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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 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number 1-8139
------
MITEL CORPORATION
(Exact name of registrant as specified in its charter)
Canada Not Applicable
------------------------------ ------------------
(State or other jurisdiction 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 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 90
At May 18, 2000, 114,123,921 common shares of Mitel Corporation were
issued and outstanding. Non-affiliates of the registrant held 100,438,453 shares
having an aggregate market value of U.S. $1,977,382,043 based upon the closing
price of the common shares on the New York Stock Exchange (May 18, 2000 being
the last trading day) of U.S. $19.6875.
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, 1999 and for the
period January 1, 2000 through May 18, 2000, as calculated from the exchange
rates reported by the Federal Reserve Bank of New York, are set forth below:
January 1
to May 18,
2000 1999 1998 1997 1996 1995
High 0.6974 0.6895 0.7105 0.7487 0.7513 0.7527
Low 0.6658 0.6540 0.6832 0.6945 0.7235 0.7023
Average 0.6817 0.6741 0.6960 0.7223 0.7332 0.7286
Period End 0.6658 0.6890 0.6863 0.6999 0.7301 0.7323
The following trademarks are mentioned in this Annual Report on Form 10-K:
MITEL, SX-200, SX-2000, SMART-1, GX5000, SUPERSET, iMAGINATION, OnePoint
Messenger, Kontact, Impresa, XPRESSOFFICE, XPRESSWAY, Mitel Systembuilder,
Lightware, Express Messenger, Mitel Connected (design), Trueplex and Speak@Ease
are trademarks of Mitel Corporation; Windows NT and Exchange which are
trademarks of Microsoft Corporation; Mobile Advantage which is a trademark of
Ericsson Inc.; and AXEL, which is a service mark of Goldman, Sachs & Co.
[Cover page 2 of 2 pages]
Table of Contents
Section Page No.
PART I
Item 1. Business 1
Overview 1
Financial Information 2
Business Strategy 2
Recent Events 3
Mitel Communications Systems 5
Industry 5
Products and Customers 6
Enterprise Communications Systems 6
Applications 9
Network Access Solutions 10
Public Switching 11
Sales Marketing and Distribution 11
Competition 13
Manufacturing 14
Research and Development 14
Government Regulation 15
Mitel Semiconductor 16
Industry 16
Products and Customers 17
Communications 17
Network Access 19
User Access 21
Medical ACISs 24
Sales, Marketing and Distribution 24
Competition 25
Manufacturing 26
Research and Development 27
Government Regulation 28
Employees 28
Proprietary Rights 28
Forward-Looking Statements and Risk Factors 29
Technological Changes; Necessity to Develop and
Introduce New Products 29
Competition 30
Dependence on Key Personnel 30
Intellectual Property Protection 32
Intellectual Property Claims 32
Acquisitions 33
Significant International Operations 33
Foreign Exchange and Interest Rate Exposure and
Concentration of Credit Risk 33
Environmental Regulations 34
Regulatory Requirements 34
Year 2000 34
European Union and the Euro 34
Other Factors 35
Item 2. Properties 35
Item 3. Legal Proceedings 35
Item 4. Submission of Matters to a Vote of Security Holders 35
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Section Page No.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters 36
Item 6. Selected Financial Data 37
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 38
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 48
Item 8. Financial Statements and Supplementary Data 50
Auditors' Report 50
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 76
PART III
Item 10. Directors and Executive Officers of the Registrant 77
Directors 77
Statement of Corporate Governance Practices 79
General 79
Mandate of the Board 79
Composition of the Board and of its Committees 80
Audit Committee 81
Compensation Committee 81
Nominating Committee 81
Executive Committee 82
Independence from Management 82
Decisions Requiring Prior Approval by
the Board of Directors 82
Other 82
Executive Officers 84
Item 11. Executive Compensation 84
Summary Compensation Table 85
Employee Share Ownership Plan 86
1991 Stock Option Plan for Key Employees and
Non-Employee Directors 86
Stock Option Grants in Last Fiscal Year 88
Year-End Option Values Table 89
Executive Termination Agreements 89
Compensation of Non-Employee Directors 90
Directors' and Officers' Liability Insurance 90
Indebtedness of Directors, Executive Officers and
Senior Officers 90
Report on Executive Compensation 91
Performance Graph 93
Item 12. Security Ownership of Certain Beneficial Owners
and Management 93
Item 13. Certain Relationships and Related Transactions 95
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 95
Signatures 98
Power of Attorney 99
Annex A - Glossary of Terms 101
ii
PART I
Item 1. Business
Mitel maintains its financial accounts in Canadian dollars. All financial
information and references to "$" and "dollars" are expressed in millions of
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 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.
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").
Since the mid-1980s, the global communications industry has been
characterized by rapid structural change and economic growth caused by
technological innovation, economic factors, and changes in government policies
that encourage competition and increase choice. The evidence for these changes
includes the growing impact of the Internet, optical networking technology,
broadband connectivity, wireless and mobile communications, and demand by
enterprises for cost-effective, multi-functional networks and applications.
Management believes that the impacts of these factors are intensifying and
that the complexity of networks demanded by customers will increase
significantly over the next several years. In addition, management believes that
network platforms will become increasingly multifunctional and converged,
supporting multiple access to combined voice, data and video communications
services, thus reducing the operating costs associated with separate networks.
Management further believes that in the enterprise market, traditionally
distinct voice and data technology platforms will converge around an Internet
Protocol-based network. Management anticipates that significant industry growth
areas will include wireless access, multifunctional systems and networking
software.
Products for the global communications industry includes systems, software
and components used for voice, data and video communications. The principal
building blocks of the industry are software, microelectronics and product
innovation in advanced digital switching and transmission platforms, supported
by a competency in, and a knowledge of, telecommunications networking.
Systems designs, manufactures, and markets feature-rich voice and data
communications systems; complete private networks including remote teleworking
solutions; unified messaging and call-center applications; computer telephony
integration ("CTI") systems and applications; and it also supplies competitive
carriers with public network access products. The principal products of the
Systems include telephone switching systems deployed on customer premises (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; CTI subsystems and interfaces; public switching equipment; and
dial-up network access products. The Company also provides hardware and software
maintenance, training and other ancillary support and professional services. See
"Business-Mitel Communications Systems-Products and Customers."
1
Semiconductor designs, manufactures, and markets specialty microelectronic
solutions for the communications and medical marketplaces. In the communications
market, Semiconductor specializes in broadband connectivity solutions over
wired, wireless and optical media. The product line enables voice and data
convergence for high speed Internet systems, switching systems, and subscriber
access systems in the Network Access and User Access market segments.
Semiconductor is a world leader in time division multiplex ("TDM") switching,
timing, asynchronous transfer mode ("ATM") convergence, Vertical Cavity Surface
Emitting Lasers ("VCSELs") and Radio Frequency ("RF") interfaces for these
markets. Mitel's medical applications-specific integrated circuits ("ASICs")
provide solutions for applications such as pacemakers and hearing aids and
portable instruments. The Company's semiconductor products are primarily
non-commodity, specialized products that are proprietary in design and used by
multiple customers. See "Business-Mitel Semiconductor-Products and Customers."
Financial Information
Financial information about industry segments and about foreign and
domestic operations and export sales is provided under Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
under Item 8 in Note 22 of the notes to the consolidated financial statements
appearing elsewhere in this Annual Report on Form 10-K. Financial information
about Research and Development is described in Note 16 of the notes to the
consolidated financial statements and Management's Discussion and Analysis of
Financial Condition and Results of Operations.
Business Strategy
Mitel's strategy is to exploit seven major developments that management
believes are under way in the communications industry:
o Convergence of voice and data transport in the enterprise around
Internet Protocol ("IP").
o Emergence of broadband connectivity as a fundamental requirement for
moving voice, data and image traffic over converging networks.
o Growth of unprecedented IP-centric interactive multimedia
applications and services.
o The increasing use of System Level Integration ("SLI") in
microelectronics to reduce size, increase functionality and reduce
the cost of networking solutions.
o Emergence of customer premise equipment ("CPE") wireless systems for
seamless indoor-outdoor mobility.
o Simplification of non-real-time modes of communications through
Unified Messaging.
o Acceptance of natural speech recognition for call routing and the
potential to "voice surf" the Internet.
Mitel's competencies range from microelectronic components for wired,
wireless and optical communications to fully networked multimedia systems and
applications for enterprise customers. In its Systems business, management
believes the Company's products have competitive advantages because of their
real-time and fault-tolerant system architecture design, and the Company's
ability to integrate microelectronic and system designs, develop
software-intensive applications, including call centers and messaging systems,
and the strength of its distribution channels. In its Semiconductor business,
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 for specialty designs (e.g.
ultra-low power and ultra-low voltage integrated circuits ("ICs") for medical
applications).
The key elements of Mitel's business strategy include the following:
2
o To evolve its communications systems and products from proprietary
platforms to open, scalable and distributed architectures using
industry standards (e.g. IP), thereby achieving larger economies of
scale, additional customer benefits and shorter delivery cycles.
o To become a fabless semiconductor company for deep sub-micron SLI
designs, while continuing to own and operate fabrication facilities
specializing in Complementary Metal Oxide Semiconductor ("CMOS") and
bipolar technologies for strategic advantage in such areas as
mixed-signal, high-frequency and medical applications.
o To leverage its semiconductor and systems technology to benefit all
of the Company's customers, from the manufacturers who buy highly
integrated microelectronics to end users who purchase fully
functional systems.
In the Systems business unit, Mitel will continue to focus on leadership
in modular, fiber-optic-based voice communications systems for the under-400
line size in the small/medium enterprise segment, and in networking technologies
that enable Mitel to scale its systems to larger line sizes. Mitel will continue
to develop voice products as an application within 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-Mitel Communications
Systems-Products and Customers."
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; and its strong position in
RF technology with applications ranging from tuners for set-top boxes to
cellular telephones. Its unique ultra-low-power CMOS process enables the Company
to maintain a major position in medical applications, while paving the way for
other low-power SLI solutions. The Company also has expertise in optoelectronic
devices principally found in transmitters and receivers for Local Area Networks
("LANs") and access networks. See "Business-Mitel Semiconductor-Products and
Customers."
Recent Events
Acquisition
On June 6, 2000, the Company entered into an agreement to acquire 100
percent of the common stock of privately-held Vertex Networks, Incorporated
("Vertex"), for total consideration of 11 million common shares issued by Mitel.
The acquisition will be accounted for by the purchase method with Vertex's
results from operations included in the consolidated accounts of the Company
from the date of acquisition, expected to be on or before August 30, 2000. The
fair value of the consideration will be determined by the fair value of the
Company's common shares, as adjusted where appropriate, near the effective date
of acquisition.
Vertex is a fabless semiconductor company providing high-performance
network packet processing, switching and routing silicon solutions for the
enterprise and wide area network ("WAN") access markets. Vertex provides
integrated circuits for Layer 3 IP routing switches and developing chipsets,
reference designs, and software for intelligent packet switching applications.
Vertex's products encompass Quality of Service ("QoS")-enabled IP switching for
enterprise communications, WAN traffic concentration, and fiber to the home
("FTTH") markets. Vertex, which was founded in 1995, is based in Irvine,
California, United States, and has design centers in San Jose, California, and
Taiwan. The Company intends to continue operating these design centers for the
same purposes as prior to the acquisition. Vertex employed approximately 75
people as at May 31, 2000.
3
Management believes the acquisition of Vertex will allow Mitel to enter
the packet processing and switch fabric market to offer system-wide, IP-based,
QoS for convergent networks. QoS is a term that qualifies certain performance
attributes of voice transmission over IP networks, and usually refers to
measures of delay, latency and jitter. Mitel's focus will be to deliver wire
speed non-blocking scalability for the edge of WANs, providing the maximum
packet-switching throughput required by systems designers and their customers.
The approach will introduce LAN cost structures into WAN applications to provide
a more competitive solution that accommodates diverse switching technologies in
use at the edge of the network.
Divestiture
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
Semiconductors Group acquired in Fiscal 1998. The formal plan to dispose of this
segment was part of the Company's efforts to focus on its core communications
business. Accordingly, the operations related to this business were accounted
for as discontinued operations. On January 19, 2000, the Company completed the
sale of Lincoln for total consideration of $12.0. As a result of the sale, the
Company recorded additional provisions of $8.0, net of tax recoveries of $3.4,
as a loss from discontinued operations in the third quarter of Fiscal 2000.
Common Share Repurchase Program
On June 7, 1999, the Company announced its Board of Directors had
authorized a normal course issuer bid to repurchase up to 5,835,645 common
shares (5% of 116,712,906 common shares issued and outstanding at May 28, 1999)
between June 9, 1999 and June 8, 2000. All repurchased shares were cancelled. As
at May 18, 2000, 3,383,800 shares were purchased and cancelled under this
program for cash consideration of $36.4, including costs to acquire the shares.
On June 5, 2000, the Company announced its Board of Directors had
authorized the continuation of its normal course issuer bid program to
repurchase up to 5,706,196 common shares, representing 5% of 114,123,921 common
shares issued and outstanding at May 18, 2000. The purchases will take place on
the open market through the stock exchanges of New York and Toronto over a
twelve-month period beginning on June 9, 2000 and ending on June 8, 2001, 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
Stock Exchange. The Company, 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.
Executive Appointments
During Fiscal 2000, Mitel made a series of executive appointments designed
to bolster the strength of Mitel's management team. With annual sales of $1.4
billion, the Company is augmenting its management and professional ranks to
reflect its new competitive standing as a global supplier of communications
products in a networked world. Of note, the following significant executive
appointments were made:
4
o In May 1999, Mitel announced the appointment of Moris M. Simson as
Senior Vice President, Strategy and Corporate Development, as well
as its Chief Technology and Marketing Officer. Mr. Simson has full
responsibility for Mitel's strategic direction, corporate alliances
and new ventures, and oversees the priorities of all technology and
marketing investments in the Company. Mr. Simson was formerly
president of an international consulting firm he founded to provide
advisory services on the exploitation of emerging technologies and
the formation of business alliances. Prior to that, he spent 18
years with Nortel Networks Corporation ("Nortel") with progressively
increasing responsibilities in product development, strategic
planning, marketing, sales and general management.
o In September 1999, Mitel confirmed the appointment of Paul Butcher
to the position of Senior Vice President, Mitel Communications
Systems. In this leadership role, Mr. Butcher is focusing the
Systems business unit on converging voice and data communications
systems and applications for enterprises.
o In September 1999, Mitel announced the appointment Dr. Semir D.
Sirazi to its Board of Directors. Dr. Sirazi is a management
consultant and individual investor, and serves as an advisor to
early-stage technology companies. He has held executive management
and Board of Director positions at U.S. Robotics/3COM and the
CATV/Communications Products division of Zenith Electronics
Corporation. Dr. Sirazi brings to Mitel's Board a broad
understanding of the data communications and Internet market. His
insights into merger and acquisition activities, strategic
alliances, and OEM sales are expected to help fuel the development
and evolution of Mitel's business.
o In December 1999, Mitel announced the appointment of Pierre Nadeau
as Vice President of Mitel Semiconductor's Communications business.
With more than 20 years of experience in engineering and business
development for the semiconductor and communications industries, Mr.
Nadeau will drive the market adoption of Mitel's connectivity
solutions. Before joining Mitel, Mr. Nadeau served as the General
Manager of LSI Logic Europe, and Vice President and officer of LSI
Logic Corporation. He has also held senior management positions with
both Nortel and Lucent Technologies Inc. ("Lucent").
o In January 2000, Mitel announced the appointment of Graham Bevington
to Managing Director of the European-based operations. Mr. Bevington
has more than 15 years of experience in the high tech industry in
sales and management positions encompassing market development,
direct and indirect sales channel management, product development,
and strategic marketing.
MITEL COMMUNICATIONS SYSTEMS
Industry
Mitel is positioning itself for rapid growth in its communications
business. Management believes that voice networks will undergo a significant
transformation in the near future, and that this transformation offers
significant growth opportunity for Mitel Communication Systems ("MCS").
To date, PBXs have been built with proprietary hardware and software,
using TDM protocol. In the future, management expects that open-system hardware
and software using IP will replace these platforms. At the same time, the voice
network will converge with the data network - and the video network. In other
words, enterprises will migrate to an "all-in-one" communications network, which
delivers multiple media types on a single network.
This transformation offers two significant growth opportunities for Mitel.
The first opportunity is VoIP ("Voice over IP"). Enterprises will replace their
existing proprietary PBX platforms with open standards based "IPBX" ("Internet
Protocol Branch Exchanges") platforms. Management believes that enterprises will
make significant investments on this conversion, and MCS, as an industry
proponent in open standard "IPBXs", is
5
well positioned to capitalize on this convergence opportunity. MCS will also
benefit from the demand for new IP based telephone sets, which are designed to
take advantage of the new converged enterprise infrastructure.
The second opportunity is voice applications. Management believes that, in
an IP-based, open standards world, the most significant "value-add" will reside
in applications. Management expects significant growth in all voice
applications, including:
o Natural speech applications that allow words and phrases spoken over
the telephone to serve as commands to perform a variety of
sophisticated tasks, such as message browsing, dialing, and
web-browsing;
o Wireless office systems that provide full PBX functionality on
standard wireless handsets;
o Unified messaging that integrates voicemail, email and fax mail,
allowing mobile users one point of contact for their messages;
o Enhanced Automatic Call Distribution ("ACD") and Interactive Voice
Response ("IVR"), especially for the growing call center market;
o CTI which allows the linking of voice and data systems to permit
data and control information to be transferred between systems, thus
providing integrated applications; and
o Applications specific to the needs of particular vertical
industries, to help enterprises resolve their business issues.
MCS is aggressively exploring opportunities in the above application
areas. Together with the market for VoIP, these market trends will offer MCS
higher growth opportunities than those in the traditional PBX industry over
recent years. Moreover, coming from a historical strength in voice, management
believes MCS is uniquely positioned to succeed in the new world of converged
communications, where voice is a key medium for messaging and data access- in
addition to being the preferred medium for real-time communication.
Products and Customers
Systems revenue grew by 5% in Fiscal 2000 and by 33% in Fiscal 1999 and
accounted for 57%, 57%, and 64% of the Company's total revenue in Fiscal 2000,
1999, and 1998, respectively. As discussed in the preceding section, management
is positioning itself for higher growth, by focusing on opportunities in VoIP
and in applications.
Currently MCS products are primarily premise-based systems used by
enterprises to communicate within and between locations, supporting the needs of
branch offices, mobile workers, and teleworkers. Management will continue to
focus on this business, both in its biggest markets (the U.S. and the U.K.), and
in other markets (e.g. mainland Europe, emerging markets). At the same time, the
Company intends to grow its applications business in addition to its businesses
in network access solutions and public switching products.
Enterprise Communications Systems
Time Division Multiplex ("TDM") Systems
Mitel's enterprise communications systems, including TDM-based 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, configuration and need of the end user.
Over the past 20 years, Mitel's PBX products have evolved from analog products
to the current family of digital products. The Company's current line of LIGHT
products and related peripherals permit the communication of voice and data
information
6
over conventional twisted-pair telephone wires or optical fiber. Mitel's larger
products provide networking capabilities to link up to hundreds of locations.
7
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 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 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. To maximize tariff efficiencies, the SX-2000
offers advanced features to support Automatic Route Selection and Least Cost
Routing. In Fiscal 2000, Mitel introduced Lightware 30, the latest release of
its advanced call control software. Lightware 30 software doubles the port
capacity of the SX-2000; increases voicemail, network management and 911
functionality; and offers PBX vendor interoperability.
The SX-200 line of digital products provides small- and medium-sized
customers in North America with the advanced telephone features found in larger
systems such as the SX-2000. Products in the SX-200 line interface to a wide
variety of user peripheral devices. In Fiscal 1997, Mitel introduced the
SX200ML, a smaller but fully functional SX-200 aimed at the 40 to 60 line-size
business market. In Fiscal 1998, Mitel introduced the next generation SX-200 EL
for the 50 to 250 line-size business market.
