UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

 

 

Commission file number: 0-49984

 

MITEL NETWORKS CORPORATION/CORPORATION MITEL NETWORKS

(Exact name of Registrant as specified in its charter)

 

MITEL NETWORKS CORPORATION

(Translation of Registrant’s name into English)

 

Canada

(Jurisdiction of incorporation or organization)

 

350 Legget Drive

Ottawa, Ontario, Canada K2K 2W7

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

None

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

Common Shares, Without Par Value

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 214,736,735 Common Shares and 316,755 Class 1 Preferred Shares.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

 

Indicate by check mark which financial statement item the registrant has elected to follow.

 

Item 17 þ     Item 18 o

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

 

TABLE OF CONTENTS

 

 

Basis of Presentation

 

The financial results of Mitel Networks Corporation (“Mitel”, “we,” “us,” “our,” or “the Company”) contained in this Form 20-F are reported in U.S. dollars and have been prepared in compliance with accounting principles generally accepted in the U.S. for the purposes of this annual report. In this annual report, all dollar amounts are expressed in U.S. dollars except where otherwise indicated.

 

Forward Looking Information

 

Some of the statements in this annual report are forward-looking statements that reflect our current views with respect to future events and financial performance. Statements that include the words “may,” “should,” “could,” “estimate,” “continue,” “expect,” “intend,” “plan,” “predict,” “potential,” “believe,” “project,” “anticipate” and similar statements of a forward-looking nature, or the negatives of those statements, identify forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

 

 

This list is not exhaustive of the factors that may affect any of our forward-looking statements. In evaluating these statements, you should carefully consider the risks outlined under Item 3.D. “Key Information — Risk Factors”. The forward-looking statements contained in this annual report are based on the beliefs, expectations and opinions of management as of the date of this annual report. We do not assume any obligation to update forward-looking statements to reflect actual results or assumptions if circumstances or management’s beliefs, expectations or opinions should change, unless otherwise required by law. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.

PART I

 

 

Not applicable.

 

 

Not applicable.

 

 

 

The following sets forth selected financial information derived from our audited consolidated financial statements as of and for the fiscal years ended April 25, 2004 (“fiscal 2004”); April 24, 2005 (“fiscal 2005”); for the six day transition period from April 25, 2005 to April 30, 2005 (the “Transition Period”); and for the fiscal years ended April 30, 2006 (“fiscal 2006”), April 30, 2007 (“fiscal 2007”) and April 30, 2008 (“fiscal 2008”). The selected financial information may not be indicative of our future performance and should be read in conjunction with Item 5 “Operating and Financial Review and Prospects” and the consolidated financial statements and the notes attached to the financial statements included elsewhere in this annual report. See Item 8 “Financial Information” and Item 17 “Financial Statements”.

 

STATEMENT OF OPERATIONS DATA

 

BALANCE SHEET DATA

 

 

 

 

 

Not applicable.

 

 

Not applicable.

 

An investment in our Common Shares should be regarded as highly speculative and is suitable only for those investors who are able to sustain a total loss of their investment. You should carefully consider the following risks, as well as the other information contained in this annual report, when evaluating us and our business and prospects. Any of the following risks, as well as risks not currently known to us, could materially and adversely affect our business, results of operations or financial condition, and could result in a complete loss of your investment.

 

Risks Relating to our Business

 

We may not be able to sustain profitability in the future.

 

In fiscal 2008 we recorded a profit of $13.2 million. This was the first year since our incorporation in 2001 that we were profitable. We incurred a net loss of $35.0 million for fiscal 2007, and net losses of $44.6 million, $49.6 million and $30.6 million in fiscal 2006, 2005 and 2004, respectively. We may not be able sustain profitability in future years. We have incurred restructuring charges in each of the previous seven fiscal years, and may incur additional restructuring charges in the future. Our future success in sustaining profitability and growing our revenues and market share for our solutions depends, among other things, upon our ability to develop and sell solutions that have a competitive advantage, to build our brand image and reputation, to attract orders from new and existing customers and to reduce our costs as a proportion of our revenue by, among other things, increasing efficiency in design, component sourcing, manufacturing and assembly cost processes.

 

Current and ongoing global economic instability in our key markets, particularly the U.S. and the United Kingdom, may adversely impact our business.

 

Our business depends on the overall demand for information technology, and in particular for telecommunications systems. The purchase of our products can be discretionary and may involve a significant commitment of capital and other resources. Current and ongoing global economic instability in our key markets, particularly the U.S. and the United Kingdom, may lead our customers to reduce, defer or suspend their information technology or telecommunications spending, may result in our suppliers seeking more prompt payment terms from us, and access to credit becoming more restricted or unavailable. If this did occur it would likely adversely impact our business, operating results and financial condition in a number of ways, including longer sales cycles, lower prices for our products, reduced unit sales, longer collection times for receivables, the timing and volume of sales of leases to third party funding sources and the availability of additional credit facilities or funding sources on terms satisfactory to us or at all.

 

Our quarterly and annual revenues and operating results have historically fluctuated, and the results of one period may not provide a reliable indicator of our future performance.

 

Our quarterly and annual revenues and operating results have historically fluctuated and are not necessarily indicative of results to be expected in future periods. A number of factors may cause our financial results to fluctuate significantly from period to period, including:

 

 

As a result of the above factors, a quarterly or yearly comparison of our results of operations is not necessarily meaningful.

We face intense competition from many competitors and we may not be able to compete effectively against these competitors.

 

The market for our solutions is highly competitive. We compete against many companies, including Aastra Technologies Limited, Alcatel-Lucent, Avaya Inc., Cisco Systems, Inc., NEC Corporation, Nortel Networks Corporation, Panasonic Corporation, Shoretel, Inc., Siemens Enterprise Communications and Toshiba Corporation. In addition, because the market for our solutions is subject to rapidly changing technologies, we may face competition in the future from companies that do not currently compete in the business communications market, including companies that currently compete in other sectors of the information technology, communications or software industries, mobile communications companies, or communications companies that serve residential rather than business customers.

 

Several of our existing competitors have, and many of our future competitors may have, greater financial, personnel, research, project management and other resources, more well-established brands or reputations and broader customer bases than we have. As a result, these competitors may be in a stronger position to respond more quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements. Some of these competitors may also have customer bases that are more geographically balanced than ours and therefore may be less affected by an economic downturn in a particular region. Competitors with greater resources may also be able to offer lower prices, additional products or services or other incentives that we cannot match or do not offer. In addition, existing customers of data communications companies that compete against us may be more inclined to purchase business communications solutions from their current data communications vendor than from us. We cannot predict which competitors may enter our markets in the future, what form the competition may take or whether we will be able to respond effectively to the entry of new competitors or the rapid evolution in technology and product development that has characterized our markets. Competition from existing and potential market entrants may take many forms, including large bundled offerings that incorporate applications and products similar to those that we offer. If our competitors offer deep discounts on certain products or services in an effort to recapture or gain market share, we may be required to lower our prices or offer other favorable terms to compete effectively, which would reduce our margins and could adversely affect our operating results.

 

As voice and data networks converge, we are likely to face increased competition from companies in the information technology, personal and business applications and software industries.

 

The convergence of voice and data networks and their wider deployment by enterprises has led information technology and communication applications deployed on converged networks to become more integrated. This integration has created an opportunity for the leaders in information technology, personal and business applications and the software that connects the network infrastructure to those applications, to enter the telecommunications market and offer products that compete with our systems. Competition from these potential market entrants may take many forms, and they may offer products and applications similar to those we offer. Certain leaders in the information technology, personal and business applications and software industries, have substantial financial and other resources that they could devote to this market. As voice and data communications converge, we may face competition from systems integrators that were traditionally focused on data network integration and who have now expanded their operations to focus on the deployment of unified communications, in particular when integration with enterprise business processes is a requirement.

 

If the solutions offered by competitors achieve substantial market penetration, we may not be able to maintain or improve our market position, and our failure to do so could materially and adversely affect our business and results of operations.

A key component of our strategy is our focus on the development and marketing of IP-based and unified communications solutions and related services, and this strategy may not be successful or may adversely affect our business.

 

We are focused on the development and sales of IP-based and unified communications solutions. Our operating results may be adversely affected if the market opportunity for IP-based and unified communications solutions and services does not develop in the way we anticipate. We cannot predict whether:

 

 

Our solutions may fail to keep pace with rapidly changing technology and evolving industry standards.

 

The markets for our solutions are competitive and characterized by rapidly changing technology, evolving industry standards, frequent new product introductions, short product life cycles and changing business models. Therefore, our operating results depend, among other things, on existing and emerging markets, our ability to develop and introduce new solutions, business processes and fulfillment models and our ability to reduce the production costs of existing solutions. The process of developing new technology and solutions is complex and uncertain, and if we fail to accurately predict and respond to our customers’ changing needs and emerging technological trends, our business could be harmed. We must commit significant resources to developing new solutions and processes before knowing whether our investments will result in solutions the market will accept. The success of new solutions depends on several factors, including new application and product definition, component costs, timely completion and introduction of these solutions, differentiation of new solutions from those of our competitors, and market acceptance of these solutions. We may not be able to successfully identify new market opportunities for our solutions, develop and bring new solutions to market in a timely manner, or achieve market acceptance of our solutions.

 

Our business may be harmed if we infringe intellectual property rights of third parties.

 

There is considerable patent and other intellectual property development activity in our industry. Our success depends, in part, upon our not infringing intellectual property rights owned by others. Our competitors, as well as a number of individuals, patent holding companies and consortiums, own, or claim to own, intellectual property relating to our industry. Aggressive patent litigation is not uncommon in our industry and can be disruptive. We cannot determine with certainty whether any existing third party patent, or the issuance of new third party patents, would require us to alter our solutions, obtain licenses or discontinue the sale of the affected applications and products. We have received notices, and we may receive additional notices, containing allegations that our solutions are subject to patents or other proprietary rights of third parties, including competitors, patent holding companies and consortiums. In addition, in July 2007, one of our competitors filed an answer and counterclaim in the U.S. District Court for the Eastern District of Texas alleging that we are infringing one of its patents and requesting damages (treble damages in respect of alleged willful infringement of the patent), injunctive relief, attorney’s fees, costs and expenses, and such further relief against us as the court deems just and proper. See Item 8.A. “Financial Information — Consolidated Statements and Other Financial Information — Legal Proceedings” for a more complete description of this proceeding.

 

Our success also depends, in part, upon our customers’ freedom to use our products. For example, certain claims have been asserted against end-users within our industry and demands for the payment of licensing fees have been made of end-users who have implemented our solutions. We generally agree to indemnify and defend our customers to the extent a claim for infringement is brought against our customers with respect to our solutions.

 

Infringement claims (or claims for indemnification resulting from infringement claims) have been and may in the future be asserted or prosecuted against us or our customers by third parties. Some of these third parties, including competitors, patent holding companies and consortiums, have, or have access to, substantially greater

resources than we do and may be better able to sustain the costs of complex patent litigation. Whether or not these claims have merit, we may be subject to costly and time-consuming legal proceedings, and this could divert our management’s attention from operating our business. If these claims are successfully asserted against us, we could be required to pay substantial damages and could be prevented from selling some or all of our solutions. In addition, an infringer of a U.S. patent may be subject to treble damages and attorney’s fees if the infringement is found to be willful. We may also be obligated to indemnify our business partners or customers in any such litigation. Furthermore, in order to resolve such proceedings, we may need to obtain licenses from third parties or substantially modify or rename our solutions in order to avoid infringement. Moreover, license agreements with third parties may not include all intellectual property rights that may be issued to or owned by the licensors, and future disputes with these parties are possible. In addition, we might not be able to obtain the necessary licenses on acceptable terms, or at all, or be able to modify or rename our solutions successfully. This could prevent us from selling some or all of our solutions. Current or future negotiations with third parties to establish license or cross license arrangements, or to renew existing licenses, may not be successful and we may not be able to obtain or renew a license on satisfactory terms, or at all. If required licenses cannot be obtained, or if existing licenses are not renewed, litigation could result. Any litigation relating to intellectual property rights, whether or not determined in our favor or settled by us, could at a minimum be costly and would divert the attention and efforts of management and our technical personnel. An adverse determination in any litigation or proceeding could prevent us from making, using or selling some or all of our solutions and subject us to damage assessments.

