Net loss available to common shareholders,
as reported (Note 22) $ (33.4) $ (55.2) $ (1.7) $ (51.5)
Estimated additional stock-based compensation (1.6) (1.5) - (1.9)
-----------------------------------------------------------------------------------------------------------------
Pro forma net loss available to common shareholders (35.0) (56.7) (1.7) (53.4)
Net loss per share, as reported - basic and diluted $ (0.26) $ (0.49) $ (0.01) $ (0.44)
Pro forma net loss per share - basic and diluted $ (0.27) $ (0.50) $ (0.01) $ (0.46)
-----------------------------------------------------------------------------------------------------------------
Risk-free interest rate 3.7% 3.8% 3.8% 3.6%
Dividends 0% 0% 0% 0%
Expected life of the options 5 years 5 years 5 years 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 employee 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 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 Company's 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 Company's 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 Company's 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 Company's consolidated
financial statements when this statement becomes effective is not yet
fully determinable.
12
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. 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
Company's 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 entity's 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) 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.
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 Matthews (the "Principal Shareholder"), not
otherwise disclosed in the financial statements, include the following:
13
Disposal of manufacturing operations
On August 31, 2001, the Company 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 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 Company's 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.
14
Other
In September 2001, the Company entered into a strategic alliance
agreement and a global distribution agreement with March Networks
Corporation ("March Networks"), a company controlled by the Principal
Shareholder, to broaden its product portfolio and its distribution
channel. Under the terms of the agreement, the parties agree to
cooperate in the performance of joint development activities and each
party will bear its own costs arising in connection with the
performance of its obligations. Both parties will share common costs
incurred in the performance of joint activities. During fiscal 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 Company's 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 year's 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 Company's discontinuation
of its ASIC design program, and a reversal of prior year's charges of
$0.3. 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.
15
The following table summarizes details of the Company's special charges
and related reserve during fiscal 2005 and fiscal 2006:
Lease
Workforce Termination Assets Written
Description Reduction Obligation Off Legal Costs Total
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Balance of provision as of April 25, 2004 $ 2.1 $ 5.3 $ - $ 0.4 $ 7.8
----------------------------------------------------------------------------------------------------------------------
Fiscal 2005:
Charges 8.7 1.3 0.9 - 10.9
Adjustments (0.3) - - - (0.3)
Cash payments (8.9) (1.2) - (0.4) (10.5)
Assets written off - - (0.9) - (0.9)
Foreign currency impact 0.4 0.3 - - 0.7
----------------------------------------------------------------------------------------------------------------------
Balance of provision as of April 24, 2005 $ 2.0 $ 5.7 $ - $ - $ 7.7
----------------------------------------------------------------------------------------------------------------------
Transition Period:
Cash payments (0.2) - - - (0.2)
Foreign currency impact - (0.1) - - (0.1)
----------------------------------------------------------------------------------------------------------------------
Balance of provision as of April 30, 2005 $ 1.8 $ 5.6 $ - $ - $ 7.4
----------------------------------------------------------------------------------------------------------------------
Fiscal 2006:
Charges 5.7 0.8 - - 6.5
Adjustments - (0.8) - - (0.8)
Cash payments (6.0) (1.3) - - (7.3)
Foreign currency impact 0.2 (0.3) - - (0.1)
----------------------------------------------------------------------------------------------------------------------
Balance of provision as of April 30, 2006 $ 1.7 $ 4.0 $ - $ - $ 5.7
----------------------------------------------------------------------------------------------------------------------
5. SEGMENT INFORMATION
General description
Mitel's 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
Company's business. The results of operations for 2005 and 2004 have
been restated to conform with the new presentation.
The Company's 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 Company's internal
management system. The primary financial measure used by the CEO is the
contribution margin, which includes segment revenues less the related
cost of sales and direct selling costs. The Company does not allocate
research and development, marketing, general and administrative
expenses, amortization, stock-based compensation expense and one-time
charges to its segments as management does not use this information to
measure the performance of the operating segments. These unallocated
expenses are included in shared and unallocated costs in the
reconciliation of operating results. In addition, total asset
information by segment is not presented because the CEO does not use
such segmented measures to allocate resources and assess performance.
Inter-segment sales are based on fair market values and are eliminated
on consolidation. With the exception of contribution margin defined
above, the accounting policies of reported segments are the same as
those described in the summary of significant accounting policies.
16
Business segments
Financial information by geographic area for fiscal years 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.
United Canada and Asia Corporate
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)
----------------------------------------------------------------------------------------------------------------
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:
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, Transition Period,
and fiscal 2006 respectively.
17
Geographic information
Revenues 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 April 30, 2005
-------------------------------------- ----------------------------------------
Property Intangible Intangible
and and Other Property and and Other
Equipment Goodwill Assets Equipment Goodwill Assets
----------------------------------------------------------------------------------------------------------------
Canada $ 9.5 $ 3.8 $ 1.9 $ 9.3 $ 3.6 $ 5.9
United States 0.9 0.8 - 0.9 0.9 -
United Kingdom 10.2 1.6 - 10.1 1.5 -
Other foreign countries 0.3 - - 0.3 - -
----------------------------------------------------------------------------------------------------------------
$ 20.9 $ 6.2 $ 1.9 $ 20.6 $ 6.0 $ 5.9
----------------------------------------------------------------------------------------------------------------
April 30, 2006
-----------------------------------------
Property Intangible
and and Other
Equipment Goodwill Assets
----------------------------------------------------------------------
Canada $ 10.4 $ 4.2 $ 6.6
United States 1.0 0.9 -
United Kingdom 5.0 1.7 -
Other foreign countries 1.0 - -
----------------------------------------------------------------------
$ 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 Company's revenue for the
periods ended April 25, 2004, April 24, 2005, 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 Company's
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 Company's 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 Company's
supply agreement with BreconRidge results in a concentration that, if
suddenly eliminated, could have an adverse effect on the Company's
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
(pound)0.2, or $0.3 to be applied against amounts due from Edict
Training Ltd. The transaction resulted in an
18
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.
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
Edict's 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 ((pound)7.1), resulting
in a pre-tax gain of $7.3 ((pound)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 ((pound)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
Company's 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.
The table below outlines the proceeds received from and amounts paid to
the securitization trust for the periods 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 $ - $ -
-------------------------------------------------------------------------------------------------------
19
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
----------------------------------------------------------------------
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.
20
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 depreciation
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
----------------------------------------------------------------------
Amortization of intangible and other assets was $0.2, $0.7, $nil and
$1.7 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.
13. BANK INDEBTEDNESS
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 at that date. The facility bore interest at the prime
rate or US 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 Company's 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 April 24, 2005, the Company was in compliance with these
financial covenants. As of April 24, 2005, the Company had outstanding
cash borrowings of $15.8 under this facility and $0.8 was committed
under letter of credit arrangements.
As of April 30, 2006, the Company's U.K. subsidiary has indemnity
facilities totaling $1.8 ((pound)1.0) available for letters of credit
and other guarantees, $0.8 of which has been drawn (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 deposit 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
----------------------------------------------------------------------------------------------
21
15. LONG-TERM DEBT
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 8 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, due and fully repaid 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 ((pound)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 Company's
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.
16. CONVERTIBLE NOTES
Senior Secured Convertible Notes
On April 27, 2005, the Company issued Senior Secured Convertible Notes,
with attached warrants, for gross proceeds of $55.0 to a group of
private investors ("Holders"). The notes mature on April 28, 2010 and
accrue interest, payable semi-annually in arrears, at LIBOR plus 5.0%
for any period prior to the consummation of a Qualified IPO, LIBOR plus
2.5% for any period following the consummation of a Qualified IPO and
LIBOR plus 10.0% on or after the 30 month anniversary of the issuance
date of the convertible notes if a Qualified IPO has not been
consummated. At any time on or after the consummation of a Qualified
IPO or upon the occurrence of a Fundamental Change, the Holders of the
notes are entitled to convert any portion of the outstanding principal
and accrued and unpaid interest into common shares of the Company with
the number of common shares to be received being calculated based on a
formula that considers the fair value of the common shares in the case
of an IPO and, in the case of a fundamental change, is based on $1.50
per common share subject to adjustment for a Make-Whole Premium. The
Make-Whole Premium, which is based on the effective date of the
Fundamental Change, the current fair value of the Company's 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.
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
Company's assets, a purchase of more than 50% of the Company's
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.
22
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 and movement in the carrying value of the
convertible notes:
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
-----------------------------------------------------------------------
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 Company's 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.
23
17. COMMITMENTS AND GUARANTEES
Operating leases
The Company leases certain equipment and facilities under 3rd party
operating leases. The Company is also committed under related party
leases and subleases for certain facilities (see Note 3). Rental
expense and income on operating leases were as follows:
Transition
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
-------------------------------------------------------------------------------------
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, Guarantor's 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.
24
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 Company's
performance and/or the Company's 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 Company's 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
management's 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 Company's management and legal counsel, any monetary
liability or financial impact of such claims or potential claims to
which the Company might be subject after final adjudication would not
be material to the consolidated financial position of the Company, its
results of operations, or its cash flows.
19. REDEEMABLE COMMON SHARES
Pursuant to the shareholders' agreement dated April 23, 2004, upon
failure to complete an initial public offering ("IPO") of its common
shares by September 1, 2006 (the "put date"), Zarlink, a shareholder of
the Company, has a right to require the Company to redeem for cash all
or part of its 10,000,000 common shares held in the Company at a price
of C$2.85 per common share. The put date has subsequently been 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.
25
The Series A Preferred Shares are convertible at any time at the option
of the holders without payment of any additional consideration into
common shares at a conversion value of C$1.00 per share, plus any
declared but unpaid dividends. The terms of the agreement provide that,
if the Company subsequently issues common shares or common share
equivalents at a price less than the conversion value in effect prior
to such issuance (subject to certain excluded transactions), the
conversion value of the Series A Preferred Shares will be reduced
accordingly. The Series A Preferred Shares also have the following
additional conversion features: i) the shares will automatically
convert into common shares upon the closing of a qualified IPO or upon
a vote or written consent of the majority of the Series A shareholders;
ii) if the Series A shareholders convert after 2 years from the
original issue date, in addition to the common shares otherwise
issuable upon conversion, the Series A shareholders will also receive,
in respect of each share so converted, an additional number of common
shares equal to the issue price of C$1.00 per preferred share divided
by the fair market value of a common share on the date of conversion
iii) if the shares are converted pursuant to a non-qualified IPO within
the first two years after the original issuance, the Series A
shareholders will receive an additional number of common shares based
on a formula set out in the articles of the Company which takes into
consideration the relative value of the issue price to the IPO price.
As the fair market value of the common shares into which the Series A
Preferred Shares were convertible was greater than the effective
conversion price for accounting purposes, determined based on the gross
proceeds less the fair value of the warrants on the date of issuance, a
deemed dividend for this excess of $1.4 was recorded as an increase in
the net loss attributable to common shareholders for the year ended
April 25, 2004.
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 per share,
respectively.
As a portion of the redemption price of the preferred shares is indexed
to the common share price of the Company, an embedded derivative exists
which has been bifurcated and accounted for separately, under SFAS 133.
The derivative component relating to the Series A Preferred Shares was
valued at $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.
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 Company's Series B Preferred Shareholders, has a right to require
the Company to redeem for cash all or part of its 16,000,000 Series B
Preferred Shares held in the Company at a price of C$1.00 per preferred
share, plus interest accrued at an annual rate of 7 percent commencing
on August 31, 2001 and compounded semi-annually. 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.
26
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
---------------------------------------------
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 Company's, the
Partner Company's and the Company's 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 fiscal year was determined based on the funding received and
the fair market value of the common shares at the date of issuance. The
warrants have no expiry date.
As at April 25, 2004 the Company had issued warrants to acquire
12,986,968 common shares pursuant to the above agreement. During
fiscal 2005, an additional 13,862,943 warrants were issued at the
then fair value of C$1.00 per share, of which 11,481,109 warrants
related to $8.7 of government funding that was receivable and
received during fiscal 2004, and the remaining 2,381,834 relate to
funding received during fiscal 2005. As at April 24, 2005 a total
of 26,849,911 warrants had been issued pursuant to the above
agreement. Warrants relating to the $7.2 of government funding
received in fiscal 2005 were issued in fiscal 2006 in
27
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 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 Company's 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 Company's 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 US employees to
purchase up to 2,000,000 common shares of the Company through a single
lump sum payment and/or a Company loan. Shares purchased using company
loans are secured by the underlying share, repayable by means of
payroll deduction over a maximum two year period and non-interest
bearing unless there is a default in payment, in which case the loan
bears simple interest calculated at 10% per annum. Non-US employees
were provided with the ability to acquire shares under similar terms
and conditions. As of April 24, 2005 and April 30, 2005, outstanding
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 Company's shareholders approved the Mitel
Networks Corporation Employee Stock Option Plan (the "Plan")
applicable to the Company's employees, directors, consultants
and suppliers and authorized 25,000,000 shares for issuance
28
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 options (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 Company's common stock on the date of grant.
Following is a summary of the Company's 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
---------------------------------------------------------------------------------------------------------------
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 period using the minimum value option pricing model $ - $ 0.14
---------------------------------------------------------------------------------------------------------------
A summary of options outstanding as at April 30, 2006 is as follows:
April 30, 2006
-----------------------------------------------------------------------
Total outstanding Total exercisable
--------------------------------- ----------------------------------
Exercise Price Weighted-Average Weighted-Average
Remaining Remaining
Number of Contractual Number of Contractual
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
-----------------------------------------------------------------------
29
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 127,831,211 113,792,829 117,149,933 117,230,198
during the period
---------------------------------------------------------------------------------------------------------------------
Loss per common share - basic and diluted $ (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:
(number of shares) Transition
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 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.
30
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 participant's annual
salary less the maximum amount of the participant's 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
-------------------------------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------------------------------
31
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 |
|-----------------|-------------------------|-----------------------------|-----------------------------|
| Year of | Tax Tax | Tax Tax | Tax Tax |
| 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 US,
the U.K., Italy, Hong Kong and Barbados. As a result of the acquisition
of the Company on February 16, 2001, there are restrictions on the use
of certain of these losses to offset taxable income in future periods.
The tax credits relate to the Canadian operations and may be used
to offset future Canadian federal income taxes payable.
The Company does not expect the unremitted earnings of its subsidiaries
will be subject to income tax or withholding taxes as it plans to
reinvest the earnings of its subsidiaries indefinitely. Accordingly, no
provision has been made for potential income tax or withholding taxes
on repatriation of subsidiary earnings.
The Company is subject to ongoing examinations by certain taxation
authorities of the jurisdictions in which it operates. The Company
regularly assesses the status of these examinations and the potential
for adverse outcomes to determine the adequacy of the provisions for
income taxes. The Company believes that it has adequately provided for
tax adjustments that are probable as a result of any ongoing or future
examination.
25. PENSION PLANS
The Company and its subsidiaries maintain defined contribution pension
plans that cover substantially all employees. In addition, the
Company's 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 management's 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.
32
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 Company's 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 (pound)9.4 (2005 - (pound)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, 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.
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 company's 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
33
The Company's 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
-----------------------------------------------------------------------------------------------------------
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 Company's 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 2006
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.
34
26. FINANCIAL INSTRUMENTS
Fair value
The Company's 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 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 asssets
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 Company's 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 Company's financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents and accounts receivable and
other receivables. Cash and cash equivalents are invested in government
and commercial paper with investment grade credit rating. The Company
is exposed to normal credit risk from customers. However, the Company's
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 US dollars, British
pounds and Euros. The Company uses foreign currency forward contracts
and foreign currency swaps to minimize the short-term impact of
currency fluctuations on foreign currency receivables, payables and
intercompany balances. These contracts are not entered into for
speculative purposes, and are not treated as hedges for accounting
purposes. Foreign currency contracts are recorded at fair market value.
Related foreign currency gains and losses are recorded in other
expense, net, in the consolidated statements of operations and offset
foreign exchange gains or losses from the revaluation of intercompany
balances and other current assets and liabilities denominated in
currencies other than the functional currency of the reporting entity.
The foreign exchange contracts outstanding at April 30, 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 US 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).
35
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 Company's 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.
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 current assets 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 $ - $ -
28. RECONCILIATION FROM US GAAP TO CANADIAN GAAP
New Canadian regulations allow issuers that are required to file
reports with the SEC, upon meeting certain conditions, to satisfy their
Canadian disclosure obligations by using financial statements prepared
in accordance with US GAAP. Accordingly, effective Fiscal 2005, Mitel
will include in the notes to its consolidated financial statements a
reconciliation highlighting the material differences between its
financial statements prepared in accordance with US GAAP as compared to
financial statements prepared in accordance with accounting principles
generally accepted in Canada ("Canadian GAAP"). Prior to Fiscal 2005,
Mitel prepared financial statements (with accompanying notes) in
accordance with Canadian GAAP, which were presented as a separate
report and provided to its Canadian shareholders. Subsequent to 2006,
no further reconciliation or financial statement presentation in
accordance with Canadian GAAP will be required under current Canadian
regulations. Mitel will therefore not present Canadian GAAP financial
statements or a reconciliation from US GAAP to Canadian GAAP in 2007.
The consolidated financial statements of Mitel have been prepared in
accordance with US GAAP and the accounting rules and regulations of
the SEC which differ in certain material respects from those
principles and practices that Mitel would have followed had its
consolidated financial statements been prepared in accordance with
Canadian GAAP. The following is a reconciliation of the
36
net loss between US GAAP and Canadian GAAP for the years ended,
April 25, 2004, April 24, 2005, for the six day period ended April
30, 2005 and year ended April 30, 2006:
April 25, April 24, April 30, April 30,
2004 2005 2005 2006
--------------------------------------------------------------------------------------------------------------
Net loss
US GAAP $ (30.6) $ (49.6) $ (1.6) $ (44.6)
Derivative accounting (a) - 5.3 0.1 32.6
Interest accretion on preferred shares (a) - (11.3) (0.3) (14.0)
Stock based compensation (c) 0.2 (0.7) - (0.1)
Foreign exchange loss on long term investment (e) - (8.7) - -
Beneficial conversion feature on convertible
debentures (d) 3.1 - - -
Interest expense on convertible debentures (d) 0.3 - - -
--------------------------------------------------------------------------------------------------------------
Canadian GAAP $ (27.0) $ (65.0) $ (1.8) $ (26.1)
--------------------------------------------------------------------------------------------------------------
Loss per share
US GAAP $ (0.26) $ (0.49) $ (0.02) $ (0.44)
Canadian GAAP $ (0.21) $ (0.57) $ (0.02) $ (0.22)
--------------------------------------------------------------------------------------------------------------
The following details the material differences between US GAAP and
Canadian GAAP for balance sheet information as of April 24, 2005, April
30, 2005 and April 30, 2006:
---------------------------------- -------------------------------- --------------------------------
April 24, 2005 April 30, 2005 April 30, 2006
---------------------------------- -------------------------------- --------------------------------
US Canadian US Canadian US Canadian
GAAP Adjustments GAAP GAAP Adjustments GAAP GAAP Adjustments GAAP
ASSETS
------------------------------------------------------------------------------------------------------------------------------------
Total assets $ 156.6 $ - $ 156.6 $ 195.3 $ - $ 195.3 $ 199.8 $ - $ 199.8
------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
SHAREHOLDERS'
DEFICIENCY
Current liabilities 115.8 - 115.8 101.9 - 101.9 126.0 - 126.0
Convertible notes - - - 46.6 - 46.6 48.7 - 48.7
Derivative instrument (a) 38.0 (38.0) - 37.4 (37.4) - 75.9 (75.9) -
Convertible,
redeemable - 73.7 73.7 - 72.6 72.6 - 96.0 96.0
preferred shares (a)
Redeemable common
shares (a) - 22.5 22.5 - 22.1 22.1 - 25.3 25.3
Pension liability (b) 25.4 (14.3) 11.1 25.1 (14.0) 11.1 40.1 (31.2) 8.9
Other long term
Liabilities 20.2 - 20.2 20.1 - 20.1 13.5 - 13.5
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities 199.4 43.9 243.3 231.1 43.3 274.4 304.2 14.2 318.4
------------------------------------------------------------------------------------------------------------------------------------
Redeemable common
Shares (a) 18.2 (18.2) - 18.2 (18.2) - 18.7 (18.7) -
Convertible, redeemable
Preferred shares (a) 39.0 (39.0) - 39.1 (39.1) - 45.5 (45.5) -
Common shares 187.6 (18.8) 168.8 187.6 (18.8) 168.8 188.8 (19.0) 169.8
Warrants 40.2 - 40.2 47.9 - 47.9 47.9 - 47.9
Contributed surplus (a) - 5.3 5.3 - 5.3 5.3 - 5.8 5.8
Deferred stock based
Compensation (0.4) 0.4 - (0.4) 0.4 - (0.1) 0.1 -
Retained earnings (302.3) 6.0 (296.3) (304.0) 4.9 (299.1) (355.5) 30.3 (325.2)
Accumulated other
comprehensive loss (25.1) 20.4 (4.7) (24.2) 22.2 (2.0) (49.7) 32.8 (16.9)
(b), (e,) (f)
------------------------------------------------------------------------------------------------------------------------------------
Total shareholders'
deficiency (100.0) 13.3 (86.7) (93.1) 14.0 (79.1) (168.6) 50.0 (118.6)
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
hareholders' deficiency $ 156.6 $ - $ 156.6 $ 195.3 $ - $ 195.3 $ 199.8 $ - $ 199.8
------------------------------------------------------------------------------------------------------------------------------------
37
The significant differences between US GAAP and Canadian GAAP that
impact the consolidated financial statements of Mitel include the
following:
a) Accounting for redeemable shares
Under US GAAP, as described further in Notes 19 and 20, redeemable
shares are presented in the mezzanine section of the Consolidated
Balance Sheets, and are accreted to their redemption values over the
period to redemption. The accreted amounts are recorded as a deemed
dividend in the Consolidated Statements of Shareholders' Deficiency.
