<PAGE>
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 26, 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 (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 28, 1998 was
108,100,506.
1
<PAGE>
Mitel Corporation
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
December 26, 1997 and March 28, 1997 . . . . . . . . . . . . . 3
Consolidated Statements of Retained Earnings -
Three months ended December 26, 1997 and December 27, 1996
Nine months ended December 26, 1997 and December 27, 1996. . . 4
Consolidated Statements of Income -
Three months ended December 26, 1997 and December 27, 1996
Nine months ended December 26, 1997 and December 27, 1996. . . 5
Consolidated Statements of Cash Flows -
Nine months ended December 26, 1997 and December 27, 1996. . . 6
Notes to the Consolidated Financial Statements . . . . . . . . .7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . .15
PART II. OTHER INFORMATION
ITEM 6. REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . . . . .23
2
<PAGE>
Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Dec. 26, March 28,
1997 1997
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 139.9 $ 143.3
Accounts receivable 182.5 156.7
Inventories (Note 3) 96.3 83.1
Prepaid expenses 5.3 4.2
Investment tax credits recoverable (Note 6) 5.9 -
------- -------
429.9 387.3
Capital assets:
Fixed assets (Note 4) 191.5 183.7
Other assets (Notes 5 and 6) 36.0 13.8
------- -------
$ 657.4 $ 584.8
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 115.8 $ 124.3
Income and other taxes payable 16.5 15.7
Deferred revenue 24.6 26.2
Current portion of long-term debt 18.3 14.8
------- -------
175.2 181.0
Long-term debt 46.6 43.0
Pension liability 12.2 11.3
Deferred income taxes 10.1 10.0
------- -------
244.1 245.3
------- -------
Shareholders' equity:
Capital Stock (Note 7)
Preferred shares 37.2 37.2
Common shares 155.2 153.3
Contributed surplus 32.3 32.3
Retained earnings 178.9 114.2
Translation account (Note 8) 9.7 2.5
------- -------
413.3 339.5
------- -------
$ 657.4 $ 584.8
======= =======
</TABLE>
3
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Mitel Corporation
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Retained earnings,
beginning of period $ 154.1 $ 105.0 $ 114.2 $ 79.4
Net income for the period 25.6 11.5 67.1 38.7
------- ------- ------- -------
179.7 116.5 181.3 118.1
Dividends on preferred
shares (Note 9) (0.8) (0.8) (2.4) (2.4)
------- ------- ------- -------
Retained earnings,
end of period $ 178.9 $ 115.7 $ 178.9 $ 115.7
======= ======= ======= =======
</TABLE>
4
<PAGE>
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. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
------- ------- ------- ------
<S> <C> <C> <C> <C>
Revenue:
Products $ 194.3 $ 156.3 $ 542.1 $ 445.7
Service 21.2 16.8 60.4 50.8
------- ------- ------- -------
215.5 173.1 602.5 496.5
------- ------- ------- -------
Cost of sales (excluding amortization):
Products 91.6 73.0 262.1 210.5
Service 13.3 11.4 37.0 32.9
------- ------- ------- -------
104.9 84.4 299.1 243.4
------- ------- ------- -------
Gross margin 110.6 88.7 303.4 253.1
------- ------- ------- -------
Expenses:
Selling and
administrative 57.8 53.3 162.8 150.5
Research and development (net) 17.9 14.1 51.4 40.9
Investment tax credits related to prior years'
research and development (Note 6) (9.9) (2.8) (26.8) (7.6)
Amortization 10.0 8.5 28.5 24.2
------- ------- ------- -------
75.8 73.1 215.9 208.0
------- ------- ------- -------
Operating income 34.8 15.6 87.5 45.1
Gain on sale of investment
(Note 11) - - - 3.6
Interest:
Income 1.4 1.4 3.9 4.8
Expense (1.0) (0.6) (2.9) (1.7)
------- ------- ------- -------
Income before income taxes 35.2 16.4 88.5 51.8
Income tax expense 9.6 4.9 21.4 13.1
------- ------- ------- -------
Net income for the period $ 25.6 $ 11.5 $ 67.1 $ 38.7
======= ======= ======= =======
Net income for the period attributable
to common shareholders after
preferred share dividends $ 24.8 $ 10.7 $ 64.7 $ 36.3
======= ======= ======= =======
Net income per common share (Note 7):
Basic $ 0.23 $ 0.10 $ 0.60 $ 0.34
======= ======= ======= =======
Fully diluted $ 0.22 $ 0.10 $ 0.59 $ 0.33
======= ======= ======= =======
</TABLE>
5
<PAGE>
Mitel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 26, Dec. 27,
1997 1996
------- -------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities:
Net income for the period $ 67.1 $ 38.7
Amortization 28.5 24.2
Investment tax credits (14.0) -
Gain on sale of capital assets (0.7) (4.3)
Deferred income taxes - 0.3
Other non-cash operating items 0.7 0.5
Increase in working capital (Note 13) (34.0) (33.9)
------- -------
Total 47.6 25.5
------- -------
Investing activities:
Additions to capital assets (39.5) (56.2)
Proceeds from disposal of capital assets 6.8 4.9
Acquisition (Note 10) (21.6) -
Net change in non-cash balances
related to investing activities (4.1) (2.4)
------- -------
Total (58.4) (53.7)
------- -------
Financing activities:
Increase in long-term debt 22.4 18.4
Repayment of long-term debt (16.0) (9.3)
Dividends on preferred shares (2.4) (2.4)
Issue of common shares (Note 7) 1.9 2.4
Net change in non-cash balances
related to financing activities - 0.8
------- -------
Total 5.9 9.9
------- -------
Effect of currency translation on cash 1.5 3.3
------- -------
Decrease in cash and short-term investments (3.4) (15.0)
Cash and short-term investments,
beginning of period 143.3 137.3
------- -------
Cash and short-term investments,
end of period $ 139.9 $ 122.3
======= =======
</TABLE>
6
<PAGE>
Mitel Corporation
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions of Canadian dollars, except 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
26, 1997 and the results of operations and the changes in financial position
for the three and nine month periods ended December 26, 1997 and December 27,
1996, in accordance with accounting principles generally accepted in Canada.