 

Our success is dependent on our intellectual property. Our inability or failure to protect our intellectual property could seriously harm our ability to compete and our financial success.

 

Our success depends on the intellectual property in the solutions and services that we develop and sell. We rely upon a combination of copyright, patent, trade secrets, trademarks, confidentiality procedures and contractual provisions to protect our proprietary technology. Our present protective measures may not be enforceable or adequate to prevent misappropriation of our technology or independent third-party development of the same or similar technology. Even if our patents are held valid and enforceable, others may be able to design around these patents or develop products competitive to our products but that are outside the scope of these patents.

 

We make use of some open source software code under various open source licenses available to the general public. A characteristic of an open source license is that it does not provide any indemnification to the licensee against third-party claims of intellectual property infringement. Some open source licenses require the licensee to disclose the licensee’s source code derived from such open source code, and failure to comply with the terms of such licenses can result in the licensee being stopped from distributing products that contain the open source code or being forced to freely disseminate enhancements that were made to the open source code. Further, the use of open source software in our solutions may expose those solutions to security risks.

 

Many foreign jurisdictions offer less protection of intellectual property rights than Canada and the U.S., and the protection provided to our proprietary technology by the laws of these and other foreign jurisdictions may not be sufficient to protect our technology. Preventing the unauthorized use of our proprietary technology may be difficult, time consuming and costly, in part because it may be difficult to discover unauthorized use by third parties. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of our proprietary rights, or to defend against claims of unenforceability or invalidity. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources.

 

Our business requires a significant amount of cash, and we may require additional sources of funds if our sources of liquidity are unavailable or insufficient to fund our operations.

 

Our working capital requirements and cash flows have historically been, and our working capital requirements and cash flows are expected to continue to be, subject to quarterly and yearly fluctuations, depending on a number of factors. If we are unable to manage fluctuations in cash flow, our business, operating results and financial condition may be materially adversely affected. Factors which could lead us to suffer cash flow fluctuations include:

 

 

 

In order to finance our business, we expect to use available cash and to continue to have access to a $30 million revolving credit facility. However, our ability to draw on this facility will be conditioned upon our compliance with covenants contained in our credit agreements. There can be no assurance that we will be in compliance with the covenants required by our lenders in the future.

 

We may need to secure additional sources of funding if our cash, credit facility and borrowings are not available or are insufficient to finance our business. We cannot provide any assurance that such funding will be available on terms satisfactory to us. In addition, any proceeds from the issuance of equity or debt may be required to be used in whole or in part, to make mandatory payments under our credit agreements. If we were to incur higher levels of debt, we would require a larger portion of our operating cash flow to be used to pay principal and interest on our indebtedness. The increased use of cash to pay indebtedness could leave us with insufficient funds to finance our operating activities, such as research and development expenses and capital expenditures. In addition, any new debt instruments may contain covenants or other restrictions that affect our business operations. If we were to raise additional funds by selling equity securities, the relative ownership of our existing investors could be diluted or the new investors could obtain terms more favorable than previous investors.

 

We have a significant amount of debt, which contains customary default clauses, a breach of which may result in acceleration of the repayment of some or all of this debt.

 

As of September 30, 2008, we had $290.4 million outstanding under our First Lien Credit Agreement, $130.0 million outstanding under our Second Lien Credit Agreement and $18.0 million outstanding under our revolving credit facility. These credit agreements have customary default clauses. In the event we were to default on these credit agreements, and were unable to cure the default, the repayment of one or more of these credit agreements may be accelerated. If acceleration were to occur, we would be required to secure alternative sources of equity or debt financing to be able to repay the existing credit facilities. Alternative financing may not be available on terms satisfactory to us, or at all. If acceptable alternative financing were unavailable, we would have to consider alternatives to fund the repayment of the debt, which may include the sale of part or all of the business, the sale of which may occur at a distressed price.

 

Our future success depends on our existing key personnel.

 

Our success is dependent upon the services of key personnel throughout our organization, including the members of our senior management and software and engineering staff, as well as the expertise of our directors. Competition for highly skilled directors, management, research and development and other employees is intense in our industry and we may not be able to attract and retain highly qualified directors, management, and research and development personnel and other key employees in the future. In order to improve productivity, a portion of our compensation to key employees and directors is in the form of stock option grants, and as a consequence, a depression in our value of our shares could make it difficult for us to motivate and retain employees and recruit additional qualified directors and personnel. The accounting treatment of stock options as compensation expense could lead to a reduction in our use of stock options as an incentive and retention tool. All of the foregoing may also negatively impact our ability to implement a management succession plan as and if required and on a timely basis. We currently do not maintain corporate life insurance policies on the lives of our directors or any of our key employees.

Because we depend upon outside contract manufacturers to manufacture our products, our operations could be delayed or interrupted if we encounter problems with these contractors.

 

We do not have any internal manufacturing capabilities, and we rely upon contract manufacturers to manufacture our products. A number of our products are currently manufactured by BreconRidge Manufacturing Solutions Corporation, a company of which Dr. Terence H. Matthews (“Dr. Matthews”), one of our major shareholders and the chairman of our board of directors, has an approximate 26.0% ownership interest. Our ability to ship products to our customers could be delayed or interrupted as a result of a variety of factors relating to our contract manufacturers, including:

 

 

The addition of a number of contract manufacturers through the acquisition of Inter-Tel (see Item 4.A. “Information on Mitel — History and Development of Mitel”) has increased the complexity of our supply chain management. If any of our contract manufacturers are unable or unwilling to continue manufacturing our products in required volumes and quality levels, we will have to identify, qualify, select and implement acceptable alternative manufacturers, which would likely be time consuming and costly. In addition, alternate sources may not be available to us or may not be in a position to satisfy our production requirements at commercially reasonable prices and quality. Therefore, any significant interruption in manufacturing would result in us being unable to deliver the affected products to meet our customer orders.

 

We depend on sole source and limited source suppliers for key components. If these components are not available on a timely basis, or at all, we may not be able to meet scheduled product deliveries to our customers.

 

We depend on sole source and limited source suppliers for key components of our products. In addition, our contract manufacturers often acquire these components through purchase orders and may have no long-term commitments regarding supply or pricing from their suppliers. Lead-times for various components may lengthen, which may make certain components scarce. As component demand increases and lead-times become longer, our suppliers may increase component costs. We also depend on anticipated product orders to determine our materials requirements. Lead-times for limited-source materials and components can be as long as six months, vary significantly and depend on factors such as the specific supplier, contract terms and demand for a component at a given time. From time to time, shortages in allocations of components have resulted in delays in filling orders. Shortages and delays in obtaining components in the future could impede our ability to meet customer orders. Any of these sole source or limited source suppliers could stop producing the components, cease operations entirely, or be acquired by, or enter into exclusive arrangements with, our competitors. As a result, these sole source and limited source suppliers may stop selling their components to our contract manufacturers at commercially reasonable prices, or at all. Any such interruption, delay or inability to obtain these components from alternate sources at acceptable prices and within a reasonable amount of time would adversely affect our ability to meet scheduled product deliveries to our customers and reduce margins realized.

The exercise of conversion rights by one or more of our preferred shareholders, warrant holders, and option holders, could adversely affect the market value of our Common Shares as well as our ability to complete any future equity financing.

 

As at September 30, 2008, we had outstanding:

 

 

The issuance of Common Shares upon the conversion of our Class 1 Preferred Shares or the exercise of certain warrants or stock options may occur at a time when the conversion or exercise price is below the market value of our Common Shares. Therefore, the conversion or exercise of these securities will likely have a dilutive effect on the value of our Common Shares. The conversion or exercise of these securities will also result in us having more Common Shares outstanding, which would have a dilutive effect on our earnings per share. Furthermore, the Class 1 Preferred Shares, warrants and stock options, as well as the terms of these securities could materially impair our future ability to raise capital through an offering of equity securities. For additional information on these conversion and exercise rights, see Item 10.B. “Additional Information — Memorandum and Articles of Incorporation — Share Capital”.

 

Delay in the delivery of, or lack of access to, software or other intellectual property licensed from our suppliers could adversely affect our ability to develop and deliver our solutions on a timely and reliable basis.

 

Our business may be harmed by a delay in delivery of software applications from one or more of our suppliers. Many of our solutions are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various components in our solutions. These licenses may not be available on acceptable terms, or at all. Moreover, the inclusion in our solutions of software or other intellectual property licensed from third parties on a non-exclusive basis could limit our ability to protect our proprietary rights to our solutions. Non-exclusive licenses also allow our suppliers to develop relationships with, and supply similar, or the same software applications, to our competitors. Software licenses could terminate in the event of a bankruptcy or insolvency of a software supplier or other third party licensor. We have not entered into source code escrow agreements with every software supplier or third party licensor. In the event that software suppliers or other third party licensors terminate their relationships with us, are unable to fill our orders on a timely basis or the licenses are otherwise terminated, we may be unable to deliver the affected products to meet our customer orders.

 

Our business may suffer if our strategic alliances are not successful.

 

We have a number of strategic alliances and continue to pursue strategic alliances with other companies in areas where collaboration can produce industry advancement and acceleration of new markets. The objectives and goals for a strategic alliance can include one or more of the following: technology exchange, product development, joint sales and marketing or new-market creation. If a strategic alliance fails to perform as expected or if the relationship is terminated, we could experience delays in product availability or impairment of our relationships with customers. In addition, we may face increased competition if a third party acquires one or more of our strategic partners or if our competitors enter into additional successful strategic relationships.

 

Design defects, errors, failures or “bugs,” which may be difficult to detect, may occur in our solutions.

 

We produce highly complex solutions that incorporate both hardware and software. Our software may contain “bugs” that can interfere with expected operations. Our pre-shipment testing and field trial programs may not be adequate to detect all defects in individual applications and products or systematic defects that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities or affect gross

margins. In the past, we have had to replace certain components and provide remediation in response to the discovery of defects or “bugs” in solutions that we had shipped. Any future remediation may have a material impact on our business. Our inability to cure an application or product defect could result in the failure of an application or product line, the temporary or permanent withdrawal from an application, product or market, damage to our reputation, inventory costs, or application or product re-engineering expenses. The sale and support of applications and products containing defects and errors may result in product liability claims and warranty claims. Our insurance may not cover or may be insufficient to cover claims that are successfully asserted against us or our contracted suppliers and manufacturers.

 

Our competitive position may be affected by fluctuations in exchange rates, and our current currency hedging strategy may not be sufficient to counter such fluctuations.

 

A significant portion of our business is conducted, and a substantial portion of our operating expenses are payable, in currencies other than the U.S. dollar. Due to the substantial volatility of currency exchange rates, we cannot predict the effect of exchange rate fluctuations upon future sales and expenses. We use financial instruments, principally forward exchange contracts, in our management of foreign currency exposure. These contracts primarily require us to purchase and sell certain foreign currencies with or for U.S. dollars at contracted rates. We may be exposed to a credit loss in the event of non-performance by the counterparties of these contracts. These financial instruments may not adequately manage our foreign currency exposure. Our results of operations could be adversely affected if we are unable to successfully manage currency fluctuations in the future.

 

We rely on our channel partners for a significant component of our sales, and disruptions to, or our failure to effectively develop and manage, our distribution channel and the processes and procedures that support it could adversely affect our ability to generate revenues.

 

Our future success is highly dependent upon establishing and maintaining successful relationships with a variety of channel partners. A substantial portion of our revenues is derived through our channel partners, most of which also sell our competitors’ products. Our revenues depend in part on the performance of these channel partners. The loss of or reduction in sales to these channel partners could materially reduce our revenues. Our competitors may in some cases be effective in causing our channel partners or potential channel partners to favor their products or prevent or reduce sales of our solutions. If we fail to maintain relationships with these channel partners, fail to develop new relationships with channel partners in new markets or expand the number of channel partners in existing markets, or if we fail to manage, train or provide appropriate incentives to existing channel partners or if these channel partners are not successful in their sales efforts, sales of our solutions may decrease and our operating results would suffer.