Furthermore, as a portion of the redemption price of the redeemable
preferred shares is indexed to the common share price of the Company,
an embedded derivative exists which is accounted for at fair value
separate from the host contract, as required under the provisions of
FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. The embedded derivative is marked to market
throughout the period to redemption with changes in value recorded in
the Consolidated Statements of Operations.
Under current Canadian GAAP, embedded derivatives are not accounted for
separately from the host contract. The carrying value of the redeemable
shares is recorded as a liability, and accreted to redemption value
over the period to redemption. The accreted amounts are recorded as
non-cash interest expense in the Consolidated Statements of Operations.
Furthermore, a conversion option exists under Canadian GAAP for the
convertible, redeemable preferred shares, which was valued using the
residual approach and is recorded as Contributed Surplus.
b) Pension and other post retirement benefits
Under US GAAP, a minimum pension liability adjustment must be
recognized in the amount of the excess of the unfunded accumulated
benefit obligation over the recorded pension benefit liability. An
offsetting intangible pension asset is recorded equal to the
unrecognized prior service costs, with any difference recorded in
accumulated other comprehensive loss. No such adjustments are required
under Canadian GAAP.
c) Stock based compensation
Under US GAAP, FASB Statement No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123") permits companies the choice between
recording compensation expense for the fair value of stock based awards
to employees, and disclosing such expense in the notes to the financial
statements. Mitel has elected to adopt the disclosure provisions of
SFAS 123, and only records employee stock based compensation expense
when the exercise price is lower than the market price on the date of
grant (see note 3(q)). Non-employee stock based compensation is
recorded as an expense as required under SFAS 123.
Under Canadian GAAP, CICA Handbook Section 3870, Stock-based
Compensation and Other Stock-based Payments ("Section 3870"),
establishes standards for the recognition, measurement and disclosure
of stock-based compensation and other stock-based payments. Section
3870 outlines a fair value based method of accounting required for
certain stock-based transactions, effective January 1, 2002, and
applied to awards granted on or after that date. Prior to Fiscal 2005,
as permitted by Section 3870, Mitel did not adopt the provisions in
respect of the fair value based method of accounting for its employee
stock-based transactions. Effective Fiscal 2005, Mitel adopted the full
provisions of Section 3870, and recognizes an expense for employee
stock-based compensation using the fair value based method
prospectively for all awards granted, modified, or settled on or after
January 1, 2003, in accordance with the transitional provisions of
Section 3870. Non employee stock based compensation is recorded as an
expense under both Canadian and US GAAP, however the expense under
Canadian GAAP is effective for non-employee options granted after the
date on which the Canadian GAAP rules came into effect on January 1,
2002.
d) Convertible debentures
On August 16, 2002, Mitel closed a private offering of debentures
convertible into shares of the Company that resulted in total cash
proceeds of $6.5. 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. The principal amount of the debentures, together with accrued
interest outstanding under the debentures was subject to mandatory
conversion, and would automatically convert into shares in the Company
upon the occurrence of certain events. Under US GAAP, the debentures
were recorded as a liability, and interest expense was recorded in the
Consolidated Statements of Operations. Under Canadian GAAP the
debentures were deemed to be equity instruments and classified in the
Shareholders' Deficiency section of the Consolidated Balance Sheets.
Accordingly, interest expense was not recorded in the Consolidated
Statements of Operations under Canadian GAAP, but was recorded as a
deemed dividend.
The full amount of the debentures was converted into common shares of
the Company during Fiscal 2004, and subsequently exchanged for
convertible, redeemable preferred shares (see Note 20). This resulted
in a beneficial conversion feature under US GAAP, however no such
requirement existed under Canadian GAAP.
e) Foreign exchange loss on long term investment
During Fiscal 2005, Mitel Networks Inc. ("MNI"), a wholly owned
subsidiary of Mitel Networks Limited ("MNL"), agreed to redeem
82.6 common shares in exchange for a payment of $28.0 to Mitel
Networks Limited ("MNL"), a wholly owned subsidiary of the
Company. The 82.6 common shares were subsequently cancelled. The
transaction did not involve any external third parties, and MNL
continued to own 100% of MNI prior to and subsequent to the
transaction. Under Canadian GAAP, a portion of the
38
cumulative translation adjustments relating to MNL's ownership
interest in MNI was included in the determination of net loss,
resulting in a foreign exchange loss of $8.7. No such requirement
exists under US GAAP.
f) Other financial statement presentation differences
Under U.S. GAAP, translation adjustments for self-sustaining
subsidiaries are reported as a component of other comprehensive
income (loss), whereas, under Canadian GAAP, these translation
adjustments are classified as foreign currency translation
adjustment, also a component of shareholders' deficiency.
29. SUBSEQUENT EVENTS
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.
On June 23, 2006, one of the Company's 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, attorney's 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 Company's 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 plaintiff's patents or that the Company would
be 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.
39
DOCUMENT 2
[MITEL LOGO
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350 Legget Drive
Ottawa, Ontario, Canada
K2K 2W7
August 16, 2006
To the Shareholders of Mitel Networks Corporation
You are invited to attend the Annual and Special Meeting of Shareholders of
Mitel Networks Corporation to be held at The Brookstreet Hotel, 525 Legget
Drive, Ottawa, Ontario, Canada on Thursday, September 7, 2006 at 2:30 p.m.,
(Ottawa time).
On May 9th, 2006, Mitel filed a preliminary prospectus for an initial public
offering and secondary offering of its common shares in Canada and in the
United States. In addition to presenting customary annual business at the
Meeting, Mitel proposes to amend the articles and the by-laws of Mitel and to
adopt a new equity incentive plan, all as described in the attached management
proxy circular. At the Meeting, in addition to approving customary annual
business, shareholders will also be asked to:
o Approve a change of the permitted range of number of directors to a
minimum of three (3) and a maximum of fifteen (15) and permit the
directors to determine the number of directors within such range;
o Approve the change of name of the Corporation from Mitel Networks
Corporation to Mitel Corporation;
o Authorize and approve the Corporation's 2006 Equity Incentive Plan;
and
o Confirm amendments to By-law No. 1A.
The holders of the common shares, the class A shares and the class B shares
will vote together as a single class on all matters to be approved by
shareholders. The enclosed management proxy circular provides a further
description of the proposed business of the Meeting to assist you in
considering the matters to be voted upon. You are urged to review this
information carefully.
Your vote is important. Shareholders who are unable to attend the Meeting in
person are encouraged to read the enclosed management proxy circular and then
complete, date, sign and return a form of proxy unless your shares are
registered in the name of an intermediary, in which case you should complete
the form of proxy delivered to you by the intermediary. Non-registered
shareholders should carefully follow the instructions of their intermediaries.
Thank you for your continued support of Mitel. We look forward to seeing you at
the Meeting.
Sincerely,
/s/ Donald W. Smith
Donald W. Smith
Chief Executive Officer
DOCUMENT 3
[MITEL LOGO
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MITEL NETWORKS CORPORATION
NOTICE OF THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that an Annual and Special Meeting (the "Meeting") of the
shareholders of Mitel Networks Corporation ("Mitel") will be held on Thursday,
September 7th, 2006 at The Brookstreet Hotel, 525 Legget Drive, Ottawa (Kanata),
Ontario, Canada, K2K 2W2 , commencing at 2:30 p.m., Ottawa time, for the
following purposes:
1. To place before the Meeting the consolidated financial statements for
the fiscal year ended April 30th, 2006 together with the auditor's
report thereon.
2. To fix the number of directors at seven and elect directors for the
ensuing year ("Annual Resolution No. 1").
3. To appoint auditors of the Corporation and authorize the directors to
fix the auditor's remuneration ("Annual Resolution No. 2").
4. To consider and, if thought advisable, to pass, with or without
variation, a special resolution ("Special Resolution No. 1") to amend
the articles of incorporation to change the minimum number of directors
to three (3) and the maximum number of directors to fifteen (15) with
such fixed number of directors from time to time authorized by the
directors of the Corporation.
5. To consider and, if thought advisable, to pass, with or without
variation, a special resolution ("Special Resolution No. 2") to amend
the articles of incorporation to change the name from Mitel Networks
Corporation (in the English form) and Corporation Mitel Networks (in
the French form) to "Mitel Corporation".
6. To consider and, if thought advisable, to pass, with or without
variation, an ordinary resolution ("Ordinary Resolution No. 1") to
approve Mitel's 2006 Equity Incentive Plan.
7. To consider and, if thought advisable, to pass, with or without
variation, an ordinary resolution ("Ordinary Resolution No. 2") to
confirm the amendments to By-law No. 1A.
8. To transact such further and other business as may properly come before
the Meeting or any adjournment thereof.
A copy of the full text of the proposed Annual Resolution No. 1, Annual
Resolution No. 2, Special Resolution No. 1, Special Resolution No. 2, Ordinary
Resolution No. 1 and Ordinary Resolution No. 2 is attached as Schedule A,
Schedule B, Schedule C, Schedule D, Schedule E and Schedule F, respectively,
to the Management Proxy Circular that accompanies this Notice.
Mitel shareholders unable to attend the Meeting in person are encouraged to read
the enclosed Management Proxy Circular and then complete and return the form of
proxy. In the case of proxies executed other than by an individual who is the
registered holder of the shares represented by such proxy, a power of attorney
or other authority should be attached to the proxy and returned. All proxies
should be returned in the envelope provided to Mitel Networks Corporation,
Attention: Corporate Secretary's Office, 350 Legget Drive, Ottawa, Ontario K2K
2W7 or by facsimile at (613) 592-7813 by 12:00 p.m. (noon), Ottawa time, on
Wednesday, September 6th, 2006, being the business day preceding the date of the
Meeting.
DATED at Ottawa, Ontario this 16th day of August, 2006.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Donald W. Smith
Donald W. Smith
Chief Executive Officer
[MITEL LOGO
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MITEL NETWORKS CORPORATION
350 Legget Drive
Ottawa, Ontario
K2K 2W7
MANAGEMENT PROXY CIRCULAR
A. INFORMATION ON VOTING AND PROXIES
1. Solicitation of Proxies
This management proxy circular (the "Management Proxy Circular" or the
"Circular") is furnished in connection with the solicitation of proxies by or on
behalf of the management of Mitel Networks Corporation ("Mitel" or the
"Corporation"), a corporation governed by the Canada Business Corporations Act
(the "CBCA"), for use at the annual and special meeting, or any adjournment or
adjournments thereof (the "Meeting"), of the shareholders of the Corporation
(each, a "Shareholder") to be held on Thursday, September 7th, 2006 at The
Brookstreet Hotel, 525 Legget Drive, Ottawa (Kanata), Ontario, Canada, K2K 2W2,
commencing at 2:30 p.m., Ottawa time, for the purposes set out in the notice of
the Meeting (the "Notice of Meeting") accompanying this Management Proxy
Circular.
The enclosed proxy is being solicited by or on behalf of the management of the
Corporation and the cost of such solicitation will be borne by the Corporation.
It is expected that the solicitation of proxies will be primarily by mail,
telephone or electronic communication by directors, officers or employees of
Mitel. Proxies may also be solicited personally or by telephone or electronic
communication by officers and employees of Mitel. Except as otherwise stated,
the information contained in this Management Proxy Circular is given as of July
31st, 2006.
Unless otherwise provided herein, all dollar amounts in this Management Proxy
Circular are stated in Canadian dollars.
2. Appointment of Proxies
The persons named in the enclosed form of proxy are directors or officers of the
Corporation. If you wish to appoint some other person or company (who need not
be a Shareholder) to represent you at the Meeting, you may do so by striking out
the name of the persons named in the enclosed form of proxy and inserting the
name of your appointee in the blank space provided or complete another form of
proxy and, in either case, deliver the completed and signed proxy in the
envelope provided to Mitel Networks Corporation, Attention: Corporate
Secretary's Office, 350 Legget Drive, Ottawa, Ontario K2K 2W7 or by facsimile at
(613) 592-7813 by 12:00 p.m. (noon), Ottawa time, on Wednesday, September 6th,
2006, being the business day preceding the date of the Meeting. It is the
responsibility of the Shareholder appointing some other person to represent it
to inform such person that he or she has been so appointed. The proxy must be
signed by the Shareholder or the Shareholder's attorney authorized in writing
or, if the Shareholder is a corporation, by an officer or attorney thereof, duly
authorized.
Registered Shareholders
A registered shareholder is the person in whose name a share certificate is
registered. If you are a registered shareholder, you are entitled to vote your
shares in person at the Meeting or by proxy. If you wish to vote in person at
the Meeting, do not complete or return the form of proxy included with this
Circular. Your vote will be taken and
- 2 -
counted at the Meeting. If you do not wish to attend the Meeting or do not
wish to vote in person, you may vote by proxy by delivering the completed and
signed form of proxy in the envelope provided to Mitel Networks Corporation,
Attention: Corporate Secretary's Office, 350 Legget Drive, Ottawa, Ontario K2K
2W7 or by facsimile at (613) 592-7813 by 12:00 p.m. (noon), Ottawa time, on
Wednesday, September 6th, 2006, being the business day preceding the date of
the Meeting. In each case, the shares represented by your proxy will be voted
in accordance with your instructions as indicated on your form of proxy and on
any ballot that may be called at the Meeting. Your proxyholder will decide how
to vote on amendments or variations to the matters to be voted on at the
Meeting. Instructions for using each of these methods are set out on the
enclosed form of proxy.
Non-Registered Shareholders
Your shares may not be registered in your name but in the name of an
intermediary (which is usually a bank, trust company, securities dealer or
broker, or trustees or administrators of self-administered RRSPs, RRIFs, RESPs
and similar plans). If your shares are registered in the name of an
intermediary, you are a non-registered shareholder.
Mitel has distributed copies of the Notice of Meeting, this Circular and the
form of proxy (collectively, the "Meeting Materials") to intermediaries for
distribution to non-registered shareholders. Unless you have waived your right
to receive the Meeting Materials, intermediaries are required to deliver them to
you as a non-registered shareholder of the Corporation and to seek your
instructions regarding how to vote your shares.
Non-registered shareholders who receive Meeting Materials from the intermediary
will typically be given the ability to provide voting instructions in one of two
ways. Usually, a non-registered shareholder will be given a voting instruction
form which must be completed and signed by the non-registered shareholder in
accordance with the instruction on the form (which may, in some cases, permit
the completion of the voting instruction form by telephone or electronically).
Occasionally, an intermediary may give you a proxy that has already been signed
by the intermediary (typically by a facsimile, stamped signature), and which is
otherwise uncompleted. This form of proxy does not need to be signed by you as
the non-registered shareholder. In this case you can complete and deposit the
proxy directly as described above.
By following these procedures, a non-registered shareholder will be able to
direct the voting of those shares that they own but which are not registered in
their own name. Should a non-registered shareholder who receives from the
intermediary either a proxy or a voting instruction form wish to attend and vote
at the Meeting in person (or have another person attend and vote on their
behalf), the non-registered shareholder should strike out the names of the
persons named in the form of proxy and insert the non-registered shareholder's
(or such other person's) name in the blank space provided or, in the case of a
voting instruction form, follow the corresponding directions on the form. In
either case, non-registered shareholders should carefully follow the
instructions of their intermediaries.
Proxies returned by intermediaries as "non-votes" because the intermediary has
not received instructions from the non-registered shareholder with respect to
the voting of certain shares will be treated as not entitled to vote on any such
matter and will not be counted as having been voted in respect of any such
matter. Shares represented by intermediary "non-votes" will, however, be counted
in determining whether there is a quorum.
3. Revocation of Proxies
In addition to revocation in any other manner permitted by law, a Shareholder
may revoke a proxy under subsection 148(4) of the CBCA by depositing an
instrument in writing executed by the Shareholder or by the Shareholder's
attorney authorized in writing (or, if the Shareholder is a corporation, by an
authorized officer or attorney thereof authorized in writing) at the registered
office of the Corporation at any time up to and including the last business day
preceding the day of the Meeting at which such proxy is to be used, or with the
Chairman of the Meeting on the day of, but prior to commencement of, the
Meeting, or in any other manner permitted by law, and upon either of such
deposits such proxy shall be revoked. If the instrument of revocation is
deposited with the Chairman of the Meeting on the day of the Meeting, the
instrument will not be effective with respect to any matter on which a vote has
already been cast pursuant to such proxy.
- 3 -
4. Voting of Proxies
The form of proxy affords the Shareholder an opportunity to specify that the
shares registered in the Shareholder's name shall be voted FOR or AGAINST or
WITHHELD in accordance with your instructions as indicated on your form of
proxy. In the absence of instructions, your shares will be voted FOR each of the
matters to be considered at the Meeting. Votes WITHHELD and abstentions are
counted as present or represented for purposes of determining the presence or
absence of a quorum, but are not included in the number of shares present or
represented and voting on each matter.
The form of proxy accompanying this Management Proxy Circular confers
discretionary authority upon the nominees named in the enclosed form of proxy
with respect to amendments or variations of matters identified in the Notice of
Meeting or other matters which may properly come before the Meeting. As of the
date of this Management Proxy Circular, management of Mitel knows of no
amendment or variation of the matters referred to in the Notice of Meeting or
other business that will be presented at the Meeting. If any such matters should
properly come before the Meeting, each nominee named in the enclosed form of
proxy will vote on those matters in accordance with his or her best judgment.
5. Authorized Capital and Voting Shares
The authorized capital of the Corporation consists of:
a) an unlimited number of Common Shares ("Common Shares");
b) an unlimited number of Class A Convertible Preferred Shares, issuable in
series, of which one series, consisting of an unlimited number of Class A
Convertible Preferred Shares, Series 1 (the "Series A Shares"), has been
designated; and
c) an unlimited number of Class B Convertible Preferred Shares, issuable in
series, of which one series, consisting of an unlimited number of Class B
Convertible Preferred Shares, Series 1 (the "Series B Shares"), has been
designated.
As of July 31st, 2006, the Corporation had 117,340,263 Common Shares, 20,000,000
Series A Shares and 67,789,300 Series B Shares issued and outstanding
(collectively, the Shares"). Each Common Share currently carries one vote in
respect of each matter to be voted upon at the Meeting. Each Series A Share and
each Series B Share currently carries a number of votes calculated based on a
formula set out in the share provisions of each series. For the purposes of this
Meeting, the Corporation has determined that each Series A Share and each Series
B Share shall have one vote per share.
The holders of the Common Shares, the Series A Shares and the Series B Shares
will vote together as a single class on all resolutions considered at the
Meeting.
