20-F/A
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 20-F/A
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REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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OR
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended April
30, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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OR
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SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Date of event requiring this
shell company report
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Commission file
number: 0-49984
MITEL NETWORKS CORPORATION /
CORPORATION MITEL NETWORKS
(Exact name of Registrant as
specified in its charter)
MITEL NETWORKS
CORPORATION
(Translation of
Registrants name into English)
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Canada
(Jurisdiction of
incorporation or organization)
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350 Legget Drive
Ottawa, Ontario, Canada K2K 2W7
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(Address of principal executive
offices)
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Securities registered or to be registered pursuant to
Section 12(b) of the Act:
None
Securities registered or to be registered pursuant to
Section 12(g) of the Act:
Common Shares, Without Par Value
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None Indicate the number of
outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by
the annual report: 117,343,736 Common Shares, 20,000,000
Class A Convertible Preferred Shares, Series 1, and
67,789,300 Class B Convertible Preferred Shares,
Series 1.
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
If this report is an annual or transition report, indicate by
check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange
Act of
1934. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
Large accelerated
filer o Accelerated
filer o Non-accelerated
filer þ
Indicate by check mark which financial statement item the
registrant has elected to follow. Item 17
þ Item 18
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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
EXPLANATORY
NOTE
Mitel Networks Corporation (Mitel) filed its Annual
Report of
Form 20-F
for the fiscal year ended April 31, 2007 (the
Form 20-F)
with the Securities and Exchange Commission (SEC) on
October 24, 2007.
This Amendment No. 1 to Mitels
Form 20-F
(the Amendment) is filed to provide a single page
that was inadvertently omitted in Item 3 of the
Form 20-F
as filed electronically with the SEC via the EDGAR system on
October 24, 2007.
Other than the foregoing, no part of Mitels
Form 20-F
filed on October 24, 2007, is being amended, and no part of
the
Form 20-F
or of Item 3 as re-filed pursuant to this Amendment speaks
as of any date subsequent to October 24, 2007.
Accordingly, pursuant to
Rule 12b-15
under the Securities Exchange Act of 1934, as amended, Mitel
hereby amends Item 3 of its
Form 20-F
in its entirely and replaces it with the following:
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A.
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Selected
Financial Data
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The following sets forth selected financial information derived
from our audited consolidated financial statements as of and for
the fiscal years ended April 27, 2003 (fiscal
2003), April 25, 2004 (fiscal
2004), April 24, 2005 (fiscal 2005); for
the six day transition period from April 25, 2005 to
April 30, 2005 (the Transition Period); and for
the fiscal years ended April 30, 2006 (fiscal
2006) and April 30, 2007 (fiscal 2007).
The selected financial information may not be indicative of our
future performance and should be read in conjunction with
Item 5 Operating and Financial Review and
Prospects and the consolidated financial statements and
the notes attached to the financial statements included
elsewhere in this annual report. See Item 8 Financial
Information and Item 17 Financial
Statements.
STATEMENT
OF OPERATIONS DATA
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Fiscal Year
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Six Days
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Ended
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Ended
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Fiscal Year Ended
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April 27,
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April 25,
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April 24,
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April 30,
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April 30,
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April 30,
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2003
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2004
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2005
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2005
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2006
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2007
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(In millions, except share and per share data)
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Consolidated Statement of Operations Data
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Revenues
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$
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352.2
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$
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340.7
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$
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342.2
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$
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3.2
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$
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387.1
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$
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384.9
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Cost of revenues
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225.4
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202.9
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213.2
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2.4
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225.7
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225.1
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Gross margin
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126.8
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137.8
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129.0
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0.8
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161.4
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159.8
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Expenses Research and development
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41.2
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36.2
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41.4
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0.7
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44.1
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41.7
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Selling, general and administrative
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114.9
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111.4
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114.9
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1.8
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120.7
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123.5
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Special charges(1)
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13.7
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11.7
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10.6
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5.7
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9.3
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Litigation settlement
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16.3
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Initial public offering costs
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3.3
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Loss (gain) on disposal of assets
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0.6
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3.4
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(2.4
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(1.0
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Amortization of acquired intangibles(2)
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29.1
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0.2
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Operating loss
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(72.1
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(22.3
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(41.3
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(1.7
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(6.7
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(33.3
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Other (income) expense, net
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0.9
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8.0
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7.5
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(0.1
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39.8
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(0.1
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Income tax (recovery) expense
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(2.9
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0.3
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0.8
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(1.9
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1.8
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Net loss
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$
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(70.1
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$
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(30.6
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$
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(49.6
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$
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(1.6
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$
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(44.6
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$
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(35.0
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Net loss per common share Basic and diluted
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$
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(0.63
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$
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(0.26
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$
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(0.49
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$
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(0.01
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$
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(0.44
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$
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(0.36
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Weighted average number of Common Shares outstanding
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113,109,751
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127,831,211
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113,792,829
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117,149,933
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117,230,198
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117,336,927
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1
BALANCE
SHEET DATA
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As at
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As at
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As at
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As at
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As at
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As at
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April 27,
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April 25,
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April 24,
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April 30,
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April 30,
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April 30,
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2003
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2004
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2005
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2005
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2006
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2007
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(In millions)
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Consolidated Balance Sheet Data
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Cash and cash equivalents
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$
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22.3
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$
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26.7
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$
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9.7
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$
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46.6
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$
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35.7
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$
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33.5
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Other current assets
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120.6
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115.0
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117.5
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115.8
