<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 28, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission File Number 1-8139
MITEL CORPORATION
(Exact name of registrant as specified in its charter)
Canada Not Applicable
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
350 Legget Drive, Kanata, Ontario, Canada K2K 1X3
(Address of principal executive offices) (Zip or Postal Code)
Registrant's telephone number, including area code:(613) 592-2122
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common shares, no par value New York Stock Exchange
The common shares are also listed on the Toronto, Montreal and London stock
exchanges.
Securities registered pursuant to Section 12(g) of the Act: None
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 X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
[Cover page 1 of 2 pages]
Exhibit Index Begins on Page 81
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At May 30, 1997, 107,437,856 common shares of Mitel Corporation were issued
and outstanding. Non-affiliates of the registrant held 93,489,001 common
shares having an aggregate market value of U.S. $525,875,630 based upon the
closing price of the common shares on the New York Stock Exchange (May 30,
1997 being the last trading day) of U.S. $5.625.
Common shares held by shareholders holding more than 5% of the outstanding
common shares and by each executive officer and director of Mitel Corporation
have been excluded from the non-affiliated common share total in that such
persons may be deemed to be affiliates of Mitel. Exclusion of such common
shares is not necessarily a conclusive determination of the affiliate status
of any holder thereof for any other purpose.
Exchange Rates of the Canadian Dollar
(Noon Buying Rate)
(Financial information is expressed in Canadian dollars unless
otherwise stated)
The high and low exchange rates (i.e., the highest and lowest rates at which
Canadian dollars were sold), the average exchange rate (i.e., the average of
the exchange rates on the last day of each full month during the period) and
the period end exchange rate of the Canadian dollar in exchange for United
States currency for each of the five calendar years ended December 31, 1996
and for the period January 1, 1997 through May 30, 1997, as calculated from
the exchange rates reported by the Federal Reserve Bank of New York, are set
forth below:
<TABLE>
January 1
to May 30,
1992 1993 1994 1995 1996 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
High 0.8757 0.8046 0.7632 0.7527 0.7513 0.7487
Low 0.7761 0.7439 0.7103 0.7023 0.7235 0.7145
Average 0.8275 0.7751 0.7318 0.7286 0.7332 0.7298
Period End 0.7865 0.7544 0.7128 0.7323 0.7301 0.7247
</TABLE>
--------------------------------
The following trademarks are mentioned in this Annual Report on Form 10-K:
MITEL, SX-50, SX-100, SX-200, SX-2000, SX-2000 LIGHT, SMART-1 and GX5000,
which are registered trademarks of Mitel Corporation; SX-10, SX-20, SUPERSET,
SUPERSET 401+, SUPERSET 410, SUPERSET 420, SUPERSET 430, SUPERSET 7000, MITAI,
CONNECTION MASTER and RADICALL, which are trademarks of Mitel Corporation;
MVIP, which is a trademark of Natural MicroSystems Corporation and GROUP
PHONEWARE, which is a trademark of Q.SYS.International Inc.
[Cover page 2 of 2 pages]
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<TABLE>
TABLE OF CONTENTS
Page
Section No.
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PART I
Item 1. Business 5
Introduction 5
Recent Developments 6
Strategy 6
Business Communications Systems 6
PBX Products 6
DeskTop Interface Products 7
Computer Telephony Integration 7
MediaPath Server 8
Call Controllers 9
Public Switching 9
Semiconductors 10
Integrated Circuits 10
Thick-Film Hybrid Microcircuits 11
Custom Wafer Foundry 11
Optoelectronic 11
ASICs 11
Geographic Markets 12
Sales, Marketing and Distribution 12
United States 12
Canada 13
Europe 14
Other Markets 14
Government Regulation 15
Competition 16
Backlog 18
Research and Development 19
Patents and Trademarks 19
Manufacturing 20
Employees 20
Forward-Looking Statements 21
Foreign Currency Exposure and Concentration of Credit Risk 21
Technological Changes 22
Competition 22
Environmental Matters 22
Regulation 23
International Growth 23
Other Factors 23
Item 2. Properties 23
Item 3. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 24
</TABLE>
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<TABLE>
Page
Section No.
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<S> <C>
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 24
Item 6. Selected Financial Data 25
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27
Item 8. Financial Statements and Supplementary Data 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 63
PART III
Item 10. Directors and Executive Officers of the Registrant 63
Directors 63
Statement of Corporate Governance Practices 64
General 64
Mandate of the Board 65
Composition of the Board and of its Committees 65
Audit Committee 66
Compensation Committee 66
Nominating Committee 67
Independence from Management 67
Other 67
Executive Officers 67
Item 11. Executive Compensation 68
Summary Compensation Table 69
Stock Option Grants and Exercises 71
Stock Option Grants in Last Fiscal Year 72
Year-End Option Values Table 73
Compensation of the President and Chief Executive Officer 74
Executive Compensation Agreements 75
Compensation of Non-Employee Directors 75
Annual Incentive Compensation Arrangements 76
Directors' and Officers' Liability Insurance 76
Indebtedness of Directors, Executive Officers and
Senior Officers 76
Performance Graph 77
Item 12. Security Ownership of Certain Beneficial Owners
and Management 77
Item 13. Certain Relationships and Related Transactions 79
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 79
Signatures 82
Power of Attorney 82
Annex A - Glossary of Terms 84
Annex B - Business Communications Systems Product Information 86
</TABLE>
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PART I
Item 1. Business
Introduction
Mitel Corporation was incorporated and organized under the laws of Canada on
March 8, 1971 and was continued under the Canada Business Corporations Act on
November 9, 1976. Unless the context indicates otherwise, "Mitel" and the
"Corporation" are used interchangeably herein to refer to Mitel Corporation
and its consolidated subsidiaries.
Mitel designs, develops, manufactures and markets business communications
systems and subsystems for large and small business customers; designs,
manufactures and sells integrated circuits ("ICs") and microelectronic
components for the telephony, computer telephony integration ("CTI") and
communications industries; and provides related services. Service activities
consist primarily of hardware and software maintenance, training and other
ancillary support services. Mitel's product lines are divided into two
principal types: business communications systems ("BCS") and semiconductors.
A glossary of certain technical and industry terms used in this Annual Report
on Form 10-K is included as Annex A attached.
BCS products include customer premise telephone switching systems (also known
as Private Branch Exchanges or PBXs) for voice and data, specialized
proprietary telephones, hardware and software products to enhance the
performance of public and private communications networks, datasets,
terminals, CTI and other communications products which provide a broad range
of communications capabilities. In addition, Mitel designs, manufactures and
sells a range of other communications products consisting principally of call
controller products, public switching equipment, and network enhancement
devices such as Centrex set handlers.
Mitel's Semiconductor Division designs, manufactures and sells integrated
circuits, thick-film hybrids, optoelectronic components and custom wafer
products. These products are distributed worldwide, primarily to
communications systems manufacturers.
Mitel operates in one industry segment, the communications business. The
following table sets forth Mitel's revenue by product group for the three most
recently completed fiscal years.
The Corporation maintains its financial accounts in Canadian dollars. All
financial information and references to "$" and "dollars" are expressed in
Canadian dollars unless otherwise stated.
<TABLE>
Millions of Dollars
-------------------------------------------------
Fiscal Year Ended:
March 28, 1997 March 29, 1996 March 31, 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Business Communications
Systems 474.5 68% 455.5 79% 501.7 85%
Semiconductors 221.0 32% 120.9 21% 87.7 15%
Total 695.5 100% 576.4 100% 589.4 100%
</TABLE>
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For information on Geographic Segments see Note 20 of the Notes to the
Consolidated Financial Statements appearing elsewhere in this Annual Report on
Form 10-K.
Recent Developments
On January 31, 1997, the Corporation acquired the business and assets of
Global Village Communication (U.K.) Limited for $5.1 million in cash. Global
Village Communication (U.K.) Limited is one of the leading integrated service
digital network ("ISDN") solution providers in the United Kingdom. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
Strategy
Mitel's business strategy is to offer its customers cost-effective
communications solutions in an open, distributed and standards-based
environment. Communications networks today must meet increasing customer
demand for systems that will offer a large variety of services from a single
network platform. These services include the transmission of voice, data,
facsimile, electronic mail, Internet traffic, video teleconferencing, on-line
transaction processing and other multimedia communications.
In order to meet the growing demand for these sophisticated communications
services, Mitel offers its customers a broad range of products for building
communications networks and equipment. Such products include voice
communications systems; public switching systems; network enhancement and
gateway products; CTI systems and applications; packaged software for personal
productivity, enhanced group-ware for call centers, telephony-enabled servers,
converged voice and data network backbones, and a wide range of silicon, thick
film and PC board-based communications components.
Business Communications Systems
Mitel's BCS and related service revenue accounted for 68%, 79%, and 85% of the
Corporation's total revenue during Fiscal 1997, 1996, and 1995, respectively.
PBX Products
Mitel's PBX systems, usually located on the customer's premises, permit a
number of local telephones or computer terminals to communicate with each
other, with or without use of the public telephone network. Over the past 20
years, Mitel's PBX products have evolved from analog products to the current
SX-50, SX-200 LIGHT and SX-2000 LIGHT digital family of products. The current
line of LIGHT products and related peripherals permit the communication of
voice and data information over conventional twisted-pair telephone wires or
optical fiber and certain of such products provide networking capabilities to
link up to hundreds of locations. Mitel's PBX products are divided into
categories geared to the particular business size and configuration of the end
user.
Mitel also develops applications software and interfaces that will add value
to the PBX at the desktop and workgroup level taking advantage of the evolving
convergence of computing and telecommunications technologies.
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Although Mitel no longer manufactures new analog PBX equipment, Mitel
continues to support its existing analog PBX products (SX-10, SX-20, SX-100
and SX-200) by offering a complete line of remanufactured equipment that
performs to specifications at the latest revision level.
Mitel's family of SX-2000 products utilizes digital switching technology to
provide advanced voice and data capabilities for businesses requiring
flexibility to shape a system that meets specific user needs. The SX-2000 and
its networking protocols are designed to bring fully integrated voice and data
capabilities to the desktop over single twisted-pair wiring. To support
networks utilizing these products, Mitel also offers OPS Manager, an off-board
computer software application that is closely integrated with the SX-2000 to
perform network management from a central location.
Some of Mitel's PBX systems can be configured with optional feature
enhancements such as ACD2000 (provides users with automatic call distribution
and automated attendant functionality), message center and hotel/motel
applications, and powerful private network protocols - Mitel Superswitch
Digital Networking ("MSDN") and its analog version, Mitel Superswitch Analog
Networking.
DeskTop Interface Products
The SUPERSET 400 series of digital business telephones and Dataset products
are designed for operation with Mitel PBXs. The sets provide functionality
such as feature access through convenient softkeys and visual prompts and,
with the MILINK Data Module, integrated simultaneous voice and data on a
single pair of wires. The SUPERSET 600 series of products is specifically
targeted for sale to original equipment manufacturers ("OEMs")as components
for use by developers of CTI products, and by PBX and key system makers. The
product family is supported by open access to Mitel's link and network
protocols, by the availability of Mitel integrated circuits for implementing
digital linecards, and by applications engineering support through Mitel's
worldwide Semiconductor Division distribution and support infrastructure.
In early 1997, the Corporation announced its first product in a brand new CTI
category - Computer Attached Telephones. This innovative first commercial
product, named MITEL PERSONAL ASSISTANT, is targeted at the lucrative small
office/home office market. It blends the accessibility and reliability of the
familiar telephone with the productivity features enabled by the PC (personal
computer) to provide innovative benefits for the home office. It uses the new
USB (Universal Serial Bus) interface standard to provide high-bandwidth, hot-
plug-and-play connection between the telephone and the PC to deliver the
functionality and ease-of-use demanded in the target market. Mitel plans to
broaden this product line with other product announcements during the coming
fiscal year.
Computer Telephony Integration
The initial concept of CTI contemplated the linking of telephone systems and
computers, allowing data to be shared and functionally integrated through
Computer Supported Telephony Applications (CSTA). CTI has moved from its
origins within large corporate call centers, to its current rapid growth in
workgroup environments and on the desktop, fueled largely by the availability
of "screen pops" and other CTI applications. Mitel offers a portfolio of
applications designed to improve productivity and customer service in
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workgroups, departments and small business environments. Client Server
Telecom ("CST") products provide telephony functionality entirely within a
computer platform which connects directly to the telephone network.
For applications requiring a high degree of voice and data integration, Mitel
manufactures and sells a Mitel Telephony Applications Interface ("MITAI")
based on open system architecture. MITAI is a developer toolkit and
Application Programming Interface ("API") which allows the exchange of
information and commands between other vendors' computers and peripherals and
Mitel PBX products. Mitel is a participant in the Novell Telephony Services
Application Programming Interface ("TSAPI") program and provides a PBX
software program NetWare loadable module so that applications developed for
TSAPI can interact with certain Mitel PBXs. Mitel is also a participant in
the Microsoft Telephony Application Programming Interface ("TAPI") program and
provides its customers a physical interface and service provider interface
software so that applications developed for TAPI can interact with the Mitel
PBX. Together these software products provide an applications interface in
the dominant LAN operating system, NetWare, and the dominant desktop operating
system, Windows. The MITAI product currently supports a Windows NT client and
an OS/2 client as well as the open standard CSTA API and the IBM CallPath API.
The additional computer telephony product line consists of a family of ISA
computer bus Dual T1 and Dual E1 board types, a Basic Rate Interface ("BRI")
card and a middleware software product that provides control over third party
MVIP boards conforming to the MVIP connection control standard. During Fiscal
1996, Mitel forged an alliance with Digital Equipment Corporation, a leading
PC industry server OEM and operating systems supplier, to co-develop and
launch a new client-server telephony platform called "MediaPath" targeted at
the unified messaging market. The product was launched in October, 1996.
MediaPath Server
The CST group was established to develop and market a new class of
communications platform to the computing industry to satisfy the needs of the
emerging multimedia, computing-telecom markets. The target customers for
these products are OEMs, Value Added Resellers ("VARs"), Systems Integrators
("SIs") and Independent Software Vendors ("ISVs"). The products include a
Voice Operating System ("VOS") which delivers switching, call control, media
and device control and supports a range of telecom platforms and applications.
Platforms are marketed through Master Resellers ("MRs"), VARs and ISVs. ISVs
and, to some extent, VARs will develop applications to run on the MediaPath
server. The combination of Mitel and third party products addresses services
such as call centers, help desks, and specialized vertical-markets requiring
communications and data processing integration. The MediaPath server
implements a client/ server model and is built on industry standards (such as
MVIP, TAPI, etc.) using universally deployed products from companies such as
Microsoft.
The MediaPath Server is not a PBX and is not marketed as such. The basic
product is an open architecture communications system that can be deployed as
a stand-alone enterprise or as an adjunct to an existing PBX. It has
switching capability, call control and media control services for voice
processing, telecommuting, mobility and routing servers, message centers or
even small call / dispatch centers. It offers a screen-based telephone for
user convenience.
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Mitel is committed to the development and adoption of open systems CTI
standards and actively participates in the ECTF (Enterprise Computer Telephony
Forum), GO MVIP forum, PICMC and Versit. In 1997, the MediaPath Server was
voted Product of the Year by a leading trade magazine, Computer Telephony.
Call Controllers
The Call Controller Product group designs, markets and sells the SMART-1 call
controller (automatic dialer) family of products for the analog voice
communications and fax markets. Mitel believes it is the world leader in the
supply of these types of network access devices based on shipments of over one
million units and market share. The SMART-1 call controllers are provided in
single and multi-line platforms which are modified for country specific
applications. In general, call controllers provide end customers with
simplified access to inter-exchange carrier networks and store and forward fax
networks and are also used to provide enhancements to PBX products, Centrex
and single line installations.
The call controller has been granted approval and can be connected to the
public telephone networks in Australia, Brazil, Canada, Germany, Holland, Hong
Kong, India, Italy, Japan, Mexico, the United States, and the United Kingdom.
Geographic markets addressed are determined primarily on the basis of the
relative status of deregulation of communication services in each market. The
Corporation is focusing its marketing efforts on international carriers who
operate in multiple markets in addition to developing national market
distribution in countries where multiple carriers are offering services.
During Fiscal 1998, the group plans to expand the call controller family of
products in the European, Japanese and United Kingdom markets, and to
introduce new call controller variants in France and Spain. The group will
also be introducing ISDN call controllers into the United Kingdom and other
European markets and Frame Relay Assembler/ Disassembler ("FRAD") access
devices into Canada and Mexico.
Public Switching
The Public Switching business unit designs, markets and sells the GX5000
central office product line. The GX5000 platform is a compact yet
sophisticated switching system capable of undertaking numerous applications.
Among its most common applications are digital end office replacements for
U.S. independent telephone companies; digital network overlay services for
networks in developing countries; rural public switched telephone network
services; satellite communications gateways; and provision of a carrier
network integrated front end for voice processing systems. The group
continued to focus on its core market segment in the North American end office
market while maintaining its presence in the international rural
communications market.
During Fiscal 1998, new capabilities will be added to the GX5000 platform to
address the Independent Telephone Companies including ISDN Basic and Primary
rate services.
In the international rural exchange market, sales of public switching products
increased during Fiscal 1997 principally as a result of increased sales to
existing customers in Latin America, Africa, and the Philippines.
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See Annex B to this Annual Report on Form 10-K for additional information
about Mitel's BCS products, including specifications as to functionality and
target users.
Semiconductors
Mitel's sales of semiconductors accounted for 32%, 21%, and 15% of the
Corporation's total revenue during Fiscal 1997, 1996, and 1995, respectively.
A portion of the Corporation's semiconductor output is supplied to other
groups within Mitel for incorporation into its systems products. Mitel
manufactures and sells semiconductor products of the following categories:
Integrated Circuits
Integrated circuits are microelectronic component parts that allow the high
feature integration, low power consumption and low physical space demanded by
the design of today's advanced communications systems. Such products are
designed to provide advanced communications and control functions for a wide
variety of electronic products and systems.
Mitel has established a family of analog and digital switching integrated
circuit products which make possible a higher capacity of switching of voice
and data information. This product line has recently been extended to include
two new high-bandwidth digital switch products to meet the needs of the
rapidly growing computer and multimedia communications market.
Mitel is a leading supplier of dual-tone multi-frequency receiver components
("DTMF") which are used for remote control in high-volume applications such as
facsimile and telephone answering machines. These components have now been
released in 3-volt versions for mobile applications. Mitel is among the
leaders in the calling line identification market with its continuous-phase-
frequency-shift-key receivers which support special services such as calling
party identification. Mitel believes it has solidified its position in this
market with the introduction of a second generation product, the first in the
industry that supports industry standards in North America, Europe and the
United Kingdom. These products are targeted to both the telephony and CTI
markets.
To meet the need for digitalization of signals in new communications
equipment, Mitel has developed a family of circuits meeting the international
industry standards of ISDN. Mitel continues to add new products to this
family, including a low cost new-generation integrated digital telephone
component aimed at ISDN and non-ISDN terminal equipment applications, and
Adaptive Pulse Code Modulation ("ADPCM") products aimed at pair-gain and
cellular radio markets.
Development programs now underway build upon Mitel's existing presence in
switching, transmission and terminal equipment to provide related functions in
two emerging market segments: Asynchronous Transfer Mode ("ATM"), which
serves computer communication and multimedia needs; and wireless telephony,
which extends the applicability of the digital telephone components into
cordless and cellular markets.
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Thick-Film Hybrid Microcircuits
These circuits permit the packaging of different technologies required by
today's advanced computer systems and range in complexity from a simple
collection of passive components to an extremely complex subsystem module.
Mitel supplies these products as either standard circuits or as customized
circuits designed for, and supplied to, a specific customer. In most cases,
the hybrid component either incorporates, or is designed to work alongside,
other Mitel components thereby increasing the overall value of the solution to
the customer.
Custom Wafer Foundry
This business unit offers specialty technology manufacturing. By building on
the Corporation's mixed-signal integrated circuit manufacturing expertise,
Mitel can offer unique features which are not widely available and which
address a niche market, such as low and high-voltage processes, double-poly
technology and high precision resistors.
In addition to providing the bulk of the integrated circuits sold by Mitel,
the Custom Wafer Foundry also serves a growing base of customers both in the
United States and Europe by performing sub-contract manufacturing of silicon
wafers. During Fiscal 1997, the Corporation commenced a project to expand the
fabrication area and convert the size of the wafers from 100mm to 150mm. See
"Business-Manufacturing" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Optoelectronic
The Corporation, through Mitel Semiconductor AB, is a leading supplier of LED
(Led Emitting Diode), PIN diodes photodetectors, and duplex devices. These
devices, which are built using Gallium Arsenide and Indium Phosphide
technologies, allow Mitel to offer products to drive fiber optic cable in
applications such as data networks including Fiber Channel, Fiber Distributed
Data Interface and ATM. In February 1997, Mitel launched a new optoelectronic
component called VCSEL (Vertical Cavity Surface Emitting Laser) to address
such applications as Gigabit Ethernet. At the same time, Mitel also announced
the availability of PIN/Pre-amp combo devices in which the pre-amplifier is
mounted inside the same package as the photodetector, thereby improving
performance and reducing assembly cost to the end-user.
ASICs
Mitel Semiconductor AB also designs and manufactures application specific
integrated circuits ("ASICs"), the main market for which is currently in
medical applications such as pacemakers and hearing aids where low-voltage,
low-power technologies are required. Mitel believes that it is the world's
leading independent supplier of pacemaker ASICs and CMOS-based hearing aid
ASICs based upon market share. Mitel also offers these innovative
technologies for low frequency wireless applications such as wireless headset
and electronic tags. In addition, Mitel serves the space market by offering
radiation-hardened CMOS and ASICs based on the Corporation's SOS (Silicon On
Sapphire) technologies.
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Geographic Markets
Revenue for the three most recently completed fiscal years, based on
geographic location of end customers, was distributed as follows:
<TABLE>
Millions of Dollars
-------------------------------------------------
Fiscal Year Ended:
March 28, 1997 March 29, 1996 March 31, 1995
-------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
United States 312.6 45% 271.7 47% 306.8 52%
Europe 228.8 33% 173.1 30% 153.7 26%
Other Regions 104.1 15% 85.4 15% 78.5 13%
Canada 50.0 7% 46.2 8% 50.4 9%
Total 695.5 100% 576.4 100% 589.4 100%
</TABLE>
The major communications product market in which Mitel operates is the market
for business communications systems. The principal geographic markets in
which Mitel operates are the United States, Canada and the United Kingdom.
Mitel also operates in China and other Asia-Pacific countries, Central and
South America, Mexico, the Caribbean, Germany, Italy, the Middle East, and a
small number of African countries. Each of the geographic markets in which
Mitel operates has unique characteristics with regard to competition and
methods of distribution. For additional information on foreign operations and
geographic segments, see Note 20 of the Notes to the Consolidated Financial
Statements appearing elsewhere in this Annual Report on Form 10-K.
Sales, Marketing and Distribution
The principal customers for the Corporation's BCS products and services are
businesses requiring communications systems on their premises. The principal
customers for Mitel's semiconductors continue to be customer premise and
network communication equipment manufacturers. Such products are also sold to
data communications suppliers as the integration of telephones and computers
continues.
United States
In the United States, Mitel sells the majority of its PBX systems (other than
the SX-2000 system) through wholesale distributors of telephone and computer
telephony equipment. The distributors, in turn, sell to independent telephone
companies and to interconnect companies. Mitel also sells directly to the
United States government. In addition to the above distribution channels,
Mitel sells products directly to end customers through its subsidiary, Mitel
Telecommunications Systems, Inc. ("MTS"), primarily in the top 25 metropolitan
statistical areas as determined by the United States Department of Commerce.
MTS is a nationwide direct sales and service operation which sells integrated
communications systems, applications and peripherals to national and regional
accounts, as well as to large single site accounts.
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Mitel has established an "Elite Dealer" program for the Corporation's top 100
to 120 dealers. Elite Dealers are provided exclusive access to some of
Mitel's newest products (i.e. SX-2000 LIGHT and CTI applications such as
PhoneWare), as well as a non-exclusive right to distribute the rest of the
Corporation's PBX product line. All other active dealers, which number over
600, are classified as Mitel Dealers. Mitel Dealers sell SX-50 and SX-200
LIGHT PBXs. Mitel has also recently developed a new Computer Telephony Dealer
channel that focuses on data-centric dealers involved in computer telephony
integration. Mitel expects this channel to grow in Fiscal 1998 as prospective
new dealers become aware of the channel and product offerings.
Mitel sells its call controller products through selected distributors, who in
turn sell such products to carriers and alternate carriers. The carrier
market addressed by call controllers is highly influenced by regulation and
impacted by the consolidation of the other common carriers.
Public switching systems are sold directly to independent telephone companies
in the United States.
