F-1 1 df1.htm FORM F-1 Form F-1
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As filed with the U.S. Securities and Exchange Commission on December 22, 2009

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

MITEL NETWORKS CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Canada   3661   98-0621254

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

350 Legget Drive

Ottawa, Ontario

Canada K2K 2W7

(613) 592-2122

(Address, including zip code, and telephone number, including area code, of

Registrant’s principal executive offices)

Corporation Service Company

2711 Centerville Road

Wilmington, Delaware 19808

(302) 636-5400

(Name, address, including zip code, and telephone number, including area code, of

agent for service in the United States)

 

 

With copies to:

 

Adam M. Givertz, Esq.

Shearman & Sterling LLP

Suite 4405

Commerce Court West

Toronto, Ontario

Canada M5L 1E8

(416) 360-8484

 

Craig Wright, Esq.

Osler, Hoskin & Harcourt LLP

Suite 1900, 340 Albert Street

Ottawa, Ontario

Canada K1R 7Y6

(613) 235-7234

 

Riccardo A. Leofanti, Esq.

Skadden, Arps, Slate,

Meagher & Flom LLP

Suite 1750, 222 Bay Street

Toronto, Ontario

Canada M5K 1J5

(416) 777-4700

 

Michael Pickersgill, Esq.

Torys LLP

Suite 3000

79 Wellington Street West

Toronto, Ontario

Canada M5K 1N2

(416) 865-0040

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.  ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

  Proposed Maximum
Aggregate Offering
Price (1)(2)
 

Amount of
Registration

Fee

Common Shares

  $230,000,000   $16,399(3)
 
 
(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”), and based on a bona fide estimate of the public offering price.
(2) Includes shares the underwriters have the option to purchase to cover over-allotments, if any.
(3) $16,050 was previously paid in connection with a registration statement on Form F-1 (File No. 333-133947) filed by the Registrant on May 10, 2006, all of which was paid in relation to securities remaining unsold in the offering contemplated by such registration statement. Pursuant to Rule 457(p) under the Securities Act, $16,050 of the filing fee for the prior registration statement is being offset against the filing fee due in connection with this Registration Statement. Accordingly, $349 is being paid at the time of filing of this Registration Statement.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion

Preliminary Prospectus dated December 22, 2009

P R O S P E C T U S

             Shares

LOGO

Mitel Networks Corporation

Common Shares

 

 

This is Mitel Networks Corporation’s initial public offering. We are selling              common shares and the selling shareholders are selling              common shares. We will not receive any proceeds from the sale of shares to be offered by the selling shareholders.

We expect the public offering price to be between $              and $              per share. Currently, no public market exists for the common shares. After pricing of the offering, we expect that the shares will trade on the                      under the symbol “            ”.

Investing in the common shares involves risks that are described in the “Risk Factors” section beginning on page 11 of this prospectus.

 

 

 

      

Per Share

    

Total

Public offering price

     $        $  

Underwriting commissions

     $        $  

Proceeds, before expenses, to us

     $        $  

Proceeds, before expenses, to the selling shareholders

     $        $  

The underwriters may also purchase up to an additional              common shares from us, and up to an additional              common shares from the selling shareholders, at the public offering price, less the underwriting commissions, within 30 days from the date of this prospectus to cover over-allotments, if any.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The common shares will be ready for delivery on or about                     , 2010.

 

 

 

BofA Merrill Lynch   J.P. Morgan   UBS Investment Bank

 

 

The date of this prospectus is                     , 2010.


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TABLE OF CONTENTS

 

     Page

PROSPECTUS SUMMARY

   1

RISK FACTORS

   11

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

   28

USE OF PROCEEDS

   30

DIVIDEND POLICY

   31

CAPITALIZATION

   32

DILUTION

   34

SELECTED CONSOLIDATED FINANCIAL DATA

   36

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   40

BUSINESS

   76

MANAGEMENT

   93

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

   110

PRINCIPAL AND SELLING SHAREHOLDERS

   112

DESCRIPTION OF SHARE CAPITAL

   115

SHARES ELIGIBLE FOR FUTURE SALE

   123

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS

   125

MATERIAL CANADIAN FEDERAL INCOME TAX CONSIDERATIONS FOR U.S. HOLDERS

   129

UNDERWRITING

   131

LEGAL MATTERS

   137

EXPERTS

   137

WHERE YOU CAN FIND MORE INFORMATION

   137

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

   F-1

 

 

You should rely only on the information contained in this prospectus or in any related free-writing prospectus filed with the Securities and Exchange Commission, or the SEC, or used or referred to in connection with the offering of our common shares. We have not, and the underwriters have not, authorized anyone to provide you with different information. We and the selling shareholders are offering to sell, and seeking offers to buy, common shares only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common shares.

 

 

Until                     , 2010, all dealers that buy, sell or trade our common shares, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

 

 

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PROSPECTUS SUMMARY

This summary highlights certain information appearing elsewhere in this prospectus. As this is a summary, it does not contain all of the information that you should consider in making an investment decision. You should read the following summary together with the entire prospectus, including the more detailed information in the consolidated financial statements and related notes appearing elsewhere in this prospectus and the matters discussed in “Risk Factors.” We express all dollar amounts in this prospectus in U.S. dollars, except where otherwise indicated. References to “$” are to U.S. dollars and references to “C$” are to Canadian dollars.

MITEL NETWORKS CORPORATION

Our Company

We are the leading provider of integrated communications solutions focused on the small-to-medium sized enterprise, or SME, market. We also have a strong and growing presence in the large enterprise market with a portfolio of products that support up to 65,000 users. Our Internet Protocol, or IP, based communications solutions consist of a combination of IP telephony platforms, which we deliver as software, appliances and desktop devices, and a suite of unified communications and collaboration, or UCC, applications that integrate voice, video and data communications with business applications. We believe that our solutions, including associated managed and network services, enable our customers to realize significant cost benefits and to conduct their business more effectively.

We have delivered innovative communications solutions to our customers for over 35 years. Over the past decade, we have made a significant investment in developing our IP-based communications solutions and transitioning our distribution channels to take advantage of the industry’s shift from legacy systems to IP-based communications solutions, including UCC applications. Our research and development has produced a global portfolio of over 1,200 patents and pending applications, and provides us with the expertise to anticipate market trends and meet the current and future needs of our customers. As part of our business strategy, we acquired Inter-Tel (Delaware), Inc., or Inter-Tel, in August 2007, which significantly enhanced our ability to target SME customers with our IP solutions by expanding our U.S. distribution and managed service capabilities. Today, we have a direct and indirect distribution channel, which addresses the needs of customers in 90 countries through our 80 offices and more than 1,600 channel partners worldwide.

Since the introduction of our IP-based systems in 1999, we have shipped more than 120,000 IP-based appliances to support the communications needs of over 6.6 million users. Our solutions are scalable, flexible and easy to deploy, manage and use. We have designed our software and appliances to allow access to our solutions from mobile devices. Our solutions interoperate with various systems supplied by other vendors, which allows our customers to preserve their existing communications investments and gives them the flexibility to choose the solutions that best meet their particular needs. We also offer our customers the flexibility of an end-to-end solution, in which our appliances and applications are integrated with our managed services and network services.

Industry Trends

Businesses are increasingly focused on deploying comprehensive communications solutions that reduce cost, increase productivity and provide competitive advantages. These solutions need to be flexible in order to respond to the ongoing trends driving growth in the communications market.

Historically, businesses have used an IP-based data network for their data communications and a separate telephony network for their voice communications. These legacy telephony networks are based on

 

 

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circuit-switched technology, which use proprietary operating systems, limiting their ability to integrate communications with other business processes and applications. Additionally, these legacy networks are expensive to manage, maintain and scale as an organization grows. As a result, businesses are migrating to IP-based communications solutions that can address their voice, video, data and business applications requirements within a single converged network.

The evolution to converged IP-based networks has given rise to two important trends: the transition from hardware-based to software-based communications solutions and the ability to deliver UCC applications. The transition to software-based communications solutions provides operational cost benefits, enhanced implementation flexibility, and the ability to integrate communications with other business processes and applications. UCC applications enable customers to move beyond basic fixed telephony and disparate communications tools toward integrated multi-media communications and collaboration between users, wherever they may be located.

Our Competitive Strengths

We believe our competitive strengths position us well to capitalize on the opportunities created by the market trends in our industry. These strengths include:

Leadership in the SME communications market. We are a recognized leader in the SME communications market. We define SMEs as enterprises with up to 1,000 employees. In the SME segment, for the nine months ended September 30, 2009, we were the third largest provider of converged IP telephony lines in North America and second largest provider of IP telephony extensions in the United Kingdom.

Comprehensive portfolio of IP-based communications solutions. We offer a comprehensive portfolio of IP-based communications solutions, which consist of IP telephony platforms and UCC applications. These solutions are designed to provide implementation flexibility so that businesses can transition to an IP-based network over time while maintaining a seamless unified communications experience. Our IP-based communications platforms efficiently scale from small businesses to large enterprises, which we define as businesses with over 1,000 employees.

Focus on software-based innovation and UCC. Our history of success as an early adopter of software-based communications solutions has provided us with the foundation for continued innovation in IP-based communications and UCC. We have a broad portfolio of over 1,200 patents and pending applications, covering over 450 inventions, in areas such as VoIP, collaboration and user availability information.

End-to-end managed services and network services offerings. We provide a comprehensive managed services offering, which includes products, complete installation and ongoing maintenance, professional services and network connectivity, complemented by a range of financing alternatives. Our managed services relationships provide us with recurring revenue and significant visibility into our customers’ future communications needs. We have a strong record of leveraging these relationships into new revenue opportunities.

Leading global distribution channel. We have a flexible go-to-market strategy tailored to our target markets, enabling us to more effectively reach vertical and geographic markets around the world. Our distribution network includes our value-added resellers, service providers, high-touch sales and direct channel, all of which we leverage in parallel depending on customer requirements and opportunities. Today, we have over 1,600 channel partners in 90 countries, including 130 exclusive channel partners in the United States.

 

 

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Strategy

Our strategy is to increase our SME market share and expand our target markets by enhancing our IP-based communications solutions, including UCC applications, and selling these solutions through our global distribution channel. To accomplish this objective, we intend to:

Leverage our highly scalable business model

 

   

We intend to capitalize on our existing, broad customer base to generate additional revenue from system expansion and upgrades and the provision of new applications, managed services and network services.

 

   

We intend to leverage our global sales and distribution network to further penetrate our target markets.

 

   

We intend to leverage our existing solutions portfolio to further expand our position in larger enterprise and international markets.

Invest in innovation to drive growth

 

   

We intend to continue to capitalize on ongoing industry trends through early and targeted investment in research and development. We are at the forefront of the transition in communications technology from hardware-based to software-based communications solutions and toward UCC, and will continue to invest in our solutions to increase the functionality and versatility of our offerings.

 

   

We will continue to leverage our proven expertise and leading position in the SME market by strategically investing in the development of solutions that effectively address the widely varying product and service requirements of SMEs and larger enterprises characterized by similar requirements.

Continue to develop our global distribution channel

 

   

We will continue to invest in supporting and enhancing our global distribution channel to capitalize on the industry trends towards software-based communications solutions and UCC.

 

   

We plan to aggressively target channel disruption, resulting from industry consolidation, to grow our distribution channel and ultimately our market position.

Expand managed and network services offerings

 

   

We plan to leverage our applications by introducing additional software-based communications solutions that enable the delivery of cost-effective hosted IP-based communications solutions.

Corporate Information

Our principal executive offices are located at 350 Legget Drive, Ottawa, Ontario, Canada, K2K 2W7, and our telephone number is (613) 592-2122. Unless the context otherwise requires, references in this prospectus to “Mitel,” the “Company,” “we,” “us” and “our” refer to Mitel Networks Corporation and its direct and indirect wholly owned subsidiaries on a consolidated basis.

 

 

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Mitel and the Mitel logo are trademarks of Mitel Networks Corporation. This prospectus also includes other trademarks of Mitel and trademarks of other persons.

For investors outside the United States. Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

 

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THE OFFERING

 

Common shares offered by Mitel Networks Corporation

             common shares

 

Common shares offered by the selling shareholders

             common shares

 

Over-allotment option

The underwriters may purchase up to an additional              common shares from us, and up to an additional              common shares from the selling shareholders, at the initial public offering price of $             per common share (the midpoint of the range listed on the cover page of this prospectus), less underwriting commissions, within 30 days of the date of this prospectus to cover over-allotments, if any.

 

Common shares to be outstanding following the offering

             common shares

 

Use of proceeds

We estimate that our net proceeds from this offering, based on an assumed initial public offering price of $             per common share (the midpoint of the range listed on the cover page of this prospectus) after deducting underwriting commissions and estimated offering expenses payable by us, will be approximately $             million ($             if the over-allotment option is exercised in full). We intend to use the net proceeds from this offering to repay borrowings outstanding under our revolving credit facility; to repay a portion of our first lien term loan; and to fund working capital and for general corporate purposes, which may include acquisitions. We will not receive any of the net proceeds from the sale of common shares by the selling shareholders. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” beginning on page 11 and other information in this prospectus for a discussion of the factors you should consider before you decide to invest in our common shares.

 

Proposed                      Symbol

 

 

The number of common shares to be outstanding after this offering is based on 500,815,762 common shares outstanding as of October 31, 2009, as adjusted by the assumptions set out below, but does not include:

 

   

40,949,707 common shares issuable upon the exercise of stock options outstanding under our equity incentive plans at a weighted average exercise price of $0.27 per share, as of October 31, 2009;

 

   

23,559,346 additional common shares reserved for issuance under our equity incentive plans, as of October 31, 2009;

 

   

37,174,887 common shares issuable upon the exercise of outstanding warrants, which are exercisable for common shares without the payment of any additional cash consideration (see “Description of Share Capital—Warrants—Technology Partnerships Canada Warrants”);

 

 

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16,500,000 common shares issuable upon the exercise of outstanding warrants at an exercise price of $1.28 per share (see “Description of Share Capital—Warrants—Convertible Noteholder Warrants”);

 

   

22,563,126 common shares issuable upon the exercise of outstanding warrants at an exercise price of $1.32 per share (see “Description of Share Capital—Warrants—FP Warrants”); and

 

   

5,000,000 common shares issuable upon the exercise of outstanding warrants at an exercise price of C$1.25 per share (see “Description of Share Capital—Warrants—EdgeStone Warrants”).

Unless we specifically state otherwise, all information in this prospectus:

 

   

assumes an initial public offering price of $             per common share (the midpoint of the range listed on the cover page of this prospectus);

 

   

assumes the conversion of all of our outstanding preferred shares into an aggregate of              common shares, which will occur prior to the completion of this offering;

 

   

assumes no exercise by the underwriters of their over-allotment option; and

 

   

reflects, for all prior periods, a one for              reverse split of our common shares, which will occur prior to the completion of this offering.

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following sets forth summary consolidated financial data derived from our audited consolidated financial statements as of and for the fiscal years ended April 30, 2007, April 30, 2008 and April 30, 2009, which are included elsewhere in this prospectus. Unless otherwise indicated, the data set out below does not take into account the conversion of our outstanding preferred shares into common shares. Our consolidated financial statements are reported in U.S. dollars and have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. Historical results do not necessarily indicate results expected for any future period. You should read the following summary consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

The pro forma balance sheet data below gives effect to the conversion of all of our outstanding preferred shares into              common shares, which will occur prior to the completion of this offering. The pro forma as adjusted balance sheet data below also gives effect to our sale of              common shares in this offering at an assumed initial public offering price of $             per common share (the midpoint of the range listed on the cover page of this prospectus), after deducting the underwriting commissions and estimated offering expenses payable by us and the application of the net proceeds from the offering as described under “Use of Proceeds,” as if the offering had occurred as of April 30, 2009.

 

     Fiscal Year
Ended April 30,
 
         2007             2008 (1)             2009      
     (in millions, except per share data)  

Consolidated Statement of Operations Data

      

Revenues

   $ 384.9      $ 692.0      $ 735.1   

Cost of revenues

     225.1        367.9        390.6   
                        

Gross margin

     159.8        324.1        344.5   

Research and development

     41.7        62.6        60.1   

Selling, general and administrative

     123.5        246.6        248.5   

Other operating charges (2)

     27.9        22.0        23.3   

Impairment of goodwill

                   284.5   
                        

Operating (loss)

     (33.3     (7.1     (271.9

Other (income) expense, net (3)

     (9.2     (42.7     (99.4

Interest expense

     9.1        34.7        40.1   

Income tax (recovery) expense

     1.8        (11.7     (19.1
                        

Net income (loss)

   $ (35.0   $ 12.6      $ (193.5
                        

Net income (loss) attributable to common shareholders

   $ (42.3   $ (83.5   $ (234.5

Net income (loss) per common share—basic and diluted

   $ (0.36   $ (0.45   $ (1.09

Weighted average number of common shares outstanding

     117.3        186.1        214.7   

Other Financial Data

      

Adjusted EBITDA (4)

   $ 5.0      $ 50.2      $ 78.7   

 

 

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     As of April 30, 2009
     Actual     Pro Forma     Pro Forma
As Adjusted (4)
     (in millions)

Consolidated Balance Sheet Data

      

Cash and cash equivalents

   $ 28.4      $ 28.4      $  

Total assets

   $ 623.1      $ 623.1      $              

Total debt, including capital leases

   $ 454.8      $ 454.8      $  

Redeemable shares (6)

   $ 249.5      $      $  

Common shares

   $ 277.8      $ 527.3      $              

Warrants

   $ 56.6      $ 56.6      $  

Total shareholders deficiency

   $ (430.1   $ (172.2   $             

 

(1) On August 16, 2007 we acquired Inter-Tel, and, as a result of this acquisition, our financial results for the fiscal year ended April 30, 2008 also include eight and a half months of financial results from Inter-Tel.

 

(2) Other operating charges include: special charges, integration and merger related costs (includes costs associated with restructuring activities, product line exits and the Inter-Tel acquisition in fiscal 2008), loss on disposal of assets, litigation settlements, initial public offering costs and in-process research and development acquired as part of the Inter-Tel acquisition.

 

(3) Other (income) expense, net includes: fair value adjustment on derivative instruments; other (income) expense, which is comprised of foreign exchange (gains) losses, net, amortization on gain on sale of assets and other expenses; and debt and warrant retirement costs.

 

(4) We present Adjusted EBITDA, which is defined as consolidated net income (loss) before (1) interest expense, (2) income tax (recovery) expense, (3) amortization and depreciation, (4) foreign exchange (gain) or loss, (5) fair value adjustment on derivative instruments, (6) debt and warrant retirement costs, (7) impairment of goodwill, (8) special charges, integration and merger related costs, (9) in-process research and development, (10) litigation settlement, (11) initial public offering costs, (12) stock-based compensation and (13) loss (gain) on sale of manufacturing operations.

Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to net income, income from operations or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We encourage you to evaluate these adjustments and the reasons we consider them appropriate, as well as the material limitations of non-GAAP measures and the manner in which we compensate for those limitations.

We use Adjusted EBITDA:

 

   

as a measure of operating performance;

 

   

for planning purposes, including the preparation of our annual operating budget;

 

   

to allocate resources to enhance the financial performance of our business; and

 

   

in communications with our board of directors concerning our financial performance.

 

 

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We believe that the use of Adjusted EBITDA provides consistency and comparability of, and facilitates, period to period comparisons, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their U.S. GAAP results.

We believe Adjusted EBITDA may also be useful to investors in evaluating our operating performance because securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies, and we anticipate that our investor and analyst presentations after we are public will include Adjusted EBITDA. However, we also caution you that other companies in our industry may calculate Adjusted EBITDA or similarly titled measures differently than we do, which limits the usefulness of Adjusted EBITDA as a comparative measure.

Moreover, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA and similar non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for an analysis of our results of operations as reported under U.S. GAAP.

Some of the limitations of Adjusted EBITDA are that it does not reflect:

 

   

interest income or interest expense;

 

   

cash requirements for income taxes;

 

   

foreign exchange gains or losses;

 

   

significant cash payments we were required to make in connection with restructuring, litigation settlements and transaction expenses;

 

   

employee stock-based compensation;

 

   

cash requirements for the replacement of assets that have been depreciated or amortized or of goodwill that is impaired;

 

   

acquired in-process research and development charges; and

 

   

losses or gains related to the sale of manufacturing operations and other assets.

We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of Adjusted EBITDA to the most directly comparable U.S. GAAP measure, net income (loss).

 

 

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The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP measure, for each of the periods indicated:

 

     Fiscal Year Ended
April 30,
 
     2007     2008     2009  
     (in millions)  

Net income (loss)

   $ (35.0   $ 12.6      $ (193.5

Adjustments:

      

Interest expense

     9.1        34.7        40.1   

Income tax (recovery) expense

     1.8        (11.7     (19.1

Amortization and depreciation

     9.2        32.6        38.0   

Foreign exchange (gain) loss

     0.3        (0.6     3.2   

Fair value adjustment on derivative instruments

     (8.6     (61.9     (100.2

Debt and warrant retirement costs

            20.8          

Impairment of goodwill

                   284.5   

Special charges, integration and merger-related costs

     9.3        16.0        23.3   

In-process research and development

            5.0          

Litigation settlement

     16.3                 

Initial public offering costs

     3.3                 

Stock-based compensation

     0.3        1.7        2.4   

Loss (gain) on sale of manufacturing operations

     (1.0     1.0          
                        

Adjusted EBITDA

   $ 5.0      $ 50.2      $ 78.7   
                        

 

(5) Assumes net proceeds to us from this offering of $             million. A $1.00 increase (decrease) in the assumed initial public offering price of $             per common share (the midpoint of the range listed on the cover page of this prospectus) would increase (decrease) pro forma as adjusted cash and cash equivalents and total shareholders’ deficiency by $             million, (i) assuming the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same and (ii) after deducting the underwriting commissions and estimated offering expenses payable by us.

 

(6) Redeemable shares includes 316,755 class 1 convertible shares, redeemable preferred shares, or the Class 1 Preferred Shares, issued in connection with the acquisition of Inter-Tel.

 

 

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RISK FACTORS

An investment in our common shares involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, together with all of the other information contained in this prospectus, including the consolidated financial statements and the related notes appearing at the end of this prospectus, before deciding to invest in our common shares. If any of the following risks actually occurs, our business, business prospects, financial condition, results of operations or cash flows could be materially adversely affected. In any such case, the trading price of our common shares could decline, and you could lose all or part of your investment. The risks below are not the only ones we face. Additional risks not currently known to us or that we currently deem immaterial may also adversely affect us. This prospectus also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks described below. See “Cautionary Note Regarding Forward-Looking Statements.”

Risks Relating to our Business

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

In fiscal 2009, we incurred a net loss of $193.5 million. Although we recorded net income of $12.6 million for fiscal 2008, prior to our acquisition of Inter-Tel in August 2007, we recorded net losses of $35.0 million, $44.6 million and $51.2 million in fiscal 2007, 2006 and 2005, respectively, and also incurred net losses in each other year since our incorporation in 2001. We may not achieve profitability in future years. We have incurred restructuring charges in fiscal 2009 and prior periods and may incur additional restructuring charges in the future. Our future success in achieving profitability and growing our revenues and market share for our solutions depends, among other things, upon our ability to develop and sell solutions that have a competitive advantage, to build our brand image and reputation, to attract orders from new and existing customers and to reduce our costs as a proportion of our revenues by, among other things, increasing efficiency in design, component sourcing, manufacturing and assembly cost processes. We may not be able to achieve such success or achieve profitability.

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

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

 

   

the fact that an individual order or contract can represent a substantial amount of revenues for that period;

 

   

the size, timing and shipment of individual orders;

 

   

changes in pricing or discount levels by us or our competitors;

 

   

foreign currency exchange rates;

 

   

the mix of products sold by us;

 

   

the timing of the announcement, introduction and delivery of new products or product enhancements by us or our competitors;

 

   

how well we execute on our strategy and operating plans;

 

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general economic conditions; and

 

   

changes in tax laws, regulations or accounting rules.

As a result of the above factors, a quarterly or yearly comparison of our results of operations is not necessarily meaningful. Prior results are not necessarily indicative of results to be expected in future periods.

Our recent growth through the acquisition of Inter-Tel may not be representative of future growth.

Our recent growth through the acquisition of Inter-Tel is not representative of our underlying organic growth and is not representative of our future growth projections. Our revenue growth in fiscal 2009 of $43.1 million and our revenue growth in fiscal 2008 of $307.1 million were due to the acquisition of Inter-Tel and the inclusion of a full twelve months of Inter-Tel revenues in fiscal 2009 and eight and a half months of Inter-Tel revenues in fiscal 2008. We may not be able to sustain similar growth in future periods.

