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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 June 27, 1997
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 executive offices) (Postal Code)
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 July 29, 1997 was 107,465,731.
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MITEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 27, 1997 and March 28, 1997 . . . . . . . . . . . . 3
Consolidated Statements of Retained Earnings -
Three months ended June 27, 1997 and June 28, 1996 . . . 4
Consolidated Statements of Income -
Three months ended June 27, 1997 and June 28, 1996 . . . 5
Consolidated Statements of Cash Flows -
Three months ended June 27, 1997 and June 28, 1996 . . . 6
Notes to the Consolidated Financial Statements . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . 13
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . 20
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Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 27, March 28,
1997 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 136.8 $ 143.3
Accounts receivable 156.2 156.7
Inventories (Note 3) 89.5 83.1
Prepaid expenses 5.9 4.2
Investment tax credits recoverable (Note 6) 2.1 -
------- -------
390.5 387.3
Capital assets:
Fixed assets (Note 4) 183.0 182.2
Other assets (Notes 5 and 6) 10.8 15.3
------- -------
$ 584.3 $ 584.8
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 105.5 $ 124.3
Income and other taxes payable 10.0 15.7
Deferred revenue 25.9 26.2
Current portion of long-term debt 20.0 14.8
------- -------
161.4 181.0
Long-term debt 42.5 43.0
Pension liability 11.5 11.3
Deferred income taxes 9.9 10.0
------- -------
225.3 245.3
------- -------
Shareholders' equity:
Capital Stock (Note 7)
Preferred shares 37.2 37.2
Common shares 153.4 153.3
Contributed surplus 32.3 32.3
Retained earnings 131.6 114.2
Translation account (Note 8) 4.5 2.5
------- -------
359.0 339.5
------- -------
$ 584.3 $ 584.8
======= =======
</TABLE>
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Mitel Corporation
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
Retained earnings, beginning of period $ 114.2 $ 79.4
Net income for the period 18.2 10.7
------- -------
132.4 90.1
Dividends on preferred shares (Note 9) (0.8) (0.8)
------- -------
Retained earnings, end of period $ 131.6 $ 89.3
======= =======
</TABLE>
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Mitel Corporation
CONSOLIDATED STATEMENTS OF INCOME
(in millions of Canadian dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
Revenue:
Products $ 162.5 $ 139.0
Service 19.5 16.9
------- -------
182.0 155.9
------- -------
Cost of sales (excluding amortization):
Products 80.6 66.1
Service 11.4 10.4
------- -------
92.0 76.5
------- -------
Gross margin 90.0 79.4
------- -------
Expenses:
Selling and administrative 49.2 47.7
Research and development (net) 15.8 14.2
Investment tax credits related to prior years'
research and development (Note 6) (7.4) (2.3)
Amortization 9.2 7.4
------- -------
66.8 67.0
------- -------
Operating income 23.2 12.4
Interest:
Income 1.2 1.8
Expense (0.9) (0.6)
------- -------
Income before income taxes 23.5 13.6
Income tax expense 5.3 2.9
------- -------
Net income for the period $ 18.2 $ 10.7
======= =======
Net income for the period attributable to common
shareholders after preferred share dividends $ 17.4 $ 9.9
======= =======
Net income per common share (Note 7) $ 0.16 $ 0.09
======= =======
</TABLE>
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Mitel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities:
Net income for the period $ 18.2 $ 10.7
Amortization 9.2 7.4
Investment tax credits (3.6) -
Gain on sale of capital assets (0.8) -
Other non-cash operating items 0.2 (0.1)
Increase in working capital (Note 11) (18.8) (16.9)
------- -------
Total 4.4 1.1
------- -------
Investing activities:
