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 26, 1999
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
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MITEL CORPORATION
(Exact name of registrant as specified in its charter)
Canada Not Applicable
- ------------------------------------------------------ --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Legget Drive, Kanata, Ontario, Canada K2K 2W7
- ------------------------------------------------------ --------------------
(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 83
<PAGE>
At May 28, 1999, 116,712,906 common shares of Mitel Corporation were
issued and outstanding. Non-affiliates of the registrant held 107,773,028 shares
having an aggregate market value of U.S. $552,336,768.50 based upon the closing
price of the common shares on the New York Stock Exchange (May 28, 1999 being
the last trading day) of U.S. $5.125.
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.
Documents incorporated by reference: None
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, 1998 and
for the period January 1, 1999 through May 28, 1999, as calculated from the
exchange rates reported by the Federal Reserve Bank of New York, are set forth
below:
<TABLE>
<CAPTION>
January 1
to May 28,
1999 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C> <C>
High 0.6891 0.7105 0.7487 0.7513 0.7527 0.7632
Low 0.6535 0.6832 0.6945 0.7235 0.7023 0.7103
Average 0.6706 0.6960 0.7223 0.7332 0.7286 0.7318
Period End 0.6791 0.6863 0.6999 0.7301 0.7323 0.7128
</TABLE>
The following trademarks are mentioned in this Annual Report on Form
10-K: MITEL, SX-200, SX-2000, SMART-1, GX5000, SUPERSET, iMAGINATION, NeVaDa and
Mitel MediaPath which are trademarks of Mitel Corporation; Windows NT, which is
a trademark of Microsoft Corporation; and AXEL, which is a registered service
mark of Goldman, Sachs & Co.
[Cover page 2 of 2 pages]
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<TABLE>
<CAPTION>
Table of Contents
Section Page No.
PART I
<S> <C> <C>
Item 1. Business 1
Overview 1
Business Strategy 1
Recent Events 2
Industry 4
Mitel Communications Systems 4
Mitel Semiconductor 5
Products and Customers 5
Mitel Communications Systems 6
Mitel Semiconductor 9
Sales, Marketing and Distribution 14
Mitel Communications Systems 14
Mitel Semiconductor 15
Competition 17
Mitel Communications Systems 17
Mitel Semiconductor 18
Manufacturing 19
Mitel Communications Systems 19
Mitel Semiconductor 19
Research and Development 20
Mitel Communications Systems 20
Mitel Semiconductor 21
Proprietary Rights 21
Government Regulation 22
Employees 23
Backlog 23
Forward-Looking Statements and Risk Factors 23
Foreign Exchange and Interest Rate Exposure and Concentration of Credit Risk 24
Technological Changes; Necessity to Develop and Introduce New Products 25
Competition 25
Environmental Regulations 25
Regulatory Requirements 26
Significant International Operations 26
Year 2000 26
European Union and the Euro 26
Dependence on Key Personnel 26
Intellectual Property Protection 27
Intellectual Property Claims 27
Acquisitions 28
Other Factors 28
Item 2. Properties 28
Item 3. Legal Proceedings 29
Item 4. Submission of Matters to a Vote of Security Holders 29
</TABLE>
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<TABLE>
<CAPTION>
Section Page No.
PART II
<S> <C> <C>
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 29
Item 6. Selected Financial Data 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 41
Item 8. Financial Statements and Supplementary Data 42
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 68
PART III
Item 10. Directors and Executive Officers of the Registrant 68
Directors 68
Statement of Corporate Governance Practices 70
General 70
Mandate of the Board 70
Composition of the Board and of its Committees 70
Audit Committee 71
Compensation Committee 71
Nominating Committee 71
Independence from Management 72
Other 72
Executive Officers 73
Item 11. Executive Compensation 73
Summary Compensation Table 74
Employee Share Ownership Plan 75
1991 Stock Option Plan for Key Employees and Non-Employee Directors 75
Stock Option Grants in Last Fiscal Year 76
Year-End Option Values Table 77
Executive Compensation Agreements 77
Compensation of Non-Employee Directors 78
Directors' and Officers' Liability Insurance 78
Indebtedness of Directors, Executive Officers and Senior Officers 78
Report on Executive Compensation 79
Performance Graph 80
Item 12. Security Ownership of Certain Beneficial Owners and Management 81
Item 13. Certain Relationships and Related Transactions 82
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 82
Signatures 85
Power of Attorney 85
Annex A - Glossary of Terms 87
</TABLE>
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PART I
Item 1. Business
Mitel maintains its financial accounts in Canadian dollars. All
financial information and references to "$" and "dollars" are expressed in
Canadian dollars unless otherwise stated. Unless the context indicates
otherwise, "Mitel" and the "Company" refer to Mitel Corporation and its
consolidated subsidiaries. A glossary of certain technical and industry terms
used in this Annual Report on Form 10-K is included as Annex A attached.
Overview
Mitel is a global designer, manufacturer and marketer of networked
systems and specialty semiconductors for the communications industry. Mitel
operates through two principal business segments, Mitel Communications Systems
("Systems") and Mitel Semiconductor ("Semiconductor").
Systems provides enterprises with feature-rich voice and data
communications systems; complete private networks including remote teleworking
solutions; unified messaging and call-center applications and systems and
applications for computer telephony integration ("CTI"); and it also supplies
competitive carriers with public network access products. The principal products
that this business unit designs, manufactures and markets include telephone
switching systems deployed on customer premises (also known as Private Branch
Exchanges or PBXs), specialized proprietary desktop terminals and related
applications, system applications for delivering messaging, management and
call-center functionality, remote data access products and concentrators,
subsystems and interfaces allowing for CTI, public switching equipment and
dial-up network access solutions. The Company also provides related services.
Service activities consist primarily of hardware and software maintenance,
training and other ancillary support and professional services. See
"Business--Products and Customers-- Mitel Communications Systems."
Semiconductor specializes in connectivity solutions for the
communications and medical industries. Its product range includes components for
both wired and wireless networks; microelectronics for enabling the convergence
of voice and data; optoelectronic devices for high-speed Internet systems; and
applications-specific integrated circuits ("ASICs") for medical applications
such as pacemakers and hearing aids. The product-line which includes standard
and application-specific integrated circuits ("ICs"), analog line components,
optoelectronic devices and custom silicon wafers is focused principally on
enabling voice and data connectivity over any network's transport fabric,
whether wired, wireless or optical. Capitalizing on the integration of its IC
design and fabrication technologies to build ultra-low-power devices, the
Company has also become a world leader in the market niche for medical ASICs
used in pacemakers and hearing aids. Mitel's semiconductor products are
primarily non-commodity, specialized products that are proprietary in design and
are often designed for a specific application or customer.
See "Business--Products and Customers--Mitel Semiconductor."
Mitel Corporation was incorporated in Canada in 1971 and continued
under the Canada Business Corporations Act in 1976. The registered office and
the principal executive offices of Mitel Corporation are located near the
capital city of Ottawa in Canada, at 350 Legget Drive, Kanata, Ontario, Canada
K2K 2W7 and its telephone number at that address is (613) 592-2122.
Business Strategy
Mitel's strategy is to exploit six major developments under way in the
communications industry:
1. Convergence of voice and data transport in the enterprise around
Internet Protocol ("IP").
2. Emergence of complementary customer premise equipment ("CPE")
wireless systems for seamless indoor-outdoor mobility.
3. Simplification of non-real-time modes of communications through
Unified Messaging.
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4. Acceptance of natural speech recognition for call routing and
stimulating Voice Commerce ("V-Commerce").
5. Growth of unprecedented IP-centric interactive multimedia
applications and services.
6. The increasing use of System Level Integration ("SLI") in
microelectronics to reduce size, increase functionality and reduce the
cost of networking solutions.
Mitel applies its competencies in a broad communications "value chain"
ranging from microelectronic components for wired, wireless and optical
communications to fully networked multimedia systems and applications serving
selected enterprise customers. In the Systems area, management believes the
Company's products have competitive advantages by reason of their real-time and
fault-tolerant system architecture design and the ability to concurrently
integrate microelectronic and system designs and capability in
software-intensive applications development such as call-centers or messaging
systems. In the Semiconductor area, management believes the Company's
competitive advantages include design and production capability for SLI
solutions including analog and digital mixed-signal ICs; media-transparent
connectivity for wired, wireless and optical applications; and engineering
process diversity allowing for a number of specialty designs (e.g. ultra-low
power or ultra-low voltage required in medical applications).
The key elements of Mitel's business strategy include the following:
o To evolve its communications systems and products from
proprietary platforms to open, scalable and distributed
architectures using industry standards (e.g. IP), thereby
allowing for larger economies of scale, higher customer
benefit and shorter delivery cycles.
o To become selectively a fabless semiconductor company for SLI
via deep sub-micron designs while continuing to own and
operate fab facilities in Complementary Metal Oxide
Semiconductor ("CMOS") and bipolar technologies for strategic
advantage in areas like mixed-signal, high-frequency and
medical applications.
o To leverage its semiconductor and systems technology to the
benefit of all of the Company's customers by targeting all
elements within the "value chain" of communications from the
manufacturers who buy highly integrated microelectronics to
the end-users who buy cost-effective and fully-functional
systems.
In the Systems business unit, Mitel will continue to focus on
leadership for the modular, fiber-optic-based voice communications systems for
the under-100 line size small/medium enterprise segment and in networking
technologies that enable Mitel to scale its systems to larger line sizes.
Mitel's competitive strength is based on its competencies in real-time and
fault-tolerant technologies, its products' ease of use and reliability and the
strength of its indirect distribution channels to market. This position is
further complemented by the addition of value added applications and services
which, as a result of recent acquisitions, have now become a core competence.
Mitel will continue to develop products that bring voice communications as an
application to the information technology ("IT") infrastructure. Mitel will also
seek to capitalize on its systems integration skills to market complete,
fully-featured communications systems to selected vertical markets, principally
the hospitality, educational, health, professional and financial services
markets. See "Business--Products and Customers--Mitel Communications Systems."
Management believes the Company is well positioned to implement its
business strategy in Semiconductor by reason of its strong core technologies for
signaling, transporting and switching voice and data; its strong position in
radio frequency ("RF") front-end technology with applications ranging from
tuners for set top boxes to cellular telephones; its CMOS ASIC technology which
enables the Company to maintain a major position in medical applications while
also paving the way for other communications solutions requiring systems level
integration; and its expertise with respect to optoelectronic devices
principally found in transmitters and receivers for Local Area Networks ("LANs")
and access networks. See "Business--Products and Customers-- Mitel
Semiconductor."
Recent Events
Mitel has completed four acquisitions since August 1997. Two
acquisitions occurred during Fiscal
2
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1998 and the others were completed mid-way through the first quarter of Fiscal
1999. The most significant transaction occurred on February 12, 1998 when Mitel
acquired GEC-Plessey Semiconductors Group ("Plessey"), an international
semiconductor company serving primarily the communications and media markets.
The other acquisitions related to the Systems business group and centered on
remote access technologies, advanced voice and unified messaging solutions and
ISDN business products for the small-to-medium enterprise market. Mitel is
focused on integrating and streamlining these new businesses to accelerate its
strategy of providing new products for the convergence of telephony, data and
other media technologies.
The Plessey operations included a business segment known as the Lincoln
Power and Automotive ("Lincoln") group. Management began an evaluation of
Lincoln's operations at the time of acquisition in light of its position outside
Mitel's strategic focus on communications. Following an extensive strategic
review of Mitel's semiconductor operations, management formalized a plan at the
end of Fiscal 1999 to sell or otherwise exit the Lincoln operations.
Accordingly, Lincoln was reclassified as a discontinued operation in the fourth
quarter of Fiscal 1999 and will continue to be reported as such until the group
is sold as a going concern or otherwise disposed of, an event which management
expects to occur within the next twelve months.
During the fourth quarter of Fiscal 1999, Mitel revised its estimated
amortization periods for intangible assets, consistent with evolving industry
practices. Such measure will allow Mitel's assets to be in better alignment with
the technological and competitive dynamics of the communications industry.
Management regularly reviews the estimated useful lives of the acquired
intangibles in addition to any related asset impairment. Management believes the
reduced amortization time period, to two years from the previous estimate of
five to fifteen years, better reflects the estimated time to market advantage
achieved by the recent acquisitions.
During the fourth quarter of Fiscal 1999, Mitel also implemented
certain rationalization plans, described elsewhere in this Form 10-K, and
realized gains related to the sale of certain semiconductor technology assets.
The net pre-tax charge to Mitel's operations as a result of these actions
amounted to $10.1 million.
During the fourth quarter of Fiscal 1999, Mitel commenced plans to
transfer all semiconductor CMOS manufacturing operations from the Company's
Sweden fab to its recently acquired sate-of-the-art manufacturing facility in
Plymouth, U.K. The transfer, which affects approximately 200 employees, will
occur in three phases and is expected to be completed by the end of May, 2000.
The relevant negotiations with the Swedish Trade Unions were completed in May,
1999 and new wafer starts at the Swedish plant ceased on May 15, 1999. The costs
of the transfer program are expected to be applied against Mitel's existing
redundancy provisions and will not affect earnings.
On July 23, 1998, Mitel repaid $123.1 million against the U.S. dollar
term loans incurred in connection with the Plessey acquisition. The repayment
was required under terms of the associated credit agreement as proceeds of
$172.0 million were received from an equity offering by the Company.
Accordingly, a proportionate amount of the related deferred debt issue costs and
deferred foreign exchange losses was recorded as additional interest expense in
the second quarter of Fiscal 1999. This non-cash expense reduced net income from
continuing operations by $7.2 million or $0.06 per share.
On June 7, 1999, Mitel announced that its Board of Directors had
authorized the repurchase of up to 5,835,645 common shares, representing five
percent of the 116,712,906 issued and outstanding common stock of the Company.
These purchases are expected to take place on the open market through the stock
exchanges of New York, London, Toronto and Montreal over a twelve-month period
starting on June 9, 1999 and ending on June 8, 2000 or on such earlier date as
the company may complete its purchases pursuant to the notice of intention to
make a normal course issuer bid filed with the Toronto and Montreal stock
exchanges. Mitel, which intends to cancel the repurchased shares, believes that
at present no director, senior officer or insider of the company intends to sell
any common shares under this program.
3
<PAGE>
Industry
The global communications industry includes systems, software and
products used for voice, data and video communications. This industry has
undergone significant transformation and growth since the mid-1980s as a result
of changes in domestic and international public policy, technological
innovations and economic factors. This is borne out by the significant increase
in mobile workers, the collaborative needs of business and workgroups and the
availability of high value information via the Internet. Management believes
that these factors will intensify and that the number of customers and the
complexity of the networks they demand will increase significantly over the next
several years. In addition, management believes that such networks will
increasingly become multifunctional in nature, supporting simultaneous wired,
wireless or optical access to combined voice, data and video communications
services, thus reducing the operating costs associated with separate networks.
Management further believes that the traditionally distinct technology platforms
supporting voice and data will converge, as will the platforms for the
traditionally separate wired, wireless and optical networks. Management
anticipates that significant industry growth areas will include wireless access,
multifunctional systems and networking software and that the principal building
blocks of the industry will continue to be software, microelectronics and
product innovation in advanced digital switching and transmission platforms,
supported by a competency in and a knowledge of telecommunications networking.
Mitel Communications Systems
The PBX industry began to evolve in the late 1950s as businesses
recognized that they could realize cost savings by reducing the number of
telephone lines leased from the telephone company. In the late 1970s and early
1980s, growth in PBX systems exploded due to two factors. First, the computer
industry led the development of microelectronics, which facilitated the
production of more cost-effective PBX products. Second, the monopoly held by
American Telephone & Telegraph Company on the provision of telephone equipment
and services was ended, thereby permitting alternate local PBX equipment
suppliers to emerge (such suppliers are often referred to as "interconnects").
The industry growth rate for PBX systems closely tracks general
economic trends and is driven primarily by general business expansion. PBX sales
depend significantly on the need of businesses to increase communications
capacity, replace older systems or obtain higher value from their existing
systems. The average product life cycle is approximately seven years. Recently,
the small and medium business sector, particularly in hospitality, government,
health care, retail and education, has contributed to PBX sales growth.
Management expects that growth in the PBX industry will occur in two
major areas related to overall solutions - enterprise communications systems and
applications. The enterprise communications systems market is experiencing the
early effects of technological change with the introduction of Microsoft Windows
NT-based PBXs and PBXs integrated with LANs and a plethora of different network
interfaces, as well as the emergence of the "all-in-one" communications system.
Management believes the evolving convergence of voice, video and data requires
systems that combine all three media on a single network infrastructure.
The second major area for market growth is in applications.
Increasingly, revenue growth is moving from the core switch into other areas
such as call centers or customer interaction centers, location independent
working, mobility and hot desking applications, value added messaging systems
and the integration of value added third party applications using CTI tools
developed for Mitel's core switching platforms. Call centers typically run on a
computer-based system that provides real-time monitoring of a telephone system's
workload, distributes calls to the agent that is idle longest, uses a queuing or
waiting list assignment that holds callers in queue until an agent is available,
averages the random flow of traffic and decreases peak traffic load. Voice
messaging is a computer-based system that enables flexible, non-simultaneous
voice communications. Unified messaging is a new software technology that
integrates voicemail, e-mail and fax mail. CTI is the linking of voice (switch)
and data (computer) systems in order to permit data and control information to
be transferred between systems, thus providing integrated applications.
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Management believes that the Company is well positioned to respond to
the business communications needs of each of these target markets.
Mitel Semiconductor
The primary markets for Semiconductor's products are growing and
technologically-evolving industries such as the telecommunications equipment,
computer network server and medical devices industries, all of which represent
major end-markets for these products. Each of these industries is expected to
grow significantly over the next several years, which management believes should
provide revenue growth opportunities to Mitel. Increased requirements of end
users and new opportunities should continue to drive the demand for telecom
equipment and infrastructure. The deregulation of telecom services in many parts
of the world has allowed new operators and service providers to be licensed,
many of which need new equipment and facilities. The emergence of these new
operators and service providers has, in turn, intensified the competitive
environment, forcing existing operators and service providers to accelerate
their capital spending plans. In addition, the low penetration of telephone
service in emerging countries is a strong driver for wired and wireless
communications. In the United States, information technology has been growing as
a proportion of capital spending and server growth, in particular, has been
spurred by the flow of information and the requirement within IT departments to
make information accessible and cost-effective. Management believes that these
developments represent significant new market opportunities for Mitel over the
next several years.
Products and Customers
The following tables set forth Mitel's revenue by product group and
geographic location of end customers, respectively, for the Company's last three
fiscal years. A portion of the Semiconductor business unit's product output is
supplied to the Systems group for incorporation into the Company's systems
products. The revenue from these products is excluded from the calculation of
Mitel's consolidated revenue and the revenue of the Semiconductor business unit.
<TABLE>
<CAPTION>
Millions of Dollars
Fiscal Year Ended: March 28, 1997
March 26, 1999 March 27, 1998
<S> <C> <C> <C> <C> <C> <C>
Mitel Communications Systems $ 752.7 57% $ 566.8 64% $ 474.5 68%
Mitel Semiconductor $ 557.7 43% $ 314.6 36% $ 221.0 32%
Total $ 1310.4 100% $ 881.4 100% $ 695.5 100%
</TABLE>
<TABLE>
<CAPTION>
Millions of Dollars
Fiscal Year Ended: March 28, 1997
March 26, 1999 March 27, 1998
<S> <C> <C> <C> <C> <C> <C>
United States $ 589.1 45% $ 404.1 46% $ 312.6 45%
Europe $ 428.6 33% $ 286.6 32% $ 228.8 33%
Other Regions $ 221.6 17% $ 137.0 16% $ 104.1 15%
Canada $ 71.1 5% $ 53.7 6% $ 50.0 7%
Total $ 1310.4 100% $ 881.4 100% $ 695.5 100%
</TABLE>
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,
France, Germany, Italy, the Middle East, the Netherlands and a limited number of
African countries, including South Africa. The Company is not economically
dependent on any one customer and no one customer accounts for more than 10% of
the Company's consolidated revenues. For additional information on foreign
operations and geographic segments, see Note 24 of the notes to the consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K.
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Mitel Communications Systems
The Company's communications systems products are primarily customer
premises-based communications systems that are used in networks that enable
businesses to communicate within and between locations to support the needs of
branch offices, mobile workers and teleworkers. Management believes that future
growth opportunities for Systems should be available in both developed and
developing countries but that a significant portion of any such growth
opportunities is likely to be derived from the sale of communications systems in
the United States, the United Kingdom and mainland Europe. The Company intends
to focus its marketing, development and sales efforts on enterprise
communications systems, applications, networked voice and data systems, network
access solutions and public switching products. Systems revenue grew by 33% in
Fiscal 1999 and by 20% in Fiscal 1998 and accounted for 57%, 64% and 68% of the
Company's total revenue in Fiscal 1999, 1998 and 1997, respectively.
Enterprise Communications Systems
Mitel's enterprise communications systems, including PBX systems
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. Mitel's PBX products are divided into categories
adapted to the particular business size and configuration of the end user. Over
the past 20 years, Mitel's PBX products have evolved from analog products to the
current digital family of products. The Company's 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. Mitel's larger
products provide networking capabilities to link up to hundreds of locations.
Although Mitel no longer manufactures new analog PBX equipment, the
Company continues to support its existing analog PBXs by offering a complete
line of remanufactured equipment that performs to specifications at the latest
revision level.
Mitel's top-of-the-line family of SX-2000 products utilizes digital
switching technology to provide advanced voice and data capabilities for
businesses requiring flexibility to configure 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 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. OPS Manager is further described under Networked Voice and Data
Systems. To maximize tariff efficiencies, the SX-2000 also offers advanced
features to support Automatic Route Selection and Least Cost Routing.
The SX-200 line of digital products provides small and medium size
customers in North America with advanced telephone features typically found in
larger systems such as the SX-2000. The current members of the SX-200 product
line provide interface to a wide variety of user peripheral devices. In Fiscal
1997, Mitel introduced the SX200ML, a smaller but fully functional SX-200 that
is aimed at the 40 to 60 line-size business market. In Fiscal 1998, Mitel
introduced the next generation SX-200, the SX-200 EL, which is directed at the
50 to 250 line-size business market.
Mitel provides a suite of ISDN business products, including the
iMAGINATION product line, to the small-to-medium enterprise market in Europe.
The iMAGINATION range has been further enhanced by the addition of a router and
an Ethernet hub to create an all-in-one solution, branded Mitel Kontact, for
small businesses and initially for the retail market where the product's
inherent capabilities for credit card authorization and electronic data
interchange ("EDI") products can be exploited.
All of Mitel's PBX systems can be configured with optional feature
enhancements such as automatic call distribution and automated attendant
functionality, message center and hotel/motel applications and powerful private
network protocols in both digital and analog versions.
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A new line of digital telephones designed for operation on the SX-200
and SX-2000 products was released in April 1998. The SS4000 phones continue the
evolution of the Company's peripheral devices by introducing new features to the
desktop such as a full duplex hands-free speaker phone capability, touch
sensitive soft keys and the ability to attach analogue devices, such as a fax
machine or secondary telephony device via an Analogue Interface Module. The
style and functionality of this product line will be carried forward to Mitel's
new family of IP-based voice terminals.
Applications
Mitel develops applications software and interfaces that add value to
the PBX at the desktop and workgroup level and take advantage of the convergence
of computing and telecommunications technologies.
One of Mitel's major application thrusts is focused on call centers.
Mitel addresses the call center market with software applications for three
distinct areas: (i) call distribution, i.e., intelligently routing calls to
agents, (ii) agent automation, i.e., tying network intelligence such as calling
line ID to a database of information that provides agents with a screen of
information on the calling customer, (iii) call management, i.e., performing
functions such as measuring the performance targets of agents, forecasting staff
and forecasting call traffic and (iv) features for supporting interactive voice
response, web and e-mail initiated transactions.
Another major application thrust is messaging. Mitel is able to offer a
complete portfolio of voice messaging products to customers. Management believes
that voice messaging has become a critical part of PBX sales such that customers
view it as a PBX feature. Mitel offers a suite of products that management
believes meets the price / value expectations of its targeted customers, from
the Mitel Express Messenger card-based solution for the SX-200, to its stand
alone, scalable server-based Mitel Mail solutions, to One Point, Mitel's unified
messaging solution which integrates voice, e-mail and fax applications. Mitel's
success in voice messaging depends on both a tighter integration of the
application to the switch as well as continued enhancements to some of the newer
developing technologies like unified messaging.
The Mitel Global Developers Network program seeks to attract leading
third-party developers to deliver productivity-enhancing business applications
that complements Mitel's suite of applications and core switching functionality.
Developers who have expertise and a presence in specific vertical markets of
interest to Mitel, such as lodging, healthcare and education are encouraged to
develop applications that integrate with Mitel's PBXs to deliver "whole"
solutions to the targeted markets. Mitel's Global Developers are identified in
the market by the "Mitel Connected" logo.
Networked Voice and Data Systems
With the convergence of data and voice infrastructures, Mitel is
focused on developing convergent solutions for the business enterprise.
Management expects that this converged infrastructure should provide customers
with significant efficiency improvements in the future. Customers are seeking to
improve their current voice systems while leveraging the advantages of open
computing platforms and operating systems. The Company works with a number of
industry forums and industry-leading partners in the voice and data
communications field to advance the convergence of computing and
telecommunications technologies.
The next step in Mitel's converged voice and data networking strategy
is referred to by Mitel as the "No Compromise" position for delivering robust
enterprise IP telephony solutions. Mitel's IP strategy is based on proven
functionality and investment protection and the delivery of solutions that do
not compromise on the quality, functionality and reliability that today's
traditional voice solutions provide. The Company's objective for its IP products
is to match or exceed the capabilities customers demand from existing PBXs. To
date, emerging IP solutions offer little of the capabilities of traditional
PBXs, creating significant adoption barriers for IP-based enterprise solutions.
In addition to robust functionality, Mitel expects to provide its customers with
a clear, logical progression path to IP platforms from their legacy solutions,
allowing them to leverage the investments made in their existing
telecommunications infrastructure.
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Mitel's most recent product offerings in the open communications
systems market are the SX-2000 for Windows NT and OPS Manager for Windows NT
with Directory Services Support. The SX-2000 for Windows NT takes Mitel's
SX-2000 software and moves it into the open computing environment of a Windows
NT pentium server. This allows businesses to integrate their PBX with other
NT-based applications in a seamless manner, thereby eliminating the need for
separate interface between those systems. The SX-2000 for Windows NT is targeted
at the small and medium enterprise market and corporate branch offices. It is
differentiated from other server-based communications systems being introduced
by its support of full telephony functionality, to the level of Mitel's
traditional SX-2000. The SX-2000 for Windows NT is the first Mitel platform to
support the new family of IP-based terminals. The introduction of Directory
Services support addresses the needs of business organizations attempting to
maintain a large number of electronic systems and databases. Directory Services
support is implemented through an industry standard protocol called Lightweight
Directory Access Protocol, which integrates voice switching with the main
directory server and permits moves, additions or changes to be made in a central
location and propagated to all other databases. Mitel believes that systems
management integration will be key to the convergence of voice and data networks
in the enterprise.
Mitel's MediaPath Server is a LAN-based communications system serving
small businesses and workgroups of up to 96 users. It consists of software and
telecommunications boards loaded on a standard pentium- or alpha-based LAN
server running on the Microsoft Windows NT 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. MediaPath delivers an IT-centric "office-in-a-box"
solution for small offices that are deploying data applications such as file and
print servers, Exchange, E-mail and specific vertical market applications in a
Microsoft environment. Mitel MediaPath provides additional "voice-enabling"
technology to create converged solutions for such customers. The product is
targeted to the small/medium sized enterprise market in Europe.
Another open system developed by the Company, NeVaDa (Networked Voice
and Data), unifies all functional levels of an organization's LAN and local
voice network on a single broadband infrastructure that supports converged
network management and call control, computer telephony and multimedia
functions. By converging the two most business critical communication networks,
NeVaDa delivers benefits to both users and the organization as a whole,
facilitates the convergence of wide area access and wiring infrastructure, makes
network management simpler, enhances network performance, allows organizations
to leverage existing voice and computing investments and enables integrated
multimedia applications.
The Mitel Xpress family of high performance Remote Access solutions
supports both data and voice for remote and central site locations. The
technology features 8:1 data compression plus Intel RISC based processing power.
Mitel's Xpress Office family of products is aimed at the burgeoning market for
teleworking and location independent workers. Full enterprise voice and data
functionality is delivered to the remote user wherever basic rate service is
available. Mitel believes Xpress Office is an ideal remote agent solution for
Call Centres.
Network Access Solutions
The Network Access Solutions group designs, markets and sells the
SMART-1 call controller/automatic dialer family of products for the analog,
digital voice communications and fax long distance telephone markets. Mitel
management believes that the exponential growth of Internet services and
products has created a new opportunity for its alternate network access
products. The Company has developed a new product variant which connects to
legacy fax machines and routes long distance fax calls from the traditional
telephone networks into the Internet networks through Internet service
providers, thereby reducing long distance costs and providing substantial cost
savings on fax calls to the end user, without changing their dialing platforms.
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Public Switching
The Public Switching business unit designs, markets and sells the
GX5000 product line. The GX5000 platform is a compact, 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.
During Fiscal 1999, the Company introduced new capabilities to the
GX5000 platform to respond to the needs of independent telephone companies for
additional services, including ISDN and asymmetric digital subscriber line
("ADSL") services.
With changes in the regulatory environment, management anticipates that
the Competitive Local Exchange Carriers ("CLECs") should emerge as potential
customers for the GX5000 product line. CLECs bundle communications, information
technology and certain entertainment services for all of the users in a
particular service area such as an apartment complex or housing development.
These services generally are offered at lower long term costs to such users,
since the CLECs negotiate more favorable rates with alternate network access
providers than could be obtained by individual users. Management believes that a
compact system like the GX5000 is an ideal central office product for such an
environment.
Mitel Semiconductor
Mitel manufactures and sells semiconductor products in the following
categories: communications: telephony; ASICs; home gateway; wireless access; WAN
Internetworking; optical and medical: ASICs. The Company also provides foundry
services to third parties on a contract basis. Mitel's semiconductor revenue
accounted for 43%, 36% and 32% of the Company's total revenue in Fiscal 1999,
1998 and 1997, respectively.
Mitel's integrated circuits are microelectronic component parts that
offer 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's semiconductor products are primarily non-commodity, specialized
products that are proprietary in design and are often designed for a specific
application or customer. As a result, management believes that Semiconductor's
revenues are not as susceptible to the volatility and cyclical nature of revenue
generally associated with the commodity-oriented segments of the semiconductor
industry.
Full custom semiconductor products rely on an original design and a
unique interface. Such products take longer to design but generally remain as a
key component in the end product for the duration of its life cycle. Semi-custom
products are proprietary products that have been altered to meet the specific
requirements of individual customers. However, because semi-custom products are
used in end products that tend to turn over quickly, semi-custom designs may be
replaced with the next generation of end products. Commodity products are "pin
for pin" replacements that sell primarily on the basis of performance,
availability and price. Mitel's products are mostly proprietary and custom.
Accordingly, management believes that once designed into a customer's product,
Mitel's products form an integral part of the customer's system and are
difficult to replace, as replacement would require some redesign of the system.
A portion of the Semiconductor's business unit product output is supplied to the
Systems group for incorporation into the Company's systems products. The revenue
from these products is excluded from the calculation of Mitel's consolidated
revenue and the revenue of the Semiconductor unit.
Semiconductor has a diverse and established base of over 3,300
customers in a wide spectrum of end markets, including leading manufacturers in
the telecommunications, medical and media sectors.
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Communications
The microelectronics market for communications is immense--comprising
local area networking, wide area networking, cellular, set top boxes and
communications processors among others. Within this diverse market, the Company
focuses on providing solutions that shape, signal, transport and switch
real-time traffic. The Semiconductor products enable convergence through a range
of products that interface the real world of every day life to the digital
worlds of the public network, Internet, cable and optical networks.
Telephony
Mitel has established a line of analog and digital switching integrated
circuit products that provide a high capacity for switching voice and data. 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, as well as Internet access. Common
applications for these IC products are PBXs, central offices, digital loop
carriers, Internet remote access concentrators, carrier class routers and
integrated access devices.
Mitel is a 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. Mitel also manufactures products in
the calling line identification market, including its
continuous-phase-frequency-shift-key receivers that support special services
such as calling party identification. Management believes that Mitel has
strengthened its position in this market with the introduction of a second
generation product, one of the first in the industry that supports industry
standards in North America, Europe and the United Kingdom. Mitel targets these
products to both the telephony and CTI markets.
In Fiscal 1999, Mitel reinforced its position as the major supplier in
Caller ID receivers with the introduction of two new products. The MT88E39 was
released to address the low power requirements of the European line powered
phone and DECT (digital enhanced cordless telephones) base station markets. The
MT88E45 product was released addressing the high growth 900MHz cordless phone
market with enhancements designed to improve performance of CIDCW ("Caller
Identity on Call Waiting") services.
Mitel also manufactures hybrid integrated circuits which 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. Some common applications for
thin-film hybrid microcircuits are in PBXs, central office switches,
multiplexers, cable modems, satellite home gateways and set top boxes.
Communications ASICs
Mitel's Communications ASICs group is focused on using the Company's
wealth of intellectual property to create a new set of solutions focused on the
emerging system level integration ("SLI")market. By integrating selected
communications technology into Systembuilder, a development toolkit for ASIC
designers, Mitel can offer its customers low risk and a fast time to market for
their communications products. The Systembuilder cells are supported with design
libraries, hardware and software development tools and high-accuracy design kits
developed to work in the customer's own design environment.
Mitel continued to augment its Systembuilder family during Fiscal 1999.
The Company released the Firefly product, a pre-defined embedded microcontroller
engine fully integrated into ASIC methodology, enabling customers to develop
their systems and design around it without the need to see prototype silicon.
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The Company also announced the addition of USB, PCI and Firewire cores
to Systembuilder providing the facility for customers to include advanced,
high-speed bus interface connections into their ASICs for computing, networking
and communication applications. The Company also began development of its 0.18
micron ASIC and ASSP design capability planned for launch in the third quarter
of calendar 1999.
Mitel SLI solutions are shipped in volume into many markets including
GSM mobile phones, PC motherboards, networking and communications applications.
Mitel's advanced CMOS process is the basis of a "System-On-A-Chip"
digital ASIC family of products for communications and computing applications.
In addition to ICs for communications systems, Mitel is also a leading supplier
of analog ASICs for medical applications (such as pacemakers and hearing aids)
and space applications (such as radiation hardened CMOS based on the Company's
Silicon on Sapphire ("SOS") technologies). Mitel's expertise in low power and
high reliability IC design has enabled the Company to provide the long battery
life and product performance required by these applications. Management believes
that Mitel is a major supplier of pacemaker ASICs and CMOS-based hearing aid
ASICs. Mitel also offers these innovative technologies for low frequency
wireless applications such as wireless headsets and electronic tags. These areas
are further described in the paragraphs that follow.
Home Gateway
Mitel is a major global supplier of tuners and RF components to
manufacturers of set top boxes--the home gateways that offer small-office and
home-office users Internet access, voice, video and multimedia all through one
connection to the network.
The Company developed and introduced the SNIM3, a complete and highly
cost-effective conversion solution for digital tuning in satellite set-top
boxes. The SNMI3 comprises the SL1914 low-noise amp (LNA), the SP5769
synthesizer, the SL1925 direct-conversion IC and the VP310 QPSK and FEC chip.
For the first time, a tuner can be placed directly on the main motherboard,
thereby reducing costs and product size for OEM customers.
For the digital cable market, the Company has also produced what it
believes to be the world's first silicon solution enabling the tuner to migrate
directly onto the motherboard using the SL2030 and SL2035 updown converters and
the dual phase lock loop (PLL) SP5848.
Mitel is a major supplier of components to the digital TV set top box
market and management believes that the Company is known for its "front end"
tuner solutions mostly for satellite and cable television systems. The Company
is also developing a "front end" for the emerging digital terrestrial television
market. In addition to its front end expertise, Mitel has developed a "back end"
solution including an MPEG2 decoder which management believes positions Mitel as
one of the few companies in the world able to offer a complete system solution
to the set top box.
Wireless Access
Mitel is an established supplier of RF and digital components to the
analog cellular market for both base stations and handsets. Mitel is a volume
supplier of both RF and digital components for the digital cellular phone
standards TDMA and CDMA, used in the United States and the Asia Pacific area.
Mitel was an early entrant into the wireless local area network ("WLAN") market
with a complete RF and baseband chipset which is currently in production. The
Company is presently developing a second generation product based on the
Bluetooth specification.
Many of the cars produced and sold each year around the world are now
being equipped with keyless-entry systems. In addition, the growing use of
wireless devices such as handset and RF devices has increased the number of
interfering signals now in the air. Due to their strong interference immunity
capabilities, management believes Mitel's range of keyless-entry products has
attained a leading position in the market.
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Mitel's Planet chip set, a full processor-to-antenna suite for Code
Division Multiple Access (CDMA) dual-mode cellular phones, continued to sell
widely, as did the Waverider, a wireless LAN chip.
WAN Internetworking
Mitel also manufactures high speed transport devices used to interface
communications systems to a wide area network, thereby significantly improving
performance and integration levels. Mitel is currently introducing a new line of
such devices.
Development programs now underway build upon Mitel's existing expertise
in switching, transmission and terminal equipment to provide related functions
in the emerging market segments of asynchronous transfer mode ("ATM") and
wireless telephony. ATM serves as the core technology inter-exchange carriers
("IXC") and Internet service providers are deploying in their networks to cope
with growth in computer communication and multimedia traffic. Wireless telephony
extends the applicability of digital telephone components into cordless and
cellular markets.