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130.8
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136.9
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Property and equipment
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25.3
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20.3
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20.9
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20.6
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17.4
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16.5
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Other assets
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7.3
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7.4
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8.5
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12.3
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15.9
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15.3
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Total assets
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$
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175.5
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$
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169.4
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$
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156.6
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$
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195.3
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$
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199.8
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$
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202.2
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Current liabilities
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$
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135.8
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$
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103.2
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$
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115.8
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$
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101.9
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$
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126.0
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$
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143.8
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Long-term debt
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23.1
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15.5
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20.2
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66.7
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56.7
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66.8
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Derivative instruments(3)(5)
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29.2
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38.0
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37.4
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75.9
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67.3
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Other long-term liabilities
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24.6
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24.8
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25.4
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25.1
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45.6
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55.4
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Redeemable shares(4)(5)
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29.0
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51.3
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57.2
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57.3
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64.2
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71.5
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Capital stock
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183.4
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184.8
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187.6
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187.6
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188.8
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189.1
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Other capital accounts
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(2.2
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7.7
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14.7
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23.3
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(1.9
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6.5
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Accumulated deficit
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(218.2
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(247.1
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(302.3
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(304.0
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(355.5
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(398.2
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Total liabilities and shareholders equity
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$
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175.5
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$
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169.4
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$
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156.6
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$
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195.3
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$
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199.8
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$
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202.2
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(1) |
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Special charges related to restructuring activities, product
line exit and other loss accruals undertaken to improve our
operational efficiency and to realign our business. |
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(2) |
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Acquired intangible assets relating to the acquisition of the
Mitel name, certain assets and subsidiaries from Zarlink
Semiconductor Inc. in 2001 were fully amortized in 2004. |
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(3) |
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The derivative instruments related to our Class A
Series 1 Preferred Shares (the Series A
Preferred Shares) and the Class B Series 1
Preferred Shares (the Series B Preferred
Shares). The derivative instruments arose because a
portion of the redemption price of the Series A Preferred
Shares and Series B Preferred Shares is indexed to our
common share price and as required by SFAS 133 has been
bifurcated and accounted for separately. |
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(4) |
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Redeemable shares included 10,000,000 Common Shares (which are
redeemable by virtue of a shareholders agreement dated
April 23, 2004, as amended, among certain of our
shareholders and us), 20,000,000 Series A Preferred Shares
and 67,789,300 Series B Preferred Shares (See
Item 6.A. Directors, Senior Management and
Employees Directors and Senior Management). |
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(5) |
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On August 16, 2007, in conjunction with the Merger (as
defined below), we converted each existing Series A
Preferred Share into Common Shares and Class 1 Preferred
Shares, converted each existing Series B Preferred Share
into Common Shares and purchased for cancellation the redeemable
shares. |
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B.
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Capitalization
and Indebtedness
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Not applicable.
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C.
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Reasons
for the offer and use of proceeds
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Not applicable.
An investment in our Common Shares should be regarded as
highly speculative and is suitable only for those investors who
are able to sustain a total loss of their investment. You should
carefully consider the following risks, as
2
well as the other information contained in this annual
report, when evaluating us and our business and prospects. Any
of the following risks, as well as risks not currently known to
us, could materially and adversely affect our business, results
of operations or financial condition, and could result in a
complete loss of your investment.
Risks
Relating to our Business
We
have incurred net losses since our incorporation in 2001 and we
may not be profitable in the future.
We incurred a net loss of $35.0 million for fiscal 2007,
and net losses of $44.6 million, $49.6 million,
$30.6 million and $70.1 million in fiscal 2006, 2005,
2004 and 2003, respectively. We may not be able to achieve
profitability or, if achieved, may not be able to sustain
profitability. We have incurred restructuring charges in each of
the previous six fiscal years, and may incur additional
restructuring charges in the future. Our future success in
attaining profitability and growing our revenues and market
share for our solutions depends, among other things, upon our
ability to develop and sell solutions that have a competitive
advantage, to build our brand image and reputation, to attract
orders from new and existing customers and to reduce our costs
as a proportion of our revenue by, among other things,
increasing efficiency in design, component sourcing,
manufacturing and assembly cost processes.
We may
fail to realize the anticipated cost savings, revenue
enhancements and other benefits expected from our acquisition of
Inter-Tel.
As part of the integration of Mitel and Inter-Tel following the
acquisition, we are executing plans to consolidate sales,
operations and support functions, including optimization of our
supply chain and procurement structure, and to leverage our
research and development and services across a larger base.
These actions are expected to result in significant cost
savings, opportunities for revenue synergies and other
synergistic benefits.
Delays we encounter in the execution of our integration plans
could have a material adverse effect on our revenues, expenses,
operating results and financial condition. Although we expect
significant benefits to result from the acquisition, there can
be no assurance that we will actually realize these anticipated
benefits.
Achieving the benefits of the acquisition will depend in part
upon meeting the challenges inherent in the successful
combination and integration of global business enterprises of
the size and scope of Mitel and Inter-Tel and the possible
resulting diversion of management attention for an extended
period of time. There can be no assurance that we will meet
these challenges and that such diversion will not negatively
affect our operations.
Uncertainties
associated with our integration and cost-reduction plans may
cause a loss of employees and may otherwise materially adversely
affect our future business and operations.
Our success is dependent upon the services of a number of key
personnel throughout our organization, including members of our
senior management and software and engineering staff, as well as
the expertise of our directors. Competition for highly skilled
directors, management, research and development and other key
employees is intense in our industry and we may not be able to
attract and retain highly qualified directors, management,
research and development personnel and other key employees in
the future. Our current and prospective employees may continue
to experience uncertainty about their roles with us as we work
through our integration associated with the acquisition.
Further, management focus may be diverted in favour of
integration requirements. This may materially adversely affect
our ability to attract and retain key management, sales,
marketing, operations, technical support and other personnel.
Accordingly, no assurance can be given that we will be able to
attract or retain our key employees to the same extent that we
have been able to attract or retain our employees in the past.
3
A key
component of our strategy is our focus on the development and
marketing of
IP-based
communications solutions and related services, and this strategy
may not be successful or may adversely affect our
business.
We are focused on the development and sales of
IP-based
communications solutions. Our operating results may be adversely
affected if the market opportunity for
IP-based
communications solutions and services does not develop in the
way we anticipate.
IP-based
communications systems currently constitute a small percentage
of global installed large enterprise telephony systems. If
IP-based
communications do not gain widespread acceptance in the
marketplace and as an alternative replacement option for
traditional business telephony systems, our overall revenues and
operating results will be adversely affected. Because this
market opportunity is in its early stages, we cannot predict
whether:
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the demand for
IP-based
communications solutions, value-added applications and services
will grow as fast as we anticipate;
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continuing reductions in long-distance and local toll charges
may adversely affect sales of certain of our solutions to
customers focused on those cost savings;
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current or future competitors or new technologies will cause the
market to evolve in a manner different than we expect;
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other technologies will become more accepted or standard in our
industry; or
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we will be able to achieve a leadership or profitable position
as this opportunity develops.
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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.
Because
we depend primarily upon a small number of 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 a small number of contract manufacturers to
manufacture our products. A large number of our products are
currently manufactured by BreconRidge Manufacturing Solutions
Corporation, a company of which Dr. Terence H. Matthews,
one of our major shareholders and the chairman of our board of
directors, has an approximate 27.1% ownership interest. Our
manufacturing agreement with BreconRidge expires on
December 31, 2007, and may or may not be renewed. Our
ability to ship products to our customers could be delayed or
interrupted as a result of a variety of factors relating to our
contract manufacturers, including:
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our contract manufacturers not being required to manufacture our
products on a long-term basis in any specific quantity or at any
specific price;
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our failure to effectively manage our contract manufacturer
relationships;
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our contract manufacturers experiencing delays, disruptions or
quality control problems in their manufacturing operations;
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lead-times for required materials and components varying
significantly and being dependent on factors such as the
specific supplier, contract terms and the demand for each
component at a given time;
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overestimating our forecast requirements resulting in excess
inventory and related carrying charges;
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underestimating our requirements, resulting in our contract
manufacturers having inadequate materials and components
required to produce our products, or overestimating our
requirements, resulting in charges assessed by the contract
manufacturers or liabilities for excess inventory, each of which
could negatively affect our gross margins; and
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the possible absence of adequate capacity and reduced control
over component availability, quality assurances, delivery
schedules, manufacturing yields and costs.
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The addition of manufacturing locations or other contract
manufacturers would likely increase the complexity of our supply
chain management. If any of our contract manufacturers are
unable or unwilling to continue manufacturing our products in
required volumes and quality levels, we will have to identify,
qualify, select and implement acceptable alternative
manufacturers, which would likely be time consuming and costly.
In addition, alternate sources may not be available to us or may
not be in a position to satisfy our production requirements at
commercially reasonable prices and quality. Therefore, any
significant interruption in manufacturing would result in us
being unable to deliver the affected products to meet our
customer orders.
We
depend on sole source and limited source suppliers for key
components. If these components are not available on a timely
basis, or at all, we may not be able to meet scheduled product
deliveries to our customers.
We depend on sole source and limited source suppliers for key
components of our products. In addition, our contract
manufacturers often acquire these components through purchase
orders and may have no long-term commitments regarding supply or
pricing from their suppliers. Lead-times for various components
may lengthen, which may make certain components scarce. As
component demand increases and lead-times become longer, our
suppliers may increase component costs. We also depend on
anticipated product orders to determine our materials
requirements. Lead-times for limited-source materials and
components can be as long as six months, vary significantly and
depend on factors such as the specific supplier, contract terms
and demand for a component at a given time. From time to time,
shortages in allocations of components have resulted in delays
in filling orders. Shortages and delays in obtaining components
in the future could impede our ability to meet customer orders.
Any of these sole source or limited source suppliers could stop
producing the components, cease operations entirely, or be
acquired by, or enter into exclusive arrangements with, our
competitors. As a result, these sole source and limited source
suppliers may stop selling their components to our contract
manufacturers at commercially reasonable prices, or at all. Any
such interruption, delay or inability to obtain these components
from alternate sources at acceptable prices and within a
reasonable amount of time would adversely affect our ability to
meet scheduled product deliveries to our customers and reduce
margins realized.
Delay
in the delivery of, or lack of access to, software or other
intellectual property licensed from our suppliers could
adversely affect our ability to develop and deliver our
solutions on a timely and reliable basis.
Our business may be harmed by a delay in delivery of software
applications from one or more of our suppliers. Many of our
solutions are designed to include software or other intellectual
property licensed from third parties. It may be necessary in the
future to seek or renew licenses relating to various components
in our solutions. These licenses may not be available on
acceptable terms, or at all. Moreover, the inclusion in our
solutions of software or other intellectual property licensed
from third parties on a non-exclusive basis could limit our
ability to protect our proprietary rights to our solutions.
Non-exclusive licenses also allow our suppliers to develop
relationships with, and supply similar or the same software
applications to, our competitors. Software licenses could
terminate in the event of a bankruptcy or insolvency of a
software supplier or other third party licensor. We have not
entered into
5
source code escrow agreements with every software supplier or
third party licensor. In the event that software suppliers or
other third party licensors terminate their relationships with
us, are unable to fill our orders on a timely basis or the
licenses are otherwise terminated, we may be unable to deliver
the affected products to meet our customer orders.
Our
success is dependent on our intellectual property. Our inability
or failure to protect our intellectual property could seriously
harm our ability to compete and our financial
success.
Our success depends on the intellectual property in the
solutions and services that we develop and sell. We rely upon a
combination of copyright, patent, trade secrets, trademarks,
confidentiality procedures and contractual provisions to protect
our proprietary technology. Our present protective measures may
not be enforceable or adequate to prevent misappropriation of
our technology or independent third-party development of the
same or similar technology. Even if our patents are held valid
and enforceable, others may be able to design around these
patents or develop products competitive to our products but that
are outside the scope of these patents.
We make use of some open source software code under various open
source licenses available to the general public. A
characteristic of an open source license is that it does not
provide any indemnification to the licensee against third-party
claims of intellectual property infringement. Some open source
licenses require the licensee to disclose the licensees
source code derived from such open source code, and failure to
comply with the terms of such licenses can result in the
licensee being stopped from distributing products that contain
the open source code or being forced to freely disseminate
enhancements that were made to the open source code. Further,
the use of open source software in our solutions may expose
those solutions to security risks.
Many foreign jurisdictions offer less protection of intellectual
property rights than Canada and the United States, and the
protection provided to our proprietary technology by the laws of
these and other foreign jurisdictions may not be sufficient to
protect our technology. Preventing the unauthorized use of our
proprietary technology may be difficult, time consuming and
costly, in part because it may be difficult to discover
unauthorized use by third parties. Litigation may be necessary
to enforce our intellectual property rights, to protect our
trade secrets, to determine the validity and scope of our
proprietary rights, or to defend against claims of
unenforceability or invalidity. Any litigation, whether
successful or unsuccessful, could result in substantial costs
and diversion of management resources.
Our
business may be harmed if we infringe intellectual property
rights of third parties.
There is considerable patent and other intellectual property
development activity in our industry. Our success depends, in
part, upon our not infringing intellectual property rights owned
by others. Our competitors, as well as a number of individuals,
patent holding companies and consortiums, own, or claim to own,
intellectual property relating to our industry. Aggressive
patent litigation is not uncommon in our industry and can be
disruptive. We cannot determine with certainty whether any
existing third party patent, or the issuance of new third party
patents, would require us to alter our solutions, obtain
licenses or discontinue the sale of the affected applications
and products. We have received notices, and we may receive
additional notices, containing allegations that our solutions
are subject to patents or other proprietary rights of third
parties, including competitors, patent holding companies and
consortiums. In addition, in July 2007, one of our competitors
filed an answer and counterclaim in the United States District
Court for the Eastern District of Texas (and has moved to have
the case transferred to the Northern District of California)
alleging that we are infringing one of its patents and
requesting damages (treble damages in respect of alleged willful
infringement of the patent), injunctive relief, attorneys
fees, costs and expenses, and such further relief against us as
the court deems just and proper. See Item 8.A.
Financial Information Consolidated Statements
and Other Financial Information Legal
Proceedings for a more complete description of this
proceeding.
Our success also depends, in part, upon our customers
freedom to use our products. For example, certain claims have
been asserted against end-users within our industry and demands
for the payment of licensing fees have been made of end-users
who have implemented our solutions. We generally agree to
indemnify and defend our customers to the extent a claim for
infringement is brought against our customers with respect to
our solutions.
6
Infringement claims (or claims for indemnification resulting
from infringement claims) have been and may in the future be
asserted or prosecuted against us or our customers by third
parties. Some of these third parties, including competitors,
patent holding companies and consortiums, have, or have access
to, substantially greater resources than we do and may be better
able to sustain the costs of complex patent litigation. Whether
or not these claims have merit, we may be subject to costly and
time-consuming legal proceedings, and this could divert our
managements attention from operating our business. If
these claims are successfully asserted against us, we could be
required to pay substantial damages and could be prevented from
selling some or all of our solutions. In addition, an infringer
of a United States patent may be subject to treble damages and
attorneys fees if the infringement is found to be willful.
We may also be obligated to indemnify our business partners or
customers in any such litigation. Furthermore, in order to
resolve such proceedings, we may need to obtain licenses from
third parties or substantially modify or rename our solutions in
order to avoid infringement. Moreover, license agreements with
third parties may not include all intellectual property rights
that may be issued to or owned by the licensors, and future
disputes with these parties are possible. In addition, we might
not be able to obtain the necessary licenses on acceptable
terms, or at all, or be able to modify or rename our solutions
successfully. This could prevent us from selling some or all of
our solutions. Current or future negotiations with third parties
to establish license or cross license arrangements, or to renew
existing licenses, may not be successful and we may not be able
to obtain or renew a license on satisfactory terms, or at all.
If required licenses cannot be obtained, or if existing licenses
are not renewed, litigation could result. Any litigation
relating to intellectual property rights, whether or not
determined in our favor or settled by us, could at a minimum be
costly and would divert the attention and efforts of management
and our technical personnel. An adverse determination in any
litigation or proceeding could prevent us from making, using or
selling some or all of our solutions and subject us to damage
assessments.
We
rely on our channel partners for the majority of our sales, and
disruptions to, or our failure to effectively develop and
manage, our distribution channel and the processes and
procedures that support it could adversely affect our ability to
generate revenues.
Our future success is highly dependent upon establishing and
maintaining successful relationships with a variety of channel
partners. A substantial portion of our revenues is derived
through our channel partners, most of which also sell our
competitors products. Our revenues depend in part on the
performance of these channel partners. The loss of or reduction
in sales to these channel partners could materially reduce our
revenues. Our competitors may in some cases be effective in
causing resellers or potential resellers to favor their products
or prevent or reduce sales of our solutions. If we fail to
maintain relationships with these channel partners, fail to
develop new relationships with channel partners in new markets
or expand the number of channel partners in existing markets, or
if we fail to manage, train or provide appropriate incentives to
existing channel partners or if these channel partners are not
successful in their sales efforts, sales of our solutions may
decrease and our operating results would suffer.
The most likely potential channel partners for us are those
businesses engaged in the voice and data communications business
or the provision of communications software applications. Many
potential channel partners in the voice communications business
have established relationships with our competitors and may not
be willing to invest the time and resources required to train
their staff to effectively market our solutions and services.
Potential channel partners engaged in the data and software
applications communications businesses are less likely to have
established relationships with our competitors, but where they
are unfamiliar with the voice communications business, they may
require substantially more training and other resources to be
qualified to sell our solutions.
Design
defects, errors, failures or bugs, which may be
difficult to detect, may occur in our solutions.
We produce highly complex solutions that incorporate both
hardware and software. Our software may contain bugs
that can interfere with expected operations. Our pre-shipment
testing and field trial programs may not be adequate to detect
all defects in individual applications and products or
systematic defects that could affect numerous shipments, which
might interfere with customer satisfaction, reduce sales
opportunities or affect gross margins. In the past, we have had
to replace certain components and provide remediation in
response to the discovery of defects or bugs in
solutions that we had shipped. Any future remediation may have a
material impact
7
on our business. Our inability to cure an application or product
defect could result in the failure of an application or product
line, the temporary or permanent withdrawal from an application,
product or market, damage to our reputation, inventory costs, or
application or product re-engineering expenses. The sale and
support of applications and products containing defects and
errors may result in product liability claims and warranty
claims. Our insurance may not cover or may be insufficient to
cover claims that are successfully asserted against us or our
contracted suppliers and manufacturers.
We
face intense competition from many competitors and we may not be
able to compete effectively against these
competitors.
The market for our solutions is highly competitive. We compete
against many companies, including Alcatel-Lucent, Avaya Inc.,
Cisco Systems, Inc., NEC Corporation , Nortel Networks
Corporation, Panasonic Corporation, Shoretel, Inc., Siemens AG,
Toshiba Corporation and 3Com Corp. In addition, because the
market for our solutions is subject to rapidly changing
technologies, we may face competition in the future from
companies that do not currently compete in the business
communications market, including companies that currently
compete in other sectors of the information technology,
communications or software industries, mobile communications
companies, or communications companies that serve residential
rather than business customers.
Several of our existing competitors have, and many of our future
competitors may have, greater financial, personnel, research and
other resources, more well-established brands or reputations and
broader customer bases than we have. As a result, these
competitors may be in a stronger position to respond more
quickly to potential acquisitions and other market
opportunities, new or emerging technologies and changes in
customer requirements. Some of these competitors may also have
customer bases that are more geographically balanced than ours
and therefore may be less affected by an economic downturn in a
particular region. Competitors with greater resources may also
be able to offer lower prices, additional products or services
or other incentives that we cannot match or do not offer. In
addition, existing customers of data communications companies
that compete against us may be more inclined to purchase
business communications solutions from their current data
communications vendor than from us. Also, as voice and data
communications converge, we may face competition from systems
integrators that were traditionally focused on data network
integration. We cannot predict which competitors may enter our
markets in the future, what form the competition may take or
whether we will be able to respond effectively to the entry of
new competitors or the rapid evolution in technology and product
development that has characterized our markets. Competition from
existing and potential market entrants may take many forms,
including large bundled offerings that incorporate applications
and products similar to those that we offer. If our competitors
offer deep discounts on certain products or services in an
effort to recapture or gain market share, we may be required to
lower our prices or offer other favorable terms to compete
effectively, which would reduce our margins and could adversely
affect our operating results.
As
voice and data networks converge, we are likely to face
increased competition from companies in the information
technology, personal and business applications and software
industries.
The convergence of voice and data networks and their wider
deployment by enterprises has led information technology and
communication applications deployed on converged networks to
become more integrated. This integration has created an
opportunity for the leaders in information technology, personal
and business applications and the software that connects the
network infrastructure to those applications, to enter the
telecommunications market and offer products that compete with
our systems. Competition from these potential market entrants
may take many forms, and they may offer products and
applications similar to those we offer. Certain leaders in the
information technology, personal and business applications and
software industries, have substantial financial and other
resources that they could devote to this market.
If competitors from the information technology, personal and
business applications or software industries enter the
telecommunications market, the market for IP telecommunications
systems will become increasingly competitive.
8
If the solutions offered by competitors achieve substantial
market penetration, we may not be able to maintain or improve
our market position, and our failure to do so could materially
and adversely affect our business and results of operations.
Our
business may suffer if our strategic alliances are not
successful.
We have a number of strategic alliances and continue to pursue
strategic alliances with other companies in areas where
collaboration can produce industry advancement and acceleration
of new markets. The objectives and goals for a strategic
alliance can include one or more of the following: technology
exchange, product development, joint sales and marketing or
new-market creation. If a strategic alliance fails to perform as
expected or if the relationship is terminated, we could
experience delays in product availability or impairment of our
relationships with customers. In addition, we may face increased
competition if a third party acquires one or more of our
strategic partners or if our competitors enter into additional
successful strategic relationships.
Our
operations in international markets involve inherent risks that
we may not be able to control.
We do business in over 90 countries and are increasing our
activities in foreign jurisdictions. Accordingly, our future
results could be materially and adversely affected by a variety
of uncontrollable and changing factors relating to international
business operations, including:
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political or social unrest or economic instability in a specific
country or region;
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macroeconomic conditions adversely affecting geographies where
we do business;
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higher costs of doing business in foreign countries;
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infringement claims on foreign patents, copyrights, or trademark
rights;
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difficulties in managing operations across disparate geographic
areas;
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difficulties associated with enforcing agreements and
intellectual property rights through foreign legal systems;
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trade protection measures and other regulatory requirements
which may affect our ability to import or export our products
from or to various countries;
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adverse tax consequences;
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unexpected changes in legal and regulatory requirements;
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military conflict, terrorist activities, natural disasters and
widespread medical epidemics; and
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our ability to recruit and retain channel partners in foreign
jurisdictions.
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Our
competitive position may be affected by fluctuations in exchange
rates, and our current currency hedging strategy may not be
sufficient to counter such fluctuations.
A significant portion of our business is conducted, and a
substantial portion of our operating expenses are payable, in
currencies other than the U.S. dollar. Due to the
substantial volatility of currency exchange rates, we cannot
predict the effect of exchange rate fluctuations upon future
sales and expenses. We use financial instruments, principally
forward exchange contracts, in our management of foreign
currency exposure. These contracts primarily require us to
purchase and sell certain foreign currencies with or for
U.S. dollars at contracted rates. We may be exposed to a
credit loss in the event of non-performance by the
counterparties of these contracts. These financial instruments
may not adequately manage our foreign currency exposure. Our
results of operations could be adversely affected if we are
unable to successfully manage currency fluctuations in the
future.
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Our
quarterly and annual revenues and operating results have
historically fluctuated, and the results of one period may not
provide a reliable indicator of our future
performance.
Our quarterly and annual revenues and operating results have
historically fluctuated and are not necessarily indicative of
results to be expected in future periods. A number of factors
may cause our financial results to fluctuate significantly from
period to period, including:
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the fact that an individual order or contract can represent a
substantial amount of revenues for that period;
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the size, timing and shipment of individual orders;
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changes in pricing or discount levels by us or our competitors;
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foreign currency exchange rates;
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the mix and volume of products sold by us;
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the timing of the announcement, introduction and delivery of new
products
and/or
product enhancements by us and our competitors; and
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general economic conditions.
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As a result of the above factors, a quarterly or yearly
comparison of our results of operations is not necessarily
meaningful.
Our
business requires a significant amount of cash, and we may
require additional sources of funds if our sources of liquidity
are unavailable or insufficient to fund our
operations.
Our working capital requirements and cash flows have
historically been, and our working capital requirements and cash
flows are expected to continue to be, subject to quarterly and
yearly fluctuations, depending on a number of factors. If we are
unable to manage fluctuations in cash flow, our business,
operating results and financial condition may be materially
adversely affected. Factors which could lead us to suffer cash
flow fluctuations include:
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the level of sales and the related margins on those sales;
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the collection of receivables;
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the timing and size of capital expenditures;
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the timing and size of purchase of inventory and related
components;
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costs associated with potential restructuring actions;
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the timing and volume of sales of leases to third party funding
sources;
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mergers and acquisitions; and
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customer financing obligations.
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In order to finance our business, we expect to use available
cash and to continue to have access to a $30 million
revolving credit facility. However, our ability to draw on this
facility will be conditioned upon our compliance with covenants
contained in the credit agreement. There can be no assurance
that we will be in compliance with the covenants required by our
lenders in the future.
We may need to secure additional sources of funding if our cash,
credit facility and borrowings are not available or are
insufficient to finance our business. We cannot provide any
assurance that such funding will be available on terms
satisfactory to us. In addition, any proceeds from the issuance
of equity or debt may be required to be used in whole or in
part, to make mandatory payments under our First
and/or
Second Lien Credit agreements. If we were to incur higher levels
of debt, we would require a larger portion of our operating cash
flow to be used to pay principal and interest on our
indebtedness. The increased use of cash to pay indebtedness
could leave us with insufficient funds to finance our operating
activities, such as research and development expenses and
capital expenditures. In addition, debt instruments may contain
covenants or other restrictions that affect our business
10
operations. If we were to raise additional funds by selling
equity securities, the relative ownership of our existing
investors could be diluted or the new investors could obtain
terms more favorable than previous investors.
The
exercise of conversion rights by one or more of our preferred
shareholders, warrant holders, and option holders, could
adversely affect the market value of our Common Shares as well
as our ability to complete any future equity
financing.
As at September 30, 2007, we had outstanding:
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307,087 Class 1 Preferred Shares (Class 1
Preferred Shares). These Class 1 Preferred Shares are
convertible into Common Shares at the option of the holders and
upon certain triggering events. The conversion ratio 767.08 was
as of September 28, 2007 and increases over time than one Common
Share for each Class 1 Preferred Share;
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Stock options to acquire 22,407,179 Common Shares; and
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Warrants to acquire up to an additional 81,505,385 Common Shares.
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The issuance of Common Shares upon the conversion of our
Preferred Shares or the exercise of certain warrants or stock
options may occur at a time when the conversion or exercise
price is below the market value of our Common Shares. Therefore,
the conversion or exercise of these securities will likely have
a dilutive effect on the value of our Common Shares. The
conversion or exercise of these securities will also result in
us having more Common Shares outstanding, which would have a
dilutive effect on our earnings per share. Furthermore, the
Class 1 Preferred Shares, warrants and stock options, as
well as the terms of these securities could materially impair
our future ability to raise capital through an offering of
equity securities. For additional information on these
conversion and exercise rights, see Item 10.B.
Additional Information Memorandum and Articles
of Incorporation Share Capital.
We
have a significant amount of debt, which contain customary
default clauses, a breach of which may result in acceleration of
the repayment of some or all of this debt.
On August 16, 2007, in connection with the acquisition of
Inter-Tel, we borrowed $300 million under a 7 year
term First Lien Credit Agreement and borrowed $130 million
under a 8 year Second Lien Credit Agreement. In addition,
as part of the transaction, we secured a 5 year,
$30 million revolving credit facility, which remained
unutilized as at September 30, 2007. All three of these
credit agreements have customary default clauses. In the event
we were to default on these credit agreements, and were unable
to cure the default, the repayment of one or more of these
credit agreements may be accelerated. If acceleration were to
occur, we would be required to secure alternative sources of
equity or debt financing to be able to repay the existing credit
facilities. Alternative financing may not be available on terms
satisfactory to us, or at all. If acceptable alternative
financing were unavailable, we would have to consider
alternatives to fund the repayment of the debt, which may
include the sale of part or all of the business, the sale of
which may occur at a distressed price.
We are
exposed to risks inherent in our defined benefit pension
plan.
We currently maintain a defined benefit pension plan, which was
closed to new employees in June 2001, for a number of our past
and present employees in the United Kingdom. The contributions
to fund benefit obligations under this plan are based on
actuarial valuations, which themselves are based on certain
assumptions about the long-term operation of the plan, including
employee turnover and retirement rates, the performance of the
financial markets and interest rates. If the actual operation of
the plan differs from these assumptions, additional
contributions by us may be required. As of April 30, 2007,
the projected benefit obligation of $173.9 million exceeded
the fair value of the plan assets of $123.4 million,
resulting in a pension liability of $50.5 million. Changes
to pension legislation in the United Kingdom may adversely
affect our funding requirements.
Transfer
pricing rules may adversely affect our income tax
expenses.
We conduct business operations in various jurisdictions and
through legal entities in Canada, the United States, the United
Kingdom, Barbados and elsewhere. We and certain of our
subsidiaries provide solutions and services to, and may from
time to time undertake certain significant transactions with,
other subsidiaries in different
11
jurisdictions. The tax laws of many of these jurisdictions,
including Canada, have detailed transfer pricing rules which
require that all transactions with non-resident related parties
be priced using arms length pricing principles, and
contemporaneous documentation must exist to support this
pricing. The taxation authorities in the jurisdictions where we
carry on business, including the Canada Revenue Agency, the
United States Internal Revenue Service and HM
Revenue & Customs in the United Kingdom, could
challenge our arms length related party transfer pricing
policies. International transfer pricing is an area of taxation
that depends heavily on the underlying facts and circumstances
and generally involves a significant degree of judgment. If any
of these taxation authorities are successful in challenging our
transfer pricing policies, our income tax expense may be
adversely affected and we could also be subjected to interest
and penalty charges. Any increase in our income tax expense and
related interest and penalties could have a significant impact
on our future earnings and future cash flows.