 

The most likely potential channel partners for us are those businesses engaged in the voice and data communications business or the provision of communications software applications. Many potential channel partners in the voice communications business have established relationships with our competitors and may not be willing to invest the time and resources required to train their staff to effectively market our solutions and services. Potential channel partners engaged in the data and software applications communications businesses are less likely to have established relationships with our competitors, but where they are unfamiliar with the voice communications business, they may require substantially more training and other resources to be qualified to sell our solutions.

 

Our operations in international markets involve inherent risks that we may not be able to control.

 

We do business in over 90 countries. Accordingly, our future results could be materially and adversely affected by a variety of uncontrollable and changing factors relating to international business operations, including:

 

 

 

Transfer pricing rules may adversely affect our income tax expenses.

 

We conduct business operations in various jurisdictions and through legal entities in Canada, the U.S., the United Kingdom, Barbados and elsewhere. We and certain of our subsidiaries provide solutions and services to, and may from time to time undertake certain significant transactions with, other subsidiaries in different jurisdictions. The tax laws of many of these jurisdictions, including Canada, have detailed transfer pricing rules which require that all transactions with non-resident related parties be priced using arm’s length pricing principles, and contemporaneous documentation must exist to support this pricing. The taxation authorities in the jurisdictions where we carry on business, including the Canada Revenue Agency, the U.S. Internal Revenue Service and HM Revenue & Customs in the United Kingdom, could challenge our arm’s length related party transfer pricing policies. International transfer pricing is an area of taxation that depends heavily on the underlying facts and circumstances and generally involves a significant degree of judgment. If any of these taxation authorities are successful in challenging our transfer pricing policies, our income tax expense may be adversely affected and we could also be subjected to interest and penalty charges. Any increase in our income tax expense and related interest and penalties could have a significant impact on our future earnings and future cash flows.

 

Business interruptions could adversely affect our operations.

 

Our operations are vulnerable to interruption by fire, earthquake, hurricane or other natural disaster, power loss, computer viruses, security breaches, telecommunications failure, quarantines, national catastrophe, terrorist activities, war and other events beyond our control. We do not have a fully implemented detailed business continuity plan. There can be no assurance that the coverage or limits of our business interruption insurance will be sufficient to compensate for any losses or damages that may occur.

 

Governmental regulation could harm our operating results and future prospects.

 

Governments in a number of jurisdictions in which we conduct business have imposed export license requirements and restrictions on the import or export of some technologies, including some of the technologies used in our solutions. Changes in these or other laws or regulations could adversely affect our revenues. A number of governments also have laws and regulations that govern technical specifications for the provision of our solutions. Changes in these laws or regulations could adversely affect the sales of, decrease the demand for and increase the cost of, our solutions. For example, the Federal Communications Commission may issue regulatory pronouncements from time to time that may mandate new standards for our equipment in the U.S. These pronouncements could require costly changes to our hardware and software. Additionally, certain government agencies currently require voice-over-Internet-Protocol products to be certified through a lengthy testing process. Other government agencies may adopt similar lengthy certification procedures which could delay the delivery of our products and adversely affect our revenues.

 

Specifically, on January 5, 2005, Inter-Tel received court approval of a civil settlement agreement (the “Civil Settlement”) and a criminal plea agreement (the “Plea Agreement”) with the U.S., each dated as of December 8, 2004 and disclosed on that same date. The court approval of the Civil Settlement and Plea Agreement resolved the investigation of the Department of Justice into the participation of Inter-Tel Technologies, Inc. (“Technologies”), a

wholly-owned subsidiary of Inter-Tel, in a federally administered “E-Rate program” to connect schools and libraries to the Internet. In connection with the Civil Settlement, Technologies paid a penalty of $6.7 million and forgave the collection of certain accounts receivable of $0.3 million related to Technologies’ participation in the E-Rate program. In connection with the Plea Agreement, Technologies entered guilty pleas to charges of mail fraud and an antitrust violation. Under the Plea Agreement, Technologies paid a fine of $1.7 million and observed a three-year probationary period, which, among other things, required Technologies to implement a comprehensive corporate compliance program. The existence and disclosure of the Civil Settlement and the Plea Agreement may cause future harm to us.

 

Governmental regulation of third party long distance and network service entities on which we rely may harm our business.

 

Our supply of telecommunications services and information depends on several long distance carriers, incumbent local exchange carriers (“ILECs”), and competitive local exchange carriers (“CLECs”) as well as other service providers. We rely on these carriers to provide local and long distance services, including voice and data circuits, to our customers and to provide us with billing information. Long distance services are subject to extensive and uncertain governmental regulation on both the federal and state level. We cannot insure that an increase in regulations will not harm our business. Our current contracts for the resale of services through long distance carriers include multi-year periods during which we have minimum use requirements and/or costs. The market for long distance services is experiencing, and is expected to continue to experience significant price competition, and this may cause a decrease in end-user rates. We cannot ensure that we will meet minimum use commitments, that we will be able to negotiate lower rates with carriers if end-user rates decrease or that we will be able to extend our contracts with carriers at favorable prices. If we are unable to secure reliable network services from certain long distance carriers and service providers, or if these entities are unwilling or unable to provide telecommunications services and billing information to us on favorable terms, our ability to expand our own network services will be harmed.

 

We are exposed to risks inherent in our defined benefit pension plan.

 

We currently maintain a defined benefit pension plan for a number of our past and present employees in the United Kingdom. The plan was closed to new employees in June 2001. The contributions to fund benefit obligations under this plan are based on actuarial valuations, which themselves are based on certain assumptions about the long-term operation of the plan, including employee turnover and retirement rates, the performance of the financial markets and interest rates. If the actual operation of the plan differs from these assumptions, additional contributions by us may be required. As of April 30, 2008, the projected benefit obligation of $198.8 million exceeded the fair value of the plan assets of $122.4 million, resulting in a pension liability of $76.4 million. Changes to pension legislation in the United Kingdom may adversely affect our funding requirements.

 

We may fail to fully realize the anticipated cost savings, revenue enhancements and other benefits expected from our acquisition of Inter-Tel.

 

Following the acquisition of Inter-Tel (see Item 4.A. “Information on Mitel — History and Development of Mitel”), we implemented a plan to consolidate sales, operations and support functions, including optimization of our supply chain and procurement structure, and to leverage our research and development and services across a larger base. These actions have, to date, resulted in cost savings, opportunities for revenue synergies and other synergistic benefits.

 

Achieving continued benefits from the acquisition of Inter-Tel (see Item 4.A. “Information on Mitel — History and Development of Mitel”) will depend in part upon meeting the challenges inherent in managing a business the size and scope of Mitel and Inter-Tel and any further integration of global business enterprises that may be required and the possible resulting diversion of management attention for an extended period of time. There can be no assurance that we will meet these challenges and that such diversion will not negatively affect our operations.

Future changes in financial accounting standards could adversely affect our reported results of operations.

 

A change in accounting policies could have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred with frequency and may occur in the future. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

 

The costs and risks associated with Sarbanes-Oxley regulatory compliance may have a material adverse effect on us.

 

We will be required to document and test our internal controls over financial reporting pursuant to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, so that our management can certify as to the effectiveness of our internal controls as at the end of each fiscal year. As a result, we are required to assess and/or improve our financial and managerial controls, reporting systems and procedures, and we will incur substantial expenses to test our systems and controls, incur expenses associated with an independent registered accounting firm report on our controls, as well as ongoing compliance costs. If our management is unable to certify the effectiveness of our internal controls or if our independent registered public accounting firm cannot render an opinion on the effectiveness of our internal controls over financial reporting, or if significant deficiencies or material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence.

 

Risks Related to an Investment in our Common Shares

 

There are significant restrictions on the resale of our securities and there can be no assurance as to when such restrictions will cease to apply, if ever.

 

There is presently no public market through which our securities may be sold or resold. Our securities are not listed for trading on any stock exchange, and there is no guarantee that any such listing will be completed in the future. None of our securities have been registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”) or the securities laws of any of the states of the U.S. and are “restricted securities” as defined under the rules of the Securities Act, which may not be transferred to a U.S. person except pursuant to registration under the Securities Act, or pursuant to an available exemption from registration under the Securities Act. Canadian provincial securities laws also restrict the transfer of our securities, unless an exemption from the prospectus requirements is available in respect of such transfer, at least until the time we become a reporting issuer in a province of Canada. In addition, our articles currently contain restrictions on the transfer of our Common Shares. Investors may be unable to liquidate an investment in our securities, whether or not a listing is subsequently affected. An investor should not purchase our securities unless such investor is able to endure a lack of liquidity and/or withstand a total loss of his or her investment.

 

Each of Francisco Partners and Dr. Matthews is a significant shareholder and each has the potential to exercise significant influence over matters requiring approval by our shareholders.

 

Francisco Partners group and Dr. Matthews group beneficially hold 42.6% and 36.9%, respectively, of the voting power of our share capital as of September 30, 2008, as further disclosed in Item 7.A. “Major Shareholders and Related Party Transactions — Major Shareholders” and Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions”. Francisco Partners has the right to nominate four members to our board of directors, Dr. Matthews has the right to nominate three members and Dr. Matthews is also the chairman of our board. Each of Francisco Partners and Dr. Matthews, given the extent of their respective ownership positions, have the potential to control matters requiring approval by shareholders, including the election of directors, any amendments to our articles of incorporation or by-laws, and significant corporate transactions. Each of Francisco Partners and Dr. Matthews may have interests that differ from the interests of our other shareholders.

Each of Francisco Partners’ and Dr. Matthews’ ownership of our shares, as well as provisions contained in our articles of incorporation and Canadian law, may reduce the likelihood of a change of control occurring and, as a consequence, may deprive you of the opportunity to sell your Common Shares at a control premium.

 

The voting power of Francisco Partners and Dr. Matthews, respectively, under certain circumstances, could have the effect of delaying or preventing a change of control and may deprive our shareholders of the opportunity to sell their Common Shares at a control premium. In addition, provisions of our articles of incorporation and Canadian law may delay or impede a change of control transaction. Our articles of incorporation permit us to issue an unlimited number of common and preferred shares. Limitations on the ability to acquire and hold our Common Shares may be imposed under the Competition Act (Canada). This legislation permits the Commissioner of Competition of Canada to review any acquisition of or control over a significant interest in us and grants the Commissioner jurisdiction to challenge such an acquisition before the Canadian Competition Tribunal on the basis that it would, or would be likely to, result in a substantial prevention or lessening of competition in any market in Canada. In addition, the Investment Canada Act subjects an acquisition of control of a Canadian business (as that term is defined therein) by a non-Canadian to government review if the value of assets acquired as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be a net benefit to Canada (see Item 10.B. “Additional Information — Exchange Controls”). Any of the foregoing could prevent or delay a change of control and may deprive our shareholders of the opportunity to sell their Common Shares at a control premium.

 

You may be unable to bring actions or enforce judgments against us, certain of our directors and officers, certain of the selling shareholders or our independent public accounting firm under U.S. federal securities laws.

 

We are incorporated under the laws of Canada, and our principal executive offices are located in Canada. A majority of our directors and officers, certain of our significant shareholders and our independent public accounting firm reside principally in Canada and all or a substantial portion of our assets and the assets of these persons are located outside the U.S. Consequently, it may not be possible for you to effect service of process within the U.S. upon us or those persons. Furthermore, it may not be possible for you to enforce judgments obtained in U.S. courts based upon the civil liability provisions of the U.S. federal securities laws or other laws of the U.S. against us or those persons. There is doubt as to the enforceability in original actions in Canadian courts of liabilities based upon the U.S. federal securities laws, and as to the enforceability in Canadian courts of judgments of U.S. courts obtained in actions based upon the civil liability provisions of the U.S. federal securities laws.

