<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 December 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 January 30, 1997 was
107,353,681.
Page 1 of 23
<PAGE> 2
MITEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
December 27, 1996 and March 29, 1996 . . . . . . . . . . . . 3
Consolidated Statements of Retained Earnings -
Three months and nine months ended
December 27, 1996 and December 29, 1995 . . . . . . . . . . . 4
Consolidated Statements of Income -
Three months and nine months ended
December 27, 1996 and December 29, 1995 . . . . . . . . . . . 5
Consolidated Statements of Cash Flows -
Nine months ended December 27, 1996 and December 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 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . 20
2
<PAGE> 3
Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Dec. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments at cost,
which approximates market $ 122.3 $ 137.3
Accounts receivable 148.6 145.7
Inventories (Note 3) 86.9 72.5
Prepaid expenses 5.2 6.7
------- -------
363.0 362.2
Capital assets:
Fixed assets (Note 4) 176.8 143.7
Other assets 11.9 11.2
------- -------
$ 551.7 $ 517.1
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 87.9 $ 103.6
Income and other taxes payable 11.7 14.9
Deferred revenue 21.2 22.2
Current portion of long-term debt 12.9 11.2
------- -------
133.7 151.9
Long-term debt 47.5 39.6
Pension liability 12.3 12.1
Deferred income taxes 11.1 10.7
------- -------
204.6 214.3
------- -------
Shareholders' equity:
Capital stock (Note 5)
Preferred shares 37.2 37.2
Common shares 153.0 150.6
Contributed surplus 32.3 32.3
Retained earnings 115.7 79.4
Translation account (Note 6) 8.9 3.3
------- -------
347.1 302.8
------- -------
$ 551.7 $ 517.1
======= =======
</TABLE>
3
<PAGE> 4
Mitel Corporation
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 27, Dec. 29, Dec. 27, Dec. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Retained earnings,
beginning of period $ 105.0 $ 54.6 $ 79.4 $ 31.7
Net income for the period 11.5 11.2 38.7 35.8
------- ------- ------- -------
116.5 65.8 118.1 67.5
Dividends on
preferred shares (Note 7) (0.8) (0.8) (2.4) (2.5)
------- ------- ------- -------
Retained earnings,
end of period $ 115.7 $ 65.0 $ 115.7 $ 65.0
======= ======= ======= =======
</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 Nine Months Ended
Dec. 27, Dec. 29, Dec. 27, Dec. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue:
Products $ 156.2 $ 110.6 $ 449.6 $ 357.1
Service 16.8 15.1 50.8 54.3
------- ------- ------- -------
173.0 125.7 500.4 411.4
------- ------- ------- -------
Cost of sales (excluding amortization):
Products 73.0 50.2 211.1 175.3
Service 11.4 10.9 32.9 34.3
------- ------- ------- -------
84.4 61.1 244.0 209.6
------- ------- ------- -------
Gross margin 88.6 64.6 256.4 201.8
------- ------- ------- -------
Expenses:
Selling and administrative 53.3 39.9 150.5 124.0
Research and development
(net) 14.0 10.5 44.2 31.1
Investment tax credits related to prior years'
research and development (2.8) - (7.6) -
Amortization 8.5 4.8 24.2 14.0
------- ------- ------- -------
73.0 55.2 211.3 169.1
------- ------- ------- -------
Operating income 15.6 9.4 45.1 32.7
Gain on sale of
investment (Note 8) - - 3.6 -
Interest:
Income 1.4 2.5 4.8 7.6
Expense (0.6) (0.4) (1.7) (1.2)
------- ------- ------- -------
Income before income taxes 16.4 11.5 51.8 39.1
Income tax expense 4.9 0.3 13.1 3.3
------- ------- ------- -------
Net income for the period $ 11.5 $ 11.2 $ 38.7 $ 35.8
======= ======= ======= =======
Net income for the period attributable to common shareholders after
preferred share dividends $ 10.7 $ 10.4 $ 36.3 $ 33.3
======= ======= ======= =======
Net income per common share:
Basic (Note 5) $ 0.10 $ 0.10 $ 0.34 $ 0.31
======= ======= ======= =======
Fully diluted (Note 5) $ 0.10 $ 0.10 $ 0.33 $ 0.31
======= ======= ======= =======
</TABLE>
5
<PAGE> 6
Mitel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 27, Dec. 29,
1996 1995
------- -------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities:
Net income for the period $ 38.7 $ 35.8
Amortization 24.2 14.0
Gain on sale of capital assets and investment (4.3) -
Increase in pension liability 0.5 -
Deferred income taxes 0.3 (0.4)
Increase in working capital (Note 10) (33.9) (19.4)
------- -------
Total 25.5 30.0
------- -------
Investing activities:
Additions to capital assets and investment (56.2) (24.2)
Proceeds from disposal of capital assets and investment 4.9 0.1
Net change in non-cash balances related
to investing activities (2.4) 3.3
------- -------
Total (53.7) (20.8)
------- -------
Financing activities:
Increase in long-term debt 18.4 12.4
Repayment of long-term debt (9.3) (6.2)
Repurchase and redemption of preferred shares (Note 5) - (1.5)
Dividends on preferred shares (2.4) (2.5)
Issue of common shares (Note 5) 2.4 0.7
Net change in non-cash balances related
to financing activities 0.8 -
------- -------
Total 9.9 2.9
------- -------
Effect of currency translation on cash 3.3 (1.5)
------- -------
Increase (decrease) in cash and short-term
investments (15.0) 10.6
Cash and short-term investments,
beginning of period 137.3 141.6
------- -------
Cash and short-term investments,
end of period $ 122.3 $ 152.2
======= =======
</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 December 27, 1996 and the results of operations and the
changes in financial position for the three and nine month periods ended
December 27, 1996 and December 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>
Dec. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
Raw materials $ 31.1 $ 21.9
Work-in-process 24.5 22.6
Finished goods 31.3 28.0
------- -------
$ 86.9 $ 72.5
======= =======
</TABLE>
<TABLE>
<CAPTION>
4. Fixed assets: Dec. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
Cost $ 409.9 $ 350.3
Accumulated amortization (233.1) (206.6)
------- -------
$ 176.8 $ 143.7
======= =======
</TABLE>
<TABLE>
<CAPTION>
5. Dec. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
Shares outstanding:
Preferred Shares - R&D Series 1,617,000 1,618,900
Common Shares 107,316,556 106,084,494
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Number of Common Shares
Nine Months Ended
Dec. 27, Dec. 29,
1996 1995
--------- --------
<S> <C> <C>
Stock Option Plans:
Outstanding options
Balance, beginning of period 2,902,525 2,721,551
Options granted 708,650 585,000
Options exercised (232,062) (229,801)
Options cancelled (40,150) (54,025)
--------- ---------
Balance, end of period 3,338,963 3,022,725
========= =========
</TABLE>
During the nine months ended December 27, 1996 , there were 1,000,000
common shares issued on warrants exercised, representing all of the
warrants then outstanding. Available for grant at December 27, 1996
were 1,111,275 (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 December, 2006.
There were 1,900 preferred shares repurchased during the nine months
ended December 27, 1996.
6. The following table summarizes changes in the translation account:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 27, Dec. 29, Dec. 27, Dec. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 4.9 $ 4.7 $ 3.3 $ 10.6
Increase (decrease):
Movements in exchange rates -
United States dollar - (0.4) - (1.3)
United Kingdom pound sterling 5.5 (1.0) 7.2 (5.2)
Swedish krona (0.7) - (0.6) -
Other currencies (0.7) - (0.2) -
Reduction of net investment
in subsidiaries (0.1) - (0.8) -
------- ------- ------- -------
Balance, end of period $ 8.9 $ 4.1 $ 8.9 $ 4.1
======= ======= ======= =======
</TABLE>
7. The Company has not declared or paid any dividends on its common
shares. During the third 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 Nine Months Ended
Dec. 29, Dec. 29,
1995 1995
------- -------
<S> <C> <C>
Revenue $ 137.8 $ 448.9
Gross margin $ 69.0 $ 220.7
Net income for the period $ 5.3 $ 27.5
Net income per common share $ 0.04 $ 0.24
</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 Nine Months Ended
Dec. 27, Dec. 29, Dec. 27, Dec. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income for the period
in accordance with Canadian GAAP $ 11.5 $ 11.2 $ 38.7 $ 35.8
Effect of deferral accounting
related to foreign exchange contracts (4.0) (2.2) (4.5) 6.0
------- ------- ------- -------
U.S. GAAP and SEC requirements:
Net income for the period $ 7.5 $ 9.0 $ 34.2 $ 41.8
======= ======= ======= =======
Net income for the period attributable to common shareholders after
preferred share dividends $ 6.7 $ 8.2 $ 31.8 $ 39.3
======= ======= ======= =======
Net income per common share $ 0.06 $ 0.08 $ 0.29 $ 0.36
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 27, Dec. 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 $ 25.5 $ 30.0
------- -------
Investing activities - Canadian GAAP (53.7) (20.8)
Change in short-term investments (5.5) (11.8)
Additions to capital assets under capital lease 18.2 12.1
------- -------
Investing activities - U.S. GAAP (41.0) (20.5)
------- -------
Financing activities - Canadian GAAP 9.9 2.9
Increase in capital leases (18.2) (12.1)
------- -------
Financing activities - U.S. GAAP ( 8.3) (9.2)
------- -------
Increase (decrease) in cash (23.8) 0.3
Effect of currency translation on cash flows 3.3 (1.5)
Cash position, beginning of period 52.4 63.0
------- -------
Cash position, end of period $ 31.9 $ 61.8
======= =======
</TABLE>
10
<PAGE> 11
Net change in non-cash balances related
to operating activities:
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 27, Dec. 29,
1996 1995
------- -------
<S> <C> <C>
Accounts receivable $ 0.2 $ 10.1
Inventories (13.6) (3.4)
Accounts payable and accrued liabilities (19.9) (22.1)
Deferred revenue (2.3) (2.7)
Other 1.7 (1.3)
------- -------
$ (33.9) $ (19.4)
======= =======
</TABLE>
Balance sheet items in conformity with U.S. GAAP and SEC requirements:
<TABLE>
<CAPTION>
Dec. 27, March 29,
1996 1996
------- -------
<S> <C> <C>
Cash $ 31.9 $ 52.4
Short-term investments 90.4 84.9
Accounts payable and accrued liabilities 89.2 100.4
Redeemable preferred shares 34.4 34.4
Common shares 598.9 596.5
Contributed surplus 2.5 2.5
Deficit (298.9) (330.7)
</TABLE>
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 third quarter net income of $11.5, or $0.10 per share,
compared with $11.2, or $0.10 per share, for the same quarter last year.
Although the gross margin contribution improved by $24.0 on higher sales
volumes, earnings only slightly improved over the corresponding third quarter
of last year due to increased operating expenses, lower interest income and a
higher effective income tax rate. For the nine month period ended December 27,
1996, net income was $38.7, or $0.34 per share, an improvement of $2.9, or
$0.03 per share, over the nine month period ended December 29, 1995.
Quarterly and year-to-date revenue grew by 38 percent and 22 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.
Business Communications Systems (BCS) revenue improved significantly in the
third quarter, growing by 20 percent over the third quarter of last year, to
result in a year-to-date increase of 3 percent over BCS revenue in the first
nine month period of last year.
As a percentage of total revenue, the total gross margin for both the quarter
and year-to-date periods ended December 27, 1996 was 51 percent, the same
percentage as in the third quarter last year, but 2 percentage points higher
than the first nine month period of Fiscal 1996. Margins remained strong
primarily due to a good mix of higher margin products sold, particularly in
semiconductors, high sales volumes, and cost efficiencies obtained in the
manufacturing plant.
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 included with this quarterly report on
Form 10-Q, 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 (MD&A) 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>
Nine Months Ended % of Nine Months Ended % of
Dec. 27, 1996 Total Dec. 29, 1995 Total
-------------- ------ -------------- ------
<S> <C> <C> <C> <C>
United States $ 229.2 46 % $ 199.0 48 %
Europe 162.0 32 115.6 28
Other Regions 72.3 14 65.5 16
Canada 36.9 8 31.3 8
------- ------ ------- ------
$ 500.4 100 % $ 411.4 100 %
======= ====== ======= ======
</TABLE>
For the quarter ended December 27, 1996, the net movement in exchange rates
from Fiscal 1996 positively impacted total revenue by 2 percent ($2.9) as a
result of favourable changes in the U.K. pound sterling exchange rate. The
year-to-date favourable impact of net movements in exchange rates from Fiscal
1996 on Fiscal 1997 first nine months revenue was less than 1 percent ($1.2).
Revenue, by product group, was distributed as follows:
<TABLE>
<CAPTION>
Nine Months Ended % of Nine Months Ended % of
Dec. 27, 1996 Total Dec. 29, 1995 Total
-------------- ------ -------------- ------
<S> <C> <C> <C> <C>
Business Communications
Systems $ 336.5 67 % $ 326.7 79 %
Semiconductors 163.9 33 84.7 21
------- ------ ------- ------
$ 500.4 100 % $ 411.4 100 %
======= ====== ======= ======
</TABLE>
13
<PAGE> 14
Business Communications Systems
Business Communications 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
communications systems, primarily PBX.
Compared to last year, BCS product revenue for the nine months ended December
27, 1996, increased by 5 percent due to increased European demand for the
Company's call controller products, improved sales of CTI products in all
markets, and higher SX200 (R) sales to U.S. supply houses and dealers. These
increases were offset by lower new installations through the Company's direct
sales channels in both Europe and the U.S.
Compared to last year, BCS service revenue for the nine months ended December
27, 1996, decreased by 6 percent mainly as a consequence of the sale of all of
the Company's North American non-Mitel PBX and key system customer base and of
the sale of 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 12
percentage points from the corresponding nine 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 higher in the first nine months of Fiscal
1997 compared to the same period last year due to higher levels of SX200
installations through the indirect sales channel offset by 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 nine months of Fiscal 1997
increased compared to the same period in Fiscal 1996 due to improved sales
volumes of the company's call controller products offset by lower new PBX
installations.
Sales into the Canadian BCS market were higher in the first nine months of
Fiscal 1997 compared to the same period last year due to higher levels of new
installations.
During the first nine months 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 nine months of Fiscal 1997, Semiconductor revenue increased by 94
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.
14
<PAGE> 15
The increase in Mitel's semiconductor business reflects the worldwide growth
in the communications segment of the semiconductor industry. Mitel is
experiencing growth in countries where there is a demand for Mitel's line of
communications components from manufacturers of advanced voice, data and
multimedia equipment in North America, Asia and Europe. Increased demand for
communications products incorporating existing Mitel Semiconductor components
by the Company's traditional customer base, along with the introduction by
Mitel Semiconductor of new components, including those intended for CTI
applications, led to increased sales volumes compared to the same nine 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 first phase of the Bromont expansion program will
be completed during the fourth 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 increase the plant's
production capacity by converting to 150 mm wafer production, is scheduled to
be completed in the beginning of calendar 1998. The estimated time to
complete each phase is approximately one fiscal quarter later than originally
planned.
Subsequent to the acquisition of Mitel Semiconductor AB, management concluded
that the thermal print-head (TPH) portion of the business was not strategic to
the Company's interests. On October 23, 1996, the Company sold the TPH
operations, including related inventory, fixed assets and certain intellectual
property rights to a German distributor. The sale of the business did not
have a significant impact on the Company's financial position or results of
operations in the third quarter of Fiscal 1997 and will not have a significant
impact on the Company's financial position or results of operations in the
future.
GROSS MARGIN
As a percentage of total revenue, total gross margin was 51 percent for both
the three and nine month periods ended December 27, 1996, the same percentage
as in the third quarter of last year, but 2 percentage points higher than the
first nine months of last year.
Product gross margin improved 2 percentage points over the nine month period
ended December 29, 1995 mainly due to an increased proportion of high margin
products sold, higher semiconductor volumes and reduced manufacturing costs.
However, product gross margins worsened by 2 percentage points over the
corresponding three month period ended December 29, 1995 due to a lower margin
semiconductor product mix in the third quarter of Fiscal 1997.
The Fiscal 1997 third quarter and year-to-date service gross margin were 32
percent and 35 percent, respectively, as compared to 28 percent and 37 percent
for the three and nine month periods ended December 29, 1995. Last year's
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 third quarter of
Fiscal 1997 to $53.3, or 31 percent of sales, from $39.9, and 32 percent of
sales, for the comparable period in Fiscal 1996. Year-to-date, S&A expenses
were 30 percent of sales, the same percentage as the first nine months of last
year.
S&A expenses were higher compared to last year primarily due to the inclusion
of the results of operations of Mitel Semiconductor AB. In addition,
operating expenses increased due to higher costs associated with new marketing
initiatives and product launches (with respect to CTI applications, work group
solutions, PC telephony and in support of the NeVaDa (TM) networked voice and
data product), costs associated with the higher sales volumes and higher
product support costs. The 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 $14.0 and $44.2, and respectively 8 and 9 percent of
revenue, for the corresponding three and nine month periods ended December 27,
1996. This compares to $10.5 and $31.1, and both at 8 percent of revenue, in
the respective third quarter and first nine month period 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 sales compared to last year mainly due to the inclusion of Mitel
Semiconductor AB which currently has a significant program for new integrated
circuits and optoelectronic components. The Fiscal 1997 year-to-date figures
reflect a reclassification of certain Fiscal 1997 first quarter research and
development expenses to cost of sales.
For the respective three and nine months ended December 27, 1996, the Company
accrued separately $2.8 and $7.6 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 third quarter of Fiscal 1997 by $3.7 compared to
the same period in Fiscal 1996. For the nine months ended December 27, 1996,
amortization increased by $10.2 compared to the first nine months 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 last day of the second quarter, 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 $1.3 and $3.3 compared
to the same three and nine 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 third quarter of Fiscal 1997, the Company deferred recognition of
certain discretionary tax deductions, increasing income tax expense by $2.8 to
permit the realization of Canadian federal investment tax credits that
otherwise would have expired. Year-to-date, this adjustment amounts to $7.6.
Income tax expense for the third quarter and first nine months of Fiscal 1997
was $4.9 and $13.1, respectively, and compares to $0.3 and $3.3 for the
respective periods in Fiscal 1996. Before accounting for the investment tax
credits, income tax expense for the third quarter and first nine months of
Fiscal 1997 was respectively $2.1 and $5.5, an increase of $1.8 and $2.2
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 and to higher taxes in Canada for corporate minimum tax on
higher accounting income in Canada.
17
<PAGE> 18
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 December
27, 1996, order backlog was $133.1 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 to the effects
of the sale of the thermal print head business in the third quarter. These
decreases were offset by an improvement in the Company's North American direct
sales BCS channel. Most of the backlog is scheduled for delivery in the next
twelve months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and short-term investment balances decreased by $15.0 from
the end of Fiscal 1996 due to fixed asset additions and an increase in working
capital, offset by increased earnings before interest, tax and depreciation.
Cash flow provided by operations decreased by $4.5 compared to the first nine
months of last year. Operating cash flow during the first nine months of
Fiscal 1997 decreased relative to the corresponding period last year primarily
due to increased working capital requirements.
Since March 29, 1996, the Company's working capital increased by $19.0 to
$229.3 primarily due to payments on year-end accounts payable and Fiscal 1996
incentives and an increase in accounts receivable and inventory levels.
Accounts receivable levels increased over the end of last year due to record
sales levels in the third quarter. Inventory increased by $14.4 since year-
end to bring levels 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.
Fixed asset additions amounted to $55.6 during the first nine months 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. As discussed in previous MD&A's, the
semiconductor capital program will be conducted in two phases. Phase one,
which commenced in the third quarter of Fiscal 1996 and is scheduled to be
completed during the fourth quarter of Fiscal 1997, is expected to cost
approximately $9.0 and phase two (scheduled to be completed during early
Calendar 1998) is expected to cost approximately $39.0. To date approximately
$7.6 and $28.0 has been spent on phase one and phase two respectively. As at
December 27, 1996, there were approximately $6.0 in 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 the Company will receive a total of $4.2
in the form of a non-interest bearing loan toward the phase two construction
project. The first claim of eligible expenditures amounting to $2.1 was
submitted in the third quarter of Fiscal 1997. Management expects the funding
will be received in the fourth quarter of Fiscal 1997. The loan will be
repayable in three equal annual installments commencing in June 2001.
18
<PAGE> 19
Total long-term debt increased by $9.6, net of repayments of $9.6, 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 nine months of Fiscal
1997, integration costs of $0.8 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.
As at December 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 $122.3 as at
December 27, 1996, the Company has unused lines of credit in North America and
the U.K. of approximately $32.9.
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, SX200 and NeVaDa are trademarks of Mitel Corporation.
19
<PAGE> 20
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
December 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>
February 4, 1997 JEAN-JACQUES CARRIER
Date Jean-Jacques Carrier
Vice President of Finance
and Chief Financial Officer
</TABLE>
20
<PAGE> 21
EXHIBIT INDEX
Exhibit Number Description
11(a) Computation of earnings per share under
Canadian accounting principles. . . . . . . . 22
11(b) Computation of earnings per share under
United States accounting principles. . . . . 23
27 Financial Data Schedule.
21
<PAGE> 22
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 Nine Months Ended
Dec. 27, Dec. 29, Dec. 27, Dec. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
BASIC EPS
Net income $ 11.5 $ 11.2 $ 38.7 $ 35.8
Less: dividends on
cumulative preferred shares (0.8) (0.8) (2.4) (2.5)
------- ------- ------- -------
Adjusted net income $ 10.7 $ 10.4 $ 36.3 $ 33.3
======= ======= ======= =======
Weighted average shares
outstanding (millions) 107.3 106.0 107.2 105.9
======= ======= ======= =======
Basic EPS $ 0.10 $ 0.10 $ 0.34 $ 0.31
======= ======= ======= =======
FULLY DILUTED EPS
Adjusted net income as
determined under basic EPS $ 10.7 $ 10.4 $ 36.3 $ 33.3
Imputed interest on stock
options and warrants 0.1 0.1 0.3 0.4
------- ------- ------- -------
Adjusted net income $ 10.8 $ 10.5 $ 36.6 $ 33.7
======= ======= ======= =======
Weighted average shares
outstanding as determined
under basic EPS (millions) 107.3 106.0 107.2 105.9
Add weighted average shares
on conversion of:
- stock options 3.3 3.0 3.3 3.0
- warrants - 1.0 - 1.0
------- ------- ------- -------
Adjusted weighted average
shares outstanding (millions) 110.6 110.0 110.5 109.9
------- ------- ------- -------
Fully diluted EPS $ 0.10 $ 0.10 $ 0.33 $ 0.31
======= ======= ======= =======
</TABLE>
22
<PAGE> 23
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 Nine Months Ended
Dec. 27, Dec. 29, Dec. 27, Dec. 29,
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY EPS
Net income $ 7.5 $ 9.0 $ 34.2 $ 41.8
Less: dividends on
cumulative preferred shares (0.8) (0.8) (2.4) (2.5)
------- ------- ------- -------
Adjusted net income $ 6.7 $ 8.2 $ 31.8 $ 39.3
======= ======= ======= =======
Weighted average shares and
share equivalents (millions) 108.6 108.1 108.5 107.9
======= ======= ======= =======
Primary EPS $ 0.06 $ 0.08 $ 0.29 $ 0.36
======= ======= ======= =======
FULLY DILUTED EPS (1)
Adjusted net income as
determined under primary EPS $ 6.7 $ 8.2 $ 31.8 $ 39.3
======= ======= ======= =======
Weighted average shares and
share equivalents (millions) 108.6 108.1 108.5 107.9
Weighted average shares on
conversion of stock options - 0.1 - 0.3
------- ------- ------- -------
Adjusted weighted average
shares outstanding (millions) 108.6 108.2 108.5 108.2
======= ======= ======= =======
Fully diluted EPS $ 0.06 $ 0.08 $ 0.29 $ 0.36
======= ======= ======= =======
</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.
23
<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 Nine Months Ended December 27, 1996 and the
Consolidated Balance Sheets at December 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> 9-MOS
<FISCAL-YEAR-END> MAR-28-1997
<PERIOD-END> DEC-27-1996
<EXCHANGE-RATE> 1.00000
<CASH> 9,815
<SECURITIES> 112,533
<RECEIVABLES> 145,442
<ALLOWANCES> 5,813
<INVENTORY> 86,925
<CURRENT-ASSETS> 363,089
<PP&E> 409,940
<DEPRECIATION> 233,145
<TOTAL-ASSETS> 551,804
<CURRENT-LIABILITIES> 133,697
<BONDS> 47,531
0
37,180
<COMMON> 153,018
<OTHER-SE> 156,954
<TOTAL-LIABILITY-AND-EQUITY> 551,804
<SALES> 500,371
<TOTAL-REVENUES> 500,371
<CGS> 243,984
<TOTAL-COSTS> 243,984
<OTHER-EXPENSES> 211,368
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,728
<INCOME-PRETAX> 51,700
<INCOME-TAX> 13,040
<INCOME-CONTINUING> 38,660
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 38,660
<EPS-PRIMARY> 0.34<F1>
<EPS-DILUTED> 0.33<F2>
<FN>
<F1>EPS-Primary is EPS-Basic under Canadian generally accepted accounting
principles.
<F2>EPS-Diluted is EPS-Fully Diluted under Canadian generally accepted
accounting principles.
</FN>
</TABLE>