Only holders of outstanding Shares of record at the close of business on the day
immediately preceding the day on which the Notice of Meeting is mailed will be
entitled to vote at the Meeting, except to the extent that a person has
transferred Shares after that date and the transferee of such Shares establishes
proper ownership and has demanded not later than 10 days before the Meeting that
his/her/its name be included in the list to vote at the Meeting, in which case
the transferee is entitled to vote such Shares at the Meeting.
6. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information with respect to all persons known by
the Corporation to be the beneficial owner, directly or indirectly, of or who
exercise control or direction over shares carrying more than 10% of the votes
attached to any class of shares entitled to vote at the Meeting:
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----------------------------------------------------------------------------------------------------------------------
Name and Address of Beneficial Owner Shares Beneficially Owned Percentage of Percentage of
Directly or Indirectly(3) Shares(1) Class
----------------------------------------------------------------------------------------------------------------------
Wesley Clover Corporation(2) 90,000,000 Common Shares 43.87% 76.70%
Ottawa, ON ("Wesley Clover Corporation")
Celtic Tech Jet Limited(2) 4,555,169 Common Shares 2.22% 3.88 %
Ottawa, ON ("CTJL")
Terence H. Matthews 40,897,750 Series B Shares 19.94% 60.33%
Ottawa, ON
Power Technology Investment Corporation 16,000,000 Series B Shares 7.8% 23.6%
EdgeStone Capital Equity Fund II-A, L.P.
Toronto, ON ("EdgeStone") 20,000,000 Series A Shares 9.75% 100%
----------------------------------------------------------------------------------------------------------------------
(1) Calculated on an as-if-converted to Common Shares basis if the Series A
Shares and the Series B Shares were to be converted into Common Shares on a
one-for-one basis. The Series A Shares and the Series B Shares are convertible
into Common Shares based on a formula that depends on the fair market value of
the Common Shares. Accordingly, if and when the Series A Shares and Series B
Shares are converted, they will be converted into Common Shares on a greater
than one-for-one basis.
(2) Dr. Terence H. Matthews, Chairman of the Corporation, controls, directly or
indirectly, Wesley Clover Corporation and CTJL.
(3) The directors and officers of the Corporation beneficially own, directly or
indirectly, 95,041,933 Common Shares, which represent 81% of the issued and
outstanding Common Shares, and 41,423,134 Series B Shares, which represent 61%
of the issued and outstanding Series B Shares. In addition, two of the directors
of the Corporation are partners of EdgeStone which owns all of the Series A
Shares.
B. ANNUAL BUSINESS TO BE TRANSACTED AT THE MEETING
1. Financial Statements
The consolidated financial statements of the Corporation for the fiscal year
ended April 30th, 2006 and the auditors' report thereon will be presented to the
Meeting. The audited consolidated financial statements accompany this Circular
and, in accordance with the provisions of the CBCA, the financial statements
will not be the subject of any vote at the Meeting.
2. Annual Resolution No. 1 - Fixing the Number of Directors and Election of
Directors
The articles of the Corporation provide for a board of directors (the "Board")
of not less than one director and not more than 10 directors to be elected
annually, with the fixed number of directors within such range from time to time
authorized by the shareholders of the Corporation. At a special meeting held on
April 20th, 2004, the shareholders of the Corporation fixed the number of
directors at eight and there are currently seven directors. Sir David
Rowe-Beddoe resigned as a director on May 8th, 2006. Management proposes to fix
the number of directors at seven and to nominate seven persons to be elected to
the Board at the Meeting. Each director who is elected will hold office until
the next annual meeting of shareholders, or until a successor is duly elected or
appointed, unless the office is earlier vacated in accordance with the by-laws
of the Corporation, the CBCA or the Shareholders Agreement (as defined and
discussed under the heading "Interest of Management, Nominees and Others in
Material Transactions" in Part E of this Circular).
The seven current directors were elected at the last annual meeting of
shareholders.
Pursuant to the Shareholders Agreement, EdgeStone is entitled to nominate two
directors to the Board. Gilbert S. Palter and Guthrie J. Stewart are the
nominees of Edgestone. The parties to the Shareholders Agreement agreed, among
other matters, to act and vote from time to time so that on any election of
directors by the Shareholders of the Corporation, that the Edgestone nominees
are elected.
A majority of the votes cast, in person or by proxy, is required for approval of
fixing the number of directors at seven and the election of directors. The
persons named in the form of proxy will, unless a proxy specifies that the
shares it represents shall be voted AGAINST in respect of the fixing of the
number of directors
- 5 -
or WITHHELD from voting in respect of the election of directors or unless
someone else is appointed as proxy holder, be voted FOR the fixing of the
number of directors at seven and FOR the election of the nominees for director
listed below. In the event a nominee is unable or unwilling to serve, (an
event that management has no reason to believe will occur), the persons named
in the form of proxy will vote for a substitute nominee in accordance with his
or her best judgment.
The following table sets forth the name of each person nominated for election as
a director; the period or periods of service as a director; the principal
occupation, business or employment, and all positions with the Corporation and
any significant affiliate of the Corporation, within the preceding five years,
as well as the number of shares beneficially owned or over which control or
direction is exercised. All of the listed nominees currently serve as directors
of the Corporation.
--------------------------------- -------------------- --------------------------------------------- ------------------------
Name and Municipality of Director Since Principal Occupation Shares Beneficially
Residence Owned
or Controlled(1)
--------------------------------- -------------------- --------------------------------------------- ------------------------
Dr. Terence H. Matthews February 16th, 2001 Chairman of the Board of the Corporation 94,555,169 Common
Ottawa, Ontario since February 2001; Chairman of the Board Shares
of March Networks Corporation since June
o Chairman of the Corporation 2000 as well as Chief Executive Officer of 40,897,750 Series B
March Networks Corporation from June 2000 to Shares
March 2004; prior thereto Chairman of the
Board of Newbridge Networks Corporation (now
Alcatel Canada Inc.) from June 1985 until
June 2000; Chairman and/or Director of a
number of companies.
--------------------------------- -------------------- --------------------------------------------- ------------------------
Donald W. Smith April 20th, 2001 Chief Executive Officer of the Corporation 26,250 Common Shares
Ottawa, Ontario since April 2001; prior thereto President
Optical Internet of
Nortel Networks
Corporation from January
2000 to April 2001 and
Vice President & General
Manager Optical Solutions
of Nortel Networks
Corporation from December
1998 to January 2000.
--------------------------------- -------------------- --------------------------------------------- ------------------------
Paul A.N. Butcher February 16th, 2001 President & Chief Operating Officer of the 25,000 Common Shares
Ottawa, Ontario Corporation since February 2001; prior
thereto Senior Vice President & General 80,996 Series B Shares
Manager, Communications Systems Business of
Mitel Corporation (now Zarlink
Semiconductor Inc.) from 1999 to 2001.
--------------------------------- -------------------- --------------------------------------------- ------------------------
Peter D. Charbonneau February 16th, 2001 General Partner of Skypoint Capital 17,998 Common Shares
Ottawa, Ontario Corporation since January 2001; prior
thereto Executive Vice President of March
o Vice-Chairman of the Board Networks Corporation from June 2000 to
of the Corporation December 2000; prior thereto held several
o Chairman of the Audit senior positions, the last of which was
Committee Vice Chairman of Newbridge Networks
o Member of the Compensation Corporation (now Alcatel Canada Inc.) and
Committee other senior management positions between
December 1986 and June 2000.
--------------------------------- -------------------- --------------------------------------------- ------------------------
Kirk K. Mandy July 11th, 2002 Chief Executive Officer of Zarlink 107,870 Series B Shares
Ottawa, Ontario Semiconductor Inc. since January 2005;
prior to that was an Independent Management
o Member of the Audit Consultant since May 2001 and as Vice
Committee Chairman of Zarlink Semiconductor Inc. and
o Member of the Compensation Chairman of several privately held
Committee companies; prior to May 2001 held several
senior executive positions, the last of
which was President & Chief Executive
Officer, of Mitel Corporation (now Zarlink
Semiconductor Inc.) from 1998 to 2001.
--------------------------------- -------------------- --------------------------------------------- ------------------------
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--------------------------------- -------------------- --------------------------------------------- ------------------------
Gilbert S. Palter April 23rd, 2004 Chief Investment Officer and Managing - (2)
Toronto, Ontario Partner of EdgeStone Capital Partners L.P.
since May 1999.
--------------------------------- -------------------- --------------------------------------------- ------------------------
Guthrie J. Stewart April 23rd, 2004 Partner of EdgeStone Capital Partners L.P. - (2)
Montreal, Quebec since October 2001; prior thereto and since
1992 Executive Vice-President Teleglobe
o Member of the Inc; Chairman of the Board of BreconRidge
Audit Committee Manufacturing Solutions Corporation.
o Chairman of the
Compensation
Committee
--------------------------------- -------------------- --------------------------------------------- ------------------------
(1) Certain spouses of nominees own Shares. The relevant nominees disclaim
beneficial ownership of such Shares.
(2) Certain funds managed by EdgeStone Capital Partners L.P., of which Mr.
Palter and Mr. Stewart are principals, own or control, directly or indirectly,
20,000,000 Series A Shares.
3. Annual Resolution No. 2 - Appointment and Remuneration of Auditors
Appointment of Auditors
On the recommendation of the Audit Committee, management proposes to present a
resolution ("Annual Resolution No. 2") to appoint Deloitte & Touche LLP,
Chartered Accountants, Ottawa, Ontario, as auditors of the Corporation for the
fiscal year ending April 2007 to hold office until the close of the next annual
meeting of shareholders. Deloitte & Touche LLP were first appointed auditors of
the Corporation on December 4th, 2001.
Remuneration of Auditors
In the past, the Audit Committee has negotiated with the auditors of the
Corporation on an arm's length basis for the purpose of determining the fees to
be paid to the auditors. Such fees have been based upon the complexity of the
matters in question and the time incurred by the auditors. Management believes
that the fees negotiated in the past with the auditors of the Corporation were
reasonable in the circumstances and would be comparable to fees charged by other
auditors providing similar services.
The persons named in the form of proxy will, unless a Shareholder has instructed
that the shares it represents be WITHHELD from voting in respect of the
appointment of auditors or someone else is appointed as proxy holder, be voted
FOR the appointment of Deloitte & Touche LLP as auditors of the Corporation and
to authorize the directors to fix the remuneration of the auditors.
C. DIRECTOR AND EXECUTIVE COMPENSATION
1. Executive Compensation
Cash and Other Remuneration of Executive Officers
During the fiscal year ended April 30th, 2006, there were eight executive
officers of the Corporation (the "Executive Officers"), as that term is defined
in the CBCA. The aggregate cash remuneration paid to the Executive Officers by
the Corporation and its subsidiaries for services rendered during the fiscal
year ended April 30th, 2006, was $3,181,426. Except as noted in this Circular,
no other form of compensation has been provided to the Executive Officers. Other
than the Corporation's stock option plan and deferred stock unit plan summarized
below, the Corporation does not have any plan pursuant to which cash or non-cash
remuneration was paid or distributed to Executive Officers during the fiscal
year ended April 30th, 2006, or is proposed to be so paid or distributed in a
subsequent year.
- 7 -
Stock Option Plan
The Corporation adopted an employee stock option plan (the "Stock Option Plan")
in March 2001. Further amendments to the Stock Option Plan have been approved by
the Board from time to time in accordance with section 24 of the Stock Option
Plan. The Stock Option Plan provides for the grant of options to acquire Common
Shares to employees, directors and consultants of the Corporation.
The Stock Option Plan provides that a committee of the Board (the "Compensation
Committee") has the authority to determine the individuals to whom options will
be granted, the number of Common Shares subject to option grants and other terms
and conditions of option grants. The Stock Option Plan also provides that,
unless otherwise determined by the Compensation Committee, one-quarter of the
Common Shares that an option holder is entitled to purchase become eligible for
purchase on each of the first, second, third and fourth anniversaries of the
date of grant, and that options expire on the fifth anniversary of the date of
grant. The Stock Option Plan provides that in no event may an option remain
exercisable beyond the tenth anniversary of the date of grant.
As at July 31st, 2006, there are 25,000,000 Common Shares representing
approximately 12% of the outstanding Shares (calculated on an as-if-converted to
Common Share basis) reserved for issuance upon the exercise of options granted
under the Stock Option Plan of which options to acquire 19,587,508 Common Shares
are currently issued and outstanding under the Stock Option Plan.
A component of executive remuneration consists of grants of stock options under
the Stock Option Plan. Options are also granted under the Stock Option Plan to
attract new executives, retain employees and recognize job promotions.
During the fiscal year ended April 30th, 2006, the Board granted options to six
Executive Officers to purchase a total of 1,225,000 Common Shares at a price of
$1.00 per Common Share. The exercise of certain of these options is subject to
meeting specific performance goals. As at April 30th, 2006, options to acquire
500,000 Common Shares were subject to meeting specific performance goals.
Following the end of the fiscal year, options to acquire 350,000 of these Common
Shares were cancelled as a result of termination of employment and failure to
meet specific performance goals. There were no options exercised by the
Executive Officers during the fiscal year ended April 30th, 2006.
Deferred Share Unit Plan for Executives
The Corporation adopted a deferred share unit plan for executives (the "DSU
Plan") on December 9th, 2004 in order to promote a greater alignment of
interests between the executives and shareholders. Under the DSU Plan, the
Compensation Committee may award certain executives of the Corporation (a "DSU
Plan Participant") deferred share units ("DSUs") of the Corporation. DSUs are
not considered shares of the Corporation, nor is the holder of any DSU entitled
to voting rights or any other rights attaching to the ownership of shares.
Upon the determination by the Compensation Committee to award DSUs to the
account of a DSU Plan Participant for a particular calendar year, the number of
DSU's to be awarded shall be determined by the Compensation Committee as
follows: (1) as at December 31 of such year the Compensation Committee shall
determine the Supplementary Benefits Amount, which is an amount equal to 15% of
the DSU Plan Participant's annual salary for such year, less the maximum amount
of eligible registered retirement savings plan contributions for the DSU Plan
Participant; and (2) the Supplementary Benefits Amount for such DSU Plan
Participant shall subsequently be divided by the Award Market Value of a DSU.
The Award Market Value of a DSU is equal to: (1) the value of a Common Share of
the Corporation as determined by the Compensation Committee in good faith and in
accordance with and subject to the terms of the DSU Plan; or (2) where the
Common Shares of the Corporation are publicly traded on the Toronto Stock
Exchange ("TSX"), the weighted average trading price of the Common Shares of the
Corporation on the TSX on the five (5) trading days immediately preceding the
date a DSU is awarded.
Upon the DSU Plan Participant ceasing to be an executive of the Corporation, the
DSU Plan Participant shall receive a cash amount equal to the number of DSUs in
his or her account multiplied by the weighted average trading price of the
Common Shares of the Corporation on the TSX on the five (5) trading days
immediately preceding the date
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the DSU Plan Participant ceases to be an executive of the Corporation, 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.
There are currently two DSU Plan Participants. Paul Butcher, President & Chief
Operating Officer is the only DSU Plan Participant who is also an Executive
Officer. As at July 31st, 2006, 340,612 DSUs have been awarded to Mr. Butcher
under the DSU Plan. Of the DSUs awarded to Mr. Butcher, 242,062 DSUs represents
the value of Mr. Butcher's interest in the Corporation's supplementary executive
retirement plan (being $242,062) which was transferred by the Corporation (with
the consent of Mr. Butcher) to the DSU Plan on July 9th, 2005: the supplementary
executive retirement plan has since been wound-up and terminated by the
Corporation (with the consent of the participants thereunder), in favour of the
DSU Plan.
Loans to Directors and Executive Officers
There are no loans outstanding from the Corporation to any of its directors or
the Executive Officers.
2. Remuneration of Directors
A director who is not also an Executive Officer is reimbursed for any
out-of-pocket expenses incurred in connection with attending Board or committee
meetings. In addition, directors of the Corporation are eligible to participate
in the Stock Option Plan described above.
Non-executive directors are compensated with either cash or stock options in
lieu of cash. The number of stock options granted is calculated using the cash
value divided by the Black-Scholes value at the time of grant.
The cash remuneration for non-executive directors is based on the following:
Annual Service on the Board (other than Chair) $25,000
Annual Service as Chair of the Board $60,000
Annual Service as member of the Audit Committee (other than Chair) $ 5,000
Annual Service as Chair of the Audit Committee $15,000
Annual Service as member of other standing committees $ 2,500
Annual Service as Chair of other standing committees $ 7,500
Meeting fees $ 1,000
Each of the non-executive directors opted to receive their compensation in the
form of stock options in lieu of cash.
During the fiscal year ended April 30th, 2006, the Corporation remunerated
non-executive directors of the Corporation with stock options to acquire an
aggregate of 337,026 Common Shares granted under the Stock Option Plan at an
exercise price of $1.00 per Common Share. There were no options exercised by
directors during the fiscal year ended April 30th, 2006.
D. CORPORATE GOVERNANCE PRACTICES
The Corporation and its management place significant emphasis on the structure
of the Board and the committees of the Board in order to promote effective
corporate governance of the Corporation. During fiscal year 2006, the
Corporation implemented several corporate governance initiatives in order to
conform to the fullest extent possible with current recommended corporate
governance guidelines and best practices.
The initiatives implemented during the fiscal year 2006 included the adoption of
corporate governance guidelines, the adoption of a mandate for the board of
directors and position descriptions for a chairman of the board, a lead director
and a chief executive officer. In addition, the Board adopted a revised audit
committee charter and compensation committee charter and adopted a charter for a
nominating and corporate governance committee.
The Corporation has also adopted a Code of Business Conduct which was revised
during fiscal year 2006. Employees are required to certify their compliance with
the Code on an annual basis. The Corporation has also
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adopted a whistleblower policy and, in fiscal year 2003, the Corporation
established a disclosure committee. Certain employees who are involved in the
preparation and review of financial statements and regulatory filings execute,
on an annual basis, certifications in support of the certification obligations
of the chief executive officer and the chief financial officer pursuant to the
Sarbanes Oxley Act of 2002. The certification process complements the due
diligence process administered by the Corporation to support reporting
obligations under the Sarbanes Oxley Act of 2002. The Corporation has also
adopted but has not yet implemented an insider trading policy which will
govern the conduct of directors, officers, employees and certain other persons
in purchasing or selling securities of the Corporation. The Corporation has
also adopted a communications policy which will govern the public
communication and disclosure of corporate information to the public.
1. Composition of the Board
As discussed under the heading "Special Resolution No. 1 - Change Number of
Directors", Shareholders are being asked to consider and if thought fit, approve
an amendment to the articles to authorize the directors to determine, between
meetings of shareholders, the fixed number of directors to be appointed within
the minimum and maximum number permitted. In addition, Shareholders are being
asked to consider and, if thought fit, approve an increase in the minimum number
of directors from one (1) to three (3) and an increase in the maximum number of
directors from ten (10) to fifteen (15).
Following the Meeting, subject to Shareholder approval, the Board will be
comprised of seven directors. The Board will regularly assess the need for
additional directors in order to ensure that the Board is composed of
individuals with diverse backgrounds, experience, competencies and independence
as evaluated against criteria established from time to time by the Board.
2. Mandate of the Board and Corporate Governance Guidelines
The statutory mandate of the Board is to supervise the management of the
Corporation. The Board's primary roles are to oversee corporate performance and
provide quality, depth and continuity of management to meet the Corporation's
strategic objectives. The Board focuses its attention on the following key
responsibilities:
o Appoint and oversee the chief executive officer and other senior
officers
o Oversee strategic implementation and performance
o Monitor the financial performance of the Corporation and other
financial reporting matters
o Identify and oversee management of principal business risks
o Monitor the legal and ethical performance of the Corporation
o Maintain shareholder relations
o Develop and oversee the Corporation's approach to governance
o Oversee internal control and management information systems
The corporate governance guidelines describe the governing roles of and the
relationships between the Board and Management. In addition, the guidelines set
forth operating and procedural guidelines for the Board.
The Board has established two committees to assist it in carrying out its
responsibilities: the Audit Committee and the Compensation Committee. The Board
has also adopted a charter for a nominating and corporate governance committee,
but such committee has not yet been constituted.