 

U.S. investors will suffer adverse U.S. federal income tax consequences if we are characterized as a passive foreign investment company.

 

If, for any taxable year, we are treated as a passive foreign investment company, or PFIC, as defined under Section 1297 of the Internal Revenue Code, then U.S. Holders (see Item 10.E. “Additional Information — Taxation — U.S. Federal Income Tax Considerations”) would be subject to adverse U.S. federal income tax consequences. Rather than being subject to these adverse tax consequences, U.S. Holders may be able to make a mark-to-market election, which could require the inclusion of amounts in income of a U.S. Holder annually, even in the absence of distributions with respect to, or the disposition of, our Common Shares. We do not believe that we are a PFIC, nor do we anticipate that we will become a PFIC in the foreseeable future. However, we cannot assure you that the Internal Revenue Service will not successfully challenge our position or that we will not become a PFIC in a future taxable year, as PFIC status is re-tested each year and depends on our assets and income in such year. For a more detailed discussion of the PFIC rules, see Item 10.E. “Additional Information — Taxation — U.S. Federal Income Tax Considerations — Passive Foreign Investment Company Considerations”.

 

 

We were incorporated in Canada under the Canadian Business Corporation Act (the “CBCA”) on January 12, 2001 by Zarlink Semiconductor Inc. (“Zarlink”) (formerly Mitel Corporation) in order to reorganize its communications systems division in contemplation of the sale of that business to companies controlled by Dr. Matthews. In a series of related transactions on February 16, 2001 and March 27, 2001, we acquired from Zarlink the “Mitel” name and substantially all of the assets (other than Canadian real estate and most intellectual property assets) and subsidiaries of the Zarlink communications systems business.

 

Pursuant to an acquisition agreement and plan of merger (the “Merger Agreement”), dated as of April 26, 2007 among Mitel, Inter-Tel (Delaware), Incorporated (“Inter-Tel”) and Arsenal Acquisition Corporation (“Arsenal”), a wholly-owned subsidiary of Mitel, we agreed to acquire Inter-Tel, including all of its direct and indirect wholly-owned subsidiaries, for $25.60 per share, in cash, representing a total purchase price of approximately $729 million. Pursuant to the Merger Agreement, on August 16, 2007, Arsenal merged with and into Inter-Tel and we indirectly acquired all of the outstanding stock of Inter-Tel such that Inter-Tel became a wholly-owned subsidiary of Mitel (the “Inter-Tel Acquisition”). Inter-Tel was a former competitor of ours and a full service provider of business communications solutions.

 

In order to complete the Inter-Tel Acquisition, we obtained both equity and debt financing commitments as described below.

 

First, we received equity financing in the amount of $263,087,000 from Francisco Partners II, L.P. on behalf of Francisco Partners affiliated entities (“Francisco Partners”) and Morgan Stanley Principal Investors Inc. (collectively, the “Investors”). Pursuant to a subscription agreement entered into between us and the Investors on August 16, 2007, the Investors made an aggregate equity investment of $263,087,000 in us in exchange for the issuance to the Investors of the Class 1 Preferred Shares and warrants to acquire Common Shares of Mitel (the “Equity Financing”).

 

Second, Morgan Stanley Senior Funding Inc. and Morgan Stanley Senior Funding (Nova Scotia) Co. (collectively, and together with their respective affiliates, “Morgan Stanley”) arranged a syndicate of lenders to provide a secured first lien term loan and revolving credit facilities and secured second lien loan facility in the aggregate amount of $460 million (collectively, the “Debt Financing”), as follows:

 

 

(i) a $300 million term loan facility; and

 

(ii) a $30 million revolving credit facility, consisting of US and Canadian sub-facilities; and (the “First Lien Credit Agreement”).

 

 

As a condition to completing each of the Equity Financing and the Debt Financing, we took the following capital and debt restructuring actions, with requisite shareholder approval:

 

 

On January 18, 2008, the Investors made an additional aggregate equity investment of $10,000,000 in us in exchange for which we issued to:

 

(i) Francisco Partners, 8,076 Class 1 Preferred Shares and warrants to acquire 611,979 Common Shares; and

 

(ii) Morgan Stanley Principal Investors Inc., 1,593 Class 1 Preferred Shares and warrants to acquire 120,714 Common Shares of Mitel.

 

Internal Re-Organization and Restructurings

 

In connection with and subsequent to the Inter-Tel Acquisition, we have completed a number of internal legal entity re-organizations undertaken as part of our post Inter-Tel Acquisition integration efforts, including:

 

 

(i) Inter-Tel (Delaware), Inc. (a Delaware corporation) to Mitel (Delaware), Inc.;

 

(ii) Inter-Tel Technologies, Inc. (an Arizona corporation) to Mitel Technologies, Inc.;

 

(iii) Inter-Tel Leasing, Inc. (an Arizona corporation) to Mitel Leasing, Inc.; and

 

(iv) Inter-Tel Business Information Systems, Inc. (an Arizona corporation) to Mitel Business Systems, Inc.

 

Our registered office and corporate headquarters are located at 350 Legget Drive, Ottawa, Ontario, Canada, K2K 2W7, Telephone: (613) 592-2122, Facsimile: (613) 592-4784.

Significant developments subsequent to April 30, 2007:

 

Inter-Tel Acquisition:

 

See Item 10.B. “Additional Information — Memorandum and Articles of Incorporation — Share Capital”.

 

 

We are a leading provider of business communications solutions and services. Our award winning portfolio of Internet Protocol (“IP”) based converged and unified communications solutions consist of a combination of telephony hardware products, such as communications platforms and desktop devices, and software applications that integrate voice, video and data communications with business applications and processes. Unified communications solutions consist of a combination of voice communications, mobility, conferencing and collaboration applications that can be integrated with personal and business desktop applications and devices as well as general business systems. Unified communications enable individuals, teams and organizations to communicate and collaborate using applications most appropriate to their needs. We also provide managed services, including voice and data network design and traffic provisioning, local and long distance calling services, custom application development, maintenance, leasing and support for our products. Our customers include businesses, government agencies and non-profit organizations. We believe that our business communications solutions and services enable our customers to realize significant cost benefits and to conduct their business more effectively.

 

The Inter-Tel Acquisition effectively doubled the size of our business in terms of revenue and has significantly increased our sales coverage in the U.S. With the Inter-Tel Acquisition, we also acquired Inter-Tel’s competitive portfolio of voice, video and data solutions and a differentiated managed service offering (as described below). Inter-Tel’s solutions are targeted at the very small business (“VSB”) market up to the small to medium sized business (“SMB”). During the period of August 2007 to September 2008, we have re-branded the majority of the Inter-Tel portfolio under the Mitel name and have also taken steps to consolidate the portfolio where appropriate, to be able to add further benefit to the solutions we offer our customers and broaden the portfolio offered to our channel partners.

 

We have been a leading vendor of business communications systems for over 30 years. We have invested heavily in the research and development of IP-based and unified communications solutions to take advantage of the telephone communications industry shift from traditional PBX systems to IP-based and unified communications solutions. As a result of our efforts, we have realigned our business and discontinued certain products and activities relating to our traditional systems. In fiscal 2008, we recorded a net income of $13.2 million. However, due to the focus of investment on our IP-based and unified communications solutions, we have incurred losses in each of the prior five fiscal years, including net losses of $35.0 million in fiscal 2007. As at April 30, 2008, we had an accumulated deficit of $492.2 million. However, we believe our early and sustained investment in IP-based and unified communications research and development, our decision to concentrate our efforts on this technology, along with the Inter-Tel Acquisition, have positioned us well to capitalize on the industry shift to IP-based and unified communications solutions. As a result of this strategic focus, we have experienced significant growth in the sales of our new generation of communications solutions as businesses migrate from their traditional systems. Substantially all of our system shipments for fiscal 2008 were IP-based and unified communications solutions.

 

Our IP-based and unified communications solutions are scalable, flexible, secure, easy to deploy, manage and use, and are currently used by customers with as few as 3 users in a single location to, for example, a customer with a seamless multi-site network that supports over 40,000 users today and has the capacity to grow to 65,000 users. Scalability refers to how well a hardware or software system can adapt to increased demands and is a very important feature because it means customers can invest in a solution with confidence that they will not outgrow it. Through the use of open and defined standards, our solutions can interoperate with various systems supplied by other vendors, allowing our customers to migrate their traditional systems towards an IP-based system at their own pace, and can also be aligned with our customers’ business systems and processes. We offer software applications that are designed to solve particular business communications challenges, including applications for unified communications, contact centers, mobility, teleworking, messaging and collaboration. We also develop solutions that focus on specific industries as well as custom software applications that address the needs of specific customers. Our customers include prominent hotel chains, governmental agencies, retail chains, professional services firms,

educational establishments and healthcare providers worldwide. We operate from over 90 locations in 19 countries around the world and we sell our communications solutions through a distribution network of over 1,400 channel partners in 90 countries that includes wholesale distributors, solutions providers, authorized channel partners, exclusive business partners, communications services providers, systems integrators, and other distribution channels.

 

Our Solutions

 

We have designed our IP-based and unified communications solutions to perform as pure IP- solutions that facilitate the use of digital or analog telephones and also as gateways to facilitate interoperability between our customers’ existing voice infrastructure, traditional devices and new IP environments, including communications applicances and networks.

 

Our product portfolio consists of a range of appliances for very small or home-based business to communications platforms and gateways (both of which manage call processing), a desktop portfolio (such as phones, desktop PC applications, conference units and operator consoles) and software applications (software which typically enables specialized functionality such as messaging, teleworking and voice and data collaboration). We also provide a suite of Application Programming Interfaces (“APIs”) which allow third parties, including our customers, to integrate their products and customers’ business systems with our solutions. We complement these products with a broad range of services.

 

We have won numerous awards for our product innovation, industrial design and performance. Some of these awards include:

 

 

We have made significant investments in the development of new IP-based communications solutions to meet the changing needs of our customers and their migration to IP-based communication systems. Our commitment to the development of our IP solutions has resulted in a portfolio that we believe is among the broadest and most sophisticated in the industry today.

 

We offer a variety of communications solutions and services to our customers and channel partners. These range from solutions that address the needs of the very small business customer to very large multi-national enterprises.

The Mitel 3300 IP Communications Platform

 

 

Applications for the Mitel 3300 ICP

 

We offer a broad range of IP-based software applications that are used by businesses across a variety of industries. We can combine our applications with desktop applications and business systems software to create a modular IP-based and unified communications solution for our customers. We also offer customized software applications to businesses requiring highly tailored solutions.

 

 

 

 

 

 

 

 

 

The Mitel 5000 Communications Platform

 

 

Applications for the Mitel 5000 CP

 

We provide a variety of applications for the Mitel 5000 CP. Our suite of presence, collaboration, messaging and management applications enable businesses with single or multiple locations to remain connected with their customers, vendors, and on-site and mobile staff and other stakeholders.

 

 

 

Mitel SX-200 ICP

 

The Mitel SX-200 ICP supports up to 600 users and specifically addresses the North American market. The Mitel SX-200 ICP provides the features required by the smaller business market and is targeted specifically at the hospitality industry. The Mitel SX-200 ICP targets organizations with up to 600 users either at a single location or in multiple locations and it supports networking and interoperability with traditional Mitel SX-200 systems.

 

Applications for the Mitel SX-200 ICP

 

The Mitel SX-200 ICP supports a range of applications many of which are supported by the Mitel 3300 ICP. In some circumstances, the Mitel 3300 ICP may offer a number of features over and above those supported on the Mitel SX-200 ICP. The common applications, which are further described above, are as follows:

 

 

 

In addition, for the hospitality industry, we have either developed or partnered with members of the MSA to develop differentiated solututions through the use of our APIs.