Mitel continued its innovative leadership in the development of
real-time network integrated circuits with the introduction of the MT90220 and
MT90221 ATM Inverse Multiplexers. ATM is a key underlying technology for the
integrated, wide-area-network access services in which voice, video and Internet
are delivered to the home, business and government. These devices manage the
transmission of ATM traffic over multiple T1 and E1 lines, so customers can
incrementally meet their growing demand for bandwidth without having to
undertake the significant expense of a T3 or E3 connection.
The MT90220 and MT90221 are the world's first ATM inverse multiplexers
that meet ATM-Forum standards. Management believes the MT90220 sets a favourable
price-performance mark by allowing Mitel's ATM OEM customers to interconnect
their products over existing T1 and E1 WAN facilities.
For T1, E1 and J1, the world's dominant wide area network
infrastructure, Mitel introduced the MT9074 T1 Combo. This device combines a
framer and a line interface unit ("LIU") in a single package which meets all
worldwide standards, including North American T1, Japanese J1 and the protocol
used in the rest of the world - E1. The LIU is capable of short-haul, mid-haul
and long-haul applications, making this device one of the most versatile in the
world.
Mitel has also introduced a new category of 3-volt carrier-class,
time-division-multiplex ("TDM") cross-point switching devices to augment its
position in TDM switches. Three devices were introduced: the MT90823 large
digital switch (a 2048 x 2048 channel switch), the MT90826 quad digital switch
(a 4,096 x 4,096 channel switch) and the MT90863 rate conversion digital switch.
These devices are used in PBXs, switching and multiplexing equipment and central
offices. In addition to these applications, these devices are currently used by
worldwide OEM manufacturers of Internet access concentrators. These high-end
platforms concentrate the data from thousands of Internet or remote-access users
onto a high-speed backbone such as ATM, currently used by most ISPs, thereby
alleviating existing networks from the high-traffic growth caused by Internet
access.
The Company launched two acoustic echo-cancellation solutions in Fiscal
1999. The MT9315 delivers clear communication for duplex hands-free
cellular-phone users, while the MT9300 eliminates echo across 32 channels in
wireless systems and can be used to remove echo from voice carried across data
networks such as the Internet and frame relay.
With years of background in ethernet LAN and basic telephony markets,
Mitel combines its expertise in both markets to develop a new line of components
for the emerging Voice over Internet Protocol ("VoIP") market at home gateway,
enterprise and carrier class levels. Mitel's objective is to bring the best
price and performance into new products targeted to VoIP applications.
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Mitel has established a line of echo cancellers to improve voice
quality in network access equipment that introduce substantial network delays
such as Internet, ATM, Frame Relay and Wireless systems. Leveraging from its
development of two-channel voice echo cancellers, Mitel has introduced the
MT9315 Acoustic Echo Canceller and MT9300 Multi-Channel Voice Echo Canceller.
The MT9315 is targeted to handfree and speakerphone applications: it uses
innovative TruePlex technology enabling the world's first true full-duplex
speakerphones that provides natural two-way conversation. The MT9315 is
particularly useful for Internet phone applications that require a high-quality
speakerphone function. The MT9315 is also targeted for use in business telephone
sets, conferencing units, mobile phone handsfree kits and intercom systems. The
MT9300 is a low-power 32-channel voice echo canceller that addresses channel
density needs in VoIP gateways, ATM and Frame Relay switches and routers,
wireless mobile switching centres and basestations, satellite communications
equipment and central office applications.
Optical Communications
Mitel is a leading supplier of Light Emitting Diodes ("LED"), 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. Mitel's
optoelectronic components include a Vertical Cavity Surface Emitting Laser
("VCSEL") to address such applications as gigabit ethernet, as well as
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. In order to address the emerging and fast growing
Optical Networking market, Mitel has undertaken a two year program to develop
DWDM and Cross-Connect Integrated devices using advanced, speciality CMOS
manufacturing processes.
A new set of optical electronics products was introduced that extend
Mitel's broad catalogue of lasers, diodes and other leading optical ICs. These
include the 1A466, the industry's first commercially available resonant-cavity
LED ("RCLED") for applications based on plastic optical fiber; a high-speed 840
mm MT-RJ Small Form Factor ("SFF") interface designed for Fibre Channel and
Gigabit Ethernet transceivers; and VCSELs for high-speed datacom applications.
These products were awarded special honors at the 1998 Fiber Optic Conference in
San Diego, California.
Medical
Medical ASICs
The high cost of medical care is generating an ever-expanding set of
opportunities for microelectronics-based products that reduce health-care costs
and improve quality of life. Implantables such as pacemakers, wearables such as
hearing aids, portable equipment and communicating devices that monitor patients
in and outside hospital are examples of emerging markets in which Mitel's
experience and skills have immediate relevance.
Management believes that Mitel is a major supplier of analog ASICs for
medical applications. Mitel's expertise in ultra-low power, high-reliability
integrated-circuit design has enabled the Company to make medical devices with
high performance and exceptional battery life.
Discontinued Operations
Power and Automotive
The Company designs, manufactures and markets several
non-communications products at its facility located in Lincoln, U.K.
Applications for these products include principally Power and Automotive. This
business unit was classified as a discontinued operation at the end of Fiscal
1999 following a strategic review and the adoption of a formal plan to either
sell or exit the Power and Automotive operations.
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The Power products are used in industrial, rail traction, aerospace and
electric utility applications and in air conditioners, white goods, compressors,
pumps and fans. The principal geographic markets for such products are in the
United Kingdom, France and North America. The automotive products are used in
road tolling applications, in car alarms and for automatic cruise control
systems.
Sales, Marketing and Distribution
Mitel Communications Systems
The Systems business unit targets its products and services principally
to businesses requiring communications systems on their premises. Management
believes that Mitel is a major supplier of PBX systems and peripherals to small
and medium sized businesses, which management further believes is one of the
fastest growing business communications systems segments in the principal
markets served by the Company.
North America
In the United States, Mitel sells most of its PBX systems (excluding
its top-of-the-line SX-2000 system) through wholesale distributors of telephony
equipment. The distributors, in turn, sell to independent telephone companies
and to interconnect companies. Mitel products are also sold to the U.S. federal,
state and local governments. Typically, the North American indirect selling
channel focuses on the small/medium-size enterprise market, with a strong
penetration into the lodging, government, manufacturing and healthcare
industries. Mitel also sells products directly to end customers through its
subsidiary Mitel Communications Solutions, Inc. ("MCS"), primarily in the top 25
metropolitan statistical areas as determined by the United States Department of
Commerce. MCS is a nationwide sales and service operation that sells integrated
communications systems, applications and peripherals to national and regional
accounts, as well as to large single site accounts.
Mitel has established an "Elite VAR" program in the United States for
the Company's top 130 dealers. Elite VARs or value added resellers that
demonstrate the skill set necessary to sell more complex converged products are
tiered as Platinum Elite VARs. Both Elite VARs and Platinum Elite VARs are
provided exclusive access to some of Mitel's newest products such as the SX-2000
PBX. Platinum Elite VARs have access to SX-2000 for Windows NT and other
applications that require expertise in server based telephony. Both also have a
non-exclusive right to distribute the rest of the Company's PBX products. All
other dealers, which number approximately 400, are classified as Mitel Dealers.
Mitel Dealers sell the balance of the Company's PBX product line.
In Canada, Mitel sells its complete range of PBX equipment to
independent interconnect companies and specific telephone companies including
Bell Canada and Manitoba Telephone Systems, which in turn sell to end users. The
interconnect companies operate under an Elite VAR support program similar to
that established in the United States. The dealers sell, install and provide
service throughout Canada, marketing Mitel products on a non-exclusive basis.
Mitel also sells the SX-2000 line of PBX systems directly to end users in Canada
through MCS.
Remote access products are sold primarily through selected data-centric
VARs, although it is planned to add this portfolio to the Elite and Platinum
Elite VARs' products offering. Public switching systems are sold directly to
independent telephone companies in the United States. Mitel distributes the
balance of its Systems product line through selected VARs and OEM (original
equipment manufacturers) customers.
Mitel sells its SMART-1 line of network access solutions in North
America through selected distributors and direct accounts, which in turn sell
such products to carriers and alternate carriers.
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Europe
Mitel markets its Systems products under distribution agreements in
several countries in Europe. The most significant market in terms of revenue is
the United Kingdom. In the United Kingdom, Mitel sells its communications
equipment to large multinational enterprises through a direct sales organization
(Mitel Solutions Division) to end customers but also indirectly through selected
distributors and dealers. In the United Kingdom, Mitel serves principally large
corporate customers with specific strengths in the high-end lodging, utilities,
financial and professional services and publishing industries. In order to
extend Mitel's distribution access to smaller, medium-sized enterprises, Mitel
has created an indirect distribution channel over the last few years.
In addition, Mitel markets its line of remote access products to a
number of post, telephone and telegraph companies in Europe.
Mitel further expanded its distribution channel across Europe, Middle
East and Africa during Fiscal 1999 principally through the iMagination product
family which management believes is very well suited for indirect distribution
targeted at the small to medium-sized enterprise market. This product technology
has been combined with edge routing technology to allow Mitel to launch the
Kontact in Europe. This product comprises a fully featured PBX with an ISDN edge
router and a LAN Hub to offer a fully converged all-in-one solution. The
iMagination product was launched in October 1998.
The Systems products, combined with the remote access product line and
Mitel's continuing CTI initiatives, will allow Mitel to continue to grow an
IT-centric distribution channel in line with planned future product
developments.
Mitel sells its SMART-1 line of alternate network access products
directly to key accounts in the United Kingdom. Such products are also sold
through distributors to other customers in the United Kingdom and, increasingly,
in continental Europe as the carrier markets are deregulated. The carrier market
addressed by these alternate network access products is highly influenced by
regulation, tariff structures and can be impacted by the consolidation of common
carriers.
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.
Mitel sells its SMART-1 line of network access solutions products in
Japan through selected distributors, which in turn sell such products to
carriers and alternate carriers.
Mitel Semiconductor
The principal customers for Mitel's semiconductors are customer premise
and network communication equipment manufacturers. Mitel's semiconductor
products are also marketed to data communications suppliers as the integration
of computing and telecommunications continues. Mitel sells its products in over
100 countries, through a network of 50 independent representatives and
distributors and through a dynamic direct sales force. Representatives generally
have strong relationships with and interact directly with end customers. These
representatives assist with the design of customer solutions incorporating Mitel
products, which are then supplied through distributors. The direct sales force
is comprised of major account teams that target specific large customers for
both custom wafer design and standard product deliveries.
The primary markets for the Semiconductor group's products are growing
and technologically-evolving industries. The telecommunications equipment,
computer network server and medical devices industries represent major end
markets for Semiconductor. Management believes that these industries will
provide revenue growth opportunities to Mitel during Fiscal 2000. In addition,
management believes
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Semiconductor's revenue growth will be supported by various factors that have
continued to drive demand for telecommunications equipment and infrastructure.
In particular, deregulation of telecommunications services worldwide has allowed
new operators and service providers to be licensed, most of which need new
equipment and facilities. The emergence of these new operators has, in turn,
intensified the competitive environment, frequently forcing existing operators
and service providers to accelerate their capital spending plans. The low
penetration of telephone service in emerging countries is also a strong driver
for wireless as well as wired communications, which management believes
increases demand for the Company's integrated circuits for communications
applications.
The Company believes that one of its competitive advantages is the
expertise of its applications groups, which are located in central locations in
the United Kingdom, the United States, Canada, Brazil, Singapore and Japan to
serve the customer bases in Europe, North America, South America and the Far
East, respectively. The applications groups assist OEMs in designing their next
generation products using Mitel components. Mitel has a strong record of design
wins and of attracting customers' solicitation of design ideas. The design win
cycle starts when Mitel and/or its representatives identify a need for one of
its standard communications products which meets certain specifications in a
customer's equipment design. Once Mitel's product is selected for a design,
Mitel generally is assured of providing the semiconductor for the product until
the product is no longer manufactured. The additions to the semiconductor
product lines through the purchase of Plessey have been integrated into Mitel's
sales channels worldwide.
North America
Mitel's semiconductor products (other than ASICs and foundry services)
are sold through representatives of manufacturers and distributors and,
increasingly, directly to OEMs. Mitel's sales representatives, who deal directly
with the end customer, assist with the design of systems incorporating Mitel
products. These products are then supplied through Mitel's distributors. To
enhance sales, major account teams target specific large customers for standard
product deliveries. Design centers (strategically located close to the customer
base in San Jose, Irvine and San Diego, California for West Coast customers and
in Kanata, Ontario, Canada for East Coast customers), provide ASIC services.
Foundry services are provided from sales offices in San Diego, California and
Bromont, Quebec, Canada, with technical support from Bromont.
Europe
Following the acquisition of Plessey, sales of Mitel semiconductor
components in Europe have been made primarily through its direct sales channel.
Semiconductor has implemented a global strategic account program, the focus of
which is the development of multinational partnerships. Management believes that
the European market is similar to the North American market in that customer
premise and network communications equipment segments utilize products from the
Company's entire portfolio. Distributors play a very important role in the
European region and management believes that their share of the overall business
will increase over the next year due to the desire of many customers to
consolidate their logistical demands. Semiconductor maintains technically
qualified sales teams across the entire region and supports them with a team of
highly skilled applications engineers based in the United Kingdom. The
headquarters of the sales operation is in Swindon, U.K. An additional facility
in Paris, France provides ASIC design and sales support for Southern Europe.
Other Markets
The Asia/Pacific area is a major geographical market for Mitel
semiconductor products, with China, Korea, Japan, Taiwan and Malaysia being the
largest markets. Mitel's semiconductor products are also sold in Australia, Hong
Kong, Thailand, New Zealand, Singapore and the Philippines and the Company is
expanding into other emerging markets in Asia Pacific, such as India.
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Mitel maintains regional headquarters in Singapore and offices in
Japan, Taiwan, Korea and China for semiconductor products. Over 60 percent of
sales in these areas are achieved through representatives and distributors. The
sales offices provide a service linking customers, local representatives and
applications support groups intended to assist OEMs in designing products with
Mitel components. Management believes that such activities provide a technology
exchange that helps increase Mitel's sales, while at the same time helping to
develop the local economy. As is the case in North America and Europe, Mitel
provides ASIC design services locally through the design center in Tokyo.
Competition
Mitel Communications Systems
The market for Systems products is characterized by rapid technological
change, evolving standards and regulatory developments. Many of the Company's
competitors and potential competitors have greater financial, technological,
manufacturing, marketing and personnel resources than the Company. Moreover, the
drive towards the convergence of voice and data has also led to the emergence of
a new category of competitors, big and small, which focus exclusively on this
market.
In addition to Mitel, the major suppliers of PBX equipment include
Nortel Networks Corporation ("Nortel Networks"), Lucent Technologies Inc.,
Siemens AG ("Siemens"), NEC America Inc. ("NEC") and Fujitsu America, Inc.
Moreover, Mitel is also competing with traditional data giants, such as Cisco
Systems Inc. ("Cisco") and 3Com Corporation and smaller niche players such as
Vertical Networks, Inc. which offer server-based communications systems (with or
without Internet Protocol capabilities) generally targeted to the small to
medium enterprise/branch office market.
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. Management believes that Mitel's target
customers also regard the ease with which they can do business with their
suppliers as an increasingly important factor in the selection process.
Management believes that Mitel compares favorably with respect to the
foregoing factors against its competitors, some of which are larger and have
more resources than Mitel. Mitel has been a significant PBX supplier to the
under-100 line segment of the market in North America since the early 1980s. In
this segment, Mitel competes with hybrid key systems manufacturers, other
manufacturers of used and new PBX products and manufacturers of server-based
"all-in-one" communications systems, "un-PBXs" and "LAN PBXs".
The Company's basic PBX hardware business has experienced and is
expected 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 that are modular and easily upgradable. Furthermore,
Mitel has recently announced the next step in the Company's converged voice and
data networking strategy by unveiling its "No Compromise" position for
delivering robust enterprise Internet protocol telephony solutions.
According to Phillips InfoTech, based on calendar 1998 market research,
as of December 31, 1998, Mitel held approximately 8.4% of the total United
States PBX market and was placed fifth overall in market share. Lucent, with
approximately 32.7% and Nortel, with approximately 28.0%, are the dominant
suppliers in the United States.
Mitel's prime competitor in Canada in the PBX market is Nortel, which
enjoys a dominant supplier position with many of the Canadian telephone
companies through the Stentor Alliance. The Stentor mandate has been changed
over the last few months since Bell Canada Enterprises formed Bell Nexxia. Bell
Nexxia has been formed to sell Bell Canada services and products outside of the
traditional territory of Ontario and
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Quebec. Mitel currently sells the SX-200 and the SX-2000 through most of the
telephone companies in Canada, most recently signing an agreement with Bell
Canada to sell the SX-2000. As of December 31, 1998, Mitel held approximately
25.5% of the total Canadian PBX line market, according to estimates provided by
Phillips InfoTech, based on calendar 1998 market research.
In the Asia/Pacific PBX market, most major communications equipment
suppliers have a presence and competition is intense. Management believes that
Mitel compares favorably to the competition in terms of price, product
performance and after-sale service provided by its appointed local distributors.
Leading communications equipment suppliers to the European PBX market
include Alcatel Alsthom Compagnie ("Alcatel"), Siemens, Robert Bosch GmbH,
Telefonaktiebolaget LM Ericsson ("Ericsson"), Philips Electronics NV and Nortel.
In the United Kingdom market, Mitel's main competitors are Nortel, selling
through British Telecommunications plc, Siemens and Ericsson.
For network access solutions, competition varies by market and by
application (voice or fax), because the worldwide long distance calling market
is in transition as a result of deregulation and consolidation of carriers and
the rise of a new breed of carriers which offer cost-competitive long distance
rates using Voice over IP-enabled networks
Mitel's prime competition in the remote access market is primarily
internetworking companies such as Cisco and Ascend Communications, Inc.
("Ascend"), now a subsidiary of Lucent . While Cisco and Ascend continue to lead
in their respective markets, Mitel has created its own niche with
internetworking products designed to meet the new and emerging voice/data
convergence market particularly for advanced compression and encryption
technologies.
The U.S. rural central office market is dominated by two suppliers:
Nortel and Siemens Stromberg Carlson. The switching market is sensitive to new
technology evolution. Internationally, the rural central office market is
dominated by large, multinational corporations, such as Alcatel, Siemens,
Ericsson, Nortel, NEC and Lucent. Most suppliers generally offer equipment with
comparable technical functionality. The principal competitive factor for success
in the international market is the strength of the financial assistance package
associated with the projects, a factor that has limited and may continue to
limit Mitel's international opportunities in the central office market.
Mitel Semiconductor
Competition in the semiconductor market is intense, with new entrants
and ever increasing functionality due to integration and a focus on end product
cost reduction. The market for Mitel's semiconductor products is characterized
by rapid technological change and evolving standards. Many of Mitel's
competitors and potential competitors have greater financial, technological,
manufacturing, marketing and personnel resources than the Company. To minimize
the effects of competition, Semiconductor produces very few commodity
semiconductor products and focuses instead on non-commodity, specialized
products that are proprietary in design and are often designed for a specific
application or customer. The commodity products are used to stabilize production
volumes in the plants by regulating price and lead time. Semiconductor primarily
designs and markets proprietary products that are sold to many customers in the
wired, wireless, ASIC and optoelectronic segments of the communications market.
Competition is based principally on design expertise, product availability,
service and support and management believes that Mitel's sales channels and
applications support compare favorably to those of its competitors. Mitel also
competes by offering a focus on intellectual property in communications systems
and a high level of system integration capabilities.
Within the wired segment, Dallas Semiconductor Corporation, Level One
Communications Inc., PMC-Sierra Inc. and Conexant Systems, Inc. ("Conexant") are
the main competitors in North America for Mitel's semiconductor products. The
principal competition for the semiconductor business in Europe comes from ST
Microelectronics, Inc. ("ST-Micro") and California MicroDevices Corp. for analog
components and from
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Siemens for digital components. Competitive pressure in other regions, most
notably the Asia/Pacific area, comes from most of the large semiconductor
manufacturers.
In the wireless segment, system integration and global standards are
the main driving forces. The Company's principal competitors in this segment
include Philips International BV, Conexant, Harris Corporation and Lucent.
The Semiconductor ASIC line competes in two broad areas, analog ASIC
and digital ASIC products. For analog ASIC products, global competitors are
Austria Mikro Systeme International AG in Austria and Orbit Semiconductor Inc.
in North America. For digital ASICs, the main competitors leverage their CMOS
process technology IE0.25 and 0.18 micron. The principal competitors include
Texas Instruments Inc., LSI Logic Corporation ("LSI") and Toshiba Corporation.
In the optoelectronic segment, competitors in the LED and PIN diode
business sectors include Hewlett Packard Company, Honeywell Inc., Epitaxx Inc.
and AMP Inc. in North America and Siemens in Germany. Currently, Honeywell is
the only known competitor for VCSEL products.
Manufacturing
Mitel Communications Systems
Mitel's systems products are manufactured in Canada, the United States
(see the discussion below) and the United Kingdom. Mitel's manufacturing
operations in all locations concentrate on quality, cost and delivery, with
special attention paid to constant process improvement. All of Mitel's systems
manufacturing facilities and their quality management systems are certified to
the strict standards established by the International Standards Organization of
Geneva, Switzerland ("ISO").
On March 1, 1999, the Company announced plans to phase out
manufacturing operations in its Ogdensburg, New York facility. Products
currently manufactured in Ogdensburg will migrate to facilities in Canada and
the United Kingdom by the end of July 1999. The Company's repair operations will
remain in Ogdensburg.
The Company continues to invest in manufacturing related technologies
that aim to improve production yields, productivity and overall product quality.
Mitel purchases substantially all of the parts and components for
assembly of its Systems products from a large number of suppliers through a
coordinated world-wide sourcing process. Mitel also obtains certain of the
semiconductors required in its Systems manufacturing from the Semiconductor
group. Mitel's suppliers are subject to audit by the Company on a regular basis
and are required to meet the Company's strict standards with regard to cost,
quality and delivery and performance. The highest level of achievement against
these standards results in the attainment of "Certified Supplier" status by
those involved in this program. No single supplier accounts for more than 10% of
the Company's total purchases and to date, Mitel has not experienced any
significant manufacturing delays relating to the availability of material.
Mitel Semiconductor
The Company manufactures its semiconductor products in six
manufacturing facilities in Canada, the United Kingdom and Sweden. The selection
of the manufacturing sites for semiconductors generally is dependent on the type
of semiconductor to be manufactured and the required process and technology.
Mitel's foundry operations also offer specialty technology
manufacturing to customer specifications. By building on the Company's
mixed-signal integrated circuit manufacturing expertise, Mitel can offer unique
features that are not widely available and address niche markets, such as those
for low and high-voltage processes, double-poly technology, high precision
resistors and charged coupled devices. The Custom Wafer
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Foundry business serves a growing base of customers both in the United States
and Europe by performing sub-contract manufacturing of silicon wafers. Mitel
views the business as a means of enhancing its manufacturing facilities to
perform at near or full capacity with a diversified set of applications and
hedging against market trends in any one segment. Mitel intends to increase the
foundry business in Bromont, Quebec, Canada and in the Plymouth, United Kingdom
facility to ensure world-class manufacturing operations.
The Bromont manufacturing facility in Canada uses CMOS technology for
digital and mixed-signal products. Two production lines are maintained at the
Bromont facility. The first line is a 150 mm line capable of 0.5 micron but
currently operating 0.8 micron up to 4.0 micron processes. In addition, the
Bromont facility has a 100 mm line capable of 3.0 to 9.0 micron processes. Most
of Bromont's wafer production is probed and tested at the Company's facility in
Kanata, Ontario, Canada, with some low volumes probed in Bromont.
Thick-film hybrid microcircuits are manufactured at the Company's
facility in Caldicot, Wales, United Kingdom.
The Company's manufacturing facility in Plymouth, U.K. possesses
leading-edge CMOS technology for digital and mixed-signal products. Plymouth's
200 mm production line is capable of 0.6 and 0.35 micron processes and its 150
mm production line is capable of 0.8 micron processes and above. The Swindon,
United Kingdom manufacturing facility uses bipolar technology for RF
applications. The facility's 100 mm production line is being converted to
produce 150 mm wafers, which is expected to be completed in the fall of calendar
1999. The Lincoln, United Kingdom manufacturing facility produces 38 mm wafers
for power-related products and the facility's 100 mm production line for ICs,
using CMOS, Silicon-on-Sapphire and quartz technologies, is capable of 1.0
micron to 5.0 micron processes. See discussion of Discontinued Operations under
Recent Events.
Optoelectronic components are also produced at the Jarfalla, Sweden
facility using gallium arsenide processes.
All of Mitel's semiconductor manufacturing facilities and their quality
management systems are certified to the strict standards established by the ISO.
Research and Development
During Fiscal 1999, gross R&D expenses, including depreciation related
to R&D, totaled $175.7 million, compared to $92.4 million during Fiscal 1998 and
$61.5 during Fiscal 1997. During Fiscal 1999, the Company qualified for funding
related to eligible R&D expenditures as described in Note 17 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.
Mitel Communications Systems
Mitel's current Systems R&D programs fall into the following areas:
o continuing support for its installed base of PBX customers,
remote access customers and existing distribution channels in
terms of new functionality and new connectivity;
o integrated messaging systems;
o the series of proprietary sets including a remote set for
teleworking;
o transitioning the existing PBX and sets platforms from their
current proprietary architectures to an open NT server
platform and USB interface to PCs;
o developing new generation convergence technology solutions and
enabling technologies based on TAPI/CSTAPI, JTAPI standards
ranging from PC boards, connection control software to
complete Windows/NT-based PC server platforms that provide
integrated PBX and unified messaging functions to small
businesses;
o in conjunction with data network companies, pioneering new
data compression and encryption algorithms to enhance network
performance and security over low speed remote access networks
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and the deployment of real-time voice across data networks
applying new technologies to work over broadband ATM and
switched ethernet LANs;
o continuing support of the GX5000 small central office and
developing advanced alternate network access products for ISDN
remote access;
o continued development of an ISDN small PBX for the European
market and development of PC ISDN interface cards for the U.K.
home market; and
o improving Mitel's manufacturing processes.
Mitel Semiconductor
Mitel's current Semiconductor R&D programs are primarily directed at
developing intellectual property in the areas of IC process development,
communications ICs, optoelectronic components, ASIC design libraries, System
Level Integration ("SLI" or "System-On-A-Chip") and high power semiconductors.
Mitel's process development efforts are focused on mixed signal
processes and yield improvements in both Mitel's CMOS and bipolar processes.
Communications R&D programs include development of intellectual property in the
areas of ATM, analog line cards, network timing functions, Wide Area Network or
WAN chips, switching and voice processing functions, wireless areas of CDMA,
paging, wireless LANs and set top box communications chips. Optoelectronics R&D
activity is focused on enhancing Mitel's market position in VCSELs and array
VCSELs for LAN applications in addition to development of optoelectronic
integrated circuits or OEICs. Mitel's ASIC unit continues to invest in the
development of digital libraries for advanced deep sub-micron CMOS designs as
well as increased design capacity. Analog ASIC development continues to focus on
low power, high reliability advances for medical and space applications. Mitel
continues to invest in the development of SLI techniques to improve time to
market for both digital and mixed signal applications.
Mitel maintains standard product design centers in Kanata, Ontario,
Canada; Jarfalla, Sweden and San Diego, California in the United States;
Caldicot, Swindon, Lincoln and Boreumwood in the United Kingdom. In addition,
Mitel maintains process development centers in each of its manufacturing
facilities.
Proprietary Rights
The Company owns many patents and has made numerous applications for
patents relating to communications and semiconductor and optoelectronic
technologies. Management believes that the ownership of patents is an important
factor in exploiting associated inventions and for providing protection for its
patentable technology in the areas referred to above.
The "MITEL" trademark and the Mitel corporate logo are registered in
Canada and the United States and have been registered in certain other countries
where Mitel conducts business. Most of the Company's other trademarks are
registered or applications for registration have been filed in various countries
where management has determined such registration to be advisable. Management
believes that the Company's trademarks are valuable assets and generally
supports applications for registration for marks in countries where the
assessment of potential business related to the sale of products or services
associated with such marks justifies such action.
The Company also owns other intellectual property rights for which
registration has not been pursued. In addition to applying for statutory
protection for certain intellectual property rights, the Company takes various
measures to protect such rights, including maintaining internal security
programs and requiring certain nondisclosure and other provisions in contracts.
As is the case with many companies doing business in the
telecommunications industry, it is necessary or desirable from time to time for
the Company to obtain licenses from third parties relating to technology for
Mitel's products and processes. No current license is considered by management
to be material to the Company's business, financial condition or results of
operations.
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Government Regulation
PBXs are considered customer premise equipment. Although the CPE market
in the United States is not regulated, certain developments, which are described
below, have changed the United States telecommunications market. On February 1,
1996, the United States Congress passed the Telecommunications Act of 1996.
Management believes that the legislation will continue to accelerate the
convergence of the communications, information and entertainment industries
while intensifying competition within those industries. This legislation removes
the line of business restrictions on the Regional Bell Operating Companies
("RBOCs") and allows the RBOCs to enter the manufacturing sector 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 for
entry into the long distance market and thereby become eligible to begin
manufacturing, it appears unlikely, at this time, that the majority of RBOCs
will commence both such activities in Fiscal 2000.
Although there can be no assurance, management does not expect that
such legislation will have a material adverse effect on the Company's results of
operations in Fiscal 2000, 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 second development is a proposed regulation by the United States
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 telecommunications industry is advocating a proposed settlement that, if
adopted, would be favorable to CPE manufacturers, including Mitel, with regard
to these proposed regulations. The benefits to Mitel from the settlement would
result principally from the availability of certain exemptions with respect to
lower line sizes as well as positive grandfathering provisions. The State of
Illinois is likewise adopting favorable aspects of the industry's position as it
amends its statute with respect to E-911. Illinois is in the forefront of state
efforts in this regard.
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 Company believes that it is currently in
compliance with these requirements in all material respects.
The United States government promulgated regulations, which came into
effect on November 1, 1998, regarding accessibility of telecommunications
equipment and customer premises equipment, pursuant to Section 255 of the
Telecommunications Act of 1996. Although there can be no assurance, such
regulations were anticipated by Mitel and management believes that ongoing
compliance with such regulations, as they are phased in, should not have a
material adverse effect on the results of Mitel's operations in Fiscal 2000.
The Company cannot now anticipate what impact such legislation and
regulations may have on the results of its operations beyond Fiscal 2000 or what
further regulatory changes will occur in the communications equipment market and
the competitive environment as a consequence of actions by the legislature, the
FCC or the courts.
The Canadian Radio-television and Telecommunications Commission
("CRTC") is the regulatory agency in Canada governing most of the
telecommunications industry. Currently, the CPE market in Canada is an
unregulated market and Canadian carriers do not need CRTC approved tariffs in
order to sell 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.
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Mitel's Semiconductor business unit is neither directly nor
significantly affected by current government regulation or policy, although
there can be no assurance that future regulatory changes will not affect the
Company's business, financial condition or results of operation.
Employees
At May 28, 1999, Mitel employed approximately 6,157 persons. As at
March 26, 1999, Mitel employed approximately 6,216 persons compared to
approximately 6,335 persons at the end of Fiscal 1998, approximately 4,095 at
the end of Fiscal 1997 and approximately 3,867 at the end of Fiscal 1996.
Approximately 36% of the Company's employees are located in Canada, 43% in the
United Kingdom, 15% in the United States, and 6% throughout the other locations
in which Mitel operates. Mitel considers its relationship with its employees to
be excellent.
Certain of the Company's employees are covered by collective bargaining
agreements or are members of a labor union. In the United States, approximately
297 service technicians employed by MCS are unionized, substantially all of whom
are represented by the International Brotherhood of Electrical Workers ("IBEW").
The Communications Workers of America ("CWA") represents two of such service
technicians in New York City. MCS completed its most recent labor negotiations
with the IBEW and CWA in October and December, 1997, respectively. The Company's
agreements with such unions expire between September and November, 2000. The
terms and conditions of such agreements, which management considers to be
competitive in the industry, provide for cost-of-living wage increases on a
periodic basis throughout the three year term plus area wage differentials where
appropriate. Management considers the Company's relationship with the unions in
the United States to be good. There are no pending grievances at this time and
any past disputes were not considered by management to be material.
In the United Kingdom, approximately 280 employees of Mitel
Semiconductor Limited are unionized. The unions representing the employees
include the Amalgamated Electrical and Engineering Union, the Manufacturing
Science and Finance Union and the Transport and General Workers Union.
Negotiations are held annually in July. Management considers the Company's
relationship with the unions in the United Kingdom to be good.
In Sweden, approximately 234 employees are represented by three unions.
The Metall Industriarbetarforbundet union represents approximately 36 production
employees; the Svenska Industriarbetarforbundet union represents approximately
153 office professional employees; and the Civilingenjorsforbundet union
represents approximately 45 other professional or "white collar, university
educated" employees. It is common practice in Sweden for the national unions to
negotiate minimum standards with the employer association, supplemented by
additional terms negotiated by the local branches. Each of the agreements is for
a term of three years and expire on January 31, 2001. Management considers the
Company's relationship with the unions in Sweden to be good. See also "Recent
Events".
Backlog
Mitel's order backlog from continuing operations as at March 26, 1999
was $179.8 million compared to $221.3 million at March 27, 1998. Management
expects that most of the Company's 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.
Forward-Looking Statements and Risk Factors
Certain statements in this section and in other sections of this Annual
Report on Form 10-K 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
Company operates, management's beliefs and assumptions made by management. Words
such as "expects," "anticipates,"
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"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 Company
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
Company 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 Exchange and Interest Rate Exposure and Concentration of Credit Risk
Because substantial portions of the Company's sales, costs of sales and
other expenses are denominated in U.S. dollars, U.K. pounds sterling and several
other currencies, the Company's results of operations are subject to the effects
of exchange rate fluctuations of those currencies relative to the Canadian
dollar. Changes in currency exchange rates may also affect the relative prices
at which the Company and its competitors sell their products in the same
markets. The Company 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 12 to 18 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 Company to purchase and sell certain foreign currencies
with or for Canadian dollars at contractual rates.
A substantial amount of the Company's long-term debt is subject to
variable interest rates. The Company uses interest rate swap contracts to manage
the interest rate risk. Payments and receipts under interest rate swap contracts
are recognized as adjustments to interest expense on a basis that matches them
with the related fluctuations in the interest receipts and payments under
floating financial assets and liabilities.
Several major financial institutions are counterparties to the
Company's financial instruments. It is the Company's practice to monitor the
financial standing of the counterparties and limit the amount of exposure to any
one institution. The Company may be exposed to a credit loss in the event of
nonperformance by the counterparties of these contracts. With respect to
accounts receivable, concentration of credit risk is limited due to the diverse
areas covered by the Company's operations. The Company 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.
The Company's operations could be adversely affected if it is unable to
guard against currency, interest and credit risks in the future. There can be no
assurance that foreign currency and interest rate fluctuations or credit risk
will not have a material adverse effect on the Company's business, financial
condition and results of operations.
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Technological Changes; Necessity to Develop and Introduce New Products
The markets for the Company's products are characterized by rapidly
changing technology and evolving and competing industry standards, changes in
customers, emerging competition, frequent new product introductions and evolving
methods used by carriers and business enterprises to manage communications
networks. The Company's future success will depend, in part, on its ability to
use leading technologies effectively, to continue to develop its technical
expertise, to maintain close working relationships with its key customers, to
develop new products that meet changing customer needs, to advertise and market
its products and to influence and respond to changing industry standards and
other technological changes on a timely and cost-effective basis.
There can be no assurance that the Company will be successful in
effectively developing or using new technologies, developing new products or
enhancing its existing products on a timely basis or that such new technologies
or enhancements will achieve market acceptance. The Company's pursuit of
necessary technological advances may require substantial time and expense and
there can be no assurance that the Company will succeed in adapting its products
or business to alternate technologies. Failure of the Company, for technological
or other reasons, to develop and introduce new or enhanced products that are
compatible with industry standards and that satisfy customer price and
performance requirements would have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Company's competitors may offer enhancements to
existing products or offer new products based upon new technologies, industry
standards or customer requirements, that have the potential to replace or
provide lower cost alternatives to the Company's products, which could render
the Company's existing and future products obsolete, unmarketable or inoperable.
There can be no assurance that the Company will be able to develop new products
to compete with new technologies on a timely basis or in a cost-effective
manner. See "Business--Research and Development."
Competition
The markets for the Company's products are 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
Company 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. Many of the Company's current and potential competitors have a
longer operating history and greater technical, manufacturing, financial and
marketing resources than the Company and, as a result, may be able to adapt more
quickly or devote greater resources to changing technological requirements,
customer demands and market trends. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which would
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that its ability to compete
successfully depends upon elements both within and outside its control,
including successful and timely development of new products and manufacturing
processes, product performance and quality, manufacturing yields and product
availability, customer services, pricing, industry trends and general economic
trends. There can be no assurance that the Company will continue to compete
successfully as to these factors. See "Business--Competition."
Environmental Regulators
The Company is subject to a variety of federal, state and local laws,
rules and regulations related to the discharge or disposal of toxic, volatile or
other hazardous chemicals used in its manufacturing process. Although the
Company believes that it has complied with these laws, rules and regulations in
all material respects and to date has not been required to take any action to
correct any noncompliance, the failure to comply with present or future
regulations could result in fines being imposed on the Company, suspension of
production or a cessation of operations. Such regulations could require the
Company to acquire significant
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equipment or to incur substantial other expenses to comply with environmental
regulations. Any failure by the Company to control the use, disposal or storage
of or adequately restrict the discharge of, hazardous substances could subject
the Company to future liabilities and could have a material adverse effect on
the Company's business, financial condition and results of operations.
Regulatory Requirements
The sale of certain of the Company's Systems 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. Regulatory authorities may prohibit sales of
products that fail to comply with these regulations until the Company makes
appropriate modifications. There can be no assurance that the Company will be
successful in obtaining or maintaining the necessary regulatory approvals for
its products and its failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operations.
In the United States, regulatory policies are likely to have a
significant impact on the competitive environment in which the Company 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
Company could face competition from these companies should they satisfy these
conditions and elect to manufacture networking products. See
"Business--Competition" and "--Governmental Regulation."
Significant International Operations
Approximately 95% of the Company's sales in Fiscal 1999 were derived
from sales in markets outside Canada and 50% outside North America. The Company
expects sales from foreign markets to continue to represent a significant
portion of total sales. The Company operates six manufacturing facilities as
well as sales and technical support service centers in Europe and Asia. Certain
risks are inherent in international operations, including exposure to currency
exchange rate fluctuations, political and economic conditions, unexpected
changes in regulatory requirements, exposure to different legal standards,
particularly with respect to intellectual property, future import and export
restrictions, difficulties in staffing and managing operations, difficulties in
collecting receivables and potentially adverse tax consequences. There can be no
assurance that the above factors will not have a material adverse effect on the
Company's business, financial condition and results of operations.
Year 2000
See "Management's Discussion and Analysis - Year 2000".
European Union and the Euro
See "Management's Discussion and Analysis - European Union and the
Euro".
Dependence on Key Personnel
The Company's future success depends to a significant extent on the
continued service of its key technical and management personnel and on its
ability to continue to attract and retain qualified employees, particularly
those highly skilled design, process and test engineers involved in the
development of mixed signal products and processes. The competition for such
personnel is intense. The loss of the services of the Company's employees or the
Company's failure to attract, retain and motivate qualified personnel could have
a material adverse effect on the Company's business, financial condition or
results of operations. The Company does not have any employment agreements with
its employees.
26
<PAGE>
Intellectual Property Protection
The Company's success and future revenue growth will depend, in part,
on its ability to protect its intellectual property. The Company relies
primarily on patent, copyright, trademark and trade secret laws, as well as
nondisclosure agreements and other methods to protect its proprietary
technologies and processes. There can be no assurance that such measures will
provide meaningful protection for the Company's proprietary technologies and
processes. The Company has been issued many patents principally in the United
States, Canada and the United Kingdom and has filed numerous patent applications
in such jurisdictions. There can be no assurance that any patent will issue from
these applications or future applications or, if issued, that any claims allowed
will be sufficiently broad to protect the Company's technology. In addition,
there can be no assurance that any existing or future patents will not be
challenged, invalidated or circumvented or that any right granted thereunder
would provide meaningful protection or competitive advantage to the Company. The
failure of any patents to provide protection to the Company's technology would
make it easier for the Company's competitors to offer similar products. The
Company also generally enters into confidentiality agreements with its employees
and strategic partners and generally controls access to and distribution of its
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use the
Company's products, services or technology without authorization, develop
similar technology independently or design around the Company's patents. In
addition, effective copyright, trademark and trade secret protection may be
unavailable or limited in certain foreign countries. Certain of the Company's
customers have entered into agreements with the Company pursuant to which such
customers have the right to use the Company's proprietary technology in the
event the Company defaults in its contractual obligations, including product
supply obligations, and fails to cure the default within a specified period of
time. Moreover, the Company often incorporates the intellectual property of its
strategic customers into its design and the Company has certain obligations with
respect to the non-use and non-disclosure of such intellectual property. There
can be no assurance that the steps taken by the Company to prevent
misappropriation or infringement of the intellectual property of the Company or
its customers will be successful. Moreover, litigation may be necessary in the
future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets or to determine the validity and scope of proprietary
rights of others, including its customers. Such litigation could result in
substantial costs and diversion of the Company's resources and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Intellectual Property Claims
The segment of the telecommunications market that includes the
Company's products has been characterized by extensive litigation regarding
patents and other intellectual property rights. As is common in the
telecommunications industry, the Company has been in the past and may in the
future be notified of claims that its products or services are subject to
patents or other proprietary rights of third parties. Although the Company
attempts to ensure that its products and processes do not infringe such
third-party patents or proprietary rights, there can be no assurance that
infringement or invalidity claims (or claims for indemnification resulting from
infringement claims) will not be asserted or prosecuted against the Company.
Periodically, the Company negotiates with third parties to establish patent
license or cross-license agreements. There can be no assurance that current or
future negotiations will result in the Company obtaining a license on
satisfactory terms or at all. Moreover, license agreements with third parties
may not include all intellectual property rights that may be issued to or owned
by the licensors and thus future disputes with these companies are possible. In
the event an intellectual property dispute is not settled through a license,
litigation could result. Any litigation or interference proceedings could result
in substantial expense to the Company and significant diversion of effort by the
Company's technical and managerial personnel. An adverse determination in such
litigation or proceeding could prevent the Company from making, using or selling
certain of its products and subject the Company to damage assessments, all of
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
27
<PAGE>
Acquisitions
Since 1996, the Company has made strategic acquisitions. In the future,
the Company may make further strategic acquisitions and investments or enter
into joint ventures or strategic alliances with other companies. Such
transactions entail many risks, including the following: inability to integrate
successfully such companies' personnel and businesses; inability to realize
anticipated synergies, economies of scale or other value associated with such
transactions; diversion of management's attention and disruption of the
Company's ongoing business; inability to retain key technical and managerial
personnel; inability to establish and maintain uniform standards, controls,
procedures and policies; and impairment of relationships with employees and
customers as a result of the integration of new personnel. In addition, future
acquisitions or investments by the Company may result in the issuance of
additional equity or debt securities, significant borrowings, significant
one-time write-offs and the creation of goodwill or other intangible assets.
Failure to avoid these or other risks associated with such business
combinations, investments, joint ventures or strategic alliances could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Other Factors
The Company 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
Mitel owns two facilities in Canada: one in Bromont, Quebec, Canada,
totaling 107,000 square feet ("sf"), used for semiconductor manufacturing and
one in Kanata, Ontario, Canada, totaling 641,000 sf. The Kanata facility
consists of four interconnected buildings: one building totaling 160,000 sf used
for manufacturing and three buildings totaling 481,000 sf used for
administration, R&D, integrated circuit design and testing.
The Company owns four facilities in the United Kingdom: one in
Portskewett, Wales, United Kingdom, totaling 279,000 sf, that is used for hybrid
ICs and systems manufacturing and administration; one in Swindon totaling
168,000 sf used for wafer fabrication, design, sales and administration; one in
Lincoln totaling 181,000 sf used for wafer fabrication, test and design; and one
in Plymouth totaling 200,000 sf used for wafer fabrication and design. The
Company also owns a 333,000 sf facility in Jarfalla, Sweden, that is used for
semiconductor manufacturing, R&D and administration.
The Company leases a 45,500 sf building in Kanata, Ontario, Canada that
is used for R&D and occupies 62,000 sf of leased space in Ogdensburg, New York,
United States, that is used for manufacturing.
The Company leases and operates 79 regional facilities, totaling
530,000 sf, primarily dedicated to sales and distribution, service, warehousing
and customer training. A geographical breakdown of these facilities is as
follows: Canada, nine locations totaling 26,000 sf; United States, 46 locations
totaling 269,000 sf; United Kingdom, 14 locations totaling 204,000 sf; France,
one location totaling 3,800 sf; Japan, two locations totaling 5,400 sf; Hong
Kong, one location totaling 4,400 sf ; Singapore, two locations totaling 9,200
sf; Taiwan, two locations totaling 4,100 sf; and Korea, two locations totaling
3,600 sf.
See "Business--Manufacturing" for additional information concerning the
Company's manufacturing facilities.
Management believes the Company's facilities are adequate for its
business needs for the foreseeable future.
28
<PAGE>
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 Company's in-house 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 Company 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
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.
Toronto Stock Exchange
(Canadian Dollars)
1999 1998
----------- ----------- ----------- ------------
High Low High Low
----------- ----------- ----------- ------------
1st Quarter $23.5500 $18.4000 $ 8.2000 $ 6.6000
2nd Quarter $21.8000 $15.0000 $10.9500 $ 7.1000
3rd Quarter $16.8000 $10.1500 $13.0000 $10.0000
4th Quarter $14.5500 $ 9.9000 $19.2000 $10.5500
New York Stock Exchange
(U.S. Dollars)
1999 1998
----------- ----------- ----------- ------------
High Low High Low
----------- ----------- ----------- ------------
1st Quarter $16.1875 $ 12.6875 $ 6.0000 $ 4.7500
2nd Quarter $14.8750 $ 9.6875 $ 7.9375 $ 5.1875
3rd Quarter $10.8750 $ 6.5625 $ 9.3125 $ 7.1250
4th Quarter $ 9.4375 $ 6.4375 $13.5000 $ 7.3125
SHAREHOLDERS
There were 4,769 common shareholders of record as at May 6, 1999.
29
<PAGE>
DIVIDEND POLICY
The Company 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, and to improve the Company's competitive position and
profitability.
Pursuant to the terms of the $2.00 Cumulative Redeemable Convertible Preferred
Shares, 1983 R&D Series (Preferred Shares - R&D Series), the Company 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.
Pursuant to the terms of the credit agreement described in note 11 to the
consolidated financial statements, the Company is required to maintain a minimum
net worth, thereby limiting the amount of dividends that could be paid out. The
preferred shares dividend does not violate this covenant. Since the Company does
not anticipate any dividends on its common shares, the covenant is not expected
to have an impact on the dividend policy.
Dividends paid by the Company to common shareholders not resident in Canada
would generally be subject to Canadian withholding tax at the rate of 25 percent
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
percent.
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 25 to the consolidated financial
statements.
<TABLE>
<CAPTION>
Fiscal Year Ended
(at the end of fiscal year for balance sheet data)
----------------------------------------------------------------
Canadian GAAP 1999 1998 1997 1996 1995
------------ ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenue $1,310.4 $ 881.4 $ 695.5 $ 576.4 $ 589.4
Gross margin percentage 46% 48% 48% 48% 44%
Gross research and development expense 175.7 92.4 61.5 46.5 44.9
Net income from continuing operations 40.5 92.0 38.0 51.0 31.8
Net income 26.2 91.9 38.0 51.0 31.8
Net income per common share from continuing operations 0.33 0.82 0.32 0.45 0.27
Net income per common share
Basic 0.20 0.82 0.32 0.45 0.27
Fully diluted 0.20 0.80 0.32 0.44 0.27
Weighted average common shares outstanding 114.0 107.8 107.3 105.9 105.6
Balance Sheet Data:
Working capital $ 337.0 $ 245.9 $ 206.3 $ 210.3 $ 208.4
Total assets 1,300.3 1,252.0 584.8 517.1 440.6
Current portion of long-term debt 37.6 40.3 14.8 11.2 9.0
Long-term debt 276.5 379.6 43.0 39.6 34.5
Pension liability 13.2 12.2 11.3 12.1 -
Shareholders' equity
(including redeemable preferred shares) 647.3 435.5 339.5 302.8 263.0
Fiscal Year Ended
(at the end of fiscal year for balance sheet data)
------------- ------------ ------------ ------------- -----------
U.S. GAAP and SEC Requirements 1999 1998 1997 1996 1995
------------- ------------ ------------ ------------- -----------
Income Statement Data:
Net income from continuing operations $ 4.9 $ 90.0 $ 41.0 $ 56.9 $ 59.0
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Fiscal Year Ended
(at the end of fiscal year for balance sheet data)
------------- ------------ ------------ ------------- -----------
U.S. GAAP and SEC Requirements 1999 1998 1997 1996 1995
------------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Net income (loss) (9.4) 89.9 41.0 56.9 59.0
Net income per common share from continuing operations 0.01 0.80 0.35 0.51 0.53
Net income (loss) per common share
Basic (0.11) 0.80 0.35 0.51 0.52
Diluted (0.11) 0.80 0.35 0.50 0.52
Balance Sheet Data:
Working capital $ 328.2 $ 278.2 $ 208.4 $ 213.5 $ 205.8
Total assets 1,278.9 1,250.0 595.0 517.1 440.6
Redeemable preferred shares 34.4 34.4 34.4 34.4 35.8
Shareholders' equity
Common shares 772.4 606.0 599.2 596.5 595.6
Contributed surplus 2.5 2.5 2.5 2.5 2.6
Deficit (221.6) (209.0) (292.9) (330.7) (384.3)
Translation account 28.2 5.8 2.5 3.3 10.6
</TABLE>
See note 21 to the consolidated financial statements for a discussion on the
effect of the discontinued operations on Fiscal 1999 and 1998 results.
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations
(in millions of Canadian dollars, except per share amounts)
The following discussion and analysis explains trends in Mitel's financial
condition and results of operations for the fiscal year ended March 26, 1999
compared with the two previous fiscal years. This discussion is intended to help
shareholders and other readers understand the dynamics of Mitel'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. Readers may wish to make
reference to the glossary of terms on page 22 of the Annual Report to assist in
their understanding of this discussion. Net income for the three fiscal years
ended March 26, 1999, March 27, 1998 and March 28, 1997 as determined by U.S.
accounting principles is detailed and discussed in note 25 to the consolidated
financial statements.
Overview of Recent Significant Events
Mitel has completed four acquisitions since August 1997. Two acquisitions
occurred during Fiscal 1998 and the others were completed mid-way through the
first quarter of Fiscal 1999. The most significant transaction occurred on
February 12, 1998 when Mitel acquired GEC-Plessey Semiconductors Group
("Plessey"), an international semiconductor company serving primarily the
communications and media markets. The other acquisitions related to the Mitel
Communications Systems ("Systems") business group. The acquisitions by the
Systems group centered on remote access technologies, advanced voice and unified
messaging solutions, and ISDN business products for the small-to-medium
enterprise market. Mitel is focused on integrating and streamlining these new
businesses to accelerate its strategy of providing new products for the
convergence of telephony, data, and other media technologies.
The Plessey operations included a business segment known as the Lincoln Power
and Automotive ("Lincoln") group. Management began an evaluation of Lincoln's
operations at the time of acquisition in light of its position outside Mitel's
strategic focus on communications. Following an extensive strategic review of
Mitel's semiconductor operations, management formalized a plan at the end of
Fiscal 1999 to sell or otherwise exit the Lincoln operations. Accordingly,
Lincoln was reclassified as a discontinued operation in the fourth quarter of
Fiscal 1999 and will continue to be reported as such until the group is sold as
a going concern or otherwise disposed of, an event which management expects to
occur within the next twelve months.
During the fourth quarter of Fiscal 1999, Mitel revised its estimated
amortization periods for intangible assets, consistent with evolving industry
practices. Such measure will allow Mitel's assets to be in better alignment with
the technological and competitive dynamics of the communications industry.
Management regularly reviews the estimated useful lives of the acquired
intangibles in addition to any related asset impairment.
31
<PAGE>
Management believes the reduced amortization time period, to two years from the
previous estimate of five to fifteen years, better reflects the estimated time
to market advantage achieved by the recent acquisitions.
During the fourth quarter of Fiscal 1999, Mitel also implemented certain
rationalization plans, described elsewhere in this management's discussion and
analysis, and realized gains related to the sale of certain semiconductor
technology assets. The net pre-tax charge to Mitel's operations as a result of
these actions amounted to $10.1.
On July 23, 1998, Mitel repaid $123.1 against the U.S. dollar term loans
incurred in connection with the Plessey acquisition. The repayment was required
under terms of the associated credit agreement as proceeds of $172.0 were
received from an equity offering. Accordingly, a proportionate amount of the
related deferred debt issue costs and deferred foreign exchange losses was
recorded as additional interest expense in the second quarter of Fiscal 1999.
This non-cash expense reduced net income from continuing operations by $7.2, or
$0.06 per share.
Results of Operations
Mitel's business is global and comprises the design, manufacture and sale of
networked systems and specialty semiconductor products for the communications
industry. Mitel operates through two reportable business segments - Mitel
Communications Systems and Mitel Semiconductor ("Semiconductor"). Mitel 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. Mitel's strategy is centered on developing strong microelectronics
technology and advancing people-to-people communications in an open, distributed
and standards-based environment.
Mitel Communications Systems provides enterprises with voice and data
communications systems; complete private networks, including remote teleworking
solutions; unified messaging and call-center applications; CTI systems and
applications; and it also supplies competitive carriers with public network
access products. All of Mitel's service revenue relates to Systems.
Mitel Semiconductor provides connectivity solutions for the communications and
medical industries with a product range which includes components for both wired
and wireless networks; microelectronics for enabling the convergence of voice
and data; optoelectronic devices for high-speed Internet systems; and, also,
applications-specific integrated circuits ("ASICs") for medical applications
such as pacemakers and hearing-aids.
Mitel's revenue reached a record high in Fiscal 1999 due to recently acquired
businesses and to strong Systems sales in Europe and North America. Total
revenue grew by 49 percent from Fiscal 1998. By business group, Semiconductor
revenue from continuing operations grew by 77 percent and Systems revenue was up
33 percent from the previous year. The Semiconductor growth rate was mainly
attributable to the inclusion of sales of the former Plessey group, which was
acquired in the fourth quarter of Fiscal 1998, for the full fiscal year in 1999.
Higher sales volumes of PBX systems, telephone sets and alternate network access
products and the effects of consolidating recent acquisitions drove the Systems
revenue growth.
32
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------------
(millions of Cdn dollars)
<S> <C> <C> <C>
Consolidated revenue $ 1310.4 $ 881.4 $ 695.5
Systems segment revenue $ 752.7 $ 566.8 $ 474.5
Semiconductor segment revenue $ 557.7 $ 314.6 $ 221.0
Net income from continuing operations $ 40.5 $ 92.0 $ 38.0
Net income per common share from continuing operations $ 0.33 $ 0.82 $ 0.32
Net income $ 26.2 $ 91.9 $ 38.0
Net income per common share $ 0.20 $ 0.82 $ 0.32
Adjusted Net Income $ 80.2 $ 93.8 $ 51.7
Adjusted Net Income per common share $ 0.67 $ 0.84 $ 0.45
</TABLE>
Adjusted Net Income excludes the impact of amortization of acquired intangibles,
special charges (net), non-cash debt issue and other costs expensed on an early
partial debt repayment, and discontinued operations. Although not a substitute
for net income or net income per common share, management utilizes Adjusted Net
Income and Adjusted Net Income per common share as a supplementary measure to
assess financial performance.
Net Income
The lower net income in Fiscal 1999 compared to Fiscal 1998 was primarily due to
incremental amortization charges of $14.7, or $0.13 per share, arising from
revisions in the estimated useful lives of acquired intangibles to better
reflect the time to market advantage expected by management from the related
acquisitions. In addition, Mitel recognized an estimated loss of $16.3, or $0.14
per share, on the planned disposal of the Lincoln operations, upon adoption of a
formal plan to exit that business segment. Mitel also implemented plans in the
fourth quarter of Fiscal 1999 to rationalize certain of its Systems operations,
partially offset by a gain on the sale of certain non-strategic technology and
other assets to result in a net charge of $10.1, or $0.09 per share. Net income
was also negatively impacted in Fiscal 1999 due to a charge to continuing
operations of $7.2, or $0.06 per share, representing a proportionate amount of
debt issue and other costs expensed in connection with an early partial debt
repayment in the second quarter of Fiscal 1998. The early repayment was required
to be made under the terms of a credit agreement out of the proceeds received
from the July 1998 equity offering.
Adjusted Net Income
Adjusted Net Income, as defined above, was lower in Fiscal 1999 than in Fiscal
1998 by $13.6, or $0.17 per share. The reduction in Adjusted Net Income was due
to increased interest expense of $20.0, or $0.18 per share, on the syndicated
term loans entered into to acquire Plessey, the effects of reduced semiconductor
sales in the Asia/Pacific region, increased amortization and excess capacity
associated with the additional Plessey microelectronics fabrication facilities
("fabs"). Adjusted Net Income per common share was also negatively impacted by a
higher number of weighted average common shares outstanding. Mitel issued 8
million additional shares through an equity offering in July 1998. These
factors, which contributed to the lower Adjusted Net Income, were partially
offset by the strong Systems performance in North America and Europe.
Unless otherwise noted, the following discussion pertains to Mitel's continuing
operations.
33
<PAGE>
REVENUE
Business Segment Review
Mitel Communications Systems
(millions Cdn$) 1999 1998 1997
---------------------------------------
Systems revenue $ 652.9 $ 484.8 $ 404.0
Products 99.8 82.0 70.5
=======================================
Service 752.7 $ 566.8 $ 474.5
=======================================
Compared to Fiscal 1998, Systems product revenue in Fiscal 1999 increased by 35
percent, from $484.8 to $652.9, due to higher sales volumes of SX-2000 and
SX-200 systems, including the associated pull-through of system sets, increased
shipments of alternate network access products and additional revenues from the
advanced messaging and ISDN PBX businesses acquired in the first quarter of
Fiscal 1999.
U.S. indirect channel sales benefited from increased demand by the small to
medium sized business segment for Mitel's SX-200 ML and SX-200 EL switches. In
addition, Mitel launched a new line of telephone sets in early Fiscal 1999 that
also produced additional revenue. U.S. direct channel sales benefited from
increased installations of new systems as well as from upgrades in the existing
customer base.
With respect to Europe, sales increased in Fiscal 1999 due to strong growth in
new system sales and system upgrades sold to the installed base, and to
continued higher demand for Mitel's alternate network access products. Service
revenue grew mainly due to the managed service business in the United Kingdom
where telecom product-related services are channeled through outsourcing
companies.
Systems sales into the Asia/Pacific region continue to be adversely affected by
the ongoing effects of weakened economies and intense price competition in that
region.
In proportion to total revenue, Systems service revenue decreased to 8 percent
of total revenue compared to 9 percent of total revenue last year. This decrease
is mainly due to the effects of consolidating Plessey which is comprised of only
product revenue. Management expects that service revenue, as a percentage of
total revenue, will continue to decrease in future periods due to the growing
significance of product sales in relation to total sales.
Fiscal 1998 total Systems revenue increased by 19 percent to $566.8 from Fiscal
1997's revenue of $474.5. The revenue growth was due to increased demand for
alternate network access products, higher SX-2000 and SX-200 sales through the
U.S. indirect channel and incremental sales of remote access products.
Mitel Semiconductor
As a percentage of total revenue, semiconductors accounted for 43 percent, 36
percent and 32 percent, respectively, in fiscal years 1999, 1998, and 1997.
(millions Cdn$) 1999 1998 1997
----------------------------------------
Semiconductor revenue $ 557.7 $ 314.6 $ 221.0
========================================
Semiconductor revenue from continuing operations in Fiscal 1999 increased by 77
percent from Fiscal 1998 principally due to the effects of consolidating the
operations of Plessey, acquired in the fourth quarter of Fiscal 1998. Management
believes the Plessey acquisition has significantly enhanced Mitel's operations,
technologies and product portfolio. The Plessey acquisition also provided Mitel
with enhanced market penetration in Europe, resulting in an increase in total
revenues generated in Europe by 50 percent from last year. This acquisition also
had the effect of reducing the proportion of total revenue recorded in the
United
34
<PAGE>
States from 46 percent in Fiscal 1998 to 45 percent in Fiscal 1999.
Excluding the growth resulting from the Plessey acquisition, Mitel has
experienced certain pricing pressures in addition to reduced demand from the
Asia/Pacific region and other emerging regions, such as Latin America and
Eastern Europe, due to the prevailing adverse local economic conditions (see
further discussion under "Other"). This recent decline and the additional
manufacturing capability acquired from Plessey combined to result in excess
capacity in Mitel's fabs. Management undertook a strategic review of its
operations and is taking the steps necessary to consolidate the capacity levels
to achieve better utilization of the fabs and to realize the synergies in the
combined semiconductor operations. When Mitel acquired Plessey, the Company
recorded provisions of $45.2 in respect of integration costs. The integration
costs related to initial estimates to exit the Lincoln Power and Automotive
business segment, the transfer of redundant production activities from Sweden to
Plymouth, U.K., and to severance costs for redundancies in the acquired
semiconductor segment throughout the world.
At the end of Fiscal 1999, following the completion of Mitel's semiconductor
strategic review, Mitel adopted a formal plan to pursue divestiture
opportunities related to the distinct and non-core operations of Lincoln, either
by sale as a going concern or by closing the operations. Accordingly, the
operations related to this business were accounted for as discontinued
operations. An additional estimated after-tax loss of $16.3 on the expected and
ultimate disposal of Lincoln was recorded in the fourth quarter of Fiscal 1999.
In May 1999, Mitel reached an agreement with the relevant Swedish Trade Unions
concerning the transfer of all semiconductor CMOS manufacturing operations from
Sweden to Mitel's other more technologically advanced fabrication sites. The
proposed transfer affects approximately 200 employees in Mitel's plant in
Jarfalla, Sweden with the program expected to be completed within the next
twelve months. The Swedish operation will operate as an IC fabless facility
focused on the design, marketing and sales of ASICs and as a manufacturer and
marketer of optoelectronic devices.
Mitel continues to evaluate the adequacy of its integration and redundancy
provisions through the implementation process of realizing synergies and
integrating recently acquired businesses.
Fiscal 1998 semiconductor revenue increased over Fiscal 1997 by 42 percent as a
result of increased demand for the Company's integrated circuits and thick film
hybrid products, primarily in the U.S. and Asia/Pacific regions, and the effects
of consolidating Plessey mid-way through the fourth quarter of Fiscal 1998.
Geographic Revenues
Revenue during the last three fiscal years, based on the geographic location of
Mitel's customers, was distributed as follows:
(millions Cdn$) 1999 1998 1997
-----------------------------------
United States $ 589.1 $ 404.1 $ 312.6
Europe 428.6 286.6 228.8
Other regions 221.6 137.0 104.1
Canada 71.1 53.7 50.0
===================================
$1310.4 $ 881.4 $ 695.5
===================================
For the year ended March 26, 1999, the net movement in exchange rates from
Fiscal 1998 favorably impacted total revenue by 4 percent ($54.1) primarily as a
result of changes in the U.K. pound sterling and U.S. dollar exchange rates.
Fiscal 1998 revenue was favorably impacted by 2 percent ($19.4) as a result of
changes in the U.K. pound sterling and U.S. dollar exchange rates.
35
<PAGE>
United States
Sales into the United States (1999 - $589.1; 1998 - $404.1; 1997 - $312.6)
increased by 46 percent in Fiscal 1999 over Fiscal 1998. The increase was due,
in part, to higher SX-2000 systems and associated sets sales and to higher voice
messaging solutions revenue resulting from the acquisition of Centigram
Communications Corporation's Customer Premise Equipment business in May of 1998.
Higher Semiconductor revenue also contributed to the growth in this region as a
result of including a full year of sales in Fiscal 1999 from the former Plessey
operations.
Sales increased by 29 percent in the United States in Fiscal 1998 over Fiscal
1997 principally due to the Systems business. Higher SX-2000 and SX-200 system
sales through the indirect channel and the effects of consolidating sales
resulting from the August 1997 acquisition of Gandalf Technologies Inc.'s remote
access business drove most of the increase.
Europe
European sales (1999 - $428.6; 1998 - $286.6; 1997 - $228.8) increased by 49
percent in Fiscal 1999 over Fiscal 1998 due to the effects of including a full
year of the former Plessey group's results. Systems revenue in this region
increased on higher alternate network access products sold to long-distance
carriers and to higher shipments of SX-2000 and SX-200 systems in the United
Kingdom.
Fiscal 1998 revenue into Europe increased by 25 percent over Fiscal 1997 on
higher alternate network access sales, higher PBX system sales, and to the
effects of consolidating Plessey towards the end of Fiscal 1998.
Canada
Canadian sales (1999 - $71.1; 1998 - $53.7; 1997 - $50.0) increased by 32
percent in Fiscal 1999 over Fiscal 1998 on higher semiconductor sales from the
former Plessey operations and to higher SX-200 and sets sales in the Systems
group.
The sales increase in Canada from Fiscal 1997 to Fiscal 1998 was 7 percent.
Other Regions
Sales into Other Regions (1999 - $221.6; 1998 - $137.0; 1997 - $104.1) increased
by 62 percent principally due to higher semiconductor sales into the
Asia/Pacific region which more than offset lower system sales in that area.
Fiscal 1998's increase of 32 percent in sales into Other Regions over Fiscal
1997 was due to higher IC sales in Asia/Pacific and to the effects of
consolidating Plessey mid-way through the fourth quarter of Fiscal 1998.
GROSS MARGIN
As a percentage of total revenue, total gross margin was 46 percent in Fiscal
1999, and 48 percent in Fiscal 1998 and Fiscal 1997. The lower Fiscal 1999 gross
margin was negatively impacted by a higher proportion of manufacturing asset
amortization expense driven by the recently acquired fabs, in addition to
reduced margins in some Semiconductor products and to certain unfavorable
manufacturing variances resulting from the fabs' excess capacity. The positive
impacts of higher sales volumes of Systems products helped to reduce the
negative impact of lower semiconductor margins.
The Fiscal 1998 gross margin remained stable relative to Fiscal 1997. The
positive impact of higher sales volumes in systems and semiconductor products
and of efficiency improvements in systems integration services helped to offset
lower average selling prices in certain Systems products in Fiscal 1998.
36
<PAGE>
OPERATING EXPENSES
Selling and Administrative
Selling and administrative ("S&A") expenses from continuing operations in Fiscal
1999 were $332.9, or 25 percent of sales, compared with $246.0, or 28 percent of
sales, in Fiscal 1998. In Fiscal 1997, S&A expenses were $220.9, or 32 percent
of sales. S&A expenses from continuing operations decreased as a percentage of
sales primarily due to revenue growth and the inclusion of the former Plessey
operations where S&A expenses as a percentage of sales were lower than Mitel's
historical average. The improvement was partially offset by the effects of
consolidating the recently-acquired advanced messaging and ISDN PBX businesses.
Fiscal 1998 S&A expenses from continuing operations decreased as a percentage of
sales from Fiscal 1997 primarily due to strong revenue growth, spending
restraints applied to marketing programs, higher efficiencies and focus in the
sales channels and reduced corporate overhead costs. The improvement was
partially offset by the effects of integrating the former Plessey operations and
the other acquired remote access technology businesses.
Research and Development ("R&D")
R&D expenses from continuing operations amounted to $149.8, or 11 percent of
revenue, for the year ended March 26, 1999. This compares to $52.0 and $50.0, or
6 and 7 percent of revenue, in the respective fiscal years of 1998 and 1997.
These amounts were net of $23.7 (1998 - $40.7; 1997 - $11.9) in R&D government
assistance, including ITCs. R&D increased due to the inclusion for a full fiscal
year of the results of operations of the former Plessey group where R&D as a
percentage of sales was higher than Mitel's historical average, and to higher
spending in Mitel's other semiconductor operations.
(millions Cdn$) 1999 1998 1997
------------------------------------------
R&D expenses $ 149.8 $ 52.0 $ 50.0
==========================================
Special Charges (net)
During the fourth quarter of Fiscal 1999, Mitel recorded a net pre-tax special
charge of $10.1 comprising actions to rationalize certain aspects of the Systems
group, net of a gain arising from the sale of certain non-strategic technology
and other assets. The Systems actions reflected efforts to streamline North
American and European sales channels, and to transfer the network access product
manufacturing operations from North America to the United Kingdom, where the
majority of the sales are generated. Also included in the charge was the cost of
severance and related benefits, with the majority of the reduction taking place
in the North American and Far East regions. Approximately 100 people are to be
terminated as part of this rationalization program. All of these activities are
expected to be substantially completed by December 1999. As at March 26, 1999,
$4.5 of severance, benefits, facilities and other costs had been paid.
Amortization of Acquired Intangibles
Amortization of acquired intangibles increased in Fiscal 1999 to $22.4 from $1.8
in Fiscal 1998. The estimated useful life of acquired intangibles was reduced to
two years from an average of five to fifteen years to better reflect the
estimated period of advantage achieved by Mitel's recent acquisitions, and to be
in line with evolving industry practices. The revision of the estimated useful
life accounted for $14.7 of the total increase. The remainder of the increase
over Fiscal 1998 resulted from the advanced messaging and ISDN PBX businesses
acquired in the first quarter of Fiscal 1999.
INVESTMENT AND INTEREST INCOME
Investment and interest income was $5.9 for the year ended March 26, 1999 as
compared to $5.7 in Fiscal 1998 and $9.6 in Fiscal 1997. Average cash balances
and interest rates remained relatively stable to result in only a minor increase
in interest income over last year. The Fiscal 1998 decrease from Fiscal 1997 was
due to a gain realized from the sale of a non-strategic investment in Esprit
Telecom (Jersey) Ltd. ("Esprit"). Esprit was sold in Fiscal 1997 for cash
proceeds of $3.7, representing a total gain of $3.6, or $2.4 after-tax.
37
<PAGE>
INTEREST EXPENSE
Interest expense from continuing operations, including $7.2 of non-cash debt
issue and other costs expensed in connection with the partial debt repayment
described below, was $30.7 for Fiscal 1999 compared to $7.2 and $2.4 for Fiscal
1998 and Fiscal 1997, respectively. The increase in interest resulted from the
term loans incurred by the Company on February 12, 1998 in connection with the
Plessey acquisition. On July 23, 1998, Mitel repaid $123.1 against the U.S.
dollar term loans. Accordingly, a proportionate amount of the related deferred
debt issue costs and deferred foreign exchange losses from continuing operations
($7.2) was recorded as additional interest expense in the second quarter of
Fiscal 1999.
INCOME TAXES
Income tax expense for Fiscal 1999 was $17.5 compared to $30.5 and $20.6 for
Fiscal 1998 and Fiscal 1997, respectively. The effective income tax rate, as a
percentage of pre-tax income from continuing operations, was 30 percent, 25
percent and 35 percent in Fiscal 1999, Fiscal 1998 and Fiscal 1997,
respectively. The increased effective tax rate in Fiscal 1999 was due to higher
non-deductible intangible asset amortization, partially offset by permanent
differences associated with European operations, lower taxes in Canada arising
from higher interest costs related to the term loans, and to tax recoveries in
Sweden. The Fiscal 1998 effective tax rate was lower than in Fiscal 1997 due to
a lower U.K. group tax position, partially offset by higher provincial income
taxes in Canada.
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 Systems since manufacturing lead times for
semiconductor products are generally longer because of the nature of the
production process. At March 26, 1999, order backlog from continuing operations
was $179.8, down from $221.3 at March 27, 1998. The decrease in backlog was
attributable to a decrease in semiconductor orders arising partly from a
reduction in order lead times. Most of the backlog is scheduled for delivery in
the next twelve months.
(millions Cdn$) 1999 1998 1997
------------------------------------------
Backlog $ 179.8 $ 221.3 $ 135.1
==========================================
Compared to Fiscal 1997, the increase in backlog of $44.7 from continuing
operations at the end of Fiscal 1998 was mostly attributable to the acquisition
of Plessey in the fourth quarter of that year and to increased Systems bookings.
LIQUIDITY AND CAPITAL RESOURCES
Mitel had cash, cash equivalents and short-term investment balances of $125.3 at
March 26, 1999 compared to $151.7 at March 27, 1998. All of the March 26, 1999
cash balance was held in either cash or highly liquid cash equivalents. The
decrease of $26.4 was mainly due to the first quarter acquisitions of the
advanced messaging and ISDN PBX businesses which, together, amounted to $46.6,
and charges to provisions related to integration costs for the Plessey
operations, which were offset, in part, by net proceeds retained from the equity
offering completed in the second quarter of Fiscal 1999.
Mitel has two term loans, respectively the AXELsSM* Series B loan and the
Tranche A Term Loan, that were entered into on February 12, 1998 with a
syndicate of banks led by Goldman, Sachs Credit Partners L.P. as the syndication
agent and the Canadian Imperial Bank of Commerce as the administrative agent.
The principal of the AXELs Series B loan is payable quarterly on a graduated
basis over five years and matures on December 2003. The principal of the Tranche
A Term Loan is payable quarterly on a graduated basis over five years and
matures on February 2003. The term loans bear interest at a variable interest
rate based on the lower of a defined base rate or the London Inter Bank Offer
Rate ("LIBOR") plus a premium. Mitel entered into an interest rate swap to fix
the base interest rate on a portion of each of the term loans. The interest rate
swap is considered to be an effective hedge of the variable interest rates on
the term loans. Mitel is subject to certain restrictive covenants and
commitments and is required to maintain certain financial ratios for the purpose
of ensuring Mitel's ability to meet its obligations under the credit agreement.
The term loans are subject to
38
<PAGE>
mandatory prepayments out of certain insurance proceeds, and defined excess cash
flow received by Mitel and in the event of asset sales (other than inventory),
equity offerings or debt issuance by Mitel. Mandatory prepayments range from 75
percent to 100 percent of the net cash proceeds and would be paid on a pro-rata
basis subject to certain constraints toward the senior secured term loans.
Management believes Mitel is in compliance with the obligations and restrictive
covenants under the credit agreement.
On July 23, 1998, Mitel, through a syndicate of underwriters, issued 8 million
common shares, at a price of $21.50 per share, for total proceeds of $172.0. Net
proceeds to Mitel were $164.1, of which $123.1 was applied to repay a portion of
the term loans. The balance of the proceeds was retained for general corporate
purposes.
Cash flow from operations before working capital changes amounted to $166.3
during Fiscal 1999 compared to $125.6 in Fiscal 1998. Since March 27, 1998,
Mitel's working capital, as reflected in the consolidated statements of cash
flows, increased by $123.2 primarily due to higher receivables and inventory
levels related to the growth in the business and payments made against the
Plessey integration provisions. Mitel maintains a minimum of critical inventory
to ensure continuity of supply for its manufacturing requirements. Most of the
security supply inventory is carried at Mitel's semiconductor plants.
Fixed asset and other additions were $63.0 during Fiscal 1999 compared with $8.3
in the previous year, excluding additions of $22.7 and $50.9 financed by capital
lease for the two respective periods. The additions were primarily related to
Semiconductor manufacturing capacity and technology enhancements as well as
continuing improvements to Mitel's information technology resources.
Long-term debt decreased due to scheduled repayments of $9.6 and a prepayment of
$123.1 against the term loans (described above).
As at March 26, 1999, Mitel's capitalization was comprised of 32 percent debt, 4
percent preferred equity, and 64 percent common equity. This compares to 49
percent debt, 4 percent preferred equity, and 47 percent common equity at the
end of Fiscal 1998.
In addition to cash and cash equivalent balances of $125.3 as at March 26, 1999,
Mitel has an unused revolving credit facility of approximately $110.7
(U.S.$73.5).
Management believes Mitel 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.
YEAR 2000
What is referred to as the Year 2000 problem ("Year 2000 problem") is the result
of computer programs being written using two digits rather than four to define
the applicable year, resulting in the possibility that computer systems and
products that have date-sensitive software may recognize a date using "00" as
the Year 1900 rather than the Year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Mitel has been working on the Year 2000
problem since 1997. A dedicated Year 2000 Program Management Office ("PMO") was
established in February 1998 to address compliance both externally, to our
customers and suppliers, and internally for Mitel's business processes. Mitel's
internal processes include network and communications infrastructure, business
software applications, manufacturing, distribution, facilities management,
product development, sales, finance and human resources. Management presently
believes that with modifications to Mitel's existing software and hardware and
conversions to new software, the Year 2000 problem can be mitigated. Despite the
extensive efforts dedicated to the Year 2000 Program, there can be no assurance
that all Year 2000 date compliance activities will be completed before problems
associated with the Year 2000 transition potentially occur.
39
<PAGE>
Mitel has completed the evaluation of its major product offerings, including
current and discontinued business telephone systems, peripherals and
applications. The majority of products have been classified as compliant or
having compliant versions.
Mitel has established a three-phase Year 2000 Readiness Program (the "Year 2000
Program") that addresses its key internal business processes and systems. Phase
I was the Initial Assessment and included an overview of Mitel and an assessment
of its awareness and readiness for Year 2000. Consultants were engaged to assist
with this review and with any necessary remedial plans. Phase II was referred to
as the Discovery and Strategy and involved the collection and assessment of a
comprehensive inventory of all internal information systems equipment as well as
a detailed assessment of the suppliers deemed to be affected by the Year 2000
Problem.
The third and current phase is the Implementation and consists of conversion,
testing and deployment of identified mission critical systems as well as risk
and contingency management activities. Presently the majority of Mitel's
identified mission critical systems are Year 2000 ready. However, a small number
of remediation projects are dependent upon third-party vendor negotiations
currently underway with certain specified software and hardware suppliers. The
remaining remediation projects are awaiting third-party software and hardware
upgrades, and are on schedule to be brought to a compliant status before the end
of June 1999. Mitel has started to address its non-mission critical systems and
plans to have the majority of these systems Year 2000 ready by the end of
calendar 1999. The integration testing of internal systems is also planned for
the spring of calendar 1999. Mitel also initiated an internal audit process
under which most of its major sites are being visited to ensure corporate
guidelines and procedures are consistently applied.
Under its comprehensive Vendor Management Program, initiated during Phase II of
the Year 2000 Program, Mitel is actively working with its suppliers to determine
the extent to which their operations and the products and services they provide
are Year 2000 ready and to monitor their progress toward Year 2000 capability.
The highest priority is given to suppliers that are critical to the business.
The program includes awareness letters, site visits, questionnaires as well as
compliance agreement and warranties. Contingency plans, such as planned
increased inventory levels or substitute suppliers, are being developed to
address issues related to suppliers that are not considered to be making
sufficient progress in becoming Year 2000 capable in a timely manner. Mitel has
also developed contingency plans to address possible changes in customer order
patterns due to Year 2000 issues. Management believes that Mitel achieved its
target to have all "high risk" suppliers' assessments of their Year 2000
readiness completed and to have necessary contingency plans in place by March
31, 1999. Contingency plans will be reviewed on a regular basis as Mitel learns
more about its suppliers' state of readiness. Mitel also conducts on-going
monitoring of local utility suppliers and is presently updating its
comprehensive Disaster Recovery Plan to accommodate Year 2000 related issues.
Mitel also initiated a comprehensive Distribution Management Program in the
fourth quarter of Fiscal 1999, in order to assess the Year 2000 state of
readiness of its distributors in a manner similar to its Vendor Management
Program. The assessment phase is completed and contingency plans are presently
being developed and should be completed by September 1999.
It is currently expected that the total incremental direct costs of the Year
2000 Program will not exceed $13.9. Approximately $7.4 has been spent on direct
Year 2000 Program costs to date and was funded through operating cash flows. The
program costs are primarily attributable to the purchase of new software and
equipment and do not include estimates for potential litigation. As Mitel
continues to assess the last phases of the Year 2000 Program, estimated costs
may change.
Based on currently available information, management does not believe that the
modifications and conversions discussed above, related to Mitel's internal
systems or products sold to customers, will have a material adverse impact on
Mitel's business, financial condition or results of operations. However, if such
modifications and conversions are not made, or are not completed on a timely
basis, the Year 2000 problem could have a material adverse effect on Mitel's
business, financial condition and results of operations. Management believes
that the most reasonably likely worst case Year 2000 scenarios would relate to
third party systems rather than Mitel's internal systems or products. Mitel
believes the risks are greatest with utilities (e.g. electricity supply, water),
40
<PAGE>
telecommunications, transportation and critical suppliers that are outside
Mitel's control.
OTHER
Asia/Pacific Economic Risk
The Asia/Pacific region encountered unstable local economies and significant
devaluation in its currencies during Fiscal 1998 and through Fiscal 1999. This
region represented 13 percent of Mitel's revenue from continuing operations for
the year ended March 26, 1999 and 11 percent of revenue from continuing
operations in Fiscal 1998. The majority of the Asia/Pacific sales relate to
Semiconductor operations. Asia/Pacific receivables, net of reserves, were
approximately 2 percent of Mitel's total assets as at March 26, 1999. To the
extent the Asia/Pacific region grows in importance to Mitel, or that the factors
affecting the region begin to adversely affect customers in other geographic
locations, Mitel's business, operating results and financial condition could be
adversely affected.
Foreign Currency Translation
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.
European Union and the Euro
On January 1, 1999, eleven of fifteen member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency - the Euro. The Euro will trade on currency
exchanges and may be used in business transactions. The conversion to the Euro
eliminates currency exchange rate risk between the member countries. Mitel's
operating subsidiaries that are affected by the Euro conversion have established
plans to address the issues raised by the Euro currency conversion. These issues
include, among others, the need to adapt computer and financial systems,
competitive impacts of cross-border price transparency, and recalculating
currency risk. Mitel does not expect any required system conversion costs to be
material due to the existing ability to transact in multiple currencies. Due to
significant uncertainties, Mitel cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any, on
Mitel's financial condition or its results of operations.
Forward Looking Statements
Certain statements in this management's discussion and analysis constitute
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of Mitel, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such risks,
uncertainties and assumptions include, among others, the following: general
economic and business conditions; demographic changes; import protection and
regulation; rapid technology development and changes; timing of product
introductions; the mix of products/services; industry competition, industry
capacity and other industry trends; and the ability of Mitel to attract and
retain key employees.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
MARKET RISK
Market risk represents the risk of loss that may impact Mitel's financial
statements due to adverse changes in financial markets. Mitel is exposed to
market risk from changes in interest rates and foreign exchange rates. To manage
these risks, Mitel uses certain derivative financial instruments including
interest rate swaps, forward contracts and other derivative instruments from
time to time, that have been authorized pursuant to board-approved policies and
procedures. Mitel does not hold or issue financial instruments for trading or
speculative purposes.
41
<PAGE>
Mitel currently uses forward contracts to reduce the exposure to foreign
exchange risk. The most significant foreign exchange exposures for Mitel relate
to the United States dollar and the British pound. At March 26, 1999, there was
a net fair value of $0.2 unrealized loss on all forward contracts, which is
calculated as the difference between the actual contract rates and the
applicable rate that would be used to terminate the contracts, if that became
necessary. Additional potential losses in the net fair value of these contracts,
assuming a 10 percent depreciation in the U.S. dollar against all currencies, at
March 26, 1999, would have been approximately $5.0. Because these contracts are
entered into for hedging purposes, management believes that these potential
losses would be largely offset by gains on the underlying firmly committed or
anticipated transaction.
Interest rate swaps are used to manage the impact of interest rate changes on
earnings and cash flows and also to lower overall borrowing costs. Mitel's main
exposure to interest rate risk relates to its United States dollar denominated
long term debt. Mitel monitors its interest rate risk on the basis of changes in
fair value. Assuming a 10 percent downward shift in interest rates at March 26,
1999, the potential loss in the net fair value of interest rate swaps and the
underlying hedged debt would have been nil because these two items are equal and
offsetting. Under the same assumption, the potential loss in the net change in
fair value of unhedged debt would have been immaterial because substantially all
of the United States dollar denominated long term debt is hedged.
In accordance with Mitel policy, cash equivalent and short-term investment
balances are primarily comprised of high-grade money market instruments with
original maturity dates of less than one year.
The estimated potential losses, as discussed above, assume the occurrence of
certain adverse market conditions. They do not consider the potential effect of
favorable changes in market factors and do not represent projected losses in
fair value that Mitel expects to incur. Future impacts would be based on actual
developments in global financial markets. Management does not foresee any
significant changes in the strategies used to manage interest and foreign
exchange rate risks in the near future.
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 as at March 26, 1999 and March 27, 1998
Consolidated Statements of Income and Retained Earnings for the years
ended March 26, 1999, March 27, 1998 and March 28, 1997
Consolidated Statements of Cash Flows for the years ended March 26,
1999, March 27, 1998 and March 28, 1997
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
26, 1999 and March 27, 1998 and the consolidated statements of income and
retained earnings and cash flows for each of the years in the three year period
ended March 26, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with 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
42
<PAGE>
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 Company as at March 26, 1999
and March 27, 1998 and the results of its operations and its cash flows for each
of the years in the three year period ended March 26, 1999 in accordance with
accounting principles generally accepted in Canada.
Ottawa, Canada /s/ Ernst & Young LLP
---------------------
May 6, 1999 Chartered Accountants
43
<PAGE>
Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
<TABLE>
<CAPTION>
March 26, March 27,
1999 1998
-------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 125.3 $ 117.2
Short-term investments -- 34.5
Accounts receivable (notes 4 & 23) 326.3 302.3
Inventories (note 5) 198.1 162.2
Prepaid expenses and other 27.4 27.3
-------------------------
677.1 643.5
Long-term receivables (note 6) 35.4 27.9
Fixed assets (note 7) 507.7 549.3
Acquired intangible assets (note 8) 56.7 13.9
Patents, trademarks and other (note 9) 23.4 17.4
-------------------------
$ 1,300.3 $ 1,252.0
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 10) $ 254.1 $ 290.7
Income and other taxes payable 11.8 33.9
Deferred revenue 36.6 32.7
Current portion of long-term debt (note 11) 37.6 40.3
--------------------------
340.1 397.6
Long-term debt (note 11) 276.5 379.6
Pension liability (note 26) 13.2 12.2
Deferred income taxes 23.2 27.1
--------------------------
653.0 816.5
--------------------------
Commitments and contingencies (notes 12 & 13)
Shareholders' equity:
Capital stock (note 14)
Preferred shares 37.2 37.2
Common shares (1999 - 116,705,531; 1998 - 108,394,631) 331.2 157.3
Contributed surplus (note 14) 32.3 32.3
Retained earnings 218.4 202.9
Translation account (note 15) 28.2 5.8
--------------------------
647.3 435.5
--------------------------
$ 1,300.3 $ 1,252.0
==========================
</TABLE>
On behalf of the Board:
Dr. Henry Simon, Director Kirk K. Mandy, Director
(See accompanying notes to the consolidated financial statements)
44
<PAGE>
Mitel Corporation
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in millions of Canadian dollars)
<TABLE>
<CAPTION>
Years Ended
March 26, March 27, March 28,
1999 1998 1997
------------------------------------------
<S> <C> <C> <C>
Retained earnings, beginning of year $ 202.9 $ 114.2 $ 79.4
Net income 26.2 91.9 38.0
----------------------------------
229.1 206.1 117.4
Cost of common share issue (note 14) (7.5) -- --
Dividends on preferred shares (note 14) (3.2) (3.2) (3.2)
-----------------------------------
Retained earnings, end of year $ 218.4 $ 202.9 $ 114.2
===================================
</TABLE>
(See accompanying notes to the consolidated financial statements)
45
<PAGE>
Mitel Corporation
CONSOLIDATED STATEMENTS OF INCOME
(in millions of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
March 26, March 27, March 28,
1999 1998 1997
--------------------------------------------
<S> <C> <C> <C>
Revenue (note 16) $1,310.4 $ 881.4 $ 695.5
----------------------------------------
Cost of sales (note 16):
Cost of sales other than amortization 645.6 432.6 344.4
Amortization of manufacturing assets 66.8 25.0 15.1
----------------------------------------
712.4 457.6 359.5
----------------------------------------
Gross margin 598.0 423.8 336.0
----------------------------------------
Expenses:
Selling and administrative 332.9 246.0 220.9
Research and development (net) (note 17) 149.8 52.0 50.0
Amortization of acquired intangibles (note 8) 22.4 1.8 0.7
Special charges (net) (note 18) 10.1 -- 13.0
----------------------------------------
515.2 299.8 284.6
----------------------------------------
Operating income from continuing operations 82.8 124.0 51.4
Investment and interest income (note 19) 5.9 5.7 9.6
Interest expense (note 11) (23.5) (7.2) (2.4)
Debt issue and other costs (note 11) (7.2) -- --
----------------------------------------
Income from continuing operations before income taxes 58.0 122.5 58.6
Income tax expense (note 20) 17.5 30.5 20.6
----------------------------------------
Net income from continuing operations 40.5 92.0 38.0
----------------------------------------
Income (loss) from discontinued operations (note 21) 2.0 (0.1) --
Estimated loss on disposal of discontinued operations (note 21) (16.3) -- --
----------------------------------------
(14.3) (0.1) --
----------------------------------------
Net income $ 26.2 $ 91.9 $ 38.0
========================================
Net income attributable to common shareholders
after preferred share dividends $ 23.0 $ 88.7 $ 34.8
========================================
Net income per common share (notes 3 & 14):
Net income per common share from continuing operations:
Basic $ 0.33 $ 0.82 $ 0.32
========================================
Fully diluted $ 0.32 $ 0.80 $ 0.32
========================================
Net income per common share:
Basic $ 0.20 $ 0.82 $ 0.32
========================================
Fully diluted $ 0.20 $ 0.80 $ 0.32
========================================
Weighted average number of common shares outstanding (millions)
Basic 114.0 107.8 107.3
========================================
Fully diluted 115.9 114.0 110.5
========================================
</TABLE>
(See accompanying notes to the consolidated financial statements)
46
<PAGE>
Mitel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
<TABLE>
<CAPTION>
Years ended
March 26, March 27, March 28,
1999 1998 1997
-----------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities:
Net income $ 26.2 $ 91.9 $ 38.0
Amortization of capital and other assets 143.2 50.8 33.5
Estimated loss on disposal of discontinued operations 16.3 -- -
Investment tax credits (7.0) (18.0) -
Special charges 0.5 -- 5.3
Gain on sale of capital assets (6.0) (0.7) (4.5)
Deferred income taxes (7.8) 0.6 (0.2)
Change in pension liability 0.9 1.0 0.6
Increase in working capital (note 28) (123.2) (50.2) (6.6)
----------------------------------------
Total 43.1 75.4 66.1
----------------------------------------
Investing activities:
Change in short-term investments 34.5 53.3 (2.9)
Additions to capital and other assets (63.0) (8.3) (42.6)
Proceeds from disposal of capital assets 11.9 7.2 5.0
Acquisitions (note 22) (46.6) (343.8) (5.1)
Net change in non-cash balances related to investing activities 5.7 (0.2) 5.4
----------------------------------------
Total (57.5) (291.8) (40.2)
----------------------------------------
Financing activities:
Increase in long-term debt 0.4 339.7 2.2
Repayment of long-term debt (132.7) (10.6) (23.5)
Repayment of capital lease liabilities (9.0) (42.4) (3.4)
Debt issue costs (2.0) (10.9) --
Dividends on preferred shares (3.2) (3.2) (3.2)
Issue of common shares - net (note 14) 166.4 4.0 2.7
Net change in non-cash balances related to financing activities -- -- 0.8
----------------------------------------
Total 19.9 276.6 (24.4)
----------------------------------------
Effect of currency translation on cash 2.6 1.5 1.6
----------------------------------------
Increase in cash and cash equivalents 8.1 61.7 3.1
Cash and cash equivalents, beginning of year 117.2 55.5 52.4
----------------------------------------
Cash and cash equivalents, end of year $ 125.3 $ 117.2 $ 55.5
========================================
</TABLE>
(See accompanying notes to the consolidated financial statements)
47
<PAGE>
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 business segments comprise the manufacture and
distribution of communications systems and microelectronic components.
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 25.
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.
(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, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company has adopted the new recommendations of Section 1540 of the
CICA Handbook "Cash Flow Statements" and has restated the comparative
years' financial information to conform to this revised standard.
All highly liquid investments with original maturities of three months
or less are classified as cash and cash equivalents. The fair value of
cash equivalents approximates the amounts shown in the financial
statements. Short-term investments comprise highly liquid low risk debt
instruments with terms of usually not greater than one year. Short-term
investments are carried at fair value, which approximates their cost.
(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,
labour and manufacturing overhead.
(E) CAPITAL AND OTHER 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 identifiable 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.
48
<PAGE>
Amortization is provided on the bases and at the rates set out below:
Assets Basis Rate
- -------------------------------------------------------------------------------
Buildings Straight-line 4 %
Equipment Declining balance 20 - 30 %
Straight-line 10 - 33.3%
Goodwill and other acquired intangibles Straight-line 50 %
Patents and trademarks Straight-line 10 - 33.3%
Prior to Fiscal 1999, the estimated useful life of acquired intangibles
and goodwill ranged from five to fifteen years. During the fourth
quarter of Fiscal 1999, management revised the estimated technological
useful life of these assets. The effect of prospectively applying this
revision was an incremental amortization of $14.7, or $0.13 per share,
in the fourth quarter of Fiscal 1999.
(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.
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) DERIVATIVE FINANCIAL INSTRUMENTS
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.
The Company uses interest rate swap contracts to manage interest rate
risk. Payments and receipts under interest rate swap contracts are
recognized as adjustments to interest expense on a basis that matches
them with the related fluctuations in the interest receipts and
payments under floating rate financial assets and liabilities.
(H) 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.
(I) 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. Investment tax credits ("ITC") are taken into income on
the same basis as the related expenditures are charged to income or
applied against acquired fixed assets, as applicable, provided the
Company expects the credits to be realized. Management periodically
reviews the reasonable assurance of realizing the ITC carryforward and
timing difference benefits in the determination of their accounting
recognition. Such review may result in the recording of the accounting
benefit for these timing differences and ITC carryforwards, as the
circumstances warrant, and the recognition of loss carryforwards, as
realized.
(J) 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 26, 1999, all development
costs, except acquired intangibles purchased in a business combination,
were expensed as incurred. Management periodically evaluates
49
<PAGE>
the realizability of the purchased development costs based upon the
expected future undiscounted cash flows of the related assets.
3. SUPPLEMENTARY INCOME INFORMATION
As a supplementary measure to assess financial performance, management
utilizes Adjusted Net Income and Adjusted Net Income per common share
which exclude the impact of amortization of acquired intangibles,
special charges (net), non-cash debt issue and other costs expensed on
an early partial debt repayment, and discontinued operations. The
Adjusted Net Income and Adjusted Net Income per common share are as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Net income as reported $ 26.2 $ 91.9 $ 38.0
Adjusted Net Income, as adjusted for:
Amortization of acquired intangibles 22.4 1.8 0.7
Special charges (net) 10.1 -- 13.0
Debt issue and other costs 7.2 -- --
(Income) loss from discontinued operations (2.0) 0.1 --
Estimated loss on disposal of discontinued operations 16.3 -- --
------- ------- -------
Adjusted Net Income $ 80.2 $ 93.8 $ 51.7
======= ======= =======
Adjusted Net Income per common share - basic $ 0.67 $ 0.84 $ 0.45
======= ======= =======
</TABLE>
4. ACCOUNTS RECEIVABLE
Included in accounts receivable was an allowance for doubtful accounts
of $8.7 (1998 - $10.2). Also included in accounts receivable was an
amount of $16.9 (1998 - $32.5) for unbilled accounts on long-term
contracts (see also note 6).
5. INVENTORIES
1999 1998
--------------------
Raw materials $ 47.8 $ 53.4
Work-in-process 86.1 60.3
Finished goods 64.2 48.5
--------------------
$ 198.1 $162.2
====================
6. LONG-TERM RECEIVABLES
<TABLE>
<CAPTION>
1999 1998
-------------------
<S> <C> <C>
Investment tax credits recoverable $ 17.3 $ 10.7
Promissory note, bearing interest at 10%, due in March 2011 and
against which a first deed on property was pledged as security 10.5 10.3
Other long-term receivables 7.6 6.9
-------------------
$ 35.4 $ 27.9
===================
</TABLE>
7. FIXED ASSETS
1999 1998
---------------------
Cost:
Land $ 13.4 $ 13.2
Buildings 169.1 173.5
Equipment 553.5 514.4
Equipment under capital leases 148.4 130.1
---------------------
884.4 831.2
---------------------
Less accumulated amortization:
Buildings 80.8 71.0
Equipment 243.6 175.7
Equipment under capital leases 52.3 35.2
50
<PAGE>
---------------------
376.7 281.9
=====================
$ 507.7 $ 549.3
=====================
8. ACQUIRED INTANGIBLE ASSETS
1999 1998
----------------------
Cost:
In-process technology $ 8.1 $ 2.7
Developed technology 34.4 9.0
Customer base and work force 11.9 --
Goodwill 24.8 3.7
----------------------
79.2 15.4
----------------------
Less accumulated amortization:
In-process technology 1.7 0.1
Developed technology 10.9 0.6
Customer base and work force 2.9 -
Goodwill 7.0 0.8
----------------------
22.5 1.5
----------------------
$ 56.7 $ 13.9
======================
9. PATENTS, TRADEMARKS AND OTHER
1999 1998
---------------------
Cost:
Patents and trademarks $ 16.3 $ 14.3
Deferred debt issue costs 8.5 10.5
Deferred foreign exchange loss 10.5 --
---------------------
35.3 24.8
---------------------
Less accumulated amortization:
Patents and trademarks 9.8 7.2
Deferred debt issue costs 2.1 0.2
---------------------
11.9 7.4
=====================
$ 23.4 $ 17.4
=====================
On February 12, 1998, the Company entered into a credit agreement with
a syndicate of lenders for total debt facilities of U.S. $310.0 (see
also note 11). The facilities were used to acquire the Plessey
Semiconductors Group ("Plessey") (see also note 22) as well as to
provide a line of credit for general corporate purposes. The Company
incurred $12.9 in respect of associated debt issue costs. These costs
were deferred and will be amortized over the life of the debt and in
pro rata amounts related to early prepayments against the term loans.
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
<TABLE>
<CAPTION>
1999 1998
---------------------
<S> <C> <C>
Trade payables $ 79.4 $ 82.2
Restructuring and other provisions (see also notes 18 & 22) 35.3 59.3
Employee-related payables 38.4 36.4
Other accrued liabilities 75.0 112.8
Provision for estimated loss on disposal of discontinued
operations (note 21) 26.0 --
---------------------
$ 254.1 $ 290.7
=====================
</TABLE>
51
<PAGE>
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
---------------------
<S> <C> <C>
AXELs Series B, at a variable interest rate based on the lower of a defined base rate or a
successive three month LIBOR rate plus 2.25%; at March 26, 1999 the effective interest rate
was 8.04% (1998 - 8.25%); with quarterly installments and due December 2003. (1999 - U.S.
$118.4; 1998 - U.S. $150.0) $ 178.2 $ 211.9
Tranche A Term Loan, at a variable interest rate based on the lower of a defined base rate or
a successive three month LIBOR rate plus 1.75%; at March 26, 1999 the effective interest rate
was 7.79% (1998 - 8.00%); with quarterly installments and due February 2003. (1999 - U.S.
$27.5; 1998 - U.S. $85.0) 41.2 119.7
Capital leases and other, at rates varying from 5.8% to 12.2% with payment terms ranging from
1 to 5 years (1998 - 3.4% to 12.2% with payment terms ranging from 3 to 5 years) 90.5 84.5
Non-interest bearing 1996 Canada-Quebec government loan, repayable in three equal annual
installments commencing July, 2001 4.2 3.8
---------------------
314.1 419.9
Less current portion 37.6 40.3
--------------------
$ 276.5 $ 379.6
=====================
</TABLE>
During Fiscal 1998, the Company entered into a credit agreement in the
amount of U.S. $310.0 with Goldman Sachs Credit Partners L.P. ("GSCP"),
as advisor, arranger, lender, and syndication agent; certain financial
institutions as lenders; and the Canadian Imperial Bank of Commerce
("CIBC"), as lender and administrative agent for the lenders. The
credit agreement provided senior secured credit facilities consisting
of: (i) a 5 year Tranche A Term Loan amounting to U.S.$85.0; (ii) a 6
year Amortization Extended Term Loan (AXELs) Series B loan amounting to
U.S.$150.0; and (iii) a 5 year revolving credit facility amounting to
U.S.$75.0 (see also note 27). The proceeds from the term loans were
used to fund the acquisition of 100 percent of the capital stock of
four affiliated entities which, together with their respective
subsidiaries, comprise Plessey (see also note 22).
To secure the credit agreement obligations, the Company granted to the
lenders a first priority lien on substantially all of its personal
property and certain of its real property, including a pledge of all of
the capital stock of each of its principal subsidiaries. Certain
restrictive covenants and financial ratios required to be maintained
are set out for the purpose of measuring the Company's ability to meet
its obligations under the credit agreement. The Company is subject to
certain mandatory prepayments in the event of asset sales (other than
inventory), equity offerings and debt issuances, certain insurance
proceeds, and defined excess cash flow. Mandatory prepayments range
from 75 percent to 100 percent of the net cash proceeds and would be
paid on a prorata basis toward the senior secured term loans. The
Company believes it is in compliance with the obligations and
restrictive covenants under the credit agreement.
On July 23, 1998, the Company, through a syndicate of underwriters,
issued 8 million common shares at a price of $21.50 per share and for
total proceeds of $172.0 (see also note 14). Net proceeds of $164.1
were received by the Company, of which $123.1 was applied to repay a
portion of the AXELs Series B and Tranche A term loans. The balance of
the proceeds was retained for general corporate purposes.
Future minimum lease payments of the obligations under capital leases
total $99.1 of which $31.5, $28.3, $21.5, $14.7, and $3.1 relate to
fiscal years 2000 to 2004 and beyond respectively. Interest costs of
$9.2 are included in the total future lease payments.
Scheduled principal repayments, excluding obligations under capital
leases, during the next five fiscal years are: 2000 - $10.4; 2001 -
$11.3; 2002 - $14.4; 2003 - $57.7; 2004 - $130.1. Interest expense,
including the portion related to discontinued operations, related to
long-term debt was $37.7 in Fiscal 1999 (1998 - $7.6; 1997 - $2.3).
52
<PAGE>
12. COMMITMENTS
(A) OPERATING LEASES
The future minimum lease payments for operating leases for
which the Company was committed were as follows: 2000 - $24.2;
2001 - $20.6; 2002 - $12.1; 2003 - $7.7; 2004 - $6.3; 2005 and
beyond - $33.5.
(B) LETTERS OF CREDIT
The Company had letters of credit outstanding as at March 26,
1999 of approximately $14.2 to secure duty charges.
13. CONTINGENCIES
(a) 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 17).
(b) Year 2000 Issue:
The Year 2000 Issue arises because many computerized systems
use two digits rather than four to identify a year.
Date-sensitive systems may recognize the year 2000 as 1900 or
some other date, resulting in errors when information which
uses year 2000 dates is processed. In addition, similar
problems may arise in some systems that use certain dates in
1999 to represent something other than a date. The effects of
the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on
operations and financial reporting may range from minor errors
to significant systems failure that could affect an entity's
ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue
affecting the entity, including those related to the efforts
of customers, suppliers, or other third parties, will be fully
resolved.
14. CAPITAL STOCK
The Company's authorized capital stock consists of an unlimited number
of preferred and common shares.
Shares outstanding 1999 1998
----------------------------
Preferred shares - R&D series 1,616,300 1,616,500
Common shares 116,705,531 108,394,631
(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. The difference between the stated capital of the
repurchased shares over the consideration paid for such shares is
recorded against contributed surplus.
53
<PAGE>
(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 26, 1999 is as
follows:
<TABLE>
<CAPTION>
Number Amount
----------------------------
<S> <C> <C>
Balance, March 29, 1996 106,084,494 $ 150.6
Exercise of warrants 1,000,000 1.7
Exercise of employee stock options 330,137 1.0
----------------------------
Balance, March 28, 1997 107,414,631 153.3
Exercise of employee stock options 980,000 4.0
----------------------------
Balance, March 27, 1998 108,394,631 157.3
Public share offering, July 23, 1998 8,000,000 172.0
Exercise of employee stock options 310,900 1.9
----------------------------
Balance, March 26, 1999 116,705,531 $ 331.2
============================
</TABLE>
(C) NET INCOME PER COMMON SHARE
The net income per common share figures were calculated based on net
income from continuing operations and net income, as applicable, after
the deduction of preferred share dividends and using the weighted
monthly average number of shares outstanding during the respective
fiscal years. The calculation of fully diluted earnings per share
assumes that, if a dilutive effect is produced, all outstanding options
had been exercised at the later of the beginning of the fiscal year and
the option issue date, and includes an allowance for imputed earnings
net of tax derived from the investment of funds which would have been
received.
(D) 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.
Pursuant to the terms of the credit agreement described in note 11, the
Company is required to maintain a minimum net worth, thereby limiting
the amount of dividends that could be paid out. The preferred shares
dividend has not violated this covenant. No common share dividend is
currently being paid out.
(E) 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, 1995 and 1998 Annual General Meetings
allowing for 1,000,000, 2,000,000 and 10,200,000 additional shares,
respectively, to be made available for grant. Available for grant at
March 26, 1999 were 10,465,525 (1998 - 243,525; 1997 - 1,113,525)
shares. All options granted have up to maximum ten year terms and
become fully exercisable at the end of four years of continuous
employment.
54
<PAGE>
A summary of the Company's stock option activity and related
information for the three years ended March 26, 1999 is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------------- ------------ ---------------- ------------ ---------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------------ ---------------- ------------ ---------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding options:
Balance, beginning of year 6,251,888 $ 12.30 3,238,638 $ 5.71 2,902,525 $ 4.54
Granted 403,000 $ 19.40 4,237,750 $ 15.19 713,500 $ 9.23
Exercised (310,900) $ 6.12 (980,000) $ 4.12 (330,137) $ 2.95
Cancelled (425,000) $ 15.38 (244,500) $ 7.87 (47,250) $ 6.06
------------ ---------------- ------------ ---------------- ------------ ---------------
Balance, end of year 5,918,988 $ 12.89 6,251,888 $ 12.30 3,238,638 $ 5.71
============ ================ ============ ================ ============ ===============
Exercisable, end of year 2,367,963 $ 9.55 1,303,407 $ 5.18 1,580,776 $ 3.75
============ ================ ============ ================ ============ ===============
Weighted average fair value
price of options granted during
the year using the Black-Scholes
fair value option pricing model
(See also note 25.) $ 10.40 $ 8.07 $ 4.54
================ ================ ===============
</TABLE>
A summary of options outstanding at March 26, 1999 is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
------------------------------- Total Outstanding --------------------------------- --------Total Exercisable---------
Weighted Average Weighted Average Remaining Weighted Average
Exercise Price Options Exercise Price Contractual Life Options Exercise Price
------------------ ------------- --------------------- ------------------------------- --------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1.10 - $ 2.39 358,225 $ 1.92 4 years 358,225 $ 1.92
$ 3.90 - $ 5.75 381,350 $ 5.14 5 years 381,350 $ 5.14
$ 6.39 - $ 9.20 1,219,413 $ 7.29 7 years 623,013 $ 7.32
$ 9.32 427,000 $ 9.32 7 years 213,500 $ 9.32
$ 9.41 - $11.73 390,750 $ 9.98 8 years 82,250 $ 9.77
$17.78 2,838,500 $ 17.78 5 years 709,625 $ 17.78
$ 17.84 - $30.00 303,750 $ 21.04 5 years - -
============= ===============
5,918,988 2,367,963
============= ===============
</TABLE>
15. TRANSLATION ACCOUNT
The following table summarizes changes in the translation account:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- --------------- -----------------
<S> <C> <C> <C>
Balance, beginning of year $ 5.8 $ 2.5 $ 3.3
Increase (decrease):
Movements in exchange rates -
U.S. dollar 18.3 (2.1) -
U.K. pound sterling 3.1 7.2 5.4
Swedish krona 1.4 (1.0) (4.4)
Other currencies 1.2 (1.0) -
Reduction of net investments in subsidiaries (1.6) 0.2 (1.8)
---------------- --------------- -----------------
Balance, end of year $28.2 $ 5.8 $ 2.5
================ =============== =================
</TABLE>
55
<PAGE>
16. SERVICE REVENUE
During the year, revenue from providing support services amounted to
$99.8 (1998 - $82.0; 1997 - $70.5). The cost of sales related to
providing these services during Fiscal 1999 amounted to $63.9 (1998 -
$51.4; 1997 - $47.0).
17. INVESTMENT TAX CREDITS AND GOVERNMENT ASSISTANCE
During the year, the Company recognized Canadian ITCs and other funding
of $23.7 (1998 - $40.7; 1997 - $11.9) related to eligible R&D
expenditures. 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. The total amounts repaid and
repayable to March 26, 1999 were negligible.
18. SPECIAL CHARGES
During the fourth quarter of Fiscal 1999, the Company recorded a net
pre-tax special charge of $10.1 related to the rationalization of
certain Company business segments, net of a gain of $6.0 on the
disposal of certain non-strategic technology and other assets. The
rationalization related to steps taken to streamline North American and
European sales channels, and to transfer the network access product
manufacturing operations from North America to the United Kingdom,
where the majority of the sales are generated. Also included in the
charge was the cost of severance and related benefits, with the
majority of the reduction taking place in the North American and Far
East regions. Approximately 100 people are to be terminated as part of
this rationalization program. All of these activities are expected to
be substantially completed by December 1999. As at March 26, 1999, $4.5
of severance, benefits, facilities and other costs had been paid, and
the balance of the special charge included in accounts payable and
accrued liabilities amounted to $10.8.
In Fiscal 1997, the Company recorded a charge of $13.0 comprising $8.0
relating to the restructuring of the Mitel Communications Systems group
and a write-off of $5.0 on the investment and related assets in the
Company's joint venture in China. The restructuring program related to
this provision was completed during Fiscal 1999.
19. 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 and was included in investment and interest income in Fiscal 1997.
20. INCOME TAXES
Details of income taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------- -------------
<S> <C> <C> <C>
Income from continuing operations before income taxes:
Canadian $ 53.0 $115.1 $ 52.5
Foreign 5.0 7.4 6.1
============ ============= =============
$ 58.0 $122.5 $ 58.6
============ ============= =============
Income tax expense (recovery):
Current
Canadian $ 20.9 $ 28.8 $ 14.9
Foreign 4.4 1.1 7.0
Deferred
Foreign (7.8) 0.6 (1.3)
============ ============= =============
$ 17.5 $ 30.5 $ 20.6
============ ============= =============
</TABLE>
Deferred taxes on income generally result from timing differences
primarily in the recognition of tax loss carryforwards.
56
<PAGE>
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>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
Expected tax rate 40% 40% 40%
------------ ------------ ------------
<S> <C> <C> <C>
Expected tax expense $ 23.2 $ 49.0 $ 23.4
Foreign tax rate differences (7.0) (1.1) (2.2)
Tax effect of losses not recognized 9.7 0.7 8.7
Tax effect of realizing benefit of prior
years' loss carryforwards and timing differences (11.7) (18.0) (13.9)
Corporate minimum taxes 1.5 0.7 3.2
Other 1.8 (0.8) 1.4
------------ ------------ ------------
Income tax expense $ 17.5 $ 30.5 $ 20.6
============ ============ ============
</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
before income taxes attributable to all foreign operations was $5.0
(1998 - $7.4; 1997 - $6.1).
As at March 26, 1999, the Company had tax loss carryforwards of
approximately $125.0 for which an accounting benefit was recognized on
approximately $15.0 of these tax losses. The remaining tax loss
carryforwards are available to reduce future years' income for tax
purposes. The tax loss carryforwards for which an accounting benefit
has been recognized do not expire while the remaining tax loss
carryforwards expire as follows: 2003 - $14.7; 2004 - $8.5; 2005 -
$13.9; 2006 to 2014 - $72.9. The tax loss carryforwards relate to
operations in the United States, the United Kingdom, Germany, France
and Hong Kong. As at March 26, 1999, the Company had Canadian ITC
carryforwards of approximately $41.7, which are available to reduce
future years' income taxes, for which the benefit was recognized in
these financial statements. These ITCs expire during the years from
2001 to 2009. In addition, the Company had timing differences of
approximately $44.0 for which no accounting benefit was recognized.
21. DISCONTINUED OPERATIONS
On March 26, 1999, the Company adopted formal plans to pursue
divestiture opportunities related to the distinct operations of the
Lincoln Power and Automotive business segment ("Lincoln") which was
part of the Plessey group acquired in Fiscal 1998 (see also note 22).
Management expects to sell or otherwise dispose the Lincoln business
within the next fiscal year. Accordingly, the operations related to
this business are accounted for as discontinued operations.
Sales applicable to Lincoln for Fiscal 1999 and Fiscal 1998 were $74.3
and $7.1, respectively. The income (loss) before income taxes includes
allocated interest expense related to long-term debt of $7.0 and $0.5
in 1999 and 1998, respectively. Interest expense was allocated to
discontinued operations based on a ratio of Lincoln revenue to total
Plessey revenue. For Fiscal 1999, the Company recorded income from
discontinued operations of $2.0 (1998 - loss of $0.1) including income
tax recoveries of $0.8 (1998 - $0.1). The estimated loss on disposal of
Lincoln was $16.3, net of estimated income tax recoveries of $9.7.
Basic and fully diluted loss per common share from discontinued
operations were $0.13 and $0.12, respectively, for Fiscal 1999 and $nil
for Fiscal 1998 and 1997.
As at March 26, 1999, total net assets related to Lincoln included
inventories of $18.2 (1998 - $22.3), fixed assets of $13.6 (1998 -
$15.5) and current liabilities of $14.3 (1998 - $19.5).
22. ACQUISITIONS
(A) On May 8, 1998, the Company acquired certain assets of the
Customer Premises Equipment Business Unit of Centigram
Communications Corporation, now operated as the Advanced Messaging
business unit under the name Baypoint Innovations, for cash
consideration of U.S.$22.0. The Company also purchased receivables
and inventories related to that business for approximately U.S.$4.8
in cash. The Advanced Messaging business, based in San Jose,
California, provides productivity-enhancing, enterprise-wide
messaging solutions to organizations around
57
<PAGE>
the world through a broad network of distributors and agents. The
acquisition was accounted for by the purchase accounting method. The
purchase price allocation was based on fair values assigned to net
assets as determined by an independent valuation firm using standard
valuation techniques. An amount of $35.9 was allocated to identifiable
intangible assets that include completed and in-process research and
development and other intangible assets. The difference between the
purchase price and the fair value of the net identifiable assets
amounted to $0.6, which was recorded as goodwill. The identifiable
intangible assets and the goodwill are amortized over a two year period
(see also note 1(F)). The allocation to net identifiable assets
included $2.9 in respect of the acquisition costs and costs to
integrate the operations of the acquired company. As at March 26, 1999,
the liability in respect of acquisition and integration costs was $1.3.
The purchase transaction was summarized as follows:
Net assets acquired, at approximate fair values:
Current assets $ 6.6
Capital assets 39.2
-------------
Total assets 45.8
-------------
Current liabilities 7.2
-------------
Total net assets $ 38.6
=============
Cash consideration $ 38.6
=============
Pro Forma financial information for the acquisition as if the business
had been acquired at the beginning of the Fiscal 1999 is not presented
due to the insignificant impact on the Company's results of operations.
(B) On May 19, 1998, the Company acquired the products, technology,
research and development facilities and sales and marketing
organization of Glasgow-based TSc for cash consideration of $8.0. TSc,
now defined as ISDN PBX, provides ISDN business products for the small
to medium enterprise market. The acquisition was accounted for by the
application of the purchase accounting method in which the results of
operation were included in the Company's accounts from the date of
acquisition. An amount of $4.5 was allocated to identifiable intangible
assets relating to completed research and development. The difference
between the purchase price and the fair value of the net identifiable
assets amounted to $2.0, which was recorded as goodwill. The completed
research and development and the goodwill are being amortized over a
two year period (see also note 1 (F)). The allocation to net
identifiable assets included $2.0 in respect of the acquisition costs
and costs to integrate the operations of the acquired company. As at
March 26, 1999, the liability in respect of acquisition and integration
costs are $nil. The purchase transaction was summarized as follows:
Net assets acquired, at approximate fair values:
Current assets $ 2.4
Capital assets 7.6
-------------
Total assets 10.0
-------------
Current liabilities 2.0
-------------
Total net assets $ 8.0
=============
Cash consideration $ 8.0
=============
Pro Forma financial information for the acquisition as if the business
had been acquired at the beginning of the Fiscal 1999 is not presented
due to the insignificant impact on the Company's results of operations.
(C) On February 12, 1998, the Company and certain of its wholly owned
subsidiaries acquired 100 percent of the capital stock of four
affiliated entities which, together with their respective subsidiaries,
comprise Plessey for a total cash consideration of $323.6 (U.S.
$225.0). Plessey, headquartered in Swindon, U.K., is an international
semiconductor manufacturer for communications and media applications.
The acquired company operates as Mitel Semiconductor
58
<PAGE>
Limited in the U.K. and as Mitel Semiconductor Americas Inc. in the U.S. The
acquisition was accounted for by the purchase accounting method. The purchase
transaction was summarized as follows:
Net assets acquired, at approximate fair value:
Current assets (including cash of $1.4) $ 134.4
Capital assets 354.3
Other assets 10.5
-------------
Total assets 499.2
-------------
Current liabilities 143.4
Capital leases 18.3
Deferred income taxes 13.9
-------------
Total liabilities 175.6
-------------
Total net assets $ 323.6
=============
Cash consideration $ 323.6
=============
As at March 26, 1999, the liability in respect of acquisition costs was $nil
(1998 - $10.6) and $10.6 (1998 - $45.2) in respect of integration costs. The
integration costs primarily related to initial estimates to exit the Lincoln
Power and Automotive business segment, the transfer of redundant production
activities from Sweden to Plymouth, U.K., and to severance costs for
redundancies in the acquired semiconductor segment throughout the world. The
remaining integration activities are expected to be completed during Fiscal
2000.
Unaudited Pro Forma financial information for the acquisition as if the business
had been acquired at the beginning of each respective fiscal period is presented
as follows:
<TABLE>
<CAPTION>
1998 1997
Pro Forma Pro Forma
combined combined
------------- ------------
<S> <C> <C>
(Unaudited)
Revenue $1,227.3 $1,152.9
------------- ------------
Net income $ 41.2 $ 34.0
============= ============
Net income attributable to common shareholders after
preferred share dividends $ 38.0 $ 30.8
============= ============
Net income per common share:
Basic $ 0.35 $ 0.29
============= ============
Fully diluted $ 0.35 $ 0.28
============= ============
</TABLE>
The unaudited Pro Forma information does not include the operating
savings or synergies anticipated as a result of the combined
operations.
(D) On August 8, 1997, the Company acquired certain assets and the remote
access business of Gandalf Technologies Inc. (Gandalf) for cash
consideration of $21.6. The purchase agreement did not include
Gandalf's service business. Gandalf's remote access products and
technology facilitate high volume data and voice communications between
the corporate office, local branches, teleworkers, and agents in the
field. Gandalf's operations are based principally in Canada, the United
States, and the United Kingdom. In addition to the cash consideration,
the Company incurred expenses of $0.5 in respect of acquisition costs
and $0.6 in respect of costs to integrate the operations of the
acquired company. As at March 27, 1998, the integration program was
substantially completed.
This acquisition was accounted for by the purchase accounting method.
The purchase price allocation was based on fair values assigned to net
assets as determined by an independent valuation firm using standard
valuation techniques. An amount of $14.9 was allocated to identifiable
intangible assets which include completed and in-
59
<PAGE>
process research and development, trademarks, and the tradename. The
purchase transaction was summarized as follows:
Net assets acquired, at approximate fair value:
Current assets $ 7.1
Capital assets 15.6
------------
Total assets 22.7
Current liabilities 1.1
------------
Total net assets $ 21.6
============
Cash consideration $ 21.6
============
(E) 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. This
acquisition was accounted for by the purchase accounting method. 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. The purchase transaction is summarized as follows:
Net assets acquired, at approximate fair value:
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
============
23. RELATED PARTY TRANSACTIONS
During the year ended March 26, 1999, the Company sold to and purchased
from jointly controlled and significantly influenced enterprises
products and services valued at approximately $3.8 (1998 - $2.5; 1997 -
$8.1) and $1.0 (1998 - $nil; 1997 - $nil) respectively.
24. INFORMATION ON BUSINESS SEGMENTS
Reportable segments, known as "business segments", are defined as components of
an enterprise about which separate financial information is available and is
used regularly by the chief operating decision makers to evaluate the segment's
performance and assess future cash flow. Mitel's chief decision making group
includes the Chief Executive Officer, the Board of Directors and certain
executives in each of the operating segments at Mitel.
Reportable segments are business units that offer different products and
services that are managed separately because of their different manufacturing
and distribution processes. The Company's reportable business segments include
the Mitel Communications Systems ("Systems") group and the Mitel Semiconductor
("Semiconductor") group.
Mitel Communications Systems provides enterprises with voice and data
communications systems; complete private networks, including remote teleworking
solutions; unified messaging and call-center applications; CTI systems and
applications; and it also supplies competitive carriers with public network
access products. All of Mitel's service revenue relates to Systems.
Mitel Semiconductor provides connectivity solutions for the communications and
medical industries with a product range which includes components for both wired
and wireless networks; microelectronics for enabling the convergence of voice
and data; optoelectronic devices for high-speed Internet systems; and, also,
applications-specific integrated
60
<PAGE>
circuits ("ASICs") for medical applications such as pacemakers and hearing-aids.
The Company evaluates the performance and allocates resources based on operating
income from continuing operations, which excludes any intersegment sales of
products and services. Mitel does not allocate amortization of intangibles,
special charges, interest revenue or interest expense and income taxes to its
reportable segments. In addition, total assets are not allocated to each
segment; however, depreciation of capital assets is allocated to the segments
based on the asset usage. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
<TABLE>
<CAPTION>
Unallocated
1999 Systems Semiconductor costs Total
----------- ------------------ -------------- -----------
<S> <C> <C> <C> <C>
Total external sales revenue $ 752.7 $ 557.7 $ - $1,310.4
Amortization of buildings and equipment 20.9 84.9 - 105.8
Amortization of acquired intangibles - - 22.4 22.4
Special charges (net) - - 10.1 10.1
Segment's operating income (loss) from
continuing operations 61.2 54.1 (32.5) 82.8
Unallocated
1998 Systems Semiconductor costs Total
----------- ------------------ -------------- -----------
Total external sales revenue $ 566.8 $ 314.6 $ - $ 881.4
Amortization of buildings and equipment 18.2 30.8 - 49.0
Amortization of acquired intangibles - - 1.8 1.8
Special charges (net) - - - -
Segment's operating income (loss) from
continuing operations 42.3 83.5 (1.8) 124.0
Unallocated
1997 Systems Semiconductor costs Total
----------- ------------------ -------------- -----------
Total external sales revenue $ 474.5 $ 221.0 $ - $ 695.5
Amortization of buildings and equipment 15.1 17.7 - 32.8
Amortization of acquired intangibles - - 0.7 0.7
Special charges (net) - - 13.0 13.0
Segment's operating income (loss) from
continuing operations 7.1 58.0 (13.7) 51.4
Geographic Segments
Revenues from external customers are attributed to countries based on location
of the selling organization. Geographic information is as follows:
</TABLE>
<TABLE>
<CAPTION>
1999 1998 1997
----------- --------- ------------- ----------- --------- ------------- -----------
Goodwill Goodwill
Fixed and other Fixed and other
Revenue assets intangibles Revenue assets intangibles Revenue
----------- --------- ------------- ----------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Canada $ 142.8 $128.9 $ 23.9 $141.0 $120.6 $ 22.1 $113.4
United States 591.6 11.5 31.3 405.7 7.2 5.6 312.9
United Kingdom 502.2 343.4 22.7 284.2 383.6 1.7 204.4
Sweden 30.2 23.5 - 29.9 36.9 - 43.6
Other foreign countries 43.6 0.4 2.2 20.6 1.0 1.9 21.2
----------- --------- ------------- ----------- --------- ------------- -----------
Consolidated total $1,310.4 $507.7 $ 80.1 $881.4 $549.3 $ 31.3 $695.5
=========== ========= ============= =========== ========= ============= ===========
</TABLE>
61
<PAGE>
Major Customers
No single customer accounted for 10% or more of the Company's revenue for the
last three fiscal years. In addition, the Company is not dependent on any single
customer or group of customers, or suppliers.
25. 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 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.
(B) 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.
(C) 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.
(D) Redeemable preferred shares are excluded from shareholders' equity
under requirements of the SEC.
(E) 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.
(F) The Company implemented SFAS 130 in Fiscal 1999, regarding
comprehensive income for purposes of reconciliation to U.S. GAAP. Under
U.S. GAAP, items defined as other comprehensive income such as foreign
currency translation adjustments, are separately classified in the
financial statements and the accumulated balance of other comprehensive
income (loss) is reported separately in shareholders' equity on the
balance sheet.
(G) The Company implemented SFAS 109, Accounting for Income Taxes, in
Fiscal 1994 for purposes of reconciliation to U.S. GAAP. As at March
26, 1999, the Company's deferred tax asset, primarily related to the
benefit of realizing investment tax credit, loss carryforwards and
timing differences, net of a valuation allowance of $80.0 (1998 -
$85.5), was $29.3 (1998 - $42.7), and deferred tax liabilities,
primarily related to buildings and equipment, were $23.2 (1998 -
$27.1). The application of this method also gives rise to differences
in the allocation of consideration with respect to business
combinations which may result in the recognition of deferred tax
balances. Subsequent realization of any unrecognized tax benefits will
be applied to reduce any remaining goodwill or intangibles of the
related acquisitions, before being reported in net income for U.S. GAAP
purposes.
(H) Under U.S. GAAP the fully diluted earnings per share is computed in
accordance with the treasury stock method and based on the weighted
average number of common shares and dilutive common share equivalents.
(I) Purchased R&D under Canadian GAAP is capitalized and amortized over the
remaining useful life of the technology to which it relates. Under U.S.
GAAP, the purchased in-process R&D is expensed at the time of
acquisition. The Company has not established the technical feasibility
of the in-process R&D and it has no alternative future use.
(J) As allowed under SFAS 123, accounting for stock based compensation,
management has determined that it will continue to apply Accounting
Principles Board Opinion No. 25 (APB 25), in accounting for its
employee stock options for purposes of reconciliation to U.S. GAAP
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.
62
<PAGE>
(K) Under Canadian GAAP, exchange gains or losses related to translation of
foreign currency denominated long-term monetary items are deferred and
amortized over the remaining life of the items. Under U.S. GAAP,
deferral is not allowed and such gains or losses are included in the
determination of net income.
(L) Under Canadian GAAP, certain costs related to the acquirer may be
recognized in the purchase price allocation when accounting for
business combinations. These costs, subject to certain conditions,
qualify where they are a direct substitute for costs that would
otherwise be incurred with respect to the acquired business. Under U.S.
GAAP, only costs relating directly to the acquired business may be
considered in the purchase price allocation.
(M) The Company implemented SFAS 131 "Disclosure about Segments of an
Enterprise and Related Information" and has provided the required
disclosure in note 24.
(N) The Company has adopted SFAS 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" and has provided the required
disclosure.
(O) The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") which will be
effective for the Company's March 31, 2002 year end. The Company has
not determined the impact, if any, of this pronouncement on its
consolidated financial statements.
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:
<TABLE>
<CAPTION>
1999 1998 1997
------------- --------------- --------------
<S> <C> <C> <C>
Net income from continuing operations in accordance with $ 40.5 $ 92.0 $ 38.0
Canadian GAAP
Write-off of acquired in-process technology (5.5) (2.7) -
Amortization of acquired in-process technology 2.3 0.2 -
Effect of deferral accounting related to foreign exchange contracts 1.4 0.4 (7.2)
Translation of foreign currency denominated debt (14.1) 6.4 -
Adjustment to deferred income taxes (16.3) 6.1 10.2
Acquirer's redundancy provisions (3.4) (12.4) -
-------------- --------------- --------------
U.S. GAAP and SEC requirements:
Net income from continuing operations 4.9 90.0 41.0
Income (loss) from discontinued operations 2.0 (0.1) -
Estimated loss on disposal of discontinued operations (16.3) - -
-------------- --------------- --------------
(14.3) (0.1) -
-------------- --------------- --------------
Net income (loss) (9.4) 89.9 41.0
Less: dividends on cumulative preferred shares 3.2 3.2 3.2
-------------- --------------- --------------
Net income (loss) attributable to common shareholders $ (12.6) $ 86.7 $ 37.8
============== =============== ==============
Net income per common share from continuing operations:
Basic and diluted $ 0.01 $ 0.80 $ 0.35
Net income (loss) per common share:
Basic and diluted $(0.11) $ 0.80 $ 0.35
Weighted average shares for basic EPS (millions) 114.0 107.8 107.3
Weighted average shares on conversion of stock options (millions) 1.5 1.1 1.2
============== =============== ==============
Adjusted weighted average shares and share equivalents (millions) 115.5 108.9 108.5
============== =============== ==============
</TABLE>
63
<PAGE>
The following options were excluded in the computation of diluted earnings per
share from continuing operations because the options' exercise price exceeded
the average market price of the common shares and, therefore, the effect would
be antidilutive: options outstanding for the year ended March 26, 1999 to
purchase 3,142,250 (1998 - 3,167,250; 1997 - 647,000) shares of common stock at
an average exercise price of $17.90 (1998 - $17.69; 1997 - $9.31) per share.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- -------------
<S> <C> <C> <C>
Net income (loss) - U.S. GAAP $ (9.4) $ 89.9 $ 41.0
Change in foreign currency adjustment 22.4 3.3 (0.8)
---------------- -------------- -------------
Comprehensive income $ 13.0 $ 93.2 $ 40.2
================ ============== =============
1999 1998
---------------- --------------
Balance sheet items, which vary, in conformity with U.S. GAAP
And SEC requirements:
Prepaid and other assets: Current deferred tax asset $ 8.8 $ 11.8
Fixed assets $ 487.6 $ 525.1
Acquired intangible assets $ 51.1 $ 11.4
Long-term receivables: Long-term deferred tax asset $ 20.5 $ 23.6
Accounts payable and accrued liabilities $ 261.2 $ 284.5
Shareholders' equity:
Redeemable preferred shares $ 34.4 $ 34.4
Common shares $ 772.4 $ 606.0
Contributed surplus $ 2.5 $ 2.5
Accumulated other comprehensive income $ 28.2 $ 5.8
Deficit $ (221.6) $ (209.0)
</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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- -------------
<S> <C> <C> <C>
U.S. GAAP Pro Forma net income (loss) attributable to
common shareholders after preferred dividends $(23.3) $ 84.0 $ 36.6
U.S. GAAP Pro Forma net income (loss) per common share:
Basic $(0.20) $ 0.78 $ 0.34
Diluted $(0.20) $ 0.77 $ 0.34
1999 1998 1997
---------------- -------------- -------------
Risk-free interest rate 5.04% 5.30% 5.45%
Dividend yield nil nil nil
Volatility factor of the expected market price
of the Company's common stock 0.495 0.483 0.565
Weighted-average expected life of the options 6 years 6 years 6 years
</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 14).
26. PENSION PLANS
The Company maintains several defined contribution and three defined
benefit pension plans for its employees. Pension expense was $10.2 in
Fiscal 1999 (1998 - $6.4; 1997 - $4.8).
64
<PAGE>
(A) Defined Contribution Pension Plans
Both the Company and the employees contribute to these plans
based on 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 and as
permitted by pension regulatory authorities.
There are two contributory defined benefit plans that cover
substantially all employees of Mitel Telecom Limited and Mitel
Semiconductor Limited ("MSL"), two wholly owned subsidiaries
of the Company. These plans provide pension benefits based on
length of service and final pensionable earnings. Employee
contributions are based on pensionable earnings. Actuarial
reports in connection with these defined benefit plans,
updated to March 26, 1999, were based on projections of
employees' compensation levels to the time of retirement.
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.
The MSL pension plan was implemented on February 1, 1999 and
employees will be eligible to pension benefits after a
two-year period from the implementation date. The actuarial
present value of MSL accrued pension benefits was $nil as at
March 26, 1999.
The third 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 insured in its entirety
by Forsakringsbolaget Pensionsagaranti. The pension liability
of $13.2 (72.7 SEK) (1998 - $12.2 (67.9 SEK)) was actuarially
determined based on the present value of the accrued future
pension benefits and in accordance with applicable laws and
regulations in Sweden.
The following table shows the plans' funded status reconciled with amount
reported in the consolidated balance sheets, and the assumptions used in
determining the actuarial present value of the benefit obligations:
<TABLE>
<CAPTION>
1999 1998
---------------- --------------
<S> <C> <C>
Change in accrued pension benefits:
Benefit obligation at beginning of year $ 84.4 $ 61.2
Service cost 5.8 4.6
Interest cost 5.6 4.6
Plan participants' contributions (2.0) (1.2)
Actuarial loss 1.5 12.0
Benefits paid (0.7) (0.7)
Foreign exchange 1.9 3.9
---------------- --------------
Benefit obligation at end of year $ 96.5 $ 84.4
---------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 70.3 $ 53.5
Actual return on plan assets 7.0 12.4
Employer contributions 3.3 1.2
Benefits paid (0.7) (0.7)
Foreign exchange 1.7 3.9
---------------- --------------
Fair value of plan assets at end of year $ 81.6 $ 70.3
---------------- --------------
Unfunded status (14.9) (14.1)
Unrecognized net actuarial loss 1.7 1.9
================ ==============
Accrued benefit cost $ (13.2) $ (12.2)
================ ==============
</TABLE>
65
<PAGE>
Assumptions:
Discount rate 6%-8% 6%-8.5%
Compensation increase rate 3%-6% 3%-6.5%
Investment return assumption 8% 8.5%
27. FINANCIAL INSTRUMENTS
(A) Fair value
The Company's financial instruments include cash and cash equivalents,
short-term investments, accounts receivable, long-term receivables,
accounts payable, long-term debt, interest swaps and foreign exchange
contracts. Due to the short-term maturity of cash and cash equivalents,
short-term investments and accounts payable, the carrying values of
these instruments are reasonable estimates of their fair value. The
fair value of the foreign exchange contracts reflects the estimated
amount that the Company would have been required to pay if forced to
settle all outstanding contracts at year-end. This fair value
represents a point-in-time estimate that may not be relevant in
predicting the Company's future earnings or cash flows. The fair value
of financial instruments approximate their carrying value with the
following exceptions:
1999 1998
-------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
----------- -------- ----------- ----------
Long-term debt:
Capital leases and other $ 90.5 $ 87.4 $ 84.5 $ 83.8
Non-interest bearing 1996
Canada-Quebec government loan 4.2 3.2 3.8 3.0
Derivatives
Interest rate swap - 1.9 - -
(B) Derivative financial instruments
The Company operates globally, and therefore may experience risk that
earnings and cash flows may be adversely impacted by fluctuations in
foreign exchange. The Company uses foreign exchange contracts to manage
foreign exchange risk. The notional amounts for foreign exchange
contracts represent the U.S. dollar equivalent of an amount exchanged.
Generally, foreign exchange contracts are designated for firmly
committed or forecasted sales and purchases that are expected to occur
in less than one year. Most of the foreign exchange contracts mature
within three months with the longest maturity extending to two years.
At March 26, 1999, deferred gains totalled $3.4 (1998 - $0.9) and
deferred losses totalled $3.6 (1998 - $12.8). The following table
presents the net notional amounts of these derivative financial
instruments in U.S. dollars:
Buy (Sell): (U.S. dollars) 1999 1998
------------- -------------
Foreign exchange contracts:
British pounds $(142.3) $(189.4)
Canadian dollars 101.2 171.8
Swedish krona 8.8 6.1
Euro (6.0) -
Italian lira (5.2) (0.4)
French francs (3.7) (0.6)
Other (5.0) 0.8
============= =============
Total $ (52.2) $ (11.7)
============= =============
In addition, foreign exchange contracts of $11.5 British pounds were
outstanding as at March 27, 1998 to buy the following currencies: $7.1
U.S. dollars, 32.4 French francs, 2.7 Deutsche marks, 646.7 Japanese
yen and 977.0 Italian lira.
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<PAGE>
On March 12, 1998, the Company entered into an interest rate swap to
fix the interest on a portion of the AXELs Series B loan and the
Tranche A Term Loan for a notional amount of $224.5 (U.S. $157.0).
Since then, it has been reduced to $219.7 (U.S. $145.8), which is
sufficient to cover the total outstanding balance of the two term
loans. The base interest rate was fixed at 5.79 percent and the
contract matures on March 2001. This interest rate swap is considered
to be an effective hedge of the variable interest rate on the term
loans. The Company is exposed to credit risk in the event of
non-performance, but does not anticipate non-performance by the
counterparty.
(C) Credit risk
The Company's financial assets that are exposed to credit risk consist
primarily of cash and cash equivalents, short-term investments,
accounts receivable and derivative contracts. Cash and cash equivalents
and short-term investments are invested in government and commercial
paper with investment grade credit rating.
The Company is exposed to normal credit risk from customers. However,
the Company's orientation is global with a large number of diverse
customers to minimize concentrations of credit risk.
Mitel is exposed to credit risk in the event of non-performance by its
counterparties on its foreign exchange contracts and interest rate swap. The
Company does not anticipate non-performance, by any of the counterparties, as it
deals with counterparties who are major financial institutions. The Company
anticipates the counterparties will satisfy their obligations under the
contracts.
(D) Interest rate risk
The Company is not exposed to significant interest rate risk due to the
short-term maturity of its monetary assets and current liabilities.
(E) Unused bank lines of credit
The Company has a line of credit for $113.0 (U.S.$75.0), of which up to
$30.1 (U.S.$20.0) is available for letters of credit. At March 26,
1999, $2.3 (U.S.$1.5) (1998 - $8.7) in letters of credit were
outstanding against this credit facility, thus the Company had unused
and available demand bank lines of credit amounting to approximately
$110.7 (U.S.$73.5) (1998 - $97.3) at a rate of interest based on the
LIBOR (5.0 percent), plus 2 percent.
28. SUPPLEMENTARY CASH FLOW INFORMATION
1999 1998 1997
----------- ----------- -----------
Net change in non-cash working capital
balances related to operating activities:
Accounts receivable $ (22.4) $ (65.6) $ (9.8)
Inventories (28.7) (6.3) (11.6)
Accounts payable and accrued liabilities (75.4) 28.9 10.3
Deferred revenue 3.0 5.1 2.9
Other 0.3 (12.3) 1.6
----------- ----------- -----------
$ (123.2) $ (50.2) $ (6.6)
=========== =========== ===========
Cash interest paid $ 38.7 $ 9.0 $ 3.8
=========== =========== ===========
Cash taxes paid $ 17.2 $ 6.5 $ 6.8
=========== =========== ===========
29. COMPARATIVE FIGURES
Certain of the 1998 and 1997 comparative figures have been reclassified
so as to conform to the presentation adopted in 1999.
67
<PAGE>
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
Company of each director and nominee for director of the Company.
Name Age Director Since Positions
Andre Borrel 62 July 23, 1998 Director
Jean-Jacques Carrier(4) 48 October 28, 1998 Director
Anthony L. Craig(2) 53 May 16, 1996 Director
Hubert T. Lacroix(1,3,4) 43 July 21, 1992 Director
Kirk K. Mandy(3,4) 43 July 23, 1998 Director, President
and CEO
Donald G. McIntyre 51 July 23, 1998 Director
Dr. John B. Millard 60 February 4, 1993 Director
Donald W. Paterson(1,2) 66 May 16, 1996 Director
Dr. Henry Simon(3,4) 69 July 21, 1992 Director and
Chairman
Peter van Cuylenburg(1,4) 51 March 15, 1996 Director
Jonathan I. Wener(2) 48 July 21, 1992 Director
(1) Member of the Audit Committee (established in accordance with the
Canada Business Corporations Act)
(2) Member of the Compensation and Human Resources Development Committee
(3) Member of the Nominating Committee
(4) Member of the Executive Committee
Mr. Borrel has been an independent consultant to the semiconductor
industry since 1995. From 1967 to 1994, he served in senior management positions
with Motorola, Inc. in Europe and the United States. Mr. Borrel is a director of
Chartered Semiconductors Manufacturing in Singapore, Microchemical System SA in
Switzerland and Terosil in the Czech Republic.
Mr. Carrier joined the Company in 1993 as Vice President of Finance and
Chief Financial Officer and became Senior Vice President of Finance and Chief
Financial Officer in January, 1999.
Mr. Craig is President of Tamandra Inc., a private investment firm.
From 1996 to 1998 he was and Chief Executive Officer of Global Knowledge
Network. 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
68
<PAGE>
Vice President, International for Oracle Corporation. Mr. Craig is also a
director of Bell Industries and Global Knowledge Network.
Mr. Lacroix has been a partner with McCarthy Tetrault (law firm) since
1984. Mr. Lacroix practices in the areas of securities, commercial and corporate
law. He is also a director of Michelin Canada Inc., Donohue Inc. and ITS
Investments Limited Partnership and acts as non-executive Chairman of the Board
of Directors of Telemedia Communications Inc. and of Gasbeau Company and is the
chairman of the securities advisory committee to the Quebec Securities
Commission.
Mr. Mandy was appointed President and Chief Executive Officer on July
23, 1998. From January 1997 until July 1998, he was Vice President and General
Manager, Business Communications Systems and 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
Company in 1984.
Mr. McIntyre joined the Company in 1987 as Vice President, General
Counsel and Secretary and became Vice President, Human Resources, General
Counsel and Secretary in 1991. In October 1998 he was appointed Senior Vice
President of Human Resources, General Counsel and Secretary. Mr. McIntyre also
served as a director of the Company from 1993 to 1996.
Dr. Millard joined the Company in 1993 as President and Chief Executive
Officer. Dr. Millard retired from the Company in 1998.
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 Telepanel Systems Inc. and
Microforum Inc.
Dr. Simon is Chairman of Schroder Ventures Life Sciences Advisers, a
venture capital company advising on investments in the life sciences. From 1994
to 1996, he was Chief Executive Officer of Schroder Ventures Life Sciences
Advisers and, from 1987 to 1996, he was a partner of Schroder Venture Advisers,
a venture capital group in London, United Kingdom. He is chairman of Leica
Microsystems and Strides Arcolab as well as a director of Laservision Inc. and
Chemunex S.A. Dr. Simon has been Chairman of the Company's Board of Directors
since July 21, 1994.
Mr. van Cuylenburg has been President, DLT & Storage Systems Group, of
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. Mr. van Cuylenburg is also a
director of QAD Inc.
Mr. Wener has been Director, Principal Shareholder and President of
Canderel Holdings Inc., 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 Laurentian Bank of Canada.
There are no family relationships among directors, nominees for
director or executive officers of the Company. Under the terms of the Company's
By-Laws and the Canada Business Corporations Act, a majority of the directors
must be resident Canadians.
69
<PAGE>
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.
The Board of Directors of the Company has always endorsed the concept,
principles and practices of sound corporate governance and believes that the
Company is in substantial compliance with the Governance Guidelines.
The following is a summary of the particulars of the system of
corporate governance of the Company.
Mandate of the Board
The mandate of the Board of Directors is to supervise the management of
the business and affairs of the Company with a view to evaluating, on an ongoing
basis, whether the Company'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 Company 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 Company and its business
environment;
(iii) identifying, with management, the principal risks of the
Company'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
70
<PAGE>
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 Company, other than interests and relationships arising from
shareholding.
The Board of Directors, currently composed of four related directors
out of ten board members, complies with such recommendations. Jean-Jacques
Carrier, Senior Vice President of Finance and Chief Financial Officer, Kirk K.
Mandy, President and Chief Executive Officer, Donald G. McIntyre, Senior Vice
President of Human Resources and General Counsel and Hubert T. Lacroix, partner
of the Company's principal legal advisors, are considered to be related to the
Company.
The Governance Guidelines also recommend that a board of directors
should examine its size. The Board of Directors believes that the number of ten
directors, will be 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 Company.
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
whom should be unrelated directors. The Company currently has four committees,
being the Audit Committee, the Compensation and Human Resources Development
Committee (the "Compensation Committee"), the Nominating Committee and the
Executive Committee. Certain of 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 four committees of the Board of Directors have been established
with specific mandates and defined authorities with a view to assisting 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 Company 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 Company and (iv) with management, the risks inherent to the
Company's business and risk management programs, including those related to the
environment and the health and safety of employees, and to make recommendations
on a quarterly basis to the Board of Directors with respect thereto.
The Audit Committee is presently composed of three outside directors,
two of whom are unrelated: Donald W. Paterson and Peter van Cuylenburg and one
of whom is related: Hubert T. Lacroix. In view of the historical contribution of
Mr. Lacroix, the Board of Directors considered the participation of Mr. Lacroix
in the Audit Committee to be 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 below 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 three outside and unrelated
directors: Anthony L. Craig, Donald W. Paterson and Jonathan I. Wener.
71
<PAGE>
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 Company, to evaluate the structure, responsibility
and composition of committees of the Board of Directors and to make
recommendations to the Board of Directors with respect thereto. 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
one inside and related director: Kirk K. Mandy. In view of the historical
contribution of Mr. Lacroix and the contribution to the Company of Mr. Mandy,
the Board of Directors considered the participation of Messrs. Lacroix and Mandy
in the Nominating Committee to be essential and concluded that they should
continue to serve on such committee.
Executive Committee
The mandate of the Executive Committee is to supervise, control and
manage the business and affairs of the Corporation when the Board is not in
session in order to execute in a timely fashion corporate plans and programs.
The Executive Committee is presently composed of three outside directors, two of
whom are unrelated: Dr. Henry Simon and Peter van Cuylenburg and one of whom is
related: Hubert T. Lacroix and two inside and related directors: Kirk K. Mandy
and Jean-Jacques Carrier. In view of the historical contribution of Mr. Lacroix,
the contribution to the Corporation of the President and Chief Executive
Officer, Kirk K. Mandy, and the focus on financial performance brought in by the
Senior Vice President of Finance and Chief Financial Officer, Jean-Jacques
Carrier, the Board of Directors considered the participation of Messrs. Lacroix,
Mandy and Carrier to be essential and concluded that they should 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
Company, 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 Company. The
Chairman of the Board will determine if the circumstances warrant the engagement
of an outside advisor.
72
<PAGE>
Executive Officers
The names, ages and positions with the Company of the executive
officers of the Company, other than Mssrs. Carrier, Mandy and McIntyre who are
listed in the table of directors, are as follows:
Name Age Positions
Paul Butcher 37 Senior Vice President
(acting) and General
Manager, Mitel
Communications Systems
Francois Cordeau 41 Vice President and General
Manager, Mitel Semiconductor
Shirley J. Mears 44 Vice President, Treasurer
Tim Saunders 39 Vice President and
Corporate Controller
Moris Simson 45 Senior Vice President,
Strategy and Corporate
Development and Chief
Technology and Marketing
Officer
Mr. Butcher was appointed Senior Vice President (acting) and General
Manager, Mitel Communications Systems on May 21, 1999. From March 1997 until May
1999, he was Managing Director, Business Communications Systems in the Europe
Middle East and Africa ("EMEA") Division and prior to that Head of the Hybrid
Division in EMEA from December 1993 to March 1997. Mr. Butcher joined the
Company in 1984.
Mr. Cordeau was appointed Senior Vice President and General Manager of
Mitel Semiconductor in October 1998. From June 1997 until October 1998 he was
Vice President, Semiconductor Operations. Between April 1996 and June 1997, Mr.
Cordeau served as Plant Director - Sweden, and from September 1992 to April 1996
as Plant Director - Bromont, both within Mitel's Semiconductor business. Mr.
Cordeau originally joined the Company in 1984.
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 Company in 1983.
Mr. Saunders was appointed Vice President and Corporate Controller in
July 1998. Mr. Saunders served as Director, Corporate Finance from July 1992 to
June 1997 and as Corporate Controller from June 1997 to July 1998. Mr. Saunders
joined Mitel in 1992.
Mr. Simson was appointed Senior Vice President, Strategy and Corporate
Development and Chief Technology and Marketing Officer in May 1999. From May
1996 to April 1999, he was President of C*Quest Consulting and, previous to that
date, he was with the BCE Group of companies as Executive Advisor in BCE Mobile
and Vice President of Nortel's Data Networks division since November 1992.
Item 11. Executive Compensation
The aggregate compensation paid by the Company to its directors and
executive officers for services rendered during Fiscal 1999 was $3,413,507. 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.
The aggregate amount set aside or accrued by the Company and its
subsidiaries during Fiscal 1999 for the provision of pension, retirement and
similar benefits to the directors, executive officers and one former executive
73
<PAGE>
officer of the Company as a group was $245,094, excluding adjustments for market
value fluctuations related to the current year and previous year accruals which
totaled a decrease of $53,715 for the above executive officers.
Summary Compensation Table
The following table sets forth compensation information for the three
fiscal years ended March 26, 1999, March 27, 1998, and March 28, 1997, for the
Chief Executive Officer ("CEO"), former CEO and the four other most highly
compensated executive officers of the Corporation (collectively, the "Named
Executive Officers").
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Annual Compensation
----------------------------------------------- Long-Term
Compensation
Awards
Bonus Other Securities
Name and (Annual Annual Under All Other
Principal Fiscal Incentive Compen- Options Compen-
Position Year Salary Awards) sation(1) Granted sation(3)
($) ($) ($) (#) ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kirk K. Mandy 1999 434,089 100,000 -- -- 66,319
President and Chief 1998 289,206 270,000 -- 100,000 47,458
Executive Officer 1997 238,836 150,000 -- 55,000 40,224
Dr. John B. Millard 1999 912,183 -- -- -- 27,458
Past President and Chief 1998 513,646 596,000 -- 50,000 2,643,193
Executive Officer 1997 508,136 125,000 -- 100,000 82,867
Paul Butcher 1999 267,285 58,729 -- -- 95,515
Senior Vice President (acting) 1998 231,586 76,730 -- 67,000 18,907
and General Manager, Mitel 1997 169,349 68,287 -- 5,000 40,121
Communications Systems
Jean-Jacques Carrier 1999 266,836 40,000 -- -- 42,668
Senior Vice President of 1998 254,916 307,500 -- 80,000 40,901
Finance and Chief Financial 1997 248,019 57,500 -- 30,000 39,690
Officer
Francois Cordeau 1999 242,791 40,000 248,372(2) -- 36,971
Senior Vice President and 1998 207,189 185,625 -- 100,000 42,083
General Manager, Mitel 1997 249,954 66,032 87,365 10,000 9,100
Semiconductor
Donald G. McIntyre 1999 211,139 40,000 25,731 -- 36,934
Senior Vice President, 1998 196,778 229,700 -- 75,000 58,763
Human Resources, General 1997 190,944 37,500 -- 25,000 113,691
Counsel and Secretary
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The value of benefits not exceeding the lesser of $50,000 and 10% of
the sum of salary and bonuses has been omitted for each of these Named
Executive Officers.
(2) Mr. Cordeau receives cost of living and other benefits under Mitel's
expatriate plan. Cost of living expenses totaling $169,624 are included in
this amount.
(3) "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 a decrease of $50,789 for the Named Executive
Officers. It also includes amounts for the exercise of stock options based
on the excess of the market price of the common shares on the date of
exercise over the exercise price thereof.
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<PAGE>
Employee Share Ownership Plan
The Employee Share Ownership Plan was approved by the Board of
Directors in May 1997. The purpose of this plan is to enable employees to invest
in equity shares of the Company through employee savings. Employees make
contributions by means of payroll deductions and common shares of the Company
are purchased twice per month by Montreal Trust Company of Canada (the trustee
appointed to administer the plan) through normal market facilities. The Company
pays all brokerage commissions, transfer taxes and other charges and expenses of
the purchase and sale of the common shares except in connection with sales of
fewer than 100 shares, in which case the employee is responsible for such costs.
1991 Stock Option Plan for Key Employees and Non-Employee Directors
The 1991 Stock Option Plan for Key Employees and Non-Employee Directors
(the "Option Plan") provides for the granting of non-transferable options to
purchase common shares to key employees and non-employee directors of the
Company and its subsidiaries, as determined from time to time by the
Compensation Committee. The Option Plan was approved by the shareholders of the
Company at the 1991 Annual and Special Meeting of Shareholders and certain
amendments were approved by the shareholders at the 1993, 1995 and 1998 Annual
and Special Meetings of Shareholders.
All options granted under the Option Plan must be exercised within a
maximum of ten years following the date of grant or such other shorter time or
times as may be determined by the Compensation Committee at the time of grant.
Under the terms of the Option Plan, up to 25 percent of the common shares in
respect of each option may be purchased after one year from the date of grant,
up to 50 percent after two years from the date of grant, up to 75 percent after
three years from the date of grant and up to 100 percent after four years from
the date of grant or at such other time or times as may be determined by the
Compensation Committee at the time of grant.
The price at which common shares may be purchased upon exercise of an
option is 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 Option Plan provides 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 (but in no event after the
expiration date of such option).
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
Company 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, for up to a maximum of three years following the date of termination
of the employee's employment (but in no event after the expiration date of such
option). 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 of a written notice by the Company to
the employee confirming such termination.
The Option Plan further provides that, in the event of a change of
control (whether in fact or in law) of the Company 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
Company, all options held by such director that 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
75
<PAGE>
(but in no event after the expiration date 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 16,000,000 (representing approximately
13.7% of the common shares outstanding as of May 28, 1999). As of May 28, 1999,
the closing price of the common shares of the Company on The Toronto Stock
Exchange was $7.60 and therefore the total market value as of such date of the
8,040,713 common shares (excluding 2,746,112 common shares as to which options
have been previously exercised) that are or may be subject to options pursuant
to the Option Plan was $61,109,419.
During Fiscal 1999, the Company granted options to purchase up to
403,000 common shares to 75 employees and one non-employee director of the
Company at an average exercise price of $19.40 per share, of which options for
127,000 common shares were granted to two executive officers at an average
exercise price of $21.98 per share. During Fiscal 1999, one former executive
officer of the Company exercised options to purchase 50,000 common shares having
an aggregate net value (being the market value less the exercise price on the
date of the exercise) of $928,500 as of such date.
As at May 28, 1999, there were outstanding under the Option Plan
options for an aggregate of 8,040,713 common shares at prices ranging from $1.10
to $30.00 per share and expiring at various dates through 2007. Of such options,
options for an aggregate of 1,370,800 common shares were held by seven executive
officers, three of whom are directors of the Company.
Stock Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted to the Named Executive Officers under the Option Plan during Fiscal
1999.
<TABLE>
<CAPTION>
Option Grants During Fiscal 1999
- -------------------------------------------------------------------------------------------------------------------------
Market Value
% of Total of Securities
Securities Options Underlying
Under Granted to Exercise Options/SARS
Options Employees or on the Date
Granted in Fiscal Base Price of Grant Expiration
Name (#) 1999 ($/Security) ($/Security) Date
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Kirk K. Mandy 100,000 26(1) 20.44(2) 21.65(2) July 17, 2004
20,000 5 30.00 21.65 July 17, 2004
John B. Millard n/a
Paul Butcher n/a
Jean-Jacques Carrier n/a
Francois Cordeau n/a
Donald G. McIntyre n/a
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
76
<PAGE>
(1) Options granted upon appointment as President and Chief Executive Officer
(2) Exercise price is determined by the five day averaging formula as defined
in the Option Plan and market value is the price on the date of grant.
Year-End Option Values Table
The following table summarizes, for each of the Named Executive
Officers, the aggregate options exercised during Fiscal 1999 and option values
at March 26, 1999.
Aggregated Options Exercised During Fiscal 1999
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Securities Aggregate Value of Unexercised
Acquired Value Unexercised Options at In-the-Money Options
Name On Exercise Realized March 26, 1999 at March 26, 1999
(#) ($) (#) ($)
--------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kirk K. Mandy n/a 102,500 107,500 181,925 --
Dr. John B. Millard n/a 538,000 -- 2,512,650 --
Paul Butcher 8,500 73,780 14,750 3,686 54,000 49,155
Jean-Jacques Carrier n/a 127,500 82,500 285,038 --
Francois Cordeau n/a 36,750 100,000 49,850 --
Donald G. McIntyre n/a 82,000 75,000 145,144 --
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Executive Compensation Agreements
The Company has entered into Compensation Agreements with five senior
executives (the "Executives"), including some of the Named Executive Officers,
to provide for certain entitlements only in the event of a Take-Over Bid (as
defined) for the Company or the termination of employment of the Executive(s)
resulting from a Change of Control (as defined) of the Company.
The agreements generally provide as follows:
(a) in the event of a Take-Over Bid for the Company, all unvested
stock options held by an Executive would immediately vest and
become exercisable. In the event a Take-Over Bid is not completed,
there are provisions to restore the Company and such Executive, 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 Company of an Executive's
employment, other than for Just Cause (as defined), within
twenty-four months following a Change of Control of the
Company, the Executive would receive as compensation: (i) for
four Executives - 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 other Executive - 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
77
<PAGE>
months of Benefits and the immediate vesting of all unvested
stock options then held by the Executive.
The Compensation Agreements were developed under the direction of the
Compensation Committee in consultation with independent compensation consultants
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 26, 1999, each director who was not
a salaried officer of the Company or its subsidiaries received an annual stipend
of $10,000 and a director's fee of $2,000 for each meeting of the Board of
Directors or any Committee thereof attended in person or $1,250 for each
telephone meeting of the Board of Directors and for each day spent on the
affairs of the Company, and was reimbursed for his expenses. In addition, the
Chairman of each Committee of the Board of Directors received an additional
annual fee of $6,000. The Company also pays the Chairman of the Board of
Directors, when such person is not an employee of the Company, an annual stipend
of $100,000 (inclusive of Board and Committee meeting fees) and a per diem of
$2,500 for attendance on Company business to an annual maximum of $50,000.
The following table summarizes the aggregate unexercised options held
by non-employee directors at May 28, 1999.
Option Information For Non-Employee Directors
- ----------------------------------- ============================================
Date of Grant Unexercised Options at May 28, 1999
Exercisable / Unexercisable
- ----------------------------------- ============================================
- ----------------------------------- ============================================
January 26, 1993 100,000 / --
- ----------------------------------- ============================================
- ----------------------------------- ============================================
May 12, 1994 48,000 / --
- ----------------------------------- ============================================
- ----------------------------------- ============================================
May 17, 1995 60,000 / --
- ----------------------------------- ============================================
- ----------------------------------- ============================================
March 15, 1996 15,000 / 5,000
- ----------------------------------- ============================================
- ----------------------------------- ============================================
May 16, 1996 65,000 / 25,000
- ----------------------------------- ============================================
- ----------------------------------- ============================================
May 22, 1997 55,000 / 60,000
- ----------------------------------- ============================================
- ----------------------------------- ============================================
March 12, 1998 37,500 / 112,500
- ----------------------------------- ============================================
- ----------------------------------- ============================================
July 23, 1998 -- / 25,000
- ----------------------------------- ============================================
- ----------------------------------- ============================================
May 20, 1999 -- / 140,000
- ----------------------------------- ============================================
Directors' and Officers' Liability Insurance
As at May 28, 1999, the Company had in force Directors' and Officers'
Liability Insurance policies in the amount of U.S. $30,000,000 for the benefit
of the directors and officers of the Company and its subsidiaries. The total
amount of the premiums paid by the Company for the policies in effect for the
fiscal year ended March 26, 1999 was Cdn. $270,468. No portion of these premiums
was paid by the directors and officers of the Company. 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 Company.
Indebtedness of Officers, Directors and Employees
As at May 28, 1999, no officer, director or employee or former officer,
director or employee of the Company or its subsidiaries was indebted to the
Company in connection with the purchase of securities of the Company.
78
<PAGE>
As at May 28, 1999, the aggregate amount of outstanding indebtedness to
the Company incurred, other than in connection with the purchase of securities
of the Company and other than routine indebtedness, by all officers, directors,
employees and former officers, directors and employees of the Company or its
subsidiaries amounted to $335,551.
REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is comprised of three members of the Board
of Directors: Jonathan I. Wener, the Chairman of the Committee, Anthony L. Craig
and Donald W. Paterson.
It is the responsibility of the Compensation Committee to recommend to
the Board of Directors compensation policies and levels, compensation plans,
stock option/purchase plans and benefit plans. The Compensation Committee is
also responsible for developing and reviewing succession plans that sustain the
long-term viability of the Company.
General Principles of Executive Compensation
Compensation of executive officers, including the Named Executive
Officers, is determined by the Board of Directors upon recommendations made by
the Compensation Committee.
The Company's executive compensation programs are designed to attract
and retain competent individuals who can ensure the current and long-term
success of the Company. Each component of the Company's executive compensation
program is designed to be competitive with leading Canadian and U.S. high
technology companies of similar size.
Executive positions are formally evaluated by an independent
consultant, using a widely recognized point-factor job evaluation system,
resulting in a specific number of points for each position. Using total points
to compare to the external comparator group, a market rate for each executive
position is established based on information furnished through independent
survey data.
The total compensation program for executive officers is comprised of
three components: base salary, an annual incentive and a long-term incentive.
Base Salary
Base salary recommendations are determined based on market data for
positions of similar responsibilities and complexity in the comparator group,
internal equity comparisons and the individual's ability and experience. The
Company's base salaries are competitive with those of the comparator group.
Annual Incentive Compensation Arrangements
The Company's annual incentive plans are intended to incent individuals
to focus on achievement of current year operating income targets and key
strategic performance objectives within each of the business units. Individual
target awards and performance weightings within the plans are dependent on the
individual's ability to influence results. Operating Income targets are set by
the Board of Directors at the commencement of the fiscal year and awards for
business unit and individual performance are only payable if the corporate
operating income is at least 75% of target performance. Payments may be made for
performance below this threshold at the Board of Directors' discretion.
79
<PAGE>
Long-Term Incentive
Options to purchase common shares are granted to the Named Executive
Officers and other key employees to sustain commitment to long-term
profitability and maximize shareholder value over the long term. Under the terms
and conditions of the Option Plan, participants are granted options which are
exercisable for periods of time determined by the Compensation Committee to a
maximum of ten years following the date of grant at an exercise price equal to
the average market price of the Company's common shares on The Toronto Stock
Exchange during the five trading day period immediately preceding the date of
grant. See "Executive Compensation - 1991 Stock Option Plan for Key Employees
and Non-Employee Directors."
Compensation of the President and Chief Executive Officer
In July 1998, Kirk K. Mandy was appointed as President and Chief
Executive Officer of the Company. Mr. Mandy's compensation was approved by the
Compensation Committee and the Board of Directors.
The base salary and long-term incentive components of Mr. Mandy's
compensation are determined in accordance with the policies applying to all
executive officers of the Company. Mr. Mandy's current base salary is $515,000.
Mr. Mandy's annual discretionary bonus is determined, at each fiscal
year end, based on the Compensation Committee's assessment of Mr. Mandy's
performance, particularly in improving the Company's long-term profitability and
financial condition. For Fiscal 1999, Mr. Mandy earned a bonus of $100,000 based
on his efforts in improving the Company's prospects for sustainable future
growth.
The Compensation Committee of the Board of Directors, whose names are
set out below, has approved the issue of this Report on Executive Compensation
and its inclusion in this Annual Report on Form 10-K.
Mr. Anthony L. Craig
Mr. Donald W. Paterson
Mr. Jonathan I. Wener
Performance Graph
The following graph compares the cumulative total shareholder return on
$100 invested in common shares of the Company with the cumulative total return
of The Toronto Stock Exchange 100 Stock Index for the five most recently
completed fiscal years, assuming reinvestment of all dividends.
80
<PAGE>
[GRAPHIC OMITTED]
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as at May 28, 1999 with
respect to: (1) all shareholders known by the Company 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, each of the Named
Executive Officers and all executive officers and directors as a group.
<TABLE>
<CAPTION>
Class of Shares Amount Beneficially Owned Percent of Class(1)
Name and Address
<S> <C> <C> <C>
The CC&L Financial Services Group common 8,590,100 7.36
1200 Cathedral Place
925 West Georgia Street
Vancouver, BC V6C 3L2
Andre Borrel common 6,250 (6)
Chemin du bois de Seyme, 1
1253 Vandoeuvres - GE - Suisse
Paul Butcher common 35,250 (6)
*Jean-Jacques Carrier common 180,000 (6)
*Francois Cordeau common 50,500 (6)
Anthony L. Craig common 17,700 (6)
27421 Country Club Drive
Bonita Bay, Bonita Springs
Florida, U.S.A. 33293
Hubert T. Lacroix common 133,778 (6)
1170 Peel Street
Montreal, Quebec H3B 4S8
*Kirk K. Mandy common 166,750 (6)
*Donald G. McIntyre common 111,250 (6)
81
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
*Shirley Mears common 32,625 (6)
Dr. John B. Millard common 610,300 (6)
200 County Rd. #249
Cullman, AL U.S.A. 35057
Donald W. Paterson common 33,250 (6)
141 Adelaide St. West, Suite 1200
Toronto, Ontario M5H 3L9
*Tim Saunders Common 24,875 (6)
Dr. Henry Simon common 176,250 (6)
1 Telegraph Hill
London, England NW3 7NU
Peter van Cuylenburg common 31,250 (6)
500 McCarthy Blvd.
Milpitas, CA 95035
Jonathan I. Wener common 222,250 (6)
2000 Peel Street, Suite 900
Montreal, Quebec H3A 2W5
15 directors and executive officers as a group common 1,832,278
R&D Preferred nil
</TABLE>
* These officers are located c/o Mitel Corporation, 350 Legget Drive, Kanata,
Ontario, Canada K2K 2W7.
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. Butcher - 32,750; Mr. Carrier - 150,000; Mr.
Cordeau - 50,500; Mr. Craig - 16,250; Mr. Lacroix - 125,250; Mr. Mandy -
163,750; Mr. McIntyre - 100,750; Ms. Mears - 32,625; Dr. Millard -
538,000; Mr. Paterson - 31,250; Mr. Saunders - 24,875; Dr.
Simon - 51,250; Mr. van Cuylenburg - 31,250 and Mr. Wener - 125,250.
(3) Does not include stock options granted to non-employee directors which
are not currently exercisable, as follows: Mr. Borrel - 38,750; Mr. Craig
- 53,750; Mr. Lacroix - 53,750; Mr. Paterson - 53,750; Dr. Simon -
53,750; Mr. van Cuylenburg - 53,750, and Mr. Wener - 53,750.
(4) 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.
(5) The holdings of one executive officer and one former executive officer
excludes 25,100 common shares held of record by their spouse and
children, as to which they disclaim beneficial ownership.
(6) Represents less than 1% of the class.
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 26, 1999, the Company 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:
82
<PAGE>
1. Consolidated Financial Statements.
<TABLE>
<CAPTION>
Page Number
(within the 10-K)
<S> <C>
Auditor's Report to the Shareholders 42
Consolidated Balance Sheets at March 26, 1999, March 27, 1998 and March 28, 1997 44
Consolidated Statements of Income and Retained Earnings for the fiscal years ended
March 26, 1999, March 27, 1998 and March 28, 1997 45
Consolidated Statements of Cash Flows for the fiscal years ended
March 26, 1999, March 27, 1998 and March 28, 1997 47
Notes to the Consolidated Financial Statements 48
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 they are not
applicable or not required, or the information is included in the consolidated
financial statements or notes thereto.
</TABLE>
3. Exhibits
Exhibit Description
Number
3.1 Articles of Continuance of the Company 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 10-K for
the year ended February 24, 1984)
3.3 Certificates and Articles of Amendment of Mitel Corporation dated
June 27, 1984, September 7, 1984 and October 9, 1984 (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 Company (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)
83
<PAGE>
10.1 Share Sale and Purchase Agreement, dated February 12, 1998, between
The General Electric Company p.l.c., London, England and Mitel
Telecom Limited, Portskewett, Gwent, Wales and Mitel Corporation,
Kanata, Ontario, Canada (incorporated by reference to Exhibit 2.1 to
Form 8-K filed on February 27, 1998)
10.2 Deed of Tax Covenant, dated February 12, 1998, between The General
Electric Company, p.l.c. and Mitel Telecom Limited (incorporated by
reference to Exhibit 2.2 to Form 8-K filed on February 27, 1998)
10.3 Environmental Deed, dated February 12, 1998, between The General
Electric Company, p.l.c. and Mitel Telecom Limited (incorporated by
reference to Exhibit 2.3 to Form 8-K filed on February 27, 1998)
10.4(a) Credit Agreement, dated as of February 12, 1998 (the "Credit
Agreement"), between Goldman Sachs Credit Partners L.P., as advisor,
arranger and syndication agent, Canadian Imperial Bank of Commerce,
as administrative agent, the Lenders listed therein, and Mitel
Corporation, as borrower (incorporated by reference to Exhibit 10.1
to Form 8-K filed on February 27, 1998)
10.4(b) First Amendment and Limited Waiver to Credit Agreement, dated as of
March 16, 1998
10.4(c) Second Amendment and Limited Waiver to Credit Agreement, dated
August 6, 1998
10.4(d) Third Amendment to Credit Agreement dated October 23, 1998
10.4(e) Fourth Amendment to Credit Agreement dated January 4, 1999
10.4(f) Fifth Amendment to Credit Agreement dated May 19, 1999
21 Subsidiaries of the Company
23 Consent of Ernst & Young
24 Power of Attorney (included on the signature page to this Form 10-K)
27 Financial Data Schedule
(b) Reports on Form 8-K. No Current Reports on Form 8-K were filed by
the Company in the fourth quarter of the fiscal year ended March 26, 1999.
84
<PAGE>
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.
MITEL CORPORATION
By: /s/ Kirk K. Mandy
------------------
(Kirk K. Mandy)
Dated: June 24, 1999 President and Chief Executive Officer
-------------
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>
<CAPTION>
<S> <C> <C>
Signature Title Date
/s/ Henry Simon Chairman of the Board June 24, 1999
- ------------------
(Henry Simon)
/s/ Kirk K. Mandy President and Chief Executive Officer June 24, 1999
- ------------------
(Kirk K. Mandy)
/s/ Jean-Jacques Carrier Senior Vice President of Finance June 24, 1999
- --------------------------- and Chief Financial Officer
(Jean-Jacques Carrier)
/s/ Anthony L. Craig Director June 24, 1999
- ---------------------------
(Anthony L. Craig)
/s/ Hubert T. Lacroix Director June 24, 1999
- ---------------------------
(Hubert T. Lacroix)
/s/ Donald G. McIntyre Senior Vice President of Human June 24, 1999
- --------------------------- Resources, General Counsel and
(Donald G. McIntyre) Secretary
/s/ Donald W. Paterson Director June 24, 1999
- ---------------------------
(Donald W. Paterson)
/s/ Peter van Cuylenburg Director June 24, 1999
- ------------------------
(Peter van Cuylenburg)
/s/ Jonathan I. Wener Director June 24, 1999
- ---------------------------
(Jonathan I. Wener)
</TABLE>
85
<PAGE>
SCHEDULE II
MITEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
March 26, 1999
(in millions of Canadian dollars)
<TABLE>
<CAPTION>
Additions
Description Balance Charged Charged to Deductions Balance, End
Beginning to Expense Other Accounts of Period
of Period
Allowance for doubtful accounts:
<S> <C> <C> <C> <C> <C>
Fiscal 1999 $10.2 0.2 -- (1.7) $ 8.7
Fiscal 1998 9.8 5.2 -- (4.8) 10.2
Fiscal 1997 5.9 5.8 -- (1.9) 9.8
Restructuring and other provisions:
Fiscal 1999 $59.3 $13.7 $ 3.5 $(41.2) $35.3
Fiscal 1998 12.6 0.2 54.5(1) (8.0) 59.3
Fiscal 1997 3.3 11.7 -- (2.4) 12.6
(1) Amounts charged to other accounts are in respect of acquisition costs and
costs to integrate the operations of the acquired companies with Mitel.
</TABLE>
86
<PAGE>
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 fast packet switching technique by
which short packets or cells containing data, voice or video signals are moved
over networks at high speed.
Asymmetric Digital Subscriber Line (ADSL): A technology that delivers
high speed data rates over a twisted pair of copper wires. ADSL provides
asymmetrical megabit access for two general types of applications, interactive
video and high speed data communications.
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).
Bipolar: Refers to transistors formed with two (N- and P-type)
semiconductor types. Such transistors are generally termed NPN or PNP types.
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.
CMOS or Complementary Metal Oxide Semiconductor: A technology for
making integrated circuits known for requiring less electricity.
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 light in a different wavelength range, thus
providing the capability to transmit light in both directions.
E1: A 2.048 Mpb/s digital transmission link, the digital transmission
standard used in Japan and Europe.
Fab: A factory that makes integrated circuit chips.
Fabless: Refers to semiconductor companies whose designed products are
manufactured in fabs owned by third parties.
87
<PAGE>
Fiber Optic Transmission: 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.
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.
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.
JTAPI or Java telephony API: A set of modularly-designed, application
programming interfaces for Java-based computer telephony applications. JTAPI
offers telephony interface extensions grouped into building-block packages.
Applications written to JTAPI are independent of platforms or phone systems.
LAN: Local Area Network that connects computers together within an
office complex. When such connections are distributed over a city or even larger
area, 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: An intermediate software application layer that links an
end user application to the call control software layer.
MILINK Date Module: A module that 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.
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.
Pin for Pin: A phrase used to describe a semiconductor component that
is not unique and is easily replaceable.
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.
Quartz technology: Base material used to produce Surface Acoustic Wave
Filters.
Silicon-on-Sapphire: A manufacturing process that allows radiation
hardening of silicon in order to permit performance under extreme and harsh
environmental contions.
Surface Acoustic Wave Filters: A product designed to filter noise.
System-On-A-Chip: A complete system designed in the form of an
integrated circuit from which blocks of functionality may be selected to build a
product.
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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.
Thyristor: A bistable semiconductor device used for power switching
that comprises three or more junctions that can be switched from the off state
to the on state, or vice versa, such switching occurring within at least one
quadrant of the principal voltage-current characteristic.
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: A 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.
VCSEL or Vertical Cavity Surface Emitting Laser: The latest development
of laser light sources used in optical fiber communications at speeds of several
gigabits per second such that all information stored on a PC's hard disk could
be transferred in a few seconds.
WAN: Wide Area Network that connects computers distributed throughout a
city or even larger area.
89
EXHIBIT 10.4B
EXECUTION
MITEL CORPORATION
FIRST AMENDMENT AND
LIMITED WAIVER TO CREDIT AGREEMENT
This FIRST AMENDMENT AND LIMITED WAIVER TO CREDIT AGREEMENT
(this "Amendment") is dated as of March 16, 1998, and entered into by and among
Mitel Corporation, a corporation organized under the laws of Canada ("Company"),
the financial institutions listed on the signature pages hereof ("Lenders"),
Goldman Sachs Credit Partners L.P. ("GSCP") as arranger, advisor and syndication
agent (in such capacity, the "Syndication Agent") and Canadian Imperial Bank of
Commerce ("CIBC"), as Administrative Agent, and for purposes of Section 11
hereof, the Subsidiary Guarantors listed on the signature pages hereto
(collectively the "Credit Support Parties"), and is made with reference to that
certain Credit Agreement dated as of February 12, 1998, by and among Company,
Lenders, GSCP, as Syndication Agent, and CIBC, as Administrative Agent (the
"Credit Agreement"). Capitalized terms used herein without definition shall have
the same meanings herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, in connection with the Credit Agreement, Company and
Administrative Agent are parties to that certain Post-Closing Punch List
Agreement dated as of February 12, 1998 (the "Post-Closing Agreement");
WHEREAS, Company has requested an additional 30 days to (i)
complete certain items set forth in the Post-Closing Agreement relating to the
property located at Ogdensburg, New York, and (ii) deliver the title opinion of
McCarthy Tetrault with respect to the Bromont Property as required by Section
6.10B of the Credit Agreement; and
WHEREAS, Company has requested that (i) Company be permitted
to borrow Swing Line Loans in both Dollars and Canadian Dollars, (ii) Mitel
Barbados be permitted to make intercompany loans to other Subsidiary Guarantors
and (iii) certain other changes be made to the Credit Agreement as more fully
set forth below;
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
Section 1. AMENDMENTS TO CREDIT AGREEMENT
A. Subsection 1.1A - Definitions.
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(i) Subsection 1.1A of the Credit Agreement is hereby amended
by amending and restating the definition of "Total Utilization
of Revolving Loan Commitments" contained therein in its
entirety as follows:
"Total Utilization of Revolving Loan
Commitments" means, as at any date of determination, the sum
of (i) the aggregate principal amount of all outstanding
Revolving Loans (other than Revolving Loans made for the
purpose of repaying any Refunded Swing Line Loans or
reimbursing the applicable Issuing Lender for any amount drawn
under any Letter of Credit but not yet so applied) plus (ii)
the Equivalent U.S. $ Amount of the aggregate principal amount
of all outstanding Canadian Dollar Swing Line Loans plus (iii)
the aggregate principal amount of all outstanding U.S. Dollar
Swing Line Loans plus (iv) the Letter of Credit Usage."
(ii) Subsection 1.1A of the Credit Agreement is hereby further
amended by adding thereto in alphabetical order the following
new definitions of "Canadian Dollar Swing Line Loans" and
"U.S. Dollar Swing Line Loans" as follows:
"Canadian Dollar Swing Line Loans" means the
Swing Line Loans made by Swing Line Lender to Company in
Canadian Dollars pursuant to subsection 2.1A(iv).
"U.S. Dollar Swing Line Loans" means the Swing
Line Loans made by Swing Line Lender to Company in Dollars
pursuant to subsection 2.1A(iv).
B. Subsection 2.1(iv) - Swing Line Loans.
(i) Subsection 2.1(iv) of the Credit Agreement is hereby
amended by deleting the figure "Cdn. $ 5,000,000" appearing in
the first paragraph thereof and substituting the figure
"$5,000,000" in its place.
(ii) Subsection 2.1(iv) of the Credit Agreement is hereby
further amended by amending and restating the third and fourth
paragraphs appearing therein in their entirety as follows:
"With respect to any Swing Line Loans which have not
been voluntarily prepaid by Company pursuant to subsection
2.4B(i), Swing Line Lender may, at any time in its sole and
absolute discretion, deliver to Administrative Agent (with a
copy to Company), no later than 10:00 A.M. (Toronto time) on
the first Business Day in advance of the proposed Funding
Date, a notice (which shall be deemed to be a Notice of
Borrowing given by Company) requesting Lenders having
Revolving Loan Exposure to make Revolving Loans that are Base
Rate Loans on such Funding Date in an amount equal to the sum
of (a) the Equivalent U.S. $ Amount of the portion of such
Swing Line Loans which are Canadian Dollar Swing Line Loans
and (b) the aggregate principal amount of the portion of such
Swing Line Loans which are
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U.S. Dollar Swing Line Loans, in each case which are
outstanding on the date such notice is given and which Swing
Line Lender requests such Lenders to prepay (the "Refunded
Swing Line Loans"). Anything contained in this Agreement to
the contrary notwithstanding, (1) the proceeds of such
Revolving Loans made by such Lenders (other than Swing Line
Lender) in respect of U.S. Dollar Swing Line Loans shall be
immediately delivered by Administrative Agent to Swing Line
Lender (and not to Company) and applied to repay a
corresponding portion of the Refunded Swing Line Loans, (2)
the proceeds of such Revolving Loans made by such Lenders
(other than Swing Line Lender) in respect of Canadian Dollar
Swing Line Loans shall be immediately converted by
Administrative Agent to the Equivalent Cdn. $ Amount and
delivered by Administrative Agent to Swing Line Lender (and
not to Company) and applied to repay a corresponding portion
of the Refunded Swing Line Loans and (3) on the day such
Revolving Loans are made, Swing Line Lender's Pro Rata Share
of the Refunded Swing Line Loans shall be deemed to be paid
with the proceeds of a Revolving Loan made by Swing Line
Lender, and such portion of the Swing Line Loans deemed to be
so paid shall no longer be outstanding as Swing Line Loans and
shall no longer be due under the Swing Line Note, if any, of
Swing Line Lender but shall instead constitute part of Swing
Line Lender's outstanding Revolving Loans and shall be due
under the Revolving Note, if any, of Swing Line Lender.
Company hereby authorizes Administrative Agent and Swing Line
Lender to charge Company's accounts with Administrative Agent
and Swing Line Lender (up to the amount available in each such
account) in order to immediately pay Swing Line Lender the
amount of the Refunded Swing Line Loans to the extent the
proceeds of such Revolving Loans made by Lenders having
Revolving Loan Exposure, including the Revolving Loan deemed
to be made by Swing Line Lender, are not sufficient to repay
in full the Refunded Swing Line Loans. If any portion of any
such amount paid (or deemed to be paid) to Swing Line Lender
should be recovered by or on behalf of Company from Swing Line
Lender in bankruptcy, by assignment for the benefit of
creditors or otherwise, the loss of the amount so recovered
shall be ratably shared among all Lenders in the manner
contemplated by subsection 10.5.
If for any reason (a) Revolving Loans are not made
upon the request of Swing Line Lender as provided in the
immediately preceding paragraph in an amount sufficient to
repay any amounts owed to Swing Line Lender in respect of any
outstanding Swing Line Loans or (b) the Revolving Loan
Commitments are terminated at a time when any Swing Line Loans
are outstanding, each Lender having Revolving Loan Exposure
shall be deemed to, and hereby agrees to, have purchased a
participation in Canadian Dollars in respect of that portion
of such outstanding Swing Line Loans which are Canadian Dollar
Swing Line Loans and in Dollars in respect of that portion of
such outstanding Swing Line Loans which are U.S. Dollar Swing
Line Loans, in each case in an amount equal to its Pro Rata
Share (calculated, in the case of the foregoing clause (b),
immediately prior to such termination of the Revolving Loan
Commitments) of the unpaid amount of such Swing Line Loans
together with
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accrued interest thereon. Upon one Business Day's notice from
Swing Line Lender, each such Lender shall deliver to Swing
Line Lender (A) an amount in Canadian Dollars equal to its
respective participation in such Canadian Dollar Swing Line
Loans in same day funds at the Funding and Payment Office and
(B) an amount in Dollars equal to its respective participation
in such U.S. Dollar Swing Line Loans in same day funds at the
Funding and Payment Office. In order to further evidence such
participation (and without prejudice to the effectiveness of
the participation provisions set forth above), each Lender
having Revolving Loan Exposure agrees to enter into a separate
participation agreement at the request of Swing Line Lender in
form and substance reasonably satisfactory to Swing Line
Lender. In the event any such Lender fails to make available
to Swing Line Lender the amount of such Lender's participation
as provided in this paragraph, Swing Line Lender shall be
entitled to recover such amount on demand from such Lender
together with interest thereon at the rate customarily used by
Swing Line Lender for the correction of errors among banks for
three Business Days and thereafter at the Base Rate. In the
event Swing Line Lender receives a payment of any amount in
which other Lenders having Revolving Loan Exposure have
purchased participations as provided in this paragraph, Swing
Line Lender shall promptly distribute to each such other
Lender its Pro Rata Share of such payment."
C. Subsection 2.1B - Borrowing Mechanics. Subsection 2.1B of
the Credit Agreement is hereby amended by deleing the phrase "and (vi) in the
case of Swing Line Loans that such Loans shall bear interest by reference to the
Canadian Prime Rate." appearing in the first paragraph thereof and substituting
the following phrase in its place:
"(vi) in the case of Swing Line Loans, whether such Loans shall be
Canadian Dollar Swing Line Loans or U.S. Dollar Swing Line Loans, (vii)
in the case of Canadian Dollar Swing Line Loans, that such Loans shall
bear interest by reference to the Canadian Prime Rate and (viii) in the
case of U.S. Dollar Swing Line Loans, that such Loans shall bear
interest by reference to the Base Rate."
D. Subsection 2.1C - Disbursement of Funds. Subsection 2.1C of
the Credit Agreement is hereby amended by amending and restating the first
paragraph thereof in its entirety as follows:
" C. Disbursement of Funds. All Term Loans and Revolving Loans under
this Agreement shall be made by Lenders simultaneously and
proportionately to their respective Pro Rata Shares, it being
understood that no Lender shall be responsible for any default by any
other Lender in that other Lender's obligation to make a Loan requested
hereunder nor shall the Commitment of any Lender to make the particular
type of Loan requested be increased or decreased as a result of a
default by any other Lender in that other Lender's obligation to make a
Loan requested hereunder. Promptly after receipt by Administrative
Agent of a Notice of Borrowing pursuant to subsection 2.1B (or
telephonic notice in lieu thereof), Administrative Agent shall notify
each Lender or Swing Line Lender, as the case may be of the proposed
borrowing. Each Lender shall make the amount of its Loan available to
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Administrative Agent not later than 12:00 Noon (Toronto time) on the
applicable Funding Date in same day funds in Dollars, at the Funding
and Payment Office, and (other than with respect to any Swing Line Loan
made without notice from Company pursuant to subsection 2.1B) Swing
Line Lender shall make the amount of its Swing Line Loan available to
Administrative Agent not later than 2:00 pm (Toronto time) on the
applicable Funding Date in same day funds in Dollars or Canadian
Dollars, as applicable, at the Funding and Payment Office. Except as
provided in subsection 2.1A(iv) or subsection 3.3B with respect to
Revolving Loans used to repay Refunded Swing Line Loans or to reimburse
any Issuing Lender for the amount of a drawing under a Letter of Credit
issued by it, upon satisfaction or waiver of the conditions precedent
specified in subsections 4.1 (in the case of Loans made on the Closing
Date) and 4.2 (in the case of all Loans), Administrative Agent shall
make the proceeds of such Loans available to Company on the applicable
Funding Date by causing an amount of same day funds in Dollars (or with
respect to Swing Line Loans requested to be made in Canadian Dollars
only, in Canadian Dollars) equal to the proceeds of all such Loans
received by Administrative Agent from Lenders or Swing Line Lender, as
the case may be, to be credited to the account of Company at the
Funding and Payment Office."
E. Subsection 2.2A - Rate of Interest. Subsection 2.2A of the
Credit Agreement is hereby amended by amending and restating the second sentence
thereof in its entirety as follows:
"Subject to the provisions of subsection 2.7, (x) each Canadian Dollar
Swing Line Loan shall bear interest on the unpaid principal amount
thereof from the date made through maturity (whether by acceleration or
otherwise) at the sum of (1) the Canadian Prime Rate plus (2) the
Applicable Base Rate Margin for Tranche A Term Loans and (y) each U.S.
Dollar Swing Line Loan shall bear interest on the unpaid principal
amount thereof from the date made through maturity (whether by
acceleration or otherwise) at the sum of (1) the Base Rate plus (2) the
Applicable Base Rate Margin for Tranche A Term Loans."
F. Subsection 2.3A - Payment of Commitment Fees. Subsection
2.3A of the Credit Agreement is hereby amended by deleting the reference therein
to "March 1, June 1, September 1 and December 1" and substituting therefor a
reference to "the first Business Day following the end of each calendar
quarter".
G. Subsection 2.4B (iii)(c) - Prepayments Due to Issuance of
Debt. Subsection 2.4B(iii)(c) of the Credit Agreement is hereby amended by
changing the cross-reference contained therein from "7.1(vi)" to "7.1(vii)".
H. Subsection 2.4C(1) - Manner and Time of Payment. Subsection
2.4C(i) of the Credit Agreement is hereby amended and restated in its entirety
as follows:
"(i) Manner and Time of Payment. All payments by Company of
principal, interest, fees and other Obligations hereunder and
under the Notes shall be
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made in Dollars (or, with respect to any such payments in
respect of Canadian Dollar Swing Line Loans only, in Canadian
Dollars) in same day funds, without defense, setoff or
counterclaim, free of any restriction or condition, and
delivered to Administrative Agent not later than 12:00 Noon
(Toronto time) on the date due at the Funding and Payment
Office for the account of Lenders; funds received by
Administrative Agent after that time on such due date shall be
deemed to have been paid by Company on the next succeeding
Business Day. Company hereby authorizes Administrative Agent
to charge its accounts with Administrative Agent in order to
cause timely payment to be made to Administrative Agent of all
principal, interest, fees and expenses due hereunder (subject
to sufficient funds being available in its accounts for that
purpose). To the extent that (a) funds received by
Administrative Agent from Company (or debited from any account
with Administrative Agent) in Dollars must be converted into
Canadian Dollars for any payment hereunder in respect of any
Canadian Dollar Swing Line Loans, Administrative Agent shall
effect such conversion on the applicable payment date on the
basis of the rate at which Administrative Agent is able to
purchase Canadian Dollars with Dollars on such payment date
and (b) funds received by Administrative Agent from Company
(or debited from any account with Administrative Agent) in
Canadian Dollars must be converted into Dollars for any other
payments hereunder, Administrative Agent shall effect such
conversion on the applicable payment date on the basis of the
rate at which Administrative Agent is able to purchase Dollars
with Canadian Dollars on such payment date."
I. Subsection 3.2(i) - Payment of Letter of Credit Fees.
Subsection 3.2(i) of the Credit Agreement is hereby amended by deleting the
reference therein to "March 1, June 1, September 1 and December 1" and
substituting therefor a reference to "the first Business Day following the end
of each calendar quarter".
J. Subsection 5.20B - Mitel (Barbados). Subsection 5.20B of
the Credit Agreement is hereby amended and restated in its entirety as follows:
"B. Mitel Barbados. Mitel Barbados has no assets (including
receivables) other than the Discounted Notes and Intercompany
Notes permitted pursuant to subsection 6.10E."
K. Subsection 6.8A - U.K. Plessey Entities. Subsection 6.8A of
the Credit Agreement is hereby amended by deleting the proviso appearing at the
end of such subsection and substituting the following proviso in its place:
"provided, however, that Company shall not be required to cause MEDL to
comply with this subsection 6.8A in the event that, within 30 days of
the Closing Date, either (a) MEDL is merged with PSL or Mitel Telecom
with PSL or Mitel Telecom, as the case may be, being the surviving
company or (b) MEDL's business is wound-up, all of its assets are
distributed to Mitel Telecom and liquidation proceedings are commenced
in the appropriate jurisdiction with respect thereto which proceedings
are not subsequently abandoned for any reason."
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L. Subsection 6.10E - Discounted Notes. Subsection 6.10E of
the Credit Agreement is hereby amended and restated in its entirety as follows:
"E. Discounted Notes. In the event Mitel Barbados receives any
payments on redemption of any Discounted Note, Company shall
ensure that Mitel Barbados applies the total amount of such
payments (net of costs and applicable taxes) to either (i)
subscribe for additional Discounted Notes within 24 hours of
such repayment, (ii) make a dividend payment to Company within
two Business Days of such receipt or (iii) make an
intercompany loan to another Subsidiary Guarantor in
accordance with the provisions of subsection 7.1(iv) within
two Business days of such receipt; it being understood that
such net payments may be applied under clauses (i), (ii) and
(iii) in such proportions as Mitel Barbados may determine."
M. Subsection 7.1 - Indebtedness. Subsection 7.1 of the Credit
Agreement is hereby amended by inserting a new clause (vi) therein as follows
and renumbering existing clause (vi) as clause (vii):
"(vi) Mitel, Inc. may become and remain liable with respect to
a revolving line of credit with National Bank of Detroit in an
aggregate principal amount not to exceed $1,000,000 at any
time outstanding and the proceeds of which shall be used for
the general corporate purposes of Mitel, Inc. and its
Subsidiaries; and"
N. Subsection 7.4 - Contingent Obligations. Subsection 7.4 of
the Credit Agreement is hereby amended by (i) changing the cross reference
contained in clause (vii) thereof from "7.1(vi)" to "7.1(vii)", (ii) deleting
the word "and" appearing at the end of clause (xi) thereof, (iii) renumbering
existing clause (xii) as new clause (xiii) and (iv) inserting a new clause (xii)
therein as follows:
"(xii) Company may become and remain liable with respect to a
guaranty of the Indebtedness of Mitel, Inc. permitted under
subsection 7.1(vi); and"
O. Exhibit I - Form of Notice of Borrowing. Exhibit I to the
Credit Agreement is hereby amended and restated in its entirety as set forth in
Annex A hereto.
P. Exhibit VI-B - Form of Swing Line Note. Exhibit VI-B to the
Credit Agreement is hereby amended and restated in its entirety as set forth in
Annex B hereto.
Section 2. LIMITED WAIVERS TO THE CREDIT AGREEMENT AND POST-CLOSING AGREEMENT
A. Limited Waiver Under Subsection 6.10B. On the basis of the
representations and warranties contained in this Amendment, and subject to the
terms and conditions of this Amendment, Requisite Lenders hereby agree to waive
Company's compliance with the provisions of subsection 6.10B(i) until April 13,
1998; provided that the waiver contained in this Section 2A shall automatically
cease to be of any force or effect on
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April 13, 1998 if Company has not complied with the provisions of subsection
6.10B (i) on or before such date;
B. Limited Waiver Under Post-Closing Agreement. On the basis
of the representations and warranties contained in this Amendment, and subject
to the terms and conditions of this Amendment, Requisite Lenders hereby agree to
waive Company's compliance with (i) the provisions of items 1.5A, 1.5C, 1.5E,
1.5H, 1.6C, 1.6D, and 1.6E of the Post-Closing Agreement (in each case as such
items relate to the property located at Ogdensburg, New York), and (ii) the
provisions of item 3 of the Post-Closing Agreement solely as such item relates
to good standing certificates in the states of Connecticut, Illinois and
Massachusetts (collectively, the "Waived Items"), in each case until April 13,
1998, provided that the waiver contained in this Section 2B shall automatically
cease to be of any force or effect on April 13, 1998 if Company has not complied
with the provisions of each of the Waived Items on or before such date.
Section 3. LIMITATION OF WAIVER
Without limiting the generality of the provisions of Section
10.6 of the Credit Agreement, the waiver set forth above shall be limited
precisely as written and relates solely to noncompliance by Borrower with the
provisions of Sections 6.10B of the Credit Agreement and the Waived Items of the
Post-Closing Agreement in the manner and to the extent described above and
nothing in this Amendment shall be deemed to:
(a) constitute a waiver of compliance by Borrower with respect
to (i) Section 6.10 of the Credit Agreement or the Waived
Items of the Post-Closing Agreement in any other instance or
(ii) any other term, provision or condition of the Credit
Agreement or Post-Closing Agreement or any other instrument or
agreement referred to therein; or
(b) prejudice any right or remedy that any Agent or any Lender
may now have or may have in the future under or in connection
with the Credit Agreement, the Post-Closing Agreement or any
other instrument or agreement referred to therein.
Except as expressly set forth herein, the terms, provisions
and conditions of the Credit Agreement, the Post-Closing Agreement and the other
Loan Documents shall remain in full force and effect and in all other respects
are hereby ratified and confirmed.
Section 4. CONDITIONS TO EFFECTIVENESS
Notwithstanding anything to the contrary herein, this
Amendment shall become effective only upon the satisfaction of the following
conditions precedent (the date of satisfaction of such conditions being referred
to herein as the "First Amendment Effective Date"):
A. Company and each Credit Support Party shall have delivered
to Administrative Agent sufficient originally executed copies
for each Lender and its counsel of this Amendment;
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B. Requisite Lenders shall each have executed a counterpart of
this Amendment; and
C. Company and Administrative Agent shall have received
written or telephonic notification of such execution by such
Lenders and authorization of delivery thereof.
Section 5. REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, Company hereby
represents and warrants that after giving effect to this Amendment:
A. Corporate Power and Authority. Each of Company and each
Credit Support Party has all requisite corporate power and
authority to enter into this Amendment, and each of Company
and each Credit Support Party has all requisite corporate
power and authority to carry out the transactions contemplated
by, and perform its obligations under, the Credit Agreement
and Post-Closing Agreement, in each case as amended by this
Amendment.
B. Authorization of Agreements. The execution and delivery of
this Amendment and the performance of the Credit Agreement as
amended by this Amendment (as so amended, the "Amended
Agreement") have been duly authorized by all necessary
corporate action on the part of Company.
C. No Conflict. The execution and delivery by of Company of
this Amendment and the performance by Company of the Amended
Agreement do not and will not (i) violate any provision of any
law or any governmental rule or regulation applicable to
Company or any of its Subsidiaries, the Certificate or
Articles of Incorporation or Bylaws (or comparable
organizational documents) of Company or any of its
Subsidiaries or any order, judgment or decree of any court or
other agency or government binding on Company or any of its
Subsidiaries, (ii) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a
default under any Contractual Obligation of Company or any of
its Subsidiaries (other than, with respect to the exercise of
certain remedies under the U.K. Guarantee and Debenture, as
such remedies may be affected by certain government contracts
in the United Kingdom), (iii) result in or require the
creation or imposition of any Lien upon any of the properties
or assets of Company or any of its Subsidiaries (other than
Liens created under any of the Loan Documents in favor of
Administrative Agent on behalf of Lenders), or (iv) require
any approval of stockholders or any approval or consent of any
Person under any Contractual Obligation of Company or any of
its Subsidiaries.
D. Governmental Consents. The execution and delivery by
Company of this Amendment and the performance by Company of
the Amended Agreement do not and will not require any
registration with, consent or
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approval of or notice to, or other action to, with or by, any
multi-national, federal, provincial, state, municipal, local
or other governmental authority or regulatory body.
E. Binding Obligation. This Amendment and the Amended
Agreement have been duly executed and delivered by Company and
are the legally valid and binding obligations of Company,
enforceable against Company in accordance with their
respective terms, except as may be limited by bankruptcy,
insolvency reorganization, moratorium or similar laws relating
to or limiting creditors' rights generally or by equitable
principles relating to enforceability.
F. Incorporation of Representations and Warranties From Credit
Agreement. The representations and warranties contained in
Section 5 of the Credit Agreement are and will be true,
correct and complete in all material respects on and as of the
First Amendment Effective Date to the same extent as though
made on and as of that date, except to the extent such
representations and warranties specifically relate to an
earlier date, in which case they were true, correct and
complete in all material respects on and as of such earlier
date.
G. Absence of Default. No event has occurred and is continuing
or will result from the consummation of the transactions
contemplated by this Amendment that would constitute an Event
of Default or a Potential Event of Default.
H. No Change to Organizational Documents. Neither the
Certificate of Incorporation nor the Bylaws of Company has
been amended, supplemented or otherwise modified since the
Closing Date.
Section 6. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS.
A. On and after the First Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to the "Credit Agreement", "thereunder",
"thereof" or words or like import referring to the Credit Agreement shall mean
and be a reference to the Amended Agreement.
B. Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
C. The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of Agent or
any Lender under, the Credit Agreement or any of the other Loan Documents.
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Section 7. FEES AND EXPENSES.
Company acknowledges that all costs, fees and expenses as
described in subsection 10.2 of the Credit Agreement incurred by Agents and
their respective counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Company.
Section 8. HEADINGS.
Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose or be given any substantive effect.
Section 9. COUNTERPARTS
This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.
Section 10. GOVERNING LAW
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
Section 11. ACKNOWLEDGEMENT AND CONSENT BY CREDIT SUPPORT PARTIES
Each undersigned Credit Support Party is a party to one or more of the
Subsidiary Security Agreement (U.S.), the Subsidiary Pledge Agreement (U.S.),
the Subsidiary Patent and Trademark Security Agreement (U.S.), the U.K. Pledge
Agreement, the U.K. Guarantee and Debenture, the Copyright Security Agreement
and certain other Collateral Documents delivered pursuant to the Credit
Agreement (collectively, the "Subsidiary Collateral Documents") and either the
Subsidiary Guaranty or the U.K. Guarantee and Debenture in each case as amended
through the First Amendment Effective Date, pursuant to which each Credit
Support Party has (a) guarantied the Obligations and (b) created Liens in favor
of Administrative Agent on certain Collateral and pledged certain Collateral to
Administrative Agent to secure the obligations of such Credit Support Parties
under the Guaranties. The Subsidiary Guaranty, U.K. Guarantee and Debenture and
the other Subsidiary Collateral Documents are collectively referred to herein as
the "Credit Support Documents".
11
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Each Credit Support Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement and this Amendment and
consents to the amendment of the Credit Agreement effected pursuant to this
Amendment. Each Credit Support Party hereby confirms that each Credit Support
Document to which it is a party or otherwise bound and all Collateral encumbered
thereby will continue to guaranty or secure, as the case may be, to the fullest
extent possible the payment and performance of all "Guarantied Obligations" and
"Secured Obligations", as the case may be (in each case as such terms are
defined in the applicable Credit Support Document) and "Indebtedness" (as
defined in the U.K. Guarantee and Debenture), including without limitation the
payment and performance of all such "Guarantied Obligations", "Secured
Obligations" or "Indebtedness", as the case may be, in respect of the
Obligations of Company now or hereafter existing under or in respect of the
Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of
the Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties contained in the
Credit Support Documents to which it is a party or otherwise bound are true,
correct and complete in all material respects on and as of the First Amendment
Effective Date to the same extent as though made on and as of that date, except
to the extent such representations and warranties specifically relate to an
earlier date, in which case they were true, correct and complete in all material
respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Credit Support Party is not required by the terms of the Credit Agreement
or any other Loan Document to consent to the amendments to the Credit Agreement
effected pursuant to this Amendment and (ii) nothing in the Credit Agreement,
this Amendment or any other Loan Document shall be deemed to require the consent
of such Credit Support Party to any future amendments to the Credit Agreement.
[Remainder of page intentionally left blank]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
LENDERS:
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as a Lender and as Syndication Agent
Authorized Signatory
GOLDMAN SACHS CANADA CREDIT PARTNERS CO.,
as a Lender
Authorized Signatory
CANADIAN IMPERIAL BANK OF COMMERCE,
as a Lender and as Administrative Agent
Executive Director
COMPANY:
MITEL CORPORATION
Name:
Title:
13
<PAGE>
CREDIT SUPPORT PARTIES:
MITEL TELECOM LIMITED
Name:
Title:
MITEL, INC.
Name:
Title:
MITEL TELECOMMUNICATIONS SYSTEMS, INC.
Name:
Title:
MITEL SEMICONDUCTOR AMERICAS, INC.
Name:
Title:
MITEL SEMICONDUCTOR, INC.
Name:
Title:
MITEL (BARBADOS) LTD.
Name:
Title:
14
<PAGE>
ANNEX A TO FIRST AMENDMENT
EXHIBIT I
[FORM OF NOTICE OF BORROWING]
NOTICE OF BORROWING
Pursuant to that certain Credit Agreement dated as of February
12, 1998, as amended, supplemented or otherwise modified to the date hereof
(said Credit Agreement, as so amended, supplemented or otherwise modified, being
the "Credit Agreement", the terms defined therein and not otherwise defined
herein being used herein as therein defined), by and among Mitel Corporation, a
corporation organized under the laws of Canada ("Company"), the financial
institutions listed therein as Lenders ("Lenders"), Goldman Sachs Credit
Partners L.P., as advisor, arranger and syndication agent and Canadian Imperial
Bank of Commerce, as Administrative Agent ("Administrative Agent"), this
represents Company's request to borrow as follows:
1. Date of borrowing: ___________________, _________
2. Amount of borrowing: $___________________
3. Lender(s):
[ ]a. Lenders, in accordance with
their applicable Pro Rata
Shares
[ ]b. Swing Line Lender
4. Type of Loans: [ ]a. Tranche A Term Loans
[ ]b. AXELs Series B
[ ]c. Revolving Loans
[ ]d. Canadian Dollar Swing Line
Loan
[ ]e. U.S. Dollar Swing Line Loan
5. Interest rate option: [ ]a. Base Rate Loan(s)
[ ]b. Eurodollar Rate Loans with
an initial Interest Period
of ____________ month(s)
[ ]c. Canadian Prime Rate
(Canadian Dollar Swing Line
Loans only)
The proceeds of such Loans are to be deposited in Company's account at
Administrative Agent.
The undersigned officer, to the best of his or her knowledge,
and Company certify that:
15
<PAGE>
(i) The representations and warranties contained in the Credit
Agreement and the other Loan Documents are true, correct and
complete in all material respects on and as of the date hereof
to the same extent as though made on and as of the date
hereof, except to the extent such representations and
warranties specifically relate to an earlier date, in which
case such representations and warranties were true, correct
and complete in all material respects on and as of such
earlier date;
(ii) No event has occurred and is continuing or would result
from the consummation of the borrowing contemplated hereby
that would constitute an Event of Default or a Potential Event
of Default; and
(iii) Company has performed in all material respects all
agreements and satisfied all conditions which the Credit
Agreement provides shall be performed or satisfied by it on or
before the date hereof.
DATED: ____________________ MITEL CORPORATION
By: __________________________
Title: ________________________
16
<PAGE>
ANNEX A TO FIRST AMENDMENT
EXHIBIT VI-B
[FORM OF SWING LINE NOTE]
MITEL CORPORATION
PROMISSORY NOTE DUE FEBRUARY 12, 2003
$5,000,000 New York, New York
February 12, 1998
FOR VALUE RECEIVED, MITEL CORPORATION, a corporation organized
under the laws of Canada ("Company"), promises to pay to Canadian Imperial Bank
of Commerce ("Payee"), on or before February 12, 2003, the lesser of (x) FIVE
MILLION DOLLARS ($5,000,000.00) and (y) the unpaid principal amount of all
advances made by Payee to Company as Swing Line Loans under the Credit Agreement
referred to below; provided that Swing Line Loans denominated in Canadian
Dollars shall be repaid in the currency required by and otherwise in accordance
with and subject to the terms of the Credit Agreement.
Company also promises to pay interest on the unpaid principal
amount hereof, from the date hereof until paid in full, at the rates, in the
currency and at the times which shall be determined in accordance with the
provisions of that certain Credit Agreement dated as of February 12, 1998 by and
among Company, the financial institutions listed therein as Lenders, Goldman
Sachs Credit Partners L.P., as advisor, arranger and syndication agent and
Canadian Imperial Bank of Commerce, as Administrative Agent (said Credit
Agreement, as it may be amended, supplemented or otherwise modified from time to
time, being the "Credit Agreement", the terms defined therein and not otherwise
defined herein being used herein as therein defined).
This Note is Company's "Swing Line Note" and is issued
pursuant to and entitled to the benefits of the Credit Agreement, to which
reference is hereby made for a more complete statement of the terms and
conditions under which the Swing Line Loans evidenced hereby were made and are
to be repaid.
All payments of principal and interest in respect of this Note
shall be made in same day funds at the Funding and Payment Office or at such
other place as shall be designated in writing for such purpose in accordance
with the terms of the Credit Agreement and shall be made in lawful money in the
currency designated in accordance with the terms of the Credit Agreement.
Whenever any payment on this Note shall be stated to be due on
a day which is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall be included in the
computation of the payment of interest on this Note.
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<PAGE>
This Note is subject to mandatory prepayment as provided in
subsection 2.4B(iii) of the Credit Agreement and to prepayment at the option of
Company as provided in subsection 2.4B(i) of the Credit Agreement.
THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF COMPANY AND PAYEE
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
Upon the occurrence of an Event of Default, the unpaid balance
of the principal amount of this Note, together with all accrued and unpaid
interest thereon, may become, or may be declared to be, due and payable in the
manner, upon the conditions and with the effect provided in the Credit
Agreement.
The terms of this Note are subject to amendment only in the
manner provided in the Credit Agreement.
This Note is subject to restrictions on transfer or assignment
as provided in subsections 10.1 and 10.16 of the Credit Agreement.
No reference herein to the Credit Agreement and no provision
of this Note or the Credit Agreement shall alter or impair the obligations of
Company, which are absolute and unconditional, to pay the principal of and
interest on this Note at the place, at the respective times, and in the currency
herein prescribed.
Company promises to pay all costs and expenses, including
reasonable attorneys' fees, all as provided in subsection 10.2 of the Credit
Agreement, incurred in the collection and enforcement of this Note. Company and
any endorsers of this Note hereby consent to renewals and extensions of time at
or after the maturity hereof, without notice, and hereby waive diligence,
presentment, protest, demand and notice of every kind and, to the full extent
permitted by law, the right to plead any statute of limitations as a defense to
any demand hereunder.
IN WITNESS WHEREOF, Company has caused this Note to be duly
executed and delivered by its officer thereunto duly authorized as of the date
and at the place first written above.
MITEL CORPORATION
By: __________________________
Title: ________________________
18
<PAGE>
TRANSACTIONS
ON
SWING LINE NOTE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Amount and Outstanding
Currency of Amount of Principal
Loan Made Principal Paid Balance Notation
Date This Date This Date This Date Made By
---- --------- --------- --------- -------
</TABLE>
19
EXHIBIT 10.4C
EXECUTION
MITEL CORPORATION
SECOND AMENDMENT AND
LIMITED WAIVER TO CREDIT AGREEMENT
This SECOND AMENDMENT AND LIMITED WAIVER TO CREDIT AGREEMENT
(this "Amendment") is dated as of August 6, 1998, and entered into by and among
Mitel Corporation, a corporation organized under the laws of Canada ("Company"),
the financial institutions listed on the signature pages hereof ("Lenders"),
Goldman Sachs Credit Partners L.P. ("GSCP") as arranger, advisor and syndication
agent (in such capacity, the "Syndication Agent") and Canadian Imperial Bank of
Commerce ("CIBC"), as Administrative Agent, and for purposes of Section 11
hereof, the Subsidiary Guarantors listed on the signature pages hereto
(collectively the "Credit Support Parties"), and is made with reference to that
certain Credit Agreement dated as of February 12, 1998, by and among Company,
Lenders, GSCP, as Syndication Agent, and CIBC, as Administrative Agent, as
amended by that certain First Amendment and Limited Waiver dated as of March 16,
1998 (as so amended, the "Credit Agreement"). Capitalized terms used herein
without definition shall have the same meanings herein as set forth in the
Credit Agreement.
RECITALS
WHEREAS, Mitel Telecom Limited has acquired the shares of 62
VSQ Limited, a company organized under the laws of England and Wales (now know
as Mitel Corporation Limited) ("MCL") and its wholly owned Subsidiary TSC Vicom
Limited, a company organized under the laws of Scotland ("TSC") pursuant to
subsection 7.7(v) of the Credit Agreement for an aggregate purchase price of
less than $10,000,000; and
WHEREAS, Company has requested that, (i) Requisite Lenders
waive the requirement set forth in subsection 6.8C of the Credit Agreement with
respect to MCL and TSC, (ii) in the event Company acquires a new Subsidiary in
connection with a Permitted Acquisition, Company not be required to comply with
the provisions of subsection 6.8C of the Credit Agreement if such new Subsidiary
has assets on a consolidated basis of less than $10,000,000, and (iii) certain
other amendments be made to the Credit Agreement as more fully set forth below.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
Section 1. AMENDMENTS TO CREDIT AGREEMENT
<PAGE>
A. Subsection 6.1. Subsection 6.1 is hereby amended by
inserting the parenthetical "(or to the Administrative Agent with instructions
to deliver to Lenders, in which case Administrative Agent shall promptly so
deliver)" immediately after the phrase "Company will deliver to Syndicate Agent,
Administrative Agent and Lenders" appearing in the second sentence thereof.
B. Subsection 6.8C. Subsection 6.8C of the Credit Agreement is
hereby amended by inserting the following proviso at the end thereof:
"; provided, however, that, notwithstanding anything in the foregoing
to the contrary, in the event that any Person becomes a Subsidiary of
Company after the date hereof, Company shall not be required to comply
with clauses (i) through (iii) of this subsection 6.8C in respect of
such Subsidiary for so long as (x) such Subsidiary does not own or
acquire assets (including receivables) on a consolidated basis with an
aggregate fair market value (without netting such fair market value
against any liability of such Subsidiary) exceeding $10,000,000 and (y)
the aggregate fair market value of the assets (including receivables)
on a consolidated basis of all such Subsidiaries (without netting such
fair market value against any liability of such Subsidiaries) does not
exceed $35,000,000 in the aggregate."
C. Subsection 7.3(ii). Subsection 7.3(ii) of the Credit
Agreement is hereby amended and restated in its entirety as follows:
"(ii) Company and its Subsidiaries may (a) continue to own the
Investments owned by them as of the Closing Date in any
Subsidiaries of Company, (b) make and maintain Investments in
any Subsidiary Guarantor from and after the Closing Date and
(c) make Investments in any Immaterial Subsidiary from and
after the Closing Date in an aggregate cumulative amount not
to exceed $10,000,000; provided, however, that from and after
the Closing Date, the aggregate cumulative amount of
Investments in all Immaterial Subsidiaries pursuant to this
subsection 7.3(ii) shall not exceed $35,000,000; provided
further, however, that to the extent any such Immaterial
Subsidiary becomes a Subsidiary Guarantor after or as a result
of any such Investment under this clause (c), the amount of
all Investments in such Immaterial Subsidiary pursuant to this
subsection 7.3(ii) shall not then be counted towards the
foregoing $10,000,000 or $35,000,000 limitations;"
D. Subsection 7.4(iv). Subsection 7.4(iv) of the Credit
Agreement is hereby amended by deleting the figure "$500,000,000" appearing
therein and inserting the figure "$600,000,000" in its place.
E. Subsection 7.4(vi). Subsection 7.4(vi) of the Credit
Agreement is hereby amended and restated in its entirety as follows:
"(vi) Company and its Subsidiaries may become and remain
liable with respect to Contingent Obligations under guarantees
in the ordinary course of business of (a) the obligations of
suppliers, customers, franchisees and
2
<PAGE>
licensees of Company and its Subsidiaries and (b) the
obligations of any Subsidiary of Company under real property
leaseholds in an aggregate amount under all such guaranties
not to exceed at any time $10,000,000;"
F. Subsection 7.10. Subsection 7.10 of the Credit Agreement is
hereby amended by amending and restating the proviso at the end thereof in its
entirety as follows:
"; provided, however, that, Company and its Subsidiaries may become and
remain liable as lessee with respect to (a) sale and lease-back
transactions with respect to assets with a fair market value not to
exceed $8,000,000 in the aggregate in any Fiscal Year and (b) sale and
lease-back transactions in existence on the Closing Date and set forth
on Schedule 7.10 annexed hereto."
G. Schedules 4.1C and 5.1. Schedules 4.1C (Corporate and
Capital Structure; Ownership; Management) and 5.1 (Subsidiaries of Company) of
the Credit Agreement are hereby amended to reflect that (i) Mitel Semiconductor,
Inc. is now a wholly owned Subsidiary of Mitel, Inc. and (ii) MCL and TSC are
wholly owned Subsidiaries of Mitel Telecom.
Section 2. LIMITED WAIVERS TO THE CREDIT AGREEMENT
Limited Waiver Under Subsection 6.8C. On the basis of the
representations and warranties contained in this Amendment, and subject to the
terms and conditions of this Amendment, Requisite Lenders hereby agree to waive
Company's compliance with the provisions of subsection 6.8C with respect to MCL
and TSC during the period prior to the Second Amendment Effective Date.
Section 3. LIMITATION OF WAIVER
Without limiting the generality of the provisions of Section
10.6 of the Credit Agreement, the waiver set forth above shall be limited
precisely as written and relates solely to noncompliance by Borrower with the
provisions of Section 6.8C of the Credit Agreement in the manner and to the
extent described above and nothing in this Amendment shall be deemed to:
(a) constitute a waiver of compliance by Borrower with respect
to (i) Section 6.8C of the Credit Agreement in any other
instance or (ii) any other term, provision or condition of the
Credit Agreement or any other instrument or agreement referred
to therein; or
(b) prejudice any right or remedy that any Agent or any Lender
may now have or may have in the future under or in connection
with the Credit Agreement or any other instrument or agreement
referred to therein.
Except as expressly set forth herein, the terms, provisions
and conditions of the Credit Agreement and the other Loan Documents shall remain
in full force and effect and in all other respects are hereby ratified and
confirmed.
3
<PAGE>
Section 4. CONDITIONS TO EFFECTIVENESS
Notwithstanding anything to the contrary herein, this
Amendment shall become effective only upon the satisfaction of the following
conditions precedent (the date of satisfaction of such conditions being referred
to herein as the "Second Amendment Effective Date"):
A. Company and each Credit Support Party shall have delivered
to Administrative Agent sufficient originally executed copies
for each Lender and its counsel of this Amendment;
B. Requisite Lenders shall each have executed a counterpart of
this Amendment; and
C. Company and Administrative Agent shall have received
written notification of such execution by such Lenders and
authorization of delivery thereof.
Section 5. REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, Company hereby
represents and warrants that after giving effect to this Amendment:
A. Corporate Power and Authority. Each of Company and each
Credit Support Party has all requisite corporate power and
authority to enter into this Amendment, and each of Company
and each Credit Support Party has all requisite corporate
power and authority to carry out the transactions contemplated
by, and perform its obligations under, the Credit Agreement,
as amended by this Amendment.
B. Authorization of Agreements. The execution and delivery of
this Amendment and the performance of the Credit Agreement as
amended by this Amendment (as so amended, the "Amended
Agreement") have been duly authorized by all necessary
corporate action on the part of Company.
C. No Conflict. The execution and delivery by Company of this
Amendment and the performance by Company of the Amended
Agreement do not and will not (i) violate any provision of any
law or any governmental rule or regulation applicable to
Company or any of its Subsidiaries, the Certificate or
Articles of Incorporation or Bylaws (or comparable
organizational documents) of Company or any of its
Subsidiaries or any order, judgment or decree of any court or
other agency or government binding on Company or any of its
Subsidiaries, (ii) conflict with, result in a breach of or
constitute (with due notice or lapse of time or both) a
default under any Contractual Obligation of Company or any of
its Subsidiaries (other than, with respect to the exercise of
certain remedies under the U.K. Guarantee and Debenture, as
such remedies may be affected by certain government contracts
in the United
4
<PAGE>
Kingdom), (iii) result in or require the creation or
imposition of any Lien upon any of the properties or assets of
Company or any of its Subsidiaries (other than Liens created
under any of the Loan Documents in favor of Administrative
Agent on behalf of Lenders), or (iv) require any approval of
stockholders or any approval or consent of any Person under
any Contractual Obligation of Company or any of its
Subsidiaries.
D. Governmental Consents. The execution and delivery by
Company of this Amendment and the performance by Company of
the Amended Agreement do not and will not require any
registration with, consent or approval of or notice to, or
other action to, with or by, any multi-national, federal,
provincial, state, municipal, local or other governmental
authority or regulatory body.
E. Binding Obligation. This Amendment and the Amended
Agreement have been duly executed and delivered by Company and
are the legally valid and binding obligations of Company,
enforceable against Company in accordance with their
respective terms, except as may be limited by bankruptcy,
insolvency reorganization, moratorium or similar laws relating
to or limiting creditors' rights generally or by equitable
principles relating to enforceability.
F. Incorporation of Representations and Warranties From Credit
Agreement. The representations and warranties contained in
Section 5 of the Credit Agreement are and will be true,
correct and complete in all material respects on and as of the
Second Amendment Effective Date to the same extent as though
made on and as of that date, except to the extent such
representations and warranties specifically relate to an
earlier date, in which case they were true, correct and
complete in all material respects on and as of such earlier
date.
G. Absence of Default. No event has occurred and is continuing
or will result from the consummation of the transactions
contemplated by this Amendment that would constitute an Event
of Default or a Potential Event of Default.
H. No Change to Organizational Documents. Neither the
Certificate of Incorporation nor the Bylaws of Company has
been amended, supplemented or otherwise modified since the
Closing Date.
Section 6. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE
OTHER LOAN DOCUMENTS.
A. On and after the Second Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and each
reference in the other Loan
5
<PAGE>
Documents to the "Credit Agreement", "thereunder", "thereof" or words of like
import referring to the Credit Agreement shall mean and be a reference to the
Amended Agreement.
B. Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
C. The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of any Agent
or any Lender under, the Credit Agreement or any of the other Loan Documents.
Section 7. FEES AND EXPENSES.
Company acknowledges that all costs, fees and expenses as
described in subsection 10.2 of the Credit Agreement incurred by Agents and
their respective counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Company.
Section 8. HEADINGS.
Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose or be given any substantive effect.
Section 9. COUNTERPARTS
This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.
Section 10. GOVERNING LAW
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
Section 11. ACKNOWLEDGEMENT AND CONSENT BY CREDIT SUPPORT PARTIES
6
<PAGE>
Each undersigned Credit Support Party is a party to one or
more of the Subsidiary Security Agreement (U.S.), the Subsidiary Pledge
Agreement (U.S.), the Subsidiary Patent and Trademark Security Agreement (U.S.),
the U.K. Pledge Agreement, the U.K. Guarantee and Debenture, the Copyright
Security Agreement and certain other Collateral Documents delivered pursuant to
the Credit Agreement (collectively, the "Subsidiary Collateral Documents") and
either the Subsidiary Guaranty or the U.K. Guarantee and Debenture in each case
as amended through the Second Amendment Effective Date, pursuant to which each
Credit Support Party has (a) guarantied the Obligations and (b) created Liens in
favor of Administrative Agent on certain Collateral and pledged certain
Collateral to Administrative Agent to secure the obligations of such Credit
Support Parties under the Guaranties. The Subsidiary Guaranty, U.K. Guarantee
and Debenture and the other Subsidiary Collateral Documents are collectively
referred to herein as the "Credit Support Documents".
Each Credit Support Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement and this Amendment and
consents to the amendment of the Credit Agreement effected pursuant to this
Amendment. Each Credit Support Party hereby confirms that each Credit Support
Document to which it is a party or otherwise bound and all Collateral encumbered
thereby will continue to guaranty or secure, as the case may be, to the fullest
extent possible the payment and performance of all "Guarantied Obligations" and
"Secured Obligations", as the case may be (in each case as such terms are
defined in the applicable Credit Support Document) and "Indebtedness" (as
defined in the U.K. Guarantee and Debenture), including without limitation the
payment and performance of all such "Guarantied Obligations", "Secured
Obligations" or "Indebtedness", as the case may be, in respect of the
Obligations of Company now or hereafter existing under or in respect of the
Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of
the Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties made by it
contained in the Credit Support Documents to which it is a party or otherwise
bound are true, correct and complete in all material respects on and as of the
Second Amendment Effective Date to the same extent as though made on and as of
that date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete in
all material respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Credit Support Party is not required by the terms of the Credit Agreement
or any other Loan Document to consent to the amendments to the Credit Agreement
effected pursuant to this Amendment and (ii) nothing in the Credit Agreement,
this Amendment or any other Loan Document shall be deemed to require the consent
of such Credit Support Party to any future amendments to the Credit Agreement.
[Remainder of page intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
COMPANY:
MITEL CORPORATION
Name:
Title:
LENDERS:
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as a Lender and as Syndication Agent
Authorized Signatory
GOLDMAN SACHS CANADA CREDIT PARTNERS CO.,
as a Lender
Authorized Signatory
CANADIAN IMPERIAL BANK OF COMMERCE,
as a Lender and as Administrative Agent
Executive Director
8
<PAGE>
CREDIT SUPPORT PARTIES:
MITEL TELECOM LIMITED
Name:
Title:
MITEL SEMICONDUCTOR LIMITED
Name:
Title:
MITEL, INC.
Name:
Title:
MITEL TELECOMMUNICATIONS SYSTEMS, INC.
Name:
Title:
MITEL SEMICONDUCTOR AMERICAS, INC.
Name:
Title:
MITEL SEMICONDUCTOR, INC.
Name:
Title:
MITEL (BARBADOS) LTD.
9
<PAGE>
Name:
Title:
10
<PAGE>
CAISSE DE DEPOT ET PLACEMENT DU QUEBEC
Name:
Title:
11
<PAGE>
THE SUMITOMO BANK OF CANADA, COMMERCE
Name:
Title:
12
<PAGE>
BANK OF TOKYO-MITSUBISHI (CANADA)
Name:
Title:
13
<PAGE>
BANK OF AMERICA CANADA
Name:
Title:
14
<PAGE>
THE BANK OF NOVA SCOTIA
Name:
Title:
15
<PAGE>
FIRST CHICAGO NBD BANK, CANADA
Name:
Title:
16
<PAGE>
FUJI BANK CANADA
Name:
Title:
17
<PAGE>
SOCIETE GENERALE CANADA
Name:
Title:
18
<PAGE>
NATIONAL BANK OF CANADA
Name:
Title:
19
<PAGE>
BANQUE NATIONALE DE PARIS (CANADA)
Name:
Title:
20
<PAGE>
DRESDNER BANK CANADA,
Name:
Title:
21
<PAGE>
CREDIT LYONNAIS CANADA,
Name:
Title:
22
<PAGE>
CYPRESS TREE INVESTMENT MANAGEMENT
COMPANY, INC.,
As: Attorney-in-Fact and on behalf of First
Allmerica Financial Life Insurance Company
as Portfolio Manager,
Name:
Title:
23
<PAGE>
FC CBO LIMITED
Name:
Title:
24
<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P.,
as Manager on behalf of ALLIANCE CAPITAL
FUNDING L.L.C.
Name:
Title:
25
<PAGE>
CREDIT AGRICOLE INDOSUEZ
Name:
Title:
26
<PAGE>
OSPREY INVESTMENTS PORTFOLIO
Citibank, N.A., as Manager
Name:
Title:
27
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION
Name:
Title:
28
<PAGE>
VAN KAMPEN AMERICAN CAPITAL PRIME RATE
INCOME TRUST
Name:
Title:
29
<PAGE>
OCTAGON LOAN TRUST
Name:
Title:
30
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
Name:
Title:
31
<PAGE>
TORONTO DOMINION (TEXAS), INC.
Name:
Title:
32
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC.
Name:
Title:
33
<PAGE>
MERRILL LYNCH PRIME RATE PORTFOLIO
Name:
Title:
34
<PAGE>
PRIME RATE INCOME TRUST
Name:
Title:
35
<PAGE>
PROTECTIVE ASSET MANAGEMENT COMPANY
Name:
Title:
36
EXHIBIT 10.4D
EXECUTION
THIRD AMENDMENT TO CREDIT AGREEMENT
October 23, 1998
Mitel Corporation
350 Legget Drive
Kenata, Ontario
Canada K2K 1X3
Attention: Shirley Mears
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement dated as of
February 12, 1998 (said Credit Agreement, as amended to the date hereof, being
the "Credit Agreement", the terms defined therein being used herein as therein
defined) by and among Mitel Corporation, a corporation organized under the laws
of Canada ("Company"), the financial institutions listed on the signature pages
hereof ("Lenders"), Goldman Sachs Credit Partners L.P. as arranger, advisor and
syndication agent and Canadian Imperial Bank of Commerce, as Administrative
Agent.
At the request of Company, the undersigned Lenders hereby
agree that subsection 7.4 of the Credit Agreement is hereby amended by (a)
amending and restating subsection (vi) thereof in its entirety to read "(vi)
Company and its Subsidiaries may become and remain liable with respect to
Contingent Obligations under guarantees in the ordinary course of business of
the obligations of suppliers, customers, franchisees and licensees of Company
and its Subsidiaries in an aggregate amount not to exceed at any time
$10,000,000;" and (b) amending and restating subsection (xii) thereof in its
entirety to read "(xii) Company may become and remain liable with respect to
Contingent Obligations in respect of any obligation of any Subsidiary of Company
permitted under this Agreement; provided that the principal amount of any such
Contingent Obligation shall not exceed the principal amount of the corresponding
obligation to which it relates; provided further that, any such Contingent
Obligation shall be subordinate to the Obligations to the same extent, and on
the same terms, if any, as the corresponding obligation is so subordinated;
and."
On and after the Third Amendment Effective Date (as defined
below), each reference in the Credit Agreement to "this Agreement", "hereunder",
"hereof", "herein" or words of like import referring to the Credit Agreement,
and each reference in the other Loan Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the Credit
Agreement shall mean and be a reference to the Credit Agreement as amended by
this Amendment (the Credit Agreement, as so amended, being the "Amended
Agreement"). Except as specifically amended by this Amendment, the Credit
Agreement and the other Loan Documents shall remain in full force and effect and
are hereby ratified and confirmed. The execution, delivery and performance of
this Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of
<PAGE>
any right, power or remedy of any Agent or any Lender under the Credit Agreement
or any other Loan Document.
In order to induce Lenders to enter into this Amendment,
Company, by its execution of a counterpart of this Amendment, represents and
warrants that (a) Company has all requisite corporate power and authority to
enter into this Amendment and to carry out the transactions contemplated by, and
perform its obligations under, the Amended Agreement, (b) the execution and
delivery of this Amendment and the performance of the Amended Agreement have
been duly authorized by all necessary corporate action on the part of Company,
(c) the execution and delivery by Company of this Amendment and the performance
by Company of the Amended Agreement do not and will not (i) violate any
provision of any law or any governmental rule or regulation applicable to
Company or any of its Subsidiaries, the Certificate or Articles of Incorporation
or Bylaws (or comparable organizational documents) of Company or any of its
Subsidiaries or any order, judgment or decree of any court or other agency or
government binding on Company or any of its Subsidiaries, (ii) conflict with,
result in a breach of or constitute (with due notice or lapse of time or both) a
default under any Contractual Obligation of Company or any of its Subsidiaries
(other than, with respect to the exercise of certain remedies under the U.K.
Guarantee and Debenture, as such remedies may be affected by certain government
contracts in the United Kingdom), (iii) result in or require the creation or
imposition of any Lien upon any of the properties or assets of Company or any of
its Subsidiaries (other than Liens created under any of the Loan Documents in
favor of Administrative Agent on behalf of Lenders), (iv) require any approval
of stockholders or any approval or consent of any Person under any Contractual
Obligation of Company or any of its Subsidiaries, or (vi) require any
registration with, consent or approval of or notice to, or other action to, with
or by, any multi-national, federal, provincial, state, municipal, local or other
governmental authority or regulatory body, (d) this Amendment and the Amended
Agreement have been duly executed and delivered by Company and are the legally
valid and binding obligations of Company, enforceable against Company in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency reorganization, moratorium or similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability, (e) the representations and warranties contained in Section 5 of
the Credit Agreement are and will be true, correct and complete in all material
respects on and as of the Third Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date, (f) no event has occurred and is continuing or will result from the
consummation of the transactions contemplated by this Amendment that would
constitute an Event of Default or a Potential Event of Default and (g) neither
the Certificate of Incorporation nor the Bylaws of Company has been amended,
supplemented or otherwise modified since the Closing Date.
This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument. This Amendment shall
become effective (the date of such effectiveness being the "Third Amendment
Effective Date") upon the execution of a counterpart hereof by Company, each of
the Subsidiary Guarantors listed below and
2
<PAGE>
Requisite Lenders and receipt by Company and Administrative Agent of written
notification of such execution and authorization of delivery thereof.
[Remainder of page intentionally left blank]
3
<PAGE>
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
AGENT AND LENDERS:
GOLDMAN SACHS CANADA CREDIT PARTNERS CO.,
as a Lender
By:-----------------------------------------
Authorized Signatory
CANADIAN IMPERIAL BANK OF COMMERCE,
as a Lender and as Administrative Agent
By:-----------------------------------------
Executive Director
COMPANY:
MITEL CORPORATION
By:-----------------------------------------
Name:
Title:
4
<PAGE>
SUBSIDIARY GUARANTORS
Each undersigned Subsidiary Guarantor hereby acknowledges that
(a) it has reviewed the terms and provisions of the Credit Agreement and this
Amendment and consents to the amendment of the Credit Agreement effected
pursuant to this Amendment and (b)(i) notwithstanding the conditions to
effectiveness set forth in this Amendment, such Subsidiary Guarantor is not
required by the terms of the Credit Agreement or any other Loan Document to
consent to the amendments to the Credit Agreement effected pursuant to this
Amendment and (ii) nothing in the Credit Agreement, this Amendment or any other
Loan Document shall be deemed to require the consent of such Subsidiary
Guarantor to any future amendments to the Credit Agreement.
MITEL TELECOM LIMITED
By:-----------------------------------------
Name:
Title:
MITEL SEMICONDUCTOR LIMITED
By:-----------------------------------------
Name:
Title:
MITEL, INC.
By:-----------------------------------------
Name:
Title:
MITEL TELECOMMUNICATIONS SYSTEMS, INC.
By:-----------------------------------------
Name:
Title:
MITEL SEMICONDUCTOR AMERICAS, INC.
By:-----------------------------------------
Name:
Title:
5
<PAGE>
MITEL SEMICONDUCTOR, INC.
By:-----------------------------------------
Name:
Title:
MITEL (BARBADOS) LTD.
By:-----------------------------------------
Name:
Title:
6
<PAGE>
LENDERS:
[NAME OF OTHER LENDER]
By:-----------------------------------------
Name:
Title:
7
<PAGE>
CAISSE DE DEPOT ET PLACEMENT DU QUEBEC
By:-----------------------------------------
Name:
Title:
8
<PAGE>
THE SUMITOMO BANK OF CANADA, COMMERCE
By:-----------------------------------------
Name:
Title:
9
<PAGE>
BANK OF TOKYO-MITSUBISHI (CANADA)
By:-----------------------------------------
Name:
Title:
10
<PAGE>
BANK OF AMERICA CANADA
By:-----------------------------------------
Name:
Title:
11
<PAGE>
THE BANK OF NOVA SCOTIA
By:-----------------------------------------
Name:
Title:
12
<PAGE>
FIRST CHICAGO NBD BANK, CANADA
By:-----------------------------------------
Name:
Title:
13
<PAGE>
FUJI BANK CANADA
By:-----------------------------------------
Name:
Title:
14
<PAGE>
SOCIETE GENERALE CANADA
By:-----------------------------------------
Name:
Title:
15
<PAGE>
NATIONAL BANK OF CANADA
By:-----------------------------------------
Name:
Title:
16
<PAGE>
BANQUE NATIONALE DE PARIS (CANADA)
By:-----------------------------------------
Name:
Title:
17
<PAGE>
DRESDNER BANK CANADA,
By:-----------------------------------------
Name:
Title:
18
<PAGE>
CREDIT LYONNAIS CANADA,
By:-----------------------------------------
Name:
Title:
19
<PAGE>
CYPRESS TREE INVESTMENT MANAGEMENT
COMPANY, INC.,
As: Attorney-in-Fact and on behalf of First
Allmerica Financial Life Insurance Company
as Portfolio Manager,
By:-----------------------------------------
Name:
Title:
20
<PAGE>
FC CBO LIMITED
By:-----------------------------------------
Name:
Title:
21
<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P.,
as Manager on behalf of ALLIANCE CAPITAL
FUNDING L.L.C.
By:-----------------------------------------
Name:
Title:
22
<PAGE>
CREDIT AGRICOLE INDOSUEZ
By:-----------------------------------------
Name:
Title:
23
<PAGE>
OSPREY INVESTMENTS PORTFOLIO
By: Citibank, N.A., as Manager
By:-----------------------------------------
Name:
Title:
24
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION
By:-----------------------------------------
Name:
Title:
25
<PAGE>
VAN KAMPEN AMERICAN CAPITAL
PRIME RATE INCOME TRUST
By:-----------------------------------------
Name:
Title:
26
<PAGE>
OCTAGON LOAN TRUST
By:-----------------------------------------
Name:
Title:
27
<PAGE>
SENIOR DEBT PORTFOLIO
By: Boston Management and Research,
as Investment Advisor
By:-----------------------------------------
Name:
Title:
28
<PAGE>
TORONTO DOMINION (TEXAS), INC.
By:-----------------------------------------
Name:
Title:
29
<PAGE>
MERRILL LYNCH SENIOR FLOATING
RATE FUND, INC.
By:-----------------------------------------
Name:
Title:
30
<PAGE>
MERRILL LYNCH PRIME RATE PORTFOLIO
By:-----------------------------------------
Name:
Title:
31
<PAGE>
PRIME RATE INCOME TRUST
By:-----------------------------------------
Name:
Title:
32
<PAGE>
PROTECTIVE ASSET MANAGEMENT
COMPANY
By:-----------------------------------------
Name:
Title:
33
EXHIBIT 10.4E
EXECUTION
MITEL CORPORATION
FOURTH AMENDMENT TO CREDIT AGREEMENT
This FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment")
is dated as of January 14, 1999, and entered into by and among Mitel
Corporation, a corporation organized under the laws of Canada ("Company"), the
financial institutions listed on the signature pages hereof ("Lenders"), Goldman
Sachs Credit Partners L.P. ("GSCP") as arranger, advisor and syndication agent
(in such capacity, the "Syndication Agent") and Canadian Imperial Bank of
Commerce ("CIBC"), as Administrative Agent, and for purposes of Section 9
hereof, the Subsidiary Guarantors listed on the signature pages hereto
(collectively the "Credit Support Parties"), and is made with reference to that
certain Credit Agreement dated as of February 12, 1998, by and among Company,
Lenders, GSCP, as Syndication Agent, and CIBC, as Administrative Agent (as
amended through the date hereof, the "Credit Agreement"). Capitalized terms used
herein without definition shall have the same meanings herein as set forth in
the Credit Agreement.
RECITALS
WHEREAS, the Company has requested that Requisite Lenders
amend the financial covenant contained in Subsection 7.6D of the Credit
Agreement to provide for the addition of 75% of Consolidated Net Income to a
threshold level of Consolidated Net Worth to be set as of the end of fourth
Fiscal Quarter of the 1998 Fiscal Year and to make certain other changes, in
each case as more fully set forth below.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
Section 1. AMENDMENT TO CREDIT AGREEMENT
A. Subject to the terms and conditions hereof and in reliance
on the representations and warranties contained herein, subsection 7.6D of the
Credit Agreement is hereby amended and restated in its entirety as follows:
"D. Minimum Consolidated Net Worth. Company shall not permit
Consolidated Net Worth at any time during any Fiscal Quarter commencing
with the first Fiscal Quarter of the 1999 Fiscal Year to be less than
the sum of (i) Consolidated Net Worth as of the last day of the fourth
Fiscal Quarter of the 1998 Fiscal Year, plus (ii) an amount equal to
75% of Consolidated Net Income, as such Consolidated Net Income is
determined on a cumulative basis from the last day of such fourth
Fiscal
<PAGE>
Quarter through the relevant date of determination (without any deduction for
losses)."
B. Subject to the terms and conditions hereof and in reliance
on the representations and warranties contained herein, Schedule 5.1 to the
Credit Agreement is hereby amended and restated in its entirety as set forth on
Annex A hereto.
Section 2. CONDITIONS TO EFFECTIVENESS
Notwithstanding anything to the contrary herein, this
Amendment shall become effective only upon the satisfaction of the following
conditions precedent (the date of satisfaction of such conditions being referred
to herein as the "Fourth Amendment Effective Date"):
A. Company and each Credit Support Party shall have delivered
to Administrative Agent sufficient originally executed copies for
each Lender and its counsel of this Amendment;
B. Requisite Lenders shall each have executed a counterpart of
this Amendment; and
C. Company and Administrative Agent shall have received
written notification of such execution by such Lenders and
authorization of delivery thereof.
Section 3. REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, Company hereby
represents and warrants that after giving effect to this Amendment:
A. Corporate Power and Authority. Each of Company and each
Credit Support Party has all requisite corporate power and authority to enter
into this Amendment, and each of Company and each Credit Support Party has all
requisite corporate power and authority to carry out the transactions
contemplated by, and perform its obligations under, the Credit Agreement, as
amended by this Amendment.
B. Authorization of Agreements. The execution and delivery of
this Amendment and the performance of the Credit Agreement as amended by this
Amendment (as so amended, the "Amended Agreement") have been duly authorized by
all necessary corporate action on the part of Company.
C. No Conflict. The execution and delivery by Company of this
Amendment and the performance by Company of the Amended Agreement do not and
will not (i) violate any provision of any law or any governmental rule or
regulation applicable to Company or any of its Subsidiaries, the Certificate or
Articles of Incorporation or Bylaws (or comparable organizational documents) of
Company or any of its Subsidiaries or any order, judgment or decree of any court
or other agency or government binding on Company or any of its Subsidiaries,
(ii) conflict with, result in a breach of or constitute (with due notice or
<PAGE>
lapse of time or both) a default under any Contractual Obligation of Company or
any of its Subsidiaries (other than, with respect to the exercise of certain
remedies under the U.K. Guarantee and Debenture, as such remedies may be
affected by certain government contracts in the United Kingdom), (iii) result in
or require the creation or imposition of any Lien upon any of the properties or
assets of Company or any of its Subsidiaries (other than Liens created under any
of the Loan Documents in favor of Administrative Agent on behalf of Lenders), or
(iv) require any approval of stockholders or any approval or consent of any
Person under any Contractual Obligation of Company or any of its Subsidiaries.
D. Governmental Consents. The execution and delivery by
Company of this Amendment and the performance by Company of the Amended
Agreement do not and will not require any registration with, consent or approval
of or notice to, or other action to, with or by, any multi-national, federal,
provincial, state, municipal, local or other governmental authority or
regulatory body.
E. Binding Obligation. This Amendment and the Amended
Agreement have been duly executed and delivered by Company and are the legally
valid and binding obligations of Company, enforceable against Company in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency reorganization, moratorium or similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability.
F. Incorporation of Representations and Warranties From Credit
Agreement. The representations and warranties contained in Section 5 of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the Fourth Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
G. Absence of Default. No event has occurred and is continuing
or will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
H. No Change to Organizational Documents. Neither the
Certificate of Incorporation nor the Bylaws of Company has been amended,
supplemented or otherwise modified since the Closing Date.
Section 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT
AND THE OTHER LOAN DOCUMENTS.
A. On and after the Fourth Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to the "Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement shall mean
and be a reference to the Amended Agreement.
<PAGE>
B. Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
C. The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of any Agent
or any Lender under, the Credit Agreement or any of the other Loan Documents.
Section 5. FEES AND EXPENSES.
Company acknowledges that all costs, fees and expenses as
described in subsection 10.2 of the Credit Agreement incurred by Agents and
their respective counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Company.
Section 6. HEADINGS.
Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose or be given any substantive effect.
Section 7. COUNTERPARTS
This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.
Section 8. GOVERNING LAW
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
Section 9. ACKNOWLEDGEMENT AND CONSENT BY CREDIT SUPPORT PARTIES
Each undersigned Credit Support Party is a party to one or more of the
Subsidiary Security Agreement (U.S.), the Subsidiary Pledge Agreement (U.S.),
the Subsidiary Patent and Trademark Security Agreement (U.S.), the U.K. Pledge
Agreement, the U.K. Guarantee and Debenture, the Copyright Security Agreement
and certain other Collateral Documents
<PAGE>
delivered pursuant to the Credit Agreement (collectively, the "Subsidiary
Collateral Documents") and either the Subsidiary Guaranty or the U.K. Guarantee
and Debenture in each case as amended through the Fourth Amendment Effective
Date, pursuant to which each Credit Support Party has (a) guarantied the
Obligations and (b) created Liens in favor of Administrative Agent on certain
Collateral and pledged certain Collateral to Administrative Agent to secure the
obligations of such Credit Support Parties under the Guaranties. The Subsidiary
Guaranty, U.K. Guarantee and Debenture and the other Subsidiary Collateral
Documents are collectively referred to herein as the "Credit Support Documents".
Each Credit Support Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement and this Amendment and
consents to the amendment of the Credit Agreement effected pursuant to this
Amendment. Each Credit Support Party hereby confirms that each Credit Support
Document to which it is a party or otherwise bound and all Collateral encumbered
thereby will continue to guaranty or secure, as the case may be, to the fullest
extent possible the payment and performance of all "Guarantied Obligations" and
"Secured Obligations", as the case may be (in each case as such terms are
defined in the applicable Credit Support Document) and "Indebtedness" (as
defined in the U.K. Guarantee and Debenture), including without limitation the
payment and performance of all such "Guarantied Obligations", "Secured
Obligations" or "Indebtedness", as the case may be, in respect of the
Obligations of Company now or hereafter existing under or in respect of the
Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of
the Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties made by it
contained in the Credit Support Documents to which it is a party or otherwise
bound are true, correct and complete in all material respects on and as of the
Fourth Amendment Effective Date to the same extent as though made on and as of
that date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete in
all material respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Credit Support Party is not required by the terms of the Credit Agreement
or any other Loan Document to consent to the amendments to the Credit Agreement
effected pursuant to this Amendment and (ii) nothing in the Credit Agreement,
this Amendment or any other Loan Document shall be deemed to require the consent
of such Credit Support Party to any future amendments to the Credit Agreement.
[Remainder of page intentionally left blank]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
COMPANY:
MITEL CORPORATION
----------------------------------
Name:
Title:
LENDERS:
GOLDMAN SACHS CREDIT PARTNERS L.P.,
as a Lender and as Syndication Agent
----------------------------------
Authorized Signatory
GOLDMAN SACHS CANADA CREDIT PARTNERS CO.,
as a Lender
----------------------------------
Authorized Signatory
CANADIAN IMPERIAL BANK OF COMMERCE,
as a Lender and as Administrative Agent
----------------------------------
Executive Director
<PAGE>
CREDIT SUPPORT PARTIES:
MITEL TELECOM LIMITED
----------------------------------
Name:
Title:
MITEL SEMICONDUCTOR LIMITED
----------------------------------
Name:
Title:
MITEL, INC.
----------------------------------
Name:
Title:
MITEL TELECOMMUNICATIONS SYSTEMS, INC.
----------------------------------
Name:
Title:
MITEL (BARBADOS) LTD.
----------------------------------
Name:
Title:
<PAGE>
LENDERS:.
----------------------------------
[Insert name of Lender]
----------------------------------
Name:
Title:
<PAGE>
ANNEX A
[TO FOLLOW]
EXHIBIT 10.4F
EXECUTION
MITEL CORPORATION
FIFTH AMENDMENT TO CREDIT AGREEMENT
This FIFTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
dated as of May 19, 1999, and entered into by and among Mitel Corporation, a
corporation organized under the laws of Canada ("Company"), the financial
institutions listed on the signature pages hereof ("Lenders"), Goldman Sachs
Credit Partners L.P. ("GSCP") as arranger, advisor and syndication agent (in
such capacity, the "Syndication Agent") and Canadian Imperial Bank of Commerce
("CIBC"), as Administrative Agent, and for purposes of Section 9 hereof, the
Subsidiary Guarantors listed on the signature pages hereto (collectively the
"Credit Support Parties"), and is made with reference to that certain Credit
Agreement dated as of February 12, 1998, by and among Company, Lenders, GSCP, as
Syndication Agent, and CIBC, as Administrative Agent (as amended through the
date hereof, the "Credit Agreement"). Capitalized terms used herein without
definition shall have the same meanings herein as set forth in the Credit
Agreement.
RECITALS
WHEREAS, the Company has requested that Requisite Lenders
amend Subsection 7.5 of the Credit Agreement to permit Company to purchase
Company common shares in the open market subject to certain limitations as more
fully set forth below.
NOW, THEREFORE, in consideration of the premises and the
agreements, provisions and covenants herein contained, the parties hereto agree
as follows:
Section 1. AMENDMENT TO CREDIT AGREEMENT
Subject to the terms and conditions hereof and in reliance on the
representations and warranties contained herein, Company and Lenders hereby
agree as follows:
A. Amendment to Section 1.
1. Section 1 of the Credit Agreement is hereby amended by
inserting a new definition of "Company Common Stock" therein in alphabetical
order as follows:
"Company Common Stock" means common shares of Company, without
par value.
1
<PAGE>
2. Section 1 of the Credit Agreement is hereby further amended
by amending and restating the definition of "Consolidated Excess Cash Flow"
appearing therein in its entirety as follows:
`"Consolidated Excess Cash Flow" means, for any
period, an amount (if positive) equal to (i) the sum, without
duplication, of the amounts for such period of (a) Consolidated
Adjusted EBITDA and (b) the Consolidated Working Capital Adjustment
minus (ii) the sum, without duplication, of the amounts for such period
of (u) voluntary and scheduled repayments of Consolidated Total Debt
(excluding repayments of Revolving Loans except to the extent the
Revolving Loan Commitments are permanently reduced in connection with
such repayments), (v) Consolidated Capital Expenditures (net of any
proceeds of any related financings with respect to such expenditures),
(w) Consolidated Cash Interest Expense, (x) cash dividends and other
cash distributions on any shares of Company Preferred Stock but only to
the extent actually made and only to the extent such dividends or other
distributions are permitted pursuant to subsection 7.5, (y) the
provision for current taxes based on income of Company and its
Subsidiaries and payable in cash with respect to such period and (z)
cash payments actually made by Company during such period to purchase
or repurchase Company Common Stock pursuant to and subject to the
limitations of subsection 7.5."
B. Amendment to Section 7. Subsection 7.5 of the Credit
Agreement is hereby amended and restated in its entirety as follows:
"7.5 Restricted Junior Payments.
Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, declare, order, pay, make or
set apart any sum for any Restricted Junior Payment; provided that so
long as no Event of Default or Potential Event of Default shall have
occurred and be continuing or shall be caused thereby, Company may (a)
make scheduled dividend payments to the holders of the Company
Preferred Stock pursuant to the terms of the Company Certificate of
Designations in an aggregate amount not to exceed Cdn$3,250,000 in any
Fiscal Year, (b) make scheduled repurchases of shares of Company
Preferred Stock pursuant to the Company Certificate of Designations for
an aggregate consideration not to exceed Cdn$2,250,000 in any Fiscal
Year, (c) redeem or repurchase options to purchase shares of Company
Common Stock granted to Company's employees in lieu of such employees
exercising such options and (d) from and after May 20, 1999, purchase
or repurchase through the open market shares of Company Common Stock
held by Persons other than Company for an aggregate cumulative
consideration not to exceed Cdn $117,000,000; provided that (i)
purchases or repurchases under this clause (d) shall be made pursuant
to and shall comply in all respects with the Toronto Stock Exchange's
Policy Statement for Normal Course Issuer Bids and (ii) immediately
after giving effect to any such
2
<PAGE>
purchase or repurchase, Company shall be in compliance on a pro forma
basis with the covenants set forth in Sections 6 and 7 of this
Agreement."
Section 2. CONDITIONS TO EFFECTIVENESS
Notwithstanding anything to the contrary herein, this
Amendment shall become effective only upon the satisfaction of the following
conditions precedent (the date of satisfaction of such conditions being referred
to herein as the "Fifth Amendment Effective Date"):
A. Company and each Credit Support Party shall have delivered
to Administrative Agent sufficient originally executed copies for each
Lender and its counsel of this Amendment;
B. Requisite Lenders shall each have executed a counterpart of
this Amendment;
C. Company and Administrative Agent shall have received
written notification of such execution by such Lenders and
authorization of delivery thereof; and
D. Agent shall have received, for the ratable benefit of
Lenders executing a counterpart hereof on or before 5:00 p.m. (EDT) on
May 19, 1999 (the "Consenting Lenders"), an amendment fee equal to 0.1%
of the sum as of such date of (i) the Revolving Loan Commitments of the
Consenting Lenders, (ii) the aggregate outstanding principal amount of
Tranche A Term Loans of the Consenting Lenders and (iii) the aggregate
outstanding principal amount of AXELs Series B of the Consenting
Lenders.
Section 3. REPRESENTATIONS AND WARRANTIES
In order to induce Lenders to enter into this Amendment and to
amend the Credit Agreement in the manner provided herein, Company hereby
represents and warrants that after giving effect to this Amendment:
A. Corporate Power and Authority. Each of Company and each
Credit Support Party has all requisite corporate power and authority to enter
into this Amendment, and each of Company and each Credit Support Party has all
requisite corporate power and authority to carry out the transactions
contemplated by, and perform its obligations under, the Credit Agreement, as
amended by this Amendment.
B. Authorization of Agreements. The execution and delivery of
this Amendment and the performance of the Credit Agreement as amended by this
Amendment (as so amended, the "Amended Agreement") have been duly authorized by
all necessary corporate action on the part of Company.
C. No Conflict. The execution and delivery by Company of this
Amendment and the performance by Company of the Amended Agreement do not and
will
3
<PAGE>
not (i) violate any provision of any law or any governmental rule or regulation
applicable to Company or any of its Subsidiaries, the Certificate or Articles of
Incorporation or Bylaws (or comparable organizational documents) of Company or
any of its Subsidiaries or any order, judgment or decree of any court or other
agency or government binding on Company or any of its Subsidiaries, (ii)
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under any Contractual Obligation of Company or any of
its Subsidiaries (other than, with respect to the exercise of certain remedies
under the U.K. Guarantee and Debenture, as such remedies may be affected by
certain government contracts in the United Kingdom), (iii) result in or require
the creation or imposition of any Lien upon any of the properties or assets of
Company or any of its Subsidiaries (other than Liens created under any of the
Loan Documents in favor of Administrative Agent on behalf of Lenders), or (iv)
require any approval of stockholders or any approval or consent of any Person
under any Contractual Obligation of Company or any of its Subsidiaries.
D. Governmental Consents. The execution and delivery by
Company of this Amendment and the performance by Company of the Amended
Agreement do not and will not require any registration with, consent or approval
of or notice to, or other action to, with or by, any multi-national, federal,
provincial, state, municipal, local or other governmental authority or
regulatory body.
E. Binding Obligation. This Amendment and the Amended
Agreement have been duly executed and delivered by Company and are the legally
valid and binding obligations of Company, enforceable against Company in
accordance with their respective terms, except as may be limited by bankruptcy,
insolvency reorganization, moratorium or similar laws relating to or limiting
creditors' rights generally or by equitable principles relating to
enforceability.
F. Incorporation of Representations and Warranties From Credit
Agreement. The representations and warranties contained in Section 5 of the
Credit Agreement are and will be true, correct and complete in all material
respects on and as of the Fifth Amendment Effective Date to the same extent as
though made on and as of that date, except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true, correct and complete in all material respects on and as of such earlier
date.
G. Absence of Default. No event has occurred and is continuing
or will result from the consummation of the transactions contemplated by this
Amendment that would constitute an Event of Default or a Potential Event of
Default.
H. No Change to Organizational Documents. Neither the
Certificate of Incorporation nor the Bylaws of Company has been amended,
supplemented or otherwise modified since the Closing Date.
Section 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND
THE OTHER LOAN DOCUMENTS.
4
<PAGE>
A. On and after the Fifth Amendment Effective Date, each
reference in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to the "Credit Agreement", "thereunder",
"thereof" or words of like import referring to the Credit Agreement shall mean
and be a reference to the Amended Agreement.
B. Except as specifically amended by this Amendment, the
Credit Agreement and the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
C. The execution, delivery and performance of this Amendment
shall not, except as expressly provided herein, constitute a waiver of any
provision of, or operate as a waiver of any right, power or remedy of any Agent
or any Lender under, the Credit Agreement or any of the other Loan Documents.
D. This Amendment supercedes any prior correspondence
concerning the subject matter hereof.
Section 5. FEES AND EXPENSES.
Company acknowledges that all costs, fees and expenses as
described in subsection 10.2 of the Credit Agreement incurred by Agents and
their respective counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of Company.
Section 6. HEADINGS.
Section and subsection headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose or be given any substantive effect.
Section 7. COUNTERPARTS
This Amendment may be executed in any number of counterparts
and by different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument; signature pages may
be detached from multiple separate counterparts and attached to a single
counterpart so that all signature pages are physically attached to the same
document.
Section 8. GOVERNING LAW
THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT
LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW
YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES.
5
<PAGE>
Section 9. ACKNOWLEDGEMENT AND CONSENT BY CREDIT SUPPORT PARTIES
Each undersigned Credit Support Party is a party to one or more of the
Subsidiary Security Agreement (U.S.), the Subsidiary Pledge Agreement (U.S.),
the Subsidiary Patent and Trademark Security Agreement (U.S.), the U.K. Pledge
Agreement, the U.K. Guarantee and Debenture, the Copyright Security Agreement
and certain other Collateral Documents delivered pursuant to the Credit
Agreement (collectively, the "Subsidiary Collateral Documents") and either the
Subsidiary Guaranty or the U.K. Guarantee and Debenture in each case as amended
through the Fifth Amendment Effective Date, pursuant to which each Credit
Support Party has (a) guarantied the Obligations and (b) created Liens in favor
of Administrative Agent on certain Collateral and pledged certain Collateral to
Administrative Agent to secure the obligations of such Credit Support Parties
under the Guaranties. The Subsidiary Guaranty, U.K. Guarantee and Debenture and
the other Subsidiary Collateral Documents are collectively referred to herein as
the "Credit Support Documents".
Each Credit Support Party hereby acknowledges that it has
reviewed the terms and provisions of the Credit Agreement and this Amendment and
consents to the amendment of the Credit Agreement effected pursuant to this
Amendment. Each Credit Support Party hereby confirms that each Credit Support
Document to which it is a party or otherwise bound and all Collateral encumbered
thereby will continue to guaranty or secure, as the case may be, to the fullest
extent possible the payment and performance of all "Guarantied Obligations" and
"Secured Obligations", as the case may be (in each case as such terms are
defined in the applicable Credit Support Document) and "Indebtedness" (as
defined in the U.K. Guarantee and Debenture), including without limitation the
payment and performance of all such "Guarantied Obligations", "Secured
Obligations" or "Indebtedness", as the case may be, in respect of the
Obligations of Company now or hereafter existing under or in respect of the
Amended Agreement and the Notes defined therein.
Each Credit Support Party acknowledges and agrees that any of
the Credit Support Documents to which it is a party or otherwise bound shall
continue in full force and effect and that all of its obligations thereunder
shall be valid and enforceable and shall not be impaired or limited by the
execution or effectiveness of this Amendment. Each Credit Support Party
represents and warrants that all representations and warranties made by it
contained in the Credit Support Documents to which it is a party or otherwise
bound are true, correct and complete in all material respects on and as of the
Fifth Amendment Effective Date to the same extent as though made on and as of
that date, except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true, correct and complete in
all material respects on and as of such earlier date.
Each Credit Support Party acknowledges and agrees that (i)
notwithstanding the conditions to effectiveness set forth in this Amendment,
such Credit Support Party is not required by the terms of the Credit Agreement
or any other Loan Document to consent to the amendments to the Credit Agreement
effected pursuant to this Amendment and (ii) nothing in the Credit Agreement,
this Amendment or any other Loan Document shall be deemed to
6
<PAGE>
require the consent of such Credit Support Party to any future amendments to the
Credit Agreement.
[Remainder of page intentionally left blank]
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective officers thereunto duly
authorized as of the date first written above.
COMPANY:
MITEL CORPORATION
----------------------------------
Name:
Title
LENDERS:
GOLDMAN SACHS CANADA CREDIT PARTNERS CO.,
as a Lender
----------------------------------
Authorized Signatory
CANADIAN IMPERIAL BANK OF COMMERCE,
as a Lender and as Administrative Agent
----------------------------------
Executive Director
FIFTH AMENDMENT
S-1
<PAGE>
CREDIT SUPPORT PARTIES:
MITEL TELECOM LIMITED
----------------------------------
Name:
Title:
MITEL SEMICONDUCTOR LIMITED
----------------------------------
Name:
Title:
MITEL, INC.
----------------------------------
Name:
Title:
MITEL TELECOMMUNICATIONS SYSTEMS, INC.
----------------------------------
Name:
Title:
MITEL (BARBADOS) LTD.
----------------------------------
Name:
Title:
FIFTH AMENDMENT
S-2
<PAGE>
LENDERS:.
----------------------------------
[Insert name of Lender]
----------------------------------
Name:
Title:
FIFTH AMENDMENT
S-3
<PAGE>
Exhibit 21
SUBSIDIARY AND PRINCIPAL INVESTMENTS
Subsidiaries*
Mitel, Inc.
U.S.A.
Mitel Communications Solutions, Inc.
U.S.A.
Mitel Telecom Limited
Great Britain
Mitel Semiconductor Limited
Great Britain
Mitel (Far East) Limited
Hong Kong
Mitel Semiconductor AB
Sweden
Mitel (Barbados) Limited
Barbados
Principal Investments
Mitel de Mexico S.A. de C.V. Mexico
Tianchi-Mitel Telecommunications Corporation
* All subsidiaries are 100% owned, directly or indirectly, by Mitel Corporation.
<PAGE>
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 26, 1999.
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, 33-98946 and 333-66315) 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 6, 1999 with respect to the consolidated financial
statements of Mitel Corporation incorporated by reference in the Annual Report
(Form 10-K) for the year ended March 26, 1999.
Our audit also included the financial statement schedule of Mitel
Corporation listed in Item 14(a)2. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audit. 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.
Ottawa, Canada,
/s/ ERNST & YOUNG LLP
June 24, 1999. ERNST & YOUNG LLP
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Financial Data Schedule for the Year Ended March 26, 1999
<ARTICLE> 5
<LEGEND>
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 26, 1999 and the
Consolidated Balance Sheets as at March 26, 1999 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> Canadian Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-26-1999
<PERIOD-END> MAR-26-1999
<EXCHANGE-RATE> 1.50671<F1>
<CASH> 35,974
<SECURITIES> 90,055
<RECEIVABLES> 317,151
<ALLOWANCES> 8,748
<INVENTORY> 198,076
<CURRENT-ASSETS> 677,029
<PP&E> 884,455
<DEPRECIATION> 376,709
<TOTAL-ASSETS> 1,300,352
<CURRENT-LIABILITIES> 340,030
<BONDS> 276,544
0
37,175
<COMMON> 331,241
<OTHER-SE> 278,881
<TOTAL-LIABILITY-AND-EQUITY> 1,300,352
<SALES> 1,310,424
<TOTAL-REVENUES> 1,310,424
<CGS> 712,385
<TOTAL-COSTS> 712,385
<OTHER-EXPENSES> 515,233
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,683
<INCOME-PRETAX> 58,058
<INCOME-TAX> 17,500
<INCOME-CONTINUING> 40,558
<DISCONTINUED> 14,334
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,224
<EPS-BASIC> 0.33<F2>
<EPS-DILUTED> 0.32<F3>
<FN>
F1 The foreign exchange rate of 1.506705 should be used to translate the
balance sheet items from Canadian Dollars (figures above) to U.S.
Dollars. The twelve month moving average foreign exchange rate of
1.502524 should be used to translate the income statement items from
Canadian Dollars (figures above) to U.S. Dollars.
F2 The figure quoted is EPS-Basic under Canadian Generally Accepted
Accounting Principles.
F3 The figure quoted is EPS-Fully Diluted under Canadian Generally Accepted
Accounting Principles.
</FN>
</TABLE>