- 10 -
3. The Audit Committee
The Audit Committee is composed of three directors namely, Peter Charbonneau,
Kirk Mandy and Guthrie Stewart. Peter Charbonneau was appointed to the Audit
Committee in February 2002, Kirk Mandy was appointed in July 2002 and Guthrie
Stewart was appointed in June, 2004.
The Audit Committee assists the Board in fulfilling its financial oversight
obligations including responsibility for overseeing the integrity of the
Corporation's financial statements, legal and regulatory compliance, auditor
independence and qualification, the work and performance of the Corporation's
financial management, internal auditor and external auditor and for overseeing
the systems of disclosure controls and procedures and the system of internal
controls regarding finance, accounting, legal compliance, risk management and
ethics that Management and the Board have established.
4. The Compensation Committee
The Compensation Committee is composed of three directors namely, Peter
Charbonneau, Kirk Mandy and Guthrie Stewart. Peter Charbonneau was appointed to
the Compensation Committee in February 2002, Kirk Mandy was appointed in July
2002 and Guthrie Stewart was appointed in December 2004.
The Compensation Committee assists the Board in discharging the Board's
oversight responsibilities relating to the compensation, development, succession
and retention of the chief executive officer and key employees and the
establishment of fair and competitive compensation and performance incentive
plans.
5. Communication with the Board
The communication channels available for Shareholders or others to contact the
Board are as follows:
1. By mail to:
The Board of Directors
c/o the Corporate Secretary's Office
Mitel Networks Corporation
350 Legget Drive
Ottawa, Ontario, Canada
K2K 2W7
E. INTEREST OF MANAGEMENT, NOMINEES AND OTHERS IN MATERIAL TRANSACTIONS
In addition to the disclosure made elsewhere in this Circular with respect to
any transaction from May 1, 2005, to and including April 30th, 2006, material
transactions between the Corporation and its insiders, proposed nominees for
director and the respective associates or affiliates of such insiders and
nominees for director which has or would materially affect the Corporation or
its subsidiaries, are as follows:
Product Supply Agreement
On August 31, 2001, the Corporation sold its manufacturing operations,
comprising plant, equipment, workforce and certain liabilities to BreconRidge
Manufacturing Solutions Corporation ("BreconRidge"), a company in which Terence
H. Matthews (the "Principal Shareholder") holds a significant interest, for
total net consideration of (US)$5,000,000 in the form of long-term promissory
notes receivable of (US)$5,400,000 and promissory notes payable of (US)$400,000.
In connection with the disposal of the manufacturing operations, the Corporation
entered into a supply agreement dated August 31, 2001, whereby BreconRidge will
provide certain products and services under terms and conditions reflecting
prevailing market conditions at the time the agreement was entered into. The
term of the agreement is six years and will be, unless otherwise terminated,
automatically renewed on the same terms and conditions for additional
consecutive one-year periods. Under the terms of the supply agreement,
BreconRidge is required to purchase the Corporation's raw material inventory,
before turning to third party suppliers for raw material
- 11 -
procurement. During the fiscal year 2006, the Corporation purchased
(US)$101,400,000 of products and services and sold (US)$400,000 of raw
material inventory under this agreement. As of April 30, 2006, balances
payable pursuant to this agreement amounted to (US)$24,000,000 and balances
receivable pursuant to this agreement amounted to (US)$700,000.
Under the terms of the supply agreement, the Corporation 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 the fiscal year 2006, manufacturing
tools purchased from BreconRidge amounted to (US)$900,000.
On August 31, 2001, the Corporation 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. During the fiscal year 2006, the
Corporation provided services valued at (US)$500,000 under these agreements.
Leased properties
In March 2001 the Corporation and Brookstreet Research Park Corporation
(formerly known as Mitel Research Park Corporation), a corporation 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. During the fiscal year 2006, rental expense and
rental income on related party operating leases were (US)$6,500,000 and
(US)$2,800,000, respectively. Future operating minimum lease payments and future
sublease income to be realized in fiscal year 2007 is (US)$8,000,000 and
(US)$900,000, respectively. As of April 30, 2006, balances due to the
Corporation controlled by the Principal Shareholder and related to the lease
agreement amounted to (US)$400,000.
On August 31, 2001, the Corporation entered into sublease agreements with
BreconRidge for certain office and manufacturing facilities in Ottawa 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 sublease agreement is for a term of five years
expiring on August 31, 2006.
Shareholders Agreement
The Corporation entered into a Shareholders Agreement on April 23rd, 2004 with
Mitel Systems Corporation, Zarlink Semiconductor Inc., Mitel Knowledge
Corporation, Wesley Clover Corporation, Edgestone, Power Technology Investment
Corporation and the Principal Shareholder. On June 30th, 2004, Mitel Systems
Corporation and Wesley Clover Corporation amalgamated, continuing under the name
of Wesley Clover Corporation. On November 1st, 2004, Mitel Knowledge Corporation
transferred all Shares held by it to and in favour of CTJL. Under an Assumption
Agreement dated April 23rd, 2004, CTJL assumed, as required under the
Shareholders Agreement, all of the obligations and rights of Mitel Knowledge
Corporation under the Shareholders Agreement. The Shareholders Agreement
contains provisions relating to the entitlement of EdgeStone to appoint two
directors to the Board, and various other provisions respecting the management
of the Corporation and dealings with the securities of the Corporation held by
the Shareholders which are parties to the Shareholders Agreement. Certain
parties to the Shareholders Agreement, Wesley Clover Corporation and CTJL, are
corporations controlled directly or indirectly by the Principal Shareholder.
The Corporation also entered into a registration rights agreement (the
"Registration Rights Agreement") dated April 23rd, 2004, with Mitel Systems
Corporation, Zarlink Semiconductor Inc., Mitel Knowledge Corporation, Wesley
Clover Corporation, Edgestone, Power Technology Investment Corporation, the
Principal Shareholder and Celtic CTJL by Assumption Agreement dated April 23rd,
2004. Pursuant to the Registration Rights Agreement, the Corporation covenanted
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 Shares and/or Canada.
- 12 -
The Corporation also entered into a registration rights agreement (the "2005
Registration Rights Agreement") dated April 27, 2005 with Highbridge
International LLC, Marathon Special Opportunity Master Fund, Ltd. and ForeMaster
Convertible Fund, Ltd. Pursuant to the 2005 Registration Rights Agreement, the
Corporation covenanted to make certain arrangements with respect to the
registration and/or the qualification for distribution of the Shares held by
such noteholders under the applicable securities laws of the United Shares
and/or Canada.
Other than the information set out elsewhere in this Circular, none of the
directors or senior officers of the Corporation, none of the persons who have
been directors or senior officers of the Corporation and no associate or
affiliate of any of the foregoing has any material interest, direct or indirect,
by way of beneficial ownership of securities or otherwise, in any matter to be
acted upon at the Meeting except to the extent that such persons may be involved
in the normal business of the Meeting or the general affairs of the Corporation
and with the exception that directors, officers and employees of the Corporation
may be granted options to acquire Common Shares pursuant to the Stock Option
Plan.
F. DIRECTORS' AND OFFICERS' INSURANCE AND INDEMNIFICATION
The Corporation maintains directors' and officers' liability insurance in the
amount of US$15,000,000 for the benefit of directors and officers of the
Corporation. The Corporation's premium is US$145,500, which covers a
twelve-month period from November 1st, 2005 to October 31st, 2006. No portion of
the premium was paid by the directors and officers of the Corporation. The
policy contains deductibles (US$75,000 for employment practices claims and
US$50,000 for all other claims, including securities claims) applicable to
losses for which reimbursement is sought and contains a number of exclusions and
limitations to the coverage provided, as a result of which the Corporation may,
under certain circumstances, be obligated to indemnify its directors or officers
for certain claims which do not fall within the coverage provided under the
policy.
The by-laws of the Corporation generally provide that the Corporation shall
indemnify a director or officer against liability incurred in such capacity,
including acting at the Corporation's request as director or officer of another
corporation, to the extent permitted or required by the CBCA. The Corporation
has agreed to contractually indemnify each director and certain officers of the
Corporation against liability resulting from any civil, criminal or
administrative action or proceeding to which such person is made a party by
reason of being, or having been, a director or officer of the Corporation
(including an action by or on behalf of the Corporation), as long as such person
(i) acted honestly and in good faith with a view to the best interests of the
Corporation; and (ii) had reasonable grounds for believing his or her conduct
was lawful in any criminal or administrative proceeding that is enforced by
monetary penalty.
G. SPECIAL BUSINESS TO BE TRANSACTED AT THE MEETING
1. Background
In conjunction with the annual business of the Meeting, Mitel proposes to:
o Change the number of directors to a minimum of three (3) and a
maximum of fifteen (15) with a fixed number of directors as the
directors may from time to time determine;
o Change the name of the Corporation to Mitel Corporation;
o Authorize and approve the Corporation's 2006 Equity Incentive Plan;
and
o Confirm amendments to By-law No. 1A.
2. Interests Of Persons In Matters To Be Acted Upon
Dr. Terence H. Matthews, the Chairman of the Corporation, has a controlling
interest, directly or indirectly, in the Corporation by way of his holdings of
approximately 60% of the Series B Shares and his holdings in Wesley Clover
- 13 -
Corporation and CTJL, which hold approximately 77% and 4%, respectively, of the
outstanding Common Shares of the Corporation.
3. Special Resolution No. 1 - Change Number of Directors
The articles of the Corporation provide that the board of directors is to
consist of a minimum of one (1) and a maximum of ten (10) directors with such
fixed number of directors as determined from time to time by the Shareholders
and permit the directors to appoint additional directors in accordance with the
CBCA. The number of directors of the Corporation was previously fixed at eight
by a shareholders resolution dated July 15th, 2004, and currently, there are
seven directors on the board of directors.
In connection with an initial public offering, the Corporation will become a
"distributing corporation" for purposes of the CBCA and a "distributing
corporation" is required to have a minimum of three directors. Shareholders are
therefore being asked to consider, and if thought fit, approve Special
Resolution No. 1 to increase the minimum number of directors from one (1) to
three (3). At the same time, Shareholders are being asked to consider, and if
thought fit, approve an increase in the maximum number of directors from ten
(10) to fifteen (15) in order to support any future increases in the size of the
board of directors.
Shareholders are also being asked to consider, and if thought fit, approve an
amendment to the articles to authorize the directors to determine, between
meetings of Shareholders, any fixed number of directors to be appointed within
the minimum and maximum number permitted. The authority to determine the number
of directors complements the directors' authority to appoint one or more
additional directors, provided the total number of directors so appointed does
not exceed one-third of the number of directors elected at the previous annual
meeting of Shareholders, in accordance with the CBCA.
The board of directors of the Corporation recommends that Shareholders vote in
favour of the special resolution to amend the articles to change the number of
directors and to authorize the directors to determine the number of directors,
attached as Schedule C to this Management Proxy Circular ("Special Resolution
No. 1").
In order to be effective, Special Resolution No. 1 must be passed, with or
without amendment, by the Shareholders voting together as a single class and
representing in the aggregate, not less than two-thirds of the votes cast (in
person or by proxy) by all such Shareholders at the Meeting. Unless the nominee
identified in the attached form of proxy is directed to do otherwise, the
nominee will vote FOR Special Resolution No. 1.
Notwithstanding such approval, the board of directors of the Corporation will be
authorized, without further approval of the Shareholders, to revoke Special
Resolution No. 1 at any time before it becomes effective in accordance with the
provisions of the CBCA.
4. Special Resolution No. 2 - Change of Name
The Mitel name has been in use worldwide in the communications system business
for over 25 years. In 2001, the Corporation acquired the communications system
business and the "Mitel" name from the corporate entity formerly called Mitel
Corporation and now called Zarlink Semiconductor Inc. The board of directors
believes that the use of the word "Networks" in the current legal name does not
properly reflect the voice centric IP-based communications solutions that the
Corporation provides. Accordingly, the board has determined that the change of
the legal name of the Corporation from "Mitel Networks Corporation" to "Mitel
Corporation" is in the best interests of the Corporation.
The board of directors of the Corporation recommends that Shareholders vote in
favour of the special resolution to amend the articles to change the name of the
Corporation, attached as Schedule D to this Management Proxy Circular ("Special
Resolution No. 2").
In order to be effective, Special Resolution No. 2 must be passed, with or
without amendment, by the Shareholders voting together as a single class and
representing in the aggregate, not less than two-thirds of the votes cast (in
- 14 -
person or by proxy) by all such Shareholders at the Meeting. Unless the nominee
identified in the attached form of proxy is directed to do otherwise, the
nominee will vote FOR Special Resolution No. 2.
Notwithstanding such approval, the board of directors of the Corporation will be
authorized, without further approval of the Shareholders, to revoke Special
Resolution No. 2 at any time before it becomes effective in accordance with the
provisions of the CBCA.
5. Ordinary Resolution No. 1 - The 2006 Equity Incentive Plan
The board of directors believes that it is in Mitel's best interests to adopt a
new equity compensation plan to replace the Corporation's existing stock option
plan. The new equity compensation plan will provide Mitel with increased
flexibility and choice in the types of compensation awards that Mitel may grant,
including options, deferred share units, restricted stock units, performance
share units and other share-based awards. The principal purpose of the proposed
2006 Equity Incentive Plan (the "Plan") is to advance the interests of Mitel by
assisting Mitel in attracting, retaining and motivating key employees,
directors, officers and consultants through performance related incentives,
thereby advancing the interests of Mitel and its shareholders. If the new Plan
is approved, the Corporation expects that no new options will be granted under
the existing stock option plan and all future awards will be granted under the
new Plan. All existing options that have been previously granted under the
existing stock option plan will continue to be governed under such existing
stock option plan
You are encouraged to read the Plan, as approved by the board of directors of
the Corporation, which is attached as Appendix E-1 to Schedule E hereto.
The aggregate number of common shares that may be issued under the Plan is 12%
of the total number of common shares outstanding from time to time. The Plan
contains an amendment provision that allows the board of directors to amend the
Plan for a number of purposes without notice or subsequent shareholder approval
including:
o to amend general vesting provisions;
o to amend the term of any option, subject to limits contained in the
Plan;
o to amend the provisions in the Plan dealing with retirement, death,
disability or termination of participant;
o to make amendments for the protection of participants in the Plan,
including amendments resulting from changes in law in any
jurisdiction; and
o to make amendments to cure or correct ambiguities, defects or
mistakes in the Plan.
If Ordinary Resolution No. 1 is approved by shareholders, no subsequent
shareholder approval will be required for the board of directors to make these
types of amendments to the Plan in the future.
The board of directors of the Corporation recommends that Shareholders vote in
favour of the ordinary resolution to approve the Plan, attached as Appendix E-1
to Schedule E to this Management Proxy Circular ("Ordinary Resolution No. 1").
In order to be effective, Ordinary Resolution No. 1 must be passed, with or
without amendment, by the Shareholders voting together as a single class and
representing in the aggregate, not less than a majority of the votes cast (in
person or by proxy) by all such Shareholders at the Meeting. Unless the nominee
identified in the attached form of proxy is directed to do otherwise, the
nominee will vote FOR Ordinary Resolution No. 1.
Notwithstanding such approval, the board of directors of the Corporation will be
authorized, without further approval of the Shareholders, to revoke Ordinary
Resolution No. 1 at any time before it becomes effective in accordance with the
provisions of the CBCA.
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6. Ordinary Resolution No. 2 - By-Law Amendments
At the Meeting, Shareholders will be asked to confirm amendments to By-law No.
1A. By-law No. 1A was enacted by the directors and confirmed by the shareholders
in 2004. The amendments to By-law No. 1A have been approved by the board of
directors and reflect Mitel's corporate governance structure and enhanced
practices including an increase in the quorum requirement for meetings of
shareholders as well as current provisions of the CBCA. A copy of the By-law
amendments, blacklined against the existing By-law No. 1A is attached as
Schedule F to this Circular.
The board of directors of the Corporation recommends that Shareholders vote in
favour of the ordinary resolution to approve the By-law Amendments, attached as
Schedule F to this Management Proxy Circular ("Ordinary Resolution No. 2").
In order to be effective, Ordinary Resolution No. 2 must be passed, with or
without amendment, by the Shareholders voting together as a single class and
representing in the aggregate, not less than a majority of the votes cast (in
person or by proxy) by all such Shareholders at the Meeting. Unless the nominee
identified in the attached form of proxy is directed to do otherwise, the
nominee will vote FOR Ordinary Resolution No. 2.
Notwithstanding such approval, the board of directors of the Corporation will be
authorized, without further approval of the Shareholders, to revoke Ordinary
Resolution No. 2 at any time before it becomes effective in accordance with the
provisions of the CBCA.
7. Other Matters
Management of the Corporation knows of no amendment or variation to the matters
referred to in the Notice of Meeting and of no other business to be brought
before the Meeting. If any amendment, variation or other business is properly
brought before the Meeting, the form of proxy confers discretion on the persons
named on the form of proxy to vote on any amendment or variation of the matters
referred to in the notice of Meeting or any other business in accordance with
their best judgment.
The CBCA provides that, in certain circumstances, eligible shareholders are
entitled to submit to the Corporation notice of a matter that such shareholder
proposes to raise at a meeting of shareholders. The final date by which the
Corporation must receive such a proposal to be raised at the next annual meeting
of shareholders of the Corporation (subsequent to this meeting) is May 17th,
2007. Any eligible shareholder who may wish to exercise this right should
carefully consider whether they are eligible to make such a proposal, and comply
with the relevant provisions of the CBCA.
CERTIFICATE
The contents and the distribution of this Circular have been approved by the
Board of Directors of the Corporation.
DATED August 16th, 2006 on behalf of the Board of Directors.
"Don Smith"
Donald W. Smith
Chief Executive Officer
Ottawa, Ontario, Canada
- 16 -
SCHEDULE A
ANNUAL RESOLUTION NO. 1
RESOLVED AS A RESOLUTION OF THE SHAREHOLDERS OF MITEL NETWORKS CORPORATION THAT:
1. The Shareholders determine that the number of directors of the
Corporation and the number of directors to be elected at each annual
meeting of the shareholders be seven (7).
2. The following persons are elected as directors of the Corporation until
the next annual meeting of shareholders or until their successor are
elected:
Dr. Terence H. Matthews Donald W. Smith
Paul A.N. Butcher Peter D. Charbonneau
Kirk K. Mandy Gilbert S. Palter
Guthrie J. Stewart
- 17 -
SCHEDULE B
ANNUAL RESOLUTION NO. 2
RESOLVED AS A RESOLUTION OF THE SHAREHOLDERS OF MITEL NETWORKS CORPORATION THAT:
Deloitte & Touche LLP are appointed the auditors of the Corporation until the
close of the next annual meeting of the shareholders, or until a successor is
appointed, at such remuneration as may be determined by the directors, and the
directors are authorized to fix such remuneration.
- 18 -
SCHEDULE C
SPECIAL RESOLUTION NO. 1
RESOLVED AS A SPECIAL RESOLUTION OF THE SHAREHOLDERS OF MITEL NETWORKS
CORPORATION THAT:
1. The Articles of the Corporation be amended as follows:
a) by deleting at paragraph 5 thereof and substituting the following:
"Minimum 3, Maximum 15"
b) by deleting at paragraph 7 thereof the following:
"and within any fixed number of directors from time to time
authorized by the shareholders of the Corporation."
and substituting at paragraph 7 thereof the following:
"with such fixed number of directors from time to time authorized
by the directors of the Corporation."
2. Any director or officer of the Corporation is authorized and directed to
take all such action and execute all such documents, including the
execution and filing of Articles of Amendment, as such director or
officer deems necessary or advisable in order to complete the matters
provided for herein.
3. Notwithstanding the approval of the matters provided for herein, the
board of directors of the Corporation is hereby authorized, without
further approval of the shareholders of the Corporation, to revoke this
special resolution for any reason, at any time before the action approved
by this special resolution becomes effective.
- 19 -
SCHEDULE D
SPECIAL RESOLUTION NO. 2
RESOLVED AS A SPECIAL RESOLUTION OF THE SHAREHOLDERS OF MITEL NETWORKS
CORPORATION THAT:
1. The Articles of the Corporation be amended as follows:
a. by deleting paragraph 1 thereof and substituting the following:
"MITEL CORPORATION"
2. Any director or officer of the Corporation is authorized and directed to
take all such action and execute all such documents, including the
execution and filing of Articles of Amendment, as such director or
officer deems necessary or advisable in order to complete the matters
provided for herein.