 

Mitel 3000 Communications System

 

The Mitel 3000 Communications System (“Mitel 3000 CS”) has been developed by our subsidiary Lake Communications Limited (“Lake Communications”) under the brand “OfficeLink”. The Mitel 3000 CS is a modular converged voice and data system designed for retail or small, multi-branch businesses with up to 52 employees, home-based businesses, or large residential customers. This system includes feature-rich telephones that have large intuitive displays and allows our customers to integrate a mix of standard analog devices, such as cordless handsets and fax machines. In addition, the system can be programmed and maintained remotely, minimizing costs associated with on-site technician visits. The Mitel 3000 CS also supports a range of applications such as voicemail, auto attendant, courtesy service, automatic call distribution, call queuing, help desk features and a dial by name service.

 

Mitel 1000 Communications System

 

The Mitel 1000 CS has also been developed by Lake Communications under the brand “Sigma”. The Mitel 1000 CS is a converged voice and data communications platform designed to address the needs of very small businesses and home offices with up to four wired and four wireless phones. The Mitel 1000 CS has primarily been sold through large European channel partners. The Mitel 1000 CS incorporates:

 

 

Mitel 3600 Hosted IP Key System

 

The Mitel 3600 Hosted IP Key System is designed for businesses with fewer than 20 employees. This product is sold through service providers or channel partners who wish to offer a hosted solution and eliminate the need for the platform to be located and managed at the end-user’s office. The Mitel 3600 enables the features of a key telephone system to be delivered as a service.

 

Desktop Portfolio.

 

Our desktop portfolio includes a broad range of IP and digital telephones, consoles, conference units, soft phones (a software-only implementation of an IP telephone that runs on a personal computer) and ancillary devices that support our solutions. We have been recognized by a number of third parties as a leader in the design of desktop devices, which have been acknowledged for their ease of use, aesthetics, high quality, low power consumption and functionality.

 

Our IP desktop products interoperate with the majority of our IP-based communications platforms and software applications. These desktop products allow users access to advanced telephony features and services such as integrated web browsing, enhanced directory management, and visual voicemail, regardless of whether they are in the office, at home or traveling.

 

Our latest desktop devices provide the capability to customize the displays for particular industries or for customer specific requirements. Functionality can be easily developed to display web content, information or

interactive services linked to internal corporate systems (for example, conference room bookings, emergency broadcasts or information queries). This customization can be undertaken by a customer, a channel partner or can be performed by our professional services organization. In addition, this capability has been leveraged to deliver “out of the box” applications from our product development group. The Mitel Intelligent Directory application provides access to the corporate directory with integrated presence capability. We also provide in-building wireless devices which provide access to the majority of the features on our platforms.

 

Our Traditional Telephony Communication Solutions

 

In some countries and for specific applications there is still a demand for traditional PBX systems. Our traditional circuit-switched telephony portfolio includes the Mitel SX-2000 and the Axxess.

 

The Mitel SX-2000 is a fully featured traditional communications platform that addresses businesses with up to 20,000 users. This system provides extensive features and functionality, allows individual elements of the system to be distributed throughout an organization, can support redundant hardware and software to minimize system downtime and supports networking between systems, based on industry standards, for seamless voice communications between separate sites. The Mitel SX-2000 is complemented by a portfolio of digital telephones and a suite of applications. We offer a simple migration path to IP communications for our extensive base of customers with Mitel SX-2000 and Mitel SX-200 PBX implementations using the Mitel 3300 ICP and Mitel SX-200 ICP.

 

The Axxess is a solution for small-to-medium and larger enterprises and supports over 1000 users. The Axxess converged platforms provide integrated voice processing, IP telephony functionality and transparent networking throughout an organization. Both the Mitel SX-2000 and the Axxess incorporate open interfaces, which enable seamless integration of computer telephony applications. The systems can be tailored to how an organization does business, providing an enterprise with the flexibility it needs to modify its communications solution as the enterprise grows or changes. The Mitel SX-2000 only supports digital and analog handsets whereas the Axxess also supports IP handsets. The Axxess also supports the same digital handsets as the Mitel 5000 CP which offers an attractive migration path for certain Axxess customers.

 

On March 1, 2008 we announced that the manufacture of the SX-2000 would be discontinued as of May 2010. However, support for the SX-2000 will continue until October 2015. The discontinuation of the SX-2000 is due primarily to the market transition to IP-based communications and the effectiveness of our migration strategy which has allowed our customers to transition, at their own pace, to a Mitel 3300 ICP solution.

 

Following the Inter-Tel Acquisition, we announced that the Inter-Tel 7000 would be discontinued largely due to the significant overlap between it and the Mitel 3000 ICP (which has broader applicability to customers globally).

 

Our Services

 

We complement our product offerings with a broad range of services. Our services are delivered by both our channel partners and us and extend from initial planning and design through to implementation and support. Planning services include needs assessments, site surveys, system configuration, network design and project management. Implementation services include IP-based system and application implementations, advanced messaging implementations and multi-site installations. Additional services include resource coordination, project management, contract administration, performance management, customized applications development, technical support services, long-term systems management service and training. Our support options are flexible to meet the varied needs of our customers, including warranty coverage, software support programs and maintenance agreements. Our service offerings enable us to maintain and grow our relationship with our customers and provide us with recurring revenues.

 

Historically, traditional equipment maintenance was focused on hardware and post implementation services. Dealing with a service concern typically entailed the dispatch of a technician to the customer site for diagnosis and repair or replacement of defective hardware. In recent years, as our product mix has transitioned towards IP-based and unified communications solutions, the nature and delivery of our service offerings has changed. For instance, we have established Mitel Professional Services to assist our customers and channel partners with the implementation of all components of our portfolio. We provide implementation services including end-to-end project

management, system design, network analysis, network configuration, system installation, training, and post-cutover support services. Consultative service, pre-engineering, planning and design have emerged as service opportunities. Post implementation service has become more efficient with the technology evolution, allowing the diagnosis (and in some cases, the resolution) of customer outages or concerns to be conducted remotely, more quickly and at a lower cost.

 

Our managed services program offers customers a single-source of business communications solutions for professional services; provisioning and facilities management; and customized applications to improve business communications processes and enhance their total return on investment, while increasing productivity and profitability. The program, provided either by us or our channel partners, is designed to address and protect the total cost of ownership of a business’ communications investment. Because of the modular design of our systems and the high level of software content in our products, customers can increase the size and functionality of their systems as their needs change. We couple this solutions-oriented approach with a high level of customer service and support along with a strong commitment to quality throughout our operations.

 

Other Products and Services (U.S. only)

 

Network, Local and Long Distance Services

 

Customers who desire the convenience of acquiring long distance and other related calling services through the same vendor they purchase their telephony equipment and services from can do so through our subsidiary, Mitel NetSolutions^, Inc. Mitel NetSolutions provides: local communications services, domestic and international long-distance services, calling card services, 800 services, dedicated data services, Internet, DSL, MPLS services and Web voice and videoconferencing, disaster recovery solutions, and network monitoring and management. We provide these services through agreements with major U.S. long-distance carriers. These services are then billed to the end-user customer by Mitel NetSolutions.

 

In addition, Mitel NetSolutions is licensed as a CLEC to provide resale of local dial tone services in over 30 states. Through Mitel’s Network Services Agency (“MNSA”) division, we sell services as an agent of various ILECs and CLECs. These services primarily include local communications services, data services and Internet access. The Local Exchange Carrier or CLEC bills these services to the end user and MNSA receives compensation from the provider for marketing these services.

 

Networking Technologies Integration

 

Mitel’s “DataNet” division designs, installs and supports an integrated, comprehensive solution for our customers’ complex data, telecommunications, and storage needs, including LAN, WAN, or Storage Area Networks. The complete integration and validation of the LAN, WAN infrastructure, along with the implementation of state-of-the-art security policies, allows us to provide the right environment, dependent on the needs of our customers, for successful IP-based implementations using solutions from a variety of networking and other vendors.

 

Through our relationships with major manufacturers of hardware and software technologies, we provide routers, switches, security products, wireless connectivity, application servers and other devices required for a customer’s infrastructure.

 

Leasing Services

 

We offer our TotalSolution program through our subsidiary, Mitel Leasing, Inc. The TotalSolution program enables customers to acquire a full range of business communications systems and applications, as well as maintenance and support services. This program provides a total-system financing, service and support package to our customers at a set monthly cost, with system expansion available for an additional fee. The typical TotalSolution contract has a term of 60 months and allows the customer to renew at a specified price for up to an additional 36 months. Over 17,000 of our customers utilize the TotalSolution program.

 

We also offer a line of lease-purchase financing options. Lease terms range from 24 to 84 months with $1.00, fixed and fair market value purchase options. We can also customize financing packages to suit customers with special financial needs. Customers are able to lease directly from us or an authorized third-party leasing company

supporting a Mitel channel partner, thereby allowing us or one of our channel partners to maintain a direct relationship with our customers. This direct relationship allows us to provide customers with maintenance, support services and information regarding our other products and services.

 

Peripheral Products

 

Through our CommSource division, we distribute peripheral telecommunications products, applications and services developed by third parties to our direct sales offices and channel partners. We offer a selection of products including: analog and cordless telephones, audio conferencing bridges and accessories, call accounting, call logging, call recording, computer telephony products, data equipment, headsets, installation equipment, message-on-hold, paging equipment, power protection and backup, premise wireless and videoconferencing systems, and other accessories. CommSource sells and distributes products we have endorsed as leading communications peripherals widely deployed within organizations, many of which interface with our communication platforms.

 

Business Segments and Principal Markets

 

The following table sets forth total revenues by geographic regions, both in dollars and as a percentage of total revenues, for the fiscal years indicated:

 

 

For further information regarding our reportable segments please see Item 5 “Operating and Financial Review and Prospects”.

 

Sales, Marketing and Distribution

 

Our sales and marketing strategy leverages our own offices in 19 countries with the local presence and customer relationships of over 1,400 channel partners servicing customers covering more than 90 countries.

 

Prior to the Inter-Tel Acquisition, our sales staff worked directly with a prospective customer or in coordination with a channel partner in defining the scope, design and implementation of our solutions. These customers could then decide to do business directly with us or through a channel partner. As a result of the Inter-Tel Acquisition, we acquired approximately 60 direct sales offices in the U.S. Our sales management staff is now directed to operate a channel-neutral selling approach and is compensated accordingly. On a case-by-case basis we may close a sale on a direct basis, while utilizing one of our channel partners for the purpose of fulfillment and ongoing support. Conversely, channel partners may bring us sales opportunities for which they see a greater likelihood of obtaining the account if we take a lead role in the selling process.

 

Our channel partners are supported by our internal teams of regional account managers, systems engineers, technical account managers and sales administrators. To complement our channel partner network, we also provide support to independent consultants who focus on assisting companies with network design, implementation and vendor selection. We believe our extensive channel partner network allows us to effectively sell our solutions globally, without the need to build dedicated in-house sales and service capabilities in every geographic market. We continue to recruit channel partners with a focus on growing market coverage, supporting converged solutions and implementing applications interoperation.

 

During fiscal 2007, we opted to take our product fulfillment and order logistics in-house in the UK, rather than through a wholesale distribution network. Product fulfillment and order logistics, for a portion of our channel

partners, were, during fiscal 2008, generally performed in the U.S. and mainland Europe by our wholesale distributors. During fiscal 2007, our major distributors in the U.S. included GrayBar Electric Co., Inc., Embarq Corp. and Tech Data Corporation. During fiscal 2008 we opted to take the majority of our U.S. product fulfillment and order logistics in-house while maintaining a relationship with Graybar Electric Co., Inc.

 

Our marketing organization employs a comprehensive strategy to enhance our brand, attract and retain channel partners, differentiate our product offerings and develop solutions for specific industry markets. Brand development is conducted through advertising, media articles, trade conferences, product placements, analyst and public relations and web content delivery. We view public relations as a key element of our marketing strategy to increase Mitel brand awareness. Our channel marketing programs are designed and administered to provide benefits and incentives targeted at competencies and quality in delivery of our solutions to the market. Our solutions marketing organization develops materials and programs for our portfolio of solutions that provide clear business value to our target customers. Our vertical marketing team understands the unique business needs and challenges of our key vertical markets and tailors our solutions to address those needs. We also operate demonstration and executive briefing centers equipped with our latest solutions. These centers are used by both our channel partners and our own staff to demonstrate our solutions to existing and prospective customers.