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

Our business depends on the overall demand for information technology, and in particular for business communications systems. The purchase of our solutions can be discretionary and may involve a significant commitment of capital and other resources. Current and ongoing global economic instability in our key markets, particularly the United States and the United Kingdom, has caused and may lead our customers to continue to reduce, defer or suspend their information technology or communications spending, may result in our suppliers seeking more prompt payment terms from us, and may result in restricted or unavailable access to credit. This instability has adversely impacted, and may continue to adversely impact, our business, operating results and financial condition in a number of ways, including:

 

   

longer sales cycles;

 

   

lower prices for our products;

 

   

reduced unit sales;

 

   

longer collection times for receivables;

 

   

increased credit losses from receivables;

 

   

increased customer defaults on payments;

 

   

the timing and volume of sales of leases to third party funding sources;

 

   

the cost of implementing restructuring actions; and

 

   

the availability of additional credit facilities or funding sources on terms satisfactory to us or at all.

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

The market for our solutions is highly competitive. We compete against many companies, including in particular Avaya Inc. and Cisco Systems, Inc., as well as Aastra Technologies Limited, Alcatel-Lucent S.A., NEC Corporation, Panasonic Corporation, ShoreTel, Inc., Siemens Enterprise Networks and Toshiba Corporation. In addition, because the market for our solutions is subject to rapidly changing technologies, we

 

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may face competition in the future from companies that do not currently compete in our business communications market, including companies that currently compete in other sectors of the information technology, communications or software industries, such as Microsoft Corporation and Google Inc., mobile communications companies or communications companies that serve residential rather than business customers. Our industry is also experiencing consolidation that may adversely impact our competitive position. Recently, Avaya Inc. acquired Nortel Network’s Enterprise Solutions business, Cisco Systems, Inc. acquired TANDBERG ASA and Hewlett-Packard Company announced the acquisition of 3Com Corporation.

Several of our existing competitors have, and many of our future potential competitors may have, greater financial, personnel, research, project management and other resources, more well-established brands or reputations and broader customer bases than we have. As a result, these competitors may be in a stronger position to respond more quickly to potential acquisitions and other market opportunities, new or emerging technologies and changes in customer requirements. Some of these competitors may also have customer bases that are more diversified than ours and therefore may be less affected by an economic downturn in a particular region. Competitors with greater resources may also be able to offer lower prices, additional products or services or other incentives that we do not offer or cannot match. In addition, existing customers of data communications companies that compete against us may be more inclined to purchase business communications solutions from their current data communications vendor than from us. We cannot predict which competitors may enter our markets in the future, what form the competition may take or whether we will be able to respond effectively to the entry of new competitors or the rapid evolution in technology and product development that has characterized our markets.

Competition from existing and potential market entrants may take many forms. Our products must interface with customer software, equipment and systems in their networks, each of which may have different specifications. To the extent our competitors supply network software, equipment or systems to our customers, it is possible these competitors could design their technologies to be closed or proprietary systems that are incompatible with our products or work less effectively with our products than their own. As a result, customers would have an incentive to purchase products that are compatible with the products and technologies of our competitors over our products. A lack of interoperability may result in significant redesign costs and harm relations with our customers. If our products do not interoperate with our customers’ networks, installations could be delayed or orders for our products could be cancelled, which would result in losses of revenues and customers that could significantly harm our business. In addition, our competitors may provide large bundled offerings that incorporate applications and products similar to those that we offer. If our competitors offer deep discounts on certain products or services in an effort to recapture or gain market share, we may be required to lower our prices or offer other favorable terms to compete effectively, which would reduce our margins and could adversely affect our operating results and financial condition.

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

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

 

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The emerging market for unified communication and collaboration may not materialize as expected and is subject to market risks and uncertainties that could cause significant delays and expenses.

The market for UCC applications has begun to develop only recently, is evolving rapidly and is characterized by an increasing number of market entrants. As is typical of a new and rapidly evolving industry, the demand for and market acceptance of UCC applications is uncertain. The adoption of UCC may not become widespread. In particular, enterprises that have already invested substantial resources in other means of communicating information may be reluctant or unwilling to adopt UCC applications. If the market for UCC applications fails to develop or develops more slowly than we anticipate, our solutions could fail to achieve market acceptance, which in turn could significantly harm our business. This growth may be inhibited by a number of factors, such as:

 

   

initial costs of implementation for a new system;

 

   

quality of infrastructure;

 

   

security concerns;

 

   

equipment, software or other technology failures;

 

   

regulatory requirements;

 

   

inconsistent quality of service; and

 

   

lack of availability of cost-effective, high-speed network capacity.

Moreover, as UCC usage grows, the infrastructure used to support these services, whether public or private, may not be able to support the demands placed on them and their performance or reliability may decline. Even if UCC becomes more widespread in the future, our solutions may not attain broad market acceptance.

The adoption of UCC applications on both desktop computers and mobile devices at a rate faster than we currently anticipate may lead to a decline in the utilization of distinct IP and digital devices and a reduction in our desktop device revenues. In addition, the evolution towards hosted IP telephony and UCC applications delivered as a service may occur faster and more extensively than currently anticipated, which may adversely impact the sale of our non-hosted communications solutions.

We are dependent on our customers’ decisions to deploy IP telephony solutions.

While many of the technical barriers to adoption of IP telephony have been resolved in recent years and IP telephony adoption has entered the mainstream, our business remains dependant on customer decisions to migrate their legacy telephony infrastructure to IP telephony and other advanced service delivery methods. While these investment decisions are often driven by macroeconomic factors, customers may also delay adoption of IP telephony due to a range of other factors, including prioritization of other IT projects and weighing the costs and benefits of deploying new infrastructures and devices. IP telephony adoption among new and additional IP telephony customers may not grow at the rates we currently anticipate.

Our working capital requirements and cash flows are subject to fluctuation which could have an adverse affect on us.

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

 

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affected. For example, if we are unable to effectively manage fluctuations in our cash flows, we may be unable to make required interest payments on our indebtedness. Factors which could result in cash flow fluctuations include:

 

   

the level of sales and the related margins on those sales;

 

   

the collection of receivables;

 

   

the timing and volume of sales of leases to third party funding sources;

 

   

the timing and size of capital expenditures;

 

   

the timing and size of purchase of inventory and related components;

 

   

the timing of payment on payables and accrued liabilities;

 

   

costs associated with potential restructuring actions; and

 

   

customer financing obligations.

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

We may not generate sufficient cash from operations to meet anticipated working capital requirements, support additional capital expenditures or take advantage of acquisition opportunities. In order to finance our business, we may need to utilize available borrowings under our revolving credit facility. Our ability to continually access this facility in the future is conditioned upon our compliance with current or future covenants contained in our revolving credit facility and in our other credit agreements. We may not be in compliance with such covenants in the future. We may need to secure additional sources of funding if our cash and borrowings under our revolving credit facility are insufficient or unavailable to finance our operations. Such funding may not be available on terms satisfactory to us, or at all. In addition, any proceeds from the issuance of equity or debt may be required to be used, in whole or in part, to make mandatory payments under our credit agreements. If we were to incur higher levels of debt, we would require a larger portion of our operating cash flow to be used to pay principal and interest on our indebtedness. The increased use of cash to pay indebtedness could leave us with insufficient funds to finance our operating activities, such as research and development expenses and capital expenditures. In addition, any new debt instruments may contain covenants or other restrictions that affect our business operations. If we were to raise additional funds by selling equity securities, the relative ownership of our existing investors could be diluted or the new investors could obtain terms more favorable than previous investors.

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

As of April 30, 2009, we had $30.0 million outstanding under our revolving credit facility, $289.6 million outstanding under our first lien term loan and $130.0 million outstanding under our second lien term loan. The credit agreements relating to these loans and the revolving credit facility have customary default clauses. In the event we were to default on these credit agreements, and were unable to cure or obtain a waiver of default, the repayment of our debt owing under these credit agreements may be accelerated. If acceleration were to occur, we would be required to secure alternative sources of equity or debt financing to be able to repay the debt. Alternative financing may not be available on terms satisfactory to us, or at all. If acceptable alternative financing were unavailable, we would have to consider alternatives to fund the repayment of the debt, including

 

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the sale of part or all of the business, which sale may occur at a distressed price. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

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

There is considerable patent and other intellectual property development activity in our industry. Our success depends, in part, upon our not infringing intellectual property rights owned by others. Our competitors, as well as a number of individuals, patent holding companies and consortiums, own, or claim to own, intellectual property relating to our industry. Our solutions may infringe the patents or other intellectual property rights of third parties. We cannot determine with certainty whether any existing third party patent, or the issuance of new third party patents, would require us to alter our solutions, obtain licenses, pay royalties or discontinue the sale of the affected applications and products. Our competitors may use their patent portfolios in an increasingly offensive manner in the future. We are currently and periodically involved in patent infringement disputes with third parties, including claims that have been made against us for the payment of licensing fees. We have received notices in the past, and we may receive additional notices in the future, containing allegations that our solutions are subject to patents or other proprietary rights of third parties, including competitors, patent holding companies and consortiums. Current or future negotiations with third parties to establish license or cross license arrangements, or to renew existing licenses, may not be successful and we may not be able to obtain or renew a license on satisfactory terms, or at all. If required licenses cannot be obtained, or if existing licenses are not renewed, litigation could result.

Our success also depends upon our customers’ ability to use our products. Claims of patent infringement have been asserted against some of our channel partners based on their use of our solutions. We generally agree to indemnify and defend our channel partners and direct customers to the extent a claim for infringement is brought against our customers with respect to our solutions.

Aggressive patent litigation is common in our industry and can be disruptive. Infringement claims (or claims for indemnification resulting from infringement claims) have been, are currently and may in the future be asserted or prosecuted against us, our channel partners or our customers by third parties. Some of these third parties, including our competitors, patent holding companies and consortiums, have, or have access to, substantially greater resources than we do and may be better able to sustain the costs of complex patent litigation. For example, in June 2006, one of our competitors filed a complaint against us alleging that we infringed certain of its patents. That complaint was settled and we paid a cash settlement to such competitor. We may face similar complaints in the future. Whether or not the claims currently pending against us, our channel partners or our customers, or those that may be brought in the future, have merit, we may be subject to costly and time-consuming legal proceedings. Such claims could also harm our reputation and divert our management’s attention from operating our business. If these claims are successfully asserted against us, we could be required to pay substantial damages (including enhanced damages and attorneys’ fees if infringement is found to be wilful). We could also be forced to obtain a license, which may not be available on acceptable terms, if at all, forced to redesign our solutions to make them non-infringing, which redesign may not be possible or, if possible, costly and time-consuming, or prevented from selling some or all of our solutions.

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

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

 

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Any of our patents may be challenged, invalidated, circumvented or rendered unenforceable. We may not be successful should one or more of our patents be challenged for any reason. If our patent claims are rendered invalid or unenforceable, or narrowed in scope, the patent coverage afforded to our solutions could be impaired, which could significantly impede our ability to market our products, negatively affect our competitive position and materially harm our business and operating results.

Pending or future patent applications held by us may not result in an issued patent, or if patents are issued to us, such patents may not provide meaningful protection against competitors or against competitive technologies. We may not be able to prevent the unauthorized disclosure or use of our technical knowledge or trade secrets by consultants, vendors, former employees and current employees, despite the existence of nondisclosure and confidentiality agreements and other contractual restrictions. Furthermore, many foreign jurisdictions offer less protection of intellectual property rights than the United States and Canada, and the protection provided to our proprietary technology by the laws of these and other foreign jurisdictions may not be sufficient to protect our technology. Preventing the unauthorized use of our proprietary technology may be difficult, time consuming and costly, in part because it may be difficult to discover unauthorized use by third parties. Litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of our proprietary rights, or to defend against claims of unenforceability or invalidity. Any litigation, whether successful or unsuccessful, could result in substantial costs and diversion of management resources and could have a material adverse effect on our business, results of operations and financial condition regardless of its outcome.

Some of the software used with our products, as well as that of some of our customers, may be derived from so-called “open source” software that is made generally available to the public by its authors and/or other third parties. Such open source software is often made available to us under licenses, such as the GNU General Public License, that impose certain obligations on us in the event we were to make derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, or license such derivative works under an open source license or another particular type of license, potentially granting third parties certain rights to the software, rather than the forms of license customarily used to protect our intellectual property. Failure to comply with such obligations can result in the termination of our distribution of products that contain the open source code or the public dissemination of any enhancements that we made to the open source code. We may also incur legal expenses in defending against claims that we did not abide by such open source licences. In the event the copyright holder of any open source software or another party in interest were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be subject to potential damages and could be required to release the source code of that work to the public, grant third parties certain rights to the source code or stop distribution of that work. Any of these outcomes could disrupt our distribution and sale of related products and materially adversely affect our business.

We rely on trade secrets and other forms of non-patent intellectual property protection. If we are unable to protect our trade secrets, other companies may be able to compete more effectively against us.

We rely on trade secrets, know-how and technology that are not protected by patents to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our partners, collaborators, employees and consultants. Any of these parties may breach these agreements and we may not have adequate remedies for any specific breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our partners, collaborators, employees and consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in the related or resulting know-how and inventions. If any of our trade secrets, know-how or other technologies not protected by a patent were to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.

 

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We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

Many of our employees may have been previously employed at other companies which provide integrated communications solutions, including our competitors or potential competitors. We may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key personnel or their work product could hamper or prevent our ability to commercialize certain product candidates, which would adversely affect our commercial development efforts, business, financial condition and results of operations.

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

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

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

Because we depend upon a small number of outside contract manufacturers, our operations could be delayed or interrupted if we encounter problems with these contractors.

We do not have any internal manufacturing capabilities, and we rely primarily upon two contract manufacturers: Flextronics International Ltd., or Flextronics, and BreconRidge Corporation, or BreconRidge, a privately held company. Dr. Terence H. Matthews, one of our principal securityholders and Chairman of our board of directors, has an approximate 22.2% ownership interest in BreconRidge and EdgeStone Capital Equity Fund II Nominee Inc., another of our securityholders, has an approximate 59.9% ownership interest in BreconRidge, each as of October 31, 2009. Our ability to ship products to our customers could be delayed or interrupted as a result of a variety of factors relating to our contract manufacturers, including:

 

   

failure to effectively manage our contract manufacturer relationships;

 

   

our contract manufacturers experiencing delays, disruptions or quality control problems in their manufacturing operations;

 

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lead-times for required materials and components varying significantly and being dependent on factors such as the specific supplier, contract terms and the demand for each component at a given time;

 

   

underestimating our requirements, resulting in our contract manufacturers having inadequate materials and components required to produce our products, or overestimating our requirements, resulting in charges assessed by the contract manufacturers or liabilities for excess inventory, each of which could negatively affect our gross margins; and

 

   

the possible absence of adequate capacity and reduced control over component availability, quality assurances, delivery schedules, manufacturing yields and costs.

We are also exposed to risks relating to the financial viability of our contract manufacturers as a result of business and industry risks that affect those manufacturers. In order to finance their businesses during economic downturns or otherwise, Flextronics and BreconRidge may need to secure additional sources of equity or debt financing. Such funding may not be available on terms satisfactory to them, or at all, which could result in a material disruption to our production requirements. Further, as a privately held company, BreconRidge may not have the same level of access to capital as a public company.

If any of our contract manufacturers are unable or unwilling to continue manufacturing our products in required volumes and quality levels, we will have to identify, qualify, select and implement acceptable alternative manufacturers, which would likely be time consuming and costly. In particular, each of Flextronics and BreconRidge are sole manufacturing sources for certain of our products. A failure of either of these parties to satisfy our manufacturing needs on a timely basis, as a result of the factors described above or otherwise, could result in a material disruption to our business until another manufacturer is identified and able to produce the same products, which could take a substantial amount of time, during which our results of operations, financial condition and reputation among our customers and within our industry could be materially and adversely affected. In addition, alternate sources may not be available to us or may not be in a position to satisfy our production requirements on a timely basis or at commercially reasonable prices and quality. Therefore, any significant interruption in manufacturing could result in us being unable to deliver the affected products to meet our customer orders.

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

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

 

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

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

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

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

 

   

macroeconomic conditions adversely affecting geographies where we do business;

 

   

foreign currency exchange rates;

 

   

political or social unrest or economic instability in a specific country or region;

 

   

higher costs of doing business in foreign countries;

 

   

infringement claims on foreign patents, copyrights or trademark rights;

 

   

difficulties in staffing and managing operations across disparate geographic areas;

 

   

difficulties associated with enforcing agreements and intellectual property rights through foreign legal systems;

 

   

trade protection measures and other regulatory requirements, which affect our ability to import or export our products from or to various countries;

 

   

adverse tax consequences;

 

   

unexpected changes in legal and regulatory requirements;

 

   

military conflict, terrorist activities, natural disasters and medical epidemics; and

 

   

our ability to recruit and retain channel partners in foreign jurisdictions.

 

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

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

Transfer pricing rules may adversely affect our income tax expenses.

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

Our operating results may be impacted by our ability to sell leases derived from our managed services offering.

We offer customers the ability to bundle all their managed service communication expense into a single monthly payment lease, which we then generally pool and sell to third party financial institutions. We derive revenues from the direct sale of pools of leases to third party financial institutions, many of whom have been impacted by challenging macroeconomic events. These leases are recurring revenue streams for us and typically produce attractive gross margins. If we are unable to secure attractive funding rates or resell these leases, our operating results would suffer. The challenging macroeconomic conditions, coupled with our level of indebtedness, have adversely impacted our ability to sell these leases in the past and may continue to do so in the future. Moreover, particularly in the current economic environment, the timing, volume and profitability of lease sales from quarter to quarter could impact our operating results. We have historically sold these pools of leases at least once per quarter. Furthermore, when the initial term of the lease is concluded, our customers have the option to renew the lease at a payment and term less than the original lease. We have typically held these customer lease renewals on balance sheet, although we could also elect to sell these renewals to a third party financial institution.

Credit and commercial risks and exposures could increase if the financial condition of our customers declines.

We provide or commit to financing, where appropriate, for our customers. Our ability to arrange or provide financing for our customers depends on a number of factors, including our credit rating, our level of available credit and our ability to sell off commitments on acceptable terms. Pursuant to certain of our customer

 

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contracts, we deliver solutions representing an important portion of the contract price before receiving any significant payment from the customer. As a result of the financing that may be provided to customers and our commercial risk exposure under long-term contracts, our business could be adversely affected if the financial condition of our customers erodes. Upon the financial failure of a customer, we may experience losses on credit extended and loans made to such customer, losses relating to our commercial risk exposure, and the loss of the customer’s ongoing business. If customers fail to meet their obligations to us or the recurring revenue stream from customer financings is lost, we may experience reduced cash flows and losses in excess of reserves, which could materially adversely impact our results of operations and financial position.

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

We sell highly complex solutions that incorporate both hardware and software. Our software may contain “bugs” that can interfere with expected operations. Our preshipment testing and field trial programs may not be adequate to detect all defects in individual applications and products or systematic defects that could affect numerous shipments, which might interfere with customer satisfaction, reduce sales opportunities or affect gross margins. In the past, we have had to replace certain components and provide remediation in response to the discovery of defects or “bugs” in solutions that we had shipped. Any future remediation may have a material impact on our business. Our inability to cure an application or product defect could result in the failure of an application or product line, the temporary or permanent withdrawal from an application, product or market, damage to our reputation, inventory costs, lawsuits by customers or customers’ or channel partners’ end users, or application or product reengineering expenses. The sale and support of solutions containing defects and errors may result in product liability claims and warranty claims. Our insurance may not cover or may be insufficient to cover claims that are successfully asserted against us or our contract suppliers and manufacturers.

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

We have a number of strategic alliances, including with Hewlett-Packard Company, Sun Microsystems Inc., VMware, Inc. and Microsoft Corporation, and continue to pursue strategic alliances with other companies. The objectives and goals for a strategic alliance can include one or more of the following: technology exchange, product development, joint sales and marketing, or new-market creation. If a strategic alliance fails to perform as expected or if the relationship is terminated, we could experience delays in product availability or impairment of our relationships with customers, and our ability to develop new solutions in response to industry trends or changing technology may be impaired. In addition, we may face increased competition if a third party acquires one or more of our strategic alliances or if our competitors enter into additional successful strategic relationships.

We may make strategic acquisitions in the future. We may not be successful in operating or integrating these acquisitions.

Our acquisition of Inter-Tel in August 2007 significantly increased our revenues and enhanced our ability to target SME customers with our IP solutions. As part of our business strategy, we may consider acquisitions of, or significant investments in, other businesses that offer products, services and technologies complementary to ours. Any such acquisition or investment could materially adversely affect our operating results and the price of our common shares. Acquisitions and other strategic investments involve significant risks and uncertainties, including:

 

   

unanticipated costs and liabilities;

 

   

difficulties in integrating new products, software, businesses, operations and technology infrastructure in an efficient and effective manner;

 

   

difficulties in maintaining customer relations;

 

   

the potential loss of key employees of the acquired businesses;

 

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the diversion of the attention of our senior management from the operation of our daily business;

 

   

the potential adverse effect on our cash position as a result of all or a portion of an acquisition purchase price being paid in cash;

 

   

the potential significant increase of our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition;

 

   

the potential issuance of securities that would dilute our shareholders’ percentage ownership;

 

   

the potential to incur large and immediate write-offs and restructuring and other related expenses; and

 

   

the inability to maintain uniform standards, controls, policies and procedures.

Our inability to successfully operate and integrate newly acquired businesses appropriately, effectively and in a timely manner could have a material adverse effect on our ability to take advantage of future growth opportunities and other advances in technology, as well as on our revenues, gross margins and expenses.

Business interruptions could adversely affect our operations.

Our operations are vulnerable to interruption by fire, earthquake, hurricane or other natural disaster, power loss, computer viruses, security breaches, telecommunications failure, quarantines, national catastrophe, terrorist activities, war and other events beyond our control. Our disaster recovery plans may not be sufficient to address these interruptions. The coverage or limits of our business interruption insurance may not be sufficient to compensate for any losses or damages that may occur.

Problems with the infrastructure of carriers may impair the performance of our solutions and cause problems with the network services we provide to our customers.

We purchase network capacity wholesale from carriers, which we resell to our customers in various retail offerings. The infrastructures of these telecom carriers are vulnerable to interruption by fires, earthquakes, hurricanes and other similar natural disasters, as well as power loss, viruses, security breaches, acts of terrorism, sabotage, intentional acts of vandalism and similar misconduct. The occurrence of such a natural disaster or misconduct, or outages affecting these carrier networks, could impair the performance of our solutions and lead to interruptions, delays or cessation of network services to our customers. Any impairment of the performance of our solutions or problems in providing our network services to our customers, even if for a limited time, could have an adverse effect on our business, financial condition and operating results.

Governmental regulation could harm our operating results and future prospects.

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

 

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We rely on carriers to provide local and long distance services, including voice and data circuits, and will rely on carriers to provide mobile voice and data services to our customers and to provide us with billing information. These services are subject to extensive and uncertain governmental regulation on both the federal and local level. An increase or change in government regulation could restrict our ability to provide these services to our customers, which may have a material adverse affect on our business.

Adverse resolution of litigation or governmental investigations may harm our operating results or financial condition.

We are a party to lawsuits in the normal course of our business. We may also be the subject of governmental investigations from time to time. Litigation and governmental investigations can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings or governmental investigations are difficult to predict. An unfavorable resolution of lawsuits or governmental investigations could have a material adverse effect on our business, operating results or financial condition.

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

We currently maintain a defined benefit pension plan for a number of our past and present employees in the United Kingdom. The plan was closed to new employees in June 2001. The contributions to fund benefit obligations under this plan are based on actuarial valuations, which themselves are based on assumptions and estimates about the long-term operation of the plan, including employee turnover and retirement rates, the performance of the financial markets and interest rates. If the actual operation of the plan differs from these assumptions, additional contributions by us may be required. As of April 30, 2009, the projected benefit obligation of $96.1 million exceeded the fair value of the plan assets of $76.0 million, resulting in a pension liability of $20.1 million. Changes to pension legislation in the United Kingdom may adversely affect our funding requirements.

Our future success depends on our existing key personnel.

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

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

We are required to document and test our internal controls over financial reporting pursuant to Section 404 of the United States Sarbanes-Oxley Act of 2002, so that our management can certify as to the effectiveness of our internal controls and, commencing with our annual report for the fiscal year ended April 30, 2011, our independent registered chartered accountants can render an opinion on management’s assessment and on the effectiveness of our internal controls over financial reporting. If our independent registered chartered accountants cannot render an opinion on management’s assessment and on the effectiveness of our internal controls over financial reporting, or if material weaknesses in our internal controls are identified, we could be subject to regulatory scrutiny and a loss of public confidence.

 

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Risks Related to an Investment in our Common Shares

Our common share price will fluctuate and you may not be able to sell your common shares at or above the initial public offering price.

There has been no public market for our common shares. We cannot predict the extent to which investor interest will lead to the development of an active and liquid trading market in our common shares and it is possible that an active and liquid trading market will not develop or be sustained. If such a market does not develop or is not sustained, it may be difficult for you to sell your common shares at an attractive price or at all. The initial public offering price for our common shares will be negotiated among us, the selling shareholders and the underwriters and may not be indicative of the market price of the common shares that will prevail in the trading market. The market price of our common shares may decline below the initial public offering price and you may not be able to sell your shares at or above the initial public offering price. Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. If a lawsuit were to be filed against us, regardless of the outcome, it could result in substantial costs and a diversion of management’s attention and resources.

The price of our common shares may fluctuate substantially in response to a number of events, including:

 

   

our quarterly operating results;

 

   

sales of our common shares by principal securityholders;

 

   

departures of key personnel;

 

   

future announcements concerning our or our competitors’ businesses;

 

   

the failure of securities analysts to cover our company and/or changes in financial forecasts and recommendations by securities analysts;

 

   

actual or anticipated developments in our competitors’ businesses or the competitive landscape generally;

 

   

litigation involving us, our industry or both;

 

   

general market, economic and political conditions;

 

   

regulatory developments; and

 

   

natural disasters, terrorist attacks and acts of war.

Future sales of a substantial amount of common shares may depress the price of the common shares.

If our shareholders sell substantial amounts of our common shares in the public market following this offering, the market price of our common shares could decline. These sales might also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate. Upon the closing of this offering, we will have outstanding              common shares (or              common shares if the underwriters’ over-allotment option is exercised in full). All of the common shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act. We, our principal securityholders, our directors and executive officers and certain other shareholders and option holders have agreed to a “lock-up,” pursuant to which neither we nor they will sell any shares without the prior consent of the

 

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underwriters for 180 days after the date of the underwriting agreement, subject to limited exceptions, and a possible extension of up to 34 additional days. These securityholders, however, may be released from their lock-up agreements with the agreement of the underwriters at any time and without notice, which would allow for earlier sales of shares in the public market. We expect that              of the remaining              outstanding common shares after this offering will be available for sale in the public market following the expiration of the applicable lock-up period, subject to certain limitations imposed by applicable U.S. and Canadian securities laws.

In addition, our articles of incorporation permit us to issue an unlimited number of common and preferred shares. Our authorized preferred shares are available for issuance, from time to time, at the discretion of the board of directors without any further vote or action by the common shareholders, which would dilute the percentage ownership held by investors who purchase our common shares in this offering. Furthermore, our board of directors has the authority, subject to applicable Canadian corporate law, to determine the rights, privileges, restrictions and conditions attaching to any series of preferred shares, and such rights may be superior to those of our common shares.

In addition, as of October 31, 2009, 40,949,707 common shares were issuable upon exercise of stock options and warrants and an additional 23,559,346 common shares were reserved for issuance under our equity incentive plans. Subject to the lock-ups described above and limitations imposed by U.S. and Canadian securities laws on resales, common shares issued pursuant to exercises of these stock options and warrants will be freely tradeable in the public markets. See “Shares Eligible for Future Sale.”

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

On a pro forma basis, after giving effect to this offering, as of October 31, 2009, Francisco Partners Management, LLC, or Francisco Partners, group and Dr. Matthews group beneficially would have controlled approximately     % and     %, respectively, of the voting power of our share capital. Each of Francisco Partners and Dr. Matthews, given the extent of their respective ownership positions, has the potential to control matters requiring approval by shareholders, including the election of directors, any amendments to our articles of incorporation or by-laws, and significant corporate transactions. Each of Francisco Partners and Dr. Matthews may have interests that differ from the interests of our other shareholders.

Some of our directors have interests that may be different than our interests.

We do business with certain companies that are related parties, such as BreconRidge and Wesley Clover International Corporation and its subsidiaries. Two of our directors, Peter Charbonneau and Gilbert Palter, serve as directors of BreconRidge, and Wesley Clover International Corporation is controlled by Dr. Matthews. Our directors owe fiduciary duties, including the duties of loyalty and confidentiality, to us. Our directors that serve on the boards of companies that we do business with also owe similar fiduciary duties to such other companies. The duties owed to us could conflict with the duties such directors owe to these other companies. See “Certain Relationships and Related Party Transactions.”

Each of Francisco Partners’ and Dr. Matthews’ ownership of our common shares, as well as provisions contained in our articles of incorporation and in certain anti-trust and foreign investment legislation, may reduce the likelihood of a change of control occurring and, as a consequence, may deprive you of the opportunity to sell your common shares at a control premium.

The voting power of Francisco Partners and Dr. Matthews, respectively, under certain circumstances could have the effect of delaying or preventing a change of control and may deprive our shareholders of the opportunity to sell their common shares at a control premium. In addition, provisions of our articles of incorporation and Canadian and U.S. law may delay or impede a change of control transaction. Our articles of incorporation permit us to issue an unlimited number of common and preferred shares. Limitations on the ability

 

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to acquire and hold our common shares may be imposed under the Hart-Scott-Rodino Act, the Competition Act (Canada) and other applicable antitrust legislation. Such legislation generally permits the relevant governmental authorities to review any acquisition of control over or of significant interest in us, and grants the authority to challenge or prevent an acquisition on the basis that it would, or would be likely to, result in a substantial prevention or lessening of competition.

In addition, the Investment Canada Act subjects an “acquisition of control” of a “Canadian business” (as those terms are defined therein) by a non-Canadian to government review if the book value of the Canadian business’ assets as calculated pursuant to the legislation exceeds a threshold amount. A reviewable acquisition may not proceed unless the relevant minister is satisfied that the investment is likely to be of net benefit to Canada. Any of the foregoing could prevent or delay a change of control and may deprive our shareholders of the opportunity to sell their common shares at a control premium.

You may be unable to bring actions or enforce judgments against us, certain of our directors and officers, certain of the selling shareholders or certain of the experts named in this prospectus under U.S. federal securities laws.

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

You will suffer an immediate and substantial dilution in the net tangible book value of the common shares you purchase.

The initial public offering price of our common shares is substantially higher than the pro forma net tangible book value per share of our outstanding common shares. You will experience immediate dilution of approximately $             in the pro forma net tangible book value per common share from the price you pay for the common shares. We have a large number of outstanding options and warrants to purchase common shares with exercise prices below the estimated public offering price for the common shares. To the extent these securities are exercised, there will be further dilution. See “Dilution.”

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

Some of the statements under the captions “Prospectus Summary,” “Risk Factors,” “Dividend Policy,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this prospectus are forward-looking statements that reflect our current views with respect to future events and financial performance. Statements that include the words “may,” “will,” “should,” “could,” “estimate,” “continue,” “expect,” “intend,” “plan,” “predict,” “potential,” “believe,” “project,” “anticipate” and similar statements of a forward-looking nature, or the negatives of those statements, identify forward-looking statements. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties and other factors that could cause actual events or results to differ from those expressed or implied by the forward-looking statements, including, without limitation:

 

   

our ability to achieve profitability in the future;

 

   

fluctuations in our quarterly and annual revenues and operating results;

 

   

our recent growth may not be representative of future growth;

 

   

current and ongoing global economic instability;

 

   

intense competition;

 

   

our ability to keep pace with technological developments and evolving industry standards;

 

   

failure of the market for UCC to become more widespread;

 

   

risks related to the rate of adoption of IP telephony by our customers;

 

   

fluctuations in our working capital requirements and cash flows;

 

   

our ability to access additional sources of funds;

 

   

risks related to our level of indebtedness;

 

   

our ability to protect our intellectual property and our possible infringement of the intellectual property rights of third parties;

 

   

our reliance on channel partners for a significant component of our sales;

 

   

our dependence upon a small number of outside contract manufacturers to manufacture our products;

 

   

our dependence on sole source and limited source suppliers for key components;

 

   

possible delays in the delivery of, or lack of access to, software or other intellectual property licensed from our suppliers;

 

   

uncertainties arising from our foreign operations;

 

   

fluctuations in exchanges rates;

 

   

challenges to our transfer pricing policies by tax authorities;

 

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our ability to sell leases derived from our managed services offering;

 

   

risks related to the financial condition of our customers;

 

   

design defects, errors, failures or “bugs” in our solutions;

 

   

our ability to successfully integrate future strategic acquisitions;

 

   

problems with the infrastructure of carriers;

 

   

our ability to successfully implement and achieve our business strategies; and

 

   

other risk factors discussed in the “Risk Factors” section of this prospectus.

These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. While we believe our plans, intentions, expectations, assumptions and strategies reflected in these forward-looking statements are reasonable, we cannot assure you that these plans, intentions, expectations assumptions and strategies will be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this prospectus as a result of various factors, including the risks and uncertainties discussed under the heading “Risk Factors.”

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this prospectus. Except as required by law, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.

This prospectus also contains statistical data and estimates, including those relating to market size and growth rates of the markets in which we participate, that we obtained from industry publications and reports generated by Gartner, Inc. (Gartner), T3i Group LLC (T3i Group), MZA Ltd. (MZA) and Forrester Research Inc. (Forrester). These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Although we have assessed the information in the publications and found it to be reasonable and believe the publications are reliable, we have not independently verified their data. None of these publications have been prepared for us or in connection with this offering.

The Gartner Reports described in this prospectus represent data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner Reports are subject to change without notice.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of $             million from the sale of the              common shares offered by us in this offering, based upon an assumed initial public offering price of $             per share (the midpoint of the range listed on the cover page of this prospectus), after deducting underwriting commissions and estimated offering expenses payable by us. If the underwriters’ over-allotment option is exercised in full, we estimate that our net proceeds would be approximately $             million, after deducting underwriting commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) the net proceeds to us from this offering by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same. We will not receive any proceeds from the sale of common shares being offered by the selling shareholders.

We intend to use the net proceeds of this offering as follows:

 

   

to repay $30.0 million of borrowings outstanding under our revolving credit facility. As of October 31, 2009, the principal amount outstanding under this credit facility was $30.0 million. This credit facility currently has an interest rate equal to the London Interbank Offered Rate, or LIBOR, plus 3.25% and has a maturity date of August 16, 2012;

 

   

to repay $             million of borrowings outstanding under our first lien term loan. As of October 31, 2009, the principal amount outstanding under this loan was $289.0 million. This loan has an interest rate equal to LIBOR plus 3.25% and has a maturity date of August 16, 2014; and

 

   

to fund working capital and for general corporate purposes, which may include acquisitions.

While we currently anticipate that we will use the net proceeds of this offering as described above, we may reallocate the net proceeds from time to time depending upon market and other conditions in effect at the time. Although we occasionally evaluate potential acquisition and investment opportunities, we have no current arrangements or commitments with respect to any particular transaction. In addition, to the extent the net proceeds of this offering are greater or less than the estimated amount, because either the offering does not price at the midpoint of the estimated price range or the size of the offering changes, the difference will increase or decrease the amount of net proceeds available for general corporate purposes. Pending their application, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities.

 

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DIVIDEND POLICY

We have never declared or paid cash dividends on our common shares. We currently intend to retain any future earnings to fund the development and growth of our business and we do not currently anticipate paying dividends on our common shares. Any determination to pay dividends to holders of our common shares in the future will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, legal requirements and other factors as our board of directors deems relevant. In addition, our outstanding credit agreements limit our ability to pay dividends and we may in the future become subject to debt instruments or other agreements that further limit our ability to pay dividends.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of April 30, 2009:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the conversion of all of our outstanding preferred shares into an aggregate of              common shares, which will occur prior to the completion of this offering; and

 

   

on a pro forma basis as adjusted to give effect to the receipt of approximately $             million in estimated net proceeds from this offering, based on an assumed initial public offering price of $             per share (the midpoint of the range listed on the cover page of this prospectus), after deducting underwriting commissions and estimated offering expenses payable by us, and the application of these proceeds as described under “Use of Proceeds.”

The table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of April 30, 2009
     Actual     Pro Forma     Pro Forma
as Adjusted (6)
     (in millions)

Cash and cash equivalents

   $ 28.4      $ 28.4      $             
                      

Debt, including capital leases

      

Revolving credit facility (secured)

     30.0        30.0     

Other bank indebtedness

     0.2        0.2     

First lien term loan (secured)

     289.6        289.6     

Second lien term loan (secured)

     129.7        129.7     

Capital leases

     4.9        4.9     

Note payable

     0.4        0.4     
                      

Total debt, including capital leases

   $ 454.8      $ 454.8      $             
                      

Redeemable shares and derivative instruments

      

Class 1 Preferred Shares (1)

     249.5            

Derivative liability instruments (2)

     8.4            
                      

Total redeemable shares and derivative instruments

     257.9            
                      

Shareholders’ deficiency

      

Common shares (3)

   $ 277.8      $ 527.3      $             

Class 2 Preferred Shares (4)

                

Warrants (5)

     56.6        56.6     

Additional paid in capital

     4.4        4.4     

Accumulated deficit

     (728.0     (719.6  

Accumulated other comprehensive loss

     (40.9     (40.9  
                      

Total shareholders’ deficiency

     (430.1     (172.2  
                      

Total capitalization

   $ 282.6      $ 282.6      $             
                      

 

(1) Actual—unlimited shares authorized, 316,755 shares issued and outstanding; pro forma and pro forma as adjusted—no shares authorized, issued or outstanding. The Class 1 Preferred Shares will be converted into common shares prior to the completion of this offering.

 

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(2) The derivative instrument relates to the redemption price of the Class 1 Preferred Shares, a portion of which is indexed to our common share price and as required by SFAS 133 has been bifurcated and accounted for separately. The Class 1 Preferred Shares will be converted into common shares prior to the completion of this offering. As a result of this conversion, the derivative instruments balance will be reclassified into equity.

 

(3) Actual—unlimited shares authorized,              shares issued and outstanding; pro forma—unlimited shares authorized,              shares issued and outstanding; pro forma as adjusted—unlimited shares authorized,              shares issued and outstanding.

 

(4) Actual—unlimited shares authorized, no shares issued and outstanding; pro forma and pro forma as adjusted—unlimited shares authorized, no shares issued and outstanding.

 

(5) The average weighted exercise price of the warrants is $1.27, which does not include warrants to acquire 37,174,887 common shares, which are exercisable into common shares without the payment of any additional cash consideration.

 

(6) A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) pro forma as adjusted cash and cash equivalents and total shareholders’ deficiency by $             million, (i) assuming the number of common shares offered by us, as set forth on the cover page of this prospectus, remains the same and (ii) after deducting underwriting commissions and estimated offering expenses payable by us.

The table above does not include:

 

   

31,251,150 common shares issuable upon the exercise of stock options outstanding under our equity incentive plans, as of April 30, 2009; and

 

   

31,890,958 additional common shares reserved for issuance under our equity incentive plans, as of April 30, 2009.

 

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DILUTION

If you invest in our common shares, your interest will be immediately diluted to the extent of the difference between the price per common share paid by you in this offering and the pro forma net tangible book value per common share after the offering. Pro forma net tangible book value per common share is determined at any date by subtracting our total liabilities from our total tangible assets and dividing the difference by the number of common shares outstanding at that date, after giving effect to the conversion of all of our outstanding preferred shares into common shares, which will occur prior to the completion of this offering.

Our pro forma net tangible book value as of April 30, 2009 was approximately $             million, or $             per common share. After giving effect to this offering, based on an assumed initial public offering price of $             per common share (the midpoint of the range listed on the cover page of this prospectus) and after deducting underwriting commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of April 30, 2009 would have been approximately $             million, or $             per common share. This represents an immediate increase in pro forma net tangible book value of $             per common share to our existing shareholders and an immediate dilution of $             per common share to new investors purchasing common shares in this offering.

The following table illustrates this substantial and immediate dilution to new investors on a per share basis:

 

Assumed initial public offering price per common share

   $             

Pro forma net tangible book value per share as of April 30, 2009

   $  

Increase in pro forma net tangible book value per share attributable to new investors in this offering

  
      

Pro forma as adjusted net tangible book value as of April 30, 2009 after giving effect to this offering

  
      

Dilution in pro forma net tangible book value per share to new investors in this offering

   $  
      

If the underwriters exercise their option to purchase additional common shares in this offering in full, our as adjusted pro forma net tangible book value as of April 30, 2009 would be $            , or $             per common share, representing an immediate increase in pro forma net tangible book value to our existing shareholders of $             per common share and an immediate dilution to new investors of $             per common share.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share (the midpoint of the range listed on the cover page of this prospectus) would increase (decrease) our pro forma as adjusted net tangible book value after giving effect to this offering by $             per share and the dilution in pro forma net tangible book value per share to new investors by $             per share, (i) assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and (ii) after deducting the underwriting commissions and estimated offering expenses payable by us.

The following table sets forth, as of April 30, 2009, on the same pro forma basis described above:

 

   

the total number of common shares owned by existing shareholders and to be owned by new investors purchasing common shares in this offering;

 

   

the total consideration paid by our existing shareholders and to be paid by new investors purchasing common shares in this offering; and

 

   

the average price per common share paid by existing shareholders and to be paid by new investors purchasing common shares in this offering.

 

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The table includes the impact of the following items:

 

   

31,251,150 common shares issuable upon the exercise of stock options outstanding under our equity incentive plans, as of April 30, 2009;

 

   

31,890,958 additional common shares reserved for issuance under our equity incentive plans, as of April 30, 2009; and

 

   

81,238,013 common shares issuable upon the exercise of other outstanding warrants held by certain entities (see “Description of Share Capital—Warrants”).

 

    Common Shares
Purchased
    Total Consideration     Average Price
Per Common
Share
    Number    Percent     Amount    Percent    

Existing shareholders

            $                        $             

New shareholders

           
                             

Total

     100 %      100 %  
                             

If the underwriters’ over-allotment option is exercised in full, the number of common shares held by the new investors will increase to      , or     % of the total common shares outstanding after this offering.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) total consideration paid by new investors, total consideration paid by all shareholders and average price per common share paid by all shareholders by $             million, $             million and $            , respectively, (i) assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and (ii) after deducting the underwriting commissions and estimated offering expenses payable by us.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following sets forth selected consolidated financial data derived from (a) our audited consolidated financial statements as of and for the fiscal years ended April 30, 2007, April 30, 2008 and April 30, 2009, which are included elsewhere in this prospectus and (b) our audited consolidated financial statements as of and for the fiscal year ended April 30, 2005 and April 30, 2006, which are not included in this prospectus. The data set out below does not take into account the conversion of our outstanding preferred shares into common shares, which will occur prior to the completion of this offering. Our consolidated financial statements are reported in U.S. dollars and have been prepared in accordance with U.S. GAAP.

Historical results do not necessarily indicate results expected for any future period. You should read the following selected consolidated financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the consolidated financial statements and the accompanying notes included elsewhere in this prospectus.

 

     Fiscal Year
Ended April 30,
 
     2005 (1)     2006     2007     2008 (2)     2009  
     (in millions, except per share data)  

Consolidated Statement of Operations Data

          

Revenues

   $ 345.4      $ 387.1      $ 384.9      $ 692.0      $ 735.1   

Cost of revenues

     215.6        225.7        225.1        367.9        390.6   
                                        

Gross margin

     129.8        161.4        159.8        324.1        344.5   

Research and development

     42.1        44.1        41.7        62.6        60.1   

Selling, general and administrative

     116.7        120.7        123.5        246.6        248.5   

Other operating charges (3)

     14.0        3.3        27.9        22.0        23.3   

Impairment of goodwill

                                 284.5   
                                        

Operating (loss)

     (43.0     (6.7     (33.3     (7.1     (271.9

Other (income) expense, net (4)

     4.8        32.2        (9.2     (42.7     (99.4

Interest expense

     2.6        7.6        9.1        34.7        40.1   

Income tax (recovery) expense

     0.8        (1.9     1.8        (11.7     (19.1
                                        

Net income (loss)

   $ (51.2   $ (44.6   $ (35.0   $ 12.6      $ (193.5
                                        

Net income (loss) attributable to common shareholders

   $ (56.2   $ (51.5   $ (42.3   $ (83.5   $ (234.5

Net income (loss) per common share—basic and diluted

   $ (0.49   $ (0.44   $ (0.36   $ (0.45   $ (1.09

Weighted average number of common shares outstanding

     113.8        117.2        117.3        186.1        214.7   

Other Financial Data

          

Adjusted EBITDA (5)

   $ (19.4   $ 9.0      $ 5.0      $ 50.2      $ 78.7   

 

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     As of April 30,  
     2005     2006     2007     2008     2009  
     (in millions)  

Consolidated Balance Sheet Data

          

Cash and cash equivalents

   $ 46.6      $ 35.7      $ 33.5      $ 19.5      $ 28.4   

Working capital (6)

   $ 60.5      $ 40.5      $ 26.6      $ 58.9      $ 49.5   

Total assets

   $ 195.3      $ 199.8      $ 202.2      $ 982.2      $ 623.1   

Total debt, including capital leases

   $ 62.4      $ 54.9      $ 54.7      $ 435.6      $ 454.8   

Redeemable shares (7)

   $ 57.3      $ 64.2      $ 71.5      $ 208.5      $ 249.5   

Common shares

   $ 187.6      $ 188.8      $ 189.1      $ 277.1      $ 277.8   

Warrants

   $ 47.9      $ 47.9      $ 62.9      $ 56.7      $ 56.6   

Total shareholders deficiency

   $ (93.1   $ (168.6   $ (202.6   $ (244.7   $ (430.1

 

(1) The consolidated statement of operations data for the year ended April 30, 2005 is an aggregation of our audited consolidated statement of operations data for the year ended April 24, 2005 and our audited consolidated statement of operations data for the six-days ended April 30, 2005, and therefore contains 371 days. The change in our fiscal year end permits us to better align our reporting results with industry norms.

 

(2) As a result of the acquisition of Inter-Tel, our financial results for the fiscal year ended April 30, 2008 also include eight and a half months of financial results from Inter-Tel.

 

(3) Other operating charges includes: special charges, integration and merger related costs (includes costs associated with restructuring activities, product line exits and the Inter-Tel acquisition in fiscal 2008), loss on disposal of assets, litigation settlements, initial public offering costs and in-process research and development costs acquired as part of the Inter-Tel acquisition.

 

(4) Other (income) expense, net includes: fair value adjustment on derivative instruments; other income (expense), which is comprised of foreign exchange gains (losses), net, amortization on gain on sale of assets and other expenses; and debt and warrant retirement costs.

 

(5) We present Adjusted EBITDA, which is defined as consolidated net income (loss) before (1) interest expense, (2) income tax (recovery) expense, (3) amortization and depreciation, (4) foreign exchange (gain) or loss, (5) fair value adjustment on derivative instruments, (6) debt and warrant retirement costs, (7) impairment of goodwill, (8) special charges, integration and merger related costs, (9) in-process research and development, (10) litigation settlement, (11) initial public offering costs, (12) stock-based compensation and (13) loss (gain) on sale of manufacturing operations.

Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to net income, income from operations or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We encourage you to evaluate these adjustments and the reasons we consider them appropriate, as well as the material limitations of non-GAAP measures and the manner in which we compensate for those limitations.

We use Adjusted EBITDA:

 

   

as a measure of operating performance;

 

   

for planning purposes, including the preparation of our annual operating budget;

 

   

to allocate resources to enhance the financial performance of our business; and

 

   

in communications with our board of directors concerning our financial performance.

 

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We believe that the use of Adjusted EBITDA provides consistency and comparability of, and facilitates, period to period comparisons, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their U.S. GAAP results.

We believe Adjusted EBITDA may also be useful to investors in evaluating our operating performance because securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies, and we anticipate that our investor and analyst presentations after we are public will include Adjusted EBITDA. However, we also caution you that other companies in our industry may calculate Adjusted EBITDA or similarly titled measures differently than we do, which limits the usefulness of Adjusted EBITDA as a comparative measure.

Moreover, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA and similar non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for an analysis of our results of operations as reported under U.S. GAAP.

Some of the limitations of Adjusted EBITDA are that it does not reflect:

 

   

interest income or interest expense;

 

   

cash requirements for income taxes;

 

   

foreign exchange gains or losses;

 

   

significant cash payments we were required to make in connection with restructuring, litigation settlements and transaction expenses;

 

   

employee stock-based compensation;

 

   

cash requirements for the replacement of assets that have been depreciated or amortized or of goodwill that is impaired;

 

   

acquired in-process research and development charges; and

 

   

losses or gains related to the sale of manufacturing operations and other assets.

We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of Adjusted EBITDA to the most directly comparable U.S. GAAP measure, net income (loss).

 

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The following table presents a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable U.S. GAAP measure, for each of the periods indicated:

 

     Fiscal Year
Ended April 30,
 
     2005     2006     2007     2008     2009  
     (in millions)  

Net income (loss)

   $ (51.2   $ (44.6   $ (35.0   $ 12.6      $ (193.5

Adjustments:

          

Interest expense

     2.6        7.6        9.1        34.7        40.1   

Income tax (recovery) expense

     0.8        (1.9     1.8        (11.7     (19.1

Amortization and depreciation

     9.1        9.9        9.2        32.6        38.0   

Foreign exchange (gain) loss

     (0.1     0.6        0.3        (0.6     3.2   

Fair value adjustment on derivative instruments

     5.4        32.6        (8.6     (61.9     (100.2

Debt and warrant retirement costs

                          20.8          

Impairment of goodwill

                                 284.5   

Special charges, integration and merger-related costs

     10.6        5.7        9.3        16.0        23.3   

In-process research and development

                          5.0          

Litigation settlement

                   16.3                 

Initial public offering costs

                   3.3                 

Stock-based compensation

                   0.3        1.7        2.4   

Loss (gain) on sale of manufacturing operations

     3.4        (0.9     (1.0     1.0          
                                        

Adjusted EBITDA

   $ (19.4   $ 9.0      $ 5.0      $ 50.2      $ 78.7   
                                        

 

(6) Working capital is total current assets less total current liabilities.

 

(7) Prior to fiscal 2008, redeemable shares included 10,000,000 common shares (which were redeemable by virtue of a shareholders agreement dated April 23, 2004, as amended, among certain of our shareholders and us), 20,000,000 class A convertible preferred shares, Series 1, or the Series A Preferred Shares, and 67,789,300 class B convertible preferred shares, Series 1, or the Series B Preferred Shares. In fiscal 2008 and 2009, redeemable shares included 316,755 Class 1 Preferred Shares issued in connection with the acquisition of Inter-Tel.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

We are the leading provider of integrated communications solutions focused on the SME market. We also have a strong and growing presence in the large enterprise market with a portfolio of products that support up to 65,000 users. Our IP-based communications solutions consist of a combination of IP telephony platforms, which we deliver as software, appliances and desktop devices, and a suite of UCC applications that integrate voice, video and data communications with business applications. We believe that our solutions, including associated managed and network services, enable our customers to realize significant cost benefits and to conduct their business more effectively.

We have delivered innovative communications solutions to our customers for over 35 years, initially through Mitel Corporation, our predecessor business. We were incorporated under the Canada Business Corporation Act, or CBCA, on January 12, 2001 by Zarlink Semiconductor Inc., or Zarlink (formerly Mitel Corporation), in order to reorganize its communications systems division in contemplation of the sale of that business to companies controlled by Dr. Matthews. In a series of related transactions on February 16, 2001 and March 27, 2001, we acquired from Zarlink the “Mitel” name and substantially all of the assets, other than Canadian real estate, and subsidiaries of the Zarlink communications systems business.

In August 2007, we completed the acquisition of Inter-Tel, which significantly enhanced our ability to target SME customers with our IP solutions by expanding our U.S. distribution and managed service capabilities. The total purchase price of $729.9 million was funded with a combination of equity and debt financing plus cash held by Inter-Tel. The transaction resulted in significant changes to our capital structure. The deemed purchase price was allocated to the underlying tangible and identifiable assets and liabilities acquired based on their respective fair values and the excess purchase price was allocated to goodwill.

Our total revenues in fiscal 2009 increased by 6.2% to $735.1 million from $692.0 million in fiscal 2008. The increase was due to the inclusion of Inter-Tel revenues for 12 months in fiscal 2009 compared to eight and a half months in fiscal 2008. While our operating results in fiscal 2009 were adversely impacted by the global recession, which resulted in weaker sales in the second half of the year, the cost saving measures we undertook during the year contributed positively to our operating performance. As a result of weaker capital markets and the global recession, fiscal 2009 includes a non-cash goodwill impairment charge of $284.5 million related to the purchase price to acquire Inter-Tel. This charge did not affect our liquidity, cash flows or current and future operations. Inclusion of this goodwill impairment resulted in an operating loss of $271.9 million in fiscal 2009 compared to an operating loss of $7.1 million in fiscal 2008.

Trends

Businesses are migrating from legacy telephony networks to IP-based environments, which can address their voice, data, video and business applications requirements within a single converged network. The transition to IP-based communications solutions provides significant benefits to businesses, including enhanced workforce productivity, reduced infrastructure costs, the creation of highly functional applications that can be distributed easily and the use of open standards. We have invested heavily and continue to innovate in IP-based solutions and therefore believe we are well positioned to benefit from this transition.

 

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The evolution to converged IP-based networks has given rise to two important trends: the transition from hardware-based to software-based communications solutions and the ability to deliver integrated UCC applications. The transition to software-based communications solutions provides operational cost benefits and the ability to integrate communications with other business processes and applications. UCC allows business customers to move beyond basic fixed telephony and disparate communications tools toward integrated multi-media communications and collaboration between users, wherever they may be located. UCC includes the integrated use of various media and messaging, such as voice, video and data. Our history of success as an early adopter in software-based communications solutions has provided us with the foundation for continued innovation in IP-based communications and UCC. We believe our comprehensive, integrated IP-based communications offering provides our customers with significant flexibility, cost efficiency and enhanced employee productivity as they transition to converged IP-based environments and UCC.

SMEs are increasingly interested in outsourcing management of their communications requirements through managed service offerings. Managed services may include equipment, installation, ongoing support, network services, or various professional services. Managed services offerings allow businesses to focus on their core expertise and, in some cases, substitute what would otherwise be a large capital expenditure for a predictable operating expense. We believe that we are well positioned to benefit from this trend through the combination of our existing managed service program and our network services offerings in the United States. We believe these solutions also provide an opportunity to achieve operational savings by giving us the flexibility to place equipment and services either on the customer’s premises or as a hosted solution.

Key Performance Indicators

Key performance indicators that we use to manage our business and evaluate our financial results and operating performance include: revenues, gross margins, operating costs, operating income (loss), cash flows and Adjusted EBITDA. After completion of this offering, we will also use net income as a key performance indicator.

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

Gross margins, operating costs and operating income (loss) are each evaluated in a similar manner as our actual results are compared against both management forecasts and prior period performance.

Cash flow from operations is the key performance indicator with respect to cash flows. As part of monitoring cash flow from operations, we also monitor our days sales outstanding, our inventory turns and our days expenses in payables outstanding.

Adjusted EBITDA, a non-GAAP measure, is evaluated by comparing actual results to management forecasts and prior period performance. For a definition and explanation of Adjusted EBITDA, as well a reconciliation of Adjusted EBITDA to net income (loss), see note 5 under “Selected Consolidated Financial Data.”

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

 

   

status of key customer contracts and regular customer satisfaction surveys;

 

   

the achievement of expected milestones of our key research and development, or R&D, projects; and

 

   

the achievement of our key strategic initiatives.

 

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

Sources of Revenues and Expenses

The following describes our sources of revenues and expenses.

Revenues

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

Our distribution network includes value-added resellers, service providers, high-touch sales and direct channel. We complement and support our channel partners in selected markets using a sales model whereby our sales staff works either directly with a prospective customer, or in coordination with a channel partner in defining the scope, design and implementation of the solution. Our direct and indirect distribution channel addresses the needs of customers in 90 countries through our 80 offices and more than 1,600 channel partners worldwide.

Because we have multiple revenue streams, our revenue recognition policy varies depending on the revenue stream and type of customer transaction.

Revenue for hardware is recognized under Staff Accounting Bulletin (SAB) 104. Under SAB 104, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, title and risk of loss have been transferred to the customer, the fee is fixed or determinable, and collection is reasonably assured.

Software revenue is accounted for under AICPA Statement of Position (SOP) 97-2. Under SOP 97-2, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred in accordance with the terms and conditions of the contract, the fee is fixed or determinable, and collection is reasonably assured. For software arrangements involving multiple elements, revenue is allocated to each element based on the relative fair value or the residual method, as applicable, and using vendor specific objective evidence, or VSOE, of fair values, which is based on prices charged when the element is sold separately. Where VSOE does not exist, revenues are deferred until such time as VSOE has been established. Revenue related to post-contract support, including technical support and unspecified when-and-if available software upgrades, is recognized ratably over the post-contract support term for contracts that are greater than one year. For contracts where the post-contract period is one year or less, the costs are deemed insignificant and the unspecified software upgrades are expected to be and historically have been infrequent, revenue is recognized together with the initial licensing fee and the estimated costs are accrued.

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

 

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Our standard warranty period extends 15 months from the date of sale and extended warranty periods are offered on certain products. At the time product revenues are recognized, an accrual for estimated warranty costs is recorded as a component of cost of revenues based on prior claims experience. Sales to our channel partners do not provide for return or price protection rights while sales to distributors provide for these rights. Product return rights for distributors are typically limited to a percentage of sales over a maximum three-month period. A reserve for estimated product returns and price protection rights based on past experience is recorded as a reduction of sales at the time product revenues are recognized. For new resellers, we estimate the product return provision using past return experience with similar partners operating in the same regions. We offer various cooperative marketing programs to assist our channels to market our products. Allowances for these programs are recorded as marketing expenses at the time of shipment based on contract terms and prior claims experience.

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

Certain arrangements with end-user customers provide for free customer support and maintenance services extending 12 months from the date of installation. Customer support and maintenance contracts are also sold separately. When customer support or maintenance services are provided free of charge, these amounts are unbundled from the product and installation revenues at their fair market value based on the prices charged when the element is sold separately and recognized ratably over the contract period. Consulting and training revenues are recognized upon performance.

We provide long term management services of communication systems, or managed services. Under these arrangements, managed services and communication equipment are provided to end-user customers typically over a five year period. Revenues from managed services are recognized ratably over the contract period. We retain title and risk of loss associated with the equipment utilized in the provision of the managed services. Accordingly, the equipment is capitalized as part of property and equipment and is amortized to cost of sales over the contract period. In a transaction containing a sales-type lease, hardware and software revenues are recognized at the present value of the payments allocated to the hardware and software lease elements at the time of system sale. Revenues from software support are deferred and recognized over the period of support. Revenues from sales-type leases are allocated between hardware and software elements based on management’s best estimate of relative fair values. We regularly sell the net rental payments from sales-type leases to financial institutions with the income streams discounted at prevailing rates at the time of sale. Gains or losses resulting from the sale of net rental payments from leases are recorded as net sales within telecommunications revenues.

We also provide network services to our customers, which includes local and long-distance voice services, internet access and data network offerings on our partners’ networks, which we bill on a monthly basis. Revenues from network services are recognized as the services are provided.

Cost of Revenues

Cost of revenues is comprised of product costs and service costs. Product cost of revenues is primarily comprised of cost of goods purchased from third party electronics manufacturing services and inventory provisions, engineering costs, warranty costs and other supply chain management costs. Product cost of revenues also includes a small component related to software comprised of royalty payments and licensing fees to third

 

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parties. Service cost of sales is primarily comprised of costs associated with managed services, which include labor costs associated with maintenance and support, installation and other professional services, and costs associated with network services, which includes the cost of acquisition of local and long-distance voice services, internet access and data network services from major carriers in the United States. Depreciation of property and equipment are also included in cost of revenues.

We use high volume contract manufacturers and component suppliers and we require them to give us full visibility of component supply, manufacturing process and portability. We measure and benchmark the performance of our component suppliers and manufacturers for technical innovation, financial strength, quality, support and operational effectiveness.

Research and Development Expenses

R&D expenses consist primarily of salaries and related expenses for engineering personnel, materials and consumables and subcontract service costs. Depreciation and amortization of R&D assets are included in R&D expenses.

Sales, General and Administrative Expenses

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

Special Charges, Integration and Acquisition-Related Expenses

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

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

Other Operating Expenses

Other expenses included as deductions against operating income include gains or losses on sale of assets or operations, in process research and development costs written off, initial public offering costs written off, litigation settlement costs and impairment of goodwill.

Comparability of Periods

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

In fiscal 2008, we revised our allocation of revenues and cost of revenues from a product and service group presentation, to a telecommunications and network services presentation, consistent with the way in which

 

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Inter-Tel reported its revenues and cost of revenues. The results of operations for fiscal 2007 have been reclassified to conform with the new presentation.

Our functional currency is the U.S. dollar and our consolidated financial statements are prepared with U.S. dollar reporting currency using the current rate method. Assets and liabilities of non-U.S. operations are translated from foreign currencies into U.S. dollars at the exchange rates in effect at the balance sheet date while revenue and expense items are translated at the monthly weighted-average exchange rates for the relevant period. The resulting unrealized gains and losses have been included as part of the cumulative foreign currency translation adjustment which is reported as other comprehensive income. As a result, changes in foreign-exchange rates from period to period can have a significant impact on our results of operations and financial position, which also makes the comparability of periods complex.

Results of Operations

Fiscal 2009 compared to Fiscal 2008

The following table sets forth our comparative results of operations, both in dollars and as a percentage of total revenues, for fiscal 2008 and 2009:

 

     Fiscal Year Ended April 30,        
     2008     2009    
    

Amounts

   

% of

Revenue

   

Amounts

   

% of

Revenue

   

2009

Change

 
           Amount     %  
     (in millions, except percentages)  

Revenues

   $ 692.0      100.0   $ 735.1      100.0   $ 43.1      6.2   

Cost of revenues

     367.9      53.2     390.6      53.1     22.7      6.2   
                              

Gross margin

     324.1      46.8     344.5      46.9     20.4      6.3   

Research and development

     62.6      9.0     60.1      8.2     (2.5   (4.0

Selling, general and administrative

     246.6      35.6     248.5      33.8     1.9      0.8   

Special charges, integration and acquisition-related expenses (1)

     16.0      2.3     23.3      3.2     7.3      45.6   

Loss (gain) on sale of manufacturing operations

     1.0      0.1          0.0     (1.0   *   

In-process research and development

     5.0      0.7          0.0     (5.0   *   

Impairment of goodwill

          0.0     284.5      38.7     284.5      *   
                              

Operating (loss)

     (7.1   (1.0 )%      (271.9   (37.0 )%      (264.8   +   

Interest expense

     34.7      5.0     40.1      5.5     5.4      15.6   

Debt and warrant retirement costs

     20.8      3.0                 (20.8   *   

Fair value adjustment on derivative instruments

     (61.9   (8.9 )%      (100.2   (13.6 )%      (38.3   +   

Other (income) expense

     (1.6   (0.2 )%      0.8      (0.1 )%      2.4      +   

Income tax (recovery) expense

     (11.7   (1.7 )%      (19.1   (2.6 )%      (7.4   +   
                              

Net income (loss)

   $ 12.6      1.8   $ (193.5   (26.3 )%    $ (206.1   +   
                              

 

* No comparison to other period.
+ The comparison is not meaningful.
(1) Special charges relate to restructuring activities and other loss accruals undertaken to improve our operational efficiency and realign our business. In fiscal 2008 and 2009, it also includes Inter-Tel acquisition related integration costs.

 

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Revenues

The following table sets forth revenues from our telecommunications and network services business segments.

 

     Fiscal Year Ended
April 30,
     
     2008     2009     2009 Change
     Revenues    % of
Revenues
    Revenues    % of
Revenues
    Amount    %
     (in millions, except percentages)

Telecommunications

   $ 642.1    92.8   $ 662.0    90.1   $ 19.9    3.1

Network services

     49.9    7.2     73.1    9.9     23.2    46.5
                                   
   $ 692.0    100.0   $ 735.1    100.0   $ 43.1    6.2
                                   

Revenues in fiscal 2009 increased 6.2% to $735.1 million compared to $692.0 million in fiscal 2008, with telecommunications revenues increasing 3.1% to $662.0 million from $642.1 million and network revenues increasing 46.5% to $73.1 million from $49.9 million. Our revenues in fiscal 2009 were adversely affected by the global recession and the increases in total, telecommunications and network revenues are a result of the inclusion of Inter-Tel revenues for 12 months in fiscal 2009 compared to only eight and a half months in fiscal 2008.

Geographic Segment Revenues:

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

 

   

the United States;

 

   

Europe, Middle East & Africa, which we refer to as EMEA;

 

   

Canada and Caribbean & Latin America, which we refer to as CALA; and

 

   

Asia Pacific.

These reportable segments were determined in accordance with how our management views and evaluates our business.

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

 

     Fiscal Year Ended April 30,        
     2008     2009    
    

Revenues

  

% of

Revenues

   

Revenues

  

% of

Revenues

   

    2009 Change    

 
             Amount     %  
     (in millions, except percentages)  

United States

   $ 409.8    59.2   $ 486.7    66.2   $ 76.9      18.8   

EMEA

     216.4    31.3     184.7    25.1     (31.7   (14.6

Canada and CALA

     51.8    7.5     50.4    6.9     (1.4   (2.7

Asia Pacific

     14.0    2.0     13.3    1.8     (0.7   (5.0
                                    
   $ 692.0    100.0   $ 735.1    100.0   $ 43.1      6.2   
                                    

During fiscal 2009, revenues increased by $43.1 million, or 6.2%, compared to fiscal 2008. The increase is primarily due to a full year of Inter-Tel revenues in fiscal 2009 compared to only eight and a half months of Inter-Tel revenues the previous year.

 

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Revenues in the United States increased by $76.9 million, or 18.8%, in fiscal 2009 compared to fiscal 2008, comprised of a $53.7 million increase in sales from our telecommunications products and a $23.2 million increase in sales from our network services products. These increases are due to incremental Inter-Tel revenues as a result of the inclusion of Inter-Tel sales for a full year in fiscal 2009 compared to only eight and a half months in fiscal 2008. This incremental growth was partially offset by the effects of the global recession.

Revenues in EMEA declined by $31.7 million, or 14.6%, in fiscal 2009 compared to fiscal 2008, as a result of the global recession and the strengthening of the U.S. dollar relative to the British pound sterling. As approximately 90% of this region’s revenues are generated in currencies other than the U.S. dollar, most significantly the British pound sterling and the Euro, our revenues, as reported in U.S. dollars, are impacted by significant changes in exchange rates, as we experienced in fiscal 2009. The decline in revenue in EMEA was partially offset by the Inter-Tel acquisition and the inclusion of Inter-Tel’s international operations in the United Kingdom for a full year in fiscal 2009 compared to only eight and a half months in fiscal 2008. Further impacting revenues in the region was the year-over-year decline in the region’s service business resulting primarily from a decline in both maintenance and support and managed service revenues.

Revenues in Canada and CALA and Asia Pacific declined in fiscal 2009 compared to fiscal 2008 as a result of the global recession, which slowed sales during the second half of fiscal 2009.

Gross Margin

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

     Fiscal Year Ended April 30,  
     2008     2009  
    

Gross
Margin

  

Gross
Margin %

   

Gross
Margin

  

Gross
Margin %

 
     (in millions, except percentages)  

Telecommunications

   $ 304.7    47.5   $ 313.1    47.3

Network services

     19.4    38.9     31.4    43.0
                  

Total

   $ 324.1    46.8   $ 344.5    46.9
                  

Gross margin improved marginally in fiscal 2009, increasing by 0.1% over fiscal 2008. The decline in revenues in the second half of fiscal 2009 as a result of the global recession was offset by lower costs to sell our products in the same period. As a result of the global recession and as part of our integration of Inter-Tel, we took actions to lower our costs, streamline our operations and negotiate better supply agreements. Lower costs were also driven by lower labor and other overhead charges resulting from headcount and salary reductions. These cost saving actions aided in maintaining our gross margin as a percentage of revenues.

Gross margin percentage on telecommunication revenues alone remained relatively flat in fiscal 2009 compared to fiscal 2008, primarily as a result of the items discussed above.

Network services typically generate lower gross margins as compared to sales of software and systems. The gross margin from our network services revenues improved to 43.0% in fiscal 2009 from 38.9% in fiscal 2008 predominantly as a result of lower rates negotiated with our local and long distance carriers. The margin improvement in network services was also aided by several one-time credits received from our carriers and as a result we anticipate that the margin for network services will decline from fiscal 2009 levels in the future.

Operating Expenses

Research and Development

R&D expenses decreased to 8.2% of total revenues in fiscal 2009 from 9.0% of total revenues in fiscal 2008, a decrease of approximately $2.5 million in absolute dollars. This reduction in fiscal 2009 was as a result

 

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of restructuring actions taken during the year to align our operating model with current revenue levels and continuing synergies from our acquisition of Inter-Tel. The impact of these restructuring activities was partially offset by the inclusion of Inter-Tel R&D expenditures for a full year in fiscal 2009 compared to eight and a half months the previous year.

We have historically invested heavily in R&D, consistent with an aggressive research and development investment strategy that has positioned us with a broad range of feature-rich, scalable, standards-based and interoperable IP-based communication solutions. The acquisition of Inter-Tel has substantially added to our product portfolio and our overall scale. As a result, we have been able to reduce our R&D spend as a percentage of total revenues while investing strategically in growth areas, such as our software and applications portfolio.

Selling, General and Administrative

SG&A expenses decreased to 33.8% of revenues in fiscal 2009 from 35.6% of revenues in fiscal 2008 but increased by $1.9 million in fiscal 2009 compared to fiscal 2008. The increase in absolute dollars is primarily due to the inclusion of Inter-Tel for a full year in fiscal 2009 compared to eight and a half months in fiscal 2008. The increase in SG&A expenses due to the acquisition was partially offset by restructuring and other cost-cutting actions taken during fiscal 2009 to align our operating model with current revenues levels. Our SG&A expenditures continued to include significant non-cash charges, most significantly $23.6 million (2008—$17.0 million) for the amortization of purchased intangible assets of Inter-Tel, such as customer relationships, developed technology and trade name and $2.4 million of incremental compensation expense associated with employee stock option grants.

Special Charges, Integration and Acquisition-Related Expenses

We recorded pre-tax special charges of $20.3 million in fiscal 2009 as a result of actions taken to lower our operating cost structure. The components of the special charges included $10.8 million of employee severance and benefits incurred in the termination of approximately 450 employees around the world, $0.5 million of accreted interest related to lease termination obligations, $7.4 million related to additional lease terminations in the period and $1.6 million in assets written off. Payment of workforce reduction liabilities is expected to be complete by the end of fiscal 2010. The lease termination obligations incurred in the current and prior fiscal years will be reduced over the remaining term of the leases. In addition to the special charges described above, we also incurred $3.0 million of costs related to integration activities following our acquisition of Inter-Tel.

Impairment of Goodwill

We recorded a goodwill impairment charge of $284.5 million in fiscal 2009 on the goodwill initially recorded as part of the Inter-Tel acquisition. In accordance with our policy, goodwill is tested for impairment annually at the reporting unit level.

The fair value of each reporting unit is estimated using a combination of the market approach and the income approach. Under the market approach, a multiple of earnings before interest, taxes, depreciation and amortization of each reporting unit is calculated and compared to marketplace participants to corroborate the results of the calculated fair value. Under the income approach, discounted cash flows for each reporting unit are used to estimate the fair value of the reporting unit. We generally select the fair value of the reporting unit using the average of the results under the two approaches. Due to the economic downturn and its impact on consumer spending, we lowered our expected cash flow forecasts and this, combined with significantly lower market multiples as a result of the general decline in global capital markets, resulted in a decline in the fair value of our U.S. reporting unit. Accordingly, the carrying amount of the goodwill exceeded the implied fair value and an impairment charge of $284.5 million was recorded. This non-cash goodwill impairment charge did not affect our liquidity, cash flows or future operations.

 

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Loss (Gain) on Sale of Manufacturing Operations

In fiscal 2008, we recorded a loss on sale of manufacturing operations of $1.0 million. We did not record any such loss in fiscal 2009.

In-Process Research and Development

In fiscal 2008, we wrote off $5.0 million of in-process research and development costs acquired as part of the Inter-Tel acquisition. We did not record any such charges in fiscal 2009.

Operating Loss

We reported an operating loss of $271.9 million in fiscal 2009 compared to an operating loss of $7.1 million in fiscal 2008. The increase in operating loss was due solely to the impairment of goodwill in fiscal 2009 of $284.5 million related to the purchase price paid to acquire Inter-Tel. Absent the impairment of goodwill, our results in fiscal 2009 improved over fiscal 2008. Excluding impairment of goodwill, we would have had operating income of $12.6 million in fiscal 2009. In comparison, excluding in-process R&D of $5.0 million, we would have had an operating loss of $2.1 million in fiscal 2008. This represents a $14.7 million year over year improvement. While our operating results were adversely impacted by the global recession, which resulted in weaker sales in the second half of fiscal 2009, the cost saving measures we undertook during fiscal 2009 contributed significantly to our improved operating performance.

Non-Operating Expenses

Interest Expense

Interest expense was $40.1 million in fiscal 2009 compared to $34.7 million in fiscal 2008. Our interest expense relates predominantly to two credit agreements bearing interest based on LIBOR that were entered into to finance a portion of the Inter-Tel acquisition. The increase is a result of a full year’s interest expense on these credit agreements in fiscal 2009 compared to only eight and a half months in fiscal 2008. The increase was partially offset by lower interest rates in fiscal 2009 compared to fiscal 2008 as LIBOR declined during the year. On August 27, 2007 we entered into an interest rate swap agreement, which effectively swapped the LIBOR rate for a fixed rate of 4.85% on a notional amount of $215.0 million for the period from October 31, 2007 to October 31, 2009. The agreement was not renewed or replaced upon expiry.

Debt and Warrant Retirement Costs

In fiscal 2008, in connection with the Inter-Tel acquisition, we incurred debt and warrant retirement costs of $20.8 million. We did not record any such costs in fiscal 2009.

Fair Value Adjustment on Derivative Instruments

The holders of Class 1 Preferred Shares, issued in connection with the acquisition of Inter-Tel, have the right to redeem the preferred shares and receive cash equal to the value of our common shares into which the instrument would convert after seven years. As a portion of the redemption price of the preferred shares is indexed to our common share price, an embedded derivative was accounted for separately and is marked to market in each reporting period to redemption. In fiscal 2009, we recorded a non-cash gain of $100.2 million (2008—$6.0 million) representing the mark-to-market adjustment on the derivative liability embedded in the Class 1 Preferred Shares.

A similar embedded derivative existed within the Series A Preferred Shares and the Series B Preferred Shares, which were redeemed in fiscal 2008 in connection with the Inter-Tel acquisition. In fiscal 2008, we

 

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recorded a non-cash expense of $2.7 million representing the mark to market adjustment on the derivative liability for the 3 1/2 months prior to the acquisition date. Upon redemption, the fair value of the derivative liability was reversed from the balance sheet and recorded as a gain in the amount of $70.0 million, of which $58.6 million was recorded to the consolidated statement of operations and $11.4 million was charged to accumulated deficit.

The following table summarizes the gains and losses recorded in fiscal 2008 and 2009 relating to mark-to-market adjustments on our derivative liabilities:

 

     Fiscal Year Ended April 30,
     2008    2009
    

Series A and
Series B
Preferred
Shares

   

Class 1
Preferred
Shares

  

Total

  

Class 1
Preferred
Shares

     (in millions)

Mark-to-market gain (loss)

   $ (2.7   $ 6.0    $ 3.3    $ 100.2

Reversal of derivative liability

     58.6             58.6     
                            

Fair value adjustment on derivative instruments

   $ 55.9      $ 6.0    $ 61.9    $ 100.2
                            

Other (Income) Expense

Other (income) expense, on a net basis, consists primarily of foreign exchange rate gains and losses, interest income and amortization of the deferred gain on sale of the United Kingdom land and building in fiscal 2006. Other income, on a net basis, amounted to a $0.8 million expense in fiscal 2009 compared to $1.6 million in income during fiscal 2008. The expense recorded in fiscal 2009 is primarily attributable to a transactional foreign currency loss of $3.2 million, compared to a gain of $0.6 million in fiscal 2008. This was partially offset by interest income of $1.8 million (2008—$0.8 million). Our strategy is to use foreign currency forward contracts and foreign currency swaps to minimize the short-term impact of currency fluctuations on foreign currency receivables, payables and inter-company balances.

Provision for Income Taxes

We recorded a net income tax benefit of $19.1 million in fiscal 2009 compared to $11.7 million in fiscal 2008. The net income tax benefit for fiscal 2009 reflects a current tax benefit of $0.7 million and a deferred tax benefit of $18.4 million resulting from differences in accounting and tax treatment pertaining to revenue recognition, the leasing portfolio and other accruals. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or none of the deferred tax assets will be realized. During fiscal 2009, there was a reduction of a $5.8 million valuation allowance because it was determined that it was more likely than not that the tax assets will be realized. This valuation allowance had been provided for in the fiscal 2008 year.

Net Income (Loss)

In fiscal 2009 our net loss, after taking into consideration all the items discussed above, was predominantly impacted by the impairment of goodwill of $284.5 million, partially offset by a $100.2 million gain from fair value adjustments on our embedded derivatives and a $18.4 million deferred tax benefit. As a result, we reported a net loss of $193.5 million compared to net income of $12.6 million in fiscal 2008.

 

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Adjusted EBITDA

Adjusted EBITDA, a non-GAAP measure, was $78.7 million in fiscal 2009 compared to $50.2 million in fiscal 2008, a $28.5 million, or 56.8% improvement. This improvement in Adjusted EBITDA, despite the global recession, was driven by proactive cost cutting measures we took during fiscal 2009. For a definition and explanation of Adjusted EBITDA as well a reconciliation of Adjusted EBITDA to net income (loss), see note 5 under “Selected Consolidated Financial Data.”

Fiscal 2008 compared to Fiscal 2007

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

 

     Fiscal Year Ended April 30,      
     2007     2008    
    

Amounts

   

% of

Revenues

   

Amounts

   

% of

Revenues

   

      2008 Change      

           Amount     %
     (in millions, except percentages)

Revenues

   $ 384.9      100.0   $ 692.0      100.0   $ 307.1      79.8

Cost of revenues

     225.1      58.5     367.9      53.2     142.8      63.4
                              

Gross margin

     159.8      41.5     324.1      46.8     164.3      102.8

Research and development

     41.7      10.8     62.6      9.0     20.9      50.1

Selling, general and administrative

     123.5      32.0     246.6      35.5     123.1      99.7

Special charges, integration and acquisition-related expenses (1)

     9.3      2.4     16.0      2.3     6.7      72.0

Litigation settlement

     16.3      4.2          0.0     (16.3   *

Initial public offering costs

     3.3      0.9          0.0     (3.3   *

Loss (gain) on sale of manufacturing operations

     (1.0   (0.3 )%      1.0      0.1     2.0      +

In-process research and development

          0.0     5.0      0.7     5.0      *
                              

Operating (loss)

     (33.3   (8.7 )%      (7.1   (1.0 )%      26.2      +

Interest expense

     9.1      2.4     34.7      5.0     25.6      281.3

Debt and warrant retirement costs

          0.0     20.8      3.0     20.8      *

Fair value adjustment on derivative instruments

     (8.6   (2.2 )%      (61.9   (8.9 )%      (53.3   +

Other (income) expense, net

     (0.6   (0.2 )%      (1.6   (0.2 )%      (1.0   +

Income tax (recovery) expense

     1.8      0.5     (11.7   (1.7 )%      (13.5   +
                              

Net income (loss)

   $ (35.0   (9.1 )%    $ 12.6      1.8   $ 47.6      +
                              

 

 * No comparison to other period.
+ The comparison is not meaningful
(1) Special charges relate to restructuring activities and other loss accruals undertaken to improve our operational efficiency and realign our business. In fiscal 2008, it also includes Inter-Tel acquisition related integration costs.

 

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Revenues

The following table sets forth revenues from our telecommunications and network services business segments.

 

     Fiscal Year Ended April 30,      
     2007     2008           
    

Revenues

  

% of

Revenues

   

Revenues

  

% of

Revenues

   

     2008 Change     

             Amount    %
     (in millions, except percentages)

Telecommunications

   $ 384.9    100.0   $ 642.1    92.8   $ 257.2    66.8

Network services

     —      —          49.9    7.2     49.9    *
                                   
   $ 384.9    100.0   $ 692.0    100.0   $ 307.1    79.8
                                   

 

* No comparison to other period.

Revenues in fiscal 2008 increased to $692.0 million compared to $384.9 million in fiscal 2007, with telecommunications revenues increasing to $642.1 million from $384.9 million and network revenues increasing to $49.9 million from $nil. Our revenues in fiscal 2008 were positively impacted by the inclusion of Inter-Tel revenues for eight and a half months in addition to increased product sales through both our channel partners and direct selling offices in all regions outside of the United States.

Geographic Segment Revenues

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

 

     Fiscal Year Ended April 30,      
     2007     2008           
    

Revenues

  

% of

Revenues

   

Revenues

  

% of

Revenues

   

     2008 Change     

             Amount    %
     (in millions, except percentages)

United States

   $ 161.6    42.0   $ 409.8    59.2   $ 248.2    153.6

EMEA

     162.4    42.2     216.4    31.3     54.0    33.3

Canada and CALA

     49.4    12.8     51.8    7.5     2.4    4.9

Asia Pacific

     11.5    3.0     14.0    2.0     2.5    21.7
                                   
   $ 384.9    100.0   $ 692.0    100.0   $ 307.1    79.8
                                   

During fiscal 2008, revenues increased by $307.1 million, or 79.8%, compared to fiscal 2007. The increase was primarily due to the Inter-Tel acquisition and the inclusion of eight and a half months of Inter-Tel revenues in fiscal 2008.

As a result of the Inter-Tel acquisition and its regional impact, revenues in the United States increased by $248.2 million, or 153.6%, and accounted for 59.2% of our total revenues in fiscal 2008 compared to 42.0% of our total revenues in fiscal 2007. The increase was partially offset by the impact of our adoption of Statement of Position 97-2, Software Revenue Recognition, or SOP 97-2, on Inter-Tel’s sales of lease-type transactions. The following table sets forth the impact of the adoption of SOP 97-2 on revenues in the United States:

 

     Fiscal Year Ended
April 30,
        Fiscal Year Ended
April 30,
    
     2007    2008    Change    2007    2008    Change
     Pre-Adoption of SOP 97-2
on Sales Lease Transactions
   Post-Adoption of SOP 97-2
on Sales Lease Transactions
     (in millions)

Revenues — United States

   $ 161.6    $ 373.9    $ 212.3    $ 161.6    $ 359.9    $ 198.3

 

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Excluding the contribution of Inter-Tel for eight and a half months in fiscal 2008, revenues in the United States in fiscal 2008 declined by $16.7 million, or 10.3%, over fiscal 2007 partially as a result of unfavorable economic and market conditions in the United States in fiscal 2008. The region also experienced an additional one-time decline in revenues since we exited a two-tier distribution model in the third quarter of fiscal 2008. Our exit of two-tier distribution in the United States was completed by the end of fiscal 2008, and we do not anticipate any further impact on future revenue.

Consistent with prior years, we continued to experience growth in revenues in fiscal 2008 across all of the other geographical segments, with the most significant growth, in absolute dollars, coming from EMEA.

Revenues in EMEA increased in fiscal 2008 compared to fiscal 2007, partially as a result of the Inter-Tel acquisition and the inclusion of its U.K. operations for eight and a half months in fiscal 2008. However, even without including the contribution of Inter-Tel, revenues in EMEA grew by $19.8 million, or 12.2%, in fiscal 2008 over fiscal 2007 as a result of increased product sales in the United Kingdom and continental Europe. Revenue growth in the region was partially offset by a year-over-year decline in the region’s service business resulting primarily from a decline in both maintenance and support and managed service revenues.

Revenues in Canada and CALA increased in fiscal 2008 compared to fiscal 2007, primarily as a result of increased product sales through channel partners and our direct sales offices in Canada.

Gross Margin

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

 

     Fiscal Year Ended April 30,  
     2007     2008  
    

Gross
Margin

  

Gross
Margin %

   

Gross
Margin

  

Gross
Margin %

 
     (in millions, except percentages)  

Telecommunications

   $ 159.8    41.5   $ 304.7    47.5

Network services

               19.4    38.9
                  

Total

   $ 159.8    41.5   $ 324.1    46.8
                  

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

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

 

   

operational synergies achieved from the Inter-Tel acquisition, specifically freight and distribution cost savings resulting from the move of our U.S. warehousing and distribution to Tempe, Arizona, negotiated cost reductions with vendors and lower technician costs; and

 

   

improved mix of software applications revenues compared to hardware revenues, as software applications typically generate higher margins than either communication platforms and desktop appliances or other product revenues.

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

 

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Operating Expenses

Research and Development

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

Selling, General and Administrative

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

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

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

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

We recorded special restructuring charges of $9.3 million in fiscal 2007 related to cost reduction measures. The net restructuring charges included workforce reduction costs of $8.7 million for employee severance and benefits and associated legal costs incurred in the termination of 129 employees throughout the world. In addition, special charges included $0.4 million of accreted interest costs associated with excess facilities obligations and $0.2 million in non-cancelable lease costs relating to various sales office closures in the United States.

Litigation Settlement

On March 19, 2007, we reached an out of court settlement agreement with one of our competitors to settle certain patent infringement complaints made by the competitor against us, as well as patent infringement complaints made by us against the competitor. Under the terms of the settlement agreement, the competitor agreed to release us from such alleged past infringements and both parties agreed not to initiate any actions against the other party involving any patents for a period of five years from the effective date of February 1, 2007. In accordance with Statement of Financial Accounting Standards No. 5, Accounting for Contingencies, a one-time litigation settlement charge of $16.3 million was recorded during fiscal 2007. The litigation settlement amount was comprised of $14.8 million, representing the present value of $19.7 million payable over a five-year period and discounted using an interest rate of 12%, plus $1.5 million in legal costs. We did not incur any litigation settlement charges in fiscal 2008.

 

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Initial Public Offering Costs

On May 9, 2006, we filed a registration statement on Form F-1 with the SEC and a preliminary prospectus with Canadian securities regulators in connection with the proposed initial public offering of our common shares in the United States and Canada. In fiscal 2006 and fiscal 2007, we incurred an aggregate of $3.3 million in costs associated with a proposed initial public offering, which we expensed in fiscal 2007. Upon completion of the Inter-Tel acquisition, we withdrew the registration statement and prospectus, and as a result, expensed all costs incurred associated with the proposed initial public offering in fiscal 2007. No related costs were incurred or written-off in fiscal 2008.

Loss (Gain) on Sale of Manufacturing Operations

On August 31, 2001, we outsourced our manufacturing operations, including the sale of related net assets and the transfer of employees and certain liabilities to BreconRidge, for total net consideration of $5.0 million in the form of long-term promissory notes receivable of $5.4 million and promissory notes payable of $0.4 million. The transaction resulted in a loss on disposal of $1.5 million recorded in fiscal 2002, representing the excess of the carrying value of the plant, equipment and manufacturing workforce over the total net consideration. This loss contained estimates and assumptions regarding expected subleasing income arising from premises that had been subleased to BreconRidge pursuant to the disposal of the manufacturing operations. Subsequent to fiscal 2002, it became evident that sublease income over the lease renewal period, which was originally included in the estimated loss on disposal, would no longer be realized and as such we have made adjustments to our estimate in each fiscal year subsequent to fiscal 2002.

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

In-Process Research and Development

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

Operating Loss

We reported an operating loss of $7.1 million in fiscal 2008 compared to an operating loss of $33.3 million in fiscal 2007. The improvement in performance was driven primarily by synergies achieved in the integration of Inter-Tel, as well as continued streamlining of the costs associated with our core operations.

Non-Operating Expenses

Interest Expense

Interest expense was $34.7 million in fiscal 2008 compared to $9.1 million in fiscal 2007. The increase resulted from $430.0 million of debt incurred to finance a portion of the Inter-Tel acquisition, partially offset by the repurchase of $55.0 million of our senior secured convertible notes, or the Convertible Notes, in connection with the Inter-Tel acquisition and lower interest rates in fiscal 2008 compared to fiscal 2007.

 

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Debt and Warrant Retirement Costs

On August 16, 2007, in connection with the Inter-Tel acquisition, we repaid the Convertible Notes plus accrued interest of $1.7 million with $66.0 million of cash and amended the terms of the 16.5 million warrants previously issued to the holders of the Convertible Notes.

The retirement of the Convertible Notes and the modification of the warrants resulted in a combined loss of $20.8 million, of which $15.3 million related to the Convertible Notes carrying value, $2.7 million to writing off the unamortized deferred debt issue costs and $2.8 million to reflect the modification of warrants.

Fair Value Adjustment on Derivative Instruments

Our Class 1 Preferred Shares were issued in connection with the Inter-Tel acquisition. In fiscal 2008, we recorded a non-cash gain of $6.0 million representing the mark-to-market adjustment on the derivative liability embedded in the Class 1 Preferred Shares for the eight and a half months after the Inter-Tel acquisition.

Our Series A Preferred Shares were redeemed in connection with the Inter-Tel acquisition. In fiscal 2008, we recorded a non-cash expense of $2.7 million representing the mark-to-market adjustment on the derivative liability embedded in the Series A Preferred Shares for three and a half months prior to the Inter-Tel acquisition. Upon redemption, the fair value of the derivative liability was reversed from the balance sheet and recorded as a gain in the amount of $70.0 million, of which $58.6 million was recorded to the consolidated statement of operations and $11.4 million was charged to accumulated deficit.

In fiscal 2007, we recorded a non-cash gain of $8.6 million, representing the mark-to-market adjustment on the derivative embedded in the Series A Preferred Shares and the Series B Preferred Shares.

The following table summarizes the gains and losses recorded in fiscal 2007 and 2008 relating to the mark-to-market adjustment on our derivative liabilities:

 

     Fiscal Year Ended April 30,
     2007    2008
    

Series A and
Series B
Preferred
Shares

  

Series A and
Series B
Preferred
Shares

   

Class 1
Preferred
Shares

  

Total

     (in millions)

Mark-to-market gain (loss)

   $ 8.6    $ (2.7   $ 6.0    $ 3.3

Reversal of derivative liability

          58.6             58.6
                            

Fair value adjustment on derivative instruments

   $ 8.6    $ 55.9      $ 6.0    $ 61.9
                            

Other (Income) Expense, Net

Other (income) expense, on a net basis, was $1.6 million in fiscal 2008 compared to $0.6 million during fiscal 2007. The other income recorded in fiscal 2008 was primarily attributable to transactional foreign currency gains of $0.6 million, compared to losses of $0.3 million in fiscal 2007, and interest income of $0.8 million, compared to $0.3 million in fiscal 2007.

Provision for Income Taxes

We recorded a net income tax benefit of $11.7 million for fiscal 2008 compared to income tax expense of $1.8 million for fiscal 2007. The net income tax benefit for fiscal 2008 reflects a current tax benefit of $0.3 million and a deferred tax benefit of $11.4 million resulting from differences in accounting and tax treatment pertaining to revenue recognition, the leasing portfolio and other accruals. In assessing the realizability

 

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of deferred tax assets, we consider whether it is more likely than not that some portion or none of the deferred tax assets will be realized. During fiscal 2007, the assessment in 2006 that certain deferred tax assets relating to our operations were more likely than not to be realized was reversed.

Net Income (Loss)

We reported net income of $12.6 million in fiscal 2008 compared to a loss of $35.0 million in fiscal 2007. The increase of $47.6 million was primarily driven by the following:

 

   

income from operations of $5.3 million, excluding the impact of certain Inter-Tel acquisition related costs in fiscal 2008 such as $7.4 million of integration and merger-related costs and $5.0 million for in-process research and developments costs. This is compared to an operating loss of $13.7 million in fiscal 2007 excluding the impact of the one-time litigation settlement and initial public offering costs incurred in that year;

 

   

gain of $61.9 million resulting from the fair value adjustments on our embedded derivatives; and

 

   

deferred tax benefit of $11.7 million.

These increases in operating and net income were partially offset by $17.0 million of amortization expense relating to acquired intangibles, $8.6 million of restructuring costs, $20.8 million of debt and warrant retirement costs and increased interest expense to service the debt issued in connection with the Inter-Tel acquisition.

Adjusted EBITDA

Adjusted EBITDA, a non-GAAP measure, was $50.2 million in fiscal 2008 compared to $5.0 million in fiscal 2007, a $45.2 million increase. The improvement in Adjusted EBITDA was driven primarily by synergies achieved in the integration of Inter-Tel, as well as continued streamlining of the cost model associated with our core operations. For a definition and explanation of Adjusted EBITDA as well a reconciliation of Adjusted EBITDA to net income (loss), see note 5 under “Selected Consolidated Financial Data.”

Liquidity and Capital Resources

As of April 30, 2009, our liquidity consisted of cash and cash equivalents of $28.4 million. Our $30.0 million revolving credit facility was fully drawn as of April 30, 2009. For more information, please see Note 15 to our audited consolidated financial statements included elsewhere in this prospectus.

We have incurred significant operating losses since our incorporation in 2001. As a result, we had an accumulated deficit of $430.1 million as of April 30, 2009. Our primary source of funds has been proceeds from financing activities. From inception through April 30, 2009, we have received net proceeds of $941.9 million from these financing activities.

The defined benefit pension plan in place for a number of our past and present employees in the United Kingdom had an unfunded pension liability of $20.1 million as of April 30, 2009. The contributions to fund the benefit obligations under this plan are based on actuarial valuations, which themselves are based on certain assumptions about the long-term operations of the plan, including employee turnover and retirement rates, the performance of the financial markets and interest rates. We expect our funding requirements for the year ended April 30, 2010 to be $3.6 million.

On August 16, 2007, in connection with the Inter-Tel acquisition, we issued $307.1 million in Class 1 Preferred Shares, received gross proceeds of $300.0 million from a seven year first lien term loan, which bears

 

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interest at a rate of LIBOR plus 3.25%, and gross proceeds of $130.0 million from an eight year second lien term loan, which bears interest at a rate of LIBOR plus 7.0%. The combined proceeds, along with $195.8 million of Inter-Tel’s cash, were used to consummate the Inter-Tel acquisition and related re-organization transactions. In addition, as part of the Inter-Tel acquisition, we secured a five year, $30.0 million revolving credit facility pursuant to the first lien credit agreement, which bears interest at a rate of LIBOR plus 3.25%. In connection with the incurrence of such debt, we entered into an interest rate swap agreement, which effectively swapped the LIBOR rate for a fixed rate of 4.85% on a notional amount of $215.0 million for the period from October 31, 2007 to October 31, 2009. The agreement was not renewed or replaced upon expiry.

Borrowings under the first and second lien term loans are repayable in full on their respective maturity dates, except that 1.0% of the original principal amount of the first lien term loan is payable each year in equal quarterly installments until August 16, 2014. Proceeds from the issuance of equity or debt, and proceeds from the sale of our assets, as well as excess annual cash flows (as defined in the credit agreements), may also be required to be used, in whole or in part, to make mandatory prepayments under the first and second lien term loans. The credit agreements relating to the first and second lien term loans have customary default clauses, wherein repayment of one or more of the credit agreements may be accelerated in the event of an uncured event of default. Each of the credit agreements contains affirmative and negative covenants, including: (a) periodic financial reporting requirements, (b) maintaining a maximum ratio of Consolidated Total Debt (as calculated under our first and second lien credit agreements) to Consolidated EBITDA (as calculated under our first and second lien credit agreements) at targets specified in our first and second lien credit agreements, (c) limitations on the incurrence of subsidiary indebtedness and also the borrowers themselves, (d) limitations on liens, (e) limitations on investments and (f) capital expenditures. As of April 30, 2009, we were in compliance with all of the covenants included in the credit agreements which were applicable at that time.

Our source for cash in the future is expected to come from operations and borrowings under our revolving credit facility and proceeds of this offering. Our most significant source of cash from operations is expected to be the collection of accounts receivable from our customers and the sale of future rental payments associated with sales leases which we provide to our customers to finance their purchases as part of our managed services offering program. The primary use of cash is expected to include funding operating expenses, working capital, capital expenditures, debt service and other contractual obligations.

We believe that we will have sufficient liquidity to support our business operations for the next 12 months. However, we may elect to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending to support product development efforts and expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, and market acceptance of our products. Additional equity or debt financing may not be available on acceptable terms or at all. In addition, any proceeds from the issuance of equity or debt may be required to be used in whole or in part, to make mandatory payments under our credit agreements. We believe that our sources of liquidity beyond the next 12 months will be our then current cash balances, funds from operations, funds available from borrowings under our revolving credit facility and proceeds of this offering.

 

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Cash Flows

Comparison of Fiscal 2009 to Fiscal 2008

Below is a summary of comparative results of cash flows and a more detailed discussion of results for fiscal 2009 and fiscal 2008.

 

     Fiscal Year Ended
April 30,
       
     2008     2009     Change  
     (in millions)  

Net cash provided by (used in)

      

Operating activities

   $ (37.8   $ 8.8      $ 46.6   

Investing activities

     (544.5     (6.4     538.1   

Financing activities

     568.4        11.5        (556.9

Effect of exchange rate changes on cash and cash equivalents

     (0.1     (5.0     (4.9
                        

Increase (decrease) in cash and cash equivalents

   $ (14.0   $ 8.9      $ 22.9   
                        

Cash and cash equivalents, end of period

   $ 19.5      $ 28.4      $ 8.9   
                        

Cash Provided by (Used in) Operating Activities

Cash generated in operating activities in fiscal 2009 was $8.8 million compared with $37.8 million used in fiscal 2008. The increased cash flows from operations was the result of improved operating performance as discussed above under “Results of Operations—Fiscal 2009 compared to Fiscal 2008—Operating Loss.”

Cash Provided by (Used in) Investing Activities

Net cash used for investing activities was $6.4 million in fiscal 2009 compared to $544.5 million in fiscal 2008. The primary use of cash in fiscal 2009 was $6.6 million for capital expenditures. Our capital expenditures were predominantly IT infrastructure and computer systems purchased for internal use.

Other significant investing activities during the year included:

 

   

increase in restricted cash of $1.2 million; and

 

   

net realized foreign exchange gains from hedging activities of $1.4 million.

The primary use of cash in fiscal 2008 was $546.3 million paid in connection with the Inter-Tel acquisition (the $729.9 million purchase price net of $195.8 million of cash acquired in the transaction, plus $12.2 million of costs incurred in connection with the Inter-Tel acquisition). Other significant investing activities during fiscal 2008 included:

 

   

the sale of an office building and surrounding land in Reno, Nevada for cash proceeds of $19.7 million;

 

   

capital expenditures of $18.3 million (which includes Inter-Tel capital expenditures for 8.5 months of fiscal 2008); and

 

   

decrease in restricted cash of $1.3 million.

 

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Cash Provided by (Used in) Financing Activities

Financing activities generated $11.5 million in cash in fiscal 2009 compared to $568.4 million in fiscal 2008.

Financing activities generating cash in fiscal 2009 included:

 

   

$17.7 million increase in bank indebtedness; and

 

   

$0.7 million in proceeds from repayment of employee share loans,

partially offset by:

 

   

$3.2 million repayment of long-term liabilities, including capital lease obligations; and

 

   

$3.7 million payment of litigation settlement obligations.

The $568.4 million in cash generated from financing activities in fiscal 2008 was driven by $731.5 million in proceeds raised to fund our acquisition of Inter-Tel which was partially offset by $148.0 million of other financing costs that were incurred in connection with the transaction. We also used $15.9 million to settle several other non-acquisition related liabilities in fiscal 2008.

Comparison of fiscal 2008 to fiscal 2007

Below is a summary of comparative results of cash flows and a more detailed discussion of results for fiscal 2008 and fiscal 2007.

 

     Fiscal Year Ended
April 30,
       
     2007     2008     Change  
     (in millions)  

Net cash provided by (used in)

      

Operating activities

   $ (12.0   $ (37.8   $ (25.8

Investing activities

     (12.4     (544.5     (532.1

Financing activities

     21.5        568.4        546.9   

Effect of exchange rate changes on cash and cash equivalents

     0.7        (0.1     (0.8
                        

Decrease in cash and cash equivalents

   $ (2.2   $ (14.0   $ (11.8
                        

Cash and cash equivalents, end of period

   $ 33.5      $ 19.5      $ (14.0
                        

Cash Provided by (Used in) Operating Activities

Cash used in operating activities in fiscal 2008 was $37.8 million compared with $12.0 million in fiscal 2007, representing an increase in cash used of $25.8 million. The increased use of cash from operating activities in fiscal 2008 was primarily driven by a $75.4 million decrease in accounts payable and other accrued liabilities, which includes certain costs resulting from the Inter-Tel acquisition, which was partially offset by a decrease in operating loss adjusted for non-cash expenses, such as depreciation, amortization, non-cash movements in provisions and fair value adjustments on derivative liabilities.

Cash Provided by (Used in) Investing Activities

Net cash used for investing activities was $544.5 million in fiscal 2008 compared to $12.4 million in fiscal 2007. The primary use of cash for investing activities in fiscal 2008 was $546.3 million paid as part of the

 

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Inter-Tel acquisition (the $729.9 million purchase price net of $195.8 of cash acquired in the transaction, plus $12.2 million of costs incurred in connection with the transaction). Other significant investing activities during the year included:

 

   

the sale of an office building and surrounding land in Reno, Nevada for cash proceeds of $19.7 million;

 

   

capital expenditures of $18.3 million, which includes Inter-Tel capital expenditures for eight and a half months of fiscal 2008; and

 

   

decrease in restricted cash of $1.3 million.

In fiscal 2007, we increased our restricted cash by $1.9 million, and we used $7.1 million for capital expenditures and $3.4 million for net foreign exchange losses on our hedging activities.

Cash Provided by (Used in) Financing Activities

Financing activities generated $568.4 million in cash in fiscal 2008 compared to $21.5 million in fiscal 2007.

Financing activities generating cash in connection with the Inter-Tel acquisition included:

 

   

$430.0 million of proceeds from debt borrowed from a syndicate of lenders, $300.0 million of which is under the first lien term loan and $130.0 million of which is under the second lien term loan;

 

   

$289.5 million of net proceeds raised from the issuance of Class 1 Preferred Shares;

 

   

$12.0 million increase in bank indebtedness under the revolving credit facility; and

 

   

$0.8 million increase from the issuance of common shares.

Cash used for financing activities in connection with the Inter-Tel acquisition included:

 

   

$66.0 million paid to extinguish the Convertible Notes;

 

   

$36.2 million paid in settlement of the Series A Preferred Shares and Series B Preferred Shares;

 

   

$12.9 million to repurchase common shares;

 

   

$20.0 million paid in settlement of warrants issued to Wesley Clover Corporation in fiscal 2007; and

 

   

$12.9 million in financing costs, of which $9.9 million related to the $430.0 million of debt borrowings and $3.0 million related to the issuance of Class 1 Preferred Shares.

Other significant financing activities in fiscal 2008 included:

 

   

$11.4 million repayment of long-term debt, including capital lease obligations; and

 

   

$4.5 million payment of litigation settlement obligations.

 

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The $21.5 million of cash from financing activities generated in fiscal 2007 was driven by $15.0 million raised upon issuing the warrants to Wesley Clover Corporation and $10.9 million received upon transfer of receivables.

Contractual Obligations

The following table sets forth our contractual obligations as of April 30, 2009:

 

     Payments Due by Period

Contractual Obligations

   Total    Less than
1 Year
   1-3
Years
   4-5
Years
   After 5
Years
     (in millions)

Long-term debt obligations (1)

   $ 675.9    $ 46.8    $ 91.6    $ 90.9    $ 446.6

Capital lease obligations (2)

     4.9      1.8      2.0      1.0      0.1

Operating lease obligations (3)

     67.5      21.0      30.6      8.0      7.9

Defined benefit pension plan contributions (4)

     3.6      3.6               

Other (5)

     11.5      3.8      7.5      0.2     
                                  

Total

   $ 763.4    $ 77.0    $ 131.7    $ 100.1    $ 454.6
                                  

 

(1)

Represents the principal balance and interest payments for the first and second lien borrowings. Interest on these liens is based on LIBOR plus 3.25%, and LIBOR plus 7.0% for the first and second liens respectively, as described in our consolidated financial statements. For the purposes of estimating the variable interest, LIBOR has been assumed to be 0.75%.

 

(2) Represents the principal and interest payments for capital lease obligations. Interest rates on these loans range from 1.3% to 11.8%, as described in our consolidated financial statements.

 

(3) Operating lease obligations exclude payments to be received by us under sublease arrangements.

 

(4) Represents the estimated contribution to our defined benefit pension plan in the United Kingdom over the next 12 months. We expect our funding requirements to increase in future years. The amount of the increase will depend upon the time period in which the deficit is amortized. We expect to fund any future increase in the annual contributions out of our expected future cash flows from operations. Liabilities arising from the deficit in our defined benefit pension plan are not included in the above table. As of April 30, 2009, the projected benefit obligation of $96.1 million exceeded the fair value of the plan assets of $76.0 million, resulting in an unfunded status of $20.1 million as recorded in our consolidated balance sheet as of April 30, 2009.

 

(5) Represents a litigation settlement and other obligations.

Total contractual obligations do not include contractual obligations recorded on the balance sheet as current liabilities. For those obligations recorded, they are reflected in long-term debt on the balance sheet.

Obligations arising from research and development spending commitments under an agreement, dated as of October 10, 2002, among us, Mitel Knowledge Corporation, March Networks and Her Majesty the Queen in Right of Canada are not included in the above table. The agreement, as last amended on October 31, 2006, requires us to invest an aggregate of C$366.5 million worth of research and development over a seven year period commencing on March 31, 2005. See “Description of Share Capital—Warrants—Technology Partnerships Canada Warrants.”

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements.

 

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Off-Balance Sheet Arrangements

We have the following material off balance sheet arrangements:

Letters of Credit

We had $0.2 million in letters of credit outstanding as of April 30, 2009.

Bid and Performance Related Bonds

We enter into bid and performance related bonds related to various customer contracts. Potential payments due under these may be related to our performance and/or our channel partners’ performance under the applicable contract. The total maximum potential amount of future payments we could be required to make under bid and performance related bonds, excluding letters of credit, was $5.5 million as of April 30, 2009. Of this amount, the amount relating to guarantees of our channel partners’ performance was $2.2 million as of April 30, 2009. Historically, we have not made any payments and we do not anticipate that we will be required to make any material payments under these types of bonds.

Intellectual Property Indemnification Obligations

We enter into agreements on a regular basis with customers and suppliers that include limited intellectual property indemnification obligations that are customary in the industry. These obligations generally require us to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of these intellectual property indemnification obligations prevents us from making a reasonable estimate of the maximum potential amount we could be required to pay to our customers and suppliers.

Historically, we have not made any significant indemnification payments under such agreements and no amount has been accrued in the consolidated financial statements with respect to these obligations.

Off-balance sheet lease obligations

We offer our customers lease financing and other services under our managed services offering. We fund this offering, which we have branded as the TotalSolution® program, in part through the sale to financial institutions of rental payment streams under the leases. Such financial institutions have the option to require us to repurchase such income streams, subject to limitations, in the event of defaults by lease customers and, accordingly, we maintain reserves based on loss experience and past due accounts. Sold payments remaining unbilled, which represents the total balance of leases that is not included in our balance sheet, as of April 30, 2008 and 2009 were $247.6 million and $215.7 million, respectively.

Qualitative and Quantitative Disclosure about Market Risk

Market risk is the risk of loss in our future earnings due to adverse changes in financial markets. We are exposed to market risk from changes in our common share price, foreign exchange rates and interest rates. Inflation has not had a significant impact on our results of operations.

Equity Price Risk

Under our deferred share unit plan, adopted December 9, 2004, when a participant ceases to be an executive of ours, the deferred share unit plan participant will receive a cash amount equal to the number of deferred share units in his or her account multiplied by the price of a common share as of the date the deferred share unit plan participant ceases to be an executive of ours, or on a later date selected by the deferred share unit

 

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plan participant, which shall in any event be a date prior to the end of the following calendar year. The obligation to pay the cash amount is recorded as a liability in our financial statements and is marked-to-market in each reporting period, with changes in the obligation recorded in our consolidated statement of operations. A $1.00 increase in our common share price would have increased our net loss for fiscal 2009 by $0.5 million and increased our net loss for fiscal 2008 by $0.4 million.

Foreign Currency Risk

We are exposed to currency rate fluctuations related primarily to our future net cash flows from operations in Canadian dollars, British pounds sterling and Euros. When possible, we use foreign currency forward contracts and foreign currency swaps to minimize the short-term impact of currency fluctuations on foreign currency receivables, payables and intercompany balances. These contracts are not entered into for speculative purposes, and are not treated as hedges for accounting purposes. Foreign currency contracts are recorded at fair market value. The fair value of our foreign currency forward contracts is sensitive to changes in foreign currency exchange rates. As of April 30, 2009, we had no foreign currency forward contracts outstanding.

Interest Rate Risk

In accordance with our corporate policy, cash equivalent and short-term investment balances are primarily comprised of high-grade commercial paper and money market instruments with original maturity dates of less than three months. Due to the short-term maturity of these investments, we are not subject to significant interest rate risk.

We are exposed to interest rate risk on our $30.0 million revolving credit facility, which bears interest at a rate of LIBOR 3.25%. If the entire revolving credit facility were utilized, each adverse change in the LIBOR rate of 1.0% would result in an additional $0.3 million in interest expense per year.

We are exposed to interest rate risk on $289.6 million outstanding on April 30, 2009 under our first lien term loan which matures on August 16, 2014 and bears interest at a rate of LIBOR plus 3.25% and $130.0 million outstanding on April 30, 2009 under our second lien term loan which matures on August 16, 2015 and bears interest at a rate of LIBOR plus 7.0%.

On August 27, 2007 we entered into an interest rate swap agreement, which effectively swapped the LIBOR rate for a fixed rate of 4.85% on a notional amount of $215 million for the period from October 31, 2007 to October 31, 2009. The agreement was designated a cash flow hedge since the relevant terms of the interest rate swap agreements matched the corresponding terms of the credit agreements. The agreement was not renewed or replaced upon expiration.

The impact of each adverse change in the LIBOR rate of 1.0% on the first lien term loan and the second lien term loan, in aggregate, is anticipated to be $3.1 million in the fiscal 2010.

The interest rates on our obligations under capital leases are fixed and therefore not subject to interest rate risk.

Credit Risk

Our financial assets that are exposed to credit risk consist primarily of cash equivalents, restricted cash, accounts receivable and other receivables. Cash equivalents are invested in government and commercial paper with investment grade credit rating. We are exposed to normal credit risk from customers. However, we have a large number of diverse customers to minimize concentrations of credit risk.

 

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As part of the TotalSolution® program, we offer sales-type leases to our customers to fund their purchases. As of April 30, 2008 and 2009, we had $57.6 million and $59.4 million, respectively, of sales-type lease receivables on our balance sheet. We regularly sell the net rental streams from sales-type leases to financial institutions. Recourse on the sold rental payments is contractually limited to a percentage of the net credit losses in a given annual period as compared to the beginning portfolio balance for a specific portfolio of sold leases. As of April 30, 2008 and 2009, we were subject to limited recourse on rental streams sold to financial institutions with such recourse varying from 9.9% to 15.0% of the net book value of sold rental streams. We maintain reserves against our estimate of potential recourse for the balance of sales-type leases and for the balance of sold rental payments remaining unbilled. Reserve levels are established based on portfolio size, loss experience, levels of past due accounts and periodic detailed reviews of the portfolio. The aggregate reserve for uncollectible lease payments and recourse liability represents the reserve for the entire lease portfolio. Our historic loss rates, defined as net write off as a percentage of the average aggregate portfolio, have ranged between 0.7% and 2.7% per annum over the past nine years. We believe our current reserve levels are sufficient given our historic loss rates. The following table provides detail on the total net balances in sales-type leases:

 

    Fiscal Year
Ended April 30,
    2008   2009
    (in millions)

Lease balances included in consolidated accounts receivable, net of allocated allowances of $3.3 million (2008 — $3.0 million)

  $ 9.5   $ 10.5

Net investment in sales-type leases:

   

Current portion, net of allowances of $1.5 million (2008 — $1.5 million)

    23.4     30.2

Long-term portion, includes residual amounts of $2.7 million (2008 — $1.3 million);
net of allowances of $1.4 million (2008 — $1.9 million)

    34.2     29.2
           

Total investment in sales-type leases, net of allowances of $6.2 million
(2008 — $6.4 million)

  $ 67.1   $ 69.9

Sold rental payments remaining unbilled (subject to limited recourse provisions), net of lease recourse liability reserves of $9.9 million (2008 — $13.3 million)

    234.3     205.8
           

Total balance of sales-type leases and sold rental payments remaining unbilled, net of allowances and reserves

  $ 301.4   $ 275.7
           

Total allowances and reserves for entire lease portfolio (including lease recourse liabilities)

  $ 19.7   $ 16.1
           

Disclosure Controls and Procedures and Internal Controls Over Financial Reporting

Disclosure Controls and Procedures

Our management carried out an evaluation, with the participation of our chief executive officer and our chief financial officer of the effectiveness of our disclosure controls and procedures as of April 30, 2009. Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that it files or submits under the U.S. Securities Exchange Act of 1934, as amended, or the Exchange Act, was recorded, processed, summarized and reported, within the time period specified in the rules and forms of the SEC.

For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

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Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal controls over financial reporting.

Internal control over financial reporting is a process designed by, or under the supervision of, the chief executive officer and chief financial officer, or persons performing similar functions, and affected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

As of April 30, 2009, our management, including the chief executive officer and chief financial officer, completed their evaluation of the effectiveness of our internal control over financial reporting. This evaluation was based on the criteria set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management identified no material weaknesses that existed in the design or operation of our internal control over financial reporting and concluded that our internal control over financial reporting was effective. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC. We will be required to include an attestation report of our registered public accounting firm in our annual report for fiscal 2011.

Changes in Internal Control over Financial Reporting

In conjunction with our review and evaluation of our internal control over financial reporting during the year ended April 30, 2009, we implemented a number of measures to improve our internal control over financial reporting in various processes. These included, among others, such measures as improvements to our financial statement close process, increased standardization of controls across functions, and further automation of processes. Our management has assessed that, while these changes were an improvement to our control activities, there have not been any changes in its internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the year ended April 30, 2009 that materially affected, or were reasonably likely to materially affect, our internal control over financial reporting. Management continues to monitor our business processes, and expects that it will continue to make improvements to our processes and controls in upcoming periods, in efforts to improve process efficiency and effectively utilize our resources.

Critical Accounting Policies

The preparation of our consolidated financial statements and related disclosures in conformity with U.S. GAAP requires us to make estimates and assumptions about future events that can have a material impact on the amounts reported in our consolidated financial statements and accompanying notes. The determination of estimates requires the use of assumptions and the exercise of judgment and as such actual results could differ from those estimated. Our significant accounting policies are described in Note 2 to our audited consolidated financial statements for fiscal 2009. The following critical accounting policies are those that we believe require a high level of subjectivity and judgment and have a material impact on our financial condition and operating performance: revenue recognition, allowance for doubtful accounts, provisions for inventory, provisions for product warranties, long-lived asset depreciation, goodwill valuation, special charges, contingencies, deferred taxes, pension and post-retirement benefits, and derivative instruments.

Revenue Recognition

For products sold through our network of wholesale distributors, solution providers, system integrators, authorized channel partners, and other technology providers, arrangements usually involve multiple elements, including post-contract technical support and training. We also sell products and installation and related

 

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maintenance and support services directly to customers. Due to the complexity of our sales agreements, judgment is routinely applied principally in the areas of customer acceptance, product returns, unbundling of multiple element arrangements, and collectibility.

Our sales arrangements frequently include a contractual acceptance provision that specifies certain acceptance criteria and the period in which a product must be accepted or returned. Consistent with SEC Staff Accounting Bulletin 101, we make an assessment of whether or not these acceptance criteria will be met by referring to prior experience in successfully complying with customer specifications. In those cases where experience supports that acceptance will be met, we recognize revenue once delivery is complete, title and risk of loss has passed, the fee is fixed and determinable and persuasive evidence of an arrangement exists.

The provision for estimated sales returns is recorded as a reduction of revenues at the time of revenue recognition. If our estimate of sales returns is too low, additional charges will be incurred in future periods and these additional charges could have a material adverse effect on our results of operations. As a percentage of annual revenues, the provision for sales returns was 1.0% as of April 30, 2009 compared to 0.6% as of April 30, 2008.

Direct revenue sales are comprised of multiple elements which consist of products, maintenance and installation services. We unbundle these products, maintenance and installation services based on vendor specific objective evidence with any discounts allocated across all elements on a pro-rata basis.

Collectibility is assessed based primarily on the credit worthiness of the customer as determined by credit checks and analysis, as well as customer payment history. Different judgments or different contract terms could adversely affect the amount and timing of revenues recorded.

Sales Type Leases

In a transaction containing a sales type lease, hardware and software revenues are recognized at the present value of the payments allocated to the hardware and software lease elements at the time of system sale. Revenues from software support are deferred and recognized over the period of support. Revenues from sales type leases are allocated between hardware and software elements on a relative fair value basis. The application of the relative fair value allocation method is based on management’s best estimate of relative fair values and requires the use of professional judgment in obtaining evidence of fair value for the various elements.

The costs of systems installed under these sales-leases are recorded as costs of sales. The net rental streams are sold to financial institutions on a regular basis with the income streams discounted by prevailing like-term rates at the time of sale. Gains or losses resulting from the sale of net rental payments from such leases are recorded as net sales. Furthermore, when the initial term of the lease is concluded, customers have the option to renew the lease at a payment and term less than the original lease. We establish and maintain reserves against potential recourse following the resales based upon historical loss experience, past due accounts and specific account analysis. The allowance for uncollectible minimum lease payments and recourse liability at the end of the year represents reserves against the entire lease portfolio. Management reviews the adequacy of the allowance on a regular basis and adjusts the allowance as required. These reserves are either netted in the accounts receivable, current and long term components of “Net investments in sales type leases” on the balance sheet, or included in long term liabilities on our balance sheet for off-balance sheet leases.

Our total reserve for losses related to the entire lease portfolio, including amounts classified as accounts receivable on our balance sheet was 5.8% of the ending aggregate lease portfolio as of April 30, 2009 compared to 6.5% in 2008. The reserve is based on a review of Inter-Tel’s write-off experience prior to the Inter-Tel acquisition and accounts receivable agings as of April 30, 2009. We believe our reserves are adequate to cover future potential write-offs. Should, however, the financial condition of our customers deteriorate in the future, additional reserves in amounts that could be material to the financial statements could be required.

 

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Allowance for Doubtful Accounts

Our allowance for doubtful accounts is based on our assessment of the collectibility of customer accounts. A considerable amount of judgment is required in order to make this assessment including a detailed analysis of the aging of our accounts receivable and the current credit worthiness of our customers and an analysis of historical bad debts and other adjustments. If there is a deterioration of a major customer’s credit worthiness or actual defaults are higher than our historical experience, our estimate of the recoverability of amounts due could be adversely affected. We review in detail our allowance for doubtful accounts on a quarterly basis and adjust the allowance amount estimate to reflect actual portfolio performance and change in future portfolio performance expectations. As of April 30, 2008 and April 30, 2009, the provision represented 9% and 11% of gross receivables, respectively. The increase in reserve level as of April 30, 2009 was due primarily to the challenging economic market conditions in the U.S. and the resulting higher level of reserves on receivables from customers in that region.

Inventory Obsolescence

In order to record inventory at the lower of cost or market, we must assess our inventory valuation, which requires judgment as to future demand. We adjust our inventory balance based on economic considerations, historical usage, inventory turnover and product life cycles through the recording of a write-down which is included in the cost of revenue. Assumptions relating to economic conditions and product life cycle changes are inherently subjective and have a significant impact on the amount of the write-down.

If there is a sudden and significant decrease in demand for our products, or a higher risk of inventory obsolescence because of rapidly changing technology and customer requirements, we may be required to increase our inventory write-downs and our gross margin could be adversely affected.

Warranty Provision

We accrue warranty costs, as part of cost of revenues, based on expected material and labor support costs. The cost to service the warranty is estimated on the date of sale based upon historical trends in the volume of product returns within a warranty period and the cost to repair or replace the equipment. If we experience an increase in warranty claims that is higher than our past experience, or an increase in actual costs to service the claims is experienced, gross margin could be adversely affected. The following table provides a continuity of the warranty provision over the past two years.

 

     Fiscal Year Ended
April 30,
 
     2008     2009  
     (in millions)  

Balance, beginning of period

   $ 1.8      $ 2.4   

Warranty costs incurred

     (1.7     (1.4

Warranties issued

     1.6        1.3   

Other

     0.7          
                

Balance, end of period

   $ 2.4      $ 2.3   
                

Accounting for Business Combinations

We account for business combinations in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations, where the deemed purchase price is allocated to the underlying tangible and identifiable assets and liabilities acquired based upon their respective fair values on the acquisition date and are subject to change during the following 12 month period. Any such changes would impact the amount we have recorded as goodwill.

 

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In determining the fair values of assets acquired and liabilities assumed, we were required to make significant estimates and assumptions, including projections of future events and operating performance. In fiscal 2008, we allocated $180.8 million to intangible assets (including customer relationships, developed technology and trade name) based on management’s best estimate. These intangible assets are being amortized over their weighted-average estimated useful lives of eight years, eight years and two years, respectively. In addition, we allocated $5.0 million to in-process research and development, which was expensed during the year ended April 30, 2008.

Long-Lived Assets

We have recorded property, plant and equipment and intangible assets at cost less accumulated amortization. The determination of useful lives and whether or not these assets are impaired involves significant judgment. We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

In response to changes in industry and market conditions, we may strategically realign our resources and consider restructuring or disposing of our exiting businesses, which could result in an impairment charge. We have not recorded any impairment charges in fiscal 2008 or fiscal 2009.

Goodwill

We assess goodwill for impairment on an annual basis or more frequently if circumstances warrant, as required by Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, or SFAS 142. An impairment charge is recorded if the implied fair value of goodwill of a reporting unit is less than the book value of goodwill for that unit. We have four geographic units that have assigned goodwill of $134.5 million as of April 30, 2009. Quoted stock market prices are not available for these individual reporting units. Accordingly, consistent with SFAS 142, our methodology for estimating the fair value of each reporting unit primarily considers estimated future revenues and cash flows for those reporting units along with many other assumptions. Future revenue estimates inherently involve a significant amount of judgment, and significant movements in revenues or changes in the assumptions used may result in fluctuations in the value of goodwill that is supported. The result of the most recent annual impairment test resulted in an impairment charge of $284.5 million being recorded against goodwill in our U.S. reporting entity. Goodwill in our other reporting units was found not be impaired.

Special Charges

We record restructuring, exit and other loss accruals when the liability has been incurred. We reassess the accruals on a regular basis to reflect changes in the timing or amount of estimated restructuring and termination costs on which the original estimates were based. New restructuring accruals or reversals of previous accruals are recorded in the period of change. Additional accruals for fiscal 2008 and fiscal 2009 resulted from new restructuring activities and severance costs, including restructuring costs incurred in connection with the Inter-Tel acquisition. No additions or reversals were made in fiscal 2008 or 2009 as a result of changes in estimates.

Lease Termination Obligations

Estimates used to establish reserves related to real estate lease obligations have been reduced for sublease income that we believe is probable. Because certain real estate lease obligations extend through fiscal 2011, assumptions were made as to the timing, availability and amount of sublease income that we expect to receive. In making these assumptions, many variables were considered such as the vacancy rates of commercial real estate in local markets and the market rate for sublease rentals. Because we are required to project sublease income for many years into the future, estimates and assumptions regarding the commercial real estate market that were used to calculate future sublease income may be different from actual sublease income. During the

 

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12 months ended April 30, 2009, we increased the provision by $7.9 million as a result of vacating leased premises in the United States that became redundant after the Inter-Tel acquisition.

As of April 30, 2009, the combined balance relating to lease termination obligations was $8.1 million compared to $6.2 million as of April 30, 2008. This estimate will change as a result of actual results, the passage of time and changes in assumptions regarding vacancy, market rate, and operating costs.

Deferred Taxes

We have significant net deferred tax assets resulting from operating loss carryforwards, tax credit carryforwards and deductible temporary differences that may reduce taxable income in future periods. Valuation allowances have been established for deferred tax assets based on a “more likely than not” threshold. We assess the likelihood that our deferred tax assets will be recovered from our ability to generate sufficient future taxable income, and to the extent that recovery is not believed to be more likely than not, a valuation allowance is recorded. We have incurred significant operating losses since our incorporation in 2001. We believe there is no assurance that we will be able to achieve profitability in some jurisdictions, or that, if achieved, such profitability can be sustained. Accordingly, based on our current circumstances and uncertainty regarding the future utilization of net deferred tax assets on certain U.S. entities and non-U.S. jurisdictions relating to most areas of the business, we recorded a $118.8 million valuation allowance against $172.6 million deferred tax assets in fiscal 2009 compared to a $121.1 million valuation allowance against $154.2 million deferred tax assets in fiscal 2008.

Numerous taxing authorities in the jurisdictions in which we do business are increasing their scrutiny of various tax positions taken by businesses. We believe that we maintain adequate tax reserves to offset the potential tax liabilities that may arise upon audit in these jurisdictions. If such amounts ultimately prove to be unnecessary, the resulting reversal of such reserves would result in tax benefits being recorded in the period the reserves are no longer deemed necessary. If such amounts ultimately prove to be less than the ultimate assessment, a future charge to expense would result.

Pension Costs

We currently maintain a defined benefit pension plan for a number of our past and present employees in the United Kingdom. The plan was closed to new employees in June 2001. Our defined benefit pension costs are developed from actuarial valuations. Inherent in these valuations are key assumptions provided by us to the actuaries, including discount rates, expected return on plan assets and rate of compensation increases. In estimating the rates and returns, we consider current market conditions and anticipate how these will affect discount rates, expected returns and rates of compensation increases. Material changes in our pension benefit costs may occur in the future as a result of changes to these assumptions or from fluctuations in our related headcount or market conditions.

During fiscal 2009 the pension liability recorded on our balance sheet decreased from $76.4 million to $20.1 million due to a decrease in the projected benefit obligation. This decrease in the projected benefit obligation is largely attributable to changes in valuation assumptions in fiscal 2009, in particular increase in the discount rate used to present value the future obligation, which produced an unfavorable impact on both the plan’s assets and obligations.

During fiscal 2009, excluding the effects of foreign currency translations, the pension liability decreased by £24.9 million or $41.0 million.

 

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The increase in the pension obligation is largely attributable to a $68.3 million actuarial gain compared to an actuarial loss of $17.1 million in fiscal 2008. Actuarial gains or losses arise from assumption changes in the obligations and from the difference between expected and actual return on assets. The following assumptions were used in valuing the liabilities and benefits under the pension plan:

 

     Fiscal Year Ended
April 30,
 
     2008     2009  

Discount rate

   5.80   7.30

Compensation increase rate

   3.50   3.00

Inflation rate

   3.50   3.00

Average remaining service life of employees

   18 years      18 years   

Stock Based Compensation

Effective May 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS 123(R), which requires that we recognize compensation expense for the fair value of stock options granted. In order to determine the options fair value and quantify the expense, SFAS 123(R) requires that we make subjective input assumptions regarding the expected life of the options, expected volatility of the options and other items. Based on the assumptions we made, share based compensation decreased our net income by $2.4 million for the year ended April 30, 2009 compared to $1.7 million for the year ended April 30, 2008. We expect this expense to increase in future years as additional options are granted. Changes to the underlying assumptions may have a significant impact on the underlying value of the stock options, which could have a material impact on our financial statements.

Derivative Instruments

In connection with the Inter-Tel acquisition an embedded derivative was identified on the Class 1 Preferred Shares, since holders have the ability to receive cash equal to the value of shares into which the instrument converts after seven years. Accordingly, the embedded derivative was recorded at fair value, and marked to market throughout the period to redemption with changes in value recorded in the Consolidated Statements of Operations. We determined the fair value of the derivative using the lattice-binomial model, and the following assumptions: seven year life, interest rate of 2.00% (2008—3%), volatility of 85% (2008—76.6%) and no dividends (2008—none). In addition to these input assumptions, the value of the derivative is also driven by the common share fair value, which is based on a number of highly subjective qualitative and quantitative assumptions made by management, and management’s assessment of the timing of an initial public offering.

In fiscal 2009, a fair value gain of $100.2 million (2008—$6.0 million) was recorded as a result of re-measuring the derivative instrument. The gain was primarily driven by the reduction in the fair value of our shares.

Determination of Fair Market Value of our Common Shares

The fair market value of our common shares is determined by independent external valuation experts and management and reviewed by our board of directors on a regular basis. As permitted by the AICPA Audit and Accounting Practice Aid “Valuation of Privately-Held Company Equity Securities Issued as Compensation,” the valuation firm estimated the fair value of our common equity on a per share basis using a probability weighted analysis of the present value of the returns afforded to our common shareholders. In doing this analysis, the valuation firm considered various scenarios including our continued operation as a private company and an orderly liquidation of our assets. The valuation firm then adjusted the range of probabilities assigned to these scenarios as appropriate. In estimating the fair value of our common shares on a going-concern basis, the valuation firm determined that given the nature of our operations and the availability of both historic and forecast financial information, estimation of the value of our common shares on a per share basis using the market

 

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approach methodologies and income approach methodologies was appropriate. The market approach was based on historical valuation multiples of comparable publicly traded companies, and the income approach was based on a discounted cash flow method applied to management’s projections.

Recent Accounting Pronouncements

SFAS 157

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. In February 2008, the FASB amended SFAS 157 by issuing FASB Staff Position 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13, or FSP 157-1. In February 2008, the FASB also issued FASB Staff Position 157-2, Effective Date of FASB Statement No. 157, or FSP 157-2. FSP 157-1 amends SFAS 157 to exclude fair value requirements on leases. FSP 157-2 delays the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. We adopted certain provisions of SFAS 157, effective May 1, 2008 (see also Note 3 to our audited consolidated financial statements for fiscal 2009). As a result of the amendments of FSP 157-1 and FSP 157-2, we have not assessed the fair value impact on our goodwill, intangible assets, provision for exit activities and leases. We are currently evaluating the effect that the adoption of the provisions deferred by FSP 157-1 and FSP 157-2 will have on our financial position and results of operations.

SFAS 159

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115, or SFAS 159, which allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses for that item shall be reported in current earnings at each subsequent reporting date. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurement attributes we elect for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We elected not to apply the standards in SFAS 159 on our financial statements.

SFAS 160

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51, or SFAS 160. SFAS 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We do not currently have any minority interests.

SFAS 141(R)

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), Business Combinations, or SFAS 141(R), which replaces SFAS 141 and significantly changes the accounting for business combinations. SFAS 141(R) requires assets and liabilities acquired in a business combination, contingent consideration, and certain acquired contingencies to be measured at their fair values as of the date of acquisition. SFAS 141(R) also requires that (1) acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred; (2) noncontrolling interests (formerly known as

 

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“minority interests”) be valued at fair value at the acquisition date; (3) in-process research and development be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; (4) restructuring costs associated with a business combination be expensed subsequent to the acquisition date; and (5) changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and earlier adoption is not permitted. As such, this standard will be effective for business combinations that are entered into after May 1, 2009. Earlier adoption is not permitted.

SFAS 161

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, or SFAS 161, Disclosures about Derivative Instruments and Hedging Activities. SFAS 161 requires companies to expand their disclosure on derivatives to include information about the fair value of derivatives, related credit risks and a company’s strategies and objectives for using derivatives so that users can understand how and why a company uses derivative instruments, and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We are currently evaluating the impact, if any, that SFAS 161 will have on our consolidated financial statements.

FSP SFAS 142-3

In April 2008, the FASB issued FSP Statement of Financial Accounting Standards No. 142-3, Determination of the Useful Life of Intangible Assets, or FSP SFAS 142-3. FSP SFAS 142-3 provides guidance with respect to estimating the useful lives of recognized intangible assets acquired on or after the effective date and requires additional disclosure related to the renewal or extension of the terms of recognized intangible assets. FSP SFAS 142-3 is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact, if any, that FSP SFAS 142-3 will have on our consolidated financial statements.

SFAS 162

In May 2008, the FASB issued Statement of Financial Accounting Standards No. 162, The Hierarchy of Generally Accepted Accounting Principles, or SFAS 162, which identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of non-governmental entities that are presented in conformity with U.S. GAAP. SFAS 162 is effective 60 days following the SEC approval of the Public Company Accounting Oversight Board, or the PCAOB, amendments to AU Section 411, The Meaning of Present Fairly in Conformity with GAAP. We do not expect the adoption of SFAS 162 to have an impact on our consolidated financial position, results of operations or cash flows.

FSP SFAS 132(R)-1

In December 2008, the FASB issued FSP No. 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets, or FSP 132, which provides additional guidance on employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. This interpretation is effective for financial statements issued for fiscal years ending after December 15, 2009. The adoption of this FSP increases the disclosures in the financial statements related to the assets of our defined benefit pension plans. We are currently evaluating the impact of this FSP on our consolidated financial statements.

SFAS 165

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, Subsequent Events, or SFAS 165, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular,

 

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this statement sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. This standard is applicable for interim or annual financial periods ending after June 15, 2009. We do not expect the adoption of this standard to have an impact on our consolidated financial position, results of operations or cash flows.

SFAS 168

In June 2009, the FASB issued FASB Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a Replacement of FASB Statement No. 162, or FASB ASC. The FASB ASC will be the single source of authoritative non-governmental U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB ASC is effective for interim and annual periods ending after September 15, 2009. All pre-FASB ASC GAAP are superseded as described in FASB Statement No. 168. All other accounting literature not included in FASB ASC is non-authoritative. We adopted FASB ASC in the second quarter of fiscal 2010. FASB ASC did not have a material impact on our consolidated financial statements. We have updated references to FASB ASC, as appropriate.

ASU 2009-14

In October 2009, the FASB issued Accounting Standards Update, or ASU, 2009-14, to address concerns raised by constituents relating to the accounting for revenue arrangements that contain tangible products and software. The amendments in this ASU change the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality will no longer be within the scope of guidance in the Software—Revenue Recognition Subtopic of the FASB ASC. The amendments in this ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are required to adopt this ASU in fiscal 2011. We are currently evaluating the effect that the adoption of this ASU will have on our consolidated financial statements.

ASU 2009-13

In October 2009, the FASB issued ASU, 2009-13, to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This ASU provides amendments to the criteria in the Revenue Recognition—Multiple-Element Arrangements Subtopic of the FASB ASC. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing U.S. GAAP. The amendments in this ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We are required to adopt this ASU in fiscal 2011. We are currently evaluating the effect that the adoption of this ASU will have on our consolidated financial statements.

EITF 07-05

In June 2008, the Emerging Issues Task Force, or EITF, issued EITF 07-05, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock. The objective of this Issue is to provide guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity’s own stock. This issue outlines how an entity shall evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock using the following two-step approach: (1) Evaluate the instrument’s contingent exercise provisions, if any. (2): Evaluate the instrument’s settlement provisions. This

 

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Issue is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Earlier application by an entity that has previously adopted an alternative accounting policy is not permitted. This issue did not have a material impact on the Company’s consolidated financial statements.

 

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BUSINESS

Overview

We are the leading provider of integrated communications solutions focused on the SME market. We also have a strong and growing presence in the large enterprise market with a portfolio of products that support up to 65,000 users. Our IP-based communications solutions consist of a combination of IP telephony platforms, which we deliver as software, appliances and desktop devices, and a suite of UCC applications that integrate voice, video and data communications with business applications. We refer to these IP telephony platforms and UCC applications as integrated communications solutions, because they meet our customers’ specific communications needs. We believe that our solutions, including associated managed and network services, enable our customers to realize significant cost benefits and to conduct their business more effectively.

We have delivered innovative communications solutions to our customers for over 35 years. Over the past decade, we have made a significant investment in developing our IP-based communications solutions and transitioning our distribution channels to take advantage of the industry’s shift from legacy systems to IP-based solutions, including UCC applications. Our research and development has produced a global portfolio of over 1,200 patents and pending applications, and provides us with the expertise to anticipate market trends and meet the current and future needs of our customers. As part of our business strategy, we acquired Inter-Tel in August 2007, which significantly enhanced our ability to target SME customers with our IP solutions by expanding our U.S. distribution and managed service capabilities. Today, we have a direct and indirect distribution channel, which addresses the needs of customers in 90 countries through our 80 offices and more than 1,600 channel partners worldwide. We also differentiate our solutions and enhance our channels to market through strategic relationships with innovative technology partners.

Since the introduction of our IP-based systems in 1999, we have shipped more than 120,000 IP-based appliances to support the communications needs of over 6.6 million users. Our solutions are scalable, flexible and easy to deploy, manage and use. We have designed our appliances to allow access to our solutions from mobile devices. Our solutions interoperate with various systems supplied by other vendors, which allows our customers to preserve their existing communications investments and gives them the flexibility to choose the solutions that best meet their particular needs. We also offer our customers the flexibility of an end-to-end solution, in which our appliances and applications are integrated with our managed services (including a combination of leasing, design and field services) and network services (including voice and data connectivity, long distance and hosted applications).

Industry

Market Trends

Businesses are increasingly focused on deploying comprehensive communications solutions that reduce cost, increase productivity and provide competitive advantages. These solutions need to be flexible in order to respond to the following trends driving growth in the communications market.

Evolution to a converged IP-based environment

Historically, businesses have used an IP-based data network for their data communications and a separate telephony network for their voice communications. These legacy telephony networks are based on circuit-switched technology, which use proprietary operating systems, limiting their ability to integrate communications with other business processes and applications. Additionally, these legacy networks are expensive to manage, maintain and scale as an organization grows. As a result, businesses are migrating to IP-based communications solutions that can address their voice, video, data and business applications requirements within a single converged network.

 

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While the costs of maintaining inefficient, legacy infrastructures are high, businesses face a number of challenges as they look to move to more cost effective, integrated IP-based networks. Many businesses, for budget and technical reasons, prefer to transition to an IP-based network over time rather than in a single phase. A transition period allows businesses to leverage their existing investment and gradually adopt next generation communications capabilities.

The transition to IP-based communications solutions provides significant benefits for businesses, including:

 

   

enhanced workforce productivity by providing access to communications solutions wherever users are located—in the office, at home or in a remote location;

 

   

reduced costs of deploying, operating, supporting and growing their communications infrastructure;

 

   

the creation of highly functional applications that can be distributed easily at a much lower cost than is the case with legacy systems; and

 

   

the use of open standards, which enable interoperability and permit partners, channels and customers to select and integrate third party applications.

Adoption of software-based solutions and UCC applications

The evolution to converged IP-based networks has given rise to two important trends: the transition from hardware-based to software-based communications solutions and the ability to deliver UCC applications. While these trends were initially adopted primarily by large scale enterprises, the lower cost of ownership and implementation is increasingly driving adoption among SMEs, which we define as enterprises with up to 1,000 employees.

The transition to software-based communications solutions provides operational cost benefits and the ability to integrate communications with other business processes and applications. Software-based communications solutions provide the customer with the flexibility to implement these solutions either on their own premises, as an appliance or integrated into a data center, or offsite as a hosted service.

UCC allows businesses to move beyond basic fixed telephony and disparate communications tools toward integrated multi-media communications and collaboration between users, wherever they may be located. UCC includes the integrated use of various media and messaging, such as voice, video and data. Collaboration tools, such as audio, video and web-based conferencing tools, can also be integrated on a UCC platform.

Adoption of business mobility solutions

As workforces become increasingly mobile, businesses need communication platforms that allow employees to seamlessly access solutions from their mobile devices. Gartner, in a report published in December 2008, predicts that by 2012, 23% of enterprise mobile users will have fully substituted their desktop device for a mobile device, up from 4% in 2008(1). Given the rapid adoption of mobile devices as network access interfaces, businesses require a full suite of mobility enabled UCC applications to optimize workforce productivity.

Evolution to managed services

SMEs are increasingly interested in outsourcing management of their communications requirements through managed service offerings. Managed services may include equipment leasing, design, installation,

 

(1)

Gartner, Inc., “Enterprise Mobile Phones Will Replace Desktop Phones in North America,” December 2008, Phillip Redman.

 

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ongoing support, network services or various professional services. Managed services offerings allow businesses to focus on their core expertise and, in some cases, substitute what would otherwise be a large capital expenditure for a predictable operating expense. An effective managed service offering creates efficiencies, allowing for reduced operational costs and, as a result, a reduction in total cost of ownership of the communications systems.

SMEs are less likely to have the resources needed to respond to increasingly complex communications infrastructure and, as a result, are more willing to fully outsource their communications needs if the economic benefits are compelling. In addition, as the proliferation of converged IP-based networks continues to improve the quality of hosted services, managed service providers will increasingly offer a mix of on-premise and hosted solutions, resulting in increased value for customers.

The Market Opportunity

The market for IP telephony solutions is growing as businesses continue to transition from legacy telephony infrastructure. According to a report published in September 2009, Gartner forecasts the global enterprise IP telephony market will grow from $7.4 billion in 2009 to $11.8 billion in 2013, a compound annual growth rate, or CAGR, of 12.3%(1). Further, Gartner forecasts that the installed base of IP-based telephony will grow from approximately 24% of the total telephony installed base in 2008 to over 50% in 2013(2).

The market for UCC is also growing as businesses move beyond basic fixed telephony and disparate communications tools toward integrated, multi-media communications and collaboration between users, wherever they may be located. Forrester estimates that UCC was a $1.2 billion market in 2008 and will grow to $14.5 billion in 2015, a CAGR of 35.9%(3).

The market for managed services is growing as businesses are increasingly interested in outsourcing management of their communications requirements through managed services offerings. According to T3i Group, this market in the United States, which T3i Group calls “converged services,” was a $3.8 billion market in 2009 and will grow to $6.9 billion in 2013, a CAGR of 16.3%(4).

As a result of these developments, there is a need for business communication solutions that are scalable, software-based and capable of interoperating with legacy telephony infrastructure, and that offer flexible implementation and managed service options.

Our Competitive Strengths

We believe our competitive strengths position us well to capitalize on the opportunities created by the market trends in our industry. These strengths include:

Leadership in the SME communications market

We are a recognized leader in the SME communications market. By developing a full range of solutions that address the widely varying product and service requirements of SMEs, we have built a diverse and loyal customer base. In the SME segment, for the nine months ended September 30, 2009, we were the third largest

 

(1) Gartner, Inc., “Forecast: Enterprise Telephony Equipment, Worldwide, 2004-2013, (4Q09 Update),” December 2009, Megan Fernandez.
(2) Gartner, Inc., “Forecast Analysis: Enterprise Communications Applications, Worldwide, 2004-2013, (3Q09 Update),” September 2009, Steve Cramoysan et al.
(3) Market Overview: Sizing Unified Communications, Forrester Research, Inc., February 2009.
(4) T3i Group LLC, “InfoTrack for Unified Communications: 2009 Enterprise and SMB Market Forecasts,” June 2009.

 

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provider of converged IP telephony lines in North America(5) and second largest provider of IP telephony extensions in the United Kingdom(6). We believe we are well positioned to further capitalize on future growth in integrated communications solutions for the SME market.

Comprehensive portfolio of IP-based communications solutions

We offer a comprehensive portfolio of IP-based communications solutions, which consist of IP telephony platforms and UCC applications. These solutions are designed to provide implementation flexibility so that businesses can transition to an IP-based network over time while maintaining a seamless unified communications experience. Our IP-based communications platforms efficiently scale from small businesses to large distributed enterprises. We believe our comprehensive integrated communications solutions provide our customers with significant flexibility, cost efficiency and enhanced employee productivity as they transition to converged IP-based environments and UCC.

Focus on software-based innovation and UCC

Our history of success as an early adopter of software-based communications solutions has provided us with the foundation for continued innovation in IP-based communications and UCC. We have a broad portfolio of over 1,200 patents and pending applications, covering over 450 inventions, in areas such as VoIP, collaboration and user availability information, also known as presence. We believe our expertise in software-based innovation will allow us to maintain a leading-edge product portfolio, offering our customers improved functionality and economics.

End-to-end managed services and network services offerings

We provide a comprehensive managed services offering, which includes products, complete installation and ongoing maintenance, professional services and network connectivity, complemented by a range of financing alternatives. Our managed services offering allows businesses to focus on their core expertise and, in some cases, substitute what would otherwise be a large capital expenditure for a predictable operating expense. These managed services relationships provide us with recurring revenue and significant visibility into our customers’ future communications needs. We have a strong record of leveraging these relationships into new revenue opportunities.

In addition, through our network services, we offer SME customers local and long-distance voice services, internet access and comprehensive data network offerings on our partners’ networks. Our network services allow us to expand connectivity options for our customers and enhance the functionality of our solutions.

Leading global distribution channel

We have a flexible go-to-market strategy tailored to our target markets, enabling us to more effectively reach vertical and geographic markets around the world. Our distribution network includes our value-added resellers, service providers, high-touch sales and direct channel, all of which we leverage in parallel depending on customer requirements and opportunities. We design our offerings to complement our channel partners’ capabilities, reduce their expenses and enhance their profitability and competitiveness, all of which increases our channel partners’ loyalty to us. Today, we have over 1,600 channel partners in 90 countries, including 130 exclusive channel partners in the United States.

 

 

(5) T3i Group LLC, “InfoTrack for Enterprise Communications: Q109, Q209 and Q309 North America Reports.”
(6) MZA Ltd., “The World Corded PBX/IP PBX Market UK Quarterly Edition—Pivot Tables Q3 2009,” December 2009.

 

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Strategy

Our strategy is to increase our SME market share and expand our target markets by enhancing our IP-based communications solutions, including UCC applications, and selling these solutions through our global distribution channel. To accomplish this objective, we intend to:

Leverage our highly scalable business model

 

   

We intend to capitalize on our existing, broad customer base to generate additional revenue from system expansion and upgrades and the provision of new applications, managed services and network services.

 

   

We intend to leverage our global sales and distribution network to further penetrate our target markets.

 

   

We intend to leverage our existing solutions portfolio to further expand our position in larger enterprise and international markets.

 

   

We expect our increasing emphasis on software solutions will improve our longterm operating performance due to higher margins and lower fulfillment costs.

 

   

We have formed a network of strategic partnerships and alliances that we expect will enable us to further improve the functionality and features of our solutions through joint research and development activities.

Invest in innovation to drive growth

 

   

We intend to continue to capitalize on ongoing industry trends through early and targeted investment in research and development. As a result of our investments in IP-based communications solutions, we believe we are now well positioned to capture growth in the developing UCC market. Furthermore, we are at the forefront of the transition in communications technology from hardware-based to software-based communications solutions, and will continue to invest in software to increase the functionality and versatility of our offerings.

 

   

We will continue to leverage our proven expertise and leading position in the SME market by strategically investing in the development of solutions that effectively address the widely varying product and service requirements of SMEs and larger enterprises characterized by similar requirements.

 

   

We will continue to pursue strategic technology and distribution relationships, alliances and acquisitions that further enhance our integrated communications offerings.

Continue to develop our global distribution channel

 

   

We will continue to invest in supporting and enhancing our global distribution channel to capitalize on the industry trends towards software-based communications solutions and UCC.

 

   

We intend to broaden our channels to market by leveraging the channels of our strategic partners.

 

   

We plan to aggressively target channel disruption, resulting from industry consolidation, to grow our distribution channel and ultimately our market position.

 

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Expand managed and network services offerings

 

   

Our existing managed services offering and customer base form an important foundation from which we intend to capitalize on the new opportunities for hosted services and communications-as-a-service in our target markets.

 

   

We plan to leverage our applications by introducing additional software-based communications solutions that enable the delivery of cost-effective hosted IP-based communications solutions.

Our Solutions

Our IP-based communications solutions consist of a combination of IP telephony platforms, which we deliver as software, appliances and desktop devices, and a suite of UCC applications that integrate voice, video and data communications with business applications. These products are complemented by our network services and managed services.

We focus on ensuring that our products address a broad range of customer and geographic markets. Our solutions are scalable, flexible and easy to deploy, manage and use. We believe that our solutions, including our managed and network services, enable our customers to realize significant cost benefits and to conduct their business more effectively.

IP Telephony Platforms

Software

Our IP telephony software provides the foundation of our integrated communication solutions. In order to efficiently address specific markets, taking into account business size, operations, infrastructure, deployment and price, our IP telephony software may be deployed on industry standard servers or on functionally optimized appliances.

Our Mitel Communications Director, or MCD, is a software product suitable for small to large enterprises addressing both pure-IP telephony and hybrid IP telephony markets worldwide. This software performs a variety of functions, including multi-media call control and communications, which allows business users to reach each other, share information and collaborate. MCD can be deployed on industry standard servers, virtualized data center environments or on the Mitel 3300 ICP appliance. Our Multi-instance Communications Director, or MiCD, uses virtualization techniques to run multiple MCDs on a single server. To address businesses that have multiple locations and geographically dispersed data centers, the MCD, and its MiCD and 3300 ICP variants, can be deployed across many different locations yet integrated to create a seamless system. We intend to leverage this platform as part of our network services offering within a hosted environment.

Appliances

Our appliances are optimized yet expandable packages combining the more popular software and hardware capabilities of their intended market. These appliances include:

 

   

Our Mitel 3300 ICP bundles MCD, certain mobility and UCC applications as well as legacy connectivity, and which can be deployed, if required, as a simple IP to legacy gateway and upgraded through licensing to a fully integrated communications appliance.

 

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Mitel 3300 ICP

LOGO

 

   

Our Mitel 5000 CP is an integrated communications appliance addressing the unique feature requirements in North America and the United Kingdom for small businesses with 20 to 250 users. The Mitel 5000 CP addresses both IP and traditional communications needs through an IP-centric hybrid architecture, which allows us to leverage existing customer infrastructure.

 

   

Our Mitel 1000/3000 CS serves the two to 30 user segment of the small business market with our Mitel 1000 and 3000 integrated communications appliances. These appliances provide complete communications capability and broadband and wireless connectivity in a single unit, utilizing a common hardware and software architecture.

Desktop Devices

Our desktop devices include a broad range of IP and digital phones, specialty desktop devices and peripherals, which are recognized in the industry for ease of use, feature set and style. Our IP phones are designed to work across our IP telephony software and appliances, allowing businesses to retain their existing phones as their requirements evolve and providing our channels to market with the ability to minimize their fulfillment and training requirements. These phones also support the SIP standard, allowing them to be used with telephony products supplied by other vendors. Our mid-market and premium IP phones have large, high quality graphical displays which enable easy access to a variety of business applications and web content.

We also offer a variety of specialty desktop devices, including IP operator consoles and conference units, and peripherals that augment our desktop devices. These peripherals include cordless handsets and headsets, receptionist key modules and other modules such as Wi-Fi and gigabit ethernet connectivity, Sun Microsystems, Inc.’s Sun Ray thin client and local phone line integration that enable local enhanced 9-1-1 calling for remote workers. In addition, we partner with industry leading vendors to provide other specialized devices, such as Wi-Fi and wireless phones.

 

Mitel 5360

   Mitel 5330 with cordless headset and handset
LOGO    LOGO

 

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UCC Applications

We offer a broad range of UCC applications that can be deployed in a variety of ways. Our UCC suite of applications work across our MCD and Mitel 5000 platforms, and can also be deployed on industry standard servers in data centers or on our own appliances such as the 3300 ICP.

Our UCC applications include:

 

   

Unified Communicator Advanced—single-user interface to access all unified communications capabilities, including desktop, web and mobile phone, with features that include soft phone capabilities and presence.

 

   

Mobility—extend business communications capabilities to mobile devices, improving the ability of employees to connect with the office and be productive.

 

   

Mitel TeleCollaboration Solution—high definition telepresence, integrated with collaboration and desktop sharing.

 

   

Customer Interaction Solutions—multi-media capable application for the operation and management of contact centers.

 

   

Unified Messaging—unified multi-media messaging, including email, fax and voicemail, with integration into messaging products such as Microsoft Exchange and IBM Lotus Notes.

 

   

Audio & Web Conferencing—collaboration and conferencing tools for users including audio conferencing, webcasting and document sharing.

 

   

Speech Auto Attendant—automated attendant allowing incoming callers to select departments and reach employees by speaking their names.

 

   

Teleworker Solution—simple and secure Mitel and SIP telephone operation and communications for remote and home based users over the public internet.

 

   

Business Dashboard—easy to use business analytics of communications system usage.

LOGO

Network services

We offer connectivity and network services and hosted applications, which we refer to as network services, that can be integrated with our products and delivered as part of our managed services. Our network

 

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services are offered only in the United States and are branded as NetSolutions®. We are licensed as a competitive local exchange carrier in 44 U.S. states and purchase network capacity wholesale from carriers, which we resell to our customers in various retail offerings. We do not operate our own network. Our network services enable us to offer our product solutions from the public network or in combination with our enterprise based products. NetSolutions® include the following types of services:

 

   

local access services;

 

   

long distance services;

 

   

data services such as internet access and private networking services; and

 

   

hosted offerings such as network monitoring and management, audio conferencing, web conferencing, hosted secure internet access and web hosting.

We plan to offer mobile voice and data services for our customers using our partners’ networks in the first half of 2010.

Managed services

We offer a comprehensive managed services portfolio to our customers. These managed services provide our customers with flexibility in integrating our solutions with their particular financial and operational needs. Our managed services include:

 

   

lifecycle management, such as project management, installation, training, maintenance, professional services, consulting, business requirements review and disaster recovery planning;

 

   

support, including product warranty and core software upgrades;

 

   

benefits such as a guaranteed renewal option, risk of loss coverage, fixed migration pricing, upgrade and expansion flexibility; and

 

   

financing of our solutions.

We offer a comprehensive package of managed services in the United States branded as the TotalSolution® program. We also offer some combination of our managed services in certain other countries.

Key Partnerships

One important result of the evolution of integrated communications solutions is the simplicity with which products and services, from a variety of sources, can be easily integrated to provide a better solution for customers. By partnering with others, we can concentrate on our core areas of expertise while leveraging the capabilities of our partners for the benefit of our customers.

We have four key types of partnerships: strategic alliances, operational partners, affiliates and solution alliances.

Our strategic alliances are generally leaders in adjacent markets or complementary technologies which, when combined with our products and services, create beneficial solutions for our customers. Our strategic partners include:

 

   

HP Procurve Networks. We partnered with HP Procurve to define an open standard method of delivering UCC applications on corporate data networks.

 

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Microsoft Corporation. We were an early participant in integrating IP communications with Microsoft’s collaboration and office productivity suites.

 

   

Sun Microsystems, Inc. We were first to market with an integration of thin client computing and UCC including integration with Sun Microsystems’s identity management solutions. We also introduced a pre-integrated UCC application on Sun Microsystems’ hardware.

 

   

VMware, Inc. We partnered with VMware to create the first to market fully virtualized UCC application suite that allows customers’ information technology teams to integrate their communications solutions into their data center application strategy.

Our operational partners allow us to leverage their capabilities to optimize our operational expenses. These include external developers, contract manufacturers, integrators, consultants and professional services.

Our affiliate program with Wesley Clover International Corporation and its subsidiaries, a company controlled by Dr. Matthews, one of our principal shareholders and Chairman of our board of directors, allows us to benefit from early investment in complementary emerging technologies by Wesley Clover and its subsidiaries. See “Certain Relationships and Related Party Transactions.”

We have a large number of solution alliance partners who offer complementary solutions and expertise in areas that are not core to our business, many of which are integrated into our applications.

We also provide access to market for our partners by allowing our channel partners to purchase these third party products through us.

Industry Awards

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

 

   

Frost & Sullivan Best Practices Award (2009)—Mitel Dynamic Extension

 

   

CATA Alliance Private Sector Innovation and/or Leadership in Advanced Technology (2009)—Mitel Dynamic Extension

 

   

TMC Labs Innovation Award Unified Communications (2009)—Mitel Dynamic Extension

 

   

TMC Labs Innovation Award Internet Telephony Magazine (2009)—Mitel Telecollaboration Solution

 

   

IP Contact Center Technology Pioneer Award Customer Interaction Solutions Magazine (2009)—Mitel Customer Interaction Solutions

 

   

Communications Solutions Product of the Year Award (2008)—Mitel Applications Suite

 

   

Unified Communications Excellence Award (2008)—Mitel Live Business Gateway

 

   

Customer Interactions Solutions Product of the Year (2008)—Mitel Customer Interaction Solutions

 

   

Internet Telephony Product of the Year (2008)—Mitel Communications Suite

 

   

TMC Labs Innovation Awards—Internet Telephony Magazine (2008)—Mitel Communications Suite

 

   

Winner Best of Interop—VoIP and Collaboration (2008)—Mitel Communications Suite

 

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Customers

Since the introduction of our IP-based systems in 1999, we have shipped more than 120,000 IP-based appliances to support the communications needs of over 6.6 million users. Our largest customer represented only 0.7% of our revenues in fiscal 2009. Our broad customer base reflects our historical strength in the SME market as well as continued penetration among large enterprises.

We have also developed a comprehensive understanding of certain vertical markets such as education, government, healthcare, hospitality and retail. Our solutions can be tailored to meet the business communications needs of these and other vertical markets.

The following are examples of our end-user customer base in various geographies:

 

Customer

  

Region

Chicago Public Schools

  

United States

InterContinental Hotels Group PLC

  

United States

Madison Memorial Hospital

  

United States

MedQuist Inc.

  

United States

Michigan Technological University

  

United States

MOS Group, Inc. (Mortgage Outreach Services)

  

United States

Premier Beverage Company, LLC

  

United States

Rosewood Hotels & Resorts

  

United States

The Philadelphia Phillies

  

United States

Westgate Resorts (Central Florida Investments, Inc.)

  

United States

Auchan (Groupe Auchan, S.A.)

   EMEA

Cardiff Council

   EMEA

Dubai International Airport

   EMEA

Government of the Netherlands (OverheidsTelecom 2006)

   EMEA

PGA European Tour

   EMEA

Salford City Council

   EMEA

University College London Hospital

   EMEA

Hôpital Montfort Hospital

  

Canada and CALA

The Ontario Association of Community Care Access Centres

  

Canada and CALA

Secretary of Government—Mexico

   Canada and CALA

Sonorad

   Canada and CALA

Great Ocean Road Real Estate

   Asia Pacific

Mowbray College

   Asia Pacific

PetroChina Company Limited

   Asia Pacific

Safe2Travel Pte Ltd

   Asia Pacific

 

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Sales and Marketing

We have a direct and indirect distribution channel, which addresses the needs of customers in 90 countries through our 80 offices and more than 1,600 channel partners worldwide. We differentiate our solutions and enhance our channels to market through strategic relationships with innovative strategic partners.

Our distribution network includes value-added resellers, service providers, high-touch sales and direct channel. We complement and support our channel partners in selected markets using a sales model whereby our sales staff works either directly with a prospective customer, or in coordination with a channel partner in defining the scope, design and implementation of the solution.

Our channel partners are supported by teams of regional account managers, systems engineers, technical account managers and support staff. To complement our channel partner network, we also provide support to independent consultants who assist companies with network design, implementation and vendor selection.

We believe our extensive channel partner network combined with our corporate and regional support allows us to scale our business for volume and sell our solutions globally, resulting in an efficient cost of sale model. We recruit our channel partners with a focus on expanding our market coverage and supporting the skills needed to successfully sell, implement and support IP-based communications solutions. Where we can benefit from operational savings, we perform our own product fulfillment and order logistics, rather than relying on a wholesale distribution network. By performing these functions ourselves, we support our strategy of ensuring global continuity of supply by leveraging in-house logistics, distribution and inventory management with our contract manufacturers. We provide a secure, internet-based distribution and licensing capability for software fulfillment and upgrades, which provides efficiency and reduced distribution costs.

Our marketing organization employs a comprehensive strategy to enhance our brand and brand attributes, generate demand, attract and retain channel partners, differentiate our product offerings and develop solutions for specific industry markets. Brand development is conducted through advertising, media articles, trade conferences, launch campaigns, analyst and public relations, social media and web content delivery. We view public relations as a key element of our marketing strategy to increase our brand awareness. Our channel marketing programs are designed and administered to provide benefits and incentives to ensure competencies, customer satisfaction and quality in the delivery of our solutions to market. Sales promotions and campaigns are conducted for channel partners and customers, to encourage the sale of specific products or in support of new product introductions. Our marketing organization conducts product launches and develops materials and programs for our portfolio of solutions. We also operate demonstration and executive briefing centers equipped with our latest solutions. These centers are used by both our channel partners and our own staff to demonstrate our solutions to existing and prospective customers.

As of October 31, 2009, our sales and marketing organization consisted of 655 employees.

Manufacturing and Supply Chain Management

A significant amount of our portfolio consists of appliances and desktop devices. Our objective is to deliver high quality and differentiated products to our channel partners and customers while optimizing our operational cost structure and ensuring continuity of supply. To enable this, we use a three-pronged strategy, which includes: leveraging our contract manufacturers and component suppliers; protecting supply continuity; and ensuring manufacturing portability across component suppliers and manufacturers.

We have combined our hardware, research and development teams and logistics operations teams to ensure design decisions are made early to optimize the use of our component suppliers and contract manufacturers. This combined organization also allows us to better leverage the development resources of our suppliers and contract manufacturers, giving us flexibility to respond quickly to customer requirements and reduce our manufacturing costs.

 

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We use high volume contract manufacturers and component suppliers and we require them to give us full visibility of component supply, manufacturing process and portability. We diversify ourselves among contract manufacturers and suppliers and we assess the performance of each component supplier and manufacturer for technical innovation, financial strength, quality, support and operational effectiveness. Our primary contract manufacturers are BreconRidge and Flextronics.

We have had a manufacturing relationship with Flextronics since 2006 and with BreconRidge since that company was spun out of our business in 2001. We do not have any long term purchase commitments with either contract manufacturer. BreconRidge is a related party of ours. See “Certain Relationships and Related Party Transactions—BreconRidge Corporation.”

In order to ensure our continuity of supply and reduce supply chain barriers, our products are designed for manufacturing portability. We implement portable designs by limiting the use of custom and sole source components and adhering to industry standard Design For Manufacture and Design For Test guidelines. We dual source the majority of our high volume products, including our core IP telephony platforms, however we sole source some legacy systems and devices.

We manage our own product distribution facilities, which are augmented with third party facilities and, in some regions, wholesale distributors, all of which are managed by our logistics operations team. This is implemented with geographically diverse points of distribution, with our principal facilities being in the United States and Europe.

Research and Development

Our history of success as an early adopter in software-based communications solutions has provided us with the foundation for continued innovation in IP-based communication solutions and UCC applications. We have invested in our research and development practices to take advantage of new methodologies, in part enabled by the technology shift itself. Our research and development efforts are focused on initiatives which we believe are highly likely to provide compelling returns. We achieve this goal through effective partnerships, lead customer engagement, operational measurement and organizational best practices.

We invest in partnerships that allow us to focus on our core areas of expertise while leveraging the core capabilities of our channel partners, which yields a higher value to our customers with minimized investment. We engage lead customers and our channel partners early in our development programs to benefit from their knowledge in the expectation that it will result in better products and more cost effective research and development. We also employ specific processes which allow us to respond quickly to near-term customer and market requirements.

In order to maximize our operational effectiveness, we maintain key metrics which are regularly reviewed for continuous improvement of the overall organization and product portfolio. These metrics cover responsiveness, agility, predictability, innovation and patent creation and efficiency and complement our ISO9001 and ISO14001 certifications.

As of October 31, 2009, our research and development organization was comprised of 424 personnel with 9.2 software developers for each hardware developer. Our research and development personnel are primarily located in three locations: Ottawa, Canada; Chandler, Arizona; and Dublin, Ireland. Our center in Ottawa, Canada is responsible for our MCD platform as well as our messaging, contact center and mobility centered applications. Our center in Chandler, Arizona, near Phoenix, is responsible for our products focused on the SME market and our advanced collaboration applications. Our center in Dublin, Ireland is responsible for our small and very small business products.

Intellectual Property

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

 

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information. These assets are important to our competitiveness and we continue to expand our intellectual property portfolio in order to protect our rights in new technologies and markets. We have a broad portfolio of over 1,200 patents and pending applications, covering over 450 inventions, in areas such as VoIP, collaboration and presence.

We leverage our intellectual property by asserting our rights in certain patented technologies. Certain companies have licensed or offered to purchase patents within our portfolio. We believe that our patent portfolio helps us counter allegations of infringement on the patents held by our competitors.

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

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

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

It is our general practice to include confidentiality and non-disclosure provisions in the agreements entered into with our employees, consultants, manufacturers, end-users, channel partners and others to attempt to limit access to and distribution of our proprietary information. In addition, it is our practice to enter into agreements with employees that include an assignment to us of all intellectual property developed in the course of their employment.

Employees

As of October 31, 2009, we had 2,408 employees of whom 611 were in Canada, 1,252 in the United States, 457 in the United Kingdom and 88 in other countries. At the end of fiscal 2009 we had 2,452 employees and at the end of fiscal 2008 and fiscal 2007 we had 2,956 and 1,518 employees, respectively. Our acquisition of Inter-Tel in fiscal 2008 accounts for the increased headcount in that year. None of our employees are unionized.

Since our acquisition of Inter-Tel, we have realized significant savings and improved operational efficiencies by streamlining and centralizing our back-end processes.

Our future success depends in large part on our ability to attract, retain and motivate our highly skilled managerial, professional and technical resources. Our compensation programs include opportunities for regular annual salary reviews, bonuses and stock options. Many of our employees are also common shareholders and over 88% of our employees hold options to acquire our common shares. We continue to actively recruit skilled employees and we believe that relations with our employees are generally positive.

Competition

Our competition is primarily from two groups of vendors: traditional IP communications vendors and software vendors who are adding communications and collaboration solutions to their offerings.

 

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We compete against many traditional IP communications vendors, including in particular Avaya Inc. and Cisco Systems, Inc., as well as Aastra Technologies Limited, Alcatel-Lucent S.A., NEC Corporation, Panasonic Corporation, ShoreTel, Inc., Siemens Enterprise Networks and Toshiba Corporation. When competing against these companies we generally focus on the following factors:

 

   

the quality of our IP product portfolio and richness of our software applications;

 

   

the tailoring of our product offerings for the SME market;

 

   

the simplicity and usability of our software;

 

   

the application of our solutions to target markets, including certain vertical markets;

 

   

the differentiation offered through our managed and network services;

 

   

the interoperability with equipment supplied by other vendors and with legacy circuit-switched network equipment;

 

   

the scalability and flexibility of our architecture, and the ease of deployment in either a centrally-managed, remotely-distributed or hosted architecture;

 

   

the strength of our strategic alliances and the differentiated solutions that have been delivered from them; and

 

   

the ease of doing business with us and our channel partners.

The second group of competitors consists of software vendors who, in recent years, have expanded their offerings to address the UCC market. These competitors include Microsoft Corporation and Google Inc. When competing against these companies, we highlight our competencies and focus in communications solutions, our ability to migrate to IP-based solutions at a pace that makes sense for the customer and the functional richness of our software applications, in addition to the other factors listed above.

Our industry is also experiencing significant vendor consolidation. Recently, Avaya Inc. acquired Nortel Network’s Enterprise Solutions business, Cisco Systems, Inc. acquired TANDBERG ASA and Hewlett-Packard Company announced the acquisition of 3Com Corporation. We believe this consolidation creates an opportunity for vendors like us to capitalize on disruption among the channel partners of these consolidated businesses as a result of channel overlap or incompatible channel compensation arrangements.

Properties

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

 

Location

 

Purpose

  Area
(In Square Feet)
 

Expiration

Date of Lease

Ottawa, Canada

  Corporate Head Office/Sales/Research and Development (1)   482,244   February 15, 2011

Ottawa, Canada

  Warehouse   9,000   February 15, 2011

Caldicot, United Kingdom

  U.K. and EMEA Regional Headquarters   45,000   March 9, 2021

Chandler, AZ

  Office/Sales/Research & Development   97,000   June 30, 2012

Tempe, AZ

  Warehouse   68,000   June 30, 2012

Reno, NV

  Office   74,000   November 14, 2018

 

(1) Sublet to: General Dynamics Canada Ltd. until February 15, 2011 (42,930 square feet); InGenius Software Inc. until February 15, 2011 (4,026 square feet); and Wesley Clover International Corporation, a company controlled by Dr. Matthews, until November 30, 2010 (10,250 square feet).

 

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

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

 

   

throughout the United States and Canada, including sales-service offices and distribution, demonstration and training centers across both countries;

 

   

throughout the United Kingdom, including London, Birmingham, Kettering, Northampton (England), Strathclyde, Glasgow (Scotland) and Dublin (Ireland);

 

   

throughout Continental Europe, the Middle East and Africa, including Belgium, France, Germany, the Netherlands, Saudi Arabia, Dubai and South Africa;

 

   

in Asia-Pacific, including Hong Kong, Shanghai, Beijing (China), Singapore and Sydney (Australia); and

 

   

in the Caribbean and Latin America, including in Mexico City (Mexico), Guaynabo (Puerto Rico), Rio de Janeiro (Brazil) and Barbados.

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

Legal Proceedings

We are involved in legal proceedings, as well as demands, claims and threatened litigation, that arise in the normal course of our business. In particular, as is common in our industry, we have received notices alleging that we infringe patents belonging to various third parties. These notices are dealt with in accordance with our internal procedures, which include assessing the merits of each notice and seeking, where appropriate, a business resolution. Where a business resolution cannot be reached, litigation may be necessary. The ultimate outcome of any litigation is uncertain, and regardless of outcome, litigation can have an adverse impact on our business because of defense costs, negative publicity, diversion of management resources and other factors. Our failure to obtain any necessary license or other rights on commercially reasonable terms, or otherwise, or litigation arising out of intellectual property claims could materially adversely affect our business. As of the date of this prospectus, except for the items outlined below, we are not party to any litigation that we believe is material to our business.

On February 27, 2008, we issued a statement of claim against one of our customers for non-payment of invoices arising from the provision of hardware, software and services. The customer responded with a counterclaim for a return of amounts paid plus other unquantified costs. We believe that the counterclaim is without merit and continue to evaluate and defend the case vigorously.

Prior to our acquisition of Inter-Tel, certain former distributors of phone equipment under dealer agreements with Executone Information Systems, Inc., a company whose assets were acquired by Inter-Tel in January 2000, brought suit against Inter-Tel asserting that Inter-Tel was liable for Executone’s alleged breaches of such dealer agreements. We continue to defend the case vigorously.

 

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Corporate Structure

We were incorporated in Canada under the CBCA on January 12, 2001 by Zarlink (formerly Mitel Corporation) in order to reorganize its communications systems division in contemplation of the sale of that business to companies controlled by Dr. Matthews. In a series of related transactions on February 16, 2001 and March 27, 2001, we acquired the “Mitel” name and substantially all of the assets, other than Canadian real estate, and subsidiaries of the Zarlink communications systems business. On August 16, 2007 we acquired Inter-Tel, now Mitel (Delaware), Inc.

We carry on our worldwide business directly and through our subsidiaries. Our material subsidiaries as of October 31, 2009 are shown on the chart below, with the jurisdiction of incorporation in parentheses:

LOGO

Head and Registered Office

Our head and registered office is located at 350 Legget Drive, Ottawa, Ontario, Canada, K2K 2W7 and our telephone number is (613) 592-2122.

 

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MANAGEMENT

Executive Officers and Directors

The following table sets forth information with respect to our directors and executive officers as of October 31, 2009. Unless otherwise indicated below, the business address for each of our directors and executive officers is 350 Legget Drive, Ottawa, Ontario, Canada K2K 2W7.

 

Name, Place of Residence and

Business Address

   Age   

Position

  

Principal Occupation

Dr. Terence H. Matthews (1)

Ottawa, Ontario, Canada

   66    Chairman of the Board    Chairman of the Board of Mitel; Chairman of the Board of March Networks

Donald W. Smith

Ottawa, Ontario, Canada

   61    Chief Executive Officer and Director    Chief Executive Officer of Mitel

Peter D. Charbonneau (2)

Ottawa, Ontario, Canada

c/o Skypoint Capital Corporation

555 Legget Drive

Tower B, Suite 830

Kanata, Ontario K2K 2X3

   56    Lead Director    General Partner of Skypoint Capital Corporation

Benjamin H. Ball

San Francisco, California, United States

c/o Francisco Partners Management, LLC

One Letterman Drive

Building C — Suite 410

San Francisco, California 94129

   43    Director    Partner of Francisco Partners Management, LLC

Andrew J. Kowal (3)

San Francisco, California, United States

c/o Francisco Partners Management, LLC

One Letterman Drive

Building C — Suite 410

San Francisco, California 94129

   32    Director    Principal of Francisco Partners Management, LLC

Jean-Paul Cossart

Versailles, France

c/o Infoteria

12 rue Georges Blandon

Louveciennes F-78430 France

   62    Director    Associate Director of Infoteria of France

Gilbert S. Palter

Toronto, Ontario, Canada

c/o EdgeStone Capital Partners, L.P.

The Exchange Tower

130 King Street West

Suite 600, P.O. Box 187

Toronto, Ontario M5X 1A6

   44    Director    Chief Investment Officer and Managing Partner of EdgeStone Capital Partners, L.P.

Norman Stout

Phoenix, Arizona, United States

c/o Hypercom Corporation

8888 East Raintree Drive

Suite 300

Scottsdale, Arizona 85260

   51    Director