3. Notwithstanding the approval of the matters provided for herein, the
board of directors of the Corporation is hereby authorized, without
further approval of the shareholders of the Corporation, to revoke this
special resolution for any reason, at any time before the action approved
by this special resolution becomes effective.
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SCHEDULE E
ORDINARY RESOLUTION NO. 1
RESOLVED AS AN ORDINARY RESOLUTION OF THE SHAREHOLDERS OF MITEL NETWORKS
CORPORATION THAT:
1. The 2006 Equity Incentive Plan of the Corporation, substantially in the
form annexed as Appendix E-1 hereto and subject to such additions,
amendments, deletions, supplements or alterations to the draft Plan
submitted to the Meeting as may be approved by the board of directors
prior to the Meeting, is hereby approved.
2. Notwithstanding the approval of the matters provided for herein, the
board of directors of the Corporation is hereby authorized, without
further approval of the shareholders of the Corporation, to revoke this
resolution for any reason, at any time before the action approved by this
resolution becomes effective.
- 21 -
APPENDIX E-1
TO SCHEDULE E
Mitel Networks Corporation
2006 Equity Incentive Plan
ARTICLE 1
PURPOSE
1.1 Purpose
The purpose of this Plan is to assist the Company in attracting, retaining and
motivating key employees, directors, officers and consultants through
performance related incentives, thereby advancing the interests of the Company
and its shareholders.
ARTICLE 2
INTERPRETATION
2.1 Definitions
When used herein, unless the context otherwise requires, the following terms
have the indicated meanings, respectively:
"Affiliate" has the meaning set forth in the Securities Act (Ontario),
as amended from time to time;
"Associate" has the meaning set forth in the Securities Act (Ontario),
as amended from time to time;
"Award" means any Option, Restricted Share Unit, Deferred Share Unit,
Performance Share Unit or Other Share-Based Award granted under this
Plan;
"Award Agreement" means a signed, written agreement between a
Participant or a Director Participant and the Company, substantially in
the form attached as Schedule A, subject to any amendments or additions
thereto as may, in the discretion of the Committee, be necessary or
advisable, evidencing the terms and conditions on which an Award has
been granted under this Plan;
"Black Out Period" means the period of time during which the Company
has imposed trading restrictions on its Insiders;
"Board" means the board of directors of the Company;
"Business Day" means a day, other than a Saturday or Sunday, on which
the principal commercial banks in the City of Ottawa are open for
commercial business during normal banking hours;
"CBCA" means the Canada Business Corporations Act and the regulations
promulgated thereunder, both as amended from time to time;
"Change in Control" means the happening of any of the following events:
(i) any transaction at any time and by whatever means
pursuant to which (A) the Company goes out of existence
by any means, except for any corporate transaction or
reorganization in which the proportionate voting power
among holders of securities of the
- 22 -
entity resulting from such corporate transaction or
reorganization is substantially the same as the
proportionate voting power of such holders of Company
voting securities immediately prior to such corporate
transaction or reorganization or (B) any Person or any
group of two or more Persons acting jointly or in
concert (other than the Company, a wholly-owned
Subsidiary of the Company, an employee benefit plan of
the Company or of any of its wholly-owned Subsidiaries,
including the trustee of any such plan acting as
trustee, or Dr. Terence H. Matthews and his Associates)
hereafter acquires the direct or indirect "beneficial
ownership" (as defined by the CBCA) of, or acquires the
right to exercise control or direction over, securities
of the Company representing 50% or more of the then
issued and outstanding Common Shares in any manner
whatsoever, including, without limitation, as a result
of a take-over bid, an exchange of securities, an
amalgamation of the Company with any other entity, an
arrangement, a capital reorganization or any other
business combination or reorganization;
(ii) the sale, assignment or other transfer of all or
substantially all of the assets of the Company to a
Person other than a wholly-owned Subsidiary of the
Company;
(iii) the dissolution or liquidation of the Company except in
connection with the distribution of assets of the
Company to one or more Persons which were wholly-owned
Subsidiaries of the Company immediately prior to such
event;
(iv) the occurrence of a transaction requiring approval of
the Company's shareholders whereby the Company is
acquired through consolidation, merger, exchange of
securities, purchase of assets, amalgamation,
arrangement or otherwise by any other Person (other than
a short form amalgamation or exchange of securities with
a wholly-owned Subsidiary of the Company); or
(v) the Board passes a resolution to the effect that, for
the purposes of some or all of the Award Agreements, an
event set forth in (i), (ii), (iii) or (iv) above has
occurred.
"Change in Control Price" means the highest price per Common Share paid
in any transaction reported on a stock exchange or paid or offered in
any bona fide transaction related to a potential or actual Change in
Control of the Company at any time during the five trading days (or if
the Common Shares are not listed on any stock exchange, during the
three month period) preceding the Change in Control, as determined by
the Board in its sole discretion;
"Code" means the U.S. Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated under it;
"Common Shares" means the common shares in the capital of the Company
and any other securities of the Company or any Affiliate or any
successor that may be so designated by the Committee;
"Committee" has the meaning set forth in Section 3.2 of this Plan;
"Company" means Mitel Networks Corporation;
"Consultant Participant" means an individual or a consultant company,
other than an Employee Participant or a Director Participant that:
(i) is engaged to provide services to the Company or a
Subsidiary other than services provided in relation to a
distribution of securities of the Company or a
Subsidiary;
(ii) provides the services under a written contract with the
Company or a Subsidiary; and
(iii) spends or will spend a significant amount of time and
attention on the affairs and business of the Company or
a Subsidiary,
- 23 -
and includes a Consultant Participant's Permitted Assigns. For the
purposes of this definition, "consultant company" means, with respect
to an individual consultant, either (i) a company of which the
individual consultant is an employee or shareholder; or (ii) a
partnership of which the individual consultant is an employee or
partner;
"Covered Employee" shall have the meaning set forth in Section
162(m)(3) of the Code;
"Date of Grant" means, for any Award, the date specified by the
Committee at the time it grants the Award (which, for greater
certainty, shall be no earlier than the date on which the Committee
meets for the purpose of granting such Award) or if no such date is
specified, the date upon which the Award was granted;
"Deferred Share Unit" or "DSU" means a unit equivalent in value to a
Common Share, credited by means of a bookkeeping entry in the books of
the Corporation in accordance with Article 5;
"Director Participant" means a director of the Company who is not an
employee of the Company or a Subsidiary and includes a Director
Participant's Permitted Assigns;
"Director's Option" means an Option granted to a Director Participant;
"Disabled" or "Disability" means the permanent and total incapacity of
a Participant or a Director Participant as determined in accordance
with procedures established by the Committee for purposes of this Plan;
"Distribution Date" means (i) in the case of a Director Participant,
the date on which the Director Participant ceases to be a member of the
Board or, in the case of a Participant, the Termination Date (the
"Separation Date"); or (ii) such later date as elected by the
Participant or Director Participant provided that in no event shall a
Participant or Director Participant be permitted to elect a date which
is later than the last Business Day of the calendar year following the
calendar year in which the Separation Date occurs. An election for a
Distribution Date described in (ii) above will only be valid if it is
delivered to the Corporate Secretary of the Company prior to the
Separation Date in the form prescribed for such purposes by the
Company, provided that such election may not be made by a Participant
or Director Participant who is a U.S. Taxpayer;
"Employee Participant" means a current full-time or part-time employee
or officer of the Company or a Subsidiary (other than a Director
Participant or a Consultant Participant) and includes an Employee
Participant's Permitted Assigns;
"Exchange Act" means the United States Securities Exchange Act of 1934,
as amended from time to time;
"Exercise Notice" means a notice in writing, substantially in the form
set out in Schedule B, signed by a Participant or a Director
Participant holding an Option and stating the Participant's or Director
Participant's intention to exercise a particular Option;
"Exercise Price" means the price at which a Common Share may be
purchased pursuant to the exercise of an Option;
"Exercise Period" means the period of time during which an Option
granted under this Plan may be exercised (provided however that the
Exercise Period may not exceed 10 years from the relevant Date of
Grant);
"Fair Market Value" means, with respect to any Common Share at a
particular date, the volume weighted average trading price on the
Toronto Stock Exchange on the last five trading days immediately prior
to such date (or if such Common Shares did not trade on such exchange
on such days, the average of the bid and ask prices of such Common
Shares at the close of trading on such days); provided that in the
event that such Common Shares are not then listed on such stock
exchange, the Fair Market Value shall be determined based on the
closing price of such Common Shares on any stock exchange in Canada or
the United States on which such Common Shares are then listed on the
last trading day prior to the particular date (or if such Common Shares
did not trade on such exchange on such day, the average of the bid and
- 24 -
ask prices of such Common Shares at the close of trading on such day);
and further provided that in the event that such Common Shares are not
then listed on any stock exchange in Canada or the United States, the
Fair Market Value shall be determined by the Board in its sole
discretion; notwithstanding the foregoing, in the case of an Option
granted to a U.S. Taxpayer, the commitment to grant such Option based
on the average trading price on the Toronto Stock Exchange over the
prior five days immediately prior to the grant date must be irrevocable
prior to the commencement of such five day measurement period;
"Incentive Stock Option" means an option granted under Section 4.6 of
the Plan that meets the requirements of Section 422 of the Code or any
successor provision and is designated as such in the applicable Award
Agreement;
"Individual Optionee" means an Optionee who is an individual or the
individual of which the Optionee is a Permitted Assign, as the case may
be;
"Insider" has the meaning set forth in the Securities Act (Ontario), as
amended from time to time, and includes Associates and Affiliates of
such Person;
"NI 45-106" means National Instrument 45-106 Prospectus and
Registration Exemptions of the Canadian Securities Administrators, as
amended from time to time;
"NICs" means UK National Insurance Contributions;
"NIC Regulations" means the laws, regulations and practices currently
in force relating to liability for and the collection of NICs;
"Non Qualified Stock Option" means an option granted under Article 4 of
the Plan that is not intended to be or does not meet the requirements
of an Incentive Stock Option. Any stock option granted by the Committee
that is not designated as an Incentive Stock Option in the applicable
Award Agreement will be deemed a Non Qualified Stock Option;
"Option" means a right to purchase Common Shares under this Plan;
"Option Gain" means a gain realized upon the exercise, assignment or
release of an Option, being a gain that is chargeable to income tax
under section 476 of the Income Tax (Earnings and Pensions) Act 2003
(UK);
"Option Tax Liability" means any liability of the Optionee's Employer
to account to the UK Inland Revenue for any amount of, or representing,
income tax or NICs (which may, to the extent provided for in Article
12, include employer's NICs) on any Option Gain;
"Optionee" means a Participant or a Director Participant who has been
granted one or more Options under this Plan;
"Optionee's Employer" means the Company or such Subsidiary as is or, if
the Optionee has ceased to be employed by the Company or such
Subsidiary, was the Optionee's Employer or such other person as, under
the PAYE Regulations or, as the case may be, the NIC Regulations, or
any other statutory or regulatory enactment is obliged to account for
any Option Tax Liability;
"Other Share-Based Award" means any right granted under Section 8.1 of
this Plan;
"Participant" means an Employee Participant or a Consultant Participant
but not a Director Participant;
"PAYE" means the Pay As You Earn System which allows for the collection
of income tax on employment income in the United Kingdom;
"PAYE Regulations" means the regulations made under section 684 of the
Income Tax (Earnings and Pensions) Act 2003 (UK);
"Performance Goals" means performance goals based on one or more of the
following criteria: (i) earnings including operating income, earnings
before or after taxes, earnings before or after interest, depreciation,
amortization, or extraordinary or special items or book value per share
(which may exclude
- 25 -
nonrecurring items); (ii) pre-tax income or after-tax income; (iii)
earnings per common share (basic or diluted); (iv) operating profit;
(v) revenue, revenue growth or rate of revenue growth; (vi) return on
assets (gross or net), return on investment, return on capital, or
return on equity; (vii) returns on sales or revenues; (viii) operating
expenses; (ix) stock price appreciation; (x) cash flow, free cash flow,
cash flow return on investment (discounted or otherwise), net cash
provided by operations, or cash flow in excess of cost of capital; (xi)
implementation or completion of critical projects or processes; (xii)
economic value created; (xiii) cumulative earnings per share growth;
(xiv) operating margin or profit margin; (xv) common stock price or
total stockholder return; (xvi) cost targets, reductions and savings,
productivity and efficiencies; (xvii) strategic business criteria,
consisting of one or more objectives based on meeting specified market
penetration, geographic business expansion, customer satisfaction,
employee satisfaction, human resources management, supervision of
litigation, information technology, and goals relating to acquisitions,
divestitures, joint ventures and similar transactions, and budget
comparisons; (xviii) personal professional objectives, including any of
the foregoing performance goals, the implementation of policies and
plans, the negotiation of transactions, the development of long term
business goals, formation of joint ventures, research or development
collaborations, and the completion of other corporate transactions; and
(xix) any combination of, or a specified increase in, any of the
foregoing. Where applicable, the Performance Goals may be expressed in
terms of attaining a specified level of the particular criteria or the
attainment of a percentage increase or decrease in the particular
criteria, and may be applied to one or more of the Company, a
Subsidiary, or a division or strategic business unit of the Company, or
may be applied to the performance of the Company relative to a market
index, a group of other companies or a combination thereof, all as
determined by the Committee. The Performance Goals may include a
threshold level of performance below which no payment will be made (or
no vesting will occur), levels of performance at which specified
payments will be made (or specified vesting will occur), and a maximum
level of performance above which no additional payment will be made (or
at which full vesting will occur). Each of the foregoing Performance
Goals shall be determined in accordance with generally accepted
accounting principles and shall be subject to certification by the
Committee; provided that the Committee shall have the authority to make
equitable adjustments to the Performance Goals in recognition of
unusual or non-recurring events affecting the Company or any Subsidiary
or the financial statements of the Company or any Subsidiary, in
response to changes in applicable laws or regulations, or to account
for items of gain, loss or expense determined to be extraordinary or
unusual in nature or infrequent in occurrence or related to the
disposal of a segment of a business or related to a change in
accounting principles;
"Performance Share Unit" means any right granted under Section 7.1 of
the Plan;
"Permitted Assign" has the meaning assigned to that term in NI 45-106;
"Person" includes an individual, sole proprietorship, partnership,
unincorporated association, unincorporated syndicate, unincorporated
organization, trust, body corporate, and a natural person in his or her
capacity as trustee, executor, administrator or other legal
representative;
"Plan" means this Mitel Networks Corporation 2006 Equity Incentive
Plan;
"Restricted Share Unit" or "RSU" means a right to receive a Common
Share granted, as determined by the Committee, under Section 6.1 of
this Plan;
"Retirement" means retirement from active employment with the Company
or a Subsidiary in accordance with the policies of the Company in place
from time to time or, with the consent for purposes of the Plan of such
officer of the Company as may be designated by the Committee, at or
after such earlier age and upon the completion of such years of service
as the Committee may specify;
"Securities Act" means the United States Securities Act of 1933, as
amended from time to time;
"Security Based Compensation Arrangement" has the meaning given to that
term in the TSX Rules;
"Termination Date" means, in the case of a Participant or Director
Participant whose employment or term of office or engagement with the
Company or an Affiliate terminates:
(i) by reason of the Participant's or Director Participant's
death, the date of death;
- 26 -
(ii) for any reason whatsoever other than death, the later of:
(A) in the case of a Participant, the last day of the
minimum statutory notice period, if any, to which
that Participant is entitled upon such termination
pursuant to applicable employment and/or labour
standards legislation; and,
(B) the date designated by the Company or the
Affiliate, as the case may be, as the last day of the
Participant's or Director Participant's employment or
term of office or engagement with the Company or the
Affiliate, as the case may be;
provided that in the case of termination by reason of
voluntary resignation by the Participant or Director
Participant, such date shall not be earlier than the
date that notice of resignation was received from
such Participant or Director Participant;
and "Termination Date" in any such case specifically does not mean the
date on which any period of contractual notice or reasonable notice
that the Company or the Affiliate, as the case may be, may be required
at law to provide to a Participant would expire;
"TSX Rules" means Part VI of the Company Manual of the Toronto Stock
Exchange, as amended from time to time; and
"U.S. Taxpayer" shall mean a Participant or Director Participant who is
a U.S. citizen, U.S. permanent resident or U.S. tax resident for
purpose of the Code.
2.2 Interpretation
(a) Whenever the Board or, where applicable, the Committee is to
exercise discretion in the administration of this Plan, the term
"discretion" means the sole and absolute discretion of the Board
or the Committee, as the case may be.
(b) As used herein, the terms "Article", "Section", "Subsection" and
"clause" mean and refer to the specified Article, Section,
Subsection and clause of this Plan, respectively.
(c) Words importing the singular include the plural and vice versa and
words importing any gender include any other gender.
(d) Whenever any payment is to be made or action is to be taken on a
day which is not a Business Day, such payment shall be made or
such action shall be taken on the next following Business Day.
(e) In this Plan, a Person is considered to be a "Subsidiary" of
another Person if:
(i) it is controlled by,
(A) that other, or
(B) that other and one or more Persons, each of which
is controlled by that other, or
(C) two or more Persons, each of which is controlled
by that other; or
(ii) it is a Subsidiary of a Person that is that other's
Subsidiary.
(f) In this Plan, a Person is considered to be "controlled" by a
Person if:
- 27 -
(i) in the case of a Person,
(A) voting securities of the first-mentioned Person
carrying more than 50% of the votes for the election
of directors are held, directly or indirectly,
otherwise than by way of security only, by or for the
benefit of the other Person; and
(B) the votes carried by the securities are entitled, if
exercised, to elect a majority of the directors of
the first-mentioned Person;
(ii) in the case of a partnership that does not have
directors, other than a limited partnership, the
second-mentioned Person holds more than 50% of the
interests in the partnership; or
(iii) in the case of a limited partnership, the general
partner is the second-mentioned Person.
(g) Unless otherwise specified, all references to money amounts are to
Canadian currency.
ARTICLE 3
ADMINISTRATION
3.1 Administration
Subject to Section 3.2, this Plan will be administered by the Board and the
Board has sole and complete authority, in its discretion, to:
(a) determine the individuals to whom grants under the Plan may be
made;
(b) make grants of Awards under the Plan relating to the issuance of
Common Shares (including any combination of Options, Deferred
Share Units, Restricted Share Units, Performance Share Units or
Other Share-Based Awards) in such amounts, to such Persons and,
subject to the provisions of this Plan, on such terms and
conditions as it determines including without limitation:
(i) the time or times at which Awards may be granted;
(ii) the conditions under which:
(A) Awards may be granted to Participants or Director
Participants; or
(B) other Awards may be forfeited to the Company,
including any conditions relating to the attainment of
specified Performance Goals;
(iii) the Exercise Price, and/or price to be paid by a
Participant or Director Participant in connection with
the granting of Awards;
(iv) the time or times when each Option becomes exercisable
and, subject to Section 4.3, the duration of the
Exercise Period;
(v) whether restrictions or limitations are to be imposed on
the Common Shares issuable pursuant to grants of Awards,
and the nature of such restrictions or limitations, if
any; and
(vi) any acceleration of exercisability or vesting, or waiver
of termination regarding any Award, based on such
factors as the Board may determine;
(c) interpret this Plan and adopt, amend and rescind administrative
guidelines and other rules and regulations relating to this Plan;
and
- 28 -
(d) make all other determinations and take all other actions necessary
or advisable for the implementation and administration of this
Plan.
The Board's determinations and actions within its authority under this Plan are
conclusive and binding on the Company and all other persons. The day-to-day
administration of the Plan may be delegated to such officers and employees of
the Company or of a Subsidiary as the Board determines.