Mitel's semiconductor products (other than the customized ICs marketed by
Mitel Semiconductor AB) are sold primarily through representatives of
manufacturers and distributors. Mitel's representatives deal directly with
the end customer and design systems incorporating Mitel products, which
products are then supplied through distributors. To enhance sales, major
account teams were put into place to target specific large customers for both
custom wafer design and standard product deliveries. Mitel Semiconductor AB
products are sold through Mitel Semiconductor Inc., located in San Diego. The
Corporation expects that Mitel Semiconductor AB will expand its product
offerings to include more standardized products that will be distributed
through the traditional Mitel Semiconductor distribution network or through
Mitel Semiconductor Inc.
CST boards and software are sold worldwide through the sales force that sells
Mitel's semiconductor products and will also be sold through OEM relationships
as component parts of computer manufacturers' systems. CTI Solutions products
are sold in the United States through MTS and the Elite Dealers.
Canada
Mitel sells its PBX products to the Canadian telephone operating companies,
which sell the SX-200 LIGHT PBX and the SX-50 PBX. These companies also carry
the Mitel SUPERSET family of products and some carry the SX-2000 LIGHT.
Mitel also sells its complete range of PBX equipment to independent
interconnect companies who sell to end users. The interconnect companies
operate under a support program of Elite Dealers and Mitel Dealers similar to
that in the United States. The dealers operate, sell and provide service
throughout Canada, marketing Mitel products on a non-exclusive basis. Mitel
also sells the SX-2000 family of PBX systems directly to end users through
MTS. Sales to specialized end users with large internal communications
networks such as hospitals, universities and colleges, hotels, public
utilities and government departments are generally concluded on a direct
relationship basis.
CTI Solutions products are sold in Canada through MTS and the Elite Dealers.
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Mitel Semiconductor products are sold in Canada through the traditional Mitel
Semiconductor distribution network or through Mitel Semiconductor Inc.
Europe
Mitel markets its communications products directly and under distribution
agreements in several countries in Europe, the most significant of which is
the United Kingdom. Mitel sells its communications equipment in the United
Kingdom primarily through a direct sales organization to end customers, but
also indirectly through selected distributors and dealers.
Mitel has established a separate Direct Sales and Customer Services division
(Mitel Solutions Division) in the United Kingdom to sell NeVaDa, the SX-2000
PBX, applications and adjuncts in order to offer United Kingdom customers a
comprehensive range of communications solutions.
In the United Kingdom, Mitel serves principally large corporate customers. In
order to extend Mitel's distribution access to smaller, regional companies not
reached by its direct sales force, Mitel entered into a distribution agreement
for the SX-2000 LIGHT with Bailey Telecom Limited, one of the leading
independent telecommunications service providers and distributors of voice and
data CPE in the United Kingdom. Other United Kingdom partners include: Atlas
Communication (UK) Limited, Decorum Networks Limited, NESSCO Business Systems
Limited and DTL International Limited.
Sales of Mitel semiconductor components in Europe are primarily handled via
distributors who perform the dual function of representative and distributor.
Some accounts are handled directly by Mitel in consultation with the
distributor. Mitel has implemented a major account program in concert with
its distributors, the focus of which is the development of multinational
accounts. The European market is similar to the North American market in that
customer premise and network communications equipment segments utilize both
hybrid and integrated circuit products. Mitel Semiconductor AB sells most of
its products directly to purchasers due to the custom and highly technical
nature of its current product offerings. However, its optoelectronic products
are supplied through distributors.
Mitel sells its SMART-1 family of call controller products both directly to
key accounts such as Mercury Communications Ltd. in the United Kingdom, but
also through distributors to customers in the United Kingdom and increasingly
in continental Europe as the carrier markets are deregulated.
Other Markets
Mitel markets its communication products directly and under distribution
agreements in China and other Asia-Pacific countries, the Middle East, Africa,
South and Central America, Mexico and the Caribbean. The most significant of
these regions is the Asia-Pacific market, including China.
Mitel maintains an Asia-Pacific regional office, referred to as Mitel (Far
East) Limited ("MFEL"), in Hong Kong, focusing on sales and service covering
China and the Asia-Pacific area. MFEL has well established distribution
networks in the following countries: China, Hong Kong, Thailand, Taiwan,
Indonesia, India, Vietnam, New Zealand, Fiji, Singapore, Malaysia, the
Philippines, Macau and Guam.
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<PAGE> 15
In order to address the needs of the Chinese market, Mitel invested in March
1994, in Tianchi Telecommunications Corporation, one of only seven licensed
PBX manufacturers to utilize foreign technology in China. This joint venture,
renamed Tianchi-Mitel Telecommunications Corporation, of which Mitel owns 50%,
manufactures, distributes and services Mitel's fiber-optic based digital PBX
systems and has a term of 30 years.
MFEL is selling through appointed distributors in the Asia-Pacific region.
Distribution agreements signed with well established local telecommunications
product distribution houses and some local telephone companies such as Hong
Kong Telecom CSL in Hong Kong and Telecom Business Limited (a subsidiary of
Telecom New Zealand Limited) in New Zealand have played a significant role in
enhancing MFEL's presence in the region.
MFEL is also actively pursuing business opportunities in emerging markets such
as Laos, Cambodia and Myanmar as these countries are gradually opening up
their telecommunications market.
The Asia-Pacific area is a major geographical market for Mitel semiconductor
products, with China, Korea, Japan, and Australia being the largest markets.
Mitel's semiconductor products are also sold in Hong Kong, Thailand, Taiwan,
New Zealand, Singapore, Malaysia, and the Philippines and the Corporation is
actively expanding into the Indonesian, Indian, Mexican and Brazilian
marketplace.
Mitel maintains regional sales offices in Japan and Singapore for
semiconductor products. Over 90% of sales in these areas are achieved through
representatives and distributors. Mitel is continuing to expand sales through
its network of representatives and distributors while expanding business
ventures with local companies. Mitel believes such ventures, especially those
involving hybrid products, provide a technology exchange that helps increase
Mitel's business, while at the same time helping to develop the local economy,
thereby benefiting the customers, the local economy and Mitel.
Mitel Semiconductor AB sells its products directly in the Asia-Pacific area
with its primary focus on the Japanese market.
Government Regulation
PBXs are considered customer premise equipment ("CPE"). Although the CPE
market in the United States is not regulated, certain actions, which are
described below, have recently caused changes in the United States
telecommunications market. On February 1, 1996, the United States Congress
passed the landmark Telecommunications Act of l996. Mitel believes that the
legislation will accelerate the convergence of the communications,
information and entertainment industries while intensifying competition within
those industries. The legislation removes the line of business restrictions on
the Regional Bell Operating Companies ("RBOCs") and allows the RBOCs to enter
the manufacturing arena at the time they are allowed into long distance
markets. For the first three years, any manufacturing by an RBOC must be
conducted through a separate affiliate and procurement from the subsidiary
must be on a non-discriminatory basis. While it is not improbable that an
RBOC will eventually meet the minimum criteria to enter the long distance
market and therefore become eligible to begin manufacturing, it appears
unlikely, at this time, that the RBOCs will commence both such activities in
Fiscal 1998.
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<PAGE> 16
The second action involves a proposed regulation by the U.S. Federal
Communications Commission ("FCC") which will impose certain enhanced 911
application requirements on CPE manufacturers. Certain states have already
imposed such requirements and the Federal government is poised to do likewise.
The FCC is presently circulating a proposed settlement of the issues that if
enacted would be favourable to CPE manufacturers with regard to FCC Docket No.
94-102.
Although there can be no assurance, the Corporation does not expect such
legislation or regulation to have a material adverse effect on the results of
operations in Fiscal 1998 in light of the existing competitive conditions in
the United States market and the significant conditions required to be
satisfied by the RBOCs under such legislation before they can commence
manufacturing.
The FCC also imposes installation and equipment standards for CPE and requires
that all CPE marketed in the United States be registered with it and comply
with these standards. The Corporation believes that it is currently complying
with and will continue to comply with these requirements.
The United States government will in all likelihood promulgate regulations
during Fiscal 1998 regarding accessibility of telecommunications equipment and
customer premises equipment, pursuant to Section 255 of the Telecommunications
Act of 1996 but, although there can be no assurance, such regulations are not
expected to have a material adverse effect on the results of Mitel's
operations in Fiscal 1998.
The Corporation cannot now predict what impact such legislation and
regulations may have on the results of its operations beyond Fiscal 1998 or
what further regulatory changes will occur in the communications equipment
market and the competitive environment as a consequence of actions by the FCC
or the courts.
The regulatory agency in Canada governing most of the telecommunications
industry is the Canadian Radio-television and Telecommunications Commission
("CRTC"). Currently, the CPE market in Canada is an unregulated market.
Accordingly, Canadian carriers do not need CRTC approved tariffs in respect
of the sale of terminal equipment.
The liberalization of access to telecommunications networks and competition in
telecommunications services in the European Union has proceeded at a steady
pace through initiatives of the Member States as well as through deregulation
initiatives of the European Commission. The deregulatory process has
increased competition and opened markets for telecommunications vendors
throughout Europe.
Competition
The market for the Corporation's products is characterized by rapid
technological change, evolving standards and regulatory developments. Many of
the Corporation's competitors and potential competitors have greater
financial, technological, manufacturing, marketing and personnel resources
than the Corporation.
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<PAGE> 17
Competition in the communications equipment market in North America is intense
and is based primarily on product performance, price, product availability,
service and warranty options. In addition to Mitel, the major suppliers of PBX
equipment are Northern Telecom Limited, Lucent Technologies Inc., Siemens Rolm
Communications, Inc. (a subsidiary of Siemens AG), NEC America Inc. and
Fujitsu America, Inc. The Corporation believes that it competes favorably with
respect to the foregoing factors against its competitors, some of which are
larger and have more resources than Mitel. Mitel currently believes its
greatest strength in the PBX market is in the under 1,000 line size market.
Mitel has been a prime PBX supplier to the under 100 line segment of the
market since the early 1980's. In this segment, Mitel competes with hybrid
PBX key systems manufacturers and other manufacturers of used and new PBX
products.
The Corporation's basic PBX hardware business has experienced and expects to
continue to experience a price-driven competitive phase, typical of a
commodity product, as equipment replacement cycles continue to slow down.
However, Mitel has attempted to provide its PBX customers with an "intelligent
evolution" from digital to broadband technology by designing communications
systems building blocks or components that are modular and can be upgraded, as
advances in technology are achieved to grow as customer needs dictate.
Mitel currently holds approximately 7.4% of the total United States PBX market
and is currently placed fifth overall in market share. Lucent Technologies
Inc., with 29.5%, and Northern Telecom Limited, with 28.3%, are the
predominant suppliers in the United States. These estimates are provided by
Phillips InfoTech based on calendar 1996 market research.
Mitel's prime competitor in Canada in the PBX market is Northern Telecom
Limited, which enjoys a dominant supplier position with many of the Canadian
telephone companies (the Stentor Alliance). In Canada, Mitel placed second
overall in PBX sales in the Canadian PBX market during 1996. Mitel currently
holds 16.5% of the total Canadian PBX line market according to estimates
provided by Phillips InfoTech based on calendar 1996 market research.
In the Asia-Pacific PBX market, most major communications equipment suppliers
have a presence and competition is intense. Mitel believes that it compares
favorably to the competition in terms of price, product performance, and
after-sale service provided by its appointed local distributors.
Leading suppliers to the European PBX market include Alcatel Alsthom
Compagnie, Siemens AG, Robert Bosch GmbH, Telefonaktiebolaget LM Ericsson,
Philips Electronics NV and Northern Telecom Limited. In the United Kingdom
market, Mitel's main competitors are Northern Telecom Limited, selling through
British Telecommunications plc, Siemens/GPT Limited and LM Ericsson.
The principal factors of competition in the market sectors addressed by Mitel
include product performance, price, reliability, ease of expansion and
enhancement, future product strategy and support of evolving networking and
computer telephony open standards. Customers see the ease with which they can
do business with their suppliers as an increasingly important factor. The
liberalization of the long-distance telecommunications market, first in the
United Kingdom and now across other European countries, has created new
opportunities for Mitel's SMART call controller products. Sales in the United
Kingdom were supplemented by new business in Germany and Holland.
Additionally, increased competition, coupled with the arrival of cable
television companies in the local telephone service market in the United
Kingdom, has fueled growing interest in Centrex services.
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<PAGE> 18
The CST platform/server market is an emerging market which currently has no
established leader or direct competitors but is largely influenced by the
information technologies ("IT") industry leaders. Mitel is actively
participating in the international CTI standards development groups to acquire
the knowledge to become a leader in the CTI industry. Further, Mitel is
working to develop new product concepts and marketing processes consistent
with the expectations of its business partners and customers.
For call controllers, there is no dominant supplier in the market.
Competition varies by market and by application (voice or fax), while the
worldwide long distance calling market is in transition as a result of
deregulation and consolidation of carriers.
The U.S. rural central office market is dominated by two suppliers: Northern
Telecom Limited with its DMS-10 product and Siemens Stromberg Carlson with its
DCO product. The switching market is sensitive to new technology evolution.
Internationally, the rural central office market is dominated by large,
multinational players: Alcatel Alsthom (E10B), Siemens (EWSD), Ericsson (AXE-
10), Northern Telecom (DMS-10), NEC (NEAX-61) and Lucent Technologies Inc.
(5ESS). Technically, all suppliers offer equipment with comparable
functionality. The principal competitive factor for success in the
international arena is based on the strength of the financial assistance
package associated with the projects, which may have the effect of limiting
the Corporation's international opportunities in the central office market.
Competition in the semiconductor market is intense, with Dallas Semiconductor
Corporation, PMC-Sierra Inc. and Brooktree Corporation being the main
competitors in North America for Mitel's semiconductor products. Mitel
believes that its sales channels and applications support compare favorably to
those of its competitors. The main competition for the semiconductor business
in Europe comes from SGS-Thomson Microelectronics, Inc. and California
MicroDevices Corp. for analog components and from Siemens AG for digital
components. Competitive pressure in other regions, most notably the Asia-
Pacific area, comes from most of the main semiconductor competitors including
Motorola Semiconductor Products Sector, National Semiconductor, Advanced Micro
Devices, Inc., SGS-Thomson Microelectronics, Inc. and Siemens AG. Mitel
Semiconductor AB competitors include Hewlett Packard Inc. and Northern Telecom
Corporation. For optoelectronic components, Mitel Semiconductor AB
competitors include Hewlett Packard Company, Honeywell Inc., Epitaxx Inc., and
AMP Inc. in North America and Siemens AG in Germany. For ASIC (Application
Specific Integrated Circuit) products, global competitors are Austria Mikro
Systeme International AG from Austria and Orbit Semiconductor Inc. in North
America.
Backlog
Mitel's order backlog as at March 28, 1997 was $135.1 million compared to
$138.8 million at March 29, 1996. The Corporation expects that most of its
current backlog will be filled within the current fiscal year. Backlog is not
necessarily a sales outlook for the month, quarter or year as orders are
frequently booked and shipped within the same fiscal month.
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<PAGE> 19
Research and Development
Mitel's Research and Development ("R&D") activities are primarily directed
towards the application of new hardware technology and software design
techniques in the development of innovative real-time communications products.
Mitel's R&D operations are concentrated at its facilities in Kanata, Ontario,
Canada with smaller operations in the United States, the United Kingdom and
Sweden. Mitel employs 475 R&D staff in Canada and 113 in its facilities
outside Canada.
Mitel's current R&D programs fall into the following areas: (i) continuing
support for its installed base of 190,000 PBX customers and existing
distribution channels in terms of new functionality and problem resolution;
(ii) transitioning the existing PBX and sets platforms from their current
proprietary architectures to a single range of high volume, cost-optimized
products and components built around open computing technologies such as PCI
and USB; (iii) development of CTI solutions and enabling technologies based on
TAPI/CSTAPI standards ranging from PC boards, connection control software as
well as complete Windows/NT-based PC server platforms that provide integrated
PBX and unified messaging functions to small businesses; (iv) pioneering the
deployment of real-time voice across data networks applying new technologies
to work over broadband ATM and switched Ethernet LANs in partnership with data
networking companies such as Madge Networks, Inc.; (v) design of new
semiconductor products in the areas of signaling, shaping, switching and
transport technologies in communications equipment; (vi) the GX5000 small
central office and development of advanced call controller products for ISDN
remote access; and (vii) improvements to Mitel's manufacturing processes.
During Fiscal 1997, gross R&D expenses (including depreciation related to R&D)
totaled $61.5 million compared to $46.6 million during Fiscal 1996 and $44.9
million during Fiscal 1995.
During Fiscal 1997, the Corporation qualified for funding related to eligible
R&D expenditures as described in Note 13 of the Notes to the Consolidated
Financial Statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations appearing elsewhere in this Annual Report
on Form 10-K.
Patents and Trademarks
The Corporation owns many patents and has made numerous applications for
patents relating to communication technology and semiconductor and
optoelectronic component manufacturing, including patents and applications for
patents relating to its business communications product line. The Corporation
believes that the ownership of patents is an important factor permitting the
exploitation of its inventions and providing protection of its patentable
technology in the areas referred to above.
The trademark "MITEL" and the MITEL corporate logo are registered in Canada
and the United States and have been registered, or registrations have been
sought, in many other countries. The majority of the Corporation's other
trademarks are registered or applications for registration have been filed in
various countries. The Corporation believes that its trademarks are valuable
assets and generally applies for registration of a mark in countries where its
assessment of potential business related to the sale of products or services
associated with such mark justifies the expense involved. The Corporation
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<PAGE> 20
also claims rights to a number of unregistered trademarks and other
intellectual property rights. In addition to its trademark registrations and
patents, the Corporation protects its trademarks, inventions, trade secrets
and other proprietary rights by contract, appropriate proprietary notice
markings and internal security measures.
Mitel, particularly in the Semiconductor Division and in connection with CST,
licenses in certain hardware and software designs and technology for use in
certain of its products. None of these licenses is considered by Mitel to be
material.
Manufacturing
Mitel products are manufactured in Canada, the United States, the United
Kingdom and Sweden using a mix of commercial components, custom integrated
circuits and thick-film hybrids. Mitel's manufacturing operations in all
locations are focused on quality, cost and delivery with special attention
paid to constant process improvement. All facilities and their quality
management systems are certified to the rigorous standards established by the
International Standards Organization of Geneva, Switzerland.
Over the past several years, Mitel has made significant investments in new
assembly technologies in order to improve overall productivity and product
quality. These improvements have largely been a result of the increased use
of "surface mount" technology in the assembly process replacing the once
dominant "through hole" process utilized in the production of many of the
Corporation's older products. The Corporation anticipates continuing its
investments in this area which it believes will allow Mitel to further improve
production yields, productivity and overall product quality. During Fiscal
1997, an investment of $33.0 million was approved to expand the fabrication
area of the Corporation's Bromont facility and convert the size of the wafers
manufactured in such facility from 100mm to 150mm.
Mitel purchases parts and components for assembly of its products from a large
number of suppliers through a coordinated world-wide sourcing initiative.
Mitel's suppliers are subject to audit on a regular basis and are required to
meet the strictest of standards with regard to cost, quality and delivery
performance. The highest level of achievement against these standards often
results in the attainment of "Certified Supplier" status by those involved in
this program. No single supplier accounts for more than 10% of the
Corporation's total purchases and to date, Mitel has not experienced any
significant manufacturing delays relating to the availability of material.
Employees
At May 30, 1997, Mitel employed 4,079 persons. As at March 28, 1997, Mitel
employed 4,095 persons compared to 3,867 at the end of Fiscal 1996 and 3,561
at the end of Fiscal 1995. Approximately 51% of the Corporation's employees
are located in Canada, 17% in the United States, 24% in the United Kingdom,
and 8% throughout the other locations in which it operates. Mitel considers
its relationship with its employees to be excellent.
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Forward-Looking Statements
Certain statements in this section and in other sections of this Form 10-K
report contain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections about the industries in which the
Corporation operates, management's beliefs and assumptions made by management.
Words such as "expects", "anticipates", "intends", "plans", "believes",
"seeks", "estimates", and variations of such words and similar expressions are
intended to identify such forward-looking statements. These statements are
not guarantees of future performance and involve certain risks, uncertainties
and assumptions which are difficult to predict. Therefore, actual outcomes
and results may differ materially from results forecast or suggested in such
forward-looking statements. The Corporation undertakes no obligation to
update publicly any forward-looking statements, whether as a result of new
information, future events or otherwise.
Such risks, uncertainties and assumptions include, among others, the
following: increasing price and product/service competition by foreign and
domestic competitors, including new entrants; rapid technological developments
and changes; the ability to continue to introduce competitive new products on
a timely, cost-effective basis; delays in product development; the mix of
products/services; changes in environmental and other domestic and foreign
governmental regulations; protection and validity of patent and other
intellectual property rights; import protection and regulation; industry
competition; industry capacity and other industry trends; the ability of the
Corporation to attract and retain key employees; demographic changes and other
factors referenced in this Form 10-K. The above factors are representative of
the risks, uncertainties and assumptions that could affect the outcome of the
forward-looking statements. In addition, such statements could be affected by
general industry and market conditions and growth rates, general domestic and
international economic conditions including interest rate and currency
exchange rate fluctuations and other risks, uncertainties and assumptions,
including the following:
Foreign Currency Exposure and Concentration of Credit Risk
Because substantial portions of the Corporation's sales, costs of sales and
other expenses are denominated in U.S. Dollars and several other currencies,
the Corporation's results of operations are subject to the effects of exchange
rate fluctuations of those currencies relative to the Canadian dollar. The
Corporation uses financial instruments, principally forward exchange
contracts, in its management of foreign currency exposures on estimated net
foreign currency cash requirements and on certain significant transactions,
generally over the ensuing twelve to eighteen months. All foreign exchange
contracts are marked to market and the resulting gains and losses are deferred
and included in the measurement of the related transactions when they occur.
These contracts primarily require the Corporation to purchase and sell certain
foreign currencies with or for Canadian dollars at contractual rates. Several
major financial institutions are counterparties to the Corporation's financial
instruments. It is the Corporation's practice to monitor the financial
standing of the counterparties and limit the amount of exposure to any one
institution. The Corporation may be exposed to a credit loss in the event of
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<PAGE> 22
nonperformance by the counterparties of these contracts; however, management
believes any such loss is unlikely. With respect to accounts receivable,
concentration of credit risk is limited due to the diverse areas covered by
the Corporation's operations. The Corporation has credit evaluation, approval
and monitoring processes intended to mitigate potential credit risks.
Anticipated bad debt loss has been provided for in the allowance for doubtful
accounts.
Technological Changes
The market for the Corporation's products is characterized by rapid
technological change, evolving industry standards, frequent product
introductions and evolving methods used by carriers and corporations in
building and managing communications networks. Such changes in the market for
networking products may adversely affect the Corporation's ability to sell its
products. The Corporation's ability to anticipate changes in technology,
industry standards and the evolution in methods of building and managing
communications networks, and to develop and introduce new and enhanced
products on a timely basis that are successful in the market, will be
significant factors in the Corporation's competitive position and its
prospects for growth. Moreover, if technologies or standards supported by the
Corporation's products or carrier service offerings based on the Corporation's
products become obsolete or fail to gain widespread commercial acceptance, the
Corporation's business may be adversely affected. As a result, management
believes that continued significant expenditures for research and development
will be required in the future. Research and development project schedules
for high technology products are inherently difficult to predict, and there
can be no assurance that the Corporation will achieve its expected initial
shipment dates of products in development. Because timely availability of new
and enhanced products is critical to the success of the Corporation, delays in
availability of these products, or lack of market acceptance of such products,
could adversely affect the Corporation. See "Business - Research and
Development".
Competition
The market for the Corporation's products is also characterized by intense
competition. With the development of the worldwide communications market and
the growing demand for related equipment, numerous manufacturers such as the
Corporation have emerged to offer products for these markets in competition
with traditional communications equipment suppliers. Competition could
further increase if new companies enter the market or if existing competitors
expand their product lines or upgrade existing products to accommodate new
technologies and features. Such factors may adversely affect the
Corporation's competitive position in the communications market. See
"Business---Competition".
Environmental Matters
The Corporation's current and historical manufacturing and research and
development activities are subject to a wide range of environmental protection
laws in the United States and other countries. In the United States, these
laws often require parties to fund remedial action regardless of fault.
Although there are no claims currently pending against the Corporation
alleging violations by the Corporation of any environmental protection laws
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and the Corporation believes it is in substantial compliance with such laws as
are applicable to it, it is often difficult to estimate the future impact of
environmental matters, including potential liabilities, and there can be no
assurance that such a claim will not be asserted against Mitel in the future.
Regulation
The sale of certain of the Corporation's BCS products may be affected by
governmental regulatory policies, the imposition of carrier tariffs and
taxation of telecommunications services. These policies are under continuous
review and are subject to change. In the United States, regulatory policies
are likely to have a significant impact on the competitive environment in
which the Corporation operates. The Telecommunications Act of 1996 and
associated regulatory developments will eliminate or modify many regulatory
restrictions in the telecommunications market. Deregulation may facilitate
the increasingly competitive offerings by communications services providers.
In addition, RBOCs are now permitted to manufacture and sell
telecommunications equipment under certain conditions. Given the substantial
resources and large customer base of the RBOCs, the Corporation could face
competition from these companies should they satisfy these conditions and
elect to manufacture networking products. See "Business---Governmental
Regulation".
International Growth
The Corporation intends to continue to pursue growth opportunities in
international markets. In many international markets, long-standing
relationships between potential customers of the Corporation and their local
providers, and protective regulations, including local content requirements
and type approvals, create barriers to entry. In addition, pursuit of such
international growth opportunities may require significant investments for an
extended period before returns on such investments, if any, are realized.
Such projects and investments could be adversely affected by reversals or
delays in the opening of foreign markets to new competitors, exchange
controls, currency fluctuations, investment policies, repatriation of cash,
nationalization, social and political risks, taxation and other factors,
depending upon the country in which such opportunity arises.
Other Factors
The Corporation further cautions that the factors referred to above and those
referred to as part of particular forward-looking statements may not be
exhaustive, and that new risk factors emerge from time to time in its rapidly
changing business.
Item 2. Properties
On March 28, 1997, Mitel owned and operated two facilities in Canada: one in
Bromont, Quebec, Canada occupying 107,000 square feet and used for
semiconductor manufacturing, and one in Kanata, Ontario, Canada occupying
641,000 square feet. The Bromont facility includes a new wafer foundry built
in Fiscal 1997 totaling 34,000 square feet. The Kanata facility consists of
four interconnected buildings, one of which occupies 160,000 square feet and
is used for manufacturing. The remaining three buildings occupy 481,000
square feet and are used for administration, R&D, integrated circuit design
and testing. The Kanata buildings are located on 62 acres of land.
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The Corporation occupies 57,000 square feet of leased space in Ogdensburg, New
York, United States that is used for manufacturing. It also owns a 100,000
square foot building in Boca Raton, Florida, United States that was leased to
a third party up to March 1, 1997 and is now the subject of a Letter of Intent
for purchase and sale with expected closing on June 30, 1997. The Boca Raton
property is pledged to secure U.S. $3.0 million Industrial Revenue and
Development Bonds.
The Corporation owns and operates a 279,000 square foot building in
Portskewett, Wales, United Kingdom that is used for manufacturing and
administration. The Corporation owns and operates a 333,000 square foot
building in Jarfalla, Sweden that is used for semiconductor manufacturing, R&D
and administration.
On March 28, 1997, the Corporation operated 56 regional facilities totaling
242,000 square feet, all of which were leased and primarily dedicated to
sales, service, warehousing and customer training. A geographical breakdown
of these facilities is as follows: Canada, nine locations totaling 26,000
square feet; United States, 34 locations totaling 154,000 square feet; United
Kingdom, eight locations totaling 45,800 square feet; Germany, one location
totaling 600 square feet; Japan, one location totaling 1,000 square feet; Hong
Kong, two locations totaling 12,400 square feet; and Singapore, one location
totaling 2,200 square feet.
Item 3. Legal Proceedings
Mitel is a defendant in a number of lawsuits and party to a number of other
proceedings that have arisen in the normal course of its business. In the
opinion of the Corporation's legal counsel, any monetary liability or
financial impact of such lawsuits and proceedings to which Mitel might be
subject after final adjudication would not be material to the consolidated
financial position of the Corporation or the results of its operations.
Item 4. Submission of Matters To a Vote of Security Holders
None.
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
COMMON SHARE INFORMATION
PRINCIPAL MARKETS
The Toronto Stock Exchange and the New York Stock Exchange are the principal
markets on which the Company's shares are traded. The shares are also listed
on the Montreal and London Stock Exchanges. The Company's shares were first
listed on the Toronto Stock Exchange on August 13, 1979 and on the New York
Stock Exchange on May 18, 1981. The stock symbol of the Company's shares is
MLT. The following table sets forth the high and low sales prices for the
common shares for each quarter of the last two fiscal years.
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The Toronto Stock Exchange
(Canadian Dollars)
<TABLE>
1997 1996
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter $10.000 $ 8.300 $ 7.500 $ 6.125
2nd Quarter 9.600 7.750 8.375 6.625
3rd Quarter 9.650 8.500 9.500 6.625
4th Quarter 10.850 6.750 9.000 7.125
</TABLE>
New York Stock Exchange
(U.S. Dollars)
<TABLE>
1997 1996
High Low High Low
------- ------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter $ 7.375 $ 6.125 $ 5.500 $ 4.500
2nd Quarter 6.875 5.750 6.125 4.875
3rd Quarter 7.250 6.250 6.875 4.875
4th Quarter 8.125 4.625 6.625 5.125
</TABLE>
SHAREHOLDERS
There were 5,774 common shareholders of record as at May 8, 1997.
DIVIDEND POLICY
The Corporation has not declared or paid any dividends on its common shares,
and the Board of Directors anticipates that, with the exception of preferred
share dividend requirements, all available funds will be applied in the
foreseeable future to finance growth of the Corporation's business. Pursuant
to the terms of the Corporation's $2.00 Cumulative Redeemable Convertible
Preferred Shares, 1983 R&D Series (Preferred Shares - R&D Series), the
Corporation will not be permitted to pay any dividends on common shares unless
all dividends accrued on the preferred shares have been declared and paid or
set apart for payment.
Dividends paid by the Corporation, if any, to common shareholders not
resident in Canada would generally be subject to Canadian withholding tax at
the rate of 25% or such lower rate as may be provided under applicable tax
treaties. Under the Canada-United States tax treaty, the rate of withholding
tax applicable to such dividends paid to residents of the United States would
generally be 15%.
Item 6. Selected Financial Data (In millions of Canadian dollars, except per
share amounts)
The following table is derived from the consolidated financial statements
included elsewhere herein, which have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP). These
principles also conform, in all material respects, with accounting principles
generally accepted in the United States (U.S. GAAP), and the requirements of
the SEC, except as more fully described in Note 21 to the consolidated
financial statements.
25
<PAGE> 26
<TABLE>
Fiscal Year
(at the end of fiscal year for balance sheet data)
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CANADIAN GAAP
Income Statement Data:
Revenue $ 695.5 $ 576.4 $ 589.4 $ 496.4 $ 423.4
Gross margin percentage 50% 49% 45% 44% 46%
Gross research and development expense 61.5 46.5 44.9 37.1 39.2
Operating income (loss) 51.4 57.7 28.3 22.0 (1.0)
Net income 38.0 51.0 31.8 20.7 2.6
Net income (loss) per common share 0.32 0.45 0.27 0.16 (0.01)
Weighted average common
shares outstanding (millions) 107.3 105.9 105.6 105.1 80.2
Balance Sheet Data:
Working capital $ 206.3 $ 210.3 $ 208.4 $ 174.2 $ 139.4
Total assets 584.8 517.1 440.6 376.4 323.4
Current portion of long-term debt 14.8 11.2 9.0 3.9 2.8
Long-term debt 43.0 39.6 34.5 27.8 23.2
Pension liability 11.3 12.1 - - -
Shareholders' equity (including
redeemable preferred shares) 339.5 302.8 263.0 231.7 204.3
U.S. GAAP AND SEC REQUIREMENTS
Income Statement Data:
Net income $ 41.0 $ 56.9 $ 59.0 $ 18.4 $ 9.6
Net income per common share 0.35 0.50 0.52 0.14 0.07
Weighted average common shares and
share equivalents outstanding
(millions) 108.5 107.9 107.2 107.2 81.1
Balance sheet data:
Working capital $ 208.4 $ 213.5 $ 205.8 $ 172.4 $ 143.5
Total assets 595.0 517.1 440.6 376.4 323.4
Current portion of long-term debt 14.8 11.2 9.0 3.9 2.8
Long-term debt 43.0 39.6 34.5 27.8 23.2
Long-term obligation under research
and development contract - - - 28.1 31.7
Pension liability 11.3 12.1 - - -
Redeemable preferred shares 34.4 34.4 35.8 37.8 39.8
Shareholders' equity
Common shares 599.2 596.5 595.6 595.2 593.9
Contributed surplus 2.5 2.5 2.6 2.7 2.7
Deficit (292.9) (330.7) (384.3) (439.6)(454.5)
Translation account 2.5 3.3 10.6 5.7 (5.3)
</TABLE>
26
<PAGE> 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(In millions of Canadian dollars, except per share amounts)
In Fiscal 1997, the Corporation achieved another year of significant overall
revenue growth. Fiscal 1997 total revenue was $695.5, 21 percent above the
total revenue achieved in Fiscal 1996 and 18 percent above Fiscal 1995's total
revenue. The growth was driven primarily by the success of the Semiconductor
division which continued to experience high demand for the Corporation's
microelectronics communication components. In addition, Fiscal 1997 results
reflected the consolidation of Mitel Semiconductor AB, the Swedish
semiconductor fab operation, which was acquired at the end of Fiscal 1996.
Business Communications Systems (BCS) sales showed only modest growth over
last year. During the fourth quarter of Fiscal 1997, management initiated
plans to re-focus the BCS operations toward improving the sales channels and
product time to market activities and at the same time reducing corporate
support costs. To carry out this plan, the Corporation recorded a $13.0, or
$0.12 per share, restructuring and other charge to operating expenses in the
fourth quarter. After recording the charge, the Corporation reported Fiscal
1997 net income of $38.0, or $0.32 per share, $13.0 less than the prior fiscal
year when net income was $51.0, or $0.45 per share, but $6.2, or $0.05 per
share better than Fiscal 1995's net income. Net income for the three fiscal
years ended March 28, 1997, March 29, 1996 and March 31, 1995 as determined by
U.S. accounting principles is detailed in Note 21 to the consolidated
financial statements.
The following discussion and analysis explains trends in the Corporation's
financial condition and results of operations for the year ended March 28,
1997 compared with the two previous years, and is intended to help
shareholders and other readers understand the dynamics of the Corporation's
business and the key factors underlying its financial results. The
consolidated financial statements, notes to the consolidated financial
statements and supplementary information constitute an integral part of and
should be read in conjunction with this management's discussion and analysis.
The Corporation's fiscal year-end is the last Friday in March. Normally this
results in a fifty-two week year with four thirteen week quarters. For Fiscal
1995, the year-end of the Corporation was March 31, 1995, which resulted in a
fifty-three week year with one additional week occurring in the first quarter
of that year. Accordingly, part of the change in revenue, associated costs,
and expenses may be attributed to one additional week in Fiscal 1995 compared
to fiscal years 1997 and 1996.
RESULTS OF OPERATIONS
Mitel's business is global and comprises the design, manufacture and sale of
systems, subsystems and microelectronic components to world markets in the
telephony, computer telephony integration (CTI) and communications industries.
These products and related services include voice communications systems;
networked voice and data systems and CTI applications; client server telecom
products; public switching systems; network enhancement and access products;
integrated and hybrid circuits, optoelectronic devices and custom silicon
wafers.
27
<PAGE> 28
The Corporation sells its products through both direct and indirect channels
of distribution. Factors affecting the choice of distribution, among others,
include: end-customer type, the level of product complexity and integration
requirements, the stage of product introduction, geographic presence and
location of markets, and volume levels.
Revenue during the last five fiscal years, based on the geographic location of
Mitel's customers, was distributed as follows:
Revenue ($ millions Cdn)
<TABLE>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Canada $ 47.3 $ 55.3 $ 50.4 $ 46.2 $ 50.0
Other Regions 52.8 66.8 78.5 85.4 104.1
Europe 117.6 132.1 153.7 173.1 228.8
United States 205.7 242.2 306.8 271.7 312.6
</TABLE>
The net movement in exchange rates from Fiscal 1996 favorably impacted total
revenue by 0.3 percent ($2.3) as a result of changes in the United States
dollar and United Kingdom pound sterling exchange rates. Fiscal 1996 revenue
was positively impacted by one percent ($6.9), when compared with Fiscal 1995,
as a result of changes in the United States dollar and United Kingdom pound
sterling exchange rates.
Business Communications Systems
BCS Revenue ($ millions Cdn)
<TABLE>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Service $ 56.2 $ 60.0 $ 67.1 $ 71.6 $ 70.5
Products 315.7 365.4 434.6 383.9 404.0
</TABLE>
Business Communications Systems (BCS) comprise PBX equipment and peripherals,
CTI products and applications, client server telecom products, call controller
products, the GX5000, and RADICALL. All of the Corporation's service revenue
relates to business communications systems, primarily PBX. Fiscal 1997 BCS
revenue, in total, was $474.5, a 4 percent increase from Fiscal 1996's figure
of $455.5. Fiscal 1997 results reflected improved sales across all regions in
which the Corporation operates, despite intense competitive pressures.
Compared to last year, BCS product revenue increased by 5 percent to $404.0
due to increased European demand for the Corporation's call controller
products, improved sales of CTI applications in all markets, and higher SX200
sales to U.S. supply houses and dealers. With respect to call controllers,
European sales increased in Fiscal 1997 as a result of deregulated network
access services in the U.K. which created a strong demand by alternate
carriers for Mitel's call controllers. In Fiscal 1997, the North American BCS
performance recovered slightly due to marketing programs and sales initiatives
introduced late in Fiscal 1996 to meet the intensifying competitive
challenges. The recovery was evidenced by growth in line shipments in the U.S.
market. In particular, sales into U.S. supply houses were up, also benefiting
28
<PAGE> 29
from the strength of a healthy economy in that country. In addition, sales of
central office equipment improved over Fiscal 1996 as Mitel increased its
share of the independent telephone company market. Overall, Fiscal 1997 lines
shipped increased by 16 percent over lines shipped in Fiscal 1996. This
increase was mostly attributable to the higher product sales in the indirect
sales channels. These increases were offset partially by lower new
installations through the Corporation's direct sales channels in both the U.S.
and in Europe. Market share in the U.S., based on total lines shipped,
improved to 7.4 percent in calendar 1996, up 0.4 percentage points from
calendar 1995 (based on market research published by Phillips InfoTech). In
the U.K., Mitel's second biggest market for BCS products, market share, based
on new lines shipped, increased to 13.0 percent in calendar 1996, up 1.2
percentage points from calendar 1995 (based on market research published by
Marketing Services).
BCS service revenue decreased by 2 percent from last year to $70.5, mainly as
a consequence of the sale of all of the Corporation's North American non-Mitel
PBX and key system customer base and the sale of certain U.K. maintenance
contracts to other service providers mid-way through Fiscal 1996. As
expected, in proportion to total revenue, BCS service revenue decreased by one
percentage point to approximately 10 percent as a result of disposing of these
revenue streams.
CTI revenue benefited in the year from efforts made in Fiscal 1996 to train
the Corporation's voice system sales force and distribution channels for the
CTI/convergence products and applications migration, but the improvement was
only modest as the market has not responded to CTI opportunities as quickly as
management and industry analysts had expected. Management remains committed
to CTI and the broader convergence category of a combined telecommunications
and information technology. The Corporation intends to use core competency
in voice products to play a major role in these new markets. Management
believes Mitel is well positioned to succeed in the convergence market by
providing voice solutions as an application over corporate LANs as well as
other CTI products including call center applications. The Corporation plans
to continue marketing voice products in the Corporation's core markets as well
as working with strategic partners to take advantage of new opportunities in
the information technology industry.
On January 31, 1997, the Corporation acquired for cash consideration of $5.1
the business and assets of Global Village Communication (U.K.) Limited, an
integrated service digital network (ISDN) solution provider based in the
United Kingdom. The acquired product line currently consists of leading edge
ISDN access products and technologies which allow for high volume digital
communications between head office, local branches, home workers and agents in
the field in a cost-effective manner. This product line complements Mitel's
open and distributed architecture of business communications solutions and
Mitel's initiative in bringing telecommunications and computer technology
together. Revenue for Fiscal 1997 was not significantly impacted by this
acquisition.
29
<PAGE> 30
Mitel's BCS focus in Asia Pacific continued to be its joint venture located in
Tianjin, China, and Mitel (Far East) Limited. In Fiscal 1997, Mitel increased
the localization of manufacturing Mitel product by the joint venture for the
China market. However, BCS revenue growth for this region has not met with
management expectations due, in part, to the effects of tight monetary
policies and intense price competition in China. Management remains confident
in the long-term prospects of this region, but has determined it prudent to
record a write-off of its investment in the joint venture as part of the
restructuring and other charges described in the following paragraph.
During the fourth quarter of Fiscal 1997, the Corporation announced plans to
restructure its BCS operations in light of the competitive conditions in the
market place and the need to curtail certain non-profitable activities. A
total charge of $13.0 was recorded to the Corporation's operating expenses.
This charge included an amount of $5.0 for the write-off of the Corporation's
investment and related assets in Tianchi-Mitel Telecommunication Corporation
(TMTC), the Corporation's joint venture in Tianjin, China. The remaining $8.0
was provided primarily for termination benefits, related to BCS operations in
North America and the United Kingdom, which will result in a net cash outlay
by the Corporation over the next twelve months. These cash outflows will be
funded through the Corporation's cash provided from operations. In addition,
as part of its restructuring plans, the Corporation determined to curtail
further development of its RADICALL products. During the last few years, the
Corporation rolled out RADICALL product to Regional Bell Operating Companies
and public network operators in the U.S. and, more recently, into the United
Kingdom. However, management believes the inroads made to date have not been
sufficient to justify further development of the product, although the
Corporation plans to support the product for existing customers. In addition,
management is working to streamline the major sales, service and distribution
channels and to reduce supporting corporate expenses. Management expects to
realize annualized savings to operating expenses of approximately $13.0 within
the next fiscal year.
Fiscal 1996 BCS revenue decreased by 9 percent to $455.5 from Fiscal 1995's
revenue of $501.7. Fiscal 1996 reflected mixed results with highly
competitive market conditions having a negative impact on BCS revenue,
particularly in North America. In Fiscal 1996, BCS product revenue decreased
by 12 percent. In addition, Fiscal 1996 lines shipped decreased by 7 percent
over lines shipped in Fiscal 1995 causing market share to decline slightly in
calendar 1995. European revenue grew on the strength of upgrades and
expansion sales to its installed base, call center application sales, and
higher maintenance service revenue. The Asia Pacific region, included in
other geographic markets, maintained its revenue base under highly competitive
conditions. Revenue also decreased in Fiscal 1996 due to the sale of Mitel's
non-core PBX and key system base and certain service contracts to other
distributors mid-way through that year. In Fiscal 1996, BCS service revenue
increased by 7 percent over Fiscal 1995 due to higher maintenance and service
revenue in the European region which resulted in part from the one-time sale
of certain maintenance contracts to other service providers.
In Fiscal 1995, the Corporation eliminated its direct BCS sales operations in
Italy and Germany due to poor performance in those countries and recorded a
$5.0 restructuring charge in that year to complete the closing of offices and
termination of staff. The Italian and German restructuring was initiated in
the second quarter of Fiscal 1995 and was substantially completed by the end
of that year.
30
<PAGE> 31
Semiconductors
As a percentage of total revenue, semiconductors accounted for 32 percent, 21
percent and 15 percent, respectively, in fiscal years 1997, 1996 and 1995.
Semiconductor Revenue ($ in millions Cdn)
<TABLE>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Semiconductors $ 51.5 $ 71.0 $ 87.7 $120.9 $221.0
</TABLE>
Semiconductor revenue showed successive annual growth rates of 38 percent and
83 percent, respectively, in Fiscal 1996 and in Fiscal 1997. The revenue
growth was the result of the additional revenue from Mitel Semiconductor AB,
which was acquired at the end of Fiscal 1996, and increased demand for the
Corporation's integrated circuits, wafers and thick film hybrid products in
all regions.
The increase in Mitel's semiconductor business reflects the worldwide growth
in the communications segment of the semiconductor industry. Mitel is
experiencing growth in countries where there is a demand for Mitel's line of
communications components from manufacturers of advanced voice, data and
multimedia equipment in North America, Asia and Europe. Increased demand for
communications products incorporating existing Mitel Semiconductor components
by the Corporation's traditional customer base, along with the introduction of
new components, including those intended for CTI/multimedia applications, led
to increased sales volumes compared to last year.
The Corporation took major steps in Fiscal 1996 to expand its production
capacity through both the acquisition of Mitel Semiconductor AB, which has a
semiconductor plant in Jarfalla, Sweden, and a major capital expansion program
at its fabrication plant in Bromont, Quebec, Canada. Both initiatives were
necessary to meet the growing demand for Mitel's integrated circuits. The
most significant part of the first phase of the Bromont expansion program,
which concerns the improvement of the volume capacity of the existing 100 mm
wafer production, was completed during the first quarter of Fiscal 1997. The
second part of the first phase, which will introduce new 0.8 micron
technology, will be completed during the second quarter of Fiscal 1998. The
second phase, intended to increase the plant's production capacity by
converting to 150 mm wafer production, is scheduled to be completed in the
beginning of calendar 1998. The estimated time to complete the second phase
is approximately one fiscal quarter later than originally planned.
Subsequent to the acquisition of Mitel Semiconductor AB, management concluded
that the thermal print head (TPH) portion of the business was not strategic to
the Corporation's interests. On October 23, 1996, the Corporation sold the
TPH operation, including related inventory, fixed assets and certain
intellectual property rights to a German distributor. The sale of the
business did not have a significant impact on the Corporation's financial
position or results of operations for Fiscal 1997 and will not have a
significant impact on the Corporation's financial position or results of
operations in the future.
31
<PAGE> 32
GROSS MARGIN
As a percentage of total revenue, the total gross margin for the year was 50
percent, one percentage point higher than Fiscal 1996, and five percentage
points higher than Fiscal 1995. Margins were strong primarily due to a good
mix of higher margin products sold, particularly in semiconductors, high sales
volumes, and cost efficiencies obtained in the manufacturing plants.
Product gross margin was 52 percent in Fiscal 1997 as against 51 percent in
Fiscal 1996 and 47 percent in Fiscal 1995. Service gross margin was 33
percent in Fiscal 1997 compared to 36 percent in Fiscal 1996 and 28 percent in
Fiscal 1995. Product gross margins improved each year due to changes in the
sales mix with a higher proportion of semiconductors and high value
applications. In addition, manufacturing efficiencies were achieved each year
on higher semiconductor volumes through the plant and cost reductions achieved
in manufactured system products. Fiscal 1997 service gross margins were lower
than in Fiscal 1996 when service gross margins benefited from the sale and
transfer of certain U.K. maintenance contracts to Bailey Telecom Limited.
OPERATING EXPENSES
Selling and Administrative
Selling and administrative (S&A) expenses increased in Fiscal 1997 to $208.4
from $172.2 in Fiscal 1996. As a percentage of sales, Fiscal 1997 S&A
expenses were 30 percent, the same as in Fiscal 1996 and Fiscal 1995. S&A
expenses were higher than in Fiscal 1996 primarily due to the inclusion of the
results of operations of Mitel Semiconductor AB. In addition, operating
expenses increased due to higher costs associated with new marketing
initiatives and product launches (with respect to CTI applications, work group
solutions, PC telephony and in support of the NeVaDa networked voice and data
product), costs associated with higher sales volumes and higher product
support costs. The marketing-related costs included increased trade show
activity, new corporate communications material, course development for
dealers and end-customers, and an increase in head count.
Fiscal 1996 S&A expenses decreased over Fiscal 1995 primarily as a result of
closing the Italian and German direct PBX sales operations and improved
operating efficiencies in the U.S. sales organization. Additionally in
accordance with a research and development (R&D) contract with British
Telecommunications plc (BT), the requirement to pay BT levies on SX2000
product sales expired on March 31, 1995. In Fiscal 1995, levies of $4.4 were
included in S&A expenses for which there was no corresponding amount in Fiscal
1996. The benefit of these savings discussed above helped to offset higher
costs associated with new marketing initiatives and product launches, and
incentives associated with the improved earnings performance in Fiscal 1996.
Research and Development
R&D Expenses ($ millions Cdn)
<TABLE>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Research
& Development $ 35.0 $ 34.2 $ 41.9 $ 42.7 $ 56.5
</TABLE>
32
<PAGE> 33
R&D expenses were $56.5 and 8 percent of revenue for the year ended March 28,
1997. This compares to $42.7 and $41.9, and both at 7 percent of revenue, for
Fiscal 1996 and Fiscal 1995, respectively. These amounts were exclusive of
related R&D capital asset amortization and net of government R&D incentives
earned in each year. R&D increased as a percentage of sales compared to last
year mainly due to the inclusion of Mitel Semiconductor AB which currently has
a significant program for new integrated circuits and optoelectronic
components.
Government R&D incentives earned and included in R&D expenses amounted to $0.2
in Fiscal 1997, $0.3 in Fiscal 1996, and $0.6 in Fiscal 1995. In addition,
the Corporation recorded $11.7 of Canadian investment tax credits not
previously recognized relating to prior years' R&D which compares to $7.7
recorded in Fiscal 1996.
Mitel's R&D program integrates its programs for existing products with
development work in emerging technologies including, among others, the
following: CTI; multimedia components and applications; networked voice and
data; client server telecom; new ISDN applications; and real-time application
specific microelectronic components.
Amortization
Amortization increased in Fiscal 1997 to $33.5 from $19.2 and $16.5 in Fiscal
1996 and Fiscal 1995, respectively. The increase over Fiscal 1996 was due
primarily to the inclusion of Mitel Semiconductor AB's results of operations,
upgrades made to the Corporation's other manufacturing plants, and a major
semiconductor capacity expansion program. Similarly, the increase in Fiscal
1996 over Fiscal 1995 was primarily due to ongoing replacements and upgrades
to the Corporation's semiconductor and other manufacturing plants during the
latter part of Fiscal 1995 and throughout Fiscal 1996.
INVESTMENT AND INTEREST INCOME
On September 27, 1996, the Corporation sold a non-strategic investment in
Esprit Telecom (Jersey) Ltd. (Esprit), a company which provides value added
network services through leased lines to European based corporate accounts.
The Esprit investment was sold for cash proceeds of $3.7, representing a total
gain of $3.6, or $2.4 after-tax. The gain has been excluded from operating
income in Fiscal 1997.
Interest income was $6.0 for Fiscal 1997 compared to $10.0 and $5.7 for Fiscal
1996 and Fiscal 1995, respectively. The decrease in interest income in Fiscal
1997 resulted from lower Canadian interest rates and from lower average cash
balances available for investment. Cash balances available for investment
were reduced due to the acquisition of Mitel Semiconductor AB for $44.0 on the
last day of Fiscal 1996. This acquisition was financed in its entirety from
the Corporation's cash resources. The increase in interest income in Fiscal
1996 over Fiscal 1995 resulted from higher average cash balances available for
investment and higher interest rates in Fiscal 1996 relative to Fiscal 1995.
INTEREST EXPENSE
Interest expense was $2.4 for Fiscal 1997 compared to $1.7 and $1.2 for Fiscal
1996 and Fiscal 1995, respectively. The increase in interest expense over the
past three years resulted from an increase in the Corporation's capital
leases.
33
<PAGE> 34
INCOME TAXES
Income tax expense for Fiscal 1997 was $20.6 compared to $15.0 and $1.0 for
Fiscal 1996 and Fiscal 1995, respectively. The Corporation follows the cost
reduction method to account for investment tax credits (ITCs). Accordingly
the ITCs, related to prior years' research and development, were applied
against research and development expenses and tax expense was increased by a
corresponding amount. Consequently, the combination of accruing for the ITCs
and the incremental tax expense resulted in an insignificant impact to net
earnings or earnings per share. Before accounting for the investment tax
credits, income tax expense for Fiscal 1997 was $8.9 compared to $7.3 for
Fiscal 1996 and $1.0 for Fiscal 1995 resulting in an effective tax rate of 19
percent, 13 percent and 3 percent respectively. The increased tax expense in
Fiscal 1997 was due to higher taxable earnings in the U.K., primarily as a
result of the gain on the sale of Esprit and to higher taxes in Canada for
higher provincial taxable income as a result of claiming investment tax
credits. The increased tax expense in Fiscal 1996 was due primarily to the
earnings improvement in the Corporation's U.K. operations.
At the end of Fiscal 1997, the Corporation had tax loss carryforwards of
$100.0, investment tax credit carryforwards of $60.0 and timing differences of
approximately $32.0. No accounting benefit has been recognized in respect of
these carryforwards due to the lack of virtual certainty or reasonable
assurance, as applicable, of realizing the benefits from the operations in
which the carryforwards and timing differences arose. Management periodically
reviews the virtual certainty or reasonable assurance, as applicable, of
realizing the carryforward and timing difference benefits in the determination
of their accounting recognition. Such review may, in the future, result in
the recording of the accounting benefit for these timing differences and
investment tax credit carryforwards, as the circumstances warrant, and the
recognition of loss carryforwards, as realized.
OTHER
Management periodically evaluates the financial and operational independence
of its foreign operations and the resulting accounting classification of the
foreign subsidiaries as self-sustaining enterprises. Should a foreign
subsidiary cease to be classified as self-sustaining, then translation gains
or losses on consolidating the foreign subsidiary's financial statements would
be charged to operating income instead of a separate component of
shareholders' equity.
The Corporation manages foreign currency risk by protecting the estimated
future foreign currency cash flows of each operating division, and certain
significant transactions from adverse foreign exchange fluctuations. The
Corporation does not engage in a trading or speculative hedging program.
The Corporation believes that inflation has not had a material impact on
revenues and costs during the last three fiscal years.
34
<PAGE> 35
Backlog
As orders are frequently booked and shipped within the same fiscal month,
order backlog is not necessarily indicative of a sales outlook for the month,
quarter, or year. This is most true for the Corporation's business
communications systems although manufacturing lead times for semiconductor
products are generally longer because of the nature of the production process.
At March 28, 1997, order backlog was $135.1 compared to $138.8 at March 31,
1996 and $83.8 at March 31, 1995. The decrease in backlog from the end of
Fiscal 1996 was mainly attributable to the effects of the sale of the thermal
print head business in the third quarter of Fiscal 1997. These decreases were
offset partially by an improvement in the Corporation's North American BCS
indirect sales channel. Most of the backlog is scheduled for delivery in the
next twelve months.
Backlog ($ millions Cdn)
<TABLE>
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Order Backlog $ 81.5 $ 86.6 $ 83.8 $138.8 $135.1
</TABLE>
The acquisition of Mitel Semiconductor AB at the end of Fiscal 1996 accounted
for most of the increase to the Corporation's total backlog outstanding at
March 31, 1996 as compared to the end of Fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation had cash and short-term investment balances of $143.3 at March
28, 1997 compared to $137.3 at March 29, 1996. The increase of $6.0 from the
end of Fiscal 1996 was due to cash flow provided by operations. Cash flow
provided by operations amounted to $66.1 during the year ended March 28, 1997.
This compares to Fiscal 1996 and Fiscal 1995 when cash provided by operations
was $70.4 and $50.9, respectively. Since March 29, 1996, the Corporation's
working capital decreased by $4.0 to $206.3 due primarily to an increase in
accounts payable and accrued liabilities partially offset by an increase in
inventory and accounts receivable levels.
Accounts payable and accrued liabilities were higher at year-end due to
increased inventory purchasing activity to support increased sales levels and
additional provisions for the Corporation's restructuring program. Cash
outflows related to the restructuring and other provisions were not
significant in Fiscal 1997. Inventory increased by $10.6 since last year to
bring levels in line with the expected operating requirements. The
Corporation maintains a minimum amount of critical inventory to ensure
continuity of supply for its manufacturing requirements. Most of the security
supply inventory is carried at the Corporation's semiconductor plants. As at
March 28, 1997, the security supply inventory was $3.1 compared to $2.9 at
March 29, 1996. Accounts receivable increased over last year due to the
higher sales levels in the fourth quarter of Fiscal 1997 as compared to the
fourth quarter of Fiscal 1996.
35
<PAGE> 36
Fixed asset additions were $73.7 during Fiscal 1997, and were primarily for
the increase in semiconductor manufacturing capacity and technology
enhancements as well as upgrades to the Corporation's information technology
resources. The semiconductor capital program is comprised of two phases.
Phase one, which commenced in the third quarter of Fiscal 1996 and was
completed during the first quarter of Fiscal 1997, except for the introduction
of the new 0.8 micron technology which will be completed in the second quarter
of Fiscal 1998, cost approximately $10.1 and phase two (scheduled to be
completed during early calendar 1998) is expected to cost approximately $39.0.
Approximately $33.4 has been spent on phase two as at the end of Fiscal 1997.
As at March 28, 1997, there were approximately $2.0 in capital expenditure
purchase orders outstanding related to the Bromont expansion program.
Management expects that Fiscal 1998 capital expenditures will be lower than
Fiscal 1997 levels.
Subsequent to year-end, the Corporation entered into an agreement to sell the
Boca Raton facility, which was previously held as an asset for resale. The
proceeds from the sale of approximately $6.2 will be used to extinguish the
Florida industrial revenue bonds amounting to $4.1 as at March 28, 1997 to
which the facility was pledged as security. Management expects the sale of
the facility would not have a significant impact on the results of operations.
On January 31, 1997, the Corporation acquired the business and assets of
Global Village Communication (U.K.) Limited, an ISDN solution provider based
in the United Kingdom, for cash consideration of $5.1. The acquisition was
financed in its entirety by the Corporation's own cash resources. Goodwill of
$3.3 was recorded for the excess of the purchase price over the fair value of
the assets acquired, which will be amortized on a straight-line basis over the
next five years.
Total long-term debt increased, net of repayments, by $7.0 from the end of
Fiscal 1996. The increase was due to new capital leases partially offset by a
repayment in full of the advances received under the Ontario Loan Agreement of
$20.0. The Ontario government loan would have become subject to interest
commencing on March 28, 1997 at an annual rate of 9.25 percent. In light of
the lower rates of interest that the Corporation could obtain through other
lending sources, management decided to repay the loan in its entirety before
interest expense would begin to accrue.
The pension liability of $11.3 relates to the unfunded pension obligation in
Mitel Semiconductor AB which was acquired on March 29, 1996. Under applicable
Swedish law, companies are not required to fund the pension obligation, but
instead operate on a "pay as you go" basis. The pension obligation is
actuarially determined in accordance with applicable laws and regulations in
Sweden and is fully insured by a Swedish regulatory agency.
At the end of Fiscal 1997, the Corporation's capitalization was comprised of
17 percent debt, 9 percent preferred equity, and 74 percent common equity.
This compares to the end of Fiscal 1996 when the Corporation's capitalization
profile was 17 percent debt, 10 percent preferred equity, and 73 percent
common equity.
In addition to cash and short-term investment balances of $143.3, the
Corporation has unused lines of credit in North America and the U.K. of
approximately $32.7. In accordance with Corporation policy, short-term
investment balances are primarily comprised of high-grade money market
instruments with original maturity dates of less than one year.
36
<PAGE> 37
Management believes that the Corporation is in a position to meet all
foreseeable business cash requirements and debt service from its cash balances
on hand, existing financing facilities and cash flow from operations.
Item 8. Financial Statements and Supplementary Data
The following financial statements and supplementary data are filed as part of
this Annual Report on Form 10-K.
Auditors' Report to the Shareholders
Consolidated Balance Sheets
Consolidated Statements Of Income And Retained Earnings for the years ended
March 28, 1997, March 29, 1996 and March 31, 1995
Consolidated Statements Of Cash Flows for the years ended March 28, 1997,
March 29, 1996 and March 31, 1995
Notes To The Consolidated Financial Statements
AUDITORS' REPORT
To the Shareholders of Mitel Corporation:
We have audited the consolidated balance sheets of Mitel Corporation as at
March 28, 1997 and March 29, 1996 and the consolidated statements of income
and retained earnings and cash flows for each of the years in the three year
period ended March 28, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at March 28,
1997 and March 29, 1996 and the results of its operations and the changes in
its financial position for each of the years in the three year period ended
March 28, 1997 in accordance with accounting principles generally accepted in
Canada.
<TABLE>
<S> <C>
ERNST & YOUNG
Ottawa, Canada Ernst & Young
May 8 , 1997 Chartered Accountants
</TABLE>
37
<PAGE> 38
MITEL CORPORATION incorporated under the laws of Canada
CONSOLIDATED BALANCE SHEETS
(In millions of Canadian dollars)
<TABLE>
March 28, March 29,
1997 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments (note 3) $ 143.3 $ 137.3
Accounts receivable (notes 4 and 19) 156.7 145.7
Inventories (note 5) 83.1 72.5
Prepaid expenses 4.2 6.7
------- -------
387.3 362.2
Capital assets:
Fixed assets (notes 6 and 8) 182.2 143.7
Other assets (notes 7 and 8) 15.3 11.2
------- -------
$ 584.8 $ 517.1
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 124.3 $ 103.6
Income and other taxes payable 15.7 14.9
Deferred revenue 26.2 22.2
Current portion of long-term debt (note 8) 14.8 11.2
------- -------
181.0 151.9
Long-term debt (note 8) 43.0 39.6
Pension liability (notes 18 and 22) 11.3 12.1
Deferred income taxes 10.0 10.7
------- -------
245.3 214.3
------- -------
Commitments and contingencies (notes 9 and 10)
Shareholders' equity:
Capital stock (note 11)
Preferred shares 37.2 37.2
Common shares (1997-107,414,631; 1996-106,084,494) 153.3 150.6
Contributed surplus (note 11) 32.3 32.3
Retained earnings 114.2 79.4
Translation account (note 12) 2.5 3.3
------- -------
339.5 302.8
------- -------
$ 584.8 $ 517.1
======= =======
</TABLE>
(See accompanying notes to the consolidated financial statements)
On behalf of the Board:
<TABLE>
<S> <C>
HENRY SIMON JOHN MILLARD
Dr. Henry Simon, Director Dr. John B. Millard, Director
</TABLE>
38
<PAGE> 39
MITEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In millions of Canadian dollars, except per share amounts)
<TABLE>
Year Ended
March 28, March 29, March 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenue:
Products $ 625.0 $ 504.8 $ 522.3
Service 70.5 71.6 67.1
------- ------- -------
695.5 576.4 589.4
Cost of sales (excluding amortization):
Products 297.4 246.7 275.1
Service 47.0 45.6 48.2
------- ------- -------
344.4 292.3 323.3
------- ------- -------
Gross Margin 351.1 284.1 266.1
------- ------- -------
Expenses:
Selling and andministrative 208.4 172.2 174.4
Research and development (note 13) 56.5 42.7 41.9
Investment tax credits related to prior
years' research and development (note 13) (11.7) (7.7) -
Restructuring and other charges (note 14) 13.0 - 5.0
Amortization 33.5 19.2 16.5
------- ------- -------
299.7 226.4 237.8
------- ------- -------
Operating income 51.4 57.7 28.3
Investment and interest income (note 15) 9.6 10.0 5.7
Interest expense (note 8) (2.4) (1.7) (1.2)
------- ------- -------
Income before income taxes 58.6 66.0 32.8
Income tax expense (note 16) 20.6 15.0 1.0
------- ------- -------
Net Income 38.0 51.0 31.8
Retained earnings, beginning of year 79.4 31.7 3.4
------- ------- -------
117.4 82.7 35.2
Dividends on preferred shares (3.2) (3.3) (3.5)
------- ------- -------
Retained earnings, end of year $ 114.2 $ 79.4 $ 31.7
======= ======= =======
Net income attributable to common
shareholders after preferred
share dividends $ 34.8 $ 47.7 $ 28.3
======= ======= =======
Net income per common share (note 17) $ 0.32 $ 0.45 $ 0.27
======= ======= =======
</TABLE>
(See accompanying notes to the consolidated financial statements)
39
<PAGE> 40
MITEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of Canadian dollars)
<TABLE>
Year Ended
March 28, March 29, March 31,
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities:
Net income $ 38.0 $ 51.0 $ 31.8
Restructuring and other charges 5.3 - -
Amortization 33.5 19.2 16.5
Loss (gain) on sale of capital assets
and investment (4.5) 0.2 -
Deferred income taxes (0.2) 0.1 (0.9)
Change in pension liability 0.6 - -
Decrease (increase) in working
capital (note 24) (6.6) (0.1) 3.5
------- ------- -------
Total 66.1 70.4 50.9
Investing activities:
Additions to capital assets (73.9) (34.5) (17.2)
Proceeds from disposal of capital assets
and investment 5.0 0.2 0.5
Acquisitions (note 18) (5.1) (43.5) (1.9)
Net change in non-cash balances related
to investing activities 5.4 1.0 1.4
------- ------- -------
Total (68.6) (76.8) (17.2)
------- ------- -------
Financing activities:
Increase in long-term debt 40.7 18.2 16.9
Repayment of long-term debt (34.1) (10.4) (5.4)
Repurchase and redemption of
preferred shares (note 11) - (1.5) (2.3)
Dividends on preferred shares (3.2) (3.3) (3.5)
Issue of common shares (note 11) 2.7 0.9 0.4
Net change in non-cash balances related
to financing activities 0.8 - (0.9)
------- ------- -------
Total 6.9 3.9 5.2
------- ------- -------
Effect of currency translation on cash 1.6 (1.8) 1.6
------- ------- -------
Increase (decrease) in cash and
short-term investments 6.0 (4.3) 40.5
Cash and short-term investments,
beginning of year 137.3 141.6 101.1
------- ------- -------
Cash and short-term investments,
end of year $ 143.3 $ 137.3 $ 141.6
======= ======= =======
</TABLE>
(See accompanying notes to the consolidated financial statements)
40
<PAGE> 41
MITEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In millions of Canadian dollars, except per share amounts)
1. NATURE OF OPERATIONS
Mitel is an international communications products supplier. The Company's
principal line of business is the manufacture and distribution of business
communications systems and semiconductors, and to a lesser degree, based on
revenue, the Company provides support services in respect of products sold.
The principal markets for the Company's products are the United States,
Europe, Canada and the Asia Pacific region.
2. ACCOUNTING POLICIES
These consolidated financial statements have been prepared by management in
accordance with accounting principles generally accepted in Canada. A
reconciliation of amounts presented in accordance with United States
accounting principles is detailed in Note 21.
The preparation of financial statements in conformity with Canadian and United
States accounting principles requires management to make estimates and
assumptions that affect the reported assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
(A) FISCAL YEAR END
The Company's fiscal year end is the last Friday in March. Normally this
results in a fifty-two week year with four thirteen week quarters. For Fiscal
1995, the year-end of the Company was March 31, 1995 which resulted in a
fifty-three week year.
(B) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
of its wholly-owned subsidiary companies. Investments in associated
companies, except for joint ventures, in which the Company has significant
influence are accounted for by the equity method. Investments in joint
ventures are accounted for by the proportionate consolidation method.
(C) CASH AND SHORT-TERM INVESTMENTS
Cash and short-term investments are valued at the lower of cost or market
value. The Company invests its excess cash in highly liquid low risk debt
instruments with terms of usually not greater than one year.
(D) INVENTORIES
Inventories are valued at the lower of average cost and net realizable value
for work-in-process and finished goods, and current replacement cost for raw
materials. The cost of inventories includes material, labor and manufacturing
overhead.
41
<PAGE> 42
(E) CAPITAL ASSETS
Capital assets are initially recorded at cost, net of related research and
development and other government assistance. Goodwill is initially recorded
at the excess of the Company's cost over the amount of the fair value of the
net assets acquired in a business combination. The Company evaluates the
realizability of these assets based upon the expected future undiscounted cash
flows of the related assets.
Amortization is provided on the bases and at the rates set out below:
<TABLE>
ASSETS BASIS RATE
--------- ----------------- --------
<C> <C> <C>
Buildings Straight-line 4%
Equipment Declining Balance 20-30%
Straight-line 10-33.3%
Patents and
trademarks Straight-line 10-33.3%
Goodwill Straight-line 6.7-20%
</TABLE>
(F) FOREIGN CURRENCY TRANSLATION
The Company uses the current rate method of foreign currency translation to
translate the accounts of its foreign subsidiaries. The resulting unrealized
gains or losses are deferred and included in shareholders' equity until there
is a reduction in the net investment in a foreign operation.
The Company enters into foreign exchange contracts intended to hedge its
estimated net foreign currency cash requirements, and certain significant
transactions, generally over the ensuing twelve to eighteen months. The
Company does not engage in a trading or speculative hedging program. All
foreign exchange contracts are marked to market and the resulting gains and
losses are deferred and included in the measurement of the related
transactions when they occur.
Exchange gains or losses related to translation of, or settlement of, foreign
currency denominated long-term monetary items are deferred and amortized on a
straight-line basis over the remaining life of the items.
(G) REVENUE RECOGNITION
Revenue from the sale of products is recognized at the time goods are shipped
to customers. Revenue from the sale of communications systems including
integration and installation services, is recognized on a percentage of
completion basis. Revenue from service is recognized at the time services are
rendered. Billings in advance of services are included in deferred revenue.
Estimated warranty costs associated with these revenues are provided for at
the time of the sale.
42
<PAGE> 43
(H) INCOME TAXES
Income taxes are accounted for using the deferred tax allocation method under
which the income tax provision is based on the income reported in the
accounts. Incentive tax credits are taken into income on the same basis as
the related expenditures are charged to income provided the Company expects
the credits to be realized.
(I) DEVELOPMENT COSTS
The Company interprets the criteria for deferral of development costs on a
very stringent basis under which few, if any, costs qualify for deferment. In
the three years ended March 28, 1997, all development costs were expensed as
incurred.
3. CASH AND SHORT-TERM INVESTMENTS
As at March 28, 1997, the Company had $116.9 (1996 - $124.3) invested in
short-term investments with maturity dates between April 1, 1997 and October
27, 1997 at rates of return extending from 2.68 percent to 6.52 percent.
4. ACCOUNTS RECEIVABLE
Included in accounts receivable was an allowance for doubtful accounts of $9.8
(1996 - $5.9). The allowance for doubtful accounts includes $2.1 related to
the write-off of the Company's investment in a joint venture, Tianchi-Mitel
Telecommunications Corporation, which is included in the restructuring and
other charges. (See also Note 14.). Also included in accounts receivable was
an amount of $16.6 (1996 - $6.9) for unbilled accounts on long-term contracts.
The Company is exposed to credit risk from customers. However, the Company's
orientation is global with a large number of diverse customers to minimize
concentrations of credit risk. (See also Note 19.)
5. INVENTORIES
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Raw materials $ 29.4 $ 21.9
Work-in-process 26.9 22.6
Finished goods 26.8 28.0
------- -------
$ 83.1 $ 72.5
======= =======
</TABLE>
43
<PAGE> 44
6. FIXED ASSETS
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Cost:
Land $ 4.5 $ 5.4
Buildings 127.6 113.8
Equipment 207.8 185.6
Equipment under capital leases 79.9 45.5
------- -------
419.8 350.3
------- -------
Less accumulated amortization:
Buildings 65.7 60.7
Equipment 148.6 131.5
Equipment under capital leases 23.3 14.4
------- -------
237.6 206.6
------- -------
$ 182.2 $ 143.7
======= =======
</TABLE>
7. OTHER ASSETS
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Cost:
Assets held for resale $ 7.4 $ 7.4
Goodwill 4.7 1.3
Patent, trademarks, and other 10.6 7.9
------- -------
22.7 16.6
------- -------
Less accumulated amortization:
Goodwill 1.4 0.2
Patents, trademarks, and other 6.0 5.2
------- -------
7.4 5.4
------- -------
$ 15.3 $ 11.2
======= =======
</TABLE>
Assets held for resale include surplus land in Kanata and a building in Boca
Raton. The Boca Raton facility was leased to a tenant for a term from March
1, 1994 to November 1, 1998. As per the terms of the lease the tenant's
option to purchase the facility expired on March 1, 1997. On April 21, 1997,
the Company signed a letter of intent to sell the Boca Raton facility. The
net cash proceeds would be approximately $6.2 for this sale. Management does
not expect the sale to have a significant impact on the results of operations.
During the fourth quarter, the Company recorded a write-off of $1.0 for the
unamortized balance of goodwill related to its investment in its joint venture
in China, Tianchi-Mitel Telecommunications Corporation. (See also Note 14.)
44
<PAGE> 45
8. LONG-TERM DEBT
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Capital leases and other, at rates varying
from 3.4% to 12.2% with payment terms ranging
from 3 to 5 years $ 51.6 $ 23.5
Florida industrial revenue and development
bonds, at a rate of 8.375%, due in April
2001 and against which certain assets held
for resale have been pledged as security
(1997 - U.S. $3.0; 1996 - U.S. $3.1) 4.1 4.2
Non-interest bearing 1996 Canada-Quebec
government loan, repayable in three equal
annual installments commencing July, 2001 2.1 -
Ontario government loan, at a rate of 9.25%,
repaid on March 21, 1997 - 20.0
Non-interest bearing unsecured note
payable, discounted at a rate of 8.75%,
due in equal annual installments of U.S. $1.4,
repaid during Fiscal 1997 (1996 - U.S. $1.3) - 1.8
Non-interest bearing 1990 Canada-Quebec
government loan, repaid during Fiscal 1997 - 1.3
------- -------
57.8 50.8
Less current portion 14.8 11.2
------- -------
$ 43.0 $ 39.6
======= =======
</TABLE>
Future minimum lease payments of the obligations under capital leases total
$59.1 of which $17.9, $15.2, $11.2, $8.4, and $6.4 relate to fiscal years 1998
to 2002 and beyond respectively. Interest costs of $8.0 are included in the
total future lease payments.
Principal repayments, excluding obligations under capital leases, during the
next five fiscal years are: 1998 - $0.2; 1999 - $0.2; 2000 - $0.2; 2001 -
$0.3; 2002 - $4.1. Interest expense related to long-term debt was $2.3 in
Fiscal 1997 (1996 - $1.7; 1995 - $1.1).
The following table presents financial instrument fair value disclosure where
the carrying value of such is different. Fair value was determined by
discounting cash flows of the obligations at 7.0 percent (1996 - 8.0 percent),
the rate determined as generally available to the Company on credit facilities
at the fiscal year-end:
45
<PAGE> 46
<TABLE>
1997 1996
------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------------------
<S> <C> <C> <C> <C>
Capital leases and other $ 51.6 $ 44.9 $ 23.5 $ 20.5
Florida industrial revenue
and development bonds $ 4.1 $ 4.3 $ 4.2 $ 4.4
Non-interest bearing 1996
Canada-Quebec government loan $ 2.1 $ 1.5 $ - $ -
Ontario government loan $ - $ - $ 20.0 $ 15.1
Non-interest bearing unsecured
note payable $ - $ - $ 1.8 $ 1.8
Non-interest bearing 1990
Canada-Quebec government loan $ - $ - $ 1.3 $ 1.1
</TABLE>
9. COMMITMENTS
(A) OPERATING LEASES
The future minimum lease payments for operating leases for which the Company
was committed as at March 28, 1997 were as follows: 1998 - $10.8; 1999 - $8.2;
2000 - $4.0; 2001 - $2.3; 2002 - $2.0; 2003 and beyond - $12.9.
(B) LETTERS OF CREDIT
The Company had letters of credit outstanding as at March 28, 1997 of
approximately $7.0 to secure accounts payable primarily relating to the
purchase of inventory.
(C) CAPITAL EXPENDITURES
Capital expenditure commitments under purchase orders outstanding at the end
of Fiscal 1997 amounted to approximately $3.0.
10. CONTINGENCIES
The Company is a defendant in a number of lawsuits and party to a number of
other claims or potential claims that have arisen in the normal course of its
business. In the opinion of the Company's legal counsel, any monetary
liability or financial impact of such lawsuits and claims or potential claims
to which the Company might be subject after final adjudication would not be
material to the consolidated financial position of the Company or the
consolidated results of its operations. (See also Note 13.)
11. CAPITAL STOCK
The Company's authorized capital stock consists of an unlimited number of
preferred and common shares.
46
<PAGE> 47
<TABLE>
Shares Outstanding 1997 1996
----------------------------- ----------- -----------
<S> <C> <C>
Preferred shares - R&D Series 1,616,500 1,618,900
Common Shares 107,414,631 106,084,494
</TABLE>
(A) PREFERRED SHARES - R&D SERIES
The preferred shares were issued in Fiscal 1984 for gross cash proceeds of
$95.2 of which $51.5 ($23.00 per share) was allocated to capital stock with
the balance being the consideration received for the sale of tax rights.
Dividends - Fixed cumulative cash dividends are payable quarterly at a rate of
$2.00 per share per annum.
Redemption - The shares are currently redeemable, at the option of the
Company, at $25.00 per share plus accrued dividends.
Purchase Obligation - Commencing January 1, 1989, the Company was required to
make reasonable efforts to purchase 22,400 shares in each calendar quarter at
a price not exceeding $25.00 per share plus costs of purchase, and this
obligation has been met. The difference between the stated capital of the
repurchased shares over the consideration paid for such shares is recorded
against contributed surplus.
(B) COMMON SHARES
An analysis of the changes in the number of common shares and the amount of
share capital for the three years ended March 28, 1997 is as follows:
<TABLE>
Number Amount
----------- -------
<S> <C> <C>
Balance, March 25, 1994 105,516,144 $ 149.3
Issued for cash - Employee stock option plans 260,474 0.4
----------- -------
Balance, March 31, 1995 105,776,618 149.7
Employee stock option plans 307,876 0.9
----------- -------
Balance March 29, 1996 106,084,494 150.6
Warrants 1,000,000 1.7
Employee stock option plans 330,137 1.0
----------- -------
Balance March 28, 1997 107,414,631 $ 153.3
=========== =======
</TABLE>
The warrants exercised in Fiscal 1997 represent all of the warrants then
outstanding to reduce outstanding warrants to nil as at March 28, 1997 (1996 -
1,000,000).
47
<PAGE> 48
(C) DIVIDEND RESTRICTIONS ON COMMON SHARES
The Company may not declare cash dividends on its common shares unless
dividends on the preferred shares have been declared and paid, or set aside
for payment.
(D) STOCK OPTION PLANS
At the Company's 1991 Annual General Meeting, the shareholders approved
resolutions authorizing stock options for key employees and non-employee
directors. Certain amendments to the plan were approved by the shareholders
at the 1993 and 1995 Annual General Meetings allowing for 1,000,000 and
2,000,000 additional shares, respectively, to be made available for grant.
Available for grant at March 28, 1997 were 1,113,525 (1996 - 1,779,775; 1995 -
268,625) shares. All options granted have ten year terms and become fully
exercisable at the end of four years of continuous employment.
A summary of the Company's stock option activity, and related information for
the two years ended March 28, 1997 is as follows:
<TABLE>
1997 1996
--------------------------- ---------------------------
Options Weighted Average Options Weighted Average
Exercise price Exercise price
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Outstanding options:
Balance,
beginning of year 2,902,525 $ 4.54 2,721,551 $ 3.74
Granted 713,500 9.23 610,500 7.52
Exercised (330,137) 2.95 (307,876) 2.97
Cancelled (47,250) 6.06 (121,650) 5.62
--------- ------- --------- -------
Balance, end of year 3,238,638 $ 5.71 2,902,525 $ 4.54
========= ======= ========= =======
Exercisable at
end of year 1,580,776 $ 3.75 1,229,775 $ 2.95
========= ======= ========= =======
Weighted average fair value price
of options granted during the year
using the Black-Scholes fair value
option pricing model
(See also Note 21.) $ 4.54 $ 3.90
======= =======
</TABLE>
48
<PAGE> 49
A summary of options outstanding at March 28, 1997 is as follows:
<TABLE>
- ------------- Total Outstanding ------------- --Total Exercisable--
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Exercise Contractual Exercise
Options Price Price Life Options Price
- ---------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
913,975 $1.10-$2.82 $1.90 6 years 896,308 $ 1.88
710,850 $3.90-$5.75 $5.10 7 years 308,925 $ 5.09
1,613,813 $6.25-$9.32 $8.14 8 years 375,376 $ 7.12
- --------- ---------
3,238,638 1,580,776
========= =========
</TABLE>
12. TRANSLATION ACCOUNT
The following table summarizes changes in the translation account:
<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of year $ 3.3 $ 10.6 $ 5.7
Increase (decrease):
Movements in exchange rates -
United States Dollar - (1.4) 0.7
United Kingdom Pound Sterling 5.4 (6.0) 5.9
Sweden Krona (4.4) - -
Other currencies - 0.1 -
Reduction of net investments
in subsidiaries (1.8) - (1.7)
------- ------- -------
Balance, end of year $ 2.5 $ 3.3 $10.6
======= ======= =======
</TABLE>
13. GOVERNMENT ASSISTANCE AND INVESTMENT TAX CREDITS
During the year, the Company recognized total funding of $0.2 (1996 - $ 0.3;
1995 - $0.6) related to eligible R&D expenditures (1997 - $0.6; 1996 - $1.0;
1995 - $2.9) which was recorded as a reduction primarily of research and
development expenses in the consolidated statements of income.
During the year, the Company also recognized Canadian investment tax credits
of $11.7 (1996 -$7.7; 1995 - $nil) related to prior years' R&D expenses for
which no accounting benefit was previously recognized. (See also Note 16.)
49
<PAGE> 50
Contributions of $5.0 made to the Company in prior years under the
Microelectronics and System Development Program, a federal assistance program,
are contingently repayable if the resulting technology is commercially
successful. The contributions are repayable based on a percentage of related
sales over a period not to exceed ten years and ending on June 30, 2004. Any
amount unpaid at the end of the ten year period would be forgiven. As the
technology is in the early stages of being commercially exploited, the total
amounts repaid and repayable to March 28, 1997 were negligible.
The Company is contingently liable for the repayment of funding received in
prior years if certain conditions are not met to a maximum of $2.9. The
Company believes that it is in compliance with these conditions.
14. RESTRUCTURING AND OTHER CHARGES
During the fourth quarter of Fiscal 1997, the Company recorded a charge of
$13.0 in respect of a restructuring program to reduce operating expenses in
Business Communications Systems and a write-off of $5.0 on the investment and
related assets in the Company's joint venture in China. As at March 28, 1997,
the balance of the restructuring provision included in accounts payable and
accrued liabilities amounted to $7.7.
In Fiscal 1995, the Company recorded a charge of $5.0 in respect of
restructuring its Business Communications Systems sales operations in Italy
and Germany which was substantially completed in that year.
15. INVESTMENT AND INTEREST INCOME
On September 27, 1996, the Company sold its equity interest in Esprit Telecom
(Jersey) Ltd. (Esprit), a non-strategic holding which was carried at a nominal
cost. The gain on the sale of shares in Esprit was $3.6.
Interest income earned on cash and short-term investments in Fiscal 1997 was
$6.0 (1996 - $10.0; 1995 - $5.7).
16. INCOME TAXES
Details of income tax expense (recovery) were as follows:
<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current
Canadian $ 14.9 $ 9.3 $ 1.0
Foreign 7.0 5.6 0.9
Deferred
Foreign (1.3) 0.1 (0.9)
------- ------- -------
$ 20.6 $ 15.0 $ 1.0
======= ======= =======
</TABLE>
Deferred taxes on income generally result from timing differences primarily in
the recognition of amortization and research and development expenditures for
tax and financial reporting purposes.
50
<PAGE> 51
The income tax expense reported differs from the amount computed by applying
the Canadian rates to the income before income taxes. The reasons for these
differences and their tax effects were as follows:
<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Expected tax rate 40% 40% 40%
------- ------- -------
Expected tax expense $ 23.4 $ 26.4 $ 13.1
Foreign tax rate differences (2.2) (0.8) (0.1)
Tax effect of losses not recognized 8.7 2.5 3.3
Tax effect of realizing benefit of prior
years' operating loss carryforwards (13.9) (15.7) (17.3)
Corporate minimum taxes 3.2 2.4 1.5
Other 1.4 0.2 0.5
------- ------- -------
Income tax expense $ 20.6 $ 15.0 $ 1.0
======= ======= =======
</TABLE>
Unremitted earnings of subsidiaries subject to withholding taxes will be
indefinitely reinvested with no provision necessary for potential withholding
taxes on repatriation of subsidiary earnings. The income (loss) before income
taxes attributable to all foreign operations was $6.1 (1996 - $15.7; 1995 -
$(2.9)).
As at March 28, 1997, the Company had tax loss carryforwards of approximately
$100.0 for which no accounting benefit was recognized and which are available
to reduce future years' income for tax purposes. These tax loss carryforwards
expire as follows: 2002 - $6.0; 2003 - $16.0; 2004 - $6.9; 2005 to 2012 -
$71.1. The tax loss carryforwards relate to operations in the United States,
Germany and Hong Kong. As at March 28, 1997, the Company had Canadian
investment tax credit carryforwards of approximately $60.0 for which no
accounting benefit was recognized and which are available to reduce future
years' income taxes. These investment tax credits expire during the years
from 1998 to 2007. In addition, the Company had timing differences of
approximately $32.0 for which no accounting benefit was recognized.
17. NET INCOME PER COMMON SHARE
The net income per common share figures were calculated based on net income
after the deduction of preferred share dividends and using the weighted
monthly average number of shares outstanding during the respective fiscal
years (107,274,463 shares in 1997; 105,920,369 shares in 1996; and 105,622,984
shares in 1995).
18. ACQUISITIONS
(A) On January 31, 1997, the Company acquired the business and assets of
Global Village Communication (U.K.) Limited, an ISDN solution provider based
in the United Kingdom, for cash consideration of $5.1. In addition, the
Company recorded a liabilitiy of $0.2 in respect of acquisition costs and
recorded a provision of $0.5 in respect of estimated costs to integrate the
operations of the acquired business with the existing U.K. division, Mitel
Telecom Limited, over the next twelve months.
51
<PAGE> 52
This acquisition was accounted for by application of the purchase method under
which the results from operations were included in the Company's accounts from
the date of acquisition. The difference between the purchase price and the
fair value of the acquired net assets amounted to $3.3, all of which was
recorded as goodwill to be amortized on a straight-line basis over the next
five years.
The purchase transaction is summarized as follows:
Net assets acquired, at approximate fair value:
<TABLE>
<S> <C>
Current assets $ 3.1
Capital assets 1.0
Goodwill 3.3
-------
Total assets 7.4
Current liabilities 2.3
-------
Total net assets 5.1
=======
Cash consideration 5.1
=======
</TABLE>
Pro Forma financial information for the acquisition as if the business had
been acquired at the beginning of Fiscal 1997 is not presented due to the
insignificant impact on the Company's results of operations.
(B) On March 29, 1996, the Company acquired ABB Hafo AB (subsequently renamed
Mitel Semiconductor AB), a designer, manufacturer and marketer of custom and
application specific integrated circuits and semiconductor components with
operations based in Sweden and the United States. Mitel Semiconductor AB was
acquired for cash consideration of $44.0, comprised of $24.0 for 100 percent
of the outstanding common shares and $20.0 for the repayment of all bank loans
in the acquired company. This acquisition was accounted for by application of
the purchase method under which the results from operations were included in
the Company's accounts from the date of acquisition.
The purchase transaction is summarized as follows:
Net assets acquired, at approximate fair value:
52
<PAGE> 53
<TABLE>
<S> <C>
Current assets $ 28.0
Capital assets 48.2
-------
Total assets 76.2
-------
Current liabilities 13.9
Pension liability 12.1
Deferred income taxes 6.2
-------
Total liabilities 32.2
-------
Total net assets $ 44.0
=======
Cash consideration $ 44.0
=======
</TABLE>
In addition to the cash consideration, the Company incurred expenses of $1.7
in respect of acquisition costs and $2.0 in respect of costs to integrate the
operations of the acquired company with the Semiconductor division. As at
March 28, 1997, the liability in respect of acquisition costs was $nil and
$1.3 in respect of estimated integration costs.
(C) On April 12, 1994, the Company completed the acquisition of its 50
percent investment in Tianchi-Mitel Telecommunications Corporation (Tianchi-
Mitel), a telecommunications manufacturing, sales and service joint venture in
Tianjin, China, for a total cash investment of $3.3. The acquisition was
accounted for by the purchase method. Accordingly, the Company's share in the
joint venture's results from operations were included in the consolidated
financial statements of the Company from the date of acquisition, April 12,
1994. (See also Note 14.)
19. RELATED PARTY TRANSACTIONS
During the year ended March 28, 1997, the Company sold to jointly controlled
and significantly influenced enterprises product and services valued at
approximately $8.1 (1996 - $7.9; 1995 - $7.1).
Included in accounts receivable as at March 28, 1997 were amounts due from
jointly controlled and significantly influenced enterprises of $0.4 (1996 -
$1.5; 1995 - $1.3).
20. INFORMATION ON GEOGRAPHIC SEGMENTS
The Company operates primarily as a vertically integrated manufacturer of
communications products which is its principal line of business. Included in
total revenue for Canada were export sales amounting to $244.9 in Fiscal 1997
(1996 - $197.7; 1995 - $178.7). The point of origin (the location of the
selling organization) of revenue and the location of the assets determine the
geographic areas.
53
<PAGE> 54
<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Revenue:
Canada
External customers $ 113.4 $ 98.6 $ 91.5
Transfers between geographic areas 181.5 145.3 137.6
------- ------- -------
294.9 243.9 229.1
------- ------- -------
United States
External customers 312.9 271.5 309.5
Transfers between geographic areas 19.4 14.1 15.8
------- ------- -------
332.3 285.6 325.3
------- ------- -------
Europe
External customers 248.0 183.3 164.5
Transfers between geographic areas 32.4 19.2 20.4
------- ------- -------
280.4 202.5 184.9
------- ------- -------
Other
External customers 21.2 23.0 23.9
Transfers between geographic areas - - -
------- ------- -------
21.2 23.0 23.9
------- ------- -------
Eliminations of transfers between
geographic areas (233.3) (178.6) (173.8)
------- ------- -------
Total Revenue $ 695.5 $ 576.4 $ 589.4
======= ======= =======
</TABLE>
54
<PAGE> 55
<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating income:
Canada $ 53.7 $ 58.8 $ 49.9
United States 35.7 37.8 47.7
Europe 40.9 35.0 12.0
Other 15.7 3.2 4.6
Eliminations (10.2) (5.0) (9.3)
------- ------- -------
Segment operating income 135.8 129.8 104.9
Corporate expenses 84.4 72.1 76.6
------- ------- -------
Operating income 51.4 57.7 28.3
Investment and interest income,
net of interest expense 7.2 8.3 4.5
Income tax expense (20.6) (15.0) (1.0)
------- ------- -------
Net income $ 38.0 $ 51.0 $ 31.8
======= ======= =======
Fixed asset additions:
Canada $ 56.9 $ 26.9 $ 12.1
United States 3.5 2.3 1.7
Europe 13.2 4.4 3.4
Other 0.1 0.9 -
------- ------- -------
Fixed asset additions $ 73.7 $ 34.5 $ 17.2
======= ======= =======
Amortization expense:
Canada $ 17.9 $ 13.4 $ 11.0
United States 2.4 1.6 1.3
Europe 12.9 4.1 4.1
Other 0.3 0.1 0.1
------- ------- -------
Amortization expense $ 33.5 $ 19.2 $ 16.5
======= ======= =======
Identifiable assets:
Canada $ 187.4 $ 136.5 $ 115.2
United States 96.7 82.8 92.1
Europe 194.9 198.1 112.9
Other 6.8 11.5 14.0
------- ------- -------
Identifiable assets 485.8 428.9 334.2
Corporate assets 99.0 88.2 106.4
------- ------- -------
Total assets $ 584.8 $ 517.1 $ 440.6
======= ======= =======
</TABLE>
In line with industry practice, corporate expenses include research and
development, scientific research agreement revenue, and general administration
expenses. Interest and income taxes are excluded from the calculation of
segment operating income.
55
<PAGE> 56
Transfers between areas are made at prices based on the total cost of the
product to the selling location.
21. UNITED STATES ACCOUNTING PRINCIPLES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP) which, in
the case of the Company, conform in all material respects with those in the
United States (U.S. GAAP) and with the requirements of the Securities and
Exchange Commission (SEC), except as follows:
(A) Under the terms of an R&D contract with British Telecommunications plc
(BT), the Company was required to pay BT levies based on defined incremental
sales of SX-2000 products. These levies were payable until the earlier of
March 31, 1995 or until the amounts paid to BT reached a specified maximum.
Under Canadian GAAP, amounts earned for work performed under the R&D contract
with BT were offset against the related costs incurred. Amounts earned for
work performed pursuant to such contracts among parties who were related at
the time the arrangement was entered into were accounted for as a liability
under interpretation of U.S. GAAP by the staff of the SEC. Although BT ceased
to be related to the Company on June 12, 1992, the R&D contract with BT was
entered into while BT was the majority owner of the Company.
Under Canadian GAAP, levies payable to BT pursuant to the contract terms were
accounted for as an expense. They were accounted for as a payment against the
liability under interpretations of U.S. GAAP by the staff of the SEC.
On March 31, 1995, the requirement to pay levies to BT expired pursuant to the
terms of the contract. Accordingly, the remaining unpaid amount in respect of
the R&D contract of $23.7 as at March 31, 1995 was accounted for as an
extinguishment of debt and recognized in income under U.S. GAAP for the year
ended March 31, 1995.
(B) Under Canadian GAAP, unrealized and realized gains and losses on foreign
currency transactions identified as hedges may be deferred as long as there is
reasonable assurance that the hedge will be effective. Under U.S. GAAP,
deferral is allowed only on foreign currency transactions intended to hedge
identifiable firm foreign currency commitments.
(C) Under Canadian GAAP, investments in joint ventures are recognized in the
financial statements of the venturer by applying the proportionate
consolidation method of accounting. Under U.S. GAAP, equity accounting is
applied to investments in joint ventures when preparing the consolidated
financial statements of the venturer.
(D) Under Canadian GAAP, stock issue costs are shown as an adjustment to
retained earnings. The carrying amount of capital stock is shown net of issue
costs under U.S. GAAP.
(E) Redeemable preferred shares are excluded from shareholders' equity under
requirements of the SEC.
(F) Reductions in stated capital and deficit are not recorded under U.S.
GAAP. The Company had previously undertaken stated capital and deficit
reductions in fiscal years 1985, 1986, 1987 and 1992.
56
<PAGE> 57
(G) Under U.S. GAAP, primary and fully diluted earnings per share are
computed in accordance with the treasury stock method and are based on the
weighted average number of common shares and dilutive common share
equivalents.
(H) Under Canadian GAAP, for purposes of the statements of cash flows, cash
position includes all short-term investments. Under U.S. GAAP, cash position
includes highly liquid investments with original maturities of less than three
months. In addition, under U.S. GAAP, non-cash items such as assets acquired
under capital lease are excluded from the statements of cash flows. Under
Canadian GAAP, the gross amount of non-cash items are included in the
respective operating, investing, or financing activities as applicable.
(I) The Company implemented SFAS 109, Accounting for Income Taxes, in Fiscal
1994 for purposes of reconciliation to U.S. GAAP. As at March 28, 1997, the
Company's deferred tax asset, primarily related to the benefit of realizing
investment tax credit and loss carryforwards and timing differences, net of a
valuation allowance of $123.1 (1996 - $135.3), was $10.2 (1996 - nil), and
deferred tax liabilities, primarily related to buildings and equipment, were
$10.0 (1996 - $10.7).
(J) Management has examined the rules applicable to SFAS 119 regarding the
disclosure of derivative financial instruments and the fair value of financial
instruments and has provided the required disclosure in notes 7, 8, 21, 22,
and 23.
(K) The United States Financial Accounting Standards Board has issued a new
standard (SFAS 128) regarding the calculation of earnings per share. SFAS 128
is effective for annual periods ending after December 15, 1997. The Company
has not determined the impact, if any, of SFAS 128 on its consolidated
financial statements.
(L) The United States Financial Accounting Standards Board has issued a new
standard (SFAS 123) for accounting for stock based compensation. As allowed
under SFAS 123, Management has determined that it will continue to apply
Accounting Principles Board Opinion No. 25 (APB 25), in accounting for its
employee stock options because the alternative fair value accounting provided
for under SFAS 123 requires the use of option valuation models that were not
developed for use in valuing employee stock options. In accordance with
Company policy the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant.
Accordingly under the rules of APB 25, no related compensation expense was
recorded in the Company's results of operations for U.S. GAAP purposes.
The following table reconciles the net income as reported on the consolidated
statements of income to the net income that would have been reported had the
financial statements been prepared in accordance with U.S. GAAP and the
requirements of the SEC. The proportionate consolidation method for joint
ventures does not affect the measurement of income or shareholders' equity and
therefore is not addressed in the following table:
57
<PAGE> 58
<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income in accordance with Canadian GAAP $ 38.0 $ 51.0 $ 31.8
Effect of research and development contract - - 4.4
Income recognized under research and development
contract (See Part A) - - 23.7
Effect of deferral accounting related to foreign
exchange contracts (7.2) 5.9 (0.9)
Adjustment to deferred income taxes 10.2 - -
------- ------- -------
U.S. GAAP and SEC requirements:
Net income $ 41.0 $ 56.9 $ 59.0
======= ======= =======
Net income for the year attributable to
common shareholders after
preferred share dividends $ 37.8 $ 53.6 $ 55.5
======= ======= =======
Net income per common share $ 0.35 $ 0.50 $ 0.52
======= ======= =======
</TABLE>
The weighted average number of common share and common share equivalents
outstanding pursuant to U.S. GAAP in Fiscal 1997 was 108,472,457 (1996 -
107,883,043; 1995 - 107,221,144).
<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flow information presented in conformity
in all material respects with U.S. GAAP:
Cash provided by (used in)
Operating activities - Canadian GAAP $ 66.1 $ 70.4 $ 50.9
------- ------- -------
Deferred income taxes 10.2 - -
Charge in deferred tax asset (10.2) - -
------- ------- -------
Operating activities - U.S. GAAP 66.1 70.4 50.9
Investing activities - Canadian GAAP (68.6) (76.8) (17.2)
Change in short-term investments (2.9) (6.3) (39.6)
Additions to capital assets under capital lease 31.3 16.3 6.6
------- ------- -------
Investing activities - U.S. GAAP (40.2) (66.8) (50.2)
------- ------- -------
Financing activities - Canadian GAAP 6.9 3.9 5.2
Increase in capital leases (31.3) (16.3) (6.6)
------- ------- -------
Financing activities - U.S. GAAP (24.4) (12.4) (1.4)
------- ------- -------
Increase (decrease) in cash 1.5 (8.8) (0.7)
Effect of currency translation on cash flows 1.6 (1.8) 1.6
Cash position, beginning of year 52.4 63.0 62.1
------- ------- -------
Cash position, end of year $ 55.5 $ 52.4 $ 63.0
======= ======= =======
</TABLE>
58
<PAGE> 59
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Balance sheet items in conformity in all
material respects with U.S. GAAP and
SEC requirements:
Cash $ 55.5 $ 52.4
Short-term investments 87.8 84.9
Deferred tax asset 10.2 -
Accounts payable and accrued liabilities 128.3 100.4
Redeemable preferred shares 34.4 34.4
Common shares 599.2 596.5
Contributed surplus 2.5 2.5
Deficit (292.9) (330.7)
</TABLE>
Pro Forma financial information required by SFAS 123 has been determined as if
the Company had accounted for its employee stock options using the Black-
Scholes fair value option pricing model with the following weighted-average
assumptions for fiscal years 1996 and 1997:
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Risk-free interest rate 5.45% 7.02%
Dividend yield nil nil
Volatility factor of the expected
market price of the Company's
common stock 0.565 0.593
Weighted-average expected life
of the options 6 years 6 years
1997 1996
------- -------
Pro Forma net income for U.S. GAAP $ 39.8 $ 56.5
Pro Forma net income per common share
Primary $ 0.34 $ 0.49
Fully diluted $ 0.34 $ 0.49
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of Pro Forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period on a straight-line
basis. (See also Note 11.)
59
<PAGE> 60
22. PENSION PLANS
The Company maintains several defined contribution and two defined benefit
pension plans for its employees. Pension expense was $4.8 in Fiscal 1997
(1996 - $3.3; 1995 - $3.7).
(A) Defined Contribution Pension Plans
Both the Company and the employees contribute to these plans based on a the
employees' earnings.
(B) Defined Benefit Pension Plans
The Company's policy is to fund defined benefit pension plans in accordance
with independent actuarial valuations as permitted by pension regulatory
authorities.
(i) The first defined benefit plan is contributory and covers substantially
all employees in the United Kingdom by providing pension benefits based on
length of service and final pensionable earnings. Employee contributions are
based on pensionable earnings. Actuarial reports in connection with the U.K.
defined benefit plan, prepared in April, 1995 and updated to March 28, 1997,
were based on projections of employees' compensation levels to the time of
retirement. These actuarial reports indicate that the actuarial present value
of the accrued pension benefits and the net assets available to provide for
these benefits, at market value, were as follows:
<TABLE>
1997 1996
------- -------
<S> <C> <C>
Pension fund assets $ 53.5 $ 39.3
Accrued pension benefits $ 48.2 $ 38.1
</TABLE>
The assumptions used to develop the actuarial present value of the accrued
pension benefits for Fiscal 1997 and Fiscal 1996 were as follows:
<TABLE>
<S> <C>
Discount rate 8.5 %
Compensation increase rate 6.5 %
Investment return assumption 9.0 %
</TABLE>
For purposes of an actuarial valuation, pension fund assets were valued using
the discounted income method. Under this approach, the value of the assets is
obtained by estimating the receipts which will arise in the future from the
plan's investments and then discounting the amounts to the valuation date, at
the valuation rate of return on assets.
60
<PAGE> 61
(ii) The second defined benefit plan covers all employees over the age of
twenty-eight in Sweden and provides pension benefits based on length of
service and final pensionable earnings. There are no pension fund assets under
the plan. The associated pension liability is calculated each year by the
Pension Registration Institute and is credit insured in its entirety by
Forsakringsbolaget Pensionsagaranti. The pension liability of $11.3 (62.6
SEK) (1996 - $12.1 (59.4 SEK)) was actuarially determined based on the present
value of the accrued future pension benefits and in accordance with the
applicable laws and regulations in Sweden.
23. FOREIGN EXCHANGE CONTRACTS
At March 28, 1997, foreign currency exchange contracts to sell $162.0 in
foreign currency (126.0 U.S. Dollars, 2.0 Pound Sterling, 50.0 Japanese Yen,
38.0 Swedish Krona and 1.0 Singapore Dollars) had an unrealized loss of $3.9.
The unrealized loss represents a point-in-time estimate that may not be
relevant in predicting the Company's future earnings or cash flows. The
unrealized loss reflects the estimated amount that the Company would have been
required to pay if forced to settle all outstanding contracts on March 28,
1997.
Mitel is exposed to credit risk in the event of non- performance, but does not
anticipate non-performance by any of the counter parties. Management believes
that there is no substantial concentration of credit risk resulting from the
foreign currency forward contracts.
24. CASH FLOW INFORMATION
Net change in non-cash working capital balances
related to operating activities:
<TABLE>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Accounts receivable $ (9.8) $ (7.0) $ (21.3)
Inventories (11.6) 9.0 9.8
Accounts payable and accrued liabilities 10.3 1.4 6.2
Deferred revenue 2.9 (0.7) 10.2
Other 1.6 (2.8) (1.4)
------- ------- -------
$ (6.6) $ (0.1) $ 3.5
======= ======= =======
</TABLE>
25. UNUSED BANK LINES OF CREDIT
At March 28, 1997, the Company had unused and available demand bank lines of
credit amounting to approximately $ 32.7 (1996 - $31.9) at rates of interest
based on the London Inter-Bank Offer Rate (LIBOR) (6.5%), Canadian prime
(4.75%), and U.K. base rate (7.0%).
26. COMPARATIVE FIGURES
Certain of the 1996 and 1995 comparative figures have been reclassified so as
to conform to the presentation adopted in 1997.
61
<PAGE> 62
SUPPLEMENTARY FINANCIAL INFORMATION
(in millions of Canadian dollars, except per share amounts; unaudited)
SELECTED QUARTERLY FINANCIAL DATA
(in accordance with Canadian generally accepted accounting principles)
FISCAL 1997
<TABLE>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue $ 155.9 $ 167.5 $ 173.1 $ 199.0 $ 695.5
Gross margin 79.4 85.0 88.7 98.0 351.1
Gross margin percentage 51% 51% 51% 49% 50%
Net income (loss) 10.7 16.5 11.5 (0.7) 38.0
Net income (loss) per common share 0.09 0.15 0.10 (0.01) 0.32
</TABLE>
Certain Fiscal 1997 quarterly figures were reclassified with no effect on the
reported quarterly net income.
FISCAL 1996
<TABLE>
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue $ 136.2 $ 149.5 $ 125.7 $ 165.0 $ 576.4
Gross margin 63.8 73.4 64.6 82.3 284.1
Gross margin percentage 47% 49% 51% 50% 49%
Net income 9.6 15.0 11.2 15.2 51.0
Net income per common share 0.08 0.13 0.10 0.14 0.45
</TABLE>
EXCHANGE RATES OF THE CANADIAN DOLLAR
(based on noon buying rates)
The high and low exchange rates (i.e. the highest and lowest rates at which
Canadian dollars were sold), the average exchange rate (i.e. the average of
the exchange rates on the last day of each month during the period) and the
period end exchange rates of the Canadian dollar in exchange for U.S. currency
for each of the five years ended December 31, 1996 and for the period January
1, 1997 through May 8, 1997, as reported by the Federal Reserve Bank of New
York, were as follows:
<TABLE>
January 1
to May 8,
U.S. DOLLARS 1997 1996 1995 1994 1993 1992
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
High 0.7487 0.7513 0.7527 0.7632 0.8046 0.8757
Low 0.7145 0.7235 0.7023 0.7103 0.7439 0.7761
Average 0.7296 0.7332 0.7286 0.7318 0.7751 0.8275
Period End 0.7228 0.7301 0.7323 0.7128 0.7544 0.7865
</TABLE>
62
<PAGE> 63
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
Directors
The following table sets forth the name, age and position with the Corporation
of each director and nominee for director of the Corporation.
<TABLE>
Name Age Director Since Positions
- ----------------------- --- -------------- --------------------------
<S> <C> <C> <C>
Anthony L. Craig(2) 51 May 16, 1996 Director
Hubert T. Lacroix(1,3) 41 July 21, 1992 Director
Dr. John B. Millard(2,3) 58 February 4, 1993 Director and President and
Chief Executive Officer
Donald W. Paterson(1,2) 64 May 16, 1996 Director
Dr. Henry Simon(2,3) 67 July 21, 1992 Director and Chairman
Peter van Cuylenburg 49 March 15, 1996 Director
Paul G. Vien(1,4) 62 July 21, 1992 Director
Jonathan I. Wener(1,2) 46 July 21, 1992 Director
</TABLE>
- -----------------------
(1) Member of the Audit Committee
(2) Member of the Compensation and Human Resources Development Committee
(3) Member of the Nominating Committee
(4) Mr. Vien is not standing for re-election.
Mr. Craig has been President and Chief Executive Officer of Global Knowledge
Network, a worldwide provider of technology learning services, since February
1996. From October 1993 to January 1996, he was Vice President, World Wide
Sales Operations of Digital Equipment Corporation and from June 1992 to June
1993, he was Senior Vice President, International for Oracle Corporation.
From May 1990 to February 1992, he was Chief Executive Officer of C3 Inc. Mr.
Craig is also a director of Bell Industries.
Mr. Lacroix is, and has been since 1981, a partner with McCarthy Tetrault (law
firm) who practices in the areas of securities, commercial and corporate law.
He is also a director of Michelin Canada Inc., Adventure Electronics Inc.,
Donohue Inc., ITS Investments Limited Partnership, Schroder Venture Managers
(Canada) Limited and Schroder Investment Canada Limited, and is the chairman
of the securities advisory committee to the Quebec Securities Commission.
Dr. Millard was appointed President and Chief Executive Officer of the
Corporation on January 11, 1993. Formerly, Dr. Millard served as Senior Vice
President of Nippon Electric Company America from October 1990 to November
1992. From 1987 to 1990, Dr. Millard was President of Millard Consulting. He
is also a director of Positron Fiber Systems Corporation.
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<PAGE> 64
Mr. Paterson has been President of Cavandale Corporation, a strategic advisor,
since September, 1988. Mr. Paterson is also Chairman of NewGrowth Corporation
and Utility Corporation and a director of Atlantis Communications Inc.,
Telepanel Systems Inc. and Imutec Corporation.
Dr. Simon is Chairman, Schroder Ventures Life Sciences Advisers, a venture
capital company advising on investments in the life sciences. From 1994 to
1996, he was CEO of Schroder Ventures Life Sciences Advisers and, from 1987 to
1996, a partner of Schroder Venture Advisers responsible for a venture capital
group in London, United Kingdom. He is chairman of Anagen plc and Shire
Pharmaceuticals plc as well as a director of Chiroscience plc, Laservision
Centers Inc. and Micromass UK Ltd. Dr. Simon has been Chairman of the
Corporation's Board of Directors since July 21, 1994.
Mr. van Cuylenburg has been President, Specialty Storage Products Group,
Quantum Corporation since September 1996. From January, 1996 to August 1996
he was an independent consultant to Xerox Corporation. From July 1993 to
December 1995, he was Executive Vice President of Xerox Corporation and from
April 1992 to May 1993, he was President of Next Computer. From April 1990 to
April 1992, Mr. van Cuylenburg served as a director of Cable & Wireless plc,
in London, England. Mr. van Cuylenburg is also a director of Dynatech
Corporation.
Mr. Vien has been President and Chief Operating Officer of St. James Financial
Corporation Inc., an investment company, since 1990. From 1979 to 1990, he
was Chairman and Chief Executive Officer of Pathonic Network Inc., a
communications company. Mr. Vien is currently President and Director of
Pathonic Inc. He is also a Director of Somiper (1991) Inc., Commercial Union
Holdings Ltd., Commercial Union Assurance Company of Canada, Commercial Union
Life Assurance Company of Canada, Telecite Inc. and Univers Info Inc.
Mr. Wener has been Chairman, Chief Executive Officer and principal shareholder
of Canderel Holdings Ltd., a real estate investment company, since 1983. Mr.
Wener is a founding member of the Urban Development Institute of Quebec. Mr.
Wener is also a Director of M-Corp Inc. and the Montreal Board of Trade.
There are no family relationships among directors, nominees for director or
executive officers of the Corporation. Under the terms of the Corporation's
By-Laws and the Canada Business Corporations Act, a majority of the directors
must be resident Canadians.
Statement of Corporate Governance Practices
General
In February 1995, The Toronto Stock Exchange Committee on Corporate Governance
in Canada issued its final report containing a series of guidelines for
effective corporate governance (the "Governance Guidelines"). The Governance
Guidelines, which are not mandatory, deal with the constitution of boards of
directors and board committees, their functions, the effectiveness and
education of board members, their independence from management and other means
of ensuring sound corporate governance. The Toronto Stock Exchange has, in
accordance with the recommendations contained in such report, adopted as a
listing requirement that disclosure be made by each listed company of its
corporate governance system with reference to the Governance Guidelines. In
July 1995, The Montreal Exchange also adopted such listing requirement and
issued guidelines similar to the Governance Guidelines.
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<PAGE> 65
The Board of Directors of the Corporation has always endorsed the concept,
principles and practices of sound corporate governance and believes that the
Corporation is in substantial compliance with the Governance Guidelines.
The following is a summary of the particulars of the system of corporate
governance of the Corporation.
Mandate of the Board
The mandate of the Board of Directors is to supervise the management of the
business and affairs of the Corporation with a view to evaluate, on an ongoing
basis, whether the Corporation's resources are being managed in a manner
consistent with enhancing shareholder value, ethical considerations and
corporate social responsibility. In order to better fulfill its mandate, the
Board of Directors has formally acknowledged its responsibility for, among
other matters, (i) reviewing and approving, at the beginning of each fiscal
year, the business plan, capital budget and financial goals of the Corporation
as well as longer term strategic plans prepared and elaborated by management
and, throughout the year, monitoring the achievement of the objectives set;
(ii) ensuring that it is properly informed, on a timely basis, of all
important issues (including environmental, cash management and business
development issues) and developments involving the Corporation and its
business environment; (iii) identifying, with management, the principal risks
of the Corporation's business and the systems put in place to manage these
risks as well as monitoring, on a regular basis, the adequacy of such systems;
(iv) ensuring proper succession planning, including appointing, training and
monitoring senior executives; (v) assessing performance of senior executives;
(vi) ensuring proper communication with shareholders, customers and
governments; and (vii) monitoring the efficiency of internal control and
management information systems, and has taken, when necessary, specific
measures in respect of such matters.
Composition of the Board and of its Committees
The Governance Guidelines recommend that a board of directors be constituted
of a majority of individuals who qualify as "unrelated directors". The
Governance Guidelines define an "unrelated director" as a director who is
independent of management and is free from any interest and any business or
other relationship which could, or could reasonably be perceived to,
materially interfere with the director's ability to act with a view to the
best interests of the Corporation, other than interests and relationships
arising from shareholding.
The Board of Directors, composed of two related directors out of seven board
members, complies with such recommendations. Dr. John B. Millard, President
and Chief Executive Officer, and Hubert T. Lacroix, partner of the
Corporation's principal legal advisors, are considered to be related to the
Corporation.
The Governance Guidelines also recommend that a board of directors should
examine its size. The Board of Directors believes that the number of seven
directors is currently sufficient and appropriate to effectively conduct
business. The Board of Directors, as presently constituted, brings together a
mix of skills, backgrounds and individual attributes that the Board of
Directors considers appropriate to the stewardship of the Corporation.
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<PAGE> 66
A further Governance Guideline recommends that the Audit Committee be made up
of outside and unrelated directors only. This guideline also states that
other board committees should be comprised of outside directors, a majority of
which should be unrelated directors. The Corporation currently has three
committees, being the Audit Committee, the Compensation and Human Resources
Development Committee (the "Compensation Committee") and the Nominating
Committee. These committees, as presently constituted, do not comply with the
Governance Guideline recommendations. However, for the reasons outlined
below, the Board of Directors has decided not to modify the composition of the
committees at this time. It is the intention of the Board of Directors to
reevaluate from time to time the composition of the various committees.
The three committees of the Board of Directors have been established with
specific mandates and defined authorities with a view to assist the Board of
Directors in efficiently carrying out its responsibilities. Set out below is
a general description of the committees of the Board and their respective
mandates.
Audit Committee
The mandate of the Audit Committee is to review (i) the annual and interim
financial statements of the Corporation and certain other public disclosure
documents required by regulatory authorities, (ii) the nature and scope of the
annual audit as proposed by the auditors and management, (iii) with the
auditors and management, the adequacy of the internal accounting control
procedures and systems within the Corporation, and (iv) with management, the
risks inherent to the Corporation's business and risk management programs,
including those related to the environment and the health and safety of
employees, and make recommendations on a quarterly basis to the Board of
Directors with respect thereto.
The Audit Committee is presently composed of four outside directors, three of
whom are unrelated: Donald W. Paterson, Paul G. Vien (who is not standing for
re-election) and Jonathan I. Wener and one of whom is related: Hubert T.
Lacroix. In view of the historical contribution of Mr. Lacroix, the Board of
Directors considered that the participation of Mr. Lacroix in the Audit
Committee is essential and concluded that he should continue to serve on such
committee, on the condition that such committee be always composed of a
majority of unrelated directors.
Compensation Committee
The mandate of the Compensation Committee is outlined above under "Report on
Executive Compensation". This mandate further includes a review of the
compensation of directors to ensure the compensation realistically reflects
the responsibilities and risk involved in being an effective director. The
Compensation Committee is presently composed of four outside and unrelated
directors: Anthony L. Craig, Donald W. Paterson, Dr. Henry Simon and Jonathan
I. Wener and of one inside and related director: Dr. John B. Millard. The
Board of Directors considered that the participation of Dr. Millard in the
Compensation Committee is essential and concluded that he should continue to
serve on such committee, on the condition that such committee be always
composed of a majority of unrelated directors. Dr. Millard does not comment
on nor approve his own compensation matters.
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<PAGE> 67
Nominating Committee
The mandate of the Nominating Committee is to seek out and review potential
additional Board of Director candidates as submitted by search consultants
retained by the Corporation and to evaluate the structure, responsibility and
composition of committees of the Board of Directors and make recommendations
to the Board of Directors. The Nominating Committee is presently composed of
two outside directors, one of whom is unrelated: Dr. Henry Simon and one of
whom is related: Hubert T. Lacroix and of one inside and related director:
Dr. John B. Millard. In view of the historical contribution of Mr. Lacroix,
and the contribution to the Corporation of Dr. Millard, the Board of Directors
considered that the participation of Mr. Lacroix and Dr. Millard in the
Nominating Committee is essential and concluded that they should continue to
serve on such committee.
Independence from Management
The Governance Guidelines state that the independence of a board is most
simply achieved by appointing a chair who is not a member of management. The
Chairman of the Board is separate from management and ensures that the Board
can function independently of management.
Other
The Board of Directors considers that orienting and educating new directors is
an important element of ensuring responsible corporate governance. By
ensuring that Board members are properly informed of the business of the
Corporation, the Board considers that it complies with the Governance
Guidelines.
A singular position description has been adopted for each non-executive member
of the Board of Directors. The Board of Directors also reviews and approves
the annual corporate objectives of the Chief Executive Officer.
The Board of Directors has determined to retain general responsibility for
dealing with corporate governance issues, while maintaining the flexibility of
asking certain committees of the Board to address specific issues as they may
arise from time to time. Therefore, a corporate governance committee will not
be created at this time.
In certain circumstances, it may be appropriate for an individual director to
engage an outside advisor at the expense of the Corporation. The Chairman of
the Board will determine if the circumstances warrant the engagement of an
outside advisor.
Executive Officers
The names, ages and positions with the Corporation of the executive officers
of the Corporation, other than Dr. Millard who is listed in the table of
directors, are as follows:
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<PAGE> 68
<TABLE>
Name Age Positions
- -------------------- --- -----------------------------------------------
<S> <C> <C>
Jean-Jacques Carrier 46 Vice President of Finance and
Chief Financial Officer
Kirk K. Mandy 41 Vice President, Business Communications Systems
and Semiconductors
Donald G. McIntyre 49 Vice President, Human Resources,
General Counsel and Secretary
Shirley J. Mears 42 Vice President, Treasurer
Geoffrey A. Smith 45 Vice President, Product Development
</TABLE>
Mr. Carrier was appointed Vice President of Finance and Chief Financial
Officer for the Corporation in September 1993. Prior to that date, he was
Senior Vice President, Finance and Chief Financial Officer for Sherritt Inc.
from 1991 to 1993, a Canadian public company based in Alberta. From 1976 to
1991, Mr. Carrier held a number of senior positions with Consolidated-Bathurst
Inc.
Mr. Mandy was appointed Vice President, Business Communications Systems in
January, 1997. Prior to that date, he was Vice President and General Manager,
Semiconductor Division from November 1992 to December 1996. Mr. Mandy served
as Vice President, Research and Development from February 1991 to November
1992; as Vice President, Product Development from August 1990 to January 1991
and Vice President, Technical Planning from May 1990 to July 1990. Mr. Mandy
joined the Corporation in 1984.
Mr. McIntyre has been Vice President, Human Resources, General Counsel and
Secretary since January 1991. Mr. McIntyre served as Vice President, General
Counsel and Secretary from March 1987 to December 1990. Mr. McIntyre served
as a director of the Corporation from July 20, 1993 to May 16, 1996. Mr.
McIntyre joined the Corporation in 1987.
Ms. Mears was appointed Vice President, Treasurer in April 1992. Ms. Mears
served as Vice President, Corporate Taxation and Canadian Human Resources from
April 1991 to March 1992 and Vice President, Corporate Taxation from February
1990 to March 1991. Ms. Mears joined the Corporation in 1983.
Mr. Smith was appointed Vice President, Product Development in December, 1996.
Prior to that date, Mr. Smith served as Vice President, CTI Products from
December 1994. Mr. Smith served as acting Vice President, PBX Products from
March 1994 to November 1994, and Head, Software Platform Development, PBX from
June 1993 to February 1994. Mr. Smith was Head of Software Development from
June 1992 to May 1993 and Head of Applications from January 1990 to May 1992.
Mr. Smith joined the Corporation in 1978.
Item 11. Executive Compensation
The aggregate compensation paid by the Corporation to its directors, executive
officers and two former executive officers for services rendered during Fiscal
1997 was $3,648,246. This amount includes salary, bonuses, car allowances and
other perquisites and excludes the amount set out below for pension,
retirement and similar benefits paid to executive officers and two former
executive officers.
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<PAGE> 69
The aggregate amount set aside or accrued by the Corporation and its
subsidiaries during the fiscal year ended March 28, 1997 for the provision of
pension, retirement and similar benefits to the directors, executive officers
and two former executive officers of the Corporation as a group was $299,277,
excluding adjustments for market value fluctuations related to the current
year and previous year accruals which totaled $29,508 for the above executive
officers.
Summary Compensation Table
The following table details compensation information for the three fiscal
years ended March 28, 1997, March 29, 1996, and March 31, 1995 for the Chief
Executive Officer ("CEO") and the four other most highly compensated executive
officers of the Corporation (collectively, the "Named Executive Officers"),
and two former Named Executive Officers.
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<PAGE> 70
<TABLE>
Annual Compensation
Long-Term
Compensation
Awards
Bonus Other Securities
Name and (Annual Annual Under All Other
Principal Fiscal Incentive Compen- Options Compen-
Position Year Salary Awards) sation(1) Granted sation(2)
($) ($) ($) (#) ($)
- -------------------- ----- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Dr. John B. Millard 1997 508,136 125,000 -- 100,000 82,867
President and Chief 1996 479,466 250,000 -- 100,000 74,629
Executive Officer 1995 436,173 275,000 -- 100,000 23,124
Kirk K. Mandy 1997 238,836 150,000 -- 55,000 40,224
Vice President,
Business 1996 189,378 135,000 -- 20,000 102,682
Communications 1995 172,880 100,000 -- 20,000 54,062
Systems and Semiconductors
Jean-Jacques Carrier 1997 248,019 57,500 -- 30,000 39,690
Vice President of 1996 236,220 115,000 -- 30,000 37,789
Finance and Chief
Financial Officer 1995 215,323 100,000 -- 20,000 15,300
Donald G. McIntyre 1997 190,944 37,500 -- 25,000 113,691
Vice President, Human 1996 181,776 75,000 -- 25,000 52,522
Resources, General 1995 160,019 68,000 -- 20,000 60,506
Counsel and Secretary
Geoffrey A. Smith 1997 181,098 45,000 -- 35,000 28,733
Vice President, 1996 142,673 33,330 -- 15,000 39,306
Product Development 1995 122,139 17,623 -- 7,000 5,164
Dr. A.R. Ian Munns(3) 1997 260,854 -- -- 35,000 42,605
Senior Vice 1996 250,108 75,000 -- 35,000 40,390
President, Marketing
& Technology 1995 226,767 100,000 -- 25,000 16,144
Gregory M. E.
Spierkel(4) 1997 224,344 22,500 -- 40,000 21,471
Vice President,
Sales and Service, 1996 256,215 49,207 -- 20,000 4,089
North America 1995 227,975 103,598 -- 20,000 --
</TABLE>
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(1) Perquisites and Personal Benefits did not exceed the lesser of $50,000
and 10% of the salary and bonus for each of these Named Executive Officers.
(2) "All Other Compensation" includes contributions made and accrued by the
Corporation to a defined contribution pension plan, excluding adjustments for
market value fluctuations related to the current year and previous year
accruals which totaled $28,511 for the Named Executive Officers. It also
includes amounts for the exercise of stock options.
(3) Dr. Munns ceased to be a Named Executive Officer as of December 4, 1996.
Dr. Munns will receive salary continuance for up to twelve (12) months from
the date of termination, as provided under the Termination Policy for Vice
Presidents.
(4) Mr. Spierkel ceased to be a Named Executive Officer as of March 26, 1997.
Mr. Spierkel will receive salary continuance for up to twelve (12) months from
the date of termination, as provided under the Termination Policy for Vice
Presidents.
Stock Option Grants and Exercises
The Corporation's 1991 Stock Option Plan for Key Employees and Non-Employee
Directors (the "Option Plan") is administered by the Compensation Committee.
The Option Plan provides for the granting of options to purchase common shares
of the Corporation to key employees and non-employee directors of the
Corporation and its subsidiaries, as determined from time to time by the
Compensation Committee.
All options granted under the Option Plan are non-transferable and must be
exercised within ten years of the date of grant. Under the terms of the
Option Plan, up to 25% of the common shares in respect of each option may be
purchased after one year from the date of grant, up to 50% after two years
from the date of grant, up to 75% after three years from the date of grant and
up to 100% after four years from the date of grant.
The purchase price at which common shares may be purchased under the option
grants is determined by the average of the market price (as defined in the
Option Plan) of the common shares on The Toronto Stock Exchange for the five
trading day period immediately preceding the date of grant.
The terms of the Option Plan provide that, in the event of the death of an
option holder, the exercise period of any options unexercised at the date of
death would be accelerated so that the option holder's legal personal
representative would be permitted to purchase and take delivery of all common
shares under option and not purchased or delivered at the date of death,
during the 180-day period following such option holder's death.
The Option Plan also provides that, in the event of the termination of an
employee's employment for any reason other than cause or death, the employee's
options may be exercised, to the extent the options are exercisable as of the
termination date, within 30 days following the date the employee's employment
is terminated; provided, however, that the Board of Directors of the
Corporation may, in its discretion, amend the terms of any option to permit
the employee to exercise such options as if such employee's employment had not
been terminated. In the event the employee's employment has been terminated
for cause, the employee's options may be exercised only during the next
business day following the date of personal delivery to the employee of a
written notice from the Corporation confirming such termination.
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<PAGE> 72
The Option Plan further provides that, in the event of a change of control
(whether in fact or in law) of the Corporation which results in a non-employee
director being replaced, the vesting period shall be waived with respect to
the options then held by such non-employee director in order to permit the
full exercise of all outstanding options then held by such person. In the
event that the non-employee director ceases to act as a director of the
Corporation, all options held by such director, which are then exercisable,
may be exercised within 180 days following the announcement of the quarterly
results next following the date of resignation of such person (but in no event
after the date which is ten years following the date of grant of such option).
The Option Plan also provides that the Compensation Committee may determine
that any option granted under the Option Plan shall include provisions which
accelerate the date on which an option shall become exercisable upon the
happening of such events as the Compensation Committee may determine and as
permitted in the Option Plan.
Under the terms of the Option Plan, the maximum number of common shares as to
which options may be granted is 5,800,000 (representing approximately 5.4% of
the common shares currently outstanding as of May 30, 1997). As of May 30,
1997, the closing price of the common shares of the Corporation on The Toronto
Stock Exchange was $7.80 and therefore the total market value as of such date
of the 4,227,038 shares (excluding 1,471,062 common shares as to which options
have been previously exercised) which are or may be subject to options
pursuant to the Option Plan was $32,970,896.40.
During Fiscal 1997, the Corporation granted options to purchase up to 713,500
common shares to 82 employees and six non-employee directors of the
Corporation at an average exercise price of $9.23 per share, of which options
for 330,000 common shares were granted to six executive officers and two
former executive officers at an average exercise price of $9.16 per share.
During Fiscal 1997, one executive officer of the Corporation exercised options
to purchase 10,000 common shares having an aggregate net value (being the
market value less the exercise price on the date of the exercise) of $81,550
as of such date.
As at May 30, 1997, there were outstanding under the Option Plan options for
an aggregate of 4,227,038 common shares at prices ranging from $1.10 to $9.48
per share and expiring at various dates through 2007. Of such options,
options for an aggregate total of 1,656,000 common shares were held by six
executive officers, one of whom is a director of the Corporation, and two
former executive officers of the Corporation.
Stock Option Grants in Last Fiscal Year
The following table sets forth the details regarding options granted to the
Named Executive Officers and two former Named Executive Officers under the
Option Plan during Fiscal 1997.
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<PAGE> 73
Option Grants During Fiscal 1997
<TABLE>
Market
Value of
Securities
Underlying
Options/
% of Total Exercise SARS
Securities Options or on the
Under Granted to Base Date of
Options Employees Price Grant
Granted in Fiscal ($/ ($/ Expiration
Name (#) 1997 Security) Security) Date
- ------------------- ---------- ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
Dr. John B. Millard 100,000 17% 9.32 9.20 May 16, 2006
Kirk K. Mandy 35,000 6% 9.32 9.20 May 16, 2006
20,000 3% 8.46 8.40 July 24, 2006
Jean-Jacques Carrier 30,000 5% 9.32 9.20 May 16, 2006
Donald G. McIntyre 25,000 4% 9.32 9.20 May 16, 2006
Geoffrey A. Smith 15,000 3% 9.32 9.20 May 16, 2006
20,000 3% 8.46 8.40 July 24, 2006
Dr. A. R. Ian Munns 35,000 6% 9.32 9.20 May 16, 2006
Gregory M.E. Spierkel 20,000 3% 9.32 9.20 May 16, 2006
20,000 3% 8.46 8.40 July 24, 2006
</TABLE>
Year-End Option Values Table
The following table sets forth information at March 28, 1997, respecting
exercisable and non-exercisable options held by the Named Executive Officers
and two former Named Executive Officers. The table also includes the value of
"in-the-money" options which represents the spread between the exercise price
of the existing stock options and the market price of the common shares of the
Corporation on The Toronto Stock Exchange on March 28, 1997, of $6.90.
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<PAGE> 74
Aggregate Options Exercised
During Fiscal 1997 and Fiscal Year-End Option Values
<TABLE>
Value of
Unexercised
Unexercised In-the-Money
Securities Aggregate Options at Options
Acquired Value March 28, at March 28,
Name On Exercise Realized 1997 1997
(#) ($) (#) ($)
- ------------------- ----------- -------- ---------------- ------------------
Exer- Unexer- Exer- Unexer-
cisable cisable cisable cisable
------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Dr. John B. Millard -- -- 497,500 232,500 2,103,063 82,688
Kirk K. Mandy -- -- 26,250 83,750 19,281 19,094
Jean-Jacques Carrier -- -- 55,000 75,000 19,000 19,000
Donald G. McIntyre 10,000 81,550 25,250 56,750 19,225 19,075
Geoffrey A. Smith -- -- 20,525 51,000 61,989 6,681
Dr. A. R. Ian Munns -- -- 85,000 95,000 238,231 95,244
Gregory M.E. Spierkel -- -- 63,500 67,500 256,988 19,063
</TABLE>
Compensation of the President and Chief Executive Officer
On December 16, 1992, the Corporation entered into an employment agreement
with Dr. John B. Millard providing for his employment as President and Chief
Executive Officer commencing January 1993. Pursuant to the agreement, as
amended, Dr. Millard is entitled to receive an annual base salary in the
amount of $515,000, subject to annual adjustment, plus an annual
discretionary bonus as determined by the Board of Directors in addition to
customary benefits and an option to purchase 400,000 common shares of the
Corporation at a price of $1.85 per common share under the Option Plan,
pursuant to which 400,000 common shares may currently be acquired on exercise
of such option. The agreement provided for an initial term of two years
commencing January 11, 1993, subject to automatic renewal for consecutive one-
year terms unless the Corporation or Dr. Millard gives notice in writing that
the agreement will not be renewed at least ninety days prior to the end of the
then current term. Pursuant to Dr. Millard's employment agreement, he will
be entitled to twelve months base salary in the event of termination of his
employment for reasons other than resignation, death, legal cause or change of
control.
Dr. Millard's compensation was approved by the Compensation Committee and the
Board of Directors after reviewing market data of the comparator group
provided by an independent consultant and taking into account Dr. Millard's
extensive knowledge and experience in the telecommunications industry, his
leadership ability and sound business acumen.
The base salary and long-term incentive components of Dr. Millard's
compensation are determined in accordance with the policies applicable to all
executive officers of the Corporation. Dr. Millard's current base salary is
$515,000.
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<PAGE> 75
Dr. Millard's annual discretionary bonus is determined at each fiscal year
end, based on the Compensation Committee's assessment of Dr. Millard's
performance, particularly in improving the Corporation's profitability and
financial condition. For Fiscal 1997, Dr. Millard earned a bonus of $125,000
based on the Corporation's profitability.
Executive Compensation Agreements
The Corporation has entered into Compensation Agreements with seven senior
executives (the "Executives"), including the Named Executive Officers, to
provide for certain entitlements only in the event of a Take-Over Bid (as
defined) for the Corporation or the termination of employment of the
Executive(s) resulting from a Change of Control (as defined) of the
Corporation.
The agreements generally provide as follows:
(a) in the event of a Take-Over Bid for the Corporation, all unvested stock
options held by the Executive(s) would immediately vest and become
exercisable. In the event a Take-Over Bid is not completed, there are
provisions to restore the Corporation and the Executive(s), as nearly as
possible, to what would have been the situation had the Take-Over Bid not
occurred; and
(b) in the event of a termination by the Corporation of the Executive's
employment, other than for Just Cause (as defined), within twenty-four months
following a Change of Control of the Corporation, the Executive would receive
as compensation: (i) for four Named Executive Officers - two times the
Executive's annual base salary; one year's bonus calculated as the one year
average of the Executive's bonuses for the previous three fiscal years; the
value of eighteen months of Benefits (as defined), and the immediate vesting
of all unvested stock options then held by the Executive, and (ii) for one
Named Executive Officer and two other Executives - one time the Executive's
annual base salary; one-half of a year's bonus calculated as one-half of the
one year average of the Executive's bonuses for the previous three fiscal
years; the value of twelve months of Benefits and the immediate vesting of all
unvested stock options then held by the Executive.
These agreements were developed under the direction of the Compensation
Committee in consultation with outside compensation and independent legal
advisers in order to reflect current North American competitive market
practices.
Compensation of Non-Employee Directors
During the fiscal year ended March 28, 1997, each director who was not a
salaried officer of the Corporation or its subsidiaries received an annual
stipend of $10,000 and a director's fee of $1,000 for attendance at each
meeting of the Board of Directors or any Committee thereof, and $1,000 for
each day spent on the affairs of the Corporation when not in attendance at a
meeting of the Board of Directors, and was reimbursed for his expenses. In
addition, the Chairman of each Committee of the Board of Directors received an
additional annual fee of $5,000. The Corporation also pays the Chairman of
the Board of Directors, when such person is not an employee of the
Corporation, an annual stipend of $100,000 (inclusive of Board and Committee
meeting fees) and a per diem of $2,500 for attendance on Corporation business
to an annual maximum of $50,000.
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The following table summarizes the aggregate unexercised options held by non-
employee directors at May 30, 1997.
Option Information For Non-Employee Directors
<TABLE>
Date of Grant Unexercised Options at May 30, 1997
Exercisable / Unexercisable
- ---------------- -----------------------------------
<S> <C>
January 26, 1993 162,500 / --
May 12, 1994 60,000 / 24,000
May 17, 1995 40,000 / 40,000
March 15, 1996 5,000 / 15,000
May 16, 1996 30,000 / 90,000
May 22, 1997 -- / 120,000
</TABLE>
Annual Incentive Compensation Arrangements
The Corporation's bonus plans, referred to as Executive, Senior Management and
Group and Individual Bonus Plans, remain in effect for Fiscal 1998. These
plans are intended to incent both individuals, and groups/teams in the
achievement of current year Corporate and Group/Business Unit operating income
targets and for individual results in support of strategic plans and financial
performance objectives. Corporate and Group/Business Unit operating income
targets are set by the Board of Directors at the commencement of the fiscal
year. If the Corporate operating income target is not met, the Corporate
component of the bonus is not achieved. Group/Business Unit components are
only awarded if the Corporate operating income is at least 75% of target and
if the applicable Group/Business Unit target is met. Individual target awards
and the weighing of Corporate and Group/Business Unit components of the Plans
are dependent on the individual's ability to influence results.
Directors' and Officers' Liability Insurance
As at May 30, 1997, the Corporation had in force Directors' and Officers'
Liability Insurance policies in the amount of U.S. $25,000,000 for the benefit
of the directors and officers of the Corporation and its subsidiaries. The
total amount of the premiums paid by the Corporation for the policies in
effect for the fiscal year ended March 28, 1997 was Cdn. $207,563. No portion
of these premiums was paid by the directors and officers of the Corporation.
The policies provide for no deductible for any loss in connection with claims
against a director or officer and deductibles of U.S. $500,000 for claims
relating to violations of United States securities laws and U.S. $250,000 for
other claims resulting in a loss for the Corporation.
Indebtedness of Officers, Directors and Employees
As at May 30, 1997, no officer, director or employee, or former officer,
director or employee of the Corporation was indebted to the Corporation in
connection with the purchase of securities of the Corporation.
As at May 30, 1997, the aggregate amount of outstanding indebtedness to the
Corporation incurred, other than in connection with the purchase of securities
of the Corporation, and other than routine indebtedness, by all officers,
directors, employees and former officers, directors and employees of the
Corporation amounted to $188,343.
76
<PAGE> 77
Performance Graph
The following graph compares the cumulative total shareholder return on $100
invested in common shares of the Corporation with the cumulative total return
of The Toronto Stock Exchange 300 Stock Index for the five most recently
completed fiscal years, assuming reinvestment of all dividends.
<TABLE>
Mitel Corp. TSE 300
---------- -------
<S> <C> <C>
March 27, 1992 $ 100 $ 100
March 26, 1993 185 109
March 25, 1994 450 140
March 31, 1995 442 137
March 29, 1996 580 161
March 28, 1997 460 197
</TABLE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as at May 30, 1997 with respect to:
(1) all shareholders known by the Corporation to be beneficial owners (which
includes shares over which control or direction is exercised) of more than 5%
of its outstanding common shares; and (2) ownership of common shares and $2.00
Cumulative Redeemable Convertible Preferred Shares, 1983 R&D Series ("R&D
Preferred Shares") by each director and nominee for director, by each of the
Named Executive Officers and by all executive officers and directors as a
group.
77
<PAGE> 78
<TABLE>
Class of Amount Percent of
Name and Address Shares Beneficially Owned Class(1)
- -------------------------------- -------- ------------------ ----------
<S> <C> <C> <C>
Knight Bain Seath & Holbrook
Capital Management Inc.
1 Toronto Street, Suite 708
Toronto, Ontario M5C 2V6 common 6,187,050 5.8
*T.A.L. Investment Counsel Ltd.
1000 de la Gauchetiere Street
West, Suite 3100
Montreal, Quebec, H3B 4W5 common 5,365,075 5.0
**Jean-Jacques Carrier common 105,000(2) (8)
Anthony L. Craig
27421 Country Club Drive
Bonita Bay, Bonita Springs
Florida, U.S.A. 33293 common 5,000(2,3)
Hubert T. Lacroix
1170 Peel Street
Montreal, Quebec H3B 4S8 common 91,000(2,3) (8)
**Kirk K. Mandy common 50,000(2) (8)
**Donald G. McIntyre common 53,250(2) (8)
**Shirley Mears common 30,975(2) (8)
**Dr. John B. Millard common 681,300(2,4) (8)
Donald W. Paterson
67 Yonge Street
Toronto, Ontario M5E 1J8 common 6,000(2,3) (8)
Dr. Henry Simon
1 Telegraph Hill
London, England NW3 7NU common 133,500(2,3) (8)
**Geoffrey A. Smith common 34,775(2) (8)
Peter van Cuylenburg
500 McCarthy Blvd.
Milpita, CA 95035 common 5,000(2,3) (8)
Paul G. Vien
1800 McGill Ave., Suite 3010
Montreal, Quebec H3A 3J6 common 118,000(5) (8)
Jonathan I. Wener
2000 Peel Street, Suite 900
Montreal, Quebec H3A 2W5 common 171,630(2,3,6) (8)
13 directors and executive
officers as a group ........ common 1,485,430(2,3,6,7) (8)
R&D Preferred
</TABLE>
* As reported on Schedule 13G, dated February 13, 1997.
** These officers are located c/o Mitel Corporation, 350 Legget Drive, Kanata,
Ontario, Canada K2K 1X3
78
<PAGE> 79
The persons named hold the sole investment and voting power except as set
forth below:
(1) Percentage ownership is calculated based upon total shares in the class
outstanding plus shares in the class subject to options currently exercisable
or exercisable within sixty days by the entity or group indicated.
(2) These holdings include stock options currently exercisable or exercisable
within 60 days by: Mr. Carrier - 75,000; Mr. Craig - 5,000; Mr. Lacroix -
83,000; Mr. Mandy - 50,000; Mr. McIntyre - 42,750; Ms. Mears - 30,975; Dr.
Millard - 560,000; Mr. Paterson - 5,000; Dr. Simon - 33,500; Mr. Smith -
34,775; Mr. van Cuylenburg - 5,000; Mr. Vien - 83,000, and Mr. Wener - 83,000.
(3) Does not include stock options granted to non-employee directors which are
not currently exercisable, as follows: Mr. Craig - 35,000; Mr. Lacroix -
51,000; Mr. Paterson - 35,000; Dr. Simon - 51,000; Mr. van Cuylenburg -
35,000, and Mr. Wener - 51,000.
(4) Dr. Millard's holdings exclude (i) 59,000 common shares held of record by
his wife, as to which he disclaims beneficial ownership and (ii) 5,500 common
shares held by trusts created for the benefit of his grandchildren as to which
he posseses shared voting and investment power as a trustee.
(5) The holdings of Mr. Vien are held by Pathonic Inc. Mr. Vien is an equity
shareholder and also holds the majority of votes in Pathonic Inc.
(6) The holdings of Mr. Wener are held by and registered in the name of MOI-
MEME Holdings Inc. Mr. Wener is the sole shareholder of MOI-MEME Holdings
Inc.
(7) The holdings of one executive officer exclude 400 common shares held of
record by his children, as to which he disclaims beneficial ownership.
(8) Represents less than 1% of the issued and outstanding shares.
Statements contained in the table as to securities beneficially owned by
persons referred to therein or over which they exercise control or direction
are, in each instance, based upon information provided by such persons.
Item 13. Certain Relationships and Related Transactions
During the fiscal year ended March 28, 1997, the Corporation retained the law
firm McCarthy Tetrault, of which Hubert T. Lacroix, a member of the Board of
Directors, is a partner.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
a) The following financial statements and supplementary data are filed as
part of this report under Item 8:
79
<PAGE> 80
1. Consolidated Financial Statements.
<TABLE>
Page Number
(within the 10-K)
-----------------
<S> <C>
Auditor's Report to the Shareholders 37
Consolidated Balance Sheets at March 28, 1997,
March 29, 1996 and March 31, 1995 38
Consolidated Statements of Income and
Retained Earnings for the fiscal years ended
March 28, 1997, March 29, 1996 and March 31, 1995 39
Consolidated Statements of Cash Flows
for the fiscal years ended March 28, 1997,
March 29, 1996, March 31, 1995 40
Notes to the Consolidated Financial Statements 41
</TABLE>
2. Financial Statement Schedules. The Schedules supporting the consolidated
financial statements which are filed as part of this report are as follows:
Schedule II - Valuation and qualifying accounts
Note: Schedules other than that listed above are omitted as not applicable,
not required, or the information is included in the consolidated financial
statements or notes thereto.
80
<PAGE> 81
3. Exhibits
<TABLE>
Exhibit
Number Description
<S> <C>
3.1 Articles of Continuance of the Corporation and Amendments thereto
(incorporated by reference to Exhibit 3.1 to Registration Statement
No.2-88432 on Form S-1)
3.2 Certificate and Articles of Amendment of Mitel Corporation dated
May 16, 1984 (incorporated by reference to Exhibit 3.2 to Form l0-K
for the year ended February 24, l984)
3.3 Certificates and Articles of Amendment of Mitel Corporation dated
June 27, l984, September 7, 1984 and October 9, l984 (incorporated by
reference to Exhibit 3.3 to Form 10-K for the year ended February 22,
1985)
3.4 Certificate and Articles of Amendment of Mitel Corporation dated May
23, 1986 (incorporated by reference to Exhibit 3.4 to Form 10-K for
the year ended March 28, 1986)
3.5 Certificate and Articles of Amendment of Mitel Corporation dated May
27, 1987 (incorporated by reference to Exhibit 3.5 to Form 10-K for
the year ended March 25, 1988)
3.6 Certificate and Articles of Amendment of Mitel Corporation dated
January 21, 1988 (incorporated by reference to Exhibit 3.6 to Form
10-K for the year ended March 25, 1988)
3.7 By-Laws of the Corporation (incorporated by reference to Exhibit 3.7
to Form 10-K for the year ended March 29, 1996).
3.8 Certificate and Articles of Amendment of Mitel Corporation dated
August 24, 1995 (incorporated by reference to Exhibit 3.8
to Form 10-K for the year ended March 29, 1996).
4.1 Proof of Share Certificate for $2.00 Cumulative Redeemable
Convertible Preferred Shares, 1983 R & D Series (incorporated by
reference to Exhibit 4.5 to Registration Statement 2-88432 on Form
S-1)
4.2 Form of Indemnity Agreement entered into between the Corporation and
Montreal Trust Company, as Trustee, with respect to the $2.00
Cumulative Redeemable Convertible Preferred Shares, 1983 R & D Series
(incorporated by reference to Exhibit 4.6 to Registration Statement
No. 2-88432 on Form S-1)
4.3 Proof of Share Certificate for Common Shares of the Corporation
(incorporated by reference to Exhibit 4.3 to Form 10-K for the year
ended March 26, 1993)
11 Computation of Earnings Per Share
21 Subsidiaries of the Corporation
23 Consent of Ernst & Young
24 Power of Attorney (included on the signature page to this Form 10-K)
27 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K. No Reports on Form 8-K were filed by the
Corporation in the fourth quarter of the fiscal year ended March 28, 1997.
81
<PAGE> 82
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
MITEL CORPORATION
JOHN B. MILLARD
(John B. Millard)
President and
Dated: May 30, 1997 Chief Executive Officer
</TABLE>
Power of Attorney
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jean-Jacques Carrier and Donald G. McIntyre,
jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign any amendments to
this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorney-in-
fact, or his substitute or substitutes, may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
Signature Title Date
- --------------------- ------------------------------------- ------------
<S> <C> <C>
HENRY SIMON
(Henry Simon) Chairman of the Board May 30, 1997
JOHN B. MILLARD
(John B. Millard) President and Chief Executive Officer May 30, 1997
ANTHONY L. CRAIG
(Anthony L. Craig) Director May 30, 1997
HUBERT T. LACROIX
(Hubert T. Lacroix) Director May 30, 1997
DONALD W. PATERSON
(Donald W. Paterson) Director May 30, 1997
PETER VAN CUYLENBURG
(Peter van Cuylenburg) Director May 30, 1997
PAUL G. VIEN
(Paul G. Vien) Director May 30, 1997
JONATHAN I. WENER
(Jonathan I. Wener) Director May 30, 1997
JEAN-JACQUES CARRIER
(Jean-Jacques Carrier) Vice President of Finance
and Chief Financial Officer May 30, 1997
</TABLE>
82
<PAGE> 83
MITEL CORPORATION
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
March 28, 1997
(in millions of Canadian dollars)
-------Additions---------
<TABLE>
Balance
Beginning Charged Charged to Balance, End
Description of Period to Expense Other Accounts Deductions of Period
- ----------- --------- ---------- -------------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts:
Fiscal 1997 $ 5.9 $ 5.8 $ - $ (1.9) $ 9.8
Fiscal 1996 7.3 1.2 - (2.6) 5.9
Fiscal 1995 7.2 0.9 - (0.8) 7.3
</TABLE>
83
<PAGE> 84
ANNEX "A"
GLOSSARY OF TERMS
Application Programming Interface (API): a software interface between a
computer program that an individual uses and the interface to network services
or program-to-program communications.
Application Gateway: part of Mitel's distributed architecture, this apparatus
connects the telephone system with a LAN to permit computers and telephones to
function together.
Application Specific Integrated Circuit (ASIC): A chip designed for use on a
particular circuit board or for a very narrow range of use. The digital
signal processor chip on a modem is an ASIC.
Asynchronous Transfer Mode (ATM): a mode of digital communications in which
messages and content data are sent in packets rather than continuous streams
from source to destination (rather like individual letters through a Post
Office). The portent for the future is to carry all forms of communication on
a single transport protocol.
Automatic Call Distribution (ACD): a telephone exchange system that optimizes
distribution of incoming calls to a service group to increase the efficiency
of the system and the service resources (agents).
Call Center: groups of people, telephones, and computers organized to permit
service agents to efficiently answer calls from, or direct calls to, large
numbers of people. Call centers are often identified by a 1-800 number and
make use of ACD technology.
Centrex: a telephone company service designed to provide PBX-like features to
subscribers.
Client/Server: a distributed computing architecture whereby the client is an
application user on a LAN, and the server provides access to common
applications and group services for database and file sharing.
Duplex Device: A device that contains both a LED and a PIN Diode
Photodetector in the same package. The LED emits light in a specific
wavelength range while the PIN detects in a different wavelength range, thus
providing the capability to transmit light in both directions.
Fiber Optic Transmission: involves the conversion of electrical signals to
light waves, thereby providing vastly increased capacity compared with copper
wire, i.e., one glass fiber can replace over 10,000 telephone wires. This is
the technology used to interconnect the modules of Mitel's LIGHT PBX systems.
E1: a 2.048 Mpb/s digital transmission link, the digital transmission
standard used in Japan and Europe.
Gallium Arsenide: A compound semiconductor material made of Gallium and
Arsenic.
Gigabit Ethernet: Transmission protocol over a LAN that operates at speed of
gigabit (10 billion bits) per second.
Indium Phosphide: A compound semiconductor material made of Indium and
Phosphorus.
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<PAGE> 85
Integrated Services Digital Network (ISDN): an infrastructure designed to
deliver digital service from local or long distance telephone companies so
that computers can be plugged into public networks as easily as are telephones
today.
LAN: Local Area Network that connects computers together within an office
complex. When such connections are distributed over a city or even larger
jurisdiction, the LAN becomes a WAN, or Wide Area Network.
Light Emiting Diode (LED): An active semiconductor device that emits light in
a specific wavelength range in response to an electrical signal applied to it.
Middleware: Middleware is an intermediate software application layer that
links an end user application to the call control software layer.
PIN Diode Photodetector: An active semiconductor device that detects light in
a specific wavelength range and transforms the detected optical signal into an
electrical signal.
Private Branch Exchange (PBX): a "branch" of the telephone company's central
office exchange, usually located on the customer's premises, to provide
connections between the extension telephones within a business as well as
connections to public and private networks outside the business.
SX-200 LIGHT, SX-2000 LIGHT, the LIGHTS, LIGHT series: all refer to the
modular, fiber-optic related PBX switching systems in Mitel's product
portfolio.
T1: a 1.544 Mbp/s digital transmission link, the North American standard for
digital transmission.
TAPI: a Windows Telephony Applications Programming Interface designed by
Microsoft and Intel to stimulate third-party development of telephony
applications that run on Windows-based PCs.
TSAPI: Telephony Service Application Programming Interface that allows
telephony applications to be designed to interwork with Novell clients and
servers.
Universal Serial Bus (USB): a new open standard designed to provide low cost
"plug and play" interface between PCs and peripherals. USB brings higher
speed PC-to-peripheral communications, allows for hot attach/detach of
peripherals and provides for the connection of multiple devices to a single
port.
85
<PAGE> 86
Page 1 of 5
ANNEX B
BUSINESS COMMUNICATIONS SYSTEMS
PRODUCT INFORMATION
A) PBX PORTFOLIO
Mitel's current family of digital PBX products include the SX-2000 LIGHT, the
SX-2000 MICRO LIGHT, the SX-200 LIGHT, and the SX-50 systems. The following
sets forth information concerning the functionality and target users of these
PBX products and certain of their predecessors.
1. SX-2000 LIGHT
The SX-2000 LIGHT incorporates state-of-the-art, fiber distributed PBX
architecture. It handles up to several thousand lines when networked. With
fiber distributed workgroup nodes, ISDN and significant networking
capabilities, the SX-2000 LIGHT addresses voice and data requirements for
organizations with sophisticated communications needs. Not only does it
support a wide range of peripherals, from single-line telephones to computers,
but it also easily integrates into a LAN (local area network) or PBX network.
The SX-2000 LIGHT is also ideal for maintaining flexibility for
telecommunications requirements such as wireless communications and video.
2. SX-2000 MICRO LIGHT
Mitel's SX-2000 MICRO LIGHT is a powerful and cost-effective extension to the
SX-2000 family. It brings the functionality and benefits of an SX-2000 PBX
network to other locations with smaller line size requirements. With an SX-
2000 MICRO LIGHT network node, smaller sites can enjoy transparent networking
with the main site's PBX network. In addition, employees at the smaller site
have access to the same network features as their colleagues at the head
office.
3. SX-2000
The SX-2000 product family is composed of five variants - the SX-2000 SG
system (up to 3,500 lines), the SX-2000 S system (up to 1,000 lines), the SX-
2000 VS system (up to 150 lines), the SX-2000 LIGHT system (up to 1,500 lines)
and the SX-2000 MICRO LIGHT (up to 600 lines). Although the system
(cabinetry) may be different sizes, the peripheral cards are the same for the
family; the larger the system (i.e. number of lines) the larger the physical
size of the cabinetry to accommodate a greater number of cards.
The SX2KSR is a marine ruggedized version of Mitel's commercial SX-2000 S
PBX developed specifically for installation in the harsh environment found on
board Navy combatant ships. Mitel also provides ruggedized versions of the
SX-2000 LIGHT (SX2KLR), the SX-200 LIGHT (SX200DLR) and the SX-50.
The SX-2000 SG, SX-2000 S and SX-2000 VS systems support the SUPERSET 3 and
SUPERSET 4 feature telephones. All SX-2000 systems support the SUPERSET 3 DN,
SUPERSET 4 DN, SUPERSET 401, SUPERSET 410, SUPERSET 420 and SUPERSET 430
digital telephones, the SUPERSET 7, SUPERCONSOLE 1000 and SUPERSET 7000
attendant consoles, the Dataset 1100 series, Dataset 2100 series, Dataset 2200
series, Dataset 4100 series and the MILINK Data Module digital data
transmission devices.
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<PAGE> 87
Page 2 of 5
4. SX-200 LIGHT
The SX-200 LIGHT system is a fiber-distributed advanced PBX, designed for
businesses with up to 500 telephones and ideally suited for locations with
multiple floors in a single building or multiple buildings on a single
property such as campus type environments. These systems address the needs of
customers with expanding telecommunications requirements, or who need to
integrate PCs and LANs into their communications environment. The SX-200
LIGHT offers businesses the power and flexibility of fiber distribution, with
the interface closer to the user. It can handle departmental and workgroup
applications and offers enterprises a sound, adaptable platform for the
future.
5. SX-200
The SX-200 DIGITAL PBX, successor to Mitel's first microprocessor controlled
PBX, the SX-200 analog product, is a fully-featured digital configuration
providing integrated voice/data capability. The SX-200 DIGITAL PBX serves the
100 to 500 line market and permits upgrading from an analog SX-200 PBX to a
digital configuration. The SX-200 DIGITAL PBX provides integrated voice and
data over a single twisted pair of wires and supports both the SUPERSET 3 DN
and SUPERSET 4 DN digital telephones, the Dataset 1100 series, the Dataset
2100 series, and the VX Series of Voice Processors. The system also supports
a comprehensive automatic call distribution package which provides a fully
integrated, feature-rich telecommunications center that processes incoming
calls.
The SX-200 LIGHT and SX-200 DIGITAL support the new 400 series of SUPERSETS.
The SUPERSET 401+ is a digital single line set; the SUPERSET 410 is a multi-
line digital set; the SUPERSET 420 is a digital multi-line display set; the
SUPERSET 430 is a high end digital application set with a 4x40 graphics
display.
6. SX-50
The SX-50 is a modular switching system serving small businesses with 16 to
100 lines, whose needs are too great to be met by a typical key telephone
system. The SX-50 system packs big-system features into a compact, wall-
mounted cabinet that fits into any office environment and can be easily
upgraded and serviced on a customer's premises. The SX-50 offers a wide range
of general business features and applications, including conferencing, call
forwarding, integrated voice mail, automated attendant and networking.
7. MediaPath Server
MediaPath Server is a LAN-based communications system serving small businesses
and workgroups of up to 96 users. MediaPath Server consists of software and
telecommunications boards loaded onto a standard Pentium- or Alpha-based LAN
server running the popular Microsoft Windows NT Server operating system and
Microsoft BackOffice. This single-platform architecture leverages the power
of computing to deliver easy-to-use telephony features such as MediaPath Phone
(Windows-based phone application), MediaPath Attendant (Windows-based operator
console) and MediaPath Auto-Attendant. The MediaPath Developers@Work program
attracts leading third-party developers to deliver productivity-enhancing
business applications such as unified messaging, remote telephony assistant
and customer help desk.
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<PAGE> 88
Page 3 of 5
8. MITEL Personal Assistant
MITEL Personal Assistant is a new category of computer peripherals delivering
true desktop computer telephony integration. The solution simplifies messaging
and communications management to provide home-based businesses with a
competitive edge.
B) DESKTOP INTERFACE PRODUCTS
1. SUPERSET 400 Series of Digital Business Telephones
The SUPERSET 400 business telephones, supported by the LIGHT product family,
are designed for comfort, convenience and accuracy. The raised dial pad and
large, well-spaced keys allow error-free dialing. Feature keys are clearly
labeled and arranged in functional groups for quick access to frequently-used
features such as transfer, conference and speed dial. Since messaging is an
integral part of every business, each SUPERSET 400 telephone has a message key
and indicator. These digital telephones, the third generation of the
legendary SUPERSET family, also support a broad range of voice and data
applications. The advanced technology of the SUPERSET 400 telephones, which
includes a "graphics-ready" display and MILINK desktop interface, provides a
gateway for the future. New applications and services can be added as they
become available, allowing our SUPERSET 400 series telephone customers to take
advantage of the latest advances in digital business telecommunications. The
SUPERSET 401+ (the newest member of Mitel's popular SUPERSET 400 series of
digital business telephones) is an economical, single line telephone for areas
requiring basic service, for example in public and multi-user areas like hotel
rooms, manufacturing areas, staff rooms, and reception/waiting areas. The set
is packaged with features specifically designed to make it easy to use.
2. PROGRAMMABLE KEY MODULE (PKM)
When connected to the SUPERSET 410, SUPERSET 420 or SUPERSET 430 telephones,
the PKM significantly expands attendant call handling and processing
capabilities by providing an additional 30 programmable keys that can be used
for speed calling, multi-line appearances and feature keys. These additional
keys are useful for backup answering positions, call center supervisors, or
those who are heavy speed call users like brokers.
3. SUPERSET 700 Attendant Console
The SUPERSET 700 is an integrated microprocessor-controlled video display
terminal that is used as an attendant console and system administration
terminal for SX-2000 PBX systems. By providing detailed screen-based
information about call and system status, the SUPERSET 700 provides
sophisticated call management capabilities thus allowing smooth processing of
incoming calls and simplifying internal communications.
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<PAGE> 89
Page 4 of 5
4. SUPERSET 7000 Attendant Console
The SUPERSET 7000 combines Mitel's call processing technology with the power
of the PC to create an integrated computer telephony workstation. When a call
comes in, an attendant who is working on the PC, can easily switch from the PC
screen to the attendant screen and process the call with a single keystroke
combination. This means that one can increase customer service by adding
attendant functionality without adding attendants thus increasing productivity
and improving resource allocation. The SUPERSET 7000 operates on industry
standard PC components and is therefore easy to maintain, install and service.
5. SUPERCONSOLE 1000
The SUPERCONSOLE 1000 is a practical, multi-use attendant console that
simplifies communications management within the organization. It provides
hardkeys for frequently used functions, and softkeys for situation-dependent
features.
6. MILINK Data Module
The MILINK Data Module allows peripheral data communications to pass through
the multi-line SUPERSET 400 series of telephones to the PBX system. It
converts data signals of RS-232 serial devices such as computers or video
display terminals, to high speed asynchronous digital signals (up to 19.2
Kbps), and allows simultaneous use of the telephone and the RS-232 device.
7. DATASET 2100 and DATASET 2200 series
The DATASET 2100 and DATASET 2200 series are (2B+D) data peripherals that
provide efficient and reliable data transmission through the telephone system.
The DATASET 2100 series is available in two options, each capable of
synchronous transmission from 1200 bps to 19.2 Kbps, and CCITT X.31 protocol
compatible asynchronous transmission from 110 bps to 19.2 Kbps. The DATASET
2200 series is available in two options, each providing high speed synchronous
data communications at speeds of 48 Kbps, 56 Kbps, and 64 Kbps. This series
features nailed up connection, network synchronization and transmission
statistics.
C) APPLICATIONS
1. ACD SUPERVISION (Release 3.0) for Call Center Interactive
Real-Time Monitoring and Decision Support
ACD SUPERVISION is a software program that combines real-time monitoring and
reporting with an interactive Graphical User Interface (GUI) for SX-2000 PBXs
running the ACD 2000 call center application. This allows call center
supervisors to monitor agent resources, make informed and immediate decisions,
and take action on-line with greater precision.
2. TASKE TOOLBOX for Call Center Real-Time Reporting and Forecasting
TASKE Toolbox is a software program that combines real-time reporting and
forecasting with an interactive Graphical User Interface (GUI). This allows
call center supervisors to monitor and forecast agent and trunk resources
while providing management with statistics, reports and graphs which aid in
making informed decisions. TASKE Toolbox integrates with SX-2000 PBXs running
the ACD 2000 call center applications, and likewise with the SX-200 PBXs that
are running the ACD TELEMARKETER call center application.
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<PAGE> 90
Page 5 of 5
3. MITEL OPS MANAGER (Release 2.0) for Simplified Network Management
Mitel OPS Manager is a complete telecommunications management tool, ideal for
Mitel SX-2000 network installations in both campus environments and networks
spanning countries or continents. The Mitel OPS Manager is an advanced PC-
based application which monitors the telecommunications network. With minimal
administrative intervention, it allows a network manager to detect, record,
and take action on network faults, as well as maintain user friendly on-line
directories, and perform centralized network moves and changes.
4. MITEL MAIL Voice Processing Solutions
MITEL MAIL adds the advantages of voice processing and voice mail to Mitel's
communications systems. Developed specifically for Mitel by Centigram, MITEL
MAIL is a PC-based option for Mitel's SX family of business telephone systems,
providing call processing, voice and fax messaging as well as paging support
for users. MITEL MAIL integrates with the SX-50, SX-200 DIGITAL, and fiber
distributed SX-200 LIGHT and SX-2000 LIGHT systems.
5. PhoneWare@work Portfolio of Products
PhoneWare@work provides LAN-based computer telephony solutions designed for a
variety of workgroup and department environments. It brings server-based
telephony to any organization, where there is a need for integrated and shared
computing and telecommunications resources. PhoneWare@work includes client
applications software products: CallManager and Group PhoneWare.
PhoneWare@work also includes the CallProducer Telephony Server, a stand-alone
telephony server that connects the customer's PBX and the public telephone
network to their computing environment. Consisting of a four port voice
processing board and scripting software, Mitel also offers the PhoneWare
DigitCollector which runs on both the Mitel SX-200 Simon Server and SX-2000
Call Producer Telephony Server.
D) PLATFORMS
1. LIGHTWARE 28 for SX-2000 PBX Systems
LIGHTWARE 28 is the latest version of software for the SX-2000 family of PBX
systems. This version of the software includes several new features from
general purpose improvements, to specialized applications such as call centers
and networking. New features and improvements include:
- - Cluster Functionality for OPS Manager
- Remote software upgrades
- Remote database saves and restores
- SNMP Proxy agent
- - Additions to Network Feature Access
- Call Forward I'M Here
- DND Remote
- Trunk Answer from any station (TARAS)
- Call Pick up
- Call Hold Remote Retrieve
2. Mitel ISDN Node
The Mitel ISDN node provides access to ISDN services. The ISDN node can be
added to the SX-2000 family of PBXs, as well as to the SX-200 LIGHT PBX
system. Each ISDN node provides two 23B+D PRI interfaces. The ISDN node
currently supports the following central offices: NT DMS 100, NT DMS 250,
AT&T #4ESS, as well as NI-2 standards associated with AT&T #5ESS and Siemens
CO switches.
90
<PAGE> 91
SECURITIES AND EXCHANGE COMMISSION
MITEL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE PERIOD ENDING MARCH 28, 1997
- -----------------------------------------------------------------------------
EXHIBITS
- -----------------------------------------------------------------------------
91
<PAGE> 92
MITEL CORPORATION Exhibit 11a
COMPUTATION OF EARNINGS PER SHARE
(CANADIAN ACCOUNTING PRINCIPLES)
(in millions of Canadian dollars, except per share amounts)
<TABLE>
Year Ended
------------------------------
March 28, March 29, March 31,
BASIC EPS 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income $ 38.0 $ 51.0 $ 31.8
Less: dividends on cumulative preferred shares (3.2) (3.3) (3.5)
------- ------- -------
Adjusted net income $ 34.8 $ 47.7 $ 28.3
======= ======= =======
Weighted average shares outstanding (millions) 107.3 105.9 105.6
======= ======= =======
Basic EPS $ 0.32 $ 0.45 $ 0.27
======= ======= =======
FULLY DILUTED EPS (1)
Adjusted net income as determined
under basic EPS $ 34.8 $ 47.7 $ 28.3
Imputed interest on stock options
and warrants 0.4 0.5 0.5
------- ------- -------
Adjusted net income $ 35.2 $ 48.2 $ 28.8
======= ======= =======
Weighted average shares outstanding as
determined under basic EPS (millions) 107.3 105.9 105.6
Add weighted average shares on
conversion of:
- stock options 3.2 2.9 2.3
- warrants - 1.0 1.0
------- ------- -------
Adjusted weighted average shares
outstanding (millions) 110.5 109.8 108.9
======= ======= =======
Fully diluted EPS $ 0.32 $ 0.44 $ 0.27
======= ======= =======
</TABLE>
(1) This calculation is submitted in accordance with Securities Exchange Act
of 1934 Release No. 33-5133 even though the amounts of per share earnings on
the fully dilutive basis are not required to be stated under the provisions of
Section 3500 of the Canadian Institute of Chartered Accountants Handbook.
92
<PAGE> 93
MITEL CORPORATION Exhibit 11b
COMPUTATION OF EARNINGS PER SHARE
(UNITED STATES ACCOUNTING PRINCIPLES)
(in millions of Canadian dollars, except per share amounts)
<TABLE>
Year Ended
-------------------------------
March 28, March 29, March 31,
PRIMARY EPS 1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net income $ 41.0 $ 56.9 $ 59.0
Less: dividends on cumulative preferred shares (3.2) (3.3) (3.5)
------- ------- -------
Adjusted net income $ 37.8 $ 53.6 $ 55.5
======= ======= =======
Weighted average shares and
share equivalents (millions) 108.5 107.9 107.2
======= ======= =======
Primary EPS $ 0.35 $ 0.50 $ 0.52
======= ======= =======
FULLY DILUTED EPS (1)
Adjusted net income as determined
under primary EPS $ 37.8 $ 53.6 $ 55.5
======= ======= =======
Weighted average shares and
share equivalents 108.5 107.9 107.2
Add weighted average shares and
share equivalents on conversion of:
- stock options - 0.2 0.3
- warrants - - 0.1
------- ------- -------
Adjusted weighted average shares
and share equivalents (millions) 108.5 108.1 107.6
======= ======= =======
Fully diluted EPS $ 0.35 $ 0.50 $ 0.52
======= ======= =======
</TABLE>
(1) This calculation is submitted in accordance with Release No. 33-5133
under the Securities Act of 1933, as amended, even though the amounts of per
share earnings on a fully diluted basis are not required to be stated under
the provisions of APB Opinion No. 15.
93
<PAGE> 94
Exhibit 21
SUBSIDIARY AND PRINCIPAL INVESTMENTS
Subsidiaries *
Mitel, Inc.
U.S.A.
Mitel Telecom Limited
Great Britain
Mitel (Far East) Limited
Hong Kong
Mitel Telecommunications Systems, Inc.
U.S.A.
Mitel Semiconductor AB
Sweden
Principal Investments
Mitel de Mexico S.A. de C.V. Mexico
Tianchi-Mitel Telecommunications Corporation
* All subsidiaries are 100 percent owned, directly or indirectly, by Mitel
Corporation.
94
<PAGE> 95
Exhibit 23
CONSENT OF INDEPENDENT
CHARTERED ACCOUNTANTS
We consent to the use in this Annual Report on Form 10-K of Mitel Corporation
of our report with respect to the Company's consolidated financial statements
for the year ended March 28, 1997.
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 numbers 2-74833, 2-78545, 2-84711, 2-86511, 2-92200, 2-92201, 2-
92494, 33-1371, 33-9682, 33-45716, and 33-98946) pertaining to the Stock
Purchase Plan for Eligible U.S. Employees, the Stock Option Plan for Key
Employees, the Basic Stock Option Plan, The Stock Option Plan for Key
Employees, the 1984 Stock Option Plan, the Basic Stock Option Plan, the United
Kingdom Savings Related Share Option Scheme, the 1985 Stock Option/Stock
Purchase Plan, the Preferred Share Purchase Plan, the 1991 Stock Option Plan
for Key Employees and Stock Option Grant to Anthony F. Griffiths and the 1991
Stock Option Plan for Key Employees and Non-Employee Directors respectively,
and in the Registration Statements (Forms S-3 numbers 2-81989, 2-82262, 2-
88432, 2-91496 and 2-96412) of Mitel Corporation, and in the related
prospectuses, of our report dated May 8, 1997 with respect to the consolidated
financial statements of Mitel Corporation incorporated by reference in the
Annual Report on Form 10-K for the year ended March 28, 1997.
Our audit also included the financial statement schedule of Mitel Corporation
listed in Item 14(a)2 of the Annual Report on Form 10-K. This schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, the financial statement
schedule referred to above, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
<TABLE>
<S> <C>
Ottawa, Canada, ERNST & YOUNG
June 23, 1997. ERNST & YOUNG
</TABLE>
95
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information (prepared in accordance
with accounting principles generally accepted in Canada) extracted from the
accounting records of Mitel Corporation and included in the Consolidated
Statements of Income for the Year Ended March 28, 1997 and the Consolidated
Balance Sheets at March 28, 1997 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-END> MAR-28-1997
<EXCHANGE-RATE> 1.00000
<CASH> 26,452
<SECURITIES> 116,894
<RECEIVABLES> 156,479
<ALLOWANCES> 9,480
<INVENTORY> 83,118
<CURRENT-ASSETS> 387,327
<PP&E> 419,825
<DEPRECIATION> 237,610
<TOTAL-ASSETS> 584,776
<CURRENT-LIABILITIES> 180,972
<BONDS> 43,028
0
37,180
<COMMON> 153,296
<OTHER-SE> 149,010
<TOTAL-LIABILITY-AND-EQUITY> 584,776
<SALES> 695,547
<TOTAL-REVENUES> 695,547
<CGS> 344,391
<TOTAL-COSTS> 344,391
<OTHER-EXPENSES> 299,739
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,426
<INCOME-PRETAX> 58,625
<INCOME-TAX> 20,636
<INCOME-CONTINUING> 37,989
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 37,989
<EPS-PRIMARY> 0.32<F1>
<EPS-DILUTED> 0.32<F2>
<FN>
<F1>EPS-Primary is EPS-Basic under Canadian generally accepted accounting
principles.
<F2>EPS-Diluted is EPS-Fully Diluted under Canadian generally accepted
accounting principles.
</FN>
</TABLE>