 

As at September 30, 2008, our sales and marketing force consisted of 750 employees.

 

Our Strategy

 

Our strategy is to build on our leading position in the small and medium-sized business market and to continue to attract large enterprise customers, increase our market share and generate attractive returns for our shareholders. To accomplish these objectives, we intend to:

 

 

Our growth strategy may also include the acquisition of additional businesses, technologies, product lines or services in the future and may also include the divestiture or downsizing of product or service groups in order to permit us to focus on what we believe are our core competencies.

 

Manufacturing and Supply Chain Management

 

We outsource all of our manufacturing and certain of our supply chain management and distribution functions. The outsourcing of these functions allows us to:

 

 

We outsource our worldwide manufacturing operations primarily to BreconRidge, Flextronics Telecom Systems, Ltd. (“Flextronics”), Jabil Circuit, Inc. (“Jabil”), Kwanasia Electronics (MCO) Ltd. (“Kwanasia”), Avnet, Inc. and TTems Ltd. (“TTems”). BreconRidge specializes in the communications, industrial and consumer

market sectors and provides many services including design, process and test engineering services, component sourcing, manufacturing, repair/refurbishment and distribution services. BreconRidge has more than 710,000 square feet of manufacturing capacity in state-of-the-art facilities in Canada, the U.S. and China. Flextronics has a network of facilities in over 30 countries on four continents. This global presence provides design and engineering solutions that are vertically integrated with manufacturing, logistics, and component technologies to optimize customer operations by lowering costs and reducing time to market. Jabil is an electronics solutions company providing electronics design, production and product management services to global electronics and technology companies.With more than 85,000 employees and facilities in 21 countries, Jabil provides comprehensive, individualized, focused solutions to customers in a broad range of industries. Kwanasia is a member of the Deswell Industries group, which specializes in plastic injection molding, electronics assembly and distribution as well as metallic parts manufacturing. Founded in 1987, Deswell Industries is headquartered in Macau and its operations are located in Dongguan and Shekou, China. TTems, part of TT electronics plc, provides design, manufacturing, logistics and custom service solutions to Lake Communications. Headquartered in London, TT electronics has appromixately 7,800 employees, 35 manufacturing facilities and has operations in 14 countries. Finally, Avnet, Inc. is one of the world’s largest distributors of electronics parts, enterprise computing and storage products and embedded subsystems, creating a vital link to the technology supply chain.

 

The manufacturing of our products has been allocated among these key suppliers to reduce the risks associated with using a single supply source and to ensure competitive pricing and levels of service. This approach also enables us to respond more rapidly to increases in demand for our products.

 

We have an internal operations group which has the responsibility of managing these contract manufacturing relationships. Functions performed by our operations group include:

 

 

In addition, we retain Lytica Inc., an independent contract manufacturing firm located in Ottawa, Canada, to assist us in assessing, on a quarterly basis, if pricing from our manufacturers is at market rates and if the level of service obtained from them is comparable to our competitors.

 

Research and Development

 

Since 2001, we have invested heavily in IP-based product research and development (“R&D”). This strategy has been based on two key planning assumptions. First, we believed that the shift in customer demand towards IP-based communications solutions, and subsequently unified communications, would be one of the most significant technology developments in the voice communications industry since digital telephony displaced analog phone systems in the 1980s. Second, we believed that the transition to this new mode of IP-based communications would be rapid. Companies who did not anticipate and proactively plan for this rapid technological change would miss out on a significant market opportunity, suffer significant customer and market share losses and damage their potential for future revenue growth. Our new product development programs are exclusively focused on developing IP-based solutions and associated applications.

 

Accordingly, we have been executing an aggressive research and development investment strategy, designed to position us with one of the broadest portfolios of IP-based and unified communications solutions in the industry. This strategy has been reflected in our research and development expense levels, which have ranged between 17%

and 9% of revenues in the period from fiscal 2001 through fiscal 2008. Our investment strategy has positioned us with a broad range of feature-rich, scalable, standards-based and interoperable IP-based communications solutions, which allow us to capitalize on our historical strength in the small and medium-sized business market, and expand our addressable market to larger enterprise customers. Substantially all of our system shipments for the fiscal year 2008 were IP-based communications solutions. As a result, we believe we have minimal exposure to continued erosion of traditional product revenues.

 

Our research and development organization is located in three centers of excellence. These centers focus on specific elements of our global portfolio. Our center in Ottawa, Canada is responsible for our enterprise products, our messaging, contact center, teleworking and mobility applications, as well as our desktop telephones and appliances. Our center in Chandler, Arizona, is responsible for our SMB portfolio and our next generation collaboration applications. Our center in Dublin, Ireland is responsible our small and very small business portfolio. Our combined research and development organization, as of September 30, 2008, was comprised of 504 personnel, almost all of whom are engaged in product design and verification. Research and development personnel have an average tenure with us of approximately 11 years, and bring competencies in real time software, call control, telephony applications and digital signal processing. Our ratio of software to hardware engineers is approximately 8:1, compared to a ratio of 5:1 in fiscal 2007, reflecting our focus on software in our core products and our growing suite of applications. We also leverage external development relationships with a number of third party software development firms, both for specific software applications that we may brand as Mitel products and for non-mission-critical development and support. We target a major release cycle for our key products every six to nine months.

 

Intellectual Property

 

We have over 1100 patents and pending applications in the U.S., Canada and Europe and in other countries around the world covering over 350 inventions. Within the last 7 years we have focused our intellectual property efforts on seeking patent protection for our IP-based communications inventions and have a number of patents in the areas of presence, collaboration and mobility.

 

Historically, our strategy had been to rely on our patent portfolio primarily to counter any allegations of infringement on the patents held by our competitors. Given the strength of our IP-based patent portfolio, we continue to implement a strategy to leverage these assets by asserting our rights in certain patented technologies. Certain companies have engaged us to pro-actively license or purchase patents within our portfolio and we will continue to encourage others to do the same.

 

Our other intellectual property assets include industrial designs, trademarks, proprietary software, copyrights, domain names, operating and instruction manuals, trade secrets and confidential business information.

 

Our solutions may contain software applications and hardware components that are either developed and owned by us or licensed to us by third parties. The majority of the software code embodied in each of our core call-processing software, IP-based teleworker software, wireless telephony software applications, integrated messaging and voicemail software and Microsoft collaboration interfaces has been developed internally and is owned by us.

 

In some cases, we have obtained a non-exclusive license from third parties to use, integrate and distribute with our products certain packaged software, as well as customized software. This third-party software is either integrated into our own software application or is sold as a separate self-contained application, such as voicemail or unified messaging applications. The majority of the software that we license is packaged software that is made generally available and has not been customized for our specific purpose. If any of these third-party licenses were to terminate, our options would be to either license a functionally equivalent software application or develop the functionally equivalent software application ourselves.

 

We have also entered into a number of non-exclusive license agreements with third parties to use, integrate and distribute certain operating systems, digital signal processors and semiconductor components as part of our IP-based communications platforms and IP-based desktop portfolio. If any of these third-party licenses were to terminate, we would need to license functionally equivalent technology from another supplier.

 

It is our general practice to include confidentiality and non-disclosure provisions in the agreements entered into with our employees, consultants, manufacturers, end-users, channel partners and others to attempt to limit

access to and distribution of our proprietary information. In addition, it is our practice to enter into agreements with employees that include an assignment to us of all intellectual property developed in the course of their employment.

 

Effective February 1, 2007, Mitel and Avaya Inc. entered into a settlement agreement with respect to worldwide mutual cross licensing agreement covering all products and services of each respective portfolios.

 

On June 27, 2007 we filed a lawsuit against ShoreTel Inc. in the U.S. District Court for the Eastern District of Texas, alleging infringement of four of our patents (we subsequently added 2 additional patents to our claim). ShoreTel filed a counter claim alleging infringement of one patent. The combined lawsuit is currently scheduled for hearings in early 2010.

 

Competition

 

The market for our products has traditionally been highly competitive, particularly given the global industry shift from traditional PBX systems to IP-based communications and unified communications solutions. This market is characterized by rapid technological change, business consolidations and new entrants. Our competitors include Aastra Technologies Limited, Alcatel-Lucent, Avaya Inc., Cisco Systems, Inc., NEC Corporation, Nortel Networks Corporation, Panasonic Corporation, Shoretel, Inc., Siemens Enterprise Communications and Toshiba Corporation. All of these competitors have been active in developing and marketing IP-based and unified communications solutions and have established relationships with customers within their markets. We also compete with a number of new startup companies who are focused on the IP-based communications market. We compete against these new entrants by leveraging our size, our extensive channel network, our large installed based, our global presence and our deep knowledge of telephony built on over 30 years of developing telephony solutions.

 

When competing against these companies we generally focus on the following factors:

 

 

We also compete against carriers and service providers, which typically offer systems produced by one or more of our competitors listed above.

 

We also compete with leaders in information technology, personal and business applications and their partners who have entered the telecommunications market and offer products that compete with our solutions.

 

In connection with Mitel Netsolutions’ business of providing long distance services in the U.S. market, we compete against AT&T, Global Crossing, Qwest, Sprint, Verizon and others. We also expect to compete with ILECs and CLECs, cable television companies, satellite and other wireless broadband service providers for long distance business.

 

We believe that we compete favorably in certain of our markets with respect to the price, performance, implementation and features of our systems, as well as the level of service and support that we provide to our customers. However, certain of our competitors have significantly greater resources, brand recognition and distribution capabilities than we do.

 

See Item 7.A. “Major Shareholders and Related Party Transactions — Major Shareholders” and Item 7.B. “Major Shareholders and Related Party Transactions — Related Party Transactions” for a discussion of our major shareholders and their related ownership interest in Mitel.

 

We carry on our worldwide business directly and through our subsidiaries. Our material subsidiaries as of September 30, 2008 are shown on the chart below, with the jurisdiction of incorporation in parentheses:

 

 

 

Leased Facilities:

 

Properties

 

We do not own any real property. The following table outlines significant properties that we currently lease:

 

 

 

 

The Ottawa facilities are leased from Brookstreet Research Park Corporation (“Brookstreet”), a company controlled by Dr. Matthews, under terms and conditions reflecting what management believed were prevailing market conditions at the time the lease was entered into. See “Certain Relationships and Related Party Transactions — Brookstreet Research Park Corporation.”

 

In addition to these significant properties, we also operate a number of regional sales offices throughout the world from leased facilities, including offices:

 

 

We believe that these facilities are adequate for our immediate needs and that additional space would be available if needed to accommodate any expansion.

 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations for the Fiscal Year Ended April 30, 2008

 

The following discussion should be read in conjunction with our consolidated financial statements and the notes to those statements, as well as the other financial information appearing elsewhere in this annual report. This annual report contains forward-looking statements that involve risks and uncertainties and that reflect estimates and assumptions. Our actual results may differ materially from those indicated in forward-looking statements. Factors that could cause our actual results to differ materially from our forward-looking statements are described in Item 3.D. “Key Information — Risk Factors” and elsewhere in this annual report.

 

Inter-Tel Acquisition

 

On August 16, 2007, we completed the Inter-Tel Acquisition for $25.60 per Inter-Tel share in cash, representing a total purchase price of approximately $729 million. As a result of the Inter-Tel Acquisition, Inter-Tel is now a wholly-owned subsidiary of Mitel and has been renamed Mitel (Delaware) Inc. The transaction was funded by a combination of equity and debt financing and resulted in significant changes to our debt and equity structure. The deemed purchase price was allocated to the underlying tangible and identifiable assets and liabilities acquired based on their respective fair values and any excess purchase price allocated to goodwill.

As a result of the Inter-Tel Acquisition, our 2008 financial results include:

 

(i) 31/2 months of operations of Mitel prior to the Inter-Tel Acquisition; and

 

(ii) 81/2 months of results of the combined entity.