Additions to capital assets (9.8) (14.4)
Proceeds from disposal of capital assets 6.8 0.1
Net change in non-cash balances related
to investing activities (12.2) 0.7
------- -------
Total (15.2) (13.6)
------- -------
Financing activities:
Increase in long-term debt 8.2 4.2
Repayment of long-term debt (3.9) (2.2)
Dividends on preferred shares (0.8) (0.8)
Issue of common shares (Note 7) 0.1 2.0
------- -------
Total 3.6 3.2
------- -------
Effect of currency translation on cash 0.7 0.4
------- -------
Decrease in cash and short-term investments (6.5) (8.9)
Cash and short-term investments,
beginning of period 143.3 137.3
------- -------
Cash and short-term investments,
end of period $ 136.8 $ 128.4
======= =======
</TABLE>
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Mitel Corporation
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of Canadian dollars)
(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 June 27,
1997 and the results of operations and the changes in financial position for
the three month periods ended June 27, 1997 and June 28, 1996, 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 28, 1997. 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>
June 27, March 28,
1997 1997
------- -------
<S> <C> <C>
Raw materials $ 33.4 $ 29.4
Work-in-process 24.4 26.9
Finished goods 31.7 26.8
------- -------
$ 89.5 $ 83.1
======= =======
</TABLE>
4. Fixed assets:
<TABLE>
<CAPTION>
June 27, March 28,
1997 1997
------- -------
<S> <C> <C>
Cost $ 430.3 $ 419.8
Accumulated amortization (247.3) (237.6)
------- -------
$ 183.0 $ 182.2
======= =======
</TABLE>
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5. Other assets:
<TABLE>
<CAPTION>
June 27, March 28,
1997 1997
------- -------
<S> <C> <C>
Cost:
Patents, trademarks, and other $ 10.7 $ 10.6
Goodwill 4.9 4.7
Investment tax credits recoverable 1.5 -
Assets held for resale 1.5 7.4
------- -------
18.6 22.7
------- -------
Less accumulated amortization:
Patents, trademarks, and other 6.2 6.0
Goodwill 1.6 1.4
------- -------
7.8 7.4
------- -------
$ 10.8 $ 15.3
======= =======
</TABLE>
On June 27, 1997, the Company sold the Boca Raton facility which was held as
an asset for resale at March 28, 1997. The Company realized a gain and other
income of approximately $1.8, or $0.02 per share, related to this sale.
6. Income Taxes
During the first quarter of Fiscal 1998, the Company recognized Canadian ITCs
related to prior years' research and development expenses. The ITCs
recognized are comprised of two components:
1) ITCs realized for tax purposes in the first quarter of Fiscal 1998,
amounting to $3.8. Because the Company expects to defer recognition of
certain discretionary tax deductions, tax expense was increased by a similar
amount, resulting in an insignificant impact to net earnings; and,
2) the recognition of ITCs for which management believes there is sufficient
evidence of expected profitability from operations in the foreseeable future
to provide reasonable assurance for accruing a future benefit related to ITCs,
amounting to $3.6, or $0.03 per share.
As at March 28, 1997, the Company had tax loss carryforwards of approximately
$100.0 for which no accounting benefit was recognized and which are available
to reduce future years' income for tax purposes. These tax loss carryforwards
expire as follows: 2002 - $6.0; 2003 - $16.0; 2004 - $6.9; 2005 to 2012 -
$71.1. The tax loss carryforwards relate to operations in the United States,
Germany and Hong Kong. As at March 28, 1997, the Company had Canadian
investment tax credit carryforwards of approximately $60.0 for which no
accounting benefit was recognized and which are available to reduce future
years' income taxes. These investment tax credits expire during the years
from 1998 to 2007. In addition, the Company had timing differences of
approximately $32.0 for which no accounting benefit was recognized as at March
28, 1997.
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7. Capital Stock:
a)
<TABLE>
<CAPTION>
June 27, March 28,
1997 1997
----------- -----------
<S> <C> <C>
Shares outstanding:
Preferred shares - R&D Series 1,616,500 1,616,500
Common shares 107,443,856 107,414,631
</TABLE>
There were no preferred shares repurchased during the three months ended June
27, 1997.
b) A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
--------- ---------
<S> <C> <C>
Outstanding options:
Balance, beginning of period 3,238,638 2,902,525
Granted 1,044,000 627,500
Exercised (29,225) (110,150)
Cancelled (10,875) (24,000)
--------- ---------
Balance, end of period 4,242,538 3,395,875
========= =========
</TABLE>
Available for grant at June 27, 1997 were 80,400 (March 28, 1997 - 1,113,525)
common shares. The exercise prices on stock options issued range from $1.10
to $9.48 per share with exercise periods extending to June, 2007.
8. The following table summarizes changes in the translation account:
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
Balance, beginning of period $ 2.5 $ 3.3
Increase (decrease):
Movements in exchange rates -
United States Dollar 0.2 -
United Kingdom Pound Sterling 2.1 1.1
Swedish Krona (0.3) 0.4
------- -------
Balance, end of period $ 4.5 $ 4.8
======= =======
</TABLE>
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9. The Company has not declared or paid any dividends on its common shares.
During the first quarter, a $0.50 per share dividend was declared and paid on
the preferred shares.
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 21 to the
consolidated financial statements as at March 28, 1997.
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:
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
Net income for the period in
accordance with Canadian GAAP $ 18.2 $ 10.7
Effect of deferral accounting related
to foreign exchange contracts (0.6) 0.5
Adjustment to deferred income taxes 3.7 -
------- -------
U.S. GAAP and SEC requirements:
Net income for the period $ 21.3 $ 11.2
======= =======
Net income for the period
attributable to common shareholders
after preferred share dividends $ 20.5 $ 10.4
======= =======
Net income per common share $ 0.19 $ 0.10
======= =======
</TABLE>
10
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<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<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 $ 4.4 $ 1.1
Investing activities - Canadian GAAP (15.2) (13.6)
Change in short-term investments 48.2 79.6
Additions to capital assets under capital lease 7.4 6.8
------- -------
Investing activities - U.S. GAAP 40.4 72.8
------- -------
Financing activities - Canadian GAAP 3.6 3.2
Increase in capital leases (7.4) (6.8)
------- -------
Financing activities - U.S. GAAP (3.8) (3.6)
------- -------
Increase in cash 41.0 70.3
Effect of currency translation on cash flows 0.7 0.4
Cash position, beginning of period 55.5 52.4
------- -------
Cash position, end of period $ 97.2 $ 123.1
======= =======
</TABLE>
Balance sheet items in conformity with U.S. GAAP and SEC requirements:
<TABLE>
<CAPTION>
June 27, March 28,
1997 1997
------- -------
<S> <C> <C>
Cash $ 97.2 $ 55.5
Short-term investments 39.6 87.8
Investment tax credits recoverable 9.0 6.1
Other assets 17.8 19.4
Accounts payable and accrued liabilities 110.1 128.3
Redeemable preferred shares 34.4 34.4
Common shares 599.3 599.2
Contributed surplus 2.5 2.5
Deficit (272.4) (292.9)
</TABLE>
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 Earnings Per Share (SFAS 128), which is effective
for annual and interim periods ending after December 15, 1997. The Company's
pro forma earnings per share giving effect to SFAS 128, would be as follows:
11
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<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
Pro forma basic earnings per share $ 0.19 $ 0.10
Pro forma diluted earnings per share $ 0.18 $ 0.10
</TABLE>
In addition, the Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 130 Comprehensive Income (SFAS 130) and No.
131 Disclosures about Segments of an Enterprise and Related Information (SFAS
131). SFAS 130 and SFAS 131 will be effective for the Company's March 27,
1998 year end. The Company has not determined the impact, if any, of these
pronouncements on its consolidated financial statements.
11. Net change in non-cash working capital balances related to operating
activities:
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
Accounts receivable $ 9.0 $ 14.7
Inventories (7.6) (8.0)
Accounts payable and accrued liabilities (20.0) (21.3)
Deferred revenue (0.9) (2.2)
Other 0.7 (0.1)
------- -------
$ (18.8) $ (16.9)
======= =======
</TABLE>
12. Certain of the Fiscal 1997 comparative figures have been reclassified so
as to conform to the presentation adopted in Fiscal 1998.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in millions of Canadian dollars, except per share amounts)
The Company's performance showed significant improvement in the three months
ended June 27, 1997 compared to the same quarter of last year. Total revenue
of $182.0, a Company record for a first quarter, was 17 percent higher than
Fiscal 1997's first quarter revenue of $155.9. Growth rates of 17 percent
were recorded by both Business Communications Systems (BCS) and
Semiconductors. The BCS revenue growth was driven by higher volumes of SX200
systems, including the recently launched SX200 ML, higher sales of voicemail
systems and applications, increased shipments of call controllers and higher
service revenue. The Semiconductor growth rate was attributable to increased
shipments of integrated and hybrid circuits, and wafers.
The Company reported net income of $18.2, or $0.16 per share, for the quarter
ended June 27, 1997, an improvement of $7.5, or $0.07 per share, over the
first quarter of Fiscal 1997. Net income in the quarter benefited from an
accrual for investment tax credits (ITCs) amounting to $3.6, or $0.03 per
share, related to ITCs expected to be realized in the foreseeable future. In
addition, the Company also recorded a gain and other income amounting to $1.8,
or $0.02 per share, related to the sale of the Boca Raton facility. The
remaining improvement over the previous fiscal period was due to the higher
sales volumes and recent management actions taken to focus operations and to
improve the sales channels.
As a percentage of total revenue, the total gross margin for the quarter ended
June 27, 1997 was 49 percent, 2 percentage points lower than the same quarter
in Fiscal 1997. The lower margins were a result of unfavourable changes in
the mix of semiconductor products sold and ongoing competitive pricing
pressures in BCS channels.
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 included elsewhere in this Form 10-Q.
The following discussion and analysis explains trends in the Company's
financial condition and results of operations for the quarter ended June 27,
1997 compared with the same period in the previous year, and is intended to
help shareholders and other readers understand the dynamics of the Company's
business and the key factors underlying its financial results. This
discussion should be read in conjunction with the attached consolidated
financial statements and notes thereto, and with the Company's audited
consolidated financial statements and notes thereto for the year ended March
28, 1997. Certain statements in this management's discussion and analysis
constitute forward-looking statements within the meaning of the U.S. Private
Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections about the industries in which the
Company operates, management's beliefs and assumptions made by management.
Such forward-looking statements 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
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expressed or implied by such forward-looking statements. Such risks,
uncertainties and assumptions include, among others, the following: general
economic and business conditions; demographic changes; import protection and
regulation; rapid technology development and changes; timing of product
introductions; the mix of products/services; industry competition, industry
capacity and other industry trends; and, the ability of the Company to attract
and retain key employees.
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;
networked voice and data systems and CTI applications; client server telecom
products; public switching systems; network enhancement and access products;
integrated and hybrid circuits, optoelectronic devices and custom silicon
wafers.
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>
Three Months Three Months
Ended % of Ended % of
June 27, 1997 Total June 28, 1996 Total
------------- ----- ------------- -----
<S> <C> <C> <C> <C>
United States $ 91.7 51 % $ 75.0 48 %
Europe 51.2 28 48.7 31
Other Regions 26.0 14 17.8 12
Canada 13.1 7 14.4 9
------------- ----- ------------- -----
$ 182.0 100 % $ 155.9 100 %
============= ===== ============= =====
</TABLE>
The net movement in exchange rates from the first quarter of Fiscal 1997
favorably impacted total first quarter revenue in Fiscal 1998 by 2.2 percent
($3.5) primarily as a result of changes in the United Kingdom pound sterling
exchange rate.
Revenue, by product group, was distributed as follows:
14
<PAGE 15>
<TABLE>
<CAPTION>
Three Months Three Months
Ended % of Ended % of
June 27, 1997 Total June 28, 1996 Total
------------- ----- ------------- -----
<S> <C> <C> <C> <C>
Business Communication
Systems $ 119.0 65 % $ 102.1 65 %
Semiconductors 63.0 35 53.8 35
------------- ----- ------------- -----
$ 182.0 100 % $ 155.9 100 %
============= ===== ============= =====
</TABLE>
Business Communications Systems
Business Communications Systems (BCS) comprise PBX equipment and peripherals,
CTI products and applications, client server telecom products, call controller
products, and the GX5000. All of the Company's service revenue relates to
BCS, primarily PBX.
Compared to the first quarter of last year, BCS product revenue increased by
17 percent due to higher volumes of SX200 systems, higher sales of voicemail
systems and applications and increased shipments of call controllers.
The U.S. indirect sales channel benefited from the successful launch of the
SX200 ML, late in the fourth quarter of Fiscal 1997. The SX200 ML voice
system is aimed at the fast-growing small business, under-100 line, market in
the United States and other countries. The SX200 ML was made available to the
Company's U.S. supply houses and dealers and selected Canadian and Caribbean
telephone companies during the first quarter of Fiscal 1998. In turn, the
dealers will begin their launch early in the second quarter of this fiscal
year.
With respect to call controllers, European sales increased in Fiscal 1998 as a
result of recently deregulated network access services in the U.K. which
created a strong demand by alternate carriers for Mitel's call controllers.
BCS sales into the Asia Pacific region were adversely affected by the ongoing
effects of tight monetary policies in China and intense price competition.
Compared to the first quarter of last year, BCS service revenue increased by
15 percent. In proportion to total revenue, BCS service revenue remained
constant at 11 percent of total revenue. Service revenue grew mainly due to
the success of a new managed service business in the United Kingdom which was
introduced in the second half of Fiscal 1997.
Semiconductors
Semiconductor revenue increased by 17 percent from the first three months of
last year as a result of increased demand for the Company's integrated
circuits, thick film hybrid products and wafers, in all regions. The increase
in Mitel's semiconductor business reflects the world-wide growth in the
communications segment of the semiconductor industry and growth in the market
for applications-specific integrated circuits (ASICs), particularly for
medical applications. Increased demand for communications products
15
<PAGE 16>
incorporating existing Mitel Semiconductor components by the Company's
traditional customer base, along with the introduction of new components,
including those intended for CTI/multimedia applications led to increased
sales volumes compared to the same three month period last year. The Company
believes the market for medical ASICs is fueled by the need to reduce costs
and improve services, and by quality of life issues.
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 Jarfalla, Sweden, and a major capital expansion program
at its fabrication plant in Bromont, Quebec, Canada. Both initiatives were
necessary to meet the growing demand for Mitel's integrated circuits. The most
significant part of the first phase of the Bromont expansion program, which
concerns the improvement of the volume capacity of the existing 100 mm wafer
production, was completed during the first quarter of Fiscal 1997. The second
part of the first phase, which will introduce new 0.8 micron technology as
well as the second phase, intended to increase the plant's production capacity
by converting to 150 mm wafer production, are scheduled to be completed in the
final quarter of Fiscal 1998. The first lots of the 150mm wafer pilot line
are currently being processed.
GROSS MARGIN
As a percentage of total revenue, total gross margin for the quarter ended
June 27, 1997 was 49 percent, 2 percentage points lower than the same quarter
in Fiscal 1997. The product gross margin was 50 percent for the quarter ended
June 27, 1997, 2 percentage points lower than in the same period in Fiscal
1997. Product gross margins declined mainly due to the mix of semiconductor
products sold and pricing pressures for the BCS products. The Fiscal 1998
first quarter service gross margin improved to 42 percent from 38 percent
primarily due to service call efficiencies obtained by North American
technicians.
OPERATING EXPENSES
Selling and Administrative
Selling and administrative (S&A) expenses in the first quarter of Fiscal 1998
were $49.2, or 27 percent of sales, compared with $47.7, and 31 percent of
sales, for the comparable period in Fiscal 1997.
S&A expenses included a gain and other income amounting to $1.8 related to the
sale of the Boca Raton facility, which was previously held as an asset for
resale. Before accounting for the sale of the Boca Raton facility, S&A
expenses were $51.0, or 28 percent of sales, 3 percentage points lower than
the first quarter of Fiscal 1997. S&A expenses decreased as a percentage of
sales primarily due to the record first quarter sales and spending restraint
in marketing and selling programs, partially offset by the effects of
consolidating the operations of the business acquired from Global Village
Communication (U.K.) Limited. The Company acquired the business and assets of
Global Village Communication (U.K.) Limited, an ISDN solution provider based
in the United Kingdom, during the fourth quarter of Fiscal 1997.
16
<PAGE 17>
During the fourth quarter of Fiscal 1997, the Company announced plans to
restructure its BCS operations and recorded a charge of $13.0 to the Company's
operating expenses, of which $8.0 related mainly to severance costs for
operations in North America and the United Kingdom. The balance of the charge
related to a write-off of the Company's investment in its joint venture in
China. The total amount charged against the provision during the quarter
amounted to $3.8; the remainder of the costs will be charged throughout Fiscal
1998.
Research and Development
R&D expenses amounted to $15.8 and 9 percent of revenue for the three month
period ended June 27, 1997. This compares to $14.2 and 9 percent of revenue
in the first quarter of Fiscal 1997. These amounts are exclusive of related
R&D capital asset amortization and net of Canadian provincial government R&D
incentives earned.
Mitel's R&D program integrates its programs 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; new ISDN applications; and real-time applications
microelectronic components.
During the quarter, the Company recorded a total of $7.4 for Canadian ITCs
related to prior years' R&D. The ITC accrual was comprised of two components.
The first component amounted to $3.8 which related to ITCs that are expected
to be realized for tax purposes in Fiscal 1998. In the first quarter of
Fiscal 1997, the Company recorded an amount of $2.3 under the same
circumstances. As the Company defers certain discretionary tax deductions to
increase tax expense by a similar amount, the combined effects of accruing for
the ITCs and a similar increase in income tax expense resulted in an
insignificant impact on net earnings or earnings per share. The second
component of the accrual amounted to $3.6, or $0.03 per share, and related to
management's assessment that reasonable assurance exists for realizing the
benefit of ITCs carried forward in the foreseeable future. The reasonable
assurance is derived from management's assessment that there is sufficient
evidence of profitability in the near future from operations in which these
carryforwards arose.
Amortization
Amortization increased in the first quarter of Fiscal 1998 to $9.2 from $7.4
for the comparable period in Fiscal 1997. The increase is due primarily to
the semiconductor capacity expansion capital program and replacements and
upgrades to the Company's other manufacturing plants.
INTEREST INCOME AND EXPENSE
Interest income, net of interest expense, was $0.3 in the three month period
ended June 27, 1997 compared to $1.2 for the same period in Fiscal 1997.
Interest income has decreased over the same period last year primarily due to
lower interest rates and lower cash balances available for investment. The
increase in interest expense over the same period last year resulted from an
increase in the Company's capital leases.
17
<PAGE 18>
INCOME TAXES
Income tax expense for the first quarter of Fiscal 1998 was $5.3 and compares
to $2.9 for the same period in Fiscal 1997. Before accounting for the
investment tax credits, income tax expense for the first quarter was $1.5 and
$0.6 for Fiscal 1998 and Fiscal 1997 respectively. The increased tax expense
in the first quarter of Fiscal 1998 was due to higher provincial income taxes
and alternative minimum taxes based on higher earnings in Canada.
Management periodically reviews the virtual certainty or reasonable assurance,
as applicable, of realizing the loss and ITC carryforward and timing
difference benefits in the determination of their accounting recognition.
Such review may result in the recording of the accounting benefit for these
timing differences and investment tax credit carryforwards, as the
circumstances warrant, and the recognition of loss carryforwards, as realized.
Management believes there is sufficient evidence of expected profitability
from the Company's Canadian operations in the foreseeable future to provide
reasonable assurance for accruing a future benefit related to ITCs. The
accounting for the investment tax credits is more fully described in the
Research and Development section of this management's discussion and analysis.
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 June 27,
1997, order backlog was $160.1 compared to $135.1 at March 28 1997. The
increase in backlog is mainly attributable to increased semiconductor
bookings. Most of the backlog is scheduled for delivery in the next twelve
months.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and short-term investment balances of $136.8 at June 27,
1997 compared to $143.3 at March 28, 1997. The decrease of $6.5 from the end
of Fiscal 1997 was due to capital asset additions during the first quarter
offset by cash flow provided by operations and an increase in long-term debt
financing.
Cash flow provided by operations amounted to $4.4 during the first quarter
ended June 27, 1997. This compares to the first quarter of Fiscal 1997 when
cash provided by operations was $1.1. Since March 28, 1997, the Company's
working capital has increased by $22.8 to $229.1 primarily due to increased
inventory levels and lower accounts payable levels. Inventory levels were
depleted at year-end due to the record sales recorded in the fourth quarter of
last year. Accounts payable and accrued liabilities decreased due to payments
associated with year-end purchasing activities, rebates and incentives on the
Fiscal 1997 sales performance, and charges to the restructuring provision.
Fixed asset additions were $9.7 during the first quarter of Fiscal 1998, and
were primarily for the increase in semiconductor manufacturing capacity and
technology enhancements as well as upgrades to the Company's information
technology resources. The semiconductor capital program is comprised of two
18
<PAGE 19>
phases as mentioned earlier in this management's discussion and analysis.
Phase one which will cost approximately $10.1, is scheduled to be completed in
the second quarter of Fiscal 1998, and phase two which will cost approximately
$39.0, is scheduled to be completed during the fourth quarter of Fiscal 1998.
Approximately $34.4 has been spent on phase two as at the end of the first
quarter of Fiscal 1998. Management expects that Fiscal 1998 capital
expenditures will be lower than Fiscal 1997 levels of $73.9.
On June 27, 1997, the Company sold the Boca Raton facility which was
previously held as an asset for resale. The proceeds from the sale, which
amounted to $6.6, were used to extinguish the Florida industrial revenue and
development bonds (IRBs) of $4.1, to which the facility was pledged as
security, on July 3, 1997. The total gain and other income related to the
sale amounted to $1.8, or $0.02 per share.
Total long-term debt, net of repayments, increased by $4.7 from the end of
Fiscal 1997 due to new capital leases. The current portion of long-term debt
was increased by the carrying amount of the IRBs which were paid shortly after
quarter-end, and long-term debt was reduced by the same amount in light of
plans to retire the IRB debt associated with the Boca Raton facility.
As at June 27, 1997, the Company's capitalization was comprised of 17 percent
debt, 9 percent preferred equity, and 74 percent common equity, the same
capitalization profile as at the end of Fiscal 1997.
In addition to cash and short-term investment balances of $136.8 as at June
27, 1997 the Company has unused lines of credit in North America and the U.K.
of approximately $33.0.
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.
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
June 27, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MITEL CORPORATION
(Registrant)
July 24, 1997 JEAN-JACQUES CARRIER
Date Jean-Jacques Carrier
Vice President of Finance
and Chief Financial Officer
20
<PAGE 21>
MITEL CORPORATION
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 11(a)
COMPUTATION OF EARNINGS PER SHARE
(CANADIAN ACCOUNTING PRINCIPLES)
(in millions of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
BASIC EPS
Net Income $ 18.2 $ 10.7
Less: dividends on cumulative preferred shares (0.8) (0.8)
------- -------
Adjusted net income $ 17.4 $ 9.9
======= =======
Weighted average shares outstanding (millions) 107.4 107.2
======= =======
Basic EPS $ 0.16 $ 0.09
======= =======
FULLY DILUTED EPS (1)
Adjusted net income as determined under basic EPS $ 17.4 $ 9.9
Imputed interest on stock options and warrants 0.1 0.1
------- -------
Adjusted net income $ 17.5 $ 10.0
======= =======
Weighted average shares outstanding as
determined under basic EPS (millions) 107.4 107.2
Add weighted average shares on conversion of:
- - stock options 4.2 3.4
------- -------
Adjusted weighted average shares outstanding (millions) 111.6 110.6
------- -------
Fully diluted EPS $ 0.16 $ 0.09
======= =======
</TABLE>
(1) This calculation is submitted in accordance with Release No. 33-5133
under the Securities Act of 1933, as amended, even though it is contrary to
Section 3500.34 of the Canadian Institute of Chartered Accountants Handbook
because it does not provide a dilutive result.
22
<PAGE 23>
Mitel Corporation Exhibit 11(b)
COMPUTATION OF EARNINGS PER SHARE
(UNITED STATES ACCOUNTING PRINCIPLES)
(in millions of Canadian dollars, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
June 27, June 28,
1997 1996
------- -------
<S> <C> <C>
PRIMARY EPS
Net Income $ 21.3 $ 11.2
Less: dividends on cumulative preferred shares (0.8) (0.8)
------- -------
Adjusted net income $ 20.5 $ 10.4
======= =======
Weighted average shares and
share equivalents (millions) $ 108.4 $ 108.5
======= =======
Primary EPS $ 0.19 $ 0.10
======= =======
FULLY DILUTED EPS (1)
Adjusted net income as determined under primary EPS $ 20.5 $ 10.4
======= =======
Weighted average shares and
share equivalents (millions) 108.4 108.5
------- -------
Adjusted weighted average
shares outstanding (millions) 108.4 108.5
------- -------
Fully diluted EPS $ 0.19 $ 0.10
======= =======
</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 a 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 Three Months Ended June 27, 1997 and the
Consolidated Balance Sheets at June 27, 1997 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-27-1998
<PERIOD-END> JUN-27-1997
<EXCHANGE-RATE> 1.38125<F1>
<CASH> 11,567
<SECURITIES> 125,211
<RECEIVABLES> 150,252
<ALLOWANCES> 9,504
<INVENTORY> 89,464
<CURRENT-ASSETS> 390,470
<PP&E> 430,338
<DEPRECIATION> 247,297
<TOTAL-ASSETS> 584,265
<CURRENT-LIABILITIES> 161,367
<BONDS> 42,471
0
37,180
<COMMON> 153,409
<OTHER-SE> 168,403
<TOTAL-LIABILITY-AND-EQUITY> 584,265
<SALES> 182,016
<TOTAL-REVENUES> 182,016
<CGS> 91,981
<TOTAL-COSTS> 91,981
<OTHER-EXPENSES> 66,778
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 938
<INCOME-PRETAX> 23,553
<INCOME-TAX> 5,343
<INCOME-CONTINUING> 18,210
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,210
<EPS-PRIMARY> 0.16<F2>
<EPS-DILUTED> 0.16<F3>
<FN>
<F1> The period ended foreign exchange rate of 1.38125 is used to translate
the balance sheet items from Canadian Dollars (figures above) to U.S. Dollars.
The three month moving average foreign exchange rate of 1.38674 is used
to translate the income statement items from Canadian Dollars (figures above)
to U.S. Dollars.
<F2> EPS-Primary is EPS-Basic under Canadian generally accepted accounting
principles.
<F3> EPS-Diluted is EPS-Fully Diluted under Canadian generally accepted
accounting principles.
</FN>
</TABLE>