In Fiscal 2000, Mitel introduced two new warranty programs: the Extended
Hardware Warranty Program and the IP Investment Protection Plan. The Extended
Hardware Warranty Program extends the hardware warranty on Mitel's family of
SX-200 and SX-2000 PBXs from one to five years, significantly reducing the
lifecycle costs of a customer's PBX investment. The IP Investment Protection
Plan ensures that the call control functionality of Mitel's core product family,
the SX-200 LIGHT and the SX-2000 LIGHT PBXs, as well as peripheral nodes,
circuit cards, telephone sets and voice mail, can be re-used and re-connected
from the legacy PBXs to Mitel IP-based PBXs.
Mitel offers a suite of ISDN business products, led by the iMAGINATION
line, to the small- to-medium enterprise market in Europe. The iMAGINATION range
has been enhanced by the addition of Mitel Kontact, a router and an Ethernet hub
that is an all-in-one solution for small businesses. The Kontact product's
inherent capabilities for credit card authorization and electronic data
interchange ("EDI") are well suited for the retail market.
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.
A line of digital telephones designed for operation on the SX-200 and
SX-2000 was released in 1998. The Superset 4000 line introduced new features
such as a full duplex hands-free speaker phone, touch sensitive soft keys, and
the ability to attach analog devices, such as a fax machine or secondary
telephony device via an Analogue Interface Module. In Fiscal 2000, the style and
functionality of this product line was carried forward to Mitel's new family of
IP-based voice terminals.
8
Voice-over-Internet-Protocol ("VoIP") 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.
In Fiscal 2000, Mitel took the next step in its converged voice and data
networking strategy with the introduction of VoIP systems that use IP to send
voice calls over the same local or wide area networks that connect personal
computers and servers. Specifically, Mitel introduced its Data Integrated Voice
Applications ("DIVA") architecture for the extended enterprise, as well as the
Ipera 2000. Mitel's DIVA architecture is the foundation for delivering
software-only IP business applications, and is the bridge between the Company's
existing PBX platforms and its next-generation IP products. Mitel's
architectural approach is based on a switched IP core that provides a full range
of IP values, including scalability, robust switching and routing. The Ipera
2000 is based on Mitel's DIVA architecture and delivers the same extensive
functionality as the SX-2000 PBX. Management believes that the Ipera 2000 is the
first VoIP product in the communications industry to offer 99.999 percent (or
"five nines", an industry term for the level of reliability expected in the
telephone network) reliable call control and management. The Company also
introduced two new IP telephones: the SUPERSET 4015(TM) IP and the SUPERSET
4025(TM) IP. The foundation for Mitel's IP product development program is its
"No Compromise" IP strategy, predicated on proven functionality and investment
protection, and the delivery of solutions that do not compromise on the quality,
functionality and reliability of traditional voice solutions.
In Fiscal 2000, Mitel announced a marketing and technology agreement with
Symbol Technologies, Inc. ("Symbol") to deliver a new converged voice and data
solution that combines Mitel's H.323-compliant voice gateway with Symbol's
Spectrum24 wireless local area network and NetVision VoIP mobile phones. The
combined solution resulting from this agreement will offer one of the first
end-to-end, standards-based enterprise networks for voice and data extending
traditional, wired networks with wireless LAN network and telephony
capabilities.
Mitel is also working with Ericsson Inc. ("Ericsson") to deliver a new
integrated wireless office solution with PBX functionality. The system will
combine Ericsson's Mobile Advantage(TM) Wireless Office and Mitel's Ipera 2000
to address the needs of both wired and wireless voice communication services in
small- and medium-size enterprises. The wireless office system with PBX
integration provides enterprise users with one telephone and one number for all
their business communication needs, regardless of location.
The Mitel XpressOffice 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 XpressOffice 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 XpressOffice is an ideal remote agent solution for
Call Centers.
Applications
Mitel develops applications software and interfaces that add value to the
PBX at the desktop and workgroup level and take advantage of converging
computing and telecommunications technologies.
9
Natural speech recognition is a new application thrust for Mitel. Using
the human voice to interact with and command computers has long been a goal of
scientists and engineers who recognize that voice is the most natural and
intuitive user interface possible. Management believes that natural speech
recognition technology will increasingly become an important PBX application.
The specially designed conversational systems built around this technology will
allow words and phrases spoken over the telephone to serve as commands to
perform a variety of tasks, such as selectively routing incoming calls. In
Fiscal 2000, Mitel introduced the Impresa Speak@Ease Attendant, the first
product delivered as part of the Company's speech processing applications
strategy. Speak@Ease Attendant is an automated attendant and personal dialer
application that is installed on a Mitel PBX. The application allows incoming
callers or employees to connect to individuals simply by speaking the person's
name or department. Speak@Ease Attendant includes security features based on a
voice signature and offers a secure, customized dialing list.
Call centers continue to be a major application thrust for Mitel. The
Company addresses the call center market with software applications for four
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. In Fiscal 2000, the Company
introduced the Mitel Impresa Customer Interaction Suite, an applications suite
that enables an organization to create a third generation call center that
improves the level of customer service and increases operating efficiency. The
suite, consisting of the Impresa Intelligent Media Router, the Impresa Agent
Desktop, and the Impresa Screen Pop, provides seamless interoperability from
beginning to end of each call.
Another major application focus is messaging. Mitel is able to offer a
complete portfolio of voice messaging products to customers. Management believes
that customers view voice messaging as a PBX feature, thus making it a critical
aspect of PBX sales. 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 and server-based Mitel Mail solutions. Mitel's success in voice
messaging depends on both a tighter integration of the application to the switch
and continued enhancements to new developing technologies like unified
messaging. In Fiscal 2000, Mitel, through its Baypoint Innovations group,
introduced the OnePoint Messenger(TM) server, a unified messaging system based
on Microsoft(R) Exchange(TM) Server. OnePoint Messenger integrates voice, e-mail
and fax applications and supports native VPIM v2.0 ("Voice Profile for Internet
Mail"), allowing users to send and receive voice and fax messages over the
Internet or enterprise Intranets.
The Mitel Global Developers Network program seeks to attract leading
third-party developers to deliver productivity-enhancing business applications
that complement 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 complete
solutions to the targeted markets. Mitel's Global Developers are identified in
the market by the "Mitel Connected" logo.
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 recently announced the SMART-1 I2AD ("Intelligent Integrated Access
Device") for the Voice over Digital Subscriber Line ("VoDSL") market. VoDSL is a
technology that uses the existing copper pairs in the telephone access network
to deliver multiple voice channels and high-speed data connections over a single
phone line. The SMART-1 I2AD is a highly intelligent VoDSL product that is
installed by the service provider
10
on a customer's premises, and connects an analog PBX, Key system, and Ethernet
LAN to a VoDSL circuit. Unlike other VoDSL access devices, the SMART-1 I2AD
supports concurrent attachments to one or more analog Public Switched Telephone
Network (PSTN) trunks in addition to the primary VoDSL connection. Combined with
local call routing intelligence, this enables the SMART-1 I2AD to overcome the
existing limitations of VoDSL service and permits service providers to control
the voice services they offer.
In Fiscal 2000, Mitel announced agreements for the joint development of
VoDSL solutions for competitive carriers with three DSL companies: Pairgain
Technologies, Inc., Jetstream Communications, Inc., and CopperCom, Inc.
Public Switching
The Public Switching group designs, markets and sells the GX5000 product
line. The GX5000 platform is a compact, sophisticated switching system that
offers numerous applications. Among its most common applications are digital end
office replacements for U.S. independent telephone companies, rural public
switched telephone network services, satellite communications gateways,
provision of a carrier network integrated front end for voice processing
systems, and digital network overlay services for networks in developing
countries.
With changes in the regulatory environment, Competitive Local Exchange
Carriers ("CLECs") and other service providers are emerging as potential
customers for end-to-end solutions that combine the GX5000 product line with
other Mitel IP-based and broadband products. In response, the Public Switching
group intends to provide applications that support both private and public
networks. Management believes that Mitel possesses both the technology and sales
channels to take advantage of this changing environment.
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.
Sales, Marketing and Distribution
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 through
wholesale distributors of telephony equipment. The distributors, in turn, sell
to independent telephone companies and to interconnect companies. Mitel products
are also sold in the United States to the federal, state and local governments.
Typically, the North American indirect selling channel focuses on the
small/medium-size enterprise market, with strong penetration into the education,
lodging, government, manufacturing and healthcare industries. Mitel also sells
products directly to end customers through its subsidiary Mitel Communications
Solutions, Inc. ("MC Solutions"), primarily in the top 25 metropolitan
statistical areas as determined by the United States Department of Commerce. MC
Solutions is a nationwide sales and service operation that sells integrated
communications systems and applications to large and strategic national and
regional accounts, and large single site accounts.
11
Mitel maintains an "Elite VAR"(value added reseller) program in the United
States for the Company's top 130 dealers. Mitel has an additional category of
dealer, the Platinum Elite VAR, as the primary indirect sales channel for
Mitel's advanced convergence solutions. To be designated a Platinum Elite VAR, a
dealer must demonstrate an understanding of both voice and data networks.
Accordingly, management believes that Platinum Elite VARs have a competitive
advantage because they can provide customers with "one-stop shopping" for their
complete communications needs. Both Elite VARs and Platinum Elite VARs have
exclusive access to Mitel's products such as the SX-2000 PBX. Platinum Elite
VARs have access to 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 300, 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,
Bell Canada Intrigna, and Aliant, which in turn sell to end users. The
interconnect companies operate under an Elite VAR and Platinum Elite VAR support
program similar to that in the United States. The VARs 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 MC Solutions.
Mitel sells its SMART-1 and SMART-1 I2AD 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.
Remote access products are sold primarily through selected data-centric
VARs, although the Company plans 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 manufacturer") customers.
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 and 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. To extend Mitel's
distribution access to small and medium-sized enterprises, Mitel sells its
products through an indirect distribution channel.
In addition, Mitel markets its line of remote access products to a number
of post, telephone and telegraph companies in Europe.
Mitel continued to expand its distribution channel across Europe, the
Middle East and Africa during Fiscal 2000 principally through the iMagination
product family, which management believes is well suited for indirect
distribution targeted at the small to medium-sized enterprise market.
Management believes that 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 and SMART-1 I2AD 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
12
market addressed by these alternate network access products is highly influenced
by regulation and 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 and SMART-1 I2AD line of network access solutions
products in Japan through selected distributors, which in turn sell such
products to carriers and alternate carriers.
Competition
Rapid technological change, evolving standards and regulatory developments
characterize the market for Systems products. 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 led to the emergence of a new category of
competitors, which focus on this emerging market.
In addition to Mitel, the major suppliers of PBX equipment in North
America include Nortel, Lucent, Siemens AG ("Siemens"), and NEC America Inc.
("NEC"). Mitel also competes with traditional data communications companies such
as Cisco Systems Inc. ("Cisco"), 3Com Corporation, and smaller niche players
such as Vertical Networks, Inc., which offer server-based communications systems
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 PBX products, and manufacturers of server-based "all-in-one"
communications systems, referred to as "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 for TDM-based products
continue to slow down. However, Mitel provides its PBX customers with an
"intelligent evolution" from digital to broadband technology by designing
communications systems building blocks that are modular and easily upgradable.
According to Phillips InfoTech, based on calendar 1999 market research,
Mitel held approximately 8.9% of the total United States PBX market and was tied
for fourth place with NEC in overall market share. Lucent, with approximately
33.2% and Nortel, with approximately 29.1%, are the dominant suppliers in the
United States.
For calendar 1999, Mitel held approximately 34.2% of the total Canadian
PBX line market, and the number one position in the under 1000 line market,
according to estimates provided by Phillips InfoTech. The
13
Company is benefiting from an agreement signed in April 1999 with Bell Canada to
sell the SX-2000 in Ontario and Quebec. Mitel also sells its systems through
most Canadian telephone companies. Mitel's prime competitor in Canada is Nortel
Networks.
Leading communications equipment suppliers to the European PBX market
include Alcatel Alsthom Compagnie ("Alcatel"), Siemens, Telefonaktiebolaget LM
Ericsson ("Ericsson"), Philips Electronics NV and Nortel. In the United Kingdom,
Mitel's main competitors are Nortel, selling through British Telecommunications
plc, Siemens, Ericsson, and Alcatel.
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.
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.
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, large, multinational corporations, such
as Alcatel, Siemens, Ericsson, Nortel, NEC and Lucent dominate the rural central
office market. Most suppliers generally offer equipment with comparable
technical functionality.
Manufacturing
Mitel's Systems products are manufactured in Canada 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 manufactured in
Ogdensburg were transferred to facilities in Canada and the United Kingdom by
the end of July 1999. The Company's repair operations 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,
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.
Research and Development
Mitel's Systems R&D programs are primarily directed in the following
areas:
14
o Call Processing: This program involves three main initiatives. The
first is to enhance Mitel's call control engines on the SX and
Imagination platforms (including remote access) to meet the needs of
enterprise customers. The second is to leverage the rich feature
base into an IP centric platform. The third is to consolidate the
number of call processing platforms to a single stream to increase
the productivity of the R&D organization. Mitel's DIVA links these
three elements into a single development program.
o Desktop Appliances: The program focuses on the development of a
series of desktop devices for both TDM and IP to provide enhanced
access to converged networks. The R&D focus is on extending the
value of existing TDM phones, practical IP phones, conference units,
PDAs, cell phones, desktop software and other personal tools by
leveraging the power of enterprise and wide-area networking. This
involves extensive work in highly integrated silicon devices,
optimized man-machine interfaces and the cost effective
implementation of standards.
o Applications: Significant investment is being directed into
development of applications which leverage Mitel's in-depth
knowledge of desktop and call processing technology in both
converged and TDM environments. Significant R&D effort is being
directed toward the extension of existing messaging and call center
product families to address current market needs. With the advent of
converged IP systems, a whole new class of applications are being
pursued which can bring new value to customers simply and cost
effectively. Mitel is investing in practical applications of voice
recognition technology which, when coupled with open standards,
greatly increases the number applications best served by a voice
based interface.
o Public Networks: Mitel continues to support the GX5000 small central
office and advanced alternate network ISDN access products. Mitel is
extending its investment in its DIVA architecture to address
application and call processing service provision within a public
network context and leveraging the power of emerging xDSL access
technology.
As at March 31, 2000, Systems employed approximately 627 research and
development personnel in Canada, the United States, and the United Kingdom.
Government Regulation
PBXs are considered customer premise equipment ("CPE"). 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 2001.
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 2001, 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 ("E-911") on CPE
15
manufacturers. Certain states have already imposed such requirements and the
Federal government in the United States 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 2001.
The Company cannot now anticipate what impact such legislation and
regulations may have on the results of its operations beyond Fiscal 2001 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.
MITEL SEMICONDUCTOR
Mitel Semiconductor designs and manufactures microelectronic devices that
help move voice, data and images over the world's wired, wireless and fiber
optic networks. Mitel Semiconductor's vision is to be known as the "Broadband
Connectivity Company" supplying connectivity solutions to wireline, wireless,
and optical markets with a focus on QoS.
In the medical market, Mitel supplies Applications Specific Integrated Circuits
("ASICs") for hearing aid and pacemaker devices. With its unique 0.35 micron
ultra low voltage CMOS process, Semiconductor is extending this core competence
into the emerging portable medical instruments and communicating medical device
markets.
Industry
The primary markets for Semiconductor's products are the network access
and user access markets for the convergent communications equipment and medical
devices industries, which represent major end-markets for these products. Each
of these industries is expected to grow economically and evolve technologically
over the next several years, which management believes should provide revenue
growth opportunities to Mitel. The
16
increased requirements of end users, coupled with new opportunities should
continue to drive the demand for network communications equipment and
infrastructure. The deregulation of telecommunications services in many parts of
the world has resulted in the licensing of new operators and service providers,
many of which need new equipment and facilities. The emergence of new operators
and service providers has, in turn, intensified the competitive environment,
forcing existing operators and service providers to accelerate their capital
spending plans. The growth of the Internet and uncontrolled increase in the
bandwidth needed for new applications is also driving demand for new capital
spending. 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. Server growth, in particular, has been spurred by the flow of
information and the requirement within IT departments to make information more
accessible, and its provision more cost-effective. Management believes that
these developments represent significant new market opportunities for Mitel over
the next several years.
Products and Customers
Mitel manufactures and sells semiconductor products in the following
categories of communications ICs: broadband networking; optical communications,
subscriber access, wireless; digital television; and communications Systems
Level Integration ("SLI"). Mitel also addresses the medical market with its
medical ASICs. The Company also provides foundry services to third parties on a
contract basis. Mitel's semiconductor revenue accounted for 43%, 43% and 36% of
the Company's total revenue in Fiscal 2000, 1999, and 1998, respectively.
Mitel's integrated circuits are microelectronic component parts that offer
the high feature integration, low power consumption and low physical space
required for the design of 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 used by multiple customers. 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. Commodity products are "pin for pin"
replacements that sell primarily on the basis of performance, availability,
quality and price. Mitel's products are mostly full 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 business unit's product output is supplied to the Systems
group for use in 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, data communications, and medical sectors.
Communications
The microelectronics market for communications is large - comprising local
area networking, wide area networking, optical communications, cellular, set-top
boxes, and communications processors, among others. Within this diverse market,
the Company focuses on providing a range of solutions that shape, signal,
transport
17
and switch real-time traffic in the public network, the Internet and in the
wireless, cable and optical networks. The Company's communications IC business
can be grouped in two broad areas: (i) network access and, (ii) user access.
18
Network Access
Broadband Networking
Mitel Semiconductor develops and manufactures complete, silicon-based
solutions designed to improve performance and integration levels for WAN access
equipment. Market drivers such as carrier deregulation, Internet growth,
increased wireless subscription and the availability of venture capital are
driving demand for next generation broadband network access equipment such as
Integrated Access Devices, Carrier Gateways, DSL Access Multiplexers, Third
Generation Wireless Systems, Remote Access Concentrators, Next Generation
Digital Loop Carrier and ATM Edge Switches. Mitel's competencies in the areas of
switching, convergence, timing and transmission enable it to deliver converged
connectivity solutions for these applications.
Switching
Mitel's digital switch product family expanded in Fiscal 2000. Mitel's
MT90826 Quad Digital Switch (a 4096 x 4096 channel switch) received the 1999
Communication Solutions Product of the Year award from Technical Marketing
Corporation. Mitel also recently introduced the MT90866 WAN Access Switch to the
market. With the product's integrated PLL meeting Bellcore's Stratum 4E
specification, this device addresses the growing compact PCI market for
carrier-class access equipment. Mitel also introduced the MT90812 Integrated
Digital Switch designed to provide a system-on-a-chip solution for smaller
enterprise switching applications, such as SOHO CTI systems, key telephone
systems and PBXs. These products provide solutions for low-end, enterprise
switching applications and also network access equipment, required to handle
voice and Internet data traffic.
Convergence
ATM is a key underlying technology for integrating WAN access services in
which voice, video and Internet traffic are delivered to the home, business and
government. Mitel addresses this market with high-density voice-over-packet
solutions for the local loop and central office. Leveraging its strengths in the
areas of QoS, latency minimization and clock recovery, Mitel delivers voice
processing SARs ("Segmentation and Reassembly sublayer") designed to convert TDM
traffic to ATM in access and carrier class equipment such as concentrators,
multiplexers and multiservice switches.
Entering this market over two years ago with the introduction of the MT90500
AAL1 (AAL means ATM Adaptation Layer; 1 is for constant bit rate traffic) SAR
designed for constant bit rate traffic, Mitel is significantly expanding the
line with the following new SARs:
o The MT90503 is an AAL1 SAR which can process greater than 2,000
simultaneous voice calls and can provide channel associated
signaling, enabling customers to deliver circuit emulation services
("CES", the transporting of TDM services transparently over an ATM
network) for assured QoS and increased network interoperability.
o The MT90528 AAL1 SAR delivers circuit emulation services over 28
T1/E1 ports, supporting new standards like dynamic bandwidth circuit
emulation services ("DBCES"). In addition, it can be programmed to
support structured or unstructured data for any access applications.
19
Timing
Stable, reliable timing is critical to networking. Mitel has a family of
digital PLLs which provide timing for CPE and central office equipment, allowing
customers to meet T1 and E1 timing interface requirements all over the world,
while ensuring consistent jitter-filtering characteristics over a range of
temperature and voltage.