 

As a result of the Inter-Tel Acquisition and the restructuring of our previous debt and equity investments, in accordance with U.S. GAAP, our results for fiscal 2008 include several non-cash impacts relating to purchase accounting, and our accounting for complex financial instruments. Our results for fiscal 2008 also reflect the impact of adopting Statement of Position 97-2, Software Revenue Recognition (“SOP 97-2”) on Inter-Tel’s sales of lease-type transactions as of the Inter-Tel Acquisition date. The effect of such adoption was to (1) defer $44.2 million of revenue previously recognized by Inter-Tel prior to the Inter-Tel Acquisition as of the acquisition date and (2) reduce both total revenues and operating income recorded in fiscal 2008 post-acquisition by $14.0 million.

 

Overview

 

We are a provider of IP-based and unified communications solutions and services for business customers. Our IP-based and unified communications solutions consist of a combination of telephony hardware products, such as communications platforms and desktop devices, and software applications that integrate voice, video and data communications with business applications and processes. We refer to these hardware products and software applications as communications solutions because they are configured to meet our customers’ specific communications needs. We complement our communications solutions with a range of services, including the design of communications networks, implementation, maintenance, training and support services. We believe that our IP-based and unified communications solutions and services enable our customers to realize significant cost benefits and to conduct their business more effectively.

 

We were incorporated in Canada on January 12, 2001 by Zarlink in order to reorganize its communications systems division in contemplation of the sale of that business to companies controlled by Dr. Matthews. In a series of related transactions on February 16, 2001 and March 27, 2001, we acquired from Zarlink the “Mitel” name and substantially all of the assets (other than Canadian real estate and most intellectual property assets) and subsidiaries of the Zarlink communications systems business.

 

We have invested heavily in the research and development of IP-based and unified communications solutions to take advantage of the telephone communications industry shift from traditional PBX systems to IP-based and unified communications solutions. As a result of our efforts, we have realigned our business and discontinued certain products and activities relating to our traditional systems. In fiscal 2008 we recorded a net income of $13.2 million. However, due to the focus of investment on our IP-based and unified communications solutions, we have incurred losses in each of the prior five fiscal years, including net losses of $35.0 million in fiscal 2007. As at April 30, 2008, we had an accumulated deficit of $492.2 million. However, we believe our early and sustained investment in IP-based and unified communications research and development, our decision to concentrate our efforts on this technology, along with the Inter-Tel Acquisition, have positioned us well to capitalize on the industry shift to IP-based and unified communications solutions. As a result of this strategic focus, we have experienced significant growth in the sales of our new generation of communications solutions as businesses migrate from their traditional systems. Substantially all of our system shipments for fiscal 2008 were IP-based and unified communications solutions.

 

Comparability of Periods

 

In light of the Inter-Tel Acquisition and the realignment of our business over the past seven years to focus on IP-based and unified communications solutions, we believe that period-over-period comparisons of our operating results are not necessarily meaningful and should not be relied upon as being a good indicator of our future performance.

 

Effective fiscal 2008, we revised our allocation of revenues and cost of revenues from a product and service group presentation, to a telecommunications and network services presentation. This revised presentation is consistent with the way in which Inter-Tel reported its revenues and cost of revenues prior to the Inter-Tel

Acquisition. The results of operations for fiscal 2006 and 2007 have been restated to conform with the new presentation.

 

The functional currency of our parent company is the U.S. dollar and our consolidated financial statements are prepared with U.S. dollar reporting currency using the current rate method. Assets and liabilities of foreign operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the balance sheet date while revenue and expense items are translated at the weighted-average exchange rates for the period. The resulting unrealized gains and losses have been included as part of the cumulative foreign currency translation adjustment which is reported as other comprehensive income.

 

Key Performance Indicators

 

Key performance indicators that we use to manage our business and evaluate our financial results and operating performance include: revenues, gross margins, operating costs and cash flows.

 

Revenue performance is evaluated from both a geographical perspective, in accordance with our reportable segments, and from a revenue source perspective, that is telecommunications and network services. We evaluate revenue performance by comparing the results to management forecasts and prior period performance.

 

Gross margins and operating costs are evaluated in similar manners as actual performance is measured against both management forecasts and prior period performance.

 

Cash flow from operations is the key performance indicator with respect to cash flows. As part of monitoring cash flow from operations, we also monitor our ability to collect accounts receivable by measuring our days sales outstanding.

 

In addition to the above indicators, from time to time, we also monitor performance in the following areas:

 

 

In an effort to ensure we are creating value for and maintaining strong relationships with our customers, we monitor the status of key customer contracts and conduct regular customer satisfaction surveys to monitor customer service levels. With respect to our R&D projects, we measure content, quality and timeliness against project plans.

 

Sources of Revenues and Expenses

 

The following describes our sources of revenues and expenses.

 

Revenues

 

We generate our revenues principally from the sale of integrated communications solutions and services to business customers with these revenues being classified as telecommunications revenues or network services revenues. Telecommunications revenues are comprised of revenues generated from the sales of platforms and desktop devices, software applications, maintenance and support, managed services, installation and other professional services, while network services are comprised of local and long distance and network resale services.

 

We sell our communications solutions and services through a distribution network of channel partners that includes wholesale distributors, solutions providers, channel partners, communications service providers, systems integrators, and other technology providers. We complement and support our channel partners in selected markets using a sales model whereby our sales staff works either directly with a prospective customer, or in coordination with a channel partner in defining the scope, design and implementation of the solution.

 

Software revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred in accordance with the terms and conditions of the contract, the fee is fixed or determinable, and collection is reasonably assured. For software arrangements involving multiple elements, revenues are allocated to each element based on the relative fair value or the residual method, as applicable, and using vendor specific objective evidence of

fair values, which is based on prices charged when the element is sold separately. Revenues related to post-contract support, including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the post-contract support term for contracts that are greater than one year. For contracts where the post-contract support period is one year or less, the costs are deemed insignificant, and the unspecified software upgrades are expected to be and historically have been infrequent, revenues are recognized together with the initial licensing fee and the estimated costs are accrued.

 

We make sales to distributors and channel partners based on contracts with terms typically ranging from one to three years. For products sold through these distribution channels, revenues are recognized at the time the risk of loss is transferred to distributors and channel partners according to contractual terms and if all contractual obligations have been satisfied. These arrangements usually involve multiple elements, including post-contract technical support and training. Costs related to insignificant technical support obligations, including second-line telephone support for certain products, are accrued. For other technical support and training obligations, revenues from product sales are allocated to each element based on vendor specific objective evidence of relative fair values, generally representing the prices charged when the element is sold separately, with any discount allocated proportionately. Revenues attributable to undelivered elements are deferred and recognized upon performance or ratably over the contract period.

 

Our standard warranty period extends fifteen months from the date of sale and extended warranty periods are offered on certain products. At the time product revenues are recognized, an accrual for estimated warranty costs is recorded as a component of cost of revenues based on prior claims experience. Sales to our channel partners do not provide for return or price protection rights while sales to distributors provide for these rights. Product return rights for distributors are typically limited to a percentage of sales over a maximum three-month period. A reserve for estimated product returns and price protection rights based on past experience is recorded as a reduction of sales at the time product revenues are recognized. For new distributors, we estimate the product return provision using past return experience with similar distribution partners operating in the same regions. We offer various cooperative marketing programs to assist our distribution channels to market our products. Allowances for these programs are recorded as marketing expenses at the time of shipment based on contract terms and prior claims experience.

 

We also sell products, including installation and related maintenance and support services, directly to end-user customers. For products sold directly to end-user customers, revenues are recognized at the time of delivery and at the time risk of loss is transferred, based on prior experience of successful compliance with customer specifications. Revenues from installation are recognized when services are rendered and when contractual obligations, including customer acceptance, have been satisfied. Revenues are also derived from professional service contracts with terms that typically range from two to six weeks for standard solutions and for longer periods for customized solutions. Revenues from customer support, professional services and maintenance contracts are recognized ratably over the contractual period, generally one year. Billings in advance of services are included in deferred revenues. Revenues from installation services provided in advance of billing are included in unbilled accounts receivable.

 

Some of our sales arrangements involve sales-type leases. Under theses arrangements, revenues are allocated between hardware and software components on a relative fair value basis, whereby hardware revenues are recognized at the present value of the payments allocated to the hardware lease element at the time of system sale. Revenues from software, including applications, upgrades, software support, and embedded software, are deferred and recognized over the period of support.

 

Certain arrangements with end-user customers provide for free customer support and maintenance services extending twelve months from the date of installation. Customer support and maintenance contracts are also sold separately. When customer support or maintenance services are provided free of charge, these amounts are unbundled from the product and installation revenues at their fair market value based on the prices charged when the element is sold separately and recognized ratably over the contract period. Consulting and training revenues are recognized upon performance.

 

We provide long-term system management services of communication systems (“Managed Services”). Under these arrangements, Managed Services and communication equipment are provided to end-user customers for terms that typically range from three to five years, with an option to renew for an additional 3 years. Revenues from Managed Services are recognized ratably over the contract period. We retain title and risk of loss associated with the

equipment utilized in the provision of the Managed Services. Accordingly, the equipment is capitalized as part of property and equipment and is amortized to cost of sales over the contract period.

 

Revenue from local, long distance and network resale services is recognized as the services are provided.

 

Cost of Revenues

 

Cost of revenues is comprised of product costs and service costs. Product cost of revenues consists of cost of goods purchased from third-party electronics manufacturing services or inventory provisions, engineering costs, warranty costs and other supply chain management costs.

 

We outsource our worldwide manufacturing and repair operations to six main contract manufacturers, BreconRidge, Flextronics, Jabil, Kwanasia, Avnet, Inc. and TTems. The manufacturing of our products has been allocated among these key suppliers to reduce the risks associated with using a single supply source. See “Risk Factors” — “Because we depend upon outside contract manufacturers to manufacture our products, our operations could be delayed or interrupted if we encounter problems with these contractors”. We retain Lytica Inc., an independent contract manufacturing firm, to assist us in attempting to confirm, on a quarterly basis, that pricing from our contract manufacturers is at market rates and the level of service obtained from them is comparable to their competitors.

 

Service cost of sales is primarily comprised of labor costs associated with maintenance and support, Managed Services, installation and other professional services.

 

Research and Development (R&D) Expenses

 

Our R&D organization is located in three centers of excellence. These centers focus on specific elements of our global portfolio. Our center in Ottawa, Canada is responsible for our enterprise products, our messaging, contact center, teleworking and mobility applications, as well as our desktop telephones and appliances. Our center in Chandler, Arizona, is responsible for our SMB portfolio and our next generation collaboration applications. Our center in Dublin, Ireland is responsible for our small and very small business portfolio. Our combined R&D organization as of September 30, 2008 was comprised of 504 personnel, almost all of whom are engaged in product design and verification.

 

R&D expenses consist primarily of salaries and related expenses for engineering personnel, materials and consumables and subcontract service costs.

 

Sales, General and Administrative Expenses

 

Sales, general and administrative, or SG&A, expenses consist primarily of costs relating to our sales and marketing activities, including salaries and related expenses, advertising, trade shows and other promotional activities and materials, administrative and finance functions, legal and professional fees, insurance and other corporate and overhead expenses. Following the Inter-Tel Acquisition, SG&A also includes significant amounts recorded for the amortization of purchased intangible assets.

 

Special Charges, Integration and Inter-Tel Acquisition-Related Expenses

 

Special charges relate to restructuring activities, product line exit and other loss accruals undertaken to improve our operational efficiency and to realign our business to focus on IP-based and unified communications solutions. Special charges consist primarily of workforce reduction costs, lease termination obligations, asset write-offs and legal costs. We reassess the accruals on a regular basis to reflect changes in the timing or amount of estimated restructuring and termination costs on which the original estimates were based. New restructuring accruals or reversals of previous accruals are recorded in the period of change.

 

Integration and acquisition-related transaction expenses principally consist of legal and consulting fees,, as well as other incremental non-recurring costs directly related to the Inter-Tel Acquisition.