3.2 Delegation to Committee
To the extent permitted by applicable law and the Company's articles, the Board
may, from time to time, delegate to a committee (the "Committee") of the Board
all or any of the powers conferred on the Board under the Plan. In connection
with such delegation, the Committee will exercise the powers delegated to it by
the Board in the manner and on the terms authorized by the Board. Any decision
made or action taken by the Committee arising out of or in connection with the
administration or interpretation of this Plan in this context is final and
conclusive. Notwithstanding any such delegation or any reference to the
Committee in this Plan, the Board may also take any action and exercise any
powers that the Committee is authorized to take or has power to exercise under
this Plan. To the extent applicable in respect of certain Awards granted to a
Participant who is a Covered Employee, such Committee shall be composed of not
less than two directors of the Company, neither of whom shall be employees of
the Company or its Affiliates and each of whom shall otherwise be "outside
directors" for the purposes of Section 162(m) of the Code. To the extent the
Company is no longer a "foreign private issuer" as defined in Exchange Act Rule
3b-4 and wishes to have a "Qualified Plan" as defined in Rule 16b-3(b)(4), such
Committee shall be composed of not less than two directors of the Company, each
of whom are "non-employee directors" for purposes of Section 16 of the Exchange
Act and Rule 16b-3 thereunder.
3.3 Eligibility
All Participants and Director Participants are eligible to participate in the
Plan, subject to subsections 9.1(e) and 9.2(g). Eligibility to participate does
not confer upon any Participant or Director Participant any right to receive any
grant of an Award pursuant to the Plan. The extent to which any Participant or
Director Participant is entitled to receive a grant of an Award pursuant to the
Plan will be determined in the sole and absolute discretion of the Committee,
provided however that the following restrictions shall also apply to this Plan,
together with all other Security Based Compensation Arrangements of the Company:
(a) the number of Common Shares issuable to Insiders, at any time,
under all Security Based Compensation Arrangements, shall not
exceed 10% of issued and outstanding Common Shares;
(b) the number of Common Shares issued to Insiders, within any one
year period, under all Security Based Compensation Arrangements,
shall not exceed 10% of issued and outstanding Common Shares; and
(c) no Awards shall be granted under this Plan to Dr. Terence H.
Matthews or any of his Associates.
If the Company repurchases Common Shares for cancellation such that the tests in
Section 3.3(a) or (b) are not met following such repurchase, this shall not
constitute non-compliance under the Plan for any Awards then outstanding.
3.4 Total Common Shares Available
(a) The aggregate number of Common Shares that may be issued for all
purposes pursuant to the Plan and all other Security Based
Compensation Arrangements must not exceed 12% of the total number
of Common Shares issued and outstanding from time to time. No
grant may be made under the Plan if such grant would result in the
issuance of Common Shares in excess of the above-noted limit.
Subject to applicable law, the requirements of any stock exchange
upon which the Common Shares may then be listed and any
shareholder or other approval which may be required, the Board may
in its discretion amend the Plan to increase such limit without
notice to any Participants. If the Company repurchases Common
Shares for cancellation such that the 12%
- 29 -
limit is exceeded following such repurchase, this shall not
constitute non-compliance under the Plan for any Awards then
outstanding.
(b) For purposes of computing the total number of Common Shares
available for grant under the Plan, Common Shares subject to any
Award (or any portion thereof) that has expired or is forfeited,
surrendered, cancelled or otherwise terminated prior to the
issuance or transfer of such Common Shares and Common Shares
subject to an Award (or portion thereof) that is settled in cash
in lieu of settlement in Common Shares shall again be available
for grant under the Plan.
3.5 Award Agreements
All grants of Awards under this Plan will be evidenced by Award Agreements.
Award Agreements will be subject to the applicable provisions of this Plan and
will contain such provisions as are required by this Plan and any other
provisions that the Committee may direct. Any one officer of the Company is
authorized and empowered to execute and deliver, for and on behalf of the
Company, an Award Agreement to each Participant or Director Participant granted
an Award pursuant to this Plan.
3.6 Conditions of Grant
Each Participant or Director Participant will, when requested by the Company,
sign and deliver all such documents relating to the granting of Awards or
exercise of Options which the Company deems necessary or desirable.
3.7 Non-transferability of Awards
Subject to Section 9.1, Awards granted under this Plan may only be exercised
during the lifetime of the Participant or Director Participant by such
Participant or Director Participant personally. No assignment or transfer of
Awards, whether voluntary, involuntary, by operation of law or otherwise, vests
any interest or right in such Awards whatsoever in any assignee or transferee
(except that a Participant or Director Participant may transfer Awards to
Permitted Assigns) and immediately upon any assignment or transfer, or any
attempt to make the same, such Awards will terminate and be of no further force
or effect. If any Participant or Director Participant has transferred Awards to
a corporation pursuant to this Section 3.7, such Awards will terminate and be of
no further force or effect if at any time the transferor should cease to own all
of the issued shares of such corporation.
ARTICLE 4
GRANT OF OPTIONS
4.1 Grant of Options
The Committee may, from time to time, subject to the provisions of this Plan and
such other terms and conditions as the Committee may prescribe, grant Options to
any Participant or any Director Participant, provided that the number of Common
Shares issuable to Director Participants shall not exceed the limits set out in
Schedule C.
4.2 Exercise Price
The Exercise Price will be as determined by the Committee but in any event will
be no less than the Fair Market Value on the Date of Grant.
4.3 Term of Options
Subject to any accelerated termination as permitted by the Committee or as
otherwise set forth in this Plan, each Option, unless otherwise specified by the
Committee, expires on the fifth (5th) anniversary of the Date of Grant (provided
that if such expiry would otherwise be during or immediately after a Black Out
Period, then the expiry shall be extended until ten (10) Business Days following
the expiration of the Black Out Period); provided that in no event will the
Exercise Period of an Option exceed ten (10) years from its Date of Grant.
- 30 -
The Committee shall have the authority to condition the grant or vesting of
Options upon the attainment of specified Performance Goals, or such other
factors (which may vary as between Options) as the Committee may determine in
its sole discretion.
4.4 Exercise of Options
Unless otherwise specified by the Committee at the time of granting an Option
and except as otherwise provided in this Plan, each Option will vest and be
exercisable as follows:
Percentage of Total
Number of Common Shares
that may be Purchased Exercisable At Any Time
------------------------ -----------------------
First 25% From the first anniversary of the Date of Grant
Second 25% From the second anniversary of the Date of Grant
Third 25% From the third anniversary of the Date of Grant
Last 25% From the fourth anniversary of the Date of Grant
Once an instalment vests and becomes exercisable, it remains exercisable until
expiration or termination of the Option, unless otherwise specified by the
Committee in connection with the grant of such Option or otherwise as specified
herein. Each Option may be exercised at any time or from time to time, in whole
or in part, for up to the total number of Common Shares with respect to which it
is then exercisable. The Committee has the right to accelerate the date upon
which any instalment of any Option becomes exercisable.
Subject to the provisions of this Plan and any Award Agreement, Options shall be
exercised by means of a fully completed Exercise Notice delivered to the
Company.
4.5 Payment of Exercise Price
The Exercise Notice must be accompanied by payment in full of the Exercise Price
in respect of the Common Shares to be purchased. The Exercise Price must be
fully paid by cash, certified cheque, bank draft or money order payable to the
Company. No Common Shares will be issued or transferred until full payment
therefor has been received by the Company. As soon as practicable after receipt
of any Exercise Notice and full payment of the Exercise Price, the Company will
deliver to the Participant or Director Participant, as the case may be, a
certificate or certificates representing the acquired Common Shares.
4.6 Incentive Stock Options
The following provisions will apply only to Incentive Stock Options granted
under the Plan:
(a) No Incentive Stock Option may be granted to any Employee
Participant who, at the time such Option is granted, (i) is not an
employee of the Company or a Subsidiary or (ii) owns securities
possessing more than ten percent (10%) of the total combined
voting power of all classes of securities of the Company or of any
Subsidiary, except that with respect to provision (ii) hereof such
an Option may be granted to such an Employee if, at the time the
Option is granted, the exercise price is at least one hundred ten
percent (110%) of the Fair Market Value of the Common Shares
subject to the Option, and the Option by its terms is not
exercisable after the expiration of five (5) years from the date
the Option is granted; and
(b) To the extent that the aggregate Fair Market Value of the Common
Shares with respect to which Incentive Stock Options (without
regard to this subsection) are exercisable for the first time by
any individual during any calendar year (under all plans of the
Company and its Affiliates) exceeds U.S. $100,000, such Options
will be treated as Non Qualified Stock Options. This subsection
will be applied by taking Options into account in the order in
which they were granted. If some but not
- 31 -
all Options granted on any one day are subject to this subsection,
then such Options will be apportioned between Incentive Stock
Option and Non Qualified Stock Option treatment in such manner as
the Committee will determine. The maximum number of Common Shares
that may be issued under Incentive Stock Options granted under the
Plan shall be equal to the number of Common Shares issued and
outstanding as of the effective date of the Plan.
4.7 Special Rule Applicable to U.S. Taxpayers
With respect to Options granted to Participants or Director Participants who are
U.S. Taxpayers, Common Shares shall constitute "stock of the service recipient"
within the meaning of Section 409A of the Code if such Participant or Director
Participant performs services for any Affiliate that is at least fifty percent
owned by the Company.
ARTICLE 5
GRANT OF DEFERRED SHARE UNITS
5.1 Number of Deferred Share Units
The Committee may, from time to time, subject to the provisions of this Plan and
such other terms and conditions as the Committee may prescribe, grant Deferred
Share Units to any Participant or Director Participant, provided that the number
of Deferred Share Units granted to Director Participants shall not exceed the
limits set out in Schedule C.
All Deferred Share Units received by a Participant or Director Participant shall
be credited to an account maintained for the Participant or the Director
Participant on the books of the Company, as of the Date of Grant. The award of
Deferred Share Units for a calendar year to a Participant or Director
Participant shall be evidenced by an Award Agreement.
5.2 Distribution of Deferred Share Units
A Participant or Director Participant shall receive, on the Distribution Date, a
lump sum payment in cash equal to the number of Deferred Share Units recorded in
the Participant's or Director Participant's account on the Distribution Date
multiplied by the Fair Market Value, less any applicable withholding taxes. At
the option of the Committee, the Company may settle the Deferred Share Units in
Common Shares. Upon payment in full of the value of the Deferred Share Units,
whether in cash or in Common Shares, the Deferred Share Units shall be
cancelled.
5.3 Death of Participant Prior to Distribution
Upon the death of a Participant or Director Participant prior to the
distribution of the Deferred Share Units credited to the account of such
Participant or Director Participant under the Plan, a cash payment shall be made
to the estate of such Participant on or about the thirtieth (30th) day after the
Company is notified of the death of the Participant or Director Participant or
on a later date elected by the Participant's or Director Participant's estate,
in the form prescribed for such purposes by the Company and delivered to the
Corporate Secretary no later than twenty (20) days after the Company is notified
of the death of the Participant or Director Participant, provided that such date
is no later than the last business day of the calendar year following the
calendar year in which the Participant or Director Participant dies. Such cash
payment shall be equivalent to the amount which would have been paid to the
Participant or Director Participant pursuant to and subject to Section 5.2,
calculated on the basis that the day on which the Participant or Director
Participant dies, or the date elected by the estate, as applicable, is the
Distribution Date. Upon payment in full of the value of all of the Deferred
Share Units that become payable under this Section 5.3, the Deferred Share Units
shall be cancelled.
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ARTICLE 6
GRANT OF RESTRICTED SHARE UNITS
6.1 Grant of RSUs
The Committee may, from time to time, subject to the provisions of this Plan and
such other terms and conditions as the Committee may prescribe, grant RSUs to
any Participant or any Director Participant, provided that the number of RSUs
issuable to Director Participants shall not exceed the limits set out in
Schedule C.
6.2 Terms of RSUs
The Committee shall have the authority to condition the grant of RSUs upon the
attainment of specified Performance Goals, or such other factors (which may vary
as between awards of RSUs) as the Committee may determine in its sole
discretion.
6.3 Vesting of RSUs
The Committee shall have the authority to determine at the time of grant, in its
sole discretion, the duration of the vesting period and other vesting terms
applicable to the grant of RSUs, provided that no RSU granted shall vest and be
payable after December 31 of the third calendar year following the year of
service for which the RSU was granted.
6.4 Share Certificates
Unless otherwise specified in the Award Agreement, as soon as practicable
following the expiry of the applicable vesting period, or at such later date as
may be determined by the Committee in its sole discretion, a share certificate
representing the Common Shares issuable pursuant to the RSUs shall be registered
in the name of the Participant or as the Participant may direct, subject to
applicable securities laws.
ARTICLE 7
PERFORMANCE SHARE UNITS
7.1 Grant of Performance Share Units
The Committee may, from time to time, subject to the provisions of this Plan and
such other terms and conditions as the Committee may prescribe, grant
Performance Share Units to any Participant. Each Performance Share Unit will
consist of a right, (i) denominated or payable in cash, Common Shares, other
securities or other property, and (ii) which will confer on the holder thereof
rights valued as determined by the Committee and payable to, or exercisable by,
the holder of the Performance Share Unit, in whole or in part, upon the
achievement of such Performance Goals during such performance periods as the
Committee will establish.
7.2 Value of Performance Share Units
The initial value of a Performance Share Unit will be established by the
Committee at the Date of Grant and, to the extent related to Common Shares,
other securities or other property will initially be equal to 100% of the Fair
Market Value of a Common Share or the fair market value (as determined by the
Board) of such other security or such other property on the Date of Grant.
7.3 Terms of Performance Share Units
Subject to the terms of the Plan and any applicable Award Agreement, the
Performance Goals to be achieved during any performance period, the length of
any performance period, the amount of any Performance Share Unit granted, the
termination of a Participant's employment and the amount of any payment or
transfer to be made pursuant to any Performance Share Unit will be determined by
the Committee and by the other terms and conditions of any Performance Share
Unit.
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7.4 Performance Goals
The Committee will issue Performance Goals prior to the commencement of the
performance period to which such Performance Goals pertain. The Performance
Goals may be based upon the achievement of corporation-wide, divisional or
individual goals, or any other basis determined by the Committee. The Committee
may modify the Performance Goals as necessary to align them with the Company's
corporate objectives if there is a subsequent material change in the Company's
business, operations or capital or corporate structure. Notwithstanding the
foregoing, to the extent deemed desirable by the Committee, in the case of a
Covered Employee, the Performance Goals set forth in Section 2.1 shall apply.
ARTICLE 8
OTHER SHARE-BASED AWARDS
8.1 Other Share-Based Awards
The Committee may, from time to time, subject to the provisions of this Plan and
such other terms and conditions as the Committee may prescribe, grant Other
Share-Based Awards to any Participant. Each Other Share-Based Award will consist
of a right (1) which is other than an Award or right described in Article 4, 5,
6 or 7 above and (2) which is denominated or payable in, valued in whole or in
part by reference to, or otherwise based on or related to, Common Shares
(including, without limitation, securities convertible into Common Shares) as
are deemed by the Committee to be consistent with the purposes of the Plan;
provided, however, that such right will comply with applicable law. Subject to
the terms of the Plan and any applicable Award Agreement, the Committee will
determine the terms and conditions of Other Share-Based Awards. Common Shares or
other securities delivered pursuant to a purchase right granted under this
Section 8.1 will be purchased for such consideration, which may be paid by such
method or methods and in such form or forms, including, without limitation,
cash, Common Shares, other securities, other Awards, other property, or any
combination thereof, as the Committee will determine.
ARTICLE 9
TERMINATION OF EMPLOYMENT
9.1 Retirement, Death or Disability
Subject to Section 5.3, if a Participant or Director Participant dies or becomes
Disabled while an employee, officer or director of or consultant to the Company
or an Affiliate or if the employment or term of office or engagement of a
Participant with the Company or an Affiliate terminates due to Retirement:
1. the executor or administrator of the Participant's or Director
Participant's estate or the Participant or Director Participant,
as the case may be, may exercise Options of the Participant or
Director Participant. The number of Options exercisable shall
equal:
(i) the number of Options that were exercisable at the
Termination Date; plus
(ii) a portion of the next instalment of the Options due to
vest equal to the number of Options next due to vest
multiplied by a fraction the numerator of which is the
number of days elapsed since the date of vesting of the
last instalment of the Options (or if none have vested,
the Date of Grant) to the Termination Date and the
denominator of which is the number of days between the
date of vesting of the last instalment of the Option (or
if none have vested, the Date of Grant) and the date of
vesting of the next instalment of the Option;
2. the right to exercise such Options terminates on the earlier of:
(i) the date that is twelve months after the Termination Date
(except that in the case of Retirement of a U.S. Taxpayer, any
Incentive Stock Option shall expire on the date that is three
months after the
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Termination Date); and (ii) the date on which the Exercise Period
of the particular Option expires. Subject to subsection (a), any
Options held by the Participant or Director Participant that are
not yet exercisable at the Termination Date immediately expire and
are cancelled on the Termination Date;
3. a portion of the next instalment of any other Awards due to vest
shall immediately vest, such portion to equal to the number of
Awards next due to vest multiplied by a fraction the numerator of
which is the number of days elapsed since the date of vesting of
the last instalment of the Awards (or if none have vested, the
Date of Grant) to the Termination Date and the denominator of
which is the number of days between the date of vesting of the
last instalment of the Awards (or if none have vested, the Date of
Grant) and the date of vesting of the next instalment of the
Awards;
4. subject to subsection (c), any other Awards held by the
Participant or Director Participant that are not yet vested at the
Termination Date are immediately forfeited to the Company on the
Termination Date; and
5. such Participant's or Director Participant's eligibility to
receive further grants of Awards under the Plan ceases as of the
Termination Date.
9.2 Termination of Employment or Services
(a) Where a Participant's or Director Participant's employment or term
of office or engagement with the Company or an Affiliate
terminates by reason of the Participant's death, Disability or
Retirement or, in the case of a Director Participant, the Director
Participant's death or Disability, then the provisions of Section
9.1 will apply.
(b) Where a Participant's employment or term of office or engagement
terminates by reason of a Participant's resignation, then any
Options held by the Participant that are exercisable at the
Termination Date continue to be exercisable by the Participant
until the earlier of: (A) the date that is 30 days after the
Termination Date; and (B) the date on which the Exercise Period of
the particular Option expires. Any Options held by the Participant
that are not yet exercisable at the Termination Date immediately
expire and are cancelled on the Termination Date, and any other
Awards held by the Participant that are not yet vested at the
Termination Date are immediately forfeited to the Company on the
Termination Date.
(c) Where a Participant's employment or term of office or engagement
terminates by reason of termination by the Company or an Affiliate
without cause (as determined by the Committee in its sole
discretion) (whether such termination occurs with or without any
or adequate notice or reasonable notice, or with or without any or
adequate compensation in lieu of such notice), then any Options
held by the Participant that are exercisable at the Termination
Date continue to be exercisable by the Participant until the
earlier of: (A) the date that is 90 days after the Termination
Date; and (B) the date on which the Exercise Period of the
particular Option expires. Any Options held by the Participant
that are not yet exercisable at the Termination Date immediately
expire and are cancelled on the Termination Date, and any other
Awards held by the Participant that are not yet vested at the
Termination Date are immediately forfeited to the Company on the
Termination Date.
(d) Where a Participant's employment or term of office or engagement
is terminated by the Company or an Affiliate for cause (as
determined by the Committee in its sole discretion), or, in the
case of a Consultant Participant, for breach of contract (as
determined by the Committee in its sole discretion), then any
Options held by the Participant at the Termination Date (whether
or not exercisable) immediately expire and are cancelled on the
Termination Date, and any other Awards held by the Participant at
the Termination Date (whether or not vested) are immediately
forfeited to the Company on the Termination Date.
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(e) Where a Director Participant's term of office is terminated by the
Company for breach by the Director Participant of his or her
fiduciary duty to the Company (as determined by the Committee in
its sole discretion), then any Options held by the Director
Participant at the Termination Date (whether or not exercisable)
immediately expire and are cancelled on the Termination Date, and
any other Awards held by the Director Participant at the
Termination Date (whether or not vested) are immediately forfeited
to the Company on the Termination Date.
(f) Where a Director Participant's term of office terminates for any
reason other than death or Disability of the Director Participant
or a breach by the Director Participant of his or her fiduciary
duty to the Company (as determined by the Committee in its sole
discretion), the Committee or the Board may, in its sole
discretion, at any time prior to or following the Termination
Date, (A) permit the exercise of any or all Options held by the
Director Participant, whether or not exercisable at the
Termination Date, in the manner and on the terms authorized by the
Board, provided that neither the Committee nor the Board shall, in
any case, authorize the exercise of an Option pursuant to this
Section beyond the date on which the Exercise Period of the
particular Option expires; and (B) provide for the vesting of any
or all other Awards held by a Director Participant on the
Termination Date.
(g) The eligibility of a Participant or Director Participant to
receive further grants under the Plan ceases as of the date that
the Company or an Affiliate, as the case may be, provides the
Participant or Director Participant with written notification that
the Participant's employment or term of office, or the Director
Participant's term of office, as the case may be, is terminated,
notwithstanding that such date may be prior to the Termination
Date.
(h) Unless the Committee, in its sole discretion, otherwise
determines, at any time and from time to time, Awards are not
affected by a change of employment arrangement within or among the
Company or a Subsidiary for so long as the Participant continues
to be an employee of the Company or a Subsidiary, including
without limitation a change in the employment arrangement of a
Participant whereby such Participant becomes a Director
Participant.
9.3 Discretion to Permit Exercise
Notwithstanding the provisions of Sections 9.1 and 9.2, the Committee may, in
its discretion, at any time prior to or following the events contemplated in
such Sections, permit the exercise of any or all Options held by a Participant
or Director Participant or permit the acceleration of vesting of any or all RSUs
or other Awards, all in the manner and on the terms as may be authorized by the
Committee, provided that the Committee will not, in any case, authorize the
exercise of an Option pursuant to this Section beyond the expiration of the
Exercise Period of the particular Option.
9.4 Incentive Stock Options
Notwithstanding anything to the contrary in this Article 9, in the case of an
Incentive Stock Option, any Incentive Stock Options held by a U.S. Taxpayer that
are exercisable at the Termination Date continue to be exercisable by the U.S.
Taxpayer until the earlier of: (A) the date that is three months after the
Termination Date; (B) the date on which the Exercise Period of the particular
Incentive Stock Option expires, or (C) any shorter post-Termination Date
exercise period as is set forth in this Article 9 or in the U.S. Taxpayer's
Award Agreement.
ARTICLE 10
CHANGE IN CONTROL
10.1 Change in Control
(a) Unless otherwise determined by the Committee or the Board at or
after the Date of Grant, any Options outstanding immediately prior
to the occurrence of a Change in Control,
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but which are not then exercisable, shall become fully exercisable
upon the occurrence of a Change in Control. Unless otherwise
determined by the Committee or the Board at or after the Date of
Grant, all outstanding vested Options shall be cashed out at the
Change in Control Price, less the applicable Exercise Price for
such Options, as of the date such Change in Control is determined
to have occurred, or as of such other date as the Committee or the
Board may determine prior to the Change in Control. Outstanding
Options may only be cashed out, as described above, if the Change
in Control Price is higher than the Exercise Price for such
outstanding Options. If the Change in Control Price is equal to or
lower than the Exercise Price for such outstanding Options, the
Committee or the Board may terminate such outstanding Options and
such outstanding Options shall be of no further force or effect
Further, the Committee or the Board shall have the right to
provide for the conversion or exchange of any outstanding Options
into or for options, rights or other securities in any entity
participating in or resulting from the Change in Control. In
addition, and notwithstanding Section 12.7(b), the Committee or
the Board shall have the right to determine, its sole discretion,
that Options outstanding, but which are not then exercisable,
shall not become exercisable and shall be cancelled in the event
of a Change in Control.
(b) Unless otherwise determined by the Committee or the Board at or
after the Date of Grant, any Restricted Share Units, Deferred
Share Units, Performance Share Units or Other Share-Based Awards
outstanding immediately prior to the occurrence of a Change in
Control shall become fully vested upon the occurrence of a Change
in Control. Unless otherwise determined by the Committee or the
Board at or after the Date of Grant, any Restricted Share Unit,
Deferred Share Unit, Performance Share Unit or Other Share-Based
Award outstanding immediately prior to the occurrence of a Change
in Control shall be cashed out at the Change in Control Price as
of the date such Change in Control is deemed to have occurred, or
as of such other date as the Committee or the Board may determine
prior to the Change in Control. Further, the Committee or the
Board shall have the right to provide for the conversion or
exchange of any Restricted Stock Unit, Deferred Stock Unit,
Performance Share Unit or Other Share-Based Award into or for
rights or other securities in any entity participating in or
resulting from the Change in Control. In addition, and
notwithstanding Section 12.7(b), the Committee or the Board shall
have the right to determine, in its sole discretion, that
Restricted Stock Units, Deferred Stock Units, Performance Share
Units or Other Share-Based Awards outstanding shall not become
vested and shall be cancelled and forfeited to the Company in the
event of a Change in Control.
10.2 Parachute Payments
If a Participant or Director Participant is entitled to receive payments that
would qualify as excess "parachute payments" under Section 280G of the Code,
those payments shall be reduced by the necessary amount so that the Participant
or Director Participant is not subject to excise tax under Section 4999 of the
Code if such reduction would result in the Participant or Director Participant
receiving a greater after-tax payment.
ARTICLE 11
SHARE CAPITAL ADJUSTMENTS
11.1 General
The existence of any Awards does not affect in any way the right or power of the
Company or its shareholders to make, authorize or determine any adjustment,
recapitalization, reorganization or any other change in the Company's capital
structure or its business, or any amalgamation, combination, arrangement, merger
or consolidation involving the Company, to create or issue any bonds,
debentures, Common Shares or other securities of the Company or to determine the
rights and conditions attaching thereto, to effect the dissolution or
liquidation of the Company or any sale or transfer of all or any part of its
assets or business, or to effect any other corporate act or proceeding, whether
of a similar character or otherwise, whether or not any such action referred to
in this Section would have an adverse effect on this Plan or on any Award
granted hereunder.
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11.2 Reorganization of Company's Capital
Should the Company effect a subdivision or consolidation of Common Shares or any
similar capital reorganization or a payment of a stock dividend (other than a
stock dividend that is in lieu of a cash dividend), or should any other change
be made in the capitalization of the Company that does not constitute a Change
in Control and that would warrant the amendment or replacement of any existing
Awards in order to adjust: (a) the number of Common Shares that may be acquired
on the vesting of outstanding Awards or the exercise of any outstanding Options;
and/or (b) the Exercise Price of any outstanding Options and/or (c) the terms of
any other Award in order to preserve proportionately the rights and obligations
of the Participants or Director Participants holding such Awards, the Board will
authorize such steps to be taken as it may consider to be equitable and
appropriate to that end.
11.3 Other Events Affecting the Company
In the event of an amalgamation, combination, arrangement, merger or other
transaction or reorganization involving the Company and occurring by exchange of
Common Shares, by sale or lease of assets or otherwise, that does not constitute
a Change in Control and that warrants the amendment or replacement of any
existing Awards in order to adjust: (a) the number of Common Shares that may be
acquired on the vesting of outstanding Awards or the exercise of any outstanding
Options; or (b) the Exercise Price of any outstanding Options and/or (c) the
terms of any other Award in order to preserve proportionately the rights and
obligations of the Participants or Director Participants holding such Awards,
the Board will authorize such steps to be taken as it may consider to be
equitable and appropriate to that end.
11.4 Immediate Exercise of Awards
Where the Board determines that the steps provided in Sections 11.2 and 11.3
would not preserve proportionately the rights, value and obligations of the
Participants or Director Participants holding such Awards in the circumstances
or otherwise determines that it is appropriate:
(a) the Board may permit the immediate exercise of any outstanding
Options that are not otherwise exercisable, and the immediate
vesting of any unvested Awards; and
(b) if the Board takes the step contemplated in (a) above, the Board
may also authorize the Company, to the extent permitted under
applicable laws, to:
(i) purchase any Options from any Participant or Director
Participants for a price equal to the difference between
the Fair Market Value of the underlying Common Shares
and the Exercise Price of the Options; or
(ii) lend to Participants an amount equal to the aggregate
Exercise Price for those Options of the Participant
which have an Exercise Price which is less than the Fair
Market Value of the underlying Common Shares at a rate
of interest equal to the current prime rate plus one
percent provided that the Participant irrevocably:
(A) agrees to exercise all such Options of the
Participant; and
(B) authorizes the Company to sell, dispose of
or deposit in acceptance of an outstanding
take-over bid the Common Shares issuable
upon the exercise of such Options, to deduct
from the proceeds of sale of such Common
Shares an amount equal to the outstanding
balance of the loan plus accrued interest in
payment of such loan, to mail a cheque
payable to the Participant for the balance
of the proceeds of sale and to execute and
deliver on behalf of the Participant all
transfers, consents or other documents
necessary to give effect to the foregoing.
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11.5 Issue by Company of Additional Shares
Except as expressly provided in this Article 11, neither the issue by the
Company of shares of any class or securities convertible into or exchangeable
for shares of any class, nor the conversion or exchange of such shares or
securities, affects, and no adjustment by reason thereof is to be made with
respect to: (a) the number of Common Shares that may be acquired as a result of
a grant of Awards or upon the exercise of any outstanding Options; or (b) the
Exercise Price of any outstanding Options.
11.6 Fractions
No fractional Common Shares will be issued on the exercise of an Option or the
grant of an Award. Accordingly, if, as a result of any adjustment under Section
11.2 or 11.3, a Participant or Director Participant would become entitled to a
fractional Common Share, the Participant or Director Participant has the right
to acquire only the adjusted number of full Common Shares and no payment or
other adjustment will be made with respect to the fractional Common Shares which
shall be disregarded.
ARTICLE 12
MISCELLANEOUS PROVISIONS
12.1 Legal Requirement
The Company is not obligated to grant any Awards, issue any Common Shares or
other securities, make any payments or take any other action if, in the opinion
of the Board, in its sole discretion, such action would constitute a violation
by a Participant, Director Participant or the Company of any provision of any
applicable statutory or regulatory enactment of any government or government
agency or the requirements of any stock exchange upon which the Common Shares
may then be listed.
12.2 Participants' Entitlement
Except as otherwise provided in this Plan, Options (whether or not exercisable)
and other Awards previously granted under this Plan are not affected by any
change in the relationship between, or ownership of, the Company and an
Affiliate. For greater certainty, all grants of Awards remain valid and all
Options remain valid and exercisable in accordance with the terms and conditions
of this Plan and are not affected by reason only that, at any time, an Affiliate
ceases to be an Affiliate.
12.3 Withholding Taxes
The granting or vesting of each Award and exercise of each Option granted under
this Plan is subject to the condition that if at any time the Committee
determines, in its discretion, that the satisfaction of withholding tax or other
withholding liabilities is necessary or desirable in respect of such grant,
vesting or exercise, such exercise is not effective unless such withholding has
been effected to the satisfaction of the Committee. In such circumstances, the
Committee may require that a Participant or Director Participant pay to the
Company, in addition to and in the same manner as the Exercise Price, or as the
Committee may determine, such amount as the Company or an Affiliate is obliged
to remit to the relevant taxing authority in respect of the granting or vesting
of the Award or exercise of the Option. Any such additional payment is due no
later than the date on which any amount with respect to the Award or exercised
Option is required to be remitted to the relevant tax authority by the Company
or an Affiliate, as the case may be.
12.4 Rights of Participant
No Participant or Director Participant has any claim or right to be granted an
Award (including, without limitation, an Option granted in substitution for any
Option that has expired pursuant to the terms of this Plan) and the granting of
any Award is not to be construed as giving a Participant or Director Participant
a right to remain as an employee, consultant or director of the Company or an
Affiliate. No Participant or Director Participant has any rights as a
shareholder of the Company in respect of Common Shares issuable
- 39 -
on the exercise of any Option or issuable pursuant to any other Award until
the allotment and issuance to such Participant or Director Participant of
certificates representing such Common Shares.
12.5 Other Incentive Awards
The Committee shall have the right to grant other incentive awards based upon
Common Shares under this Plan to Participants or Director Participants in
accordance with applicable laws and regulations and subject to regulatory
approval, including without limitation the approval of the Toronto Stock
Exchange, having such terms and conditions as the Committee may determine,
including without limitation the grant of Common Shares based upon certain
conditions and the grant of securities convertible into Common Shares.
12.6 Termination
The Plan will terminate on the earliest of: (i) the date upon which no further
Common Shares remain available for issuance under the Plan and no Options or
other Awards remain outstanding; and (ii) the acceleration of the vesting of
Options and other Awards pursuant to Section 10.1 upon the occurrence of a
Change in Control, unless renewed for such further period and upon such terms
and conditions as the Committee may determine, but in all events the Plan will
automatically terminate on the tenth anniversary of the effective date of the
Plan.
12.7 Amendment
(a) Subject to the rules and policies of any stock exchange on which
the Common Shares are listed and applicable law, the Board may,
without notice or shareholder approval, at any time or from time
to time, amend the Plan for the purposes of:
(i) making any amendments to the general vesting provisions
of each Option, RSU or other Award;
(ii) making any amendments to the general term of each Option
provided that no Option held by an Insider may be
extended beyond its original expiry date and no Option
may be exercised after the tenth (10th) anniversary of
the Date of Grant;
(iii) making any amendments to the provisions set out in
Article 9;
(iv) making any amendments to add covenants of the Company
for the protection of Participants or Director
Participants, as the case may be, provided that the
Board shall be of the good faith opinion that such
additions will not be prejudicial to the rights or
interests of the Participants or Director Participants,
as the case may be;
(v) making any amendments not inconsistent with the Plan as
may be necessary or desirable with respect to matters or
questions which, in the good faith opinion of the Board,
having in mind the best interests of the Participants
and Director Participants, it may be expedient to make,
including amendments that are desirable as a result of
changes in law in any jurisdiction where a Participant
or Director Participant resides, provided that the Board
shall be of the opinion that such amendments and
modifications will not be prejudicial to the interests
of the Participants and Director Participants; or
(vi) making such changes or corrections which, on the advice
of counsel to the Company, are required for the purpose
of curing or correcting any ambiguity or defect or
inconsistent provision or clerical omission or mistake
or manifest error, provided that the Board shall be of
the opinion that such changes or corrections will not be
prejudicial to the rights and interests of the
Participants or Director Participants.
- 40 -
(b) Subject to Section 10.1, the Board shall not alter or impair any
rights or increase any obligations with respect to an Award
previously granted under the Plan without the consent of the
Participant or Director Participant, as the case may be.
(c) Notwithstanding any other provision of this Plan, none of the
following amendments shall be made to this Plan without approval
of the Toronto Stock Exchange (to the extent the Company has any
securities listed on such exchange) and the approval of
shareholders:
(i) amendments to the Plan which would increase the number
of Common Shares issuable under the Plan, otherwise than
in accordance with the terms of this Plan;
(ii) amendments to the Plan which would increase the number
of Common Shares issuable to Insiders, otherwise than in
accordance with the terms of this Plan;
(iii) amendments to the Plan which would increase the number
of Common Shares issuable to Director Participants under
the Plan, otherwise than in accordance with the terms of
this Plan;
(iv) amendments that would extend the Exercise Period of any
Options held by Insiders beyond the Exercise Period
otherwise determined in accordance with this Plan;
(v) amendments that would reduce the Exercise Price of any
Options held by Insiders, otherwise than in accordance
with the terms of this Plan; and
(vi) the addition of any form of financial assistance to a
Participant or Director Participant.
Any amendment that would cause an Award held by a U.S. Taxpayer to fail to
comply with Section 409A of the Code shall be null and void ab initio.
12.8 Section 409A of the Code
This Plan will be construed and interpreted to comply with Section 409A of the
Code to the extent required to preserve the intended tax consequences of this
Plan. The Company reserves the right to amend this Plan to the extent it
reasonably determines is necessary in order to preserve the intended tax
consequences of this Plan in light of Section 409A of the Code and any
regulations or guidance under that section. In no event will the Company be
responsible if Awards under this Plan result in adverse tax consequences to a
U.S. Taxpayer under Section 409A of the Code. Notwithstanding any provisions of
the Plan to the contrary, in the case of any "specified employee" within the
meaning of Section 409A of the Code who is a U.S. Taxpayer, distributions of
defined compensation under Section 409A of the Code made in connection with a
"separation from service" within the meaning set forth in Section 409A of the
Code may not be made prior to the date which is 6 months after the date of
separation from service (or, if earlier, the date of death of the U.S.
Taxpayer). Any amounts subject to a delay in payment pursuant to the preceding
sentence shall be paid as soon practicable following such 6-month anniversary of
such separation from service.
12.9 Requirement of Notification of Election Under Section 83(b) of the Code
If a Participant or Director Participant, in connection with the acquisition of
Common Shares under the Plan, is permitted under the terms of the Award
Agreement to make the election permitted under Section 83(b) of the Code (i.e.,
an election to include in gross income in the year of transfer the amounts
specified in Section 83(b) of the Code notwithstanding the continuing transfer
restrictions) and the Participant or Director Participant makes such an
election, the Participant or Director Participant shall notify the Company of
such election within ten (10) days of filing notice of the election with the
Internal Revenue Service, in addition to any filing and notification required
pursuant to regulations issued under Section 83(b) of the Code.
- 41 -
12.10 Requirement of Notification Upon Disqualifying Disposition Under
Section 421(b) of the Code
If any Participant shall make any disposition of Common Shares issued pursuant
to the exercise of an Incentive Stock Option under the circumstances described
in Section 421(b) of the Code (relating to certain disqualifying dispositions),
such Participant shall notify the Company of such disposition within ten (10)
days thereof.
12.11 Indemnification
Every member of the Board will at all times be indemnified and saved harmless by
the Company from and against all costs, charges and expenses whatsoever
including any income tax liability arising from any such indemnification, that
such member may sustain or incur by reason of any action, suit or proceeding,
taken or threatened against the member, otherwise than by the Company, for or in
respect of any act done or omitted by the member in respect of this Plan, such
costs, charges and expenses to include any amount paid to settle such action,
suit or proceeding or in satisfaction of any judgment rendered therein.
12.12 Participation in the Plan
The participation of any Participant or Director Participant in the Plan is
entirely voluntary and not obligatory and shall not be interpreted as conferring
upon such Participant or Director Participant any rights or privileges other
than those rights and privileges expressly provided in the Plan. In particular,
participation in the Plan does not constitute a condition of employment or
engagement nor a commitment on the part of the Company to ensure the continued
employment or engagement of such Participant or Director Participant. The Plan
does not provide any guarantee against any loss which may result from
fluctuations in the market value of the Common Shares. The Company does not
assume responsibility for the income or other tax consequences for the
Participants and Director Participants and they are advised to consult with
their own tax advisors.
12.13 Optionee to bear cost of Employer's NICs on Option Gains
The Optionee agrees with the Company and undertakes to any other company which
is a "secondary contributor" in respect of Employer's NICs payable in respect of
any Option Gain (the "Secondary Contributor") that:
(a) the Secondary Contributor may recover from the Optionee the whole
of any Employer's NIC; and
(b) the Optionee shall join with the Secondary Contributor in making
an election (in such terms and such form and subject to such
approval by the Inland Revenue as provided in paragraphs 3A and 3B
of Schedule 1 to the Social Security Contributions and Benefits
Act 1992) for the whole of any liability of the Secondary
Contributor to Employer's NICs to be transferred to the Optionee.
12.14 Optionee's tax indemnity and recovery of Employer's NICs
(a) The Optionee shall indemnify the Optionee's Employer against any
Option Tax Liability.
(b) On any occasion on which an Option is exercised after an election
has been made as mentioned in Section 12.13(b) of this Plan, the
Optionee shall ensure that any Employer's NICs are paid to the
Optionee's Employer in time to enable the Optionee's Employer to
remit such Employer's NICs to the UK Inland Revenue before the
fourteenth day following the end of the PAYE month in which the
Option is exercised.
(c) The Company shall not be obliged to procure the transfer of Option
Shares or to allot and issue any Option Shares or any interest in
Option Shares pursuant to this Plan unless and until the Optionee
has paid to the Optionee's Employer such sum as is, in the opinion
of the Optionee's Employer, sufficient to indemnify the Optionee's
Employer in full against any Option Tax Liability or the Optionee
has made such other arrangement as, in the opinion of the
Optionee's Employer, will ensure that the full amount of any
Option Tax Liability will be recovered from the Optionee within
such period as the Optionee's Employer may determine.
- 42 -
(d) The Company shall have the right not to procure the transfer of
Option Shares or not to allot and issue to or to the order of the
Optionee the aggregate number of Option Shares to which the
Optionee would otherwise be entitled but to retain out of such
aggregate number of Option Shares such number of Option Shares as,
in the opinion of the Company, will enable the Company to sell as
agent for the Optionee (at the best price which can reasonably be
expected to be obtained at the time of sale) and to pay over to
the Optionee's Employer sufficient monies out of the net proceeds
of sale, after deduction of all fees, commissions and expenses
incurred in relation to such sale, to satisfy the Optionee's
liability under such indemnity.
12.15 International Participants
With respect to Participants or Director Participants who reside or work outside
Canada and the United States, the Board may, in its sole discretion, amend, or
otherwise modify, without shareholder approval, the terms of the Plan or Awards
with respect to such Participants or Director Participants in order to conform
such terms with the provisions of local law, and the Committee may, where
appropriate, establish one or more sub-plans to reflect such amended or
otherwise modified provisions.
12.16 Effective Date
This Plan becomes effective on a date to be determined by the Board.
12.17 Governing Law
This Plan is created under and is to be governed, construed and administered in
accordance with the laws of the Province of Ontario and the laws of Canada
applicable therein.
SCHEDULE A
Form of Award Agreement
Mitel Networks Corporation (the "Company") hereby grants the following Award(s)
to the Participant or Director Participant named below (the "Participant"), in
accordance with and subject to the terms, conditions and restrictions of this
Agreement, together with the provisions of the 2006 Equity Incentive Plan (the
"Plan") of the Company dated o, 2006:
Name of Participant or Director Participant:
----------------------------
Date of Grant:
--------------------------------------------------------
Total Number of Common Shares Subject to Option:
----------------------
Total Number of RSUs:
-------------------------------------------------
Total Number of Deferred Share Units:
---------------------------------
Total Number of Performance Share Units:
------------------------------
Total Number and type of Other Share-Based Awards:
--------------------
Additional terms applicable to such Award:
H. THE TERMS AND CONDITIONS OF THE PLAN ARE HEREBY INCORPORATED BY
REFERENCE AS TERMS AND CONDITIONS OF THIS AWARD AGREEMENT AND ALL
CAPITALIZED TERMS USED HEREIN, UNLESS EXPRESSLY DEFINED IN A DIFFERENT
MANNER, HAVE THE MEANINGS ASCRIBED THERETO IN THE PLAN.
I. SUBJECT TO ANY ACCELERATION IN VESTING AS PROVIDED IN THE PLAN OR AS
OTHERWISE DETERMINED IN THIS AWARD AGREEMENT, EACH OPTION IS
EXERCISABLE IN THE INSTALMENTS SET FORTH IN SECTION 4.4 OF THE PLAN AND
EACH RSU VESTS AS TO ONE-THIRD EFFECTIVE ON THE BUSINESS DAY PRIOR TO
EACH OF THE FIRST, SECOND AND THIRD ANNIVERSARIES OF THE DATE OF GRANT.
J. IN NO EVENT IS THE OPTION GRANTED HEREUNDER EXERCISABLE AFTER THE
EXPIRATION OF THE RELEVANT EXERCISE PERIOD.
K. NO FRACTIONAL COMMON SHARES WILL BE ISSUED PURSUANT TO AN AWARD GRANTED
HEREUNDER. IF, AS A RESULT OF ANY ADJUSTMENT TO THE NUMBER OF COMMON
SHARES ISSUABLE PURSUANT TO AN AWARD GRANTED HEREUNDER PURSUANT TO THE
PLAN, THE PARTICIPANT WOULD BE ENTITLED TO RECEIVE A FRACTIONAL COMMON
SHARE, THE PARTICIPANT HAS THE RIGHT TO ACQUIRE ONLY THE ADJUSTED
NUMBER OF FULL COMMON SHARES AND NO PAYMENT OR OTHER ADJUSTMENT WILL BE
MADE WITH RESPECT TO THE FRACTIONAL COMMON SHARES SO DISREGARDED.
L. NOTHING IN THE PLAN OR IN THIS AWARD AGREEMENT WILL AFFECT THE
COMPANY'S RIGHT, OR THAT OF AN AFFILIATE, TO TERMINATE THE EMPLOYMENT
OR TERM OF OFFICE OR ENGAGEMENT OF A PARTICIPANT AT ANY TIME FOR ANY
REASON WHATSOEVER. UPON SUCH TERMINATION, A PARTICIPANT'S RIGHTS TO
EXERCISE OPTIONS WILL BE SUBJECT TO RESTRICTIONS AND TIME LIMITS,
COMPLETE DETAILS OF WHICH ARE SET OUT IN THE PLAN.
A - 2
M. EACH NOTICE RELATING TO THE AWARD, INCLUDING THE EXERCISE OF ANY OPTION
MUST BE IN WRITING. ALL NOTICES TO THE COMPANY MUST BE DELIVERED
PERSONALLY OR BY PREPAID REGISTERED MAIL AND MUST BE ADDRESSED TO THE
CHIEF FINANCIAL OFFICER OF THE COMPANY WITH A COPY TO THE ASSISTANT
SECRETARY OF THE COMPANY. ALL NOTICES TO THE PARTICIPANT WILL BE
ADDRESSED TO THE PRINCIPAL ADDRESS OF THE PARTICIPANT ON FILE WITH THE
COMPANY. EITHER THE COMPANY OR THE PARTICIPANT MAY DESIGNATE A
DIFFERENT ADDRESS BY WRITTEN NOTICE TO THE OTHER. SUCH NOTICES ARE
DEEMED TO BE RECEIVED, IF DELIVERED PERSONALLY, ON THE DATE OF
DELIVERY, AND IF SENT BY PREPAID, REGISTERED MAIL, ON THE FIFTH
BUSINESS DAY FOLLOWING THE DATE OF MAILING. ANY NOTICE GIVEN BY EITHER
THE PARTICIPANT OR THE COMPANY IS NOT BINDING ON THE RECIPIENT THEREOF
UNTIL RECEIVED.
N. SUBJECT TO SECTION 9.1 OF THE PLAN, ANY OPTION GRANTED PURSUANT TO THIS
AWARD AGREEMENT MAY ONLY BE EXERCISED DURING THE LIFETIME OF THE
PARTICIPANT BY THE PARTICIPANT PERSONALLY AND NO ASSIGNMENT OR TRANSFER
OF AN AWARD, WHETHER VOLUNTARY, INVOLUNTARY, BY OPERATION OF LAW OR
OTHERWISE, VESTS ANY INTEREST OR RIGHT IN SUCH AWARD WHATSOEVER IN ANY
ASSIGNEE OR TRANSFEREE, AND IMMEDIATELY UPON ANY ASSIGNMENT OR TRANSFER
OR ANY ATTEMPT TO MAKE SUCH ASSIGNMENT OR TRANSFER, THE AWARD GRANTED
HEREUNDER TERMINATES AND IS OF NO FURTHER FORCE OR EFFECT. COMPLETE
DETAILS OF THIS RESTRICTION ARE SET OUT IN THE PLAN.
O. THE PARTICIPANT HEREBY AGREES THAT:
1. any rule, regulation or determination, including the
interpretation by the Board of the Plan, the Award granted
hereunder and, if applicable, its exercise, is final and
conclusive for all purposes and binding on all persons including
the Company and the Participant; and
2. the grant of the Award does not affect in any way the right of the
Company or any Affiliate to terminate the employment of the
Participant.
P. THIS AWARD AGREEMENT HAS BEEN MADE IN AND IS TO BE CONSTRUED UNDER AND
IN ACCORDANCE WITH THE LAWS OF THE PROVINCE OF ONTARIO AND THE LAWS OF
CANADA APPLICABLE THEREIN.
MITEL NETWORKS CORPORATION
By:
-----------------------------
Authorized Signatory
A - 3
I have read the foregoing Award Agreement and hereby accept the Award in
accordance with and subject to the terms and conditions of such Award Agreement
and the Plan. I understand that I may review the complete text of the Plan by
contacting the Assistant Secretary of the Company. I agree to be bound by the
terms and conditions of the Plan governing the Award.
--------------------------- ---------------------------------------------------
Date Accepted Participant's Signature
---------------------------------------------------
Participant's Name
(Please Print)
SCHEDULE B
2006 Equity Incentive Plan Exercise Notice Form - Options
Pursuant to the terms of the Award Agreement dated ______________ between
Mitel Networks Corporation (the "Company") and me, I hereby exercise my
options to purchase ______________ Common Shares of the Company (the
"Options"), at the Exercise Price (as defined in the Award Agreement) of
$_______ Cdn. per share. Enclosed herewith is a cheque in the amount of
$__________ Cdn. payable to the Company in full payment of the purchase price
for such shares.
Please cause any Common Shares purchased hereby to be issued in _________
certificate(s) of Common Shares each, registered as follows:
Name:
-----------------------------------------------------
Address:
-----------------------------------------------------
I understand that the certificate(s) for any Common Shares issuable to me
pursuant to this Notice will be forwarded to me by the Company's Transfer Agent
by registered mail.
------------------------ ---------------------------------------------------
Date Participant's Signature
SCHEDULE C
---------------------------------------- -------------------------------------- --------------------------------------
Reason for Grant Date of Grant Award Grant
---------------------------------------- -------------------------------------- --------------------------------------
Initial Grant upon joining Board of Date of Appointment to Board of Options to acquire 30,000 Common
Directors Directors Shares, or 15,000 DSUs or RSUs
(or a combination thereof)
---------------------------------------- -------------------------------------- --------------------------------------
Annual Service on Board of Directors Date of each annual meeting of Options to acquire 15,000 Common
shareholders at which the Director Shares, or 7,500 DSUs or RSUs (or a
Participant is elected to the Board combination thereof)
by the shareholders
---------------------------------------- -------------------------------------- --------------------------------------
SCHEDULE F
ORDINARY RESOLUTION NO. 2
RESOLVED AS AN ORDINARY RESOLUTION OF THE SHAREHOLDERS OF MITEL NETWORKS
CORPORATION THAT:
1. The following amendments to By-law No. 1A of the Corporation are hereby
confirmed:
2.3 Financial Year
Until otherwise determined by the board, the financial year of the
Corporation shall end on the 30th day of April in each
year.
4.5 Calling of Meetings
Meetings of the board shall be held from time to time at such place
within or outside Canada, on such day and at such time as the board,
the chairperson of the board, the chief executive officer, the
president or any two directors may determine.
4.8 Chairperson and Secretary
The chairperson of the board or, in the chairperson's absence, the
lead director, or in lead directors' absence, the chief executive
officer or, in the chief executive officer's absence, the president
or, in the president's absence, a vice-president shall be chairperson
of any meeting of the board. If none of these officers are present,
the directors present shall choose one of their number to be
chairperson. The secretary or an assistant secretary of the
Corporation shall act as secretary at any meeting of the board and,
if the secretary or an assistant secretary of the Corporation is
absent, the chairperson of the meeting shall appoint a person who
need not be a director to act as secretary of the meeting.
4.11 Electronic Voting
Subject to the Act, a director participating in a meeting by
telephonic, electronic or other communication facility in accordance
with section 4.10 may vote by means of such facility.
8.6 Chairperson and Secretary
The chairperson of the board or, in the chairperson's absence, the
chief executive officer or, in the chief executive officer's absence,
the president or, in the president's absence, a vice-president shall
be chairperson of any meeting of shareholders. If none of these
officers are present within 15 minutes after the time appointed for
holding the meeting, the persons present and entitled to vote shall
choose a chairperson from amongst themselves. The secretary or an
assistant secretary of the Corporation shall act as secretary at any
meeting of shareholders or, if the secretary or an assistant
secretary of the Corporation be absent, the chairperson of the
meeting shall appoint some person, who need not be a shareholder, to
act as secretary of the meeting. If desired, one or more scrutineers,
who need not be shareholders, may be appointed by resolution or by
the chairperson with the consent of the meeting.
8.8 Quorum
A quorum of shareholders is present at a meeting of shareholders if
the holders of 25% of the shares entitled to vote at the meeting
are present in person or represented by proxy, provided that a quorum
shall not be less than two persons. A quorum need not be present
throughout the meeting provided a quorum is present at the opening of
the meeting.
10.4 Unclaimed Dividends
Any dividend unclaimed after a period of two years from the date on
which the dividend has been declared to be payable shall be forfeited
and shall revert to the Corporation.
2. Notwithstanding the approval of the matters provided for herein, the
board of directors of the Corporation is hereby authorized, without
further approval of the shareholders of the Corporation, to revoke this
resolution for any reason, at any time before the action approved by this
resolution becomes effective.
DOCUMENT 4
DRAFT: July 26, 2006
[MITEL LOGO OMITTED]
FORM OF PROXY FOR THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON THURSDAY, SEPTEMBER 7TH, 2006
THIS PROXY IS SOLICITED ON BEHALF OF MANAGEMENT OF MITEL NETWORKS CORPORATION
The undersigned hereby appoints Donald W. Smith, Chief Executive Officer and a
director of Mitel Networks Corporation (the "Corporation") or failing him,
Steven E. Spooner, Chief Financial Officer of the Corporation, or instead of
either of them, _____________________, as proxy for the undersigned, with full
power of substitution, to attend at the Annual and Special Meeting of
Shareholders of the Corporation to be held on Thursday, September 7th, 2006 at
The Brookstreet Hotel, 525 Legget Drive, Ottawa (Kanata), Ontario, Canada, K2K
2W2, commencing at 2:30 p.m., Ottawa time, and any adjournment or adjournments
thereof (the "Meeting"), to act for and on behalf of the undersigned and to
vote the shares of the undersigned and to cast the number of votes the
undersigned would be entitled to cast as if the undersigned was personally
present at the Meeting.
The undersigned hereby directs the appointed proxyholder to vote the shares
represented by this proxy as follows:
Please mark with a "X".
1. Annual Resolution No. 1, as set out in Schedule A to the management
proxy circular accompanying this proxy, to determine that the number of
directors of the Corporation and the number of directors to be elected
at each annual meeting of shareholders be seven and to elect the
following persons as directors of the Corporation until the next annual
meeting of shareholders or until their successors are elected.
All Classes of Shares
Dr. Terence H. Matthews FOR WITHHOLD Kirk K. Mandy FOR WITHHOLD
---- ---- ---- ----
Paul A.N. Butcher FOR WITHHOLD Gilbert S. Palter FOR WITHHOLD
---- ---- ---- ----
Donald W. Smith FOR WITHHOLD Guthrie J. Stewart FOR WITHHOLD
---- ---- ---- ----
Peter D. Charbonneau FOR WITHHOLD
---- ----
2. Annual Resolution No. 2, as set out in Schedule B to the management
proxy circular accompanying this proxy, to appoint Deloitte & Touche
LLP as Auditors and authorize the directors to determine and fix their
remuneration as such.
All Classes of Shares FOR WITHHOLD
--------- -------
3. Special Resolution No. 1, as set out in Schedule C to the management
proxy circular accompanying this proxy, to amend the articles of the
Corporation to decrease the authorized capital by cancelling the
authorized and unissued Class A Convertible Preferred Shares ("Class A
Shares"), the Class B Convertible Preferred Shares ("Class B Shares"),
the Class A Convertible Preferred Shares, Series 1 (the "Series A
Shares") and the Class B Convertible Preferred Shares, Series 1 (the
"Series B Shares"), immediately following and conditional upon the
conversion of all the issued Series A Shares and all the issued Series
B Shares into Common Shares.
All Classes of Shares FOR AGAINST
--------- -------
Class A Shares Only FOR AGAINST
--------- -------
Class B Shares Only FOR AGAINST
--------- -------
4. Special Resolution No. 2, as set out in Schedule D to the management
proxy circular accompanying this proxy, to amend the articles of the
Corporation to change the Corporation's issued and outstanding Common
Shares into a smaller number of Common Shares on the basis of one (1)
Common Share for each eight (8) issued and outstanding Common Shares.
All Classes of Shares FOR AGAINST
--------- -------
5. Special Resolution No. 3, as set out in Schedule E to the management
proxy circular accompanying this proxy, to increase the authorized
capital by creating an unlimited number of preferred shares, issuable
in series.
All Classes of Shares FOR AGAINST
--------- -------
Common Shares Only FOR AGAINST
--------- -------
Class A Shares Only FOR AGAINST
--------- -------
Class B Shares Only FOR AGAINST
--------- -------
6. Special Resolution No. 4, as set out in Schedule F to the management
proxy circular accompanying this proxy, to remove the share transfer
restrictions as set out in the articles of incorporation.
All Classes of Shares FOR AGAINST
--------- -------
7. Special Resolution No. 5, as set out in Schedule G to the management
proxy circular accompanying this proxy, to change the number of
directors from a minimum of one (1) to a minimum of three (3) and from
a maximum of ten (10) to a maximum of fifteen (15) with such fixed
number of directors from time to time authorized by the directors of
the Corporation.
All Classes of Shares FOR AGAINST
--------- -------
8. Special Resolution No. 6, as set out in Schedule H to the management
proxy circular accompanying this proxy, to change the name of the
Corporation to Mitel Corporation.
All Classes of Shares FOR AGAINST
--------- -------
9. Ordinary Resolution No. 1, as set out in Schedule I to the management
proxy circular accompanying this proxy, to approve the 2006 Equity
Incentive Plan.
All Classes of Shares FOR AGAINST
--------- -------
10. Ordinary Resolution No. 2, as set out in Schedule J to the management
proxy circular accompanying this proxy, to confirm the amendments to
By-law No. 1A.
All Classes of Shares FOR AGAINST
--------- -------
The shares represented by this proxy will be voted on any ballot that may be
called for at the Meeting in the manner specified herein by a shareholder. If
instructions are not given with respect to any particular matter and either
Donald W. Smith or Steven E. Spooner is appointed proxyholder, the shares
represented by this proxy will be voted FOR each such matter.
Discretionary authority is hereby conferred by the undersigned on the appointed
proxyholder with respect to amendments or variations to any of the above matters
and to any other matters that may properly come before the Meeting. At the date
of the management proxy circular accompanying this proxy, management of the
Corporation knows of no such other matters.
DATED this day of , 2006.
---------------- ---------------------------
----------------------------------------
Name of Shareholder(s) [please print]
---------------------------------- -------------------------------------------
Signature of Shareholder Signature of Shareholder (if held Jointly)
PROXY INSTRUCTIONS
PLEASE COMPLETE, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED
ENVELOPE OR SENDING IT BY FACSIMILE TO THE CORPORATION AT 613-592-7813
ATTENTION: CORPORATE SECRETARY'S OFFICE.
1. This proxy must be deposited no later than 12:00 p.m. (noon) on
Wednesday, September 6th, 2006, being the business day preceding the
day of the Meeting .
2. This proxy must be dated and signed by the shareholder or his or her
attorney authorized in writing or, where the shareholder is a
corporation, must be executed or signed by a duly authorized officer or
attorney of the corporation. If this proxy is executed by an attorney
for an individual shareholder or by an officer or attorney of a
corporate shareholder, the instrument so empowering the officer or
officers or the attorney, as the case may be, or a notarial copy
thereof, should accompany the proxy.
3. If this proxy is not dated in the space provided, it shall be deemed to
bear the date on which it was mailed by the management of the
Corporation.
4. The persons named in the enclosed form of proxy are directors or
officers of the Corporation. If you wish to appoint some other person
or company (who need not be a shareholder) to represent you at the
Meeting, you may do so by striking out the name of the persons named in
the enclosed form of proxy and inserting the name of your appointee in
the blank space provided.
5. A shareholder may revoke a proxy by depositing an instrument in
writing executed by the shareholder or by the shareholder's attorney
authorized in writing (or, if the shareholder is a corporation, by an
authorized officer or attorney thereof authorized in writing), at the
registered office of the Corporation at any time up to and including
the close of business of the last business day preceding the day of
the Meeting at which such proxy is to be used, or with the chairman
of the Meeting on the day of, but prior to commencement of, the
Meeting, or in any other manner permitted by law, and upon either of
such deposits such proxy shall be revoked. If the instrument of
revocation is deposited with the Chairman of the Meeting on the day
of the Meeting, the instrument will not be effective with respect to
any matter on which a vote has already been cast pursuant to such
proxy.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MITEL NETWORKS CORPORATION
-------------------------------------------
(Registrant)
Date: September 12, 2006 By: /S/ DONALD W. SMITH
------------------------- ---------------------------------------
Name: Donald W. Smith
Title: Chief Executive Officer