This year Mitel is sampling the MT9043 and MT9045, two 3.3 volt digital
PLLs used to provide reliable and stable clocks that meet the required
telecommunications specifications in the presence of impairments on the input
timing signals. The MT9043 is a reference switching PLL intended for line-timed
networking equipment, such as PBXs, wireless base stations and Integrated Access
Devices with more than one interface. The MT9045 is a reference switching PLL
with a holdover capability intended for externally-timed equipment such as
remote access concentrators and central office carrier gateways that is required
to be highly reliable.
Transmission
For T1, E1 and J1, the world's dominant wide area network infrastructure,
Mitel is expanding its family of framers to include a number of 3 volt parts
designed to meet all worldwide standards, including North American T1, Japanese
J1, and E1 - the protocol used in the rest of the world. With the need for
higher bandwidth links, customers are demanding combo chip sets with higher
integration and high channel density. The MT9076 combines a T1/E1/J1 framer, a
PLL and a long haul line interface unit (LIU) into a single package for
low-density applications. For higher density applications the MT9072 delivers
eight T1/E1/J1 framers in a single package.
Optical Communications
Mitel supplies VCSELs, Light Emitting Diodes ("LED"), PIN photodetectors,
PIN/Pre-amp combos 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 data network applications such as Gigabit
Ethernet, Fibre Channel, Fiber Distributed Data Interface and ATM.
In Fiscal 2000, Mitel announced the 623-family of parallel fiber modules
to serve the emerging requirements for short-reach optical interconnect in
large-scale computing and communication systems. Management believes the market
for very short-reach parallel fiber will grow significantly over the next
several years. Parallel fiber modules improve channel cost and density, enabling
the all-fiber architectures that will displace the current interconnect scheme
made up of conventional copper and single-channel fiber optic links.
Applications for Mitel's 623-family of parallel fiber modules include
interconnects from board-to-board, board-to-optical backplane, shelf-to-shelf,
and rack-to-rack within and between terabit-class switches, routers, and
transport equipment in the central office. The new modules combine Mitel's VCSEL
and Smart OSA packaging technologies to deliver what management believes is the
industry's best price/performance ratio. Mitel is collaborating with AMCC, Tyco
Electronics (formerly AMP), and US Conec to enable the 623-family of parallel
fiber modules to seamlessly interface to a range of complementary products.
Management believes that its customers are able to derive significant
benefits from the Company's wide range of broadband networking solutions. For
example, in the growing high speed IAD (Integrated Access Devices) markets such
as terabit routers, Mitel Semiconductor's customers are using its Phase Lock
Loops ("PLLs"), high speed T1/E1 interfaces, TDM switches, echo cancellors, and
emerging 623 series optics.
20
User Access
Subscriber Access
Mitel has established a line of analog and digital switching integrated
circuit products that provide a high capacity for switching voice and data in
telephony applications. In Fiscal 2000, Mitel introduced a complete chipset that
delivers voice quality to enterprise-level VoIP systems. Mitel's Internet Phone
chipset combines all of the hardware and software building blocks necessary for
solutions that meet the performance, functionality and cost requirements for
both telephone vendors and data communications companies seeking to enter the
emerging VoIP market. Mitel's chipset includes the MT92101 IP phone controller,
the MT92303 dual codec, and the MT933, a 10/100 Ethernet PHY. Employing Mitel's
Trueplex technology, the chipset reduces echoes that result from transmission
delays inherent in packet-based networks.
Mitel also launched two silicon SLICs (Subscriber Line Interface Circuit)
that deliver highly reliable ringing at competitive cost for telecommunications
access applications. The products are part of Semiconductor's strategy to
provide a complete range of line card interfaces between a switching system and
subscriber loop in short- to mid-range telecommunications applications. The
MT91600 is an analog device that meets system cost and functionality
requirements in a footprint that is smaller than alternative solutions. The
MT91610 is a fully-featured SLIC that uses an advanced ringing architecture to
improve performance, while integrating complete functionality into a very
compact, off-the-shelf device.
Mitel is a leading supplier of Caller ID receiver integrated circuits for
the telephony and CTI markets, and continues to reinforce its position with the
introduction of new products which address the low power requirements of the
European line powered phone and DECT (digital enhanced cordless telephones) base
station markets, as well as the high growth 900MHz cordless phone market with
enhancements designed to improve performance of CIDCW ("Caller Identity on Call
Waiting") services. The new MT88E46 is a Caller ID / CIDCW receiver chip that
exceeds Bellcore (now Telcordia) specifications for performance and reliability.
Mitel also manufactures hybrid integrated circuits that 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
thick-film hybrid microcircuits are in PBXs, central office switches,
multiplexers, cable modems, and set-top boxes.
Mitel is also 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.
Wireless
Mitel is an established supplier of RF and digital components to the
analog and digital cellular market for both base stations and handsets. 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. 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.
In Fiscal 2000, Mitel entered the market for Bluetooth(TM) devices - the
industry name for a radio system specification that allows very short-range
transmission of voice and data between electronic devices without connecting
cables. RF devices built to the Bluetooth standard will enable new wireless
applications such as the transfer of data between computers in a meeting, and a
wireless link between a Personal Digital Assistant ("PDA") and a personal
computer ("PC"). Mitel announced it is co-developing a module for
next-generation Bluetooth systems with Matsushita Electronic Components Co.
Ltd., and Philsar Electronics Inc. of Ottawa (now part of Conexant Systems, Inc.
or "Conexant"). The module, which integrates a baseband controller IC and
software from Mitel and a radio transceiver from Philsar with high-density
packaging and RF expertise
21
from Matsushita, that management believes will meet the requirements for mobile
and wireless applications in consumer and business electronics.
22
Digital Television
The television is evolving from a medium for delivering channels into a
vehicle for delivering Internet access, voice, video and multimedia into the
home. Mitel is a major global supplier of RF components for tuners used in
digital set-top boxes, the home gateways that interface between the television
and the network. Management believes that the Company is known for its "front
end" tuner solutions, mostly for satellite and cable television systems, and in
Fiscal 2000, Mitel introduced new silicon tuner products for set-top box
manufacturers.
Mitel developed and introduced the SNIM3 (Satellite Network Interface
Module 3), a complete and highly cost-effective conversion solution for digital
tuning in satellite set-top boxes. The SNIM3 comprises the SL1914 low-noise amp
(LNA), the SP5769 synthesizer, the SL1925 direct-conversion IC, and the VP310
QPSK and FEC chip. SNIM3 allows the STB manufacturer to place the complete
front-end directly on the main motherboard, thereby reducing costs and product
size for OEM customers.
For tuners in digital cable set-top boxes, Mitel 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 up/down converters and the dual
PLL SP5848. It was also the first up/down conversion chip set manufactured using
a bipolar silicon process, which is less expensive and more reliable than
traditional solutions based on gallium arsenide technology.
Mitel also developed a "front end" for the emerging digital terrestrial
television (DDT) market. In Fiscal 2000, Mitel introduced the SP5730, a PLL
integrated circuit that improves the noise performance of digital television
receivers, resulting in clearer reception.
Mitel has introduced high-performance satellite, cable and terrestrial
set-top box integrated circuits that deliver performance and cost advantages for
new broadband digital television systems. The SL1935 is one of the world's first
fully integrated direct conversion single chip tuner devices for satellite
set-top boxes. The SL2100 is a cost-effective broadband down converter IC for
use in cable tuner applications, integrating the SL2030 with an I2C PLL. The
MT350 is a demodulator for terrestrial set-top boxes and digital TVs. The
product is designed for maximum flexibility within terrestrial applications and
supports both 2k and 8k modes of operation. Management believes that a
key-differentiating factor for the MT350 is its ability to identify broadcast
multiplexes in a few tens of seconds, which enables extremely rapid end
appliance installation.
Communications SLI
Mitel Semiconductor has increased its focus on the application of its ASIC
knowledge to Communications SLI. Today, Mitel has a 0.18u capability and Mitel
SystemBuilder IP portfolio that will support SLI offerings in the broadband
networking, access, wireless, and digital television markets.
Mitel 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.
Mitel also announced the addition of Universal Serial Bus ("USB"), Protocol
Control Information ("PCI") and Firewire cores to Mitel's proprietary ASIC
design flow and methodology, Systembuilder, providing the facility for customers
to include advanced, high-speed bus interface connections into their ASICs for
networking and communication applications. Mitel also began development of its
0.18 micron ASIC and Application Specific Standard Products ("ASSP") design
capability launched in the third quarter of calendar 1999. This extends Mitel
Semiconductor's capability to offer customers ASSP and Customer Specific
Standard Products ("CSSP"), enhanced by highly differentiated, market specific
IP and more efficient design flows enabling fast time to market.
23
In Fiscal 2000, Mitel formed a core technology and engineering group to
continue the development of market specific IP, design flows and methodologies,
targeted at the communications market. The group is dedicated to achieving world
class standards in design productivity, tools and flows, IP re-use and ease of
use for internal and external customers.
ASIC business opportunities from customers are now being routed through
Mitel's market channels, which can combine the work of the core technology and
engineering group with their own specialist market segment knowledge, thereby
providing customers with access to advanced standard products and the
flexibility to create customer specific variants. In making this change, Mitel
Semiconductor has set up a special team to ensure that all customers with
existing ASIC design and production commitments are continued uninterrupted.
This team is completing all customer designs and continues to manage the ongoing
manufacturing and supply of products in production. Customers continue to be
supported through the Mitel sales network and the engineering and marketing
staff from this team.
Medical ASICs
The high cost of medical care is generating opportunities for
microelectronics-based products that reduce health-care costs and improve
quality of life. Implantable medical devices such as pacemakers, wearable
devices such as hearing aids, portable equipment and communicating devices that
monitor patients in and outside a 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 exceptionally long battery life.
Sales, Marketing and Distribution
The principal customers for Mitel's semiconductors are customer premise
and network communication equipment manufacturers. Mitel's 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 direct sales force. Representatives generally have strong relationships with
Mitel's end customers. These representatives assist with the design of customer
solutions incorporating Mitel products, which are then supplied through
distributors. Semiconductor has implemented a strategic account program focusing
on the development of business with the key network equipment suppliers in the
industry. Direct sales force personnel from each of Semiconductor's sales
regions collaborate to manage business with these multinational enterprises.
The primary markets for the Semiconductor group's products are the fast
growing and technologically driven industries. The telecommunications equipment,
computer network server and medical device industries represent major end
markets for Semiconductor. Management believes that these industries will
provide revenue growth opportunities to Mitel during Fiscal 2001. In addition,
management believes Semiconductor's revenue growth will be supported by various
factors that continue to drive demand for telecommunications equipment and
infrastructure. In particular, deregulation of telecommunications services
worldwide has resulted in the licensing of new operators and service providers,
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 increasing penetration of telephone service in emerging
countries is also a strong driver for both wireless and wired communications,
which management believes increases demand for the Company's integrated circuits
for communications applications.
24
The Company believes that one of its competitive advantages is the
expertise of its applications groups, which are located in the United Kingdom,
the United States, Canada, Singapore and Japan to serve customers in all parts
of the world. The applications groups assist OEMs in designing their next
generation products using Mitel components. Mitel Semiconductor has a strong
record of soliciting customers with design ideas and obtaining design wins. The
design win cycle starts when Mitel and/or its representatives identify a need
for one of its standard communications products that meet certain specifications
in a customer's equipment design. Once Mitel's product is selected for a design,
the Company generally is assured of providing the semiconductor for the product
until the product is no longer manufactured.
North America
Mitel's semiconductor products (other than medical 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. Foundry services are provided from sales offices in
San Diego, California and Bromont, Quebec, Canada, with technical support from
Bromont and Plymouth, United Kingdom.
Europe
Sales of Mitel semiconductor components in Europe have been made primarily
through its direct sales channel. Distributors also play an 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.
Asia/Pacific
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. The Company is
expanding into other emerging markets in Asia Pacific, such as India.
Mitel maintains regional headquarters in Singapore and offices in Japan,
Taiwan, Korea and China for semiconductor products. Over 60% 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 that assist OEMs in designing products with Mitel components.
Competition
Competition in the semiconductor market is intense, with new entrants
continually coming into the industry. Rapid technological change,
ever-increasing functionality due to integration, a focus on end product cost
reduction, and evolving standards characterize the markets for Semiconductor's
products. Many of Semiconductor's competitors and potential competitors have
greater financial, technological, manufacturing, marketing and personnel
resources than the Company. Competition is based principally on design
expertise, product availability, service and support. Management believes
Semiconductor compares favorably via its focus on real time networking,
proprietary designs, and its sales and support network. Mitel also competes by
25
offering a focus on intellectual property in communications systems and a high
level of system integration capabilities.
In the communications market, Semiconductor focuses on the convergence of
real time traffic with data. Management believes Semiconductor has substantial
intellectual property associated with networking real time traffic such as
voice. Converged voice networking requires competencies in regulatory policies,
analog and mixed signal design, specialty processes, and voice quality.
Semiconductor primarily designs and markets proprietary products that are
sold to many customers in the wired, wireless, and optoelectronic segments of
the communications market rather than competing with commodity products.
Proprietary designs provide a long design-in cycle with customers and present a
significant barrier to entry.
Management believes that Semiconductor's sales channels and applications
support compare favorably to those of its competitors by providing worldwide
coverage, and pre- and post design-in support to assist customers in getting
their products to market quickly.
Within the Network Access segment, PMC-Sierra, Inc., Dallas Semiconductor
Corporation, Lucent, Infineon Technologies AG ("Infineon"), Motorola, Inc.
("Motorola"), Intersil Corporation, Advanced Micro Devices, Inc. ("AMD"), Texas
Instruments Incorporated, and Netergy Networks, Inc. (formerly 8x8, Inc.) are
the Company's main global competitors in one or more product lines. Management
believes that Semiconductor competes favorably in Network Access based on
Mitel's extensive intellectual property rights ("IPR") in converged networks and
in QoS while meeting regulatory and industry standards.
In the optoelectronic segment of Network Access, competitors in the LED
and PIN diode business sectors include Hewlett Packard Company, Honeywell Inc.,
Epitaxx Inc. and Tyco Electronics (formerly AMP Inc.), a division of Tyco
International Ltd., in North America and Infineon in Germany. In this segment,
management believes that Semiconductor competes primarily on product quality and
customization capability. In the single channel VCSEL market, Semiconductor
enjoys a shared leadership position with Honeywell, currently the only known
competitor. In the VCSEL array market, Semiconductor was first to market to
establish a leadership position. Management expects other competitors to
eventually enter this market. Here, Semiconductor competes via sales support and
price performance. In respect of the VSR ("Very Short Reach") SMART OSA
("Optical Sub-Assembly") transceiver, Mitel competes mainly with Infineon and
W.L. Gore & Associates, Inc. Management believes that Semiconductor's smaller
footprint and higher performance will provide a competitive advantage in favor
of Mitel.
Within the User Access segment, Philips International BV, Infineon,
Toshiba Corporation, Motorola, Broadcom Corporation, Conexant, Maxim Integrated
Products, Inc., ST Microelectronics, Inc. ("ST-Micro"), and Lucent are Mitel's
main global competitors in one or more product lines. In this segment,
management believes Semiconductor competes favorably using products designed on
its bipolar processes and by using innovative design techniques on standard CMOS
technologies.
In medical business, Semiconductor competes mainly with American
Microsystems, Inc., Medtronic, Inc. ("Medtronic Micro-Rel") and "pure play"
foundries. Management believes that Mitel competes favorably against competitors
through its expertise in ultra low power design capability, custom analog and
mixed signal processes and Mitel's quality safety audit process. Semiconductor
sells to four of the top seven medical OEMs worldwide.
Manufacturing
Mitel manufactures its semiconductor products in five 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. Mitel's foundry
26
operations serve a growing base of customers in the United States and Europe by
performing sub-contract manufacturing of silicon wafers. Mitel views the foundry
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, U.K. facility to ensure
world-class manufacturing operations.
The Bromont manufacturing facility uses CMOS technology for digital and
mixed-signal products. Two production lines are maintained at Bromont. The first
is a 150 mm line capable of 0.5 micron, but is currently operating 0.8 micron to
4.0 micron processes. The Bromont facility also 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.
Thick-film hybrid microcircuits are manufactured at the Company's facility
in Caldicot, Wales, United Kingdom.
Mitel'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, U.K.
manufacturing facility uses bipolar technology for RF applications. In the fall
1999, the facility's 100 mm production line was upgraded to produce 150 mm
wafers. The Lincoln, United Kingdom manufacturing facility was included in the
sale of the Lincoln Power and Automotive business segment. See the Lincoln
discussion under Recent Events.
Optoelectronic components are also produced at the Jarfalla, Sweden
facility using gallium arsenide and indium phosphide processes. All of the CMOS
manufacturing operations previously carried out at the Sweden facility were
transferred to Mitel's other more technologically advanced fabrication sites
during Fiscal 2000.
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
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, SLI or
"System-On-A-Chip", as well as low power and high voltage semiconductors.
Semiconductor'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, WAN chips, switching
and voice processing functions, the CDMA wireless standard, paging, wireless
LANs, and set-top box communications chips. Optoelectronics R&D activity is
focused on enhancing Mitel's patented Smart OSA packaging technology, its market
position in VCSELs and array VCSELs for LAN applications, and the development of
optoelectronic integrated circuits ("OEICs"). Mitel's ASIC unit invests in the
development of digital libraries for advanced deep sub-micron CMOS designs as
well as increased design capacity. Analog ASIC development is focused on low
power, high reliability advances for medical and space applications. Mitel also
continues to invest in the development of SLI techniques to improve time to
market for both digital and mixed signal applications.
Semiconductor maintains standard product design centers in Kanata,
Ontario, Canada; Jarfalla, Sweden; San Diego, California; and Caldicot, Swindon,
Lincoln and Boreumwood in the United Kingdom. In addtion, Mitel maintains
process development centers in each of its manufacturing facilities.
27
As at March 31, 2000, Semiconductor employed approximately 454 research
and development personnel primarily based in Canada, the United States, the
United Kingdom and Sweden.
Government Regulation
Mitel's Semiconductor business unit is neither directly nor significantly
affected by current government regulation or policy, although there can be no
assurance future regulatory changes will not affect the Company's business,
financial condition or results of operation.
Other Corporate Information
Employees
At May 18, 2000, Mitel employed approximately 5,740 persons. As at March
31, 2000, Mitel employed approximately 5,688 persons compared to approximately
6,216 persons at the end of Fiscal 1999, approximately 6,335 at the end of
Fiscal 1998 and approximately 4,095 at the end of Fiscal 1997. The decrease in
personnel from the end of Fiscal 1999 to the end of Fiscal 2000 is principally
due to the sale of the Lincoln business, as described under Business - Recent
Events Divestiture. Approximately 41% of the Company's employees are located in
Canada, 40% in the United Kingdom, 14% in the United States, and 5% throughout
the other locations in which Mitel operates. Mitel considers the 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
178 service technicians employed by MC Solutions are unionized, substantially
all of whom are represented by the International Brotherhood of Electrical
Workers ("IBEW"). MC Solutions completed its most recent labor negotiations with
the IBEW in October 1997. The Company's agreement with the IBEW expires in
September 2000. The terms and conditions of the agreement, 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 union 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 84 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, three unions represent approximately 164 employees. The Metall
Industriarbetarforbundet union represents approximately 19 production employees;
the Svenska Industriarbetarforbundet union represents approximately 111 office
professional employees; and the Civilingenjorsforbundet union represents
approximately 34 other professional 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 agreement is for a term of three years and expires on January 31, 2001.
Management considers the Company's relationship with the unions in Sweden to be
good.
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
28
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.
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," "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:
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
29
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-- Mitel Communications Systems Research and Development" and "- Mitel
Semiconductor - 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 See "Business-- Mitel Communications Systems - Competition" and "-
Mitel Semiconductor - Competition."
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
30
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.
31
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 a 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 the
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.
32
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.
Significant International Operations
Approximately 93% of the Company's sales in Fiscal 2000 were derived from
sales in markets outside Canada and 48% outside North America. The Company
expects sales from foreign markets to continue to represent a significant
portion of total sales. The Company operates five 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.
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
33
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.
Environmental Regulations
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 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-- Mitel
Communications Systems - Competition", "-- Mitel Communications Systems -
Government Regulation", "-Mitel Semiconductor - Competition", "-Mitel
Semiconductor - Government Regulation".