Other Operating Expenses

 

Other expenses included as deductions against operating income include gains or losses on sale of assets or operations.

 

Results of Operations

 

The following table sets forth our audited consolidated statement of operations data for the fiscal periods indicated:

 

Fiscal 2008 as compared to Fiscal 2007

 

The following table sets forth our comparative results of operations, both in dollars and as a percentage of total revenues, for fiscal 2008 and 2007:

 

 

 

 

Revenues:

 

Geographic Segment Revenues:

 

Our reportable segments are represented by the following four geographic sales regions:

 

 

These reportable segments were determined in accordance with how our management views and evaluates our business. The following table sets forth total revenues by geographic regions, both in dollars and as a percentage of total revenues, for the fiscal years indicated:

 

 

During fiscal 2008, revenues increased by $307.1 million, or 79.8%, compared to fiscal 2007. The increase is primarily due to the Inter-Tel Acquisition and the inclusion of 81/2 months of Inter-Tel revenues.

 

As a result of the Inter-Tel Acquisition and its regional impact, revenues in the U.S. increased by $248.2 million, and accounted for 59.2% of our total revenues in fiscal 2008, as compared to 42.0% of our total revenues in fiscal 2007. The increase was partially offset by the impact of adopting Statement of Position 97-2, Software Revenue Recognition (“SOP 97-2”) on Inter-Tel’s sales of lease-type transactions post-Inter-Tel Acquisition. The following table sets forth the impact of the adoption of SOP 97-2 on revenues in the U.S.:

 

 

Excluding Inter-Tel (and its subsidiaries) revenues for the 81/2 month period post-Inter-Tel Acquisition, revenues in the U.S. declined by $16.7 million, or 10%, over fiscal 2007 partially as a result of unfavorable economic and market conditions in the U.S. The region also experienced an additional one-time decline in U.S. revenues since we exited a two-tier distribution model in the third quarter of fiscal 2008. The exit of two-tier distribution was completed by the end of fiscal 2008, and we do not anticipate further impact on future revenue levels.

 

Consistent with prior years, we continue to experience growth in revenues across all of the other geographical segments, with the most significant growth, in absolute dollars, coming from EMEA.

 

Revenue growth in EMEA was partially helped by the Inter-Tel Acquisition and the inclusion of its international operations in the United Kingdom. However, even without including the impact of the Inter-Tel Acquisition, revenues in EMEA grew by $19.8 million, or 12.2%, over fiscal 2007 as a result of increased product sales in the United Kingdom and continental Europe. Revenue growth in the region has been partially mitigated by a year-over-year decline in the region’s service business resulting primarily from a decline in both maintenance and support and managed service revenues.

 

Revenue growth in the Canada and CALA segment is primarily attributable to increased product sales through channel partners and our direct sales offices in Canada.

Gross Margin:

 

The following table sets forth gross margin, both in dollars and as a percentage of revenues, for the fiscal years indicated:

 

 

Gross margin, in absolute dollars, more than doubled in fiscal 2008, as a result of the Inter-Tel Acquisition, representing 46.8% of revenues, compared to 41.5% in fiscal 2007.

 

Gross margin percentage on telecommunication revenues alone increased by 6.0% from fiscal 2007 to fiscal 2008, primarily as a result of:

 

 

The increase in gross margin percentage was partially offset by lower margins on sales of local, long distance and network services. Network services represents a new revenue stream for us following the Inter-Tel Acquisition, and typically generates lower gross margins as compared to sales of software and systems.

 

Operating Expenses

 

Research and Development:

 

R&D expenses increased in absolute dollars by $20.9 million year-over-year as a result of the Inter-Tel Acquisition, but decreased as a percentage of revenues from 10.8% in fiscal 2007 to 9.0% in fiscal 2008. The reduction as a percentage of revenue is mostly attributed to relatively lower research and development spending levels in Inter-Tel’s business prior to the Inter-Tel Acquisition. Excluding the impact of the Inter-Tel Acquisition, R&D expenses decreased by only 0.3% from 10.8% in fiscal 2007 to 10.5% in fiscal 2008. The decrease is the result of restructuring actions taken during fiscal 2008 to align our operating expense model with current revenue levels.

 

Historically, we have invested between 17% and 11% of revenues on R&D from fiscal 2002 through fiscal 2007, consistent with an aggressive research and development investment strategy that has positioned us with a broad range of feature-rich, scalable, standards-based and interoperable IP-based communication solutions.

Selling, General and Administrative:

 

SG&A expenses increased from 32.0% of total revenues in fiscal 2007 to 35.5% in fiscal 2008, with spending in absolute dollars growing by $123.1 million year-over-year. The increase in absolute dollars is primarily due to the inclusion of 81/2 months of operations for Inter-Tel (and its subsidiaries). The increase as a percentage of revenues is due to the inclusion of significant non-cash charges, including $17.0 million for the amortization of purchased intangible assets of Inter-Tel (and its subsidiaries), such as customer relationships, developed technology and trade name, and $1.4 million of incremental compensation expense associated with employee stock option grants. Excluding the impact of these significant non-cash charges, SG&A as a percentage of revenues was 32.9% in fiscal 2008 as compared to 32.0% in fiscal 2007.

 

Special Charges, Integration and Inter-Tel Acquisition-Related Expenses:

 

During the year ended April 30, 2008, we recorded net special restructuring charges of $8.6 million related to further cost reduction measures taken to align our operating expense model with current revenue levels. The net restructuring charges included workforce reduction costs of $4.3 million for employee severance and benefits and associated legal costs incurred in the termination of 74 employees throughout the world. In addition, special charges included $0.9 million of accreted interest related to lease termination obligations and $3.4 million in non-cancelable lease costs relating to various sales office closures in the U.S.

 

In fiscal 2008, we also recorded charges to operations of $7.4 million for Inter-Tel Acquisition-related integration costs. These charges primarily include outside legal and consulting fees and other incremental costs directly related to integrating the two companies.

 

During the year ended April 30, 2007, we recorded special restructuring charges of $9.3 million related to cost reduction measures. The net restructuring charges included workforce reduction costs of $8.9 million for employee severance and benefits and associated legal costs incurred in the termination of 129 employees throughout the world. In addition, special charges included $0.4 million of accreted interest costs associated with excess facilities obligations and $0.2 million in non-cancelable lease costs relating to various sales office closures in the U.S.

 

Litigation Settlement:

 

On March 19, 2007 we reached a settlement agreement with one of our competitors to settle certain patent infringement complaints made by the competitor against us, as well as patent infringement complaints made by us against the competitor, outside of court. Under the terms of the settlement agreement, the competitor agreed to release us from all past infringements and also entered into a covenant to not sue each other for a period of 5 years from the effective date. In accordance with SFAS No. 5, Accounting for Contingencies, a one-time litigation settlement charge of $16.3 million was recorded during fiscal 2007. The litigation settlement amount was comprised of $14.8 million, representing the present value of $19.7 million payable over a five-year period and discounted using an interest rate of 12%, plus $1.5 million in legal costs. We did not incur any further litigation settlement charges in fiscal 2008.

 

Initial Public Offering Costs:

 

On May 9, 2006, we initiated an initial public offering by filing a registration statement on Form F-1 under the Securities Act of 1933 to sell common shares in the U.S. and a preliminary prospectus with Canadian securities regulators to sell common shares in Canada. In fiscal 2006 and fiscal 2007, we incurred $3.3 million in costs associated with the initial public offering.

 

Upon completion of the Inter-Tel Acquisition, we withdrew from the initial public offering process in both the U.S. and Canada and as a result, expensed all costs incurred associated with the initial public offering in fiscal 2007. No additional costs were incurred or written-off in fiscal 2008.

 

Loss (Gain) on Sale of Manufacturing Operations:

 

On August 31, 2001, we outsourced our manufacturing operations, including the sale of related net assets and the transfer of employees and certain liabilities to BreconRidge, for total net consideration of $5.0 million in the

form of long-term promissory notes receivable of $5.4 million and promissory notes payable of $0.4 million. The transaction resulted in a loss on disposal of $1.5 million recorded in fiscal 2002, representing the excess of the carrying value of the plant, equipment and manufacturing workforce over the total net consideration. This loss contained estimates and assumptions regarding expected subleasing income arising from premises that had been subleased to BreconRidge pursuant to the disposal of the manufacturing operations. Subsequent to fiscal 2002, it became evident that sublease income over the lease renewal period, which was originally included in the estimated loss on disposal, would no longer be realized and as such we have made adjustments to our estimate in each fiscal year subsequent to fiscal 2002.

 

In fiscal 2007, the future estimated operating cost estimates for the premises were re-evaluated with the result being a reversal of $1.0 million of the loss on disposal previously recognized. In fiscal 2008, we recorded an additional $1.0 million against our lease termination obligation estimates as a result of unfavourable changes in certain timing and market rate assumptions whereby we reduced our sublease income estimate relating to the disposal of manufacturing operations.

 

In-process Research and Development:

 

In fiscal 2008, we recorded charges totaling $5.0 million for in-process R&D acquired as part of the Inter-Tel Acquisition. The acquired R&D related to 8 projects associated primarily with enhancements and upgrades to the Inter-Tel 5000 (now known as the Mitel 5000 CP) and Inter-Tel Axxess product lines. The amount allocated to purchase in-process R&D was determined by management using the income valuation approach, and was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed for these 8 in-process research and development projects as of the acquisition date.

 

Interest Expense:

 

Interest expense was $34.7 million in fiscal 2008 compared to $9.1 million in fiscal 2007. The increase is consistent with the overall increase in debt levels, as we borrowed a total of $430.0 million through two credit agreements all bearing interest based on LIBOR, to finance a portion of the Inter-Tel Acquisition. As part of the same transaction, we repurchased the $55.0 million of Convertible Notes, also bearing interest based on LIBOR. The increase was tempered by lower borrowing costs in fiscal 2008 compared to fiscal 2007.

 

Debt and Warrant Retirement Costs:

 

On August 16, 2007, in connection with the Inter-Tel Acquisition, we repaid the Convertible Notes with $66.0 million of cash plus accrued interest of $1.7 million, and amended the terms of the 16.5 million warrants previously issued to the noteholders. The retirement of the convertible notes and the modification of the warrants resulted in a combined loss of $20.8 million, of which $15.3 million related to the convertible notes carrying value, $2.7 million to writing off the unamortized deferred debt issue costs and $2.8 million to reflect the modification of warrants.

 

Mark-to-Market Adjustment on Derivatives:

 

The holders of the Class 1 Preferred Shares have the right to redeem the preferred shares and receive cash equal to the value of the Common Shares into which the instrument would convert after 7 years. This feature qualifies as a derivative liability under generally accepted accounting principles, and therefore must be accounted for separately and marked to market at the end of each reporting period. In fiscal 2008, we recorded a non-cash gain of $6.0 million representing the mark to market adjustment on the derivative liability embedded in the Class 1 Preferred Shares.

 

A similar embedded derivative instrument had been identified within the Series A Preferred Shares and the Series B Preferred Shares which we settled in connection with the Inter-Tel Acquisition. The holders of the Series A Preferred Shares and the Series B Preferred Shares had the right to redeem the preferred shares for cash at an amount equal to the original issue price of C$1.00 per preferred share multiplied by the number of preferred shares outstanding, plus any declared but unpaid dividends, plus the then current fair market value of the common shares into which the preferred shares are convertible. As a portion of the redemption price of the preferred shares was indexed to our common share price, an embedded derivative was accounted for separately and marked to market throughout the period to redemption. In fiscal 2008, we recorded a non-cash expense of $2.7 million representing the mark to market adjustment on the derivative liability for the 31/2 months prior to the acquisition date. Upon redemption, the fair value of the derivative liability was reversed from the balance sheet and recorded as a gain in the

amount of $70.0 million, of which $58.6 million was recorded to the consolidated statement of operations and $11.4 was charged to accumulated deficit.

 

The following table summarizes the gains and losses recorded in fiscal 2008 relating to the derivative liability: