<PAGE> 1
http://www.mitel.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-8139
MITEL CORPORATION
(Exact name of registrant as specified in its charter)
CANADA NONE
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
350 Legget Drive
P.O. Box 13089
Kanata, Ontario, Canada K2K 1X3
(Address of principal (Postal Code)
executive offices)
Registrant's telephone number, including area code: (613) 592-2122
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
The number of common shares outstanding as at November 1, 1996 was
107,299,381.
Page 1 of 24
<PAGE> 2
MITEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
September 27, 1996 and March 29, 1996 . . . . . . . . . . . . 3
Consolidated Statements of Retained Earnings -
Three months and six months ended
September 27, 1996 and September 29, 1995 . . . . . . . . . . 4
Consolidated Statements of Income -
Three months and six months ended
September 27, 1996 and September 29, 1995 . . . . . . . . . . 5
Consolidated Statements of Cash Flows -
Six months ended September 27, 1996 and September 29, 1995 . 6
Notes to the Consolidated Financial Statements . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 21
2
<PAGE> 3
Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Sept. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments at cost,
which approximates market $ 135.4 $ 137.3
Accounts receivable 136.3 145.7
Inventories (Note 3) 84.0 72.5
Prepaid expenses 10.7 6.7
------- -------
366.4 362.2
Capital assets:
Fixed assets (Note 4) 163.9 143.7
Other assets 10.8 11.2
------- -------
$ 541.1 $ 517.1
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 95.0 $ 103.6
Income and other taxes payable 16.0 14.9
Deferred revenue 18.1 22.2
Current portion of long-term debt 11.4 11.2
------- -------
140.5 151.9
Long-term debt 44.5 39.6
Pension liability 12.8 12.1
Deferred income taxes 11.1 10.7
------- -------
208.9 214.3
------- -------
Shareholders' equity:
Capital stock (Note 5)
Preferred shares 37.2 37.2
Common shares 152.8 150.6
Contributed surplus 32.3 32.3
Retained earnings 105.0 79.4
Translation account (Note 6) 4.9 3.3
------- -------
332.2 302.8
------- -------
$ 541.1 $ 517.1
======= =======
</TABLE>
3
<PAGE> 4
Mitel Corporation
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 27, Sept. 29, Sept. 27, Sept. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Retained earnings,
beginning of period $ 89.3 $ 40.4 $ 79.4 $ 31.7
Net income for the period 16.5 15.0 27.2 24.6
------- ------- ------- -------
105.8 55.4 106.6 56.3
Dividends on
preferred shares (Note 7) (0.8) (0.8) (1.6) (1.7)
------- ------- ------- -------
Retained earnings,
end of period $ 105.0 $ 54.6 $ 105.0 $ 54.6
======= ======= ======= =======
</TABLE>
4
<PAGE> 5
Mitel Corporation
CONSOLIDATED STATEMENTS OF INCOME
(in millions of Canadian dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 27, Sept. 29, Sept. 27, Sept. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Products $ 152.2 $ 129.2 $ 293.4 $ 246.5
Service 17.1 20.3 34.0 39.2
------- ------- ------- -------
169.3 149.5 327.4 285.7
------- ------- ------- -------
Cost of sales (excluding amortization):
Products 71.4 65.4 138.1 125.1
Service 11.1 10.7 21.5 23.4
------- ------- ------- -------
82.5 76.1 159.6 148.5
------- ------- ------- -------
Gross margin 86.8 73.4 167.8 137.2
------- ------- ------- -------
Expenses:
Selling and administrative 49.5 43.8 97.2 84.1
Research and development
(net)(Note 11) 14.4 10.2 30.2 20.6
Investment tax credits related to prior years'
research and development (2.5) - (4.8) -
Amortization 8.3 4.7 15.7 9.2
------- ------- ------- -------
69.7 58.7 138.3 113.9
------- ------- ------- -------
Operating income 17.1 14.7 29.5 23.3
Gain on sale of
investment (Note 8) 3.6 - 3.6 -
Interest:
Income 1.6 2.4 3.4 5.1
Expense (0.5) (0.4) (1.1) (0.8)
------- ------- ------- -------
Income before income taxes 21.8 16.7 35.4 27.6
Income tax expense 5.3 1.7 8.2 3.0
------- ------- ------- -------
Net income for the period $ 16.5 $ 15.0 $ 27.2 $ 24.6
======= ======= ======= =======
Net income for the period attributable to common shareholders after
preferred share dividends $ 15.7 $ 14.2 $ 25.6 $ 22.9
------- ------- ------- -------
Net income per common share:
Basic (Note 5) $ 0.15 $ 0.13 $ 0.24 $ 0.22
======= ======= ======= =======
Fully diluted (Note 5) $ 0.14 $ 0.13 $ 0.23 $ 0.21
======= ======= ======= =======
</TABLE>
5
<PAGE> 6
Mitel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
Sept. 27, Sept. 29,
1996 1995
------- -------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities:
Net income for the period $ 27.2 $ 24.6
Amortization 15.7 9.2
Gain on sale of capital assets and investment (3.6) -
Increase in pension liability 0.6 -
Deferred income taxes 0.3 0.1
Increase in working capital (Note 10) (20.0) (12.5)
------- -------
Total 20.2 21.4
------- -------
Investing activities:
Additions to capital assets (34.7) (14.7)
Proceeds from disposal of capital assets and investment 3.8 -
Net change in non-cash balances related
to investing activities 1.6 1.1
------- -------
Total (29.3) (13.6)
------- -------
Financing activities:
Increase in long-term debt 11.6 8.6
Repayment of long-term debt (6.6) (4.7)
Repurchase and redemption of preferred shares (Note 5) - (1.0)
Dividends on preferred shares (1.6) (1.7)
Issue of common shares (Note 5) 2.2 0.2
Net change in non-cash balances related
to financing activities 0.8 -
------- -------
Total 6.4 1.4
------- -------
Effect of currency translation on cash 0.8 (1.2)
------- -------
Increase (decrease) in cash and short-term
investments (1.9) 8.0
Cash and short-term investments,
beginning of period 137.3 141.6
------- -------
Cash and short-term investments,
end of period $ 135.4 $ 149.6
======= =======
</TABLE>
6
<PAGE> 7
Mitel Corporation
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of Canadian dollars, except share and per share amounts)
(Unaudited)
1. In the opinion of Management, the unaudited consolidated financial
statements reflect all adjustments, which consist only of normal and
recurring adjustments, necessary to present fairly the financial position
at September 27, 1996 and the results of operations and the changes in
financial position for the three and six month periods ended September
27, 1996 and September 29, 1995, in accordance with accounting principles
generally accepted in Canada.(See also Note 10).
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the year ended March 29, 1996. The Company's
fiscal year-end is the last Friday in March.
2. Due to the cyclical nature of the business, the results of operations for
the periods presented are not necessarily indicative of the results to be
expected for the full year.
3. The components of inventory are:
<TABLE>
<CAPTION>
Sept. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
Raw materials $ 27.9 $ 21.9
Work-in-process 24.8 22.6
Finished goods 31.3 28.0
------- -------
$ 84.0 $ 72.5
======= =======
</TABLE>
<TABLE>
<CAPTION>
4. Fixed assets: Sept. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
Cost $ 384.9 $ 350.3
Accumulated amortization (221.0) (206.6)
------- -------
$ 163.9 $ 143.7
======= =======
</TABLE>
<TABLE>
<CAPTION>
5. Sept. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
Shares outstanding:
Preferred Shares - R&D Series 1,617,400 1,618,900
Common Shares 107,275,444 106,084,494
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Number of Common Shares
Six Months Ended
Sept.27, Sept. 29,
1996 1995
--------- --------
<S> <C> <C>
Stock Option Plans:
Outstanding options
Balance, beginning of period 2,902,525 2,721,551
Options granted 699,000 571,000
Options exercised (190,950) (86,976)
Options cancelled (25,000) (46,650)
--------- ---------
Balance, end of period 3,385,575 3,158,925
========= =========
</TABLE>
During the six months ended September 27, 1996 , there were 1,000,000
common shares issued on warrants exercised, representing all of the
warrants then outstanding. Available for grant at September 27, 1996
were 1,105,775 (March 29, 1996 - 1,779,775) common shares. The exercise
prices on stock options issued range from $1.10 to $9.32 per share with
exercise periods extending to September, 2006.
There were 1,500 preferred shares repurchased during the six months ended
September 27, 1996.
6. The following table summarizes changes in the translation account:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 27, Sept. 29, Sept. 27, Sept. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 4.8 $ 7.7 $ 3.3 $ 10.6
Increase (decrease):
Movements in exchange rates -
United States dollar - (0.9) - (1.7)
United Kingdom pound sterling 0.6 (2.1) 1.7 (4.2)
Swedish krona 0.1 - 0.5 -
Other currencies 0.1 - 0.1 -
Reduction of net investment
in subsidiaries (0.7) - (0.7) -
------- ------- ------- -------
Balance, end of period $ 4.9 $ 4.7 $ 4.9 $ 4.7
======= ======= ======= =======
</TABLE>
7. The Company has not declared or paid any dividends on its common
shares. During the second quarter, a $0.50 per share dividend was
declared and paid on the preferred shares.
8
<PAGE> 9
8. On September 27, 1996, the Company sold all of its 6 percent interest in
Esprit Telecom (Jersey) Ltd., a non-strategic holding which was
previously carried at a nominal value on the cost basis of accounting.
The gain on the sale was $3.6, approximately $2.4 after taxes.
9. On March 29, 1996, the Company acquired ABB Hafo AB (subsequently
renamed Mitel Semiconductor AB), a designer, manufacturer and marketer of
custom and application specific integrated circuits and optoelectronic
components with operations based in Sweden and the United States.
Pro forma financial information as if the business had been acquired at
the beginning of Fiscal 1996 is presented as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 29, Sept. 29,
1995 1995
------- -------
<S> <C> <C>
Revenue $ 164.0 $ 311.1
Gross margin $ 181.8 $ 151.7
Net income for the period $ 15.1 $ 22.2
Net income per common share $ 0.13 $ 0.19
</TABLE>
This information has been prepared on a basis consistent with Note 15 to
the financial statements contained in the Company's Annual Report on Form
10-K for the year ended March 29, 1996.
10. The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada (Canadian GAAP),
which, in the case of the Company, conform in all material respects with
those in the United States (U.S. GAAP) and with the requirements of the
Securities and Exchange Commission (SEC), except as fully described in
Note 18 to the consolidated financial statements as at March 29, 1996.
The following table reconciles the net income as reported on the
consolidated statements of income to the net income that would have been
reported had the financial statements been prepared in accordance with
U.S. GAAP and the requirements of the SEC:
9
<PAGE> 10
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 27, Sept. 29, Sept. 27, Sept. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income for the period
in accordance with Canadian GAAP $ 16.5 $ 15.0 $ 27.2 $ 24.6
Effect of deferral accounting
related to foreign exchange contracts (1.0) 3.8 (0.5) 8.2
------- ------- ------- -------
U.S. GAAP and SEC requirements:
Net income for the period $ 15.5 $ 18.8 $ 26.7 $ 32.8
======= ======= ======= =======
Net income for the period attributable to common shareholders after
preferred share dividends $ 14.7 $ 18.0 $ 25.1 $ 31.1
======= ======= ======= =======
Net income per common share $ 0.14 $ 0.17 $ 0.23 $ 0.29
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
Sept. 27, Sept. 29,
1996 1995
------- -------
<S> <C> <C>
Cash flow information presented in conformity
in all material respects with U.S. GAAP:
Cash provided by (used in)
Operating activities - Canadian and U.S. GAAP $ 19.6 $ 21.4
------- -------
Investing activities - Canadian GAAP (29.3) (13.6)
Change in short-term investments 73.2 50.4
Additions to capital assets under capital lease 15.1 7.8
------- -------
Investing activities - U.S. GAAP 59.0 44.6
------- -------
Financing activities - Canadian GAAP 7.0 1.4
Increase in capital leases (15.1) (7.8)
------- -------
Financing activities - U.S. GAAP (8.1) (6.4)
------- -------
Increase in cash 70.5 59.6
Effect of currency translation on cash flows 0.8 (1.2)
Cash position, beginning of period 52.4 63.0
------- -------
Cash position, end of period $ 123.7 $ 121.4
======= =======
</TABLE>
10
<PAGE> 11
Net change in non-cash balances related
to operating activities:
<TABLE>
<CAPTION>
Six Months Ended
Sept. 27, Sept. 29,
1996 1995
------- -------
<S> <C> <C>
Accounts receivable $ 10.3 $ 10.4
Inventories (11.4) 1.6
Accounts payable and accrued liabilities (10.5) (16.0)
Deferred revenue (4.5) (7.5)
Other (3.9) (1.0)
------- -------
$ (20.0) $ (12.5)
======= =======
</TABLE>
Balance sheet items in conformity with U.S. GAAP and SEC requirements:
<TABLE>
<CAPTION>
Sept. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
Cash $ 123.7 $ 52.4
Short-term investments 11.7 84.9
Accounts payable and accrued liabilities 92.3 100.4
Redeemable preferred shares 34.4 34.4
Common shares 598.7 596.5
Contributed surplus 2.5 2.5
Deficit (305.6) (330.7)
</TABLE>
11. The Fiscal 1997 year to date figures reflect a reclassification of certain
first quarter research and development expenses to cost of sales.
Presentation of the Fiscal 1996 figures were unaffected.
11
<PAGE> 12
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in millions of Canadian dollars, except per share amounts)
The Company reported net income of $16.5, or $0.15 per share, in the second
quarter of Fiscal 1997. These earnings included the benefit of a gain on sale
of an investment in the amount of $3.6, or $0.02 per share. On September 27,
1996, the Company sold all of its 6 percent interest in Esprit Telecom
(Jersey) Ltd. (Esprit), a non-strategic holding which was previously carried
at a nominal value. The Fiscal 1997 second quarter earnings represent an
improvement of $1.5, or $0.02 per share, over the second quarter of last year.
For the six month period ended September 27, 1996, net income was $27.2, or
$0.24 per share, an improvement of $2.6, or $0.02 per share, over the six
month period ended September 26, 1995.
Quarterly and year to date revenue grew by 13 percent and 15 percent
respectively over the comparable periods last year. The revenue growth was
mostly attributable to the inclusion of Mitel Semiconductor AB, Mitel's
Swedish semiconductor plant, which was acquired at the end of Fiscal 1996, and
to significant growth in the Company's original semiconductor business. Lower
sales of business communication systems partially offset the semiconductor
performance. The Fiscal 1997 second quarter and first six months total revenue
figures were Company records for those particular fiscal periods.
As a percentage of total revenue, the total gross margin for the quarter ended
September 27, 1996 was 51 percent, 2 percentage points higher than the same
quarter in Fiscal 1996. Compared to the first half of last year, the year to
date total gross margin improved by 3 percentage points to also reach 51
percent. The improvement was primarily due to an increased proportion of
higher margin products in the sales mix, particularly in semiconductors, and
to reduced manufacturing costs.
Net income and cash flows for each period as determined by United States
accounting principles are detailed in Note 10 to the consolidated financial
statements.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto, and with the Company's audited
consolidated financial statements and notes thereto for the year ended March
29, 1996. Certain statements in this management's discussion and analysis
constitute forward-looking statements. Such forward-looking statements
included elsewhere in this quarterly report on Form 10-Q involve known and
unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to
be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors
include, among others, the following: general economic and business
conditions, demographic changes, import protection and regulation, major
technology changes, timing of product introductions, industry competition,
industry capacity and other industry trends, and the ability of the Company to
attract and retain key employees.
12
<PAGE> 13
RESULTS OF OPERATIONS
Mitel's business is global and comprises the design, manufacture and sale of
systems, subsystems and microelectronic components to world markets in the
telephony, computer telephony integration (CTI) and communications industries.
These products and related services include voice communications systems;
public switching systems; network enhancement and gateway products; CTI
systems and applications; client server telecom products; custom silicon
wafers, integrated and hybrid circuits and optoelectronic components.
The Company sells its products through both direct and indirect channels of
distribution. Factors affecting the choice of distribution, among others,
include: end-customer type, the level of product complexity and integration
requirements, the stage of product introduction, geographic presence and
location of markets, and volume levels.
REVENUE
Revenue, based on the geographic location of Mitel's customers, was
distributed as follows:
<TABLE>
<CAPTION>
Six Months Ended % of Six Months Ended % of
Sept. 27, 1996 Total Sept. 29, 1995 Total
-------------- ------ -------------- ------
<S> <C> <C> <C> <C>
United States $ 151.7 46 % $ 137.6 48 %
Europe 103.2 32 78.8 28
Other Regions 46.1 14 48.1 17
Canada 26.4 8 21.2 7
------- ------ ------- ------
$ 327.4 100 % $ 285.7 100 %
======= ====== ======= ======
</TABLE>
For the quarter ended September 27, 1996, the net movement in exchange rates
from Fiscal 1996 positively impacted total revenue by less than 1 percent
($0.7) as a result of favourable changes in the U.K. pound sterling exchange
rate. This reduced the year-to-date negative impact of net movements in
exchange rates from Fiscal 1996 on Fiscal 1997 first half revenue to less than
1 percent ($1.7).
Revenue, by product group, was distributed as follows:
<TABLE>
<CAPTION>
Six Months Ended % of Six Months Ended % of
Sept. 27, 1996 Total Sept. 29, 1995 Total
-------------- ------ -------------- ------
<S> <C> <C> <C> <C>
Business Communication
Systems $ 219.0 67 % $ 228.6 80 %
Semiconductors 108.4 33 57.1 20
------- ------ ------- ------
$ 327.4 100 % $ 285.7 100 %
======= ====== ======= ======
</TABLE>
13
<PAGE> 14
Business Communication Systems
Business Communication Systems (BCS) comprise PBX equipment and peripherals,
CTI products and applications, client server telecom products, RADICALL (TM)
set handlers, call controller products, and the GX5000(R) central office
switch. All of the Company's service revenue relates to business
communication systems, primarily PBX.
Compared to the first half of last year, BCS revenue, for the six months ended
September 27, 1996, decreased by 4 percent due to lower new installations in
both Europe and in the U.S.. This decline also includes service revenue
decreases relating to the sale of all of the Company's North American non-
Mitel PBX and key system customer base and certain U.K. maintenance contracts
to other service providers mid-way through Fiscal 1996.
As a percentage of the total revenue mix, BCS revenue decreased by 13
percentage points from the corresponding six month period in Fiscal 1996. The
business mix changed as a result of the rapid growth of the Company's
semiconductor business, including the recent acquisition of Mitel
Semiconductor AB.
Sales into the U.S. BCS market were lower in the first half of Fiscal 1997
compared to the same period last year as a result of the sale of Mitel's non-
core base, mentioned above, and the effects of intensified competitive
conditions.
Mitel's BCS revenue in Europe in the first half of Fiscal 1997 decreased
compared to the same period in Fiscal 1996 due to lower new installation
sales.
During the first half of Fiscal 1997, Mitel's primary focus in Asia Pacific
continued to be its joint venture located in Tianjin, China. BCS revenue
during this period decreased in this region compared to the same period last
year due to the effects of tight monetary policies and intense price
competition in China.
Semiconductors
In the first half of Fiscal 1997, Semiconductor revenue increased by 90
percent over last year as a result of the additional revenue from the newly
acquired company, Mitel Semiconductor AB, and increased demand for the
Company's integrated circuits and thick film hybrid products in all regions.
Sales into Europe and into the U.S. grew significantly over the same period
last year largely due to sales by Mitel Semiconductor AB which operates
primarily in these markets. Second quarter sales slipped slightly compared to
the first quarter of this fiscal year, but would still be higher than the same
quarter last year even without the additional sales from the Swedish
subsidiary. The second quarter drop was due primarily to lower shipments
during the planned maintenance shut-down periods this past summer and to
delayed shipments resulting from reduced manufacturing yields while new
production processes were being introduced.
14
<PAGE> 15
The increase in Mitel's semiconductor business reflects the worldwide growth
in the segment of the semiconductor industry not directly related to personal
computers, as high technology product manufacturing continues to expand.
Mitel is experiencing growth in countries where there is a demand for Mitel's
line of communications components from manufacturers of advanced voice, data
and multimedia equipment in North America, Asia and Europe. Increased sales
of other equipment manufacturers' (OEM) products incorporating existing Mitel
Semiconductor components, along with the introduction of new components,
including those intended for CTI applications, led to increased sales volumes
compared to the same six month period last year.
The Company took major steps in Fiscal 1996 to expand its production capacity
through both the acquisition of Mitel Semiconductor AB, which has a
semiconductor plant in Sweden, and a major capital expansion program at its
fabrication plant in Bromont, Quebec, Canada to meet the growing demand for
its integrated circuits. The Company expects the first phase of the Bromont
expansion program to be completed during the third quarter of Fiscal 1997,
which will improve volume capacity of the existing 100 mm wafer production and
introduce new 0.8 micron technology. The second phase, intended to double the
plant's production capacity by converting to 150 mm wafer production, is
scheduled to be completed in the fall of calendar 1997.
Subsequent to the acquisition of Mitel Semiconductor AB, management concluded
that the thermal print-head (TPH) portion of the business was not strategic
to the Company's interests. On October 23, 1996, the Company entered into an
agreement to sell the TPH operations, including related inventory, fixed
assets and certain intellectual property rights to a German distributor.
Adjustments to the final sale price as allowed under the terms of the agreement
and the related accounting for the sale of the TPH operation, are expected to
be finalized by the end of calendar 1996. Management expects that the sale
of the business will not have a material impact on the Company's financial
position or results of operations.
GROSS MARGIN
As a percentage of total revenue, total gross margin was 51 percent for the
respective three and six month periods ended September 27, 1996, improvements
of 2 and 3 percentage points over the respective comparative periods last
year.
Product gross margins strengthened by 4 percentage points over the respective
three and six month periods ended September 26, 1995. The improvement was due
to an improved mix of higher margin products sold and increased semiconductor
volumes and to reduced manufacturing costs.
The Fiscal 1997 second quarter and year-to-date service gross margin was 35
percent and 37 percent, respectively, as compared to 47 percent and 40 percent
for the three and six month periods ended September 25, 1995. Last year's
second quarter and year to date service margin benefited from the sale and
transfer of certain U.K. maintenance contracts to Bailey Telecom Limited.
15
<PAGE> 16
OPERATING EXPENSES
Selling and Administrative
Selling and administrative (S&A) expenses increased in the second quarter of
Fiscal 1997 to $49.5, or 29 percent of sales, from $43.8, and also 29 percent
of sales, for the comparable period in Fiscal 1996. Year-to-date, S&A
expenses were 30 percent of sales, 1 percentage point higher than the first
half of last year.
S&A expenses were higher compared to last year primarily as a result of
including the results of operations of Mitel Semiconductor AB and higher costs
associated with new marketing initiatives and product launches (with respect
to CTI applications, work group solutions, PC telephony and in support of the
NeVaDa (TM) networked voice and data product). These marketing related costs
include increased trade show activity, new corporate communications material,
course development for dealers and end-customers, and an increase in new
hires.
Research and Development
R&D expenses amounted to $14.4 and $30.2, and respectively 8 and 9 percent of
revenue, for the corresponding three and six month periods ended September 27,
1996. This compares to $10.2 and $20.6, and both at 7 percent of revenue, in
the respective second quarter and first half periods of Fiscal 1996. These
amounts are exclusive of related R&D capital asset amortization and net of
Canadian provincial government R&D incentives earned. R&D increased as a
percentage of revenue compared to last year mainly due to the inclusion of
Mitel Semiconductor AB which currently has a significant program for new
integrated circuits and optoelectronic components. However, compared to the
first quarter of this fiscal year, R&D decreased by $1.4 in the second quarter
due primarily to lower R&D material and contracting costs incurred during the
typically slower activity summer months of the second quarter. The Fiscal 1997
year to date figures reflect a reclassification of certain first quarter
research and development expenses to cost of sales.
For the respective three and six months ended September 27, 1996, the Company
accrued separately $2.5 and $4.8 of Canadian federal investment tax credits
not previously recognized but relating to prior years' R&D. At the same time,
the Company elected to defer certain discretionary tax deductions, creating
taxable income, to increase income tax expense by the same amount as the
investment tax credits accrued. Accordingly, the combination of accruing for
the investment tax credits and the incremental income tax expense resulted in
no impact to net earnings or earnings per share.
Mitel's R&D program integrates its support for existing products with
development work in emerging technologies including, among others, the
following: CTI; multimedia components and applications; networked voice and
data; client server telecom; Centrex service enhancements; new ISDN
applications; and real-time application specific microelectronics components.
16
<PAGE> 17
Amortization
Amortization increased in the second quarter of Fiscal 1997 by $3.6 compared
to the same period in Fiscal 1996. For the six months ended September 27,
1996, amortization increased by $6.5 compared to the first half of Fiscal
1996. The increase is due primarily to the semiconductor capacity expansion
program, replacements and upgrades to the Company's other manufacturing
plants, as well as the inclusion of Mitel Semiconductor AB's results of
operations.
GAIN ON SALE OF INVESTMENT
On September 27, 1996, the Company sold a non-strategic investment in Esprit,
a company which provides value added network services through leased lines to
European based corporate accounts. The Esprit investment was sold for cash
proceeds of $3.7, representing a total gain of $3.6, or $2.4 after-tax. The
gain has been excluded from operating income in Fiscal 1997 .
INTEREST INCOME AND EXPENSE
Interest income, net of interest expense, decreased by $0.9 and $2.0 compared
to the same three and six month periods last year. The decrease in net
interest income resulted from lower Canadian interest rates and from lower
average cash balances available for investment. Cash balances available for
investment were reduced due to the acquisition of Mitel Semiconductor AB for
$44.0 on the last day of Fiscal 1996. This acquisition was financed in its
entirety from the Company's cash resources.
INCOME TAXES
In the second quarter of Fiscal 1997, the Company deferred recognition of
certain discretionary tax deductions, increasing income tax expense by $2.5 to
permit the realization of Canadian federal investment tax credits that
otherwise would have expired. Year-to-date, this adjustment amounts to $4.8.
Income tax expense for the second quarter and first half of Fiscal 1997 was
$5.3 and $8.2, respectively, and compares to $1.7 and 3.0 for the respective
periods in Fiscal 1996. Before accounting for the investment tax credits,
income tax expense for the second quarter and first half of Fiscal 1997 was
respectively $2.8 and $3.4, an increase of $1.1 and $0.4 compared to the same
periods last year. The increased tax expense is due to higher taxable
earnings in the U.K., primarily on account of the gain on the sale of Esprit.
BACKLOG
As orders are frequently booked and shipped within the same fiscal month,
order backlog is not necessarily indicative of a sales outlook for the month,
quarter, or year. This is most true for the Company's business communication
systems although manufacturing lead times for semiconductor products are
generally longer because of the nature of the production process. At
September 27, 1996, order backlog was $132.2 as compared to $138.8 at March
29, 1996. The decrease in backlog was mainly attributable to lower
semiconductor bookings for the China market where local manufacturing
companies are faced with the effects of tight monetary policies in that
country and in the U.S. semiconductor dealer channel where there is a
temporary over-stock position due to a strong security of supply built in that
channel. Most of the backlog is scheduled for delivery in the next twelve
months.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investment balances decreased by $1.9 from
the end of Fiscal 1996 due to fixed asset additions and an increase in working
capital, offset by the steady operating results and the sale of the investment
in Esprit.
Cash flow provided by operations decreased by $1.1 compared to the first half
of last year. Operating cash flow during the first half of Fiscal 1997
decreased relative to the corresponding period last year primarily due to
greater reductions in payables and higher inventory levels.
Since March 29, 1996, the Company's working capital increased by $15.6 to
$225.9 primarily due to payments on year-end accounts payable and Fiscal 1996
incentives and an increase in inventories offset by reduced accounts
receivable levels. Inventory increased by $11.5 since year-end to bring levels
more in line with expected operating requirements and in order to improve the
security supply for semiconductor raw materials. Last year, inventory levels
dropped significantly at year-end due to the high fourth quarter sales
volumes. Accounts receivable decreased by $9.4 as a result of collections on
the typically higher year-end balances.
Fixed asset additions amounted to $34.5 during the first half of Fiscal 1997,
and were primarily for the increase in semiconductor manufacturing capacity
and technology enhancements as well as upgrades to the Company's information
technology resources. Management expects that Fiscal 1997 capital expenditures
will be significantly higher than in Fiscal 1996 as a result of the
semiconductor capital program. As previously discussed, the semiconductor
capital program will be conducted in two phases. Phase one, which commenced
in the third quarter of Fiscal 1996, is expected to cost approximately $9.0
and phase two is expected to cost approximately $39.0. To date approximately
$6.9 and $16.5 has been spent on phase one and phase two respectively. As at
September 27, 1996, there were approximately $15.6 capital expenditure
purchase orders outstanding related to the Bromont expansion program.
On August 30, 1996, the Company entered into an agreement with the Quebec and
Canadian governments with respect to the Canada-Quebec Subsidiary Agreement On
Industrial Development (1991) whereby each government will advance $2.1 for a
total of $4.2 in the form of a non-interest bearing loan toward the phase two
construction project. Management expects the first claim of eligible
expenditures amounting to approximately $2.0 will be submitted in the fourth
quarter of Fiscal 1997 with funding to be received in early Fiscal 1998. The
loan will be repayable in three equal annual installments commencing in June
2001.
Total long-term debt increased by $5.1, net of repayments of $6.6, from the
end of Fiscal 1996 due to capital assets acquired under capital leases. The
repayments included a final payment in the second quarter of Fiscal 1997 of
$1.8 on the remaining principal balance owing on the non-interest bearing
unsecured note payable.
On March 29, 1996, the company recorded a liability of $2.0 in respect of
costs to integrate the operations of the acquired company, Mitel Semiconductor
AB, with the Semiconductor Division. During the first half of Fiscal 1997,
integration costs of $0.5 were charged against the provision. These costs
consist primarily of information systems integration costs. The Company
expects that the program to integrate the acquired company with the
Semiconductor Division will be completed by the end of Fiscal 1997.
18
<PAGE> 19
As at September 27, 1996, the Company's capitalization was comprised of 17
percent debt, 9 percent preferred equity, and 74 percent common equity. The
capitalization profile as at the end of Fiscal 1996 was similar at 17, 10, and
73 percent respectively for debt, preferred and common equity.
In addition to cash and short-term investment balances of $135.4 as at
September 27, 1996, the Company has unused lines of credit in North America
and the U.K. of approximately $32.2.
Management believes the Company is in a position to meet all foreseeable
business cash requirements and debt service from its cash balances on hand,
existing financing facilities and cash flow from operations.
________________________
Radicall, GX5000 and NeVaDa are trademarks of Mitel Corporation.
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on July 25, 1996 at the Company's
headquarters in Kanata, Ontario, Canada. At the Annual Meeting, the following
matters were presented to shareholders for approval:
Motion 1. In respect of electing the eight directors to the board; and,
Motion 2. In respect of appointing Ernst & Young as the Company's
auditors;
The results of matters submitted to a vote of shareholders were as follows:
<TABLE>
<CAPTION>
Shares
------
<S> <C>
Motion 1
For 59,838,649
Vote Withheld 164,569
</TABLE>
The following five directors, were previously elected at the 1995 annual
meeting: Dr. John Millard, Dr. Henry Simon, Mr. Paul G. Vien, Mr.
Jonathan I. Wener and Mr. Hubert T. Lacroix. Mr. Peter van Cuylenburg
was appointed on March 15, 1996. Mr. Anthony L. Craig and Mr. Donald W.
Paterson were appointed on May 16, 1996.
<TABLE>
<CAPTION>
Shares
------
<S> <C>
Motion 2
For 59,889,675
Vote Withheld 90,512
</TABLE>
20
<PAGE> 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
Exhibit 11(a) Computation of earnings per share under Canadian
accounting principles.
Exhibit 11(b) Computation of earnings per share under United
States accounting principles.
Exhibit 27 Financial Data Schedule
b) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
September 27, 1996.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITEL CORPORATION (Registrant)
<TABLE>
<S> <C>
November 7, 1996 JEAN-JACQUES CARRIER
Date Jean-Jacques Carrier
Vice President of Finance
and Chief Financial Officer
</TABLE>
21
<PAGE> 22
EXHIBIT INDEX
Exhibit Number Description
11(a) Computation of earnings per share under
Canadian accounting principles. . . . . . . . 23
11(b) Computation of earnings per share under
United States accounting principles. . . . . 24
27 Financial Data Schedule
22
<PAGE> 23
MITEL CORPORATION Exhibit 11a
COMPUTATION OF EARNINGS PER SHARE
(CANADIAN ACCOUNTING PRINCIPLES)
(in millions of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 27, Sept. 29, Sept. 27, Sept. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC EPS
Net income $ 16.5 $ 15.0 $ 27.2 $ 24.6
Less: dividends on
cumulative preferred shares (0.8) (0.8) (1.6) (1.7)
------- ------- ------- -------
Adjusted net income $ 15.7 $ 14.2 $ 25.6 $ 22.9
======= ======= ======= =======
Weighted average shares
outstanding (millions) 107.2 105.9 107.2 105.8
======= ======= ======= =======
Basic EPS $ 0.15 $ 0.13 $ 0.24 $ 0.22
======= ======= ======= =======
FULLY DILUTED EPS
Adjusted net income as
determined under basic EPS $ 15.7 $ 14.2 $ 25.6 $ 22.9
Imputed interest on stock
options and warrants 0.1 0.2 0.2 0.3
------- ------- ------- -------
Adjusted net income $ 15.8 $ 14.4 $ 25.8 $ 23.2
======= ======= ======= =======
Weighted average shares
outstanding as determined
under basic EPS (millions) 107.2 105.9 107.2 105.8
Add weighted average shares
on conversion of:
- stock options 3.4 3.2 3.4 3.2
- warrants - 1.0 - 1.0
------- ------- ------- -------
Adjusted weighted average
shares outstanding (millions) 110.6 110.1 110.6 110.0
------- ------- ------- -------
Fully diluted EPS $ 0.14 $ 0.13 $ 0.23 $ 0.21
======= ======= ======= =======
</TABLE>
23
<PAGE> 24
MITEL CORPORATION Exhibit 11b
COMPUTATION OF EARNINGS PER SHARE
(UNITED STATES ACCOUNTING PRINCIPLES)
(in millions of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 27, Sept. 29, Sept. 27, Sept. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY EPS
Net income $ 15.5 $ 18.8 $ 26.7 $ 32.8
Less: dividends on
cumulative preferred shares (0.8) (0.8) (1.6) (1.7)
------- ------- ------- -------
Adjusted net income $ 14.7 $ 18.0 $ 25.1 $ 31.1
======= ======= ======= =======
Weighted average shares and
share equivalents (millions) 108.5 107.9 108.5 107.8
======= ======= ======= =======
Primary EPS $ 0.14 $ 0.17 $ 0.23 $ 0.29
======= ======= ======= =======
FULLY DILUTED EPS (1)
Adjusted net income as
determined under primary EPS $ 14.7 $ 18.0 $ 25.1 $ 31.1
======= ======= ======= =======
Weighted average shares and
share equivalents (millions) 108.5 107.9 108.5 107.8
Weighted average shares on
conversion of stock options - - - 0.1
------- ------- ------- -------
Adjusted weighted average
shares outstanding (millions) 108.5 107.9 108.5 107.9
======= ======= ======= =======
Fully diluted EPS $ 0.14 $ 0.17 $ 0.23 $ 0.29
======= ======= ======= =======
</TABLE>
(1) This calculation is submitted in accordance with Release No. 33-5133
under the Securities Act of 1933, as amended, even though the amounts of per
share earnings on the fully dilutive basis are not required to be stated under
the provisions of APB Opinion No. 15.
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information (prepared in accordance
with accounting principles generally accepted in Canada) extracted from the
accounting records of Mitel Corporation and included in the Consolidated
Statements of Income for the Six Months Ended September 27, 1996 and the
Consolidated Balance Sheets at September 27, 1996 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-END> SEP-27-1996
<EXCHANGE-RATE> 1.00000
<CASH> 13,598
<SECURITIES> 121,791
<RECEIVABLES> 132,933
<ALLOWANCES> 5,392
<INVENTORY> 84,017
<CURRENT-ASSETS> 366,399
<PP&E> 384,879
<DEPRECIATION> 220,953
<TOTAL-ASSETS> 541,103
<CURRENT-LIABILITIES> 140,449
<BONDS> 44,471
0
37,191
<COMMON> 152,849
<OTHER-SE> 142,210
<TOTAL-LIABILITY-AND-EQUITY> 541,103
<SALES> 327,422
<TOTAL-REVENUES> 327,422
<CGS> 159,661
<TOTAL-COSTS> 159,661
<OTHER-EXPENSES> 138,262
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,108
<INCOME-PRETAX> 35,357
<INCOME-TAX> 8,154
<INCOME-CONTINUING> 27,203
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,203
<EPS-PRIMARY> 0.24<F1>
<EPS-DILUTED> 0.23
<FN>
<F1>EPS-Primary is EPS-Basic under Canadian generally accepted accounting
principles.
</FN>
</TABLE>