Future
changes in financial accounting standards could adversely affect
our reported results of operations.
A change in accounting policies could have a significant effect
on our reported results and may even affect our reporting of
transactions completed before the change is effective. New
pronouncements and varying interpretations of pronouncements
have occurred with frequency and may occur in the future.
Changes to existing rules or the questioning of current
practices may adversely affect our reported financial results or
the way we conduct our business.
Governmental
regulation could harm our operating results and future
prospects.
Governments in a number of jurisdictions in which we conduct
business have imposed export license requirements and
restrictions on the import or export of some technologies,
including some of the technologies used in our solutions.
Changes in these or other laws or regulations could adversely
affect our revenues. A number of governments also have laws and
regulations that govern technical specifications for the
provision of our solutions. Changes in these laws or regulations
could adversely affect the sales of, decrease the demand for and
increase the cost of, our solutions. For example, the Federal
Communications Commission may issue regulatory pronouncements
from time to time that may mandate new standards for our
equipment in the United States. These pronouncements could
require costly changes to our hardware and software.
Additionally, certain government agencies currently require
voice-over-Internet-Protocol products to be certified through a
lengthy testing process. Other government agencies may adopt
similar lengthy certification procedures which could delay the
delivery of our products and adversely affect our revenues.
Specifically, on January 5, 2005, Inter-Tel received court
approval of a civil settlement agreement (the Civil
Settlement) and a criminal plea agreement (the Plea
Agreement) with the United States of America, each dated
as of December 8, 2004 and disclosed on that same date. The
court approval of the Civil Settlement and Plea Agreement
resolved the investigation of the Department of Justice into the
participation of Inter-Tel Technologies, Inc.
(Technologies), a wholly-owned subsidiary of
Inter-Tel, in a federally administered
E-Rate
program to connect schools and libraries to the Internet.
In connection with the Civil Settlement, Technologies paid a
penalty of $6.7 million and forgave the collection of
certain accounts receivable of $0.3 million related to
Technologies participation in the
E-Rate
program. In connection with the Plea Agreement, Technologies
entered guilty pleas to charges of mail fraud and an antitrust
violation. Under the Plea Agreement, Technologies paid a fine of
$1.7 million and is observing a three-year probationary
period, which has, among other things, required Technologies to
implement a comprehensive corporate compliance program. The
existence and disclosure of the Civil Settlement and the Plea
Agreement may have already caused and may cause future harm to
Inter-Tel and, as a result of our acquisition of Inter-Tel, to
us.
Our
future success depends on our existing key
personnel.
Our success is dependent upon the services of key personnel
throughout our organization, including the members of our senior
management and software and engineering staff, as well as the
expertise of our directors. Competition for highly skilled
directors, management, research and development and other
employees is intense in our industry and we may not be able to
attract and retain highly qualified directors, management, and
research and development personnel and other key employees in
the future. In order to improve productivity, a portion of our
compensation to key employees and directors is in the form of
stock option grants, and as a consequence, a
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depression in our value of our shares could make it difficult
for us to motivate and retain employees and recruit additional
qualified directors and personnel. The recent decision by the
Financial Accounting Standards Board regarding the accounting
treatment of stock options as compensation expense could lead to
a reduction in our use of stock options as an incentive and
retention tool. We currently do not maintain corporate life
insurance policies on the lives of our directors or any of our
key employees.
We may
make further strategic acquisitions in the future. We may not be
successful in operating or integrating these
acquisitions.
As part of our business strategy, we will consider further
acquisitions of, or significant investments in, businesses that
offer products, services and technologies complementary to ours.
These acquisitions could materially adversely affect our
operating results and the price of our Common Shares.
Acquisitions involve significant risks and uncertainties,
including:
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unanticipated costs and liabilities;
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difficulties in integrating new products, software, businesses,
operations, technology infrastructure and personnel in an
efficient and effective manner;
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difficulties in maintaining customer relations;
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the potential loss of key employees of the acquired businesses
or our key employees;
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the diversion of the attention of our senior management from the
operation of our daily business;
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the potential adverse effect on our cash position as a result of
all or a portion of an acquisition purchase price being paid in
cash;
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the potential issuance of securities that would dilute our
shareholders percentage ownership;
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the inability to maintain uniform standards, controls, policies
and procedures; and
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fluctuations in interests rates, and the timing and volume of
sales of leases to third party funding sources.
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Our inability to successfully operate and integrate newly
acquired businesses appropriately, effectively and in a timely
manner could have a material adverse effect on our ability to
take advantage of future growth opportunities and other advances
in technology, as well as on our revenues, gross margins and
expenses.
The
costs and risks associated with Sarbanes-Oxley regulatory
compliance may have a material adverse effect on
us.
We will be required to document and test our internal controls
over financial reporting pursuant to Section 404 of the
United States Sarbanes-Oxley Act of 2002, so that our management
can certify as to the effectiveness of our internal controls for
the year ended April 30, 2008. As a result, we will be
required to assess
and/or
improve our financial and managerial controls, reporting systems
and procedures, and we will incur substantial expenses to test
our systems and controls, incur expenses associated with an
independent registered accounting firm report on our controls,
as well as ongoing compliance costs. If our management is unable
to certify the effectiveness of our internal controls or if our
independent registered public accounting firm cannot render an
opinion on managements assessment and on the effectiveness
of our internal controls over financial reporting, or if
significant deficiencies or material weaknesses in our internal
controls are identified, we could be subject to regulatory
scrutiny and a loss of public confidence.
Business
interruptions could adversely affect our
operations.
Our operations are vulnerable to interruption by fire,
earthquake or other natural disaster, power loss, computer
viruses, security breaches, telecommunications failure,
quarantines, national catastrophe, terrorist activities, war and
other events beyond our control. We do not have a fully
implemented detailed business continuity plan. There can be no
assurance that the coverage or limits of our business
interruption insurance will be sufficient to compensate for any
losses or damages that may occur.
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Risks
Related to an Investment in our Common Shares
There
are significant restrictions on the resale of our securities and
there can be no assurance as to when such restrictions will
cease to apply, if ever.
There is presently no public market through which our securities
may be sold or resold. Our securities are not listed for trading
on any stock exchange, and there is no guarantee that any such
listing will be completed in the future. None of our securities
have been registered under the United States Securities Act
of 1933 , as amended (the Securities Act) or the
securities laws of any of the states of the United States and
are restricted securities as defined under the rules
of the Securities Act, which may not be transferred to a
U.S. person except pursuant to registration under the
Securities Act, or pursuant to an available exemption from
registration under the Securities Act. Canadian provincial
securities laws also restrict the transfer of our securities,
unless an exemption from the prospectus requirements is
available in respect of such transfer, at least until the time
we become a reporting issuer in a province of Canada. In
addition, our articles currently contain restrictions on the
transfer of our Common Shares. Investors may be unable to
liquidate an investment in our securities, whether or not a
listing is subsequently affected. An investor should not
purchase our securities unless such investor is able to endure a
lack of liquidity
and/or
withstand a total loss of his or her investment.
Each
of Francisco Partners and Dr. Matthews is a significant
shareholder and each has the potential to exercise significant
influence over matters requiring approval by our
shareholders.
Francisco Partners group and Dr. Matthews group
beneficially hold 41.5% and 38.7%, respectively, of the voting
power of our share capital as of September 30, 2007, as
further disclosed in Item 7.A. Major Shareholders and
Related Party Transactions Major Shareholders
and Item 7.B. Major Shareholders and Related Party
Transactions Related Party Transactions.
Francisco Partners has the right to nominate four members to our
board of directors, Dr. Matthews has the right to nominate
three members and Dr. Matthews is also the chairman of our
board. Each of Francisco Partners and Dr. Matthews, given
the extent of their respective ownership positions, have the
potential to control matters requiring approval by shareholders,
including the election of directors, any amendments to our
articles of incorporation or by-laws, and significant corporate
transactions. Each of Francisco Partners and Dr. Matthews
may have interests that differ from the interests of our other
shareholders.
Each
of Francisco Partners and Dr. Matthews
ownership of our Common Shares, as well as provisions contained
in our articles of incorporation and Canadian law, may reduce
the likelihood of a change of control occurring and, as a
consequence, may deprive you of the opportunity to sell your
Common Shares at a control premium.
The voting power of Francisco Partners and Dr. Matthews,
respectively, under certain circumstances, could have the effect
of delaying or preventing a change of control and may deprive
our shareholders of the opportunity to sell their Common Shares
at a control premium. In addition, provisions of our articles of
incorporation and Canadian law may delay or impede a change of
control transaction. Our articles of incorporation permit us to
issue an unlimited number of common and preferred shares.
Limitations on the ability to acquire and hold our Common Shares
may be imposed under the Competition Act (Canada). This
legislation permits the Commissioner of Competition of Canada to
review any acquisition of or control over a significant interest
in us and grants the Commissioner jurisdiction to challenge such
an acquisition before the Canadian Competition Tribunal on the
basis that it would, or would be likely to, result in a
substantial prevention or lessening of competition in any market
in Canada. In addition, the Investment Canada Act
subjects an acquisition of control of a Canadian business
(as that term is defined therein) by a non-Canadian to
government review if the value of assets acquired as calculated
pursuant to the legislation exceeds a threshold amount. A
reviewable acquisition may not proceed unless the relevant
minister is satisfied that the investment is likely to be a net
benefit to Canada (see Item 10.B. Additional
Information Exchange Controls). Any of the
foregoing could prevent or delay a change of control and may
deprive our shareholders of the opportunity to sell their Common
Shares at a control premium.
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You
may be unable to bring actions or enforce judgments against us,
certain of our directors and officers, certain of the selling
shareholders or our independent public accounting firm under
U.S. federal securities laws.
We are incorporated under the laws of Canada, and our principal
executive offices are located in Canada. A majority of our
directors and officers, certain of our significant shareholders
and our independent public accounting firm reside principally in
Canada and all or a substantial portion of our assets and the
assets of these persons are located outside the United States.
Consequently, it may not be possible for you to effect service
of process within the United States upon us or those persons.
Furthermore, it may not be possible for you to enforce judgments
obtained in U.S. courts based upon the civil liability
provisions of the U.S. federal securities laws or other
laws of the United States against us or those persons. There is
doubt as to the enforceability in original actions in Canadian
courts of liabilities based upon the U.S. federal
securities laws, and as to the enforceability in Canadian courts
of judgments of U.S. courts obtained in actions based upon
the civil liability provisions of the U.S. federal
securities laws.
U.S.
investors will suffer adverse United States federal income tax
consequences if we are characterized as a passive foreign
investment company.
If, for any taxable year, we are treated as a passive foreign
investment company, or PFIC, as defined under Section 1297
of the Internal Revenue Code, then U.S. Holders (see
Item 10.E. Additional Information
Taxation United States Federal Income Tax
Considerations) would be subject to adverse United States
federal income tax consequences. Rather than being subject to
these adverse tax consequences, U.S. Holders may be able to
make a mark-to-market election, which could require the
inclusion of amounts in income of a U.S. Holder annually,
even in the absence of distributions with respect to, or the
disposition of, our Common Shares. We do not believe that we are
a PFIC, nor do we anticipate that we will become a PFIC in the
foreseeable future. However, we cannot assure you that the
Internal Revenue Service will not successfully challenge our
position or that we will not become a PFIC in a future taxable
year, as PFIC status is re-tested each year and depends on our
assets and income in such year. For a more detailed discussion
of the PFIC rules, see Item 10.E. Additional
Information Taxation United States
Federal Income Tax Considerations Passive Foreign
Investment Company Considerations.
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SIGNATURE
The registrant hereby certifies that it meets all of the
requirements of filing on Form 20-F/A and that it has duly
caused and authorized the undersigned to sign this annual report
on its behalf.
MITEL NETWORK CORPORATION
Name: Donald W. Smith
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Title:
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Chief Executive Officer
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