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".
34
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 three 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; 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, of which 70,000 sf is
vacant and is to be leased out.
The Company occupies 42,000 sf of leased space in Ogdensburg, New York,
United States, that is used for research and development and for repair
operations.
The Company leases and operates 71 regional facilities, totaling 392,500
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, 38 locations totaling
210,000 sf; United Kingdom, 14 locations totaling 130,000 sf; France, one
location totaling 3,800 sf; Japan, two locations totaling 5,400 sf; Singapore,
two locations totaling 9,200 sf; Taiwan, two locations totaling 4,100 sf; Korea,
two locations totaling 3,600 sf.; and Netherlands, one location of 400 sf.
See "Business--Mitel Communications Systems-Manufacturing" and
"Business-Mitel Semiconductor-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.
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.
35
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 London Stock Exchange. 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)
2000 1999
-------------------- -----------------------
High Low High Low
-------------------- -----------------------
1st Quarter
11.0500 7.3500 23.5500 18.4000
2nd Quarter
12.6000 9.7000 21.8000 15.0000
3rd Quarter
19.7500 10.2500 16.8000 10.1500
4th Quarter
43.2500 18.6000 14.5500 9.9000
New York Stock Exchange
(U.S. Dollars)
2000 1999
-------------------- -----------------------
High Low High Low
-------------------- -----------------------
1st Quarter
7.3750 5.0625 16.1875 12.6875
2nd Quarter
8.5000 6.4375 14.8750 9.6875
3rd Quarter
13.3125 7.0000 10.8750 6.5625
4th Quarter
30.0625 13.0000 9.4375 6.4375
SHAREHOLDERS
There were 114,123,921 common shareholders of record as at May 18, 2000.
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 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
36
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 share 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 23 to the consolidated financial
statements.
Fiscal Year Ended
(at the end of fiscal year for balance sheet data)
--------------------------------------------------------
Canadian GAAP 2000 1999 1998 1997 1996
--------------------------------------------------------
Income Statement Data:
Revenue $ 1,396.5 $ 1,310.4 $ 881.4 $ 695.5 $ 576.4
Gross margin percentage 49% 46% 48% 48% 48%
Gross research and development expense 166.3 175.7 92.4 61.5 46.5
Net income from continuing operations 64.0 40.5 92.0 38.0 51.0
Net income 56.0 26.2 91.9 38.0 51.0
Net income per common share from
continuing operations 0.53 0.33 0.82 0.32 0.45
Net income per common share
Basic 0.46 0.20 0.82 0.32 0.45
Fully diluted 0.45 0.20 0.80 0.32 0.44
Weighted average common shares 114.7 114.0 107.8 107.3 105.9
Outstanding
Balance Sheet Data:
Working capital $ 386.1 $ 337.0 $ 245.9 $ 206.3 $ 210.3
Total assets 1,225.5 1,300.3 1,252.0 584.8 517.1
Current portion of long-term debt 57.9 37.6 40.3 14.8 11.2
Long-term debt 217.5 276.5 379.6 43.0 39.6
Pension liability 13.4 13.2 12.2 11.3 12.1
Shareholders' equity
(including redeemable preferred shares) 635.8 647.3 435.5 339.5 302.8
37
Fiscal Year Ended
(at the end of fiscal year for balance sheet data)
----------------------------------------------------------
U.S. GAAP and SEC Requirements 2000 1999 1998 1997 1996
----------------------------------------------------------
Income Statement Data:
Net income from continuing operations $ 82.1 $ 4.9 $ 90.0 $ 41.0 $ 56.9
Net income (loss) 74.1 (9.4) 89.9 41.0 56.9
Net income per common share from continuing
Operations
Basic 0.69 0.01 0.80 0.35 0.51
Diluted 0.67 0.01 0.80 0.35 0.51
Net income (loss) per common share
Basic 0.62 (0.11) 0.80 0.35 0.51
Diluted 0.61 (0.11) 0.80 0.35 0.50
Balance Sheet Data:
Working capital $ 385.0 $ 328.2 $ 278.2 $ 208.4 $ 213.5
Total assets 1,214.0 1,278.9 1,250.0 595.0 517.1
Redeemable preferred shares 34.2 34.4 34.4 34.4 34.4
Shareholders' equity
Common shares 763.1 772.4 606.0 599.2 596.5
Contributed surplus -- 2.5 2.5 2.5 2.5
Deficit (171.2) (221.6) (209.0) (292.9) (330.7)
Translation account (3.4) 28.2 5.8 2.5 3.3
See note 19 to the consolidated financial statements for a discussion on
the effect of the discontinued operations on Fiscal 2000, 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 31, 2000,
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 20 of the Annual Report to assist in
their understanding of this discussion. Net income for the three fiscal years
ended March 31, 2000; March 26, 1999; and March 27, 1998, as determined by U.S.
generally accepted accounting principles, is detailed and discussed in note 23
to the consolidated financial statements.
Recent Significant Events
On June 7, 1999, Mitel announced it would make a normal course issuer bid for up
to 5,835,645 common shares (5% of 116,712,906 common shares issued and
outstanding at May 28, 1999). These purchases took place on the open market
through the stock exchanges of New York, London, Toronto and Montreal pursuant
to the normal course issuer bid filed with the Toronto and Montreal exchanges.
As at March 31, 2000, 3,383,800 common shares were purchased and canceled for
cash consideration of $36.4, including costs to acquire the shares.
38
On January 19, 2000, Mitel completed the sale of its Lincoln Automotive and
Power business segment ("Lincoln") for total consideration of $12.0. The sale
concluded a formal plan announced on April 22, 1999, to dispose of this segment
as part of Mitel's efforts to focus on its core communications business. As a
result of the sale, the Company recorded additional after-tax provisions of $8.0
as a loss from discontinued operations in the third quarter of Fiscal 2000.
RESULTS OF OPERATIONS
Mitel is a global provider of converging voice and data systems and
applications, and specialty semiconductors for the communications industry.
Mitel operates through two reportable business segments - Mitel Communications
Systems ("Systems") and Mitel Semiconductor ("Semiconductor").
Mitel sells its products through both direct and indirect channels of
distribution. Factors affecting the choice of distribution include end-customer
type, the level of product complexity and integration requirements, the stage of
product introduction, geographic presence and location of markets, and volume
levels.
Mitel Communications Systems provides enterprises with voice and data
communications systems; complete private networks, including remote teleworking
solutions; unified messaging and call center applications; and CTI systems and
applications. It also supplies competitive carriers with public network access
products.
Mitel Semiconductor specializes in connectivity solutions for the communications
and medical industries with a product range that includes components for both
wired and wireless networks; microelectronics for enabling the convergence of
voice and data; optoelectronic devices for high-speed Internet systems; and
application-specific integrated circuits ("ASICs") for medical applications such
as pacemakers and hearing aids.
(millions Cdn$) 2000 1999 1998
------------------------------
Consolidated revenue $1,396.5 $1,310.4 $ 881.4
Systems segment revenue 793.7 752.7 566.8
Semiconductor segment revenue 602.8 557.7 314.6
Net income from continuing operations 64.0 40.5 92.0
Net income per common share from
continuing operations 0.53 0.33 0.82
Net income 56.0 26.2 91.9
Net income per common share 0.46 0.20 0.82
Adjusted Net Income 119.3 80.2 93.8
Adjusted Net Income per common share 1.01 0.67 0.84
Mitel's total revenue grew by 7% from Fiscal 1999. By business group,
Semiconductor revenue from continuing operations grew by 8% and Systems revenue
was up 5% from the previous year. The Semiconductor growth rate was mainly
attributable to sales of WAN Internetworking products, stimulated by increased
demand for high-speed networking systems. Higher sales volumes of PBX systems
and telephone sets in North America and alternative network access products in
Europe drove the Systems revenue growth.
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, Adjusted Net Income and Adjusted
Net Income per common share are used by management as a supplementary measure to
assess financial performance.
39
Net Income
Net income was higher in Fiscal 2000 than in Fiscal 1999 by $29.8, or $0.26 per
share. This increase was primarily due to revenue growth and higher gross
profits, principally in Semiconductor, and to lower interest expense due to the
scheduled and mandatory debt repayments made against the syndicated term loans.
Fiscal 1999's results also included a $10.1 net charge to rationalize certain
Systems operations. The positive factors in Fiscal 2000 were partially offset by
higher intangible asset amortization of $32.4 as a result of revisions to the
estimated useful lives of those assets made in the fourth quarter of Fiscal 1999
and to a higher effective income tax rate in Fiscal 2000 compared to Fiscal
1999.
Adjusted Net Income
Adjusted Net Income was higher in Fiscal 2000 than in Fiscal 1999 by $39.1, or
$0.34 per share, representing a year-over-year growth rate of 49%. The increase
in Adjusted Net Income primarily reflected increases in Semiconductor revenues
and gross margins, partially offset by a higher effective income tax rate in
Fiscal 2000 compared with Fiscal 1999.
Unless otherwise noted, the following discussion pertains to Mitel's continuing
operations.
REVENUE
Business Segment Review
Mitel Communications Systems
(millions Cdn$) 2000 1999 1998
-----------------------------
Systems revenue $ 793.7 $ 752.7 $ 566.8
As a percent of total revenue 57% 57% 64%
Systems revenue grew by $41.0, or 5%, in Fiscal 2000 compared with Fiscal 1999.
The growth was due to increased sales volumes of SX-200 and SX-2000 systems,
including the associated pull-through of system sets, primarily in North
America, and to increased demand for Mitel's network access solutions products
in Europe. The improvement was partially offset by lower European system sales
to large accounts that were adversely affected in part by the Year 2000
concerns.
Fiscal 2000 North American channel sales increased by 15% compared with Fiscal
1999. The 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. U.S. direct channel sales benefited from increased installations of
new systems as well as from upgrades in the existing customer base. Based on
market research provided by Phillips InfoTech, a New Jersey-based market
research firm, Mitel's North American market share, based on PBX line shipments,
improved to 10.2% in calendar 1999 from 8.9% in calendar 1998. This placed Mitel
third overall in the North American PBX line market. Voice messaging product
sales were flat in this region compared with last year as a result of delayed
orders, partly due to Year 2000 concerns and a resulting focus by customers on
core business systems instead of improved features and functionality.
The decline in European system sales and service revenue compared with Fiscal
1999 was primarily the result of delayed orders in the latter half of the fiscal
year in light of the market's Year 2000 concerns and the lingering effects into
the fourth quarter. The lower sales were partially offset by continued higher
demand for Mitel's alternative network access products.
40
Systems sales into the Asia/Pacific region were lower due to a reduced focus by
Mitel on competing in that region for enterprise communications systems.
Fiscal 2000 Systems segment operating income improved to $79.8, or by 30% over
Fiscal 1999, primarily as a result of improved voice systems margins and sales
channel efficiencies.
Fiscal 1999 Systems revenue growth of 33% compared with Fiscal 1998 was due to
increased demand for alternative network access products, higher SX-200 and
SX-2000 sales through the U.S. indirect channel, and additional revenues from
the advanced messaging and ISDN PBX businesses acquired in the first quarter of
Fiscal 1999.
Mitel Semiconductor
(millions Cdn$) 2000 1999 1998
------------------------------
Semiconductor revenue $ 602.8 $ 557.7 $ 314.6
As a percent of total revenue 43% 43% 36%
Through Fiscal 2000, Mitel continued to consolidate and rationalize its product
line to focus on areas that management believes will result in high growth and
profitability. Overall, Semiconductor revenue from continuing operations in
Fiscal 2000 increased by 8% from Fiscal 1999, principally due to stronger WAN
Internetworking and wireless access sales, partially offset by lower home
gateway and medical sales. The significant increase in WAN internetworking sales
occurred primarily in the United States. The increase in wireless access sales
was driven by growth across all regions. Management believes that home gateway
and medical sales will improve in Fiscal 2001 based in part on a strengthened
order backlog at year-end.
During Fiscal 2000, as part of a strategic plan to consolidate capacity levels
and achieve better manufacturing utilization, Mitel implemented a plan to
transfer all semiconductor CMOS manufacturing operations from Jarfalla, Sweden,
to Plymouth, U.K. The transfer resulted in improved semiconductor manufacturing
capacity. Since the transfer, the Swedish operation has been operating as an IC
fabless facility focused on the design, marketing and sales of ASICs and as a
manufacturer and marketer of optoelectronic devices.
Certain capital investments were made during Fiscal 2000 to increase overall
semiconductor production capacity, principally for wireless and new media
products, to meet the requirements of the growing semiconductor backlog.
Fiscal 2000 Semiconductor segment operating income improved to $92.0, or by 70%
over Fiscal 1999, primarily as a result of an improved product portfolio mix and
higher manufacturing utilization.
Fiscal 1999 Semiconductor revenue increased over Fiscal 1998 by 77% as a result
of increased demand for the Company's ICs and thick film hybrid products,
primarily in the U.S., and the effects of consolidating the former Plessey
Semiconductor Group for a full year.
Geographic Revenues
Revenue during the last three fiscal years, based on the geographic location of
Mitel's customers, was distributed as follows:
41
(millions Cdn$) 2000 1999 1998
-------------------------
United States $ 632.7 $ 589.1 $ 404.1
Europe 459.8 428.6 286.6
Asia/Pacific 159.9 166.7 92.8
Canada 92.3 71.1 53.7
Other regions 51.8 54.9 44.2
For the year ended March 31, 2000, the net movement in exchange rates from
Fiscal 1999 adversely affected total revenue by 3% ($45.6) primarily as a result
of changes in the U.K. pound sterling and U.S. dollar exchange rates. Fiscal
1999 revenue was favorably affected by 4% ($54.1) as a result of changes in the
U.K. pound sterling and U.S. dollar exchange rates.
United States
Sales into the United States increased by 7% in Fiscal 2000 over Fiscal 1999.
The increase was principally due to higher sales of SX-200 systems and
associated sets, and increased installation of new systems and upgrades in the
existing customer base. Higher Semiconductor revenue also contributed to the
growth in this region, primarily due to higher WAN Internetworking and wireless
sales.
Sales increased by 46% in the United States in Fiscal 1999 over Fiscal 1998,
principally due to the Systems business. Higher sales of SX-2000 and associated
sets, and the effects of consolidating sales resulting from the May 1998
acquisition of Centigram Communications Corporation's Customer Premises
Equipment, drove most of the increase.
Europe
European sales increased by 7% in Fiscal 2000 over Fiscal 1999 due to higher
sales of alternative network access products to long-distance carriers and
stronger sales of semiconductors.
Fiscal 1999 revenue into Europe increased by 49% over Fiscal 1998 due to the
effects of including a full year of the former Plessey group's results.
Canada
Canadian sales increased by 30% in Fiscal 2000 over Fiscal 1999 as a result of
increased PBX market share driven by stronger sales of SX-200 and SX-2000
systems and higher semiconductor sales. According to research by Phillips
InfoTech, Mitel was the number one PBX supplier in Canada in the under 1,000
line segment in calendar 1999, capturing 34.2% of that market segment. Mitel
gained 8.7 market share points, up from 25.5% in calendar 1998.
The sales increase in Canada from Fiscal 1998 to Fiscal 1999 was 32% on higher
semiconductor sales from the former Plessey operations and to higher sales of
SX-200 systems and sets in the Systems group.
Asia/Pacific
Asia/Pacific sales decreased by 4% in Fiscal 2000 compared to Fiscal 1999 as a
result of reduced focus on this segment of the enterprise communications systems
market.
42
Fiscal 1999 revenue in the Asia/Pacific region increased by 80%, principally due
to the effects of including a full year of the former Plessey group's results.
Other Regions
Sales into other regions decreased by 6% in Fiscal 2000 compared with Fiscal
1999. The decrease was principally due to reduced semiconductor sales.
Fiscal 1999's increase of 24% in sales into other regions over Fiscal 1998 was
due to the effects of consolidating Plessey for a full year.
GROSS MARGIN
(millions Cdn$) 2000 1999 1998
------------------------------
Gross margin $ 684.1 $ 598.0 $ 423.8
As a percent of revenue 49% 46% 48%
The higher Fiscal 2000 gross margin was principally attributable to a favorable
semiconductor sales mix and positive manufacturing variances resulting from
improved semiconductor manufacturing utilization and to the positive impacts of
higher sales volumes of voice systems and network access products.
Gross margin in Fiscal 1999 decreased relative to Fiscal 1998 by 2 percentage
points. The negative impact resulted mainly from increased amortization expense,
reduced margins in some products, and certain unfavorable manufacturing
variances in Semiconductor.
OPERATING EXPENSES
Selling and Administrative ("S&A")
(millions Cdn$) 2000 1999 1998
----------------------------
S&A expenses $ 359.4 $ 332.9 $ 246.0
As a percent of revenue 26% 25% 28%
S&A expenses increased as a percentage of sales in Fiscal 2000 over the previous
year, primarily due to Mitel's continued investments in marketing new advanced
messaging applications, as well as developing new channels in Europe for the
ISDN PBX products.
Fiscal 1999 S&A expenses decreased as a percentage of sales from Fiscal 1998,
primarily due to strong 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.
Research and Development ("R&D")
(millions Cdn$) 2000 1999 1998
----------------------------
R&D Expenses $ 152.9 $ 149.8 $ 52.0
As a percent of revenue 11% 11% 6%
43
Fiscal 2000 R&D expenses were net of $13.4 (1999 - $23.7; 1998 - $40.7) in R&D
government assistance, including investment tax credits. The R&D focus in
Systems is directed to introducing new Internet Protocol-based ("IP") voice
systems and peripherals for the enterprise network and to integrating advanced
messaging applications into its product portfolio. R&D is also ensuring a
migration path for Mitel legacy systems to the new IP architecture. In
Semiconductor, investments are being made in high-growth areas such as WAN
Internetworking, optoelectronics and medical devices.
Special Charges (net)
During the fourth quarter of Fiscal 1999, Mitel recorded a net pre-tax special
charge of $10.1, including 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 by transfering 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 Asia/Pacific regions. Approximately 100 people were
terminated as part of this rationalization program that was completed during the
year, resulting in a nil restructuring provision balance at March 31, 2000.
Amortization of Acquired Intangibles
Amortization of acquired intangibles increased in Fiscal 2000 to $54.8 from
$22.4 in Fiscal 1999. In the fourth quarter of Fiscal 1999, the estimated useful
life of acquired intangibles was reduced to two years from an average of 5 to 15
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 to the estimated useful life of acquired intangibles accounted for the
total increase.
INTEREST INCOME
Interest income was $8.6 for the year ended March 31, 2000, as compared with
$5.9 in Fiscal 1999 and $5.7 in Fiscal 1998. The increase over Fiscal 1999 was
due to higher average cash balances on hand.
INTEREST EXPENSE
Interest expense was $22.0 for Fiscal 2000, compared with $30.7 and $7.2 for
Fiscal 1999 and Fiscal 1998, respectively. The decrease in interest expense was
principally attributable to repayments on the syndicated term loans. The Fiscal
1999 increase resulted from the term loans incurred by Mitel on February 12,
1998, in connection with the Plessey acquistion.
INCOME TAXES
Income tax expense for Fiscal 2000 was $39.6, compared with $17.5 and $30.5 for
Fiscal 1999 and Fiscal 1998, respectively. The effective income tax rate, as a
percentage of pre-tax income from continuing operations and before the effect of
amortization of acquired intangibles, was 25%, 22% and 25% in Fiscal 2000,
Fiscal 1999 and Fiscal 1998, respectively. The increased effective tax rate in
Fiscal 2000 was mainly due to higher taxable income in Canada and the favorable
impact in Fiscal 1999 of certain permanent differences associated with European
operations. The Fiscal 1999 effective tax rate was lower than in Fiscal 1998 due
to lower taxes in Canada, resulting from higher interest costs related to the
term loans and to tax recoveries in Europe.
44
BACKLOG
(millions Cdn$) 2000 1999 1998
----------------------------
Backlog $ 280.0 $ 179.8 $ 221.3
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 31, 2000, order backlog was $280.0, up from $179.8
at March 26, 1999. The increase in backlog was attributable to higher orders
arising from growing demand for Semiconductor products related to Internet and
broadband connectivity. Most of the backlog is scheduled for delivery in the
next 12 months.
Compared with Fiscal 1998, the decrease in backlog of $41.5 from continuing
operations at the end of Fiscal 1999 was attributable to a decrease in
semiconductor orders, arising partly from a reduction in order lead times.
LIQUIDITY AND CAPITAL RESOURCES
Mitel had cash, cash equivalents and short-term investment balances of $228.4 at
March 31, 2000, compared with $125.3 at March 26, 1999. All of the March 31,
2000, cash balance was held in either cash or highly liquid cash equivalents.
The increase of $103.1 was mainly due to cash flow provided by operating
activities, partially offset by fixed asset additions and the cost of a common
share repurchase program.
Operating activities
Cash flow from operations before working capital changes amounted to $229.3
during Fiscal 2000, compared with $166.3 in Fiscal 1999. Since March 26, 1999,
Mitel's working capital, as reflected in the consolidated statements of cash
flows, decreased by $18.1, primarily due to lower receivables as a result of
strong collections in the fourth quarter of Fiscal 2000, partially offset by
payments made against the special charges and the discontinued operations
provisions. Inventory levels remained flat compared to last year. 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.
Investing activities
Fixed asset and other additions were $60.9 during Fiscal 2000, compared with
$63.0 in the previous year, excluding additions of $25.2 and $22.7 financed by
capital lease for the two respective periods. The additions were primarily
related to continuing improvements to Mitel's information technology resources,
as well as Semiconductor manufacturing capacity and technology enhancements.
The Fiscal 2000 technology enhancements included the implementation of a global
ERP software system. The project was completed on schedule on April 1, 2000,
when the whole of the Company moved to the new ERP platform. Management believes
this advanced information system will significantly improve the business tools
supporting sales and order administration, procurement, manufacturing and
financial reporting. In addition, the new system's infrastructure enables the
Company to prepare for upcoming e-commerce and business-to-business initiatives.
The total project costs capitalized in Fiscal 2000, including hardware costs and
costs to configure the software, amounted to approximately $39.
In the fourth quarter of Fiscal 2000, Mitel received cash proceeds of $9.5
related to the sale of the Lincoln business.
45
Financing activities
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 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 the Company's
ability to meet its obligations under the credit agreement. The term loans are
subject to mandatory prepayments out of certain insurance proceeds, defined
excess cash flow generated by Mitel, and the proceeds of certain asset sales
(other than inventory), equity offerings or debt issuances by Mitel. Mandatory
prepayments range from 50% to 100% of the applicable net cash proceeds and would
be paid on a pro-rata basis between the AXELs Series Bond Tranche A Term Loan
subject to certain constraints toward the Tranche A Term Loans. Management
believes Mitel is in compliance with the obligations and restrictive covenants
under the credit agreement.
The principal of the AXELs Series B loan is payable in four equal quarterly
installments commencing March 2003. The principal of the Tranche A Term Loan
will be fully repaid in June 2000 as a result of a mandatory prepayment required
to be made from Mitel's defined excess cash flow in Fiscal 2000.
Long-term debt decreased due to scheduled repayments of $10.0 against the
syndicated term loans. As a result of the Lincoln sale, Mitel made a mandatory
prepayment of $11.3 (U.S. $7.8) against the syndicated term loans on January 20,
2000.
On June 7, 1999, Mitel announced its intention to make a normal course issuer
bid for up to 5,835,645 common shares (5% of 116,712,906 common shares issued
and outstanding at May 28, 1999). These purchases took place on the open market
through the stock exchanges of Toronto and Montreal commencing on June 9, 1999,
pursuant to the normal course issuer bid filed with these exchanges. As at March
31, 2000, 3,383,800 common shares were purchased and canceled for cash
consideration of $36.4, including costs to acquire the shares.
As at March 31, 2000, Mitel's capitalization consisted of 30% debt, 4% preferred
equity and 66% common equity. This compares with 32% debt, 4% preferred equity
and 64% common equity at the end of Fiscal 1999.
In addition to cash and cash equivalent balances of $228.4 as at March 31, 2000,
Mitel has an unused revolving credit facility of approximately $106.6
(U.S.$73.3). In accordance with the terms of the credit agreement, the maximum
amount of U.S.$75.0 available under the revolving credit facility will be
reduced by $13.0 (U.S.$8.9) in June 2000 as a result of the mandatory prepayment
triggered by Mitel's achievement of defined excess cash flow in Fiscal 2000.
Mandatory prepayments that would exceed contractual limitations on prepayments
of the AXELs Series B loan are instead applied to reduce permanently the
revolving loan commitments under the credit agreement.
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
The following statements constitute a "Year 2000 readiness disclosure" as that
term is defined in the Year 2000 Information and Readiness Disclosure Act
(P.L-105-271) signed into law by U.S. President Clinton on October 19, 1998.
46
The Year 2000 challenge was the result of computer programs being written using
two digits rather than four digits to define the applicable year. This practice
resulted in the possibility that the Company's internal computer systems and
products that have date-sensitive software could recognize a date that uses "00"
as 1900 rather than the year 2000. If Mitel's internal computer systems misread
the year date, system failures or miscalculations could cause disruptions of
operations, including a temporary inability to process transactions, send
invoices, or engage in similar normal business operations. A dedicated Year 2000
Program Management Office ("PMO") was established in February 1998 to address
compliance both externally, by Mitel's customers and suppliers, and internally,
with respect to Mitel's business processes. These internal processes include
network and communications infrastructure, business software applications,
manufacturing, distribution, facilities management, product development, sales,
finance and human resources.
Mitel experienced no major issues related to the transition to January 1, 2000.
Preparations were made for the February 29, 2000 rollover to address potential
problems that would arise due to the century leap-year date. Though no Year
2000-related issues were encountered over the February 29, 2000 rollover,
internal systems will continue to be monitored for any unlikely disruptions. The
contingency plans that were developed for use in the event of Year 2000-related
failures will be maintained and generalized for ongoing business use.
The Year 2000 PMO closed on March 31, 2000. The final phase of Mitel's formal
Year 2000 Program was the collection and long-term retention of Year
2000-related due diligence documentation. Guidelines were developed to assist
Mitel in its standard collection and retention of relevant documentation on a
worldwide basis. Due diligence will be maintained to ensure that business
continues as usual.
As part of Mitel's Year 2000 Internal Readiness Program, compliance of internal
systems was addressed by assessing the Company's requirements for business
continuation. Through thorough inventory assessment, testing and renovation of
internal information systems equipment, Mitel safe-guarded its mission-critical
systems against major internal Year 2000-related failures. In addition, risk
assessments were performed, and contingency plans were developed for technical
systems, as well as for business processes. Year 2000 readiness drills were
conducted at each corporate location to further test and fine-tune contingency
plans.
Mitel also implemented a Year 2000 Vendor Management Program and a Year 2000
Distributor Management Program, which required that all suppliers and
distributors be evaluated and ranked upon criticality to the business. Those
suppliers and distributors determined to be most critical to the business were
given highest priority, and contingency plans were developed for use in the
event that critical supplies could not be delivered to Mitel or regular
distribution channels were not available.
Mitel also completed comprehensive tests on customer premises equipment and
semiconductor component products manufactured and sold to customers, including
current and certain discontinued business telephone systems (PBXs), peripheral
components and applications. The majority of these products were classified as
Year 2000-compliant or as having compliant versions.
The total incremental direct cost of the Year 2000 Internal Readiness Program
amounted to $12.5 and was funded through operating cash flows. The program costs
were primarily attributable to the purchase of new software and equipment and do
not include estimates for potential litigation.
OTHER
Asia/Pacific Economic Risk
The Asia/Pacific region encountered unstable local economies and significant
devaluation in its currencies during Fiscal 1999 and through most of Fiscal
2000. This region represented 11% of Mitel's revenue from continuing operations
for the year ended March 31, 2000, and 13% of revenue from continuing operations
in
47
Fiscal 1999. The majority of the Asia/Pacific sales relate to Semiconductor
operations. Asia/Pacific receivables, net of reserves, were approximately 2% of
Mitel's total assets as at March 31, 2000. To the extent that the Asia/Pacific
region grows in importance to Mitel, or that the factors affecting the region
begin to adversely affect customers in other 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. At
March 31, 2000, the translation account was in a debit position of $3.4,
representing a decrease of $31.6 from the end of Fiscal 1999. The decrease was
due to a stronger Canadian dollar as measured against other currencies,
principally the U.K. pound sterling and the U.S. dollar.
European Union and the Euro
On January 1, 1999, 11 of 15 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
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 that 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 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.
SM* AXEL is a registered service mark of Goldman, Sachs and Co.
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-
48
approved policies and procedures. Mitel does not hold or issue financial
instruments for trading or speculative purposes.
Mitel currently uses forward contracts and foreign currency options to reduce
the exposure to foreign exchange risk. The most significant foreign exchange
exposures for Mitel relate to the U.S. dollar, U.K. pound sterling and the Euro.
At March 31, 2000, there were unrealized gains of $6.4 on the forward contracts
and unrealized losses of $1.6 and $0.7 on the forward and option contracts,
respectively. These unrealized gains and losses are calculated as the difference
between the actual contract rates and the applicable current market rates that
would be used if the foreign exchange contracts were unwound on March 31, 2000.
Additional potential losses in the net fair value of these contracts, assuming a
10% appreciation in the U.S. dollar against all currencies at March 31, 2000,
would have been approximately $9.0. Because these contracts are entered into for
hedging purposes, management believes that these potential losses would be
largely offset by gains on the underlying exposures from firmly committed or
anticipated transactions.
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 U.S. dollar denominated long term
debt. Mitel monitors its interest rate risk on the basis of changes in fair
value. Assuming a 1 percentage point rise in U.S. interest rates at March 31,
2000, the potential loss in the net fair value of the interest rate swap and the
underlying hedged debt would be $3.9 over the life of the debt. 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 U.S. dollar
denominated long-term debt is hedged.
In accordance with Mitel policy, cash equivalent and short-term investment
balances consist primarily of high-grade money market instruments with original
maturity dates of less than one year.
The estimated potential losses discussed previously assume the occurrence of
certain adverse market conditions. These calculations 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.
49
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 31, 2000 and March 26, 1999
Consolidated Statements of Income and Retained Earnings for the
years ended March 31, 2000, March 26, 1999 and March 27, 1998
Consolidated Statements of Cash Flows for the years ended March 31,
2000, March 26, 1999 and March 27, 1998
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
31, 2000 and March 26, 1999 and the consolidated statements of income and
retained earnings and cash flows for each of the years in the three year period
ended March 31, 2000. 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 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 31, 2000
and March 26, 1999 and the results of its operations and its cash flows for each
of the years in the three year period ended March 31, 2000 in accordance with
accounting principles generally accepted in Canada.
Ottawa, Canada Ernst & Young LLP
April 28, 2000, except as to note 27 Chartered Accountants
which is as of June 7, 2000.
50
Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
March 31, March 26,
2000 1999
--------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 195.5 $ 125.3
Short-term investments 32.9 --
Accounts receivable (notes 4 & 21) 288.2 326.3
Inventories (note 5) 187.7 198.1
Prepaid expenses and other 30.8 27.4
--------------------------
735.1 677.1
Long-term receivables (note 6) 18.7 35.4
Fixed assets (note 7) 457.4 507.7
Acquired intangible assets (note 8) 3.0 56.7
Patents, trademarks and other (note 9) 11.3 23.4
--------------------------
$ 1,225.5 $ 1,300.3
==========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 10) $ 215.4 $ 254.1
Income and other taxes payable 31.6 11.8
Deferred revenue 44.1 36.6
Current portion of long-term debt (note 11) 57.9 37.6
--------------------------
349.0 340.1
Long-term debt (note 11) 217.5 276.5
Pension liability (note 24) 13.4 13.2
Deferred income taxes (note 18) 9.8 23.2
--------------------------
589.7 653.0
--------------------------
Commitments and contingencies (notes 12, 13 & 16)
Shareholders' equity:
Capital stock (note 14)
Preferred shares 37.0 37.2
Common shares (2000 - 113,997,734; 1999 - 116,705,531) 325.6 331.2
Contributed surplus (note 14) 9.2 32.3
Retained earnings 267.4 218.4
Translation account (note 15) (3.4) 28.2
--------------------------
635.8 647.3
--------------------------
$ 1,225.5 $ 1,300.3
==========================
On behalf of the Board:
Dr. Henry Simon, Director Kirk K. Mandy, Director
(See accompanying notes to the consolidated financial statements)
51
Mitel Corporation
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in millions of Canadian dollars)
Years Ended
March 31, March 26, March 27,
2000 1999 1998
--------------------------------------
Retained earnings, beginning of year $ 218.4 $ 202.9 $ 114.2
Net income 56.0 26.2 91.9
--------------------------------------
274.4 229.1 206.1
Cost of common share issue (note 14) -- (7.5) --
Cost of common share repurchase (note 14) (3.8) -- --
Dividends on preferred shares (note 14) (3.2) (3.2) (3.2)
--------------------------------------
Retained earnings, end of year $ 267.4 $ 218.4 $ 202.9
======================================
(See accompanying notes to the consolidated financial statements)
52
Mitel Corporation
CONSOLIDATED STATEMENTS OF INCOME
(in millions of Canadian dollars, except per share amounts)
Years Ended
March 31, March 26, March 27,
2000 1999 1998
-----------------------------------------
Revenue $1,396.5 $1,310.4 $881.4
-----------------------------------------
Cost of sales:
Cost of sales other than amortization 645.1 645.6 432.6
Amortization of manufacturing assets 67.3 66.8 25.0
-----------------------------------------
712.4 712.4 457.6
-----------------------------------------
Gross margin 684.1 598.0 423.8
-----------------------------------------
Expenses:
Selling and administrative 359.4 332.9 246.0
Research and development (net) (note 16) 152.9 149.8 52.0
Amortization of acquired intangibles 54.8 22.4 1.8
Special charges (net) (note 17) -- 10.1 --
-----------------------------------------
567.1 515.2 299.8
-----------------------------------------
Operating income from continuing operations 117.0 82.8 124.0
Interest income 8.6 5.9 5.7
Interest expense (note 11) (21.5) (23.5) (7.2)
Debt issue and other costs (note 11) (0.5) (7.2) --
-----------------------------------------
Income from continuing operations before income taxes 103.6 58.0 122.5
Income tax expense (note 18) 39.6 17.5 30.5
-----------------------------------------
Net income from continuing operations 64.0 40.5 92.0
-----------------------------------------
Income (loss) from discontinued operations (note 19) -- 2.0 (0.1)
Estimated loss on disposal of discontinued operations (note 19) (8.0) (16.3) --
-----------------------------------------
(8.0) (14.3) (0.1)
-----------------------------------------
Net income $ 56.0 $ 26.2 $ 91.9
=========================================
Net income attributable to common shareholders
after preferred share dividends $ 52.8 $ 23.0 $ 88.7
=========================================
Net income per common share (notes 3 & 14):
Net income per common share from
continuing operations:
Basic $ 0.53 $ 0.33 $ 0.82
=========================================
Fully diluted $ 0.52 $ 0.32 $ 0.80
=========================================
Net income per common share:
Basic $ 0.46 $ 0.20 $ 0.82
=========================================
Fully diluted $ 0.45 $ 0.20 $ 0.80
=========================================
Weighted average number of common shares
outstanding (millions)
Basic 114.7 114.0 107.8
=========================================
Fully diluted 120.3 115.9 114.0
=========================================
(See accompanying notes to the consolidated financial statements)
53
Mitel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
Years ended
March 31, March 26, March 27,
2000 1999 1998
----------------------------------------
CASH PROVIDED BY (USED IN)
Operating activities:
Net income $ 56.0 $ 26.2 $ 91.9
Amortization of capital and other assets 157.0 143.2 50.8
Estimated loss on disposal of discontinued operations 8.0 16.3 --
Investment tax credits 10.1 (7.0) (18.0)
Gain on sale of capital assets and investments (1.0) (5.5) (0.7)
Deferred income taxes (1.9) (7.8) 0.6
Change in pension liability 1.1 0.9 1.0
Decrease (increase) in working capital (note 26) 18.1 (123.2) (50.2)
----------------------------------------
Total 247.4 43.1 75.4
----------------------------------------
Investing activities:
Change in short-term investments (33.5) 34.5 53.3
Additions to capital and other assets (60.9) (63.0) (8.3)
Proceeds from disposal of capital assets and investments 4.8 11.9 7.2
Proceeds from sale of discontinued operations (note 19) 9.5 -- --
Acquisitions (note 20) -- (46.6) (343.8)
Net change in non-cash balances related to investing activities (4.5) 5.7 (0.2)
----------------------------------------
Total (84.6) (57.5) (291.8)
----------------------------------------
Financing activities:
Increase in long-term debt -- 0.4 339.7
Repayment of long-term debt (21.3) (132.7) (10.6)
Repayment of capital lease liabilities (33.0) (9.0) (42.4)
Debt issue costs -- (2.0) (10.9)
Dividends on preferred shares (3.2) (3.2) (3.2)
Issue of common shares - net (note 14) 3.9 166.4 4.0
Repurchase of common and preferred shares (note 14) (36.6) -- --
----------------------------------------
Total (90.2) 19.9 276.6
----------------------------------------
Effect of currency translation on cash (2.4) 2.6 1.5
----------------------------------------
Increase in cash and cash equivalents 70.2 8.1 61.7
Cash and cash equivalents, beginning of year 125.3 117.2 55.5
----------------------------------------
Cash and cash equivalents, end of year $ 195.5 $ 125.3 $ 117.2
========================================
(See accompanying notes to the consolidated financial statements)
54
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 product 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 23.
The preparation of financial statements in conformity with Canadian and
United States accounting principles requires management to make estimates
and assumptions that affect the reported assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those
estimates.
(A) FISCAL YEAR END
The Company's fiscal year end is the last Friday in March. Normally this
results in a fifty-two week year with four thirteen week quarters. For
Fiscal 2000, the year-end of the Company is March 31, 2000 resulting in a
fifty-three week year.
(B) BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and of its wholly-owned subsidiary companies. Investments in associated
companies, except for joint ventures, in which the Company has significant
influence are accounted for by the equity method. Investments in joint
ventures are accounted for by the proportionate consolidation method.
(C) CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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 cost, which approximates their fair value.
(D) INVENTORIES
Inventories are valued at the lower of average cost and net realizable
value for work-in-process and finished goods, and current replacement cost
for raw materials. The cost of inventories includes material, labor and
manufacturing overhead.
(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.
55
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%
(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 forward and option 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 program. All forward
and option 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. Premiums paid with respect to option
contracts are deferred and charged to net earnings over the contract
period.
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 31, 2000, all development costs, except
acquired intangibles purchased in a business combination, were expensed as
incurred. Management periodically evaluates the realizability of the
purchased development costs based upon the expected future undiscounted
cash flows of the related assets.
56
(K) STOCK-BASED COMPENSATION PLAN
The Company has a stock-based compensation plan described in note 14. No
compensation expense is recognized for this plan when stock or stock
options are issued to employees. Any consideration paid by employees on
exercise of stock options or purchase of stock is credited to share
capital. If stock or stock options are repurchased from employees, the
excess of the consideration paid over the carrying amount of the stock or
stock option canceled is charged to retained earnings.
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:
2000 1999 1998
--------- -------- --------
Net income as reported $ 56.0 $ 26.2 $ 91.9
Adjusted Net Income, as adjusted for:
Amortization of acquired intangibles 54.8 22.4 1.8
Special charges (net) -- 10.1 --
Debt issue and other costs 0.5 7.2 --
(Income) loss from discontinued operations -- (2.0) 0.1
Estimated loss on disposal of discontinued operations 8.0 16.3 --
--------- -------- --------
Adjusted Net Income $ 119.3 $ 80.2 $ 93.8
========= ======== ========
Adjusted Net Income per common share - basic $ 1.01 $ 0.67 $ 0.84
========= ======== ========
4. ACCOUNTS RECEIVABLE
Included in accounts receivable was an allowance for doubtful accounts of
$8.0 (1999 - $8.7). Also included in accounts receivable was an amount of
$11.6 (1999 - $16.9) for unbilled accounts on long-term contracts (see
also note 6).
5. INVENTORIES
2000 1999
--------------------
Raw materials $ 53.5 $ 47.8
Work-in-process 68.3 86.1
Finished goods 65.9 64.2
--------------------
$ 187.7 $ 198.1
====================
6 LONG-TERM RECEIVABLES
2000 1999
---------------
Investment tax credits recoverable $ 4.8 $ 17.3
Promissory note, bearing interest at 8% (1999 - 10%) payable
annually, due in June 2004 and against which a first deed
on real property was pledged as security 6.1 10.5
Other long-term receivables 7.8 7.6
---------------
$18.7 $ 35.4
===============
57
7. FIXED ASSETS
2000 1999
-----------------------
Cost:
Land $ 12.4 $ 13.4
Buildings 155.8 169.1
Equipment 508.6 553.5
Equipment under capital leases 150.1 148.4
-----------------------
826.9 884.4
-----------------------
Less accumulated amortization:
Buildings 83.1 80.8
Equipment 226.4 243.6
Equipment under capital leases 60.0 52.3
-----------------------
369.5 376.7
-----------------------
$ 457.4 $ 507.7
=======================
As at March 31, 2000, the cost of equipment and equipment under capital
leases included $29.4 of enterprise resource planning systems under
development.
8. ACQUIRED INTANGIBLE ASSETS
2000 1999
-----------------
Cost:
In-process technology $ 5.2 $ 8.1
Developed technology 23.7 34.4
Customer base and work force 11.6 11.9
Goodwill 6.3 24.8
-----------------
46.8 79.2
-----------------
Less accumulated amortization:
In-process technology 4.7 1.7
Developed technology 22.4 10.9
Customer base and work force 10.9 2.9
Goodwill 5.8 7.0
-----------------
43.8 22.5
-----------------
$ 3.0 $ 56.7
=================
Fully amortized acquired intangible assets of $31.9 were removed from the
accounts of the Company at the end of Fiscal 2000.
9. PATENTS, TRADEMARKS AND OTHER
2000 1999
-----------------
Cost:
Patents, trademarks and other (note 24) $ 16.3 $ 16.3
Deferred debt issue costs 8.5 8.5
Deferred foreign exchange loss -- 10.5
-----------------
24.8 35.3
-----------------
Less accumulated amortization:
Patents and trademarks 9.7 9.8
Deferred debt issue costs 3.8 2.1
-----------------
13.5 11.9
-----------------
$ 11.3 $ 23.4
=================
58
10. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
2000 1999
-------------------
Trade payables $ 68.5 $ 79.4
Employee-related payables 34.9 38.4
Restructuring and other provisions (see also notes 17 & 20) -- 32.2
Other accrued liabilities 112.0 78.1
Provision for estimated loss on disposal of discontinued
operations (note 19) -- 26.0
-------------------
$ 215.4 $ 254.1
===================
11. LONG-TERM DEBT
2000 1999
---------------------
AXELs Series B, at a variable interest rate based on a defined US base rate plus
1.25% or a successive three month LIBOR rate plus 2.25%; at March 31, 2000 the
effective interest rate was 8.56% (1999 - 8.04%); repayable in four equal quarterly
installments commencing March, 2003. (2000 - U.S. $112.5; 1999 - U.S. $118.4) $ 163.5 $ 178.2
Tranche A Term Loan, at a variable interest rate based on a defined US base rate plus
0.75% or a successive three month LIBOR rate plus 1.75%; at March 31, 2000 the
effective interest rate was 8.06% (1999 - 7.79%); due June 2000 (see below). (2000 -
U.S. $18.9; 1999 - U.S. $27.5) 27.0 41.2
Capital leases and other, at rates varying from 5.8% to 10.4% with payment terms
ranging from 1 to 5 years (1999 - 5.8% to 12.2% with payment terms ranging from 1 to 80.7 90.5
5 years)
Non-interest bearing 1996 Canada-Quebec government loan, repayable in three equal
annual installments commencing July, 2001 4.2 4.2
--------------------
275.4 314.1
Less current portion 57.9 37.6
--------------------
$ 217.5 $ 276.5
====================
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 25). The proceeds from the term loans were used
to fund the acquisition of 100% of the capital stock of four affiliated
entities which, together with their respective subsidiaries, comprise
Plessey (see also note 20).
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 50% to 100% 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.
For the year ended March 31, 2000, the Company had excess cash flow, as
defined by the credit agreement, that is expected to result in the full
repayment of the $27.0 Tranche A term loan in June 2000. No further
quarterly principal repayments are required on the AXELs Series B loan
until March 2003, as per restrictions under the credit agreement.
59
Future minimum lease payments of the obligations under capital leases
total $89.1 of which $34.9, $29.3, $19.8, $4.2, and $0.9 relate to fiscal
years 2001 to 2005 and beyond respectively. Interest costs of $8.4 are
included in the total future lease payments.
Scheduled principal repayments, excluding obligations under capital
leases, during the next five fiscal years are: 2001 - $27.0; 2002 - $1.4;
2003 - $42.3; 2004 - $124.0; 2005 - $nil. Interest expense, including the
portion related to discontinued operations, related to long-term debt was
$25.9 in Fiscal 2000 (1999 - $37.7; 1998 - $7.6).
12. COMMITMENTS
(A) OPERATING LEASES
The future minimum lease payments for operating leases for which the
Company was committed were as follows: 2001 - $21.8; 2002 - $16.0;
2003 - $10.2; 2004 - $7.0; 2005 - $4.8; 2006 and beyond - $23.4.
Rental expense on operating leases for the year ended March 31, 2000
amounted to $25.0 (1999 - $24.7; 1998 - $17.1).
(B) LETTERS OF CREDIT
The Company had letters of credit outstanding as at March 31, 2000
of approximately $13.6 to collateralize duty charges.
(C) CAPITAL EXPENDITURES
Capital expenditure commitments under purchase orders outstanding at
the end of Fiscal 2000 amounted to approximately $9.4.
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.
(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.
Although the change in date has occurred, it is not possible to
conclude that all aspects of the Year 2000 Issue that may affect the
Company, including those related to customer, suppliers, or other
third parties, have been fully resolved. The effects of the Year
2000 Issue may be experienced after January 1, 2000, and if not
addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure which could
affect an entity's ability to conduct normal business operations.
14. CAPITAL STOCK
The Company's authorized capital stock consists of an unlimited number of
preferred and common shares.
Shares outstanding 2000 1999
-------------------------
Preferred shares - R&D series 1,607,900 1,616,300
Common shares 113,997,734 116,705,531
60
(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. During the year ended March 31, 2000, the Company purchased 8,400
preferred shares for cash consideration of $0.2.
(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 31, 2000 is as follows:
Number Amount
-----------------------
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
Repurchase of common shares (3,383,800) (9.5)
Exercise of employee stock options 676,003 3.9
-----------------------
Balance, March 31, 2000 113,997,734 $ 325.6
=======================
On June 7, 1999, the Company announced its intention to make a normal
course issuer bid for up to 5,835,645 common shares (5% of 116,712,906
common shares issued and outstanding at May 28, 1999) between June 9, 1999
and June 8, 2000. All repurchased shares will be cancelled. As at March
31, 2000, 3,383,800 shares have been purchased and cancelled under the
normal course issuer bid for cash consideration of $36.4, including costs
to acquire the shares. The amount paid to acquire the shares over and
above the average carrying value was charged pro rata to contributed
surplus that arose from common share transactions, with the balance
charged to retained earnings.
(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.
61
Pursuant to the terms of the credit agreement described in note 11, the
Company is restricted from declaring any common share dividends. 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 31, 2000 were
6,691,248 (1999 - 10,465,525; 1998 - 243,525) shares. All options granted
prior to January 29, 1998 have ten year terms and options granted
thereafter have six year terms. All options become fully exercisable at
the end of four years of continuous employment.
On July 12, 1999, the Company offered an option exchange program to option
holders (with the exception of directors, officers and certain executives)
who received stock option grants in calendar 1998 at $17.78 and higher.
Under the terms of the program, and with the consent of the Toronto and
Montreal Stock Exchanges, 1,750,000 options were cancelled and 1,000,657
new options were granted at an exercise price of $9.92 per share. The
reduction in number of options was directly proportional to the decrease
in the exercise price. The new grants have a term of 6 years.
A summary of the Company's stock option activity and related information
for the three years ended March 31, 2000 is as follows:
2000 1999 1998
----------------------------- ---------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
----------------------------- ---------------------------- -----------------------------
Outstanding options:
Balance, beginning of year 5,918,988 $12.89 6,251,888 $12.30 3,238,638 $ 5.71
Granted 6,439,957 $13.03 403,000 $19.40 4,237,750 $15.19
Exercised (676,003) $ 5.84 (310,900) $ 6.12 (980,000) $ 4.12
Forfeited (633,180) $13.14 (425,000) $15.38 (244,500) $ 7.87
Cancelled (2,032,500) $17.85 -- -- -- --
----------------------------- ---------------------------- -----------------------------
Balance, end of year 9,017,262 $12.37 5,918,988 $12.89 6,251,888 $12.30
============================= ============================ =============================
Exercisable, end of year 1,863,584 $ 9.37 2,367,963 $ 9.55 1,303,407 $ 5.18
============================= ============================ =============================
Weighted average fair value
price of options granted
during the year using the
Black-Scholes fair value
option pricing model (See also
note 23) $ 7.33 $10.40 $ 8.07
====== ====== ======
62
A summary of options outstanding at March 31, 2000 is as follows:
------------------------------------------------------------------------------------------------------------------------------
------------------------------------Total Outstanding------------------------------- --------------Total Exercisable------
Weighted Average Weighted Average Remaining Weighted Average
Exercise Price Options Exercise Price Contractual Life Options Exercise Price
------------------------------------------------------------------------------------------------------------------------------
$ 1.10-$ 5.75 348,717 $ 3.69 3 years 348,200 $ 3.69
$ 6.39-$ 9.20 3,290,895 $ 7.58 5 years 676,288 $ 7.36
$ 9.32 375,000 $ 9.32 5 years 297,125 $ 9.32
$ 9.44-$11.73 1,519,868 $10.08 6 years 183,287 $ 9.77
$12.03-$17.78 665,359 $17.47 4 years 283,747 $17.78
$18.33-$35.90 2,817,423 $19.49 6 years 74,937 $21.17
--------- ---------
9,017,262 1,863,584
========= =========
15. TRANSLATION ACCOUNT
The following table summarizes changes in the translation account:
2000 1999 1998
----------------------------------------------
Balance, beginning of year $ 28.2 $ 5.8 $ 2.5
Increase (decrease):
Movements in exchange rates -
U.K. pound sterling (14.3) 3.1 7.2
U.S. dollar (11.4) 18.3 (2.1)
Other currencies (3.2) 1.2 (1.0)
Swedish krona (1.9) 1.4 (1.0)
Reduction of net investments in subsidiaries (0.8) (1.6) 0.2
----------------------------------------------
Balance, end of year $ (3.4) $ 28.2 $ 5.8
==============================================
16. INVESTMENT TAX CREDITS AND GOVERNMENT ASSISTANCE
During the year, the Company recognized Canadian ITCs and other funding of
$14.0 (1999 - $23.7; 1998 - $40.7) 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
31, 2000 were negligible.
17. SPECIAL CHARGES
In 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
Asia/Pacific regions. Approximately 100 people were terminated as part of
this rationalization program. The restructuring programs related to this
provision were completed during Fiscal 2000.
63
18. INCOME TAXES
Details of income taxes were as follows:
2000 1999 1998
---------------------------------------
Income from continuing operations before income taxes:
Canadian $119.3 $ 53.0 $115.1
Foreign (15.7) 5.0 7.4
---------------------------------------
$103.6 $ 58.0 $122.5
=======================================
Income tax expense (recovery):
Current
Canadian $40.0 $ 20.9 $28.8
Foreign 1.5 4.4 1.1
Deferred
Canadian 4.5 -- --
Foreign (6.4) (7.8) 0.6
---------------------------------------
$39.6 $ 17.5 $ 30.5
=======================================
Deferred taxes on income generally result from timing differences
primarily in the recognition of tax loss carryforwards and R&D
expenditures for tax and accounting purposes.
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:
2000 1999 1998
---------------------------------------
Expected tax rate 40% 40% 40%
---------------------------------------
Expected tax expense $ 41.5 $ 23.2 $ 49.0
Foreign tax rate differences (2.8) (7.0) (1.1)
Tax effect of losses not recognized 9.6 9.7 0.7
Tax effect of realizing benefit of prior
years' loss carryforwards and timing differences (13.1) (11.7) (18.0)
Corporate minimum taxes 1.9 1.5 0.7
Other 2.5 1.8 (0.8)
---------------------------------------
Income tax expense $ 39.6 $ 17.5 $ 30.5
=======================================
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 loss before
income taxes attributable to all foreign operations was $15.7 (1999 -
income of $5.0; 1998 - income of $7.4).
As at March 31, 2000, the Company had tax loss carryforwards of
approximately $154.0 for which an accounting benefit was recognized on
approximately $64.5 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: 2004 - $5.5; 2005 - $13.6; 2006 to 2019 - $70.4. The
tax loss carryforwards relate to operations in the United States, the
United Kingdom, Sweden and Germany. As at March 31, 2000, the Company had
Canadian ITC carryforwards of approximately $24.8, 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 2007
to 2010. In addition, the Company had timing differences of approximately
$60.0 for which no accounting benefit was recognized.
64
19. 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
Semiconductors Group acquired in Fiscal 1998 (see also note 20).
Accordingly, the operations related to this business were accounted for as
discontinued operations.
On January 19, 2000, the Company completed the sale of Lincoln for total
consideration of $12.0, including cash of $9.5 and a note receivable of
$2.5. The financial results of the discontinued operations are as follows:
2000 1999 1998
---------------------------
Sales $ 32.2 $74.3 $ 7.1
Income (loss) from discontinued operations, net of income tax
recoveries of $Nil (1999 - $0.8, 1998 - $0.1) -- 2.0 (0.1)
Estimated loss on disposal of discontinued operations, net of income
tax recoveries of $3.4 (1999 - $9.7) 8.0 16.3 --
Basic loss per common share from discontinued operations
$ 0.7 $ 0.13 --
Fully diluted loss per common share from discontinued operations $ 0.7 $ 0.12 --
The Lincoln operating loss of $9.8 for the ten months ended January 20,
2000 was charged to the provision for discontinued operations.
The income (loss) before income taxes includes allocated interest expense
related to long-term debt of $nil, $7.0 and $0.5 in Fiscal 2000, 1999 and
1998, respectively. Interest expense was allocated to discontinued
operations based on a ratio of Lincoln revenue to total Plessey revenue.
As at March 26, 1999, total net assets related to Lincoln included
inventories of $18.2, fixed assets of $13.6 and current liabilities of
$14.3.
20. 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 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. 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 31, 2000, the liability in respect of
acquisition and integration costs was $nil (March 26, 1999 was $1.3). The
purchase transaction was summarized as follows:
65
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
=======
(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 operations 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. 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
31, 2000 and March 26, 1999, the liability in respect of acquisition and
integration costs was $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
=====
(C) On February 12, 1998, the Company and certain of its wholly owned
subsidiaries acquired 100% 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 Limited in the U.K. and as part of
Mitel Inc. in the U.S. The acquisition was accounted for by the purchase
accounting method. The purchase transaction was summarized as follows:
66
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 31, 2000, the liability in respect of acquisition costs was
$nil (1999 - $nil) and $nil (1999 - $10.6) 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 were completed
during Fiscal 2000.
(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. The
integration program was completed during Fiscal 1999.
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-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
========
21. RELATED PARTY TRANSACTIONS
During the year ended March 31, 2000, the Company sold to and purchased
from jointly controlled and significantly influenced enterprises products
and services valued at approximately $2.7 (1999 - $3.8; 1998 - $2.5) and
$0.9 (1999 - $1.0; 1998 - $nil) respectively.
Included in accounts receivable as at March 31, 2000 were amounts due from
jointly controlled and significantly influenced enterprises of $0.5 (1999
- $nil; 1998 - $0.4).
67
22. 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 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.
Unallocated
2000 Systems Semiconductor costs Total
----------- ------------------ -------------- -----------
Total external sales revenue $ 793.7 $ 602.8 $ -- $1,396.5
Amortization of buildings and equipment 22.6 77.8 -- 100.4
Amortization of acquired intangibles -- -- 54.8 54.8
Segment's operating income (loss) from
continuing operations 79.8 92.0 (54.8) 117.0
Unallocated
1999 Systems Semiconductor costs Total
----------- ------------------ -------------- -----------
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
Segment's operating income (loss) from
continuing operations 42.3 83.5 (1.8) 124.0
68
Geographic Segments
Revenues from external customers are attributed to countries based on
location of the selling organization. Geographic information is as
follows:
2000 1999 1998
----------------------------------- ------------------------------------ ----------------------------------
Goodwill Goodwill Goodwill
Fixed and other Fixed and other Fixed and other
Revenue assets Intangibles Revenue assets Intangibles Revenue assets Intangibles
----------------------------------- ------------------------------------ ----------------------------------
Canada $ 207.9 $140.4 $ 10.3 $ 142.8 $128.9 $23.9 $141.0 $120.6 $ 22.1
United States 631.3 11.2 1.8 591.6 11.5 31.3 405.7 7.2 5.6
United Kingdom 506.2 285.4 1.7 502.2 343.4 22.7 284.2 383.6 1.7
Sweden 26.0 19.3 -- 30.2 23.5 -- 29.9 36.9 --
Other foreign
countries 25.1 1.1 0.5 43.6 0.4 2.2 20.6 1.0 1.9
----------------------------------- ------------------------------------ ----------------------------------
Consolidated
total $ 1,396.5 $457.4 $ 14.3 $ 1,310.4 $507.7 $ 80.1 $ 881.4 $549.3 $ 31.3
=================================== ==================================== ==================================
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.
23. 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, 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.
(B) 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.
(C) 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.
(D) 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.
(E) The Company implemented SFAS 109, Accounting for Income Taxes, in
Fiscal 1994 for purposes of reconciliation to U.S. GAAP. As at March
31, 2000, the Company's deferred tax asset, primarily related to the
benefit of realizing investment tax credit, loss carryforwards and
temporary differences, net of a valuation allowance of $78.0 (1999 -
$80.0), was $15.7 (1999 - $29.3), and deferred tax liabilities,
primarily related to research and development expenditures,
buildings and equipment, were $9.8 (1999 - $23.2). The application
of this method also gives rise to differences in the allocation of
consideration with
69
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.
(F) 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. This has resulted in
a difference in the valuation of goodwill at the time of the
purchase and in the subsequent amortization of the goodwill.
(G) 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.
(H) U.S. GAAP requires the presentation of comprehensive income which
includes all changes in shareholders' equity during a period except
shareholders transactions. In addition, 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.
(I) Redeemable preferred shares are excluded from shareholders' equity
under requirements of the SEC.
(J) Under Canadian GAAP, stock issue costs may be shown as an adjustment
to retained earnings. The carrying amount of capital stock is shown
net of issue costs under U.S. GAAP.
(K) 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.
(L) 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.
(M) 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 29, 2002 year end. The Company has
not determined the impact, if any, of this pronouncement on its
consolidated financial statements.
(N) The Financial Accounting Standards Board ("FASB") has issued FASB
Interpretation No. 44 of APB Opinion No. 25, Accounting for certain
transactions involving stock compensation which will be effective
for the Company's March 30, 2001 year end. The Company does not
anticipate this interpretation will have any material impact 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:
70
2000 1999 1998
-----------------------------------
Net income from continuing operations in accordance with
Canadian GAAP $ 64.0 $ 40.5 $ 92.0
Write-off of acquired in-process technology -- (5.5) (2.7)
Amortization of acquired in-process technology 5.1 2.3 0.2
Effect of deferral accounting related to foreign exchange contracts -- 1.4 0.4
Translation of foreign currency denominated debt 8.8 (14.1) 6.4
Adjustment to deferred income taxes -- (16.3) 6.1
Acquirer's redundancy provisions 4.2 (3.4) (12.4)
-----------------------------------
U.S. GAAP and SEC requirements:
Net income from continuing operations 82.1 4.9 90.0
Income (loss) from discontinued operations -- 2.0 (0.1)
Estimated loss on disposal of discontinued operations (8.0) (16.3) --
-----------------------------------
(8.0) (14.3) (0.1)
-----------------------------------
Net income (loss) 74.1 (9.4) 89.9
Less: dividends on cumulative preferred shares 3.2 3.2 3.2
-----------------------------------
Net income (loss) attributable to common shareholders $ 70.9 $(12.6) $ 86.7
===================================
Net income per common share from continuing operations:
Basic $ 0.69 $ 0.01 $ 0.80
Diluted $ 0.67 $ 0.01 $ 0.80
Net income (loss) per common share:
Basic $ 0.62 $(0.11) $ 0.80
Diluted $ 0.61 $(0.11) $ 0.80
Weighted average shares for basic EPS (millions) 114.7 114.0 107.8
Weighted average shares on conversion of stock options (millions) 2.4 1.5 1.1
-----------------------------------
Adjusted weighted average shares and share equivalents (millions) 117.1 115.5 108.9
===================================
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 31, 2000 to
purchase 3,424,622 (1999 - 3,142,250; 1998 - 3,167,250) shares of common stock
at an average exercise price of $19.19 (1999 - $17.90; 1998 - $17.69) per share.
The components of comprehensive income are as follows:
2000 1999 1998
-------------------------------------
Net income (loss) - U.S. GAAP $74.1 $(9.4) $89.9
Change in foreign currency adjustment (31.6) 22.4 3.3
-------------------------------------
Comprehensive income $42.5 $13.0 $93.2
=====================================
71
2000 1999
----------------------
Balance sheet items, which vary, in conformity with U.S. GAAP and SEC
requirements:
Prepaid and other assets: Current deferred tax asset $ 10.6 $ 8.8
Fixed assets $ 445.6 $ 487.6
Acquired intangible assets $ 2.5 $ 51.1
Long-term receivables: Long-term deferred tax asset $ 5.1 $ 20.5
Accounts payable and accrued liabilities $ 217.0 $ 261.2
Shareholders' equity:
Redeemable preferred shares $ 34.2 $ 34.4
Common shares $ 763.1 $ 772.4
Contributed surplus $ -- $ 2.5
Accumulated other comprehensive income $ (3.4) $ 28.2
Deficit $(171.2) $(221.6)
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 2000, 1999 and 1998:
2000 1999 1998
----------------------------
U.S. GAAP Pro Forma net income (loss) attributable to
common shareholders after preferred dividends $ 48.7 $(23.3) $ 84.0
U.S. GAAP Pro Forma net income (loss) per common share:
Basic $ 0.42 $(0.20) $ 0.78
Diluted $ 0.42 $(0.20) $ 0.77
2000 1999 1998
--------------------------------
Risk-free interest rate 6.02% 5.04% 5.30%
Dividend yield nil nil nil
Volatility factor of the expected market price
of the Company's common stock 0.509 0.495 0.483
Weighted-average expected life of the options 6 years 6 years 6 years
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).
24. PENSION PLANS
The Company maintains several defined contribution and three defined
benefit pension plans for its employees. The components of the pension
expense are as follows:
2000 1999 1998
-----------------------
Defined contribution benefit plan $ 6.3 $ 6.1 $4.4
Defined benefit plan 8.0 4.1 2.0
-----------------------
Pension expense $14.3 $10.2 $6.4
-----------------------
(A) Defined Contribution Pension Plans
Both the Company and the employees contribute to these plans based
on the employees' earnings.
72
(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 31, 2000, 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 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 $13.0 (76.9 SEK) (1999 - $13.2 (72.7 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 amounts
reported in the consolidated balance sheets, and the assumptions used in
determining the actuarial present value of the benefit obligations:
2000 1999
--------------------
Change in accrued pension benefits:
Benefit obligation at beginning of year $ 96.5 $ 84.4
Service cost 11.6 5.8
Interest cost 5.7 5.6
Plan participants' contributions 2.4 (2.0)
Actuarial loss 2.1 1.5
Benefits paid (1.4) (0.7)
Foreign exchange (6.0) 1.9
------------------
Benefit obligation at end of year $110.9 $ 96.5
------------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 81.6 $ 70.3
Actual return on plan assets 5.7 7.0
Employer contributions 8.3 3.3
Employee contributions 5.2 --
Benefits paid (1.4) (0.7)
Foreign exchange (4.9) 1.7
------------------
Fair value of plan assets at end of year $ 94.5 $ 81.6
------------------
Unfunded status (16.4) (14.9)
Unrecognized net actuarial loss 3.9 1.7
------------------
Net pension benefit liability $(12.5) $(13.2)
==================
73
The net pension benefit liability is reflected in the consolidated balance sheet
as follows:
2000 1999
-----------------
Patents, trademarks and other 0.9 --
Pension liability (13.4) (13.2)
-----------------
Net pension benefit liability (12.5) (13.2)
=================
Assumptions:
Discount rate 6% 6%-8%
Compensation increase rate 3%-5% 3%-6%
Investment return assumption 8% 8%
25. 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 rate 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 long-term debt was determined by discounting future payments of
interest and principal at estimated interest rates that would be available
to the Company at year-end. 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:
2000 1999
-------------------------------------------------
Carrying Fair Carrying Fair
amount value amount value
-------------------------------------------------
Long-term debt:
Capital leases and other $ 80.7 $ 79.7 $ 90.5 $ 87.4
Non-interest bearing 1996
Canada-Quebec government loan 4.2 3.6 4.2 3.2
Derivatives
Interest rate swap -- 1.8 -- (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 forward and option contracts to manage
foreign exchange risk. Generally, forward and option contracts are
designated for firmly committed or forecasted sales and purchases that are
expected to occur in less than one year. At March 31, 2000, the Company
owned four Canadian dollar call option contracts outstanding for a total
notional value of $40.0 U.S. dollars (1999 - $nil) and with maturities
ranging from July to October, 2000. The total premium paid for the options
was $1.2 and is deferred and amortized over the life of the options. The
fair value of the options at March 31, 2000, was $0.5.
The notional amounts for forward contracts represent the U.S. dollar
equivalent of an amount exchanged. Most of the forward contracts mature
within six months with the longest maturity extending to February, 2001.
At March 31, 2000, deferred gains totaled $6.4 (1999 - $3.4) and deferred
losses totaled $1.6 (1999 - $3.6). The following table presents the net
notional amounts of the forward contracts in U.S. dollars:
74
Buy (Sell): (U.S. dollars) 2000 1999
---------------------------
Forward contracts:
British pounds ($60.7) $(142.3)
Canadian dollars 88.3 101.2
Swedish krona 8.2 8.8
Euro 2.6 (6.0)
Italian lira -- (5.2)
French francs -- (3.7)
Other 0.6 (5.0)
---------------------------
Total $ 39.0 $ (52.2)
===========================
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 $189.0 (U.S. $130.0), which is sufficient to cover the
total outstanding balance of the two term loans. The base interest rate
was fixed at 5.79% 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 $109.0 (U.S.$75.0), of which up to
$29.1 (U.S.$20.0) is available for letters of credit. At March 31, 2000,
$2.4 (U.S.$1.7) (1999 - $2.3) 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 $106.6 (U.S.$73.3)
(1999 - $110.7) at a rate of interest based on a defined US base rate plus
0.75% or a successive three month LIBOR plus 1.75%. In June 2000, the line
of credit is expected to be reduced by $13.0 (U.S. $8.9) as a result of
excess cashflow at March 31, 2000, as defined by the credit agreement (see
also note 11), and Mitel reaching its limit for mandatory prepayments on
its AXELs Series B loan.
75
26. SUPPLEMENTARY CASH FLOW INFORMATION
2000 1999 1998
-------------------------------------------
Net change in non-cash working capital
Balances related to operating activities:
Accounts receivable $ 26.0 $ (22.4) $(65.6)
Inventories 1.1 (28.7) (6.3)
Accounts payable and accrued liabilities (14.7) (75.4) 28.9
Deferred revenue 9.2 3.0 5.1
Other (3.5) 0.3 (12.3)
------------------------------------------
$ 18.1 $(123.2) $(50.2)
==========================================
Cash interest paid $ 26.0 $ 38.7 $ 9.0
==========================================
Cash taxes paid $ 2.9 $ 17.2 $ 6.5
==========================================
27. SUBSEQUENT EVENT
On June 7, 2000, the Company announced it had entered into an agreement to
acquire Vertex Networks, Incorporated, a California-based fabless
semiconductor company providing high-performance solutions for the
enterprise switching and WAN access markets, for 11 million common shares.
The acquisition is expected to close before August 30, 2000, and will be
accounted for by application of the purchase method of accounting.
Accordingly, the fair value of the consideration will be determined by the
fair value of the Company's common shares, as adjusted where appropriate,
near the effective date of acquisition.
28. COMPARATIVE FIGURES
Certain of the 1999 and 1998 comparative figures have been reclassified so
as to conform to the presentation adopted in 2000.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
76
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 63 July 23, 1998 Director
Jean-Jacques Carrier(4) 49 October 28, 1998 Director
Anthony L. Craig(2) 54 May 16, 1996 Director
Hubert T. Lacroix(1,3,4) 44 July 21, 1992 Director
Kirk K. Mandy(3,4) 44 July 23, 1998 Director, President and CEO
Donald G. McIntyre 52 July 23, 1998 Director
Donald W. Paterson(1,2) 67 May 16, 1996 Director
Dr. Henry Simon(3,4) 70 July 21, 1992 Director and Chairman
Dr. Semir D. Sirazi 45 September 27, 1999 Director
Peter van Cuylenburg(1,4) 52 March 15, 1996 Director
Jonathan I. Wener(2) 49 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 Pixtech in the United States.
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 October 1998.
Mr. Craig has been Chairman and CEO of Arbinet Holdings, an internet
telecommunications exchange company since January 2000. From June 1998 to
December 1999 he was President of Tamandra Inc. and, from 1996 to 1998, he was
President 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
Vice President, International for Oracle Corporation. Mr. Craig is also a
director of Bell Industries.
77
Mr. Lacroix has been Executive Chairman of Telemedia Corporation, a media
and telecommunications company, since February 2000. Prior to his appointment,
he was a partner with McCarthy Tetrault (law firm) since 1984; he still acts as
special counsel to this firm. He is also a director of G.T.C. Group
Transcontintal Ltd. and ITS Investments Limited Partnership.
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.
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.,
Microforum Inc., Angoss Software Corporation and Lorus Therapeutics 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 Chemunex S.A and
Orchid Pharmaceuticals. Dr. Simon has been Chairman of the Company's Board of
Directors since July 21, 1994.
Dr. Sirazi has been a consultant to the semiconductor, networking and
telecommunications industries since July 7, 1997. He has held a variety of
executive management positions at U.S. Robotics/3COM and Zenith Electronics
Corporation. He is an active advisor and investor to several private companies
in the high-technology field and serves on the board of directors of these
companies.
Mr. van Cuylenburg has been an advisor to the Chairman of InterTrust
Technologies Corporation since October 1999. He was President, DLT & Storage
Systems Group, of Quantum Corporation from September 1996 to October 1999. 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. and PixelFusion
Group plc
Mr. Wener has been Director and President of Canderel Management 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.
78
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 (these guidelines, as amended from time to
time, are herein referred to as the "Governance Guidelines"). These 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, their relationship with management
and shareholders 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 1999, The Toronto Stock Exchange amended the Governance Guidelines and
companies are now required to disclose their corporate governance practices with
specific reference to each of the 14 Governance Guidelines.
The Board of Directors and the members of the Company's management are
committed to the highest standard of corporate governance. The Company's
corporate governance practices comply with the Governance Guidelines. The
Company's principal objective in directing and managing its business and affairs
is to enhance shareholder value. The Company believes that effective corporate
governance improves corporate performance and benefits all Shareholders.
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 Board of Directors establishes the overall policies for the Company
and monitors and evaluates the Company's strategic direction and retains plenary
power for those functions not specifically delegated by it to management.
Accordingly, the mandate of the Board of Directors is to supervise the
management of the business and affairs of the Company with a view to evaluate,
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;
79
(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 this respect.
Long term goals and strategies for the Company are developed as part of
its annual strategic planning process with the Board of Directors, which also
includes the preparation of a detailed one-year operating plan. Through this
process, led by the President and Chief Executive Officer and senior management
of the Company, the Board of Directors adopts the operating plan for the coming
financial year and monitors senior management's relative progress through a
regular reporting and review process. The Board of Directors reviews on a
quarterly basis the extent to which the Company has met the current year's
operating plan.
To comply with the Governance Guidelines which recommend that a board of
directors should assume responsibility for succession planning, including
appointing, training and monitoring senior management, the Board of Directors
reviews all appointments of officers.
The Board of Directors has put policies in place to ensure effective,
timely and non-selective communications between the Company, its stakeholders
and the public. The Board, or the appropriate committee thereof, reviews the
content of the Company's major communications to Shareholders and the investing
public, including the quarterly and annual reports, and approves the proxy
circular, the annual information form and any prospectuses that may be issued.
The disclosed information is released through mailings to Shareholders, news
wire services, the general media and a home page on the internet.
The Company has an investor relations group which responds to analyst,
institutional and individual Shareholder inquiries and maintains a toll-free
telephone line for ease of contact. Individual queries, comments or suggestions
can be made at any time by calling or writing directly to the Company's
registered office in Kanata, Ontario, Canada. In addition, the Company has a
communications group to respond to inquiries from media, government and the
public. Together, these groups deal with stakeholder concerns and ensure that
all inquiries receive a full and timely response.
Composition of the Board and of its Committees
The Governance Guidelines recommend that a board of directors be
constituted of a majority of individuals who qualify as "unrelated directors".
The Governance Guidelines define an "unrelated director" as a director who is
independent of management and is free from any interest and any business or
other relationship which could, or could reasonably be perceived to, materially
interfere with the director's ability to act with a view to the best interests
of the Company, other than interests and relationships arising from
shareholding. The Governance Guidelines also make an informal distinction
between "inside" and "outside" directors. The Governance Guidelines and related
rules consider an inside director of a corporation to be a director who is an
officer or employee of the corporation or any of its subsidiaries.
The directors of the Company have examined the relevant definitions of the
Governance Guidelines and have individually considered their respective
interests in and relationships with the Company. As a consequence, the Board of
Directors has determined that on a rigorous application of these definitions, it
would be composed of eight unrelated directors out of eleven board members.
Jean-Jacques Carrier, Senior Vice President of Finance and Chief Financial
Officer, Kirk K. Mandy, President and Chief Executive Officer, and Donald G.
McIntyre,
80
Senior Vice President, Human Resources, General Counsel and Secretary 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 eleven
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.
The Governance Guidelines also recommend that, in circumstances where a
corporation has a "significant shareholder" (that is, a shareholder with the
ability to exercise the majority of the votes for the election of the directors
of a corporation), the Board of Directors should include a number of directors
who do not have interests in or relationships with either the corporation or the
significant shareholder and should fairly reflect the investment in the
corporation by shareholders other than the significant shareholder. The Company
does not presently have a significant shareholder.
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 Committee, the Nominating Committee
and the Executive Committee. All of these committees, as presently constituted,
comply with the Governance Guideline recommendations. 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 assist the Board of
Directors in efficiently carrying out its responsibilities. Set out below is a
general description of the committees of the Board and their respective
mandates.
Audit Committee
The Company has a standing Audit Committee. Information regarding the
functions performed by the Audit Committee, its membership, and the number of
meetings held during the fiscal year, is set forth in the "Report to the Audit
Committee," included in this Form 10-K.
The Audit Committee is presently composed of three outside and unrelated
directors: Donald W. Paterson, Peter van Cuylenburg and Hubert T. Lacroix.
Compensation Committee
The mandate of the Compensation Committee is outlined above under "Report
on Executive Compensation". This mandate further includes a review of the
compensation of directors to ensure the compensation realistically reflects the
responsibilities and risk involved in being an effective director. The
Compensation Committee is presently composed of three outside and unrelated
directors: Anthony L. Craig, Donald W. Paterson and Jonathan I. Wener.
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 and unrelated directors: Dr.
Henry Simon and Hubert T. Lacroix and one inside and related director: Kirk K.
Mandy. In view of the contribution to the Company of the President and Chief
Executive Officer, Kirk K. Mandy, the
81
Board of Directors considered the participation of Mr. Mandy in the Nominating
Committee to be essential and concluded that he 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 Company 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 and unrelated directors: Dr.
Henry Simon, Peter van Cuylenburg and Hubert T. Lacroix and two inside and
related directors: Kirk K. Mandy and Jean-Jacques Carrier. In view of the
contribution to the Company of the President and Chief Executive Officer, Kirk
K. Mandy, and the focus on financial performance provided by the Senior Vice
President of Finance and Chief Financial Officer, Jean-Jacques Carrier, the
Board of Directors considered the participation of Messrs. Mandy and Carrier to
be essential and concluded that they should continue to serve on such committee.
Independence from Management
The Governance Guidelines state that the independence of a Board of
Directors 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 of Directors can function independently of management. In
addition, the Board of Directors, from time to time, holds sessions at Board
meetings without management present.
Decisions Requiring Prior Approval by the Board of Directors
The Board of Directors has delegated to the President and Chief Executive
Officer and senior management the responsibility for the day-to-day management
of the business of the Company, subject to compliance with the plans approved
from time to time by the Board of Directors. In addition to those matters, which
must by law or by the articles of the Company be approved by the Board of
Directors, the Board of Directors has specified limits to management's
responsibility as recommended in the Governance Guidelines, and retains
responsibility for significant changes in the Company's affairs, such as
approval of major capital expenditures, debt and equity financing arrangements
and significant acquisitions and divestitures.
Other
The Board of Directors considers that orienting and educating new
directors is an important element of ensuring responsible corporate governance
and the Governance Guidelines recommend that a corporation should provide such
an orientation and education program for new directors. Therefore, in addition
to having extensive discussions with the Chairman of the Board of Directors and
the President and Chief Executive Officer with respect to the business and
operations of the Company, a new director receives a record of public and other
information concerning the Company and prior minutes of recent meetings of the
Board of Directors and applicable committees. The details of the orientation of
each new director will be tailored to that director's individual needs and areas
of interest. 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 has determined to retain general responsibility for
dealing with corporate governance issues, while maintaining the flexibility of
asking certain committees of the Board of Directors to address specific issues
as they may arise from time to time. Therefore, a corporate governance committee
will not be created at this time.
82
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.
83
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 38 Senior Vice President and General Manager, Mitel
Communications Systems
Francois Cordeau 42 Senior Vice President and General Manager, Mitel
Semiconductor
Shirley J. Mears 45 Vice President, Treasurer
Tim Saunders 40 Vice President and Corporate Controller
Moris Simson 46 Senior Vice President, Strategy and Corporate
Development and Chief Technology and Marketing
Officer
Mr. Butcher was appointed Senior Vice President and General Manager, Mitel
Communications Systems on September 7, 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 2000 was $5,594,906. 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.
84
The aggregate amount set aside or accrued by the Company and its
subsidiaries during Fiscal 2000 for the provision of pension, retirement and
similar benefits to the directors and executive officers the Company as a group
was $288,971, excluding adjustments for market value fluctuations related to the
current year and previous year accruals which totaled a decrease of $14,668 for
the above executive officers.
Summary Compensation Table
The following table sets forth compensation information for the three
fiscal years ended March 31, 2000, March 26, 1999, and March 27, 1998,
respectively, for the Chief Executive Officer and the four other most highly
compensated executive officers of the Company (collectively, the "Named
Executive Officers").
- ----------------------------------------------------------------------------------------------------------------------------
Annual Compensation
------------------------------------------------ Long-Term
Compensation
Awards
Bonus Other Securities
Name and (Annual Annual Under All Other
Principal Fiscal Incentive Compen- Options Compen-
Position Year Salary Awards) sation(1) Granted sation(3)
($) ($) ($) (#) ($)
- ----------------------------------------------------------------------------------------------------------------------------
Kirk K. Mandy 2000 519,208 795,000 -- 245,000 81,142
President and Chief 1999 434,089 100,000 -- -- 66,319
Executive Officer 1998 289,206 270,000 -- 100,000 47,458
Jean-Jacques Carrier 2000 281,025 275,000 -- 110,000 44,150
Senior Vice President of 1999 266,836 40,000 -- -- 42,668
Finance and Chief Financial 1998 254,916 307,500 -- 80,000 40,901
Officer
Moris Simson 2000 259,352 275,000 -- 100,000 38,026
Senior Vice President Corporate 1999 -- -- -- -- --
Strategy & Development 1998 -- -- -- -- --
Paul Butcher 2000 259,229 275,000 -- 134,100 25,453
Senior Vice President 1999 267,285 58,729 -- -- 95,515
and General Manager, Mitel 1998 231,586 76,730 -- 67,000 18,907
Communications Systems
Francois Cordeau 2000 255,435 275,000 143,729(2) 120,000 440,517
Senior Vice President and 1999 242,791 40,000 248,372(2) -- 36,971
General Manager, Mitel 1998 207,189 185,625 -- 100,000 42,083
Semiconductor
- ----------------------------------------------------------------------------------------------------------------------------
(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. These amounts include cost of living expenses totaling
$131,503 in Fiscal 2000 and $169,624 in Fiscal 1999.
(3) "All Other Compensation" includes contributions made and accrued by the
Company 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 $14,112.28 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.
85
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
86
days following the announcement of the quarterly results next following the date
of resignation of such person (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.
On January 11, 2000, the Board of Directors of the Company decided that
all unvested stock options held by each director, the President and Chief
Executive Officer, the five Senior Vice Presidents and any other executives of
the Company as may be designated by the Board of Directors from time to time
will be accelerated and become fully vested and immediately exercisable in the
event of (i) the making by any person of a take-over bid (as defined in the
Securities Act (Ontario)) for the common shares of the Company, or (ii) a change
of control (whether in fact or in law and as more fully defined in such Board
resolution) of the Company.
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 14% of
the common shares outstanding as of May 18, 2000). As of May 18, 2000, the
closing price of the common shares of the Company on The Toronto Stock Exchange
was $29.45 and therefore the total market value as of such date of the 8,887,922
common shares (excluding 3,607,200 common shares as to which options have been
previously exercised) that are or may be subject to options pursuant to the
Option Plan was $261,749,303.
During Fiscal 2000, the Company granted options to purchase up to
6,439,957 common shares to 2,111 employees and eight non-employee directors of
the Company at an average exercise price of $13.03 per share, of which options
for 785,000 common shares were granted to six executive officers at an average
exercise price of $12.99 per share. During Fiscal 2000, one executive officer of
the Company exercised options to purchase 47,500 common shares having an
aggregate net value (being the market value less the exercise price on the date
of the exercise) of $400,987.50 as of such date.
As at May 18, 2000, there were outstanding under the Option Plan options
for an aggregate of 8,887,922 common shares at prices ranging from $1.10 to
$37.35 per share and expiring at various dates through 2007. Of such options,
options for an aggregate of 1,722,800 common shares were held by eight executive
officers, three of whom are directors of the Company.
87
Stock Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted to the Named Executive Officers under the Option Plan during Fiscal
2000.
Option Grants During Fiscal 2000
=========================================================================================================================
Market Value
% of Total of Securities
Securities Options Underlying
Under Granted to Exercise Options/SARS
Options Employees or on the Date
Granted in Fiscal Base Price(1) of Grant Expiration
Name (#) 2000 ($/Security) ($/Security) Date
- -------------------------------------------------------------------------------------------------------------------------
Kirk Mandy 145,000 2.4 7.68 7.75 May 20, 2005
100,000 1.6 19.11 19.25 January 12, 2006
Jean-Jacques Carrier 60,000 -- (2) 7.68 7.75 May 20, 2005
50,000 -- (2) 19.11 19.25 January 12, 2006
Moris Simson 50,000 -- (2) 8.19 8.30 May 3, 2005
50,000 -- (2) 19.11 19.25 January 12, 2006
Paul Butcher 34,100 -- (2) 7.68 7.75 May 20, 2005
50,000 -- (2) 10.55 11.20 August 12,2005
50,000 -- (2) 19.11 19.25 January 12, 2006
Francois Cordeau 70,000 1.2 7.68 7.75 May 20, 2005
50,000 -- (2) 19.11 19.25 January 12, 2006
=========================================================================================================================
(1) Exercise price is determined by the five day averaging formula as defined
in the Option Plan and market value is the price on the date of grant.
(2) The percentage of total options granted was less than 1%.
88
Year-End Option Values Table
The following table summarizes, for each of the Named Executive Officers,
the aggregate options exercised during Fiscal 2000 and option values at March
26, 1999.
Aggregated Options Exercised During Fiscal 2000
and Fiscal Year-End Option Values
==============================================================================================================================
Securities Aggregate Value of Unexercised
Acquired Value Unexercised Options at In-the-Money Options
Name On Exercise Realized March 31, 2000 at March 31, 2000
(#) ($) (#) ($)
-------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
==============================================================================================================================
Kirk K. Mandy n/a 171,250 353,750 4,041,313 7,572,013
Jean-Jacques Carrier n/a 147,500 142,500 3,985,675 3,249,175
Moris Simson n/a -- 100,000 -- 2,170,000
Paul Butcher n/a 34,000 168,850 863,334 3,883,180
Francois Cordeau 47,500 400,988 28,750 170,000 634,238 3,990,975
==============================================================================================================================
Executive Termination Agreements
The Company has entered into new executive termination arrangements with
eight senior executives (the "Executives"), including the five Named Executive
Officers, to provide for certain entitlements in the event of the involuntary
termination of the Executives' employment with the Company in any circumstances
considered to constitute a "termination without good legal cause", as such term
is interpreted by the Courts of the Province of Ontario from time to time.
The agreements generally provide that, in the event of such an involuntary
termination of employment without good legal cause, the Executive would receive
as compensation: (i) for one Executive - three times the Executive's annual base
salary and annual target bonus, subject to a total minimum of $3,000,000, (ii)
for five Executives - two times the Executive's annual base salary and annual
target bonus, and (iii) for two Executives - one and one half times the
Executive's annual base salary and average annual bonus, based on the actual
bonus payments made to such Executive for the previous two fiscal years.
In addition to such compensation, the agreements provide for continued
contributions to the Executive Pension Plan and continuous group life and health
benefits coverage during the three, two or one and one half year period, as
applicable. In all cases, the Executives have a period of six months following
the date of termination to exercise all stock options that are vested up to the
end of the exercise period.
These agreements replace the former VP Termination Policy of the Company
as well as all previous compensation arrangements entered into with the
Executives and were developed under the direction of the Compensation Committee
in consultation with outside compensation and independent legal advisors in
order to reflect current North American competitive market practices.
89
Compensation of Non-Employee Directors
During the fiscal year ended March 31, 2000, 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 18, 2000.
Option Information For Non-Employee Directors
=====================================================================================
Date of Grant Unexercised Options at May 18, 2000
Exercisable / Unexercisable
-------------------------------------------------------------------------------------
January 26, 1993 100,000 / --
-------------------------------------------------------------------------------------
May 12, 1994 48,000 / --
-------------------------------------------------------------------------------------
May 17, 1995 60,000 / --
-------------------------------------------------------------------------------------
March 15, 1996 20,000 / --
-------------------------------------------------------------------------------------
May 16, 1996 90,000 / --
-------------------------------------------------------------------------------------
May 22, 1997 55,000 / 60,000
-------------------------------------------------------------------------------------
March 12, 1998 75,000 / 75,000
-------------------------------------------------------------------------------------
July 23, 1998 6,250 / 18,750
-------------------------------------------------------------------------------------
May 20, 1999 -- / 140,000
-------------------------------------------------------------------------------------
August 27, 1999 -- / 20,000
-------------------------------------------------------------------------------------
January 12, 2000 -- / 160,000
=====================================================================================
Directors' and Officers' Liability Insurance
As at May 18, 2000, 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 31, 2000 was Cdn. $294,711. 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. For claims brought against the Company, relating to violations of
United States securities laws governed by the United States Securities and
Exchange Commission ("SEC"), the deductible is U.S. $500,000. For other claims
brought against the Company in Canada, the deductible is Cdn. $100,000. For
claims brought against the Company in the United States (excluding SEC
violations) and the rest of the world, the deductible is U.S. $250,000.
Indebtedness of Officers, Directors and Employees
As at May 18, 2000, 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.
As at May 18, 2000, 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 $256,300.
90
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 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.
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
91
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 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 $530,000.
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 2000, Mr. Mandy earned a bonus of $795,000 based
on the Company's profitability.
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 Circular.
Mr. Anthony L. Craig
Mr. Donald W. Paterson
Mr. Jonathan I. Wener
92
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 300 Stock Index for the five most recently
completed fiscal years, assuming reinvestment of all dividends.
[The following table was depicted as a bar chart in the printed material.]
March 31, 1995 March 29, 1996 March 28, 1997 March 27, 1998 March 26, 1999 March 31, 2000
---------------------------------------------------------------------------------------------------
- -- -- -- MITEL $100 $131 $104 $276 $161 $533
- ----------------------------------------------------------------------------------------------------------------------
- -------- TSE 300 $100 $118 $144 $187 $166 $240
- ----------------------------------------------------------------------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as at May 18, 2000 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.
Class of Shares Amount Beneficially Owned Percent of Class(1)
Name and Address
The CC&L Financial Services Group common 6,904,740 6.1
1200 Cathedral Place
925 West Georgia Street
Vancouver, BC V6C 3L2
Knight Bain Seath & Holbrook Capital common 6,496,270 5.7
Management Inc.
1 Toronto Street, Ste. 708
Toronto, ON L1N 6J5
93
Andre Borrel common 11,250 (6)
Chemin du bois de Seyme, 1
1253 Vandoeuvres - GE - Suisse
*Paul Butcher common 58,775 (6)
*Jean-Jacques Carrier common 207,500 (6)
*Francois Cordeau common 60,000 (6)
Anthony L. Craig common 38,950 (6)
33 Whitehall Street, 19th Floor
New York, NY 10004
Hubert T. Lacroix common 155,028 (6)
1 Place Ville Marie, Suite 3333
Montreal, Quebec H3B 3N2
*Kirk K. Mandy common 231,750 (6)
*Donald G. McIntyre common 136,250 (6)
*Shirley Mears common 41,350 (6)
Donald W. Paterson common 54,500 (6)
141 Adelaide St. West, Suite 1200
Toronto, Ontario M5H 3L9
*Tim Saunders common 21,325 (6)
Dr. Henry Simon common 197,500 (6)
1 Telegraph Hill
London, England NW3 7NU
*Moris Simson common 12,500 (6)
Dr. Semir D. Sirazi common nil (6)
500 Elmwood Ave
Wilmette, Illinois 60091
Peter van Cuylenburg common 52,500 (6)
720 Bair Island Road
Redwood City, CA 94063
Jonathan I. Wener common 247,980(4) (6)
2000 Peel Street, Suite 900
Montreal, Quebec H3A 2W5
16 directors and executive officers as a common 1,527,158
group(3,5) R&D Preferred nil
* 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. Borrel - 11,250; Mr. Butcher - 56,275; Mr. Carrier
- 177,500; Mr. Cordeau - 60,000; Mr. Craig - 37,500; Mr. Lacroix -
146,500; Mr. Mandy - 228,750; Mr. McIntyre - 125,750; Ms. Mears - 41,350;
Mr. Paterson - 52,500; Mr. Saunders - 21,325; Dr. Simon - 72,500; Mr.
Simson - 12,500; Dr. Sirazi - nil; Mr. van Cuylenburg - 52,500 and Mr.
Wener - 146,500.
(3) Does not include stock options granted to non-employee directors which are
not currently exercisable, as follows: Mr. Borrel - 53,750; Mr. Craig -
52,500; Mr. Lacroix - 52,500; Mr. Paterson - 52,500; Dr. Simon - 52,500;
Dr. Sirazi - 40,000; Mr. van Cuylenburg - 52,500, and Mr. Wener - 52,500.
(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.
94
(5) The holdings of one executive officer exclude 2,100 common shares held of
record by his spouse and children, as to which he disclaims 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 31, 2000, the Company retained the law
firm of McCarthy Tetrault, of which Hubert T. Lacroix, a member of the
Board of Directors, was a partner until January 31, 2000.
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:
1. Consolidated Financial Statements. Page Number
(within the 10-K)
Auditor's Report to the Shareholders 42
Consolidated Balance Sheets at March 31, 2000, March 26, 1999 and March 27, 1998 44
Consolidated Statements of Income and Retained Earnings for the fiscal years ended
March 31, 2000, March 26, 1999 and March 27, 1998 45
Consolidated Statements of Cash Flows for the fiscal years ended
March 31, 2000, March 26, 1999 and March 27, 1998 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.
95
3. Exhibits
Exhibit Description
Number
2.1 Agreement and Plan of Reorganization and Merger by and among
Mitel Corporation, U.S. Acquisition Corp. and Vertex Networks,
Incorporated ("Vertex"), dated as of June 6, 2000 (the "Merger
Agreement") (incorporated by reference to Exhibit 2.1 to Form
8-K filed on June 21, 2000). Except for the Escrow Agreement and
Restricted Stock Agreement listed below as Exhibits 2.2 and 2.3,
respectively, the following exhibits to the Merger Agreement
have been omitted. The Company will furnish supplementally a
copy of any omitted exhibit to the Commission upon request.
Omitted exhibits:
Exhibit A Form of Merger Agreement
Exhibit C 2000 Financial Statements
Exhibit D Form of Written Consent and Agreement
Exhibit E Form of Purchaser/Acquisition Corp. Tax
Representation Letter
Exhibit F-1 Form of Employment Agreement (Founders)
Exhibit F-2 Form of Employment Agreement (Non Founders)
Exhibit G-1 Form of Non-competition Agreement (Founders)
Exhibit G-2 Form of Non-competition Agreement (Non Founders)
Exhibit H-1 Form of Lock Up Agreement
Exhibit H-2 Form of Lock Up Agreement (Designated Employees)
Exhibit I Form of Voting Agreement
Exhibit J Form of Affiliate Agreement
Exhibit L Form of Opinion of Counsel to the Company
Exhibit M Form of Shareholder Letter
Exhibit N Form of FIRPTA Notification Letter
Exhibit O Form of Opinion of Counsel to Purchaser
2.2 Form of Escrow Agreement to be executed and delivered by
the Company, the Shareholder Representatives (as defined in
the Merger Agreement) and the Escrow Agent named therein
(incorporated by reference to Exhibit 2.2 to Form 8-K filed on
June 21, 2000).
2.3 Form of Restricted Stock Agreement to be executed
and delivered by the Company and certain holders of capital
stock of Vertex (incorporated by reference to Exhibit 2.3 to
Form 8-K filed on June 21, 2000).
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 fiscal 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 fiscal 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 fiscal year ended March 28,
96
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 fiscal 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 fiscal 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 fiscal 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 fiscal year ended March 29,
1996)
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(a) First Amendment and Limited Waiver to Credit Agreement,
dated as of March 16, 1998 10.4(b) (incorporated by reference to
Exhibit 10.4 (b) to Form 10-K for the fiscal year ended March
26, 1999)
10.4(c) Second Amendment and Limited Waiver to Credit
Agreement, dated August 6, 1998 (incorporated by reference to
Exhibit 10.4 (c) to Form 10-K for the fiscal year ended March
26, 1999)
10.4(d) Third Amendment to Credit Agreement dated October 23, 1998
(incorporated by reference to Exhibit 10.4 (d) to Form 10-K for
the fiscal year ended March 26, 1999)
10.4(e) Fourth Amendment to Credit Agreement dated January 4, 1999
(incorporated by reference to Exhibit 10.4 (e) to Form 10-K for
the fiscal year ended March 26, 1999)
10.4(f) Fifth Amendment to Credit Agreement dated May 19, 1999
(incorporated by reference to Exhibit 10.4 (f) to Form 10-K for
the fiscal year ended March 26, 1999)
97
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 31, 2000.
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 22, 2000 President and Chief
Executive Officer
98
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.
Signature Title Date
/s/ Henry Simon Chairman of the Board June 22, 2000
--------------------------
(Henry Simon)
/s/ Kirk K. Mandy President and Chief Executive Officer June 22, 2000
--------------------------
(Kirk K. Mandy)
/s/ Andre Borrel Director June 22, 2000
--------------------------
(Andre Borrel)
/s/ Jean-Jacques Carrier Senior Vice President of Finance June 22, 2000
-------------------------- and Chief Financial Officer
(Jean-Jacques Carrier)
/s/ Anthony L. Craig Director June 22, 2000
--------------------------
(Anthony L. Craig)
/s/ Peter van Cuylenburg Director June 22, 2000
--------------------------
(Peter van Cuylenburg)
/s/ Hubert T. Lacroix Director June 22, 2000
--------------------------
(Hubert T. Lacroix)
/s/ Donald G. McIntyre Senior Vice President of Human June 22, 2000
-------------------------- Resources, General Counsel and
(Donald G. McIntyre) Secretary
/s/ Donald W. Paterson Director June 22, 2000
--------------------------
(Donald W. Paterson)
/s/ Semir D. Sirazi Director June 22, 2000
--------------------------
(Semir D. Sirazi)
/s/ Jonathan I. Wener Director June 22, 2000
--------------------------
(Jonathan I. Wener)
99
SCHEDULE II
MITEL CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
March 31, 2000
(in millions of Canadian dollars)
Additions
Balance, Charged to Balance,
Beginning Charged to other End
Description of Period expense accounts Deductions of Period
Allowance for doubtful accounts:
Fiscal 2000 $ 8.7 $2.6 -- ($3.3) $ 8.0
Fiscal 1999 10.2 0.2 -- (1.7) 8.7
Fiscal 1998 9.8 5.2 -- (4.8) 10.2
Restructuring and other provisions:
Fiscal 2000 $ 32.2 -- -- ($32.2) $ --
Fiscal 1999 59.3 13.7 0.4 (41.2) 32.2
Fiscal 1998 12.6 0.2(1) 54.5 (8.0) 59.3
(1) Amounts charged to other accounts are in respect of acquisition costs
and costs to integrate the operations of the acquired companies with Mitel.
100
ANNEX "A"
GLOSSARY OF TERMS
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.
Bluetooth(TM): The industry name for a radio system specification that
allows very short-range transmission of voice and data between electronic
devices, without connecting wires.
Broadband Connectivity: A new term that refers to moving and connecting
high volumes of different types of traffic (voice, data and image) over
different networks (copper wire, cable, fiber-optic and wireless).
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.
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.
Data Integrated Voice Applications Architecture: A Mitel software
architecture that delivers the full set of capabilities needed to support
Voice-over-IP in the enterprise.
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.
101
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 a
speed of gigabit (10 billion bits) per second.
Indium Phosphide: A compound semiconductor material made of Indium and
Phosphorus.
Integrated Circuit ("IC"): A single electronic device that contains
thousands of previously separate (discrete) components. An IC is produced on a
small slice of semiconductor material, commonly silicon.
Internet Protocol ("IP"): Part of the TCP/IP family of protocols
describing software that tracks the Internet address of nodes, routes outgoing
messages, and recognizes incoming messages.
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.
Natural Speech Recognition: The ability of a computer to recognize
naturally spoken words, without requiring the speaker to "train" the system.
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.
Radio Frequency ("RF"): Electromagnetic waves operating between 10 kHz and
3 MHz, propagated without wire or cable in free space.
Set-Top Box: The electronic box that sits on top of or near a TV, and
interfaces between the TV and the network.
Short-Reach Optical Interconnect: The use of fiber-optic modules and
components to interconnect boards, backplanes, shelves and racks within and
between switches, routers, and transport equipment.
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.
Time Division Multiplex ("TDM"): A technique for transmitting separate
data, voice and video simultaneously over one continuous medium.
Unified Messaging: Software that integrates voice, fax, e-mail, and
multimedia messaging.
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.
Voice-over-Internet Protocol ("VoIP"): The movement of voice traffic over
an Internet Protocol network.
WAN: Wide Area Network that connects computers distributed throughout a
city or even larger area.
Wireless: Wireless originally meant radio, but now refers to different
modes of communication without wires. Cellular is wireless in the strictest
sense of the term, but wireless now includes wireless systems that work within a
building.
Wireline: The transmission of information over wires - for example,
conventional, wired telephone systems.
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SECURITIES AND EXCHANGE COMMISSION
MITEL CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE PERIOD ENDING MARCH 31, 2000
EXHIBITS