(See also Note 12).
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>
Dec. 26, March 28,
1997 1997
------- -------
<S> <C> <C>
Raw materials $ 34.9 $ 29.4
Work-in-process 28.6 26.9
Finished goods 32.8 26.8
------- -------
$ 96.3 $ 83.1
======= =======
</TABLE>
4. Fixed assets:
<TABLE>
<CAPTION>
Dec. 26, March 28,
1997 1997
------- -------
<S> <C> <C>
Cost $ 458.2 $ 421.3
Accumulated amortization (266.7) (237.6)
------- -------
$ 191.5 $ 183.7
======= =======
</TABLE>
7
<PAGE>
5. Other assets:
<TABLE>
<CAPTION>
Dec. 26, March 28,
1997 1997
------- -------
<S> <C> <C>
Cost:
Patents, trademarks, and other $ 20.5 $ 10.6
Purchased R&D 11.7 -
Investment tax credits recoverable 8.1 -
Goodwill 5.0 4.7
Assets held for resale - 5.9
------- -------
45.3 21.2
------- -------
Less accumulated amortization:
Patents, trademarks, and other 6.8 6.0
Purchased R&D 0.6 -
Goodwill 1.9 1.4
------- -------
9.3 7.4
------- -------
$ 36.0 $ 13.8
======= =======
</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.
On August 8, 1997, the Company acquired completed and in-process research and
development (R&D) in connection with the purchase of the assets and technology
business of Gandalf Technologies Inc. (See also Note 10). The R&D will be
amortized over a period of ten years.
6. Income taxes
As at December 26, 1997, the Company recognized a net Canadian ITC asset of
$14.0 related to prior years' research and development expenses.
The ITCs recognized in earnings were comprised of two components:
1) the recognition of ITCs in Fiscal 1998 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 $5.4, or $0.05 per
share, for the third quarter and $14.0, or $0.13 per share, year-to-
date; and,
2) ITCs realized for tax purposes in the third quarter and first nine
months of Fiscal 1998, amounting to $4.5 (1997 - $2.8) and $12.8
(1997 - $7.6) respectively. The benefit of recording these ITCs
contributed to reducing the impact of a higher effective income tax
rate in Canada, combining to result in an insignificant impact to net
earnings.
8
<PAGE>
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.
7. Capital stock:
a)
<TABLE>
<CAPTION>
Dec. 26, March 28,
1997 1997
----------- -----------
<S> <C> <C>
Shares outstanding:
Preferred shares - R&D Series 1,616,500 1,616,500
Common shares 107,986,506 107,414,631
</TABLE>
There were no preferred shares repurchased during the nine months ended
December 26, 1997.
b) A summary of the Company's stock option activity is
as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 26, Dec. 27,
1997 1996
------- -------
<S> <C> <C>
Outstanding options:
Balance, beginning of period 3,238,638 2,902,525
Granted 1,112,500 708,650
Exercised (571,875) (232,062)
Cancelled (38,250) (40,150)
Balance, end of period 3,741,013 3,338,963
</TABLE>
Available for grant at December 26, 1997 were 39,275 (March 28, 1997 -
1,113,525) common shares. The exercise prices on stock options issued range
from $1.10 to $11.73 per share with exercise periods extending to December,
2007.
c) The net income per common share figures were calculated based on net
income after the deduction of preferred share dividends and using the
weighted monthly average number of shares outstanding during the
respective periods as follows:
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding (millions) 107.9 107.3 107.6 107.2
======= ======= ======= =======
</TABLE>
8. The following table summarizes changes in the translation account:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Balance, beginning of period $ 2.8 $ 4.9 $ 2.5 $ 3.3
Increase (decrease):
Movements in exchange rates -
United Kingdom Pound Sterling 5.5 5.5 5.1 7.2
United States Dollar 1.2 - 1.4 -
Swedish Krona 0.2 (0.7) 0.6 (0.6)
Other currencies - (0.7) 0.1 (0.2)
Reduction of net investment
in subsidiaries - (0.1) - (0.8)
------- ------- ------- -------
Balance, end of period $ 9.7 $ 8.9 $ 9.7 $ 8.9
======= ======= ======= =======
</TABLE>
9. 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.
10. Acquisition
On August 8, 1997, the Company acquired certain assets of Gandalf Technologies
Inc. (Gandalf) related to its technology business (principally its remote
access business). Gandalf's remote access products and technology facilitate
high volume data and voice communications between the corporate office, local
branches, teleworkers, and agents in the field. Gandalf's operations are
based principally in Canada, the United States, and the United Kingdom. The
Company acquired the assets and technology business for cash consideration of
$21.6. The purchase agreement did not include Gandalf's service business.
This acquisition was accounted for by application of the purchase method under
which the results of operations of Gandalf were included in the Company's
accounts from the date of acquisition. The purchase price allocation was
based on fair values assigned to net assets as determined by an independent
valuation using standard valuation techniques. An amount of $14.9 was
allocated to identifiable intangible assets which include completed and in-
process research and development, trademarks, and the tradename. The
identifiable intangible assets will be amortized over ten years.
10
<PAGE>
The purchase transaction is summarized as follows:
Net assets acquired, at approximate fair value:
<TABLE>
<S> <C>
Current assets $ 7.1
Capital assets 15.6
-------
Total assets 22.7
Current liabilities 1.1
-------
Total net assets $ 21.6
=======
Cash consideration $ 21.6
=======
</TABLE>
11. Gain on sale of investment
On September 27, 1996, the Company sold its equity investment in Esprit
Telecom (Jersey) Ltd. (Esprit), a non-strategic holding which was carried at a
nominal cost. The gain on the sale of shares in Esprit was $3.6.
12. United States accounting principles
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada (Canadian GAAP), which, in
the case of the Company, conform in all material respects with those in the
United States (U.S. GAAP) and with the requirements of the Securities and
Exchange Commission (SEC), except as fully described in Note 21 to the
consolidated financial statements as at March 28, 1997. In addition, under
U.S. GAAP, acquired in-process R&D with no alternative future use is written-
off against net earnings upon acquisition. Under Canadian GAAP, acquired in-
process R&D is capitalized and amortized over its estimated useful life,
subject to a periodic review of its recoverability.
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
the calculation of basic earnings per share excludes any dilutive effects of
options, warrants, and convertible securities. Diluted earnings per share is
very similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
necessary, restated to conform to the Statement 128 requirements.
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:
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Dec. 26, Dec. 27, Dec. 26, Dec. 27,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income for the period in
accordance with Canadian GAAP $ 25.6 $ 11.5 $ 67.1 $ 38.7
Write-off of acquired in-process R&D - - (2.7) -
Amortization of acquired
in-process R&D 0.1 - 0.1 -
Effect of deferral accounting related
to foreign exchange contracts (9.5) (4.0) (9.8) (4.5)
Adjustment to deferred income taxes 0.8 - (0.5) -
------- ------- ------- -------
U.S. GAAP and SEC requirements:
Net income for the period $ 17.0 $ 7.5 $ 54.2 $ 34.2
Less: dividends on cumulative
preferred shares 0.8 0.8 2.4 2.4
------- ------- ------- -------
Adjusted net income $ 16.2 $ 6.7 $ 51.8 $ 31.8
======= ======= ======= =======
Net income per common share:
Basic $ 0.15 $ 0.06 $ 0.48 $ 0.30
======= ======= ======= =======
Diluted $ 0.15 $ 0.06 $ 0.48 $ 0.29
======= ======= ======= =======
Weighted average shares for
basic EPS (millions) 107.9 107.3 107.6 107.2
Weighted average shares on conversion
of stock options 1.6 1.3 1.1 1.3
------- ------- ------- -------
Adjusted weighted average shares
and share equivalents (millions) $ 109.5 $ 108.6 $ 108.7 $ 108.5
======= ======= ======= =======
</TABLE>
The following options were excluded in the computation of diluted earnings per
share because the options' exercise price exceeded the average market price of
the common shares and, therefore, the effect would be antidilutive:
i) Options outstanding for the nine months ended December 26, 1997 to
purchase 328,500 shares of common stock at an average exercise price of $9.76
per share.
ii) Options outstanding for the three and nine months ended December 27, 1996
to purchase 643,500 shares of common stock at an average exercise price of
$9.32 per share.
12
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 26, Dec. 27,
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 $ 47.6 $ 25.5
------- -------
Investing activities - Canadian GAAP (58.4) (53.7)
Change in short-term investments 12.4 (5.5)
Additions to capital assets under capital lease 20.0 18.2
------- -------
Investing activities - U.S. GAAP (26.0) (41.0)
------- -------
Financing activities - Canadian GAAP 5.9 9.9
Increase in capital leases (20.0) (18.2)
------- -------
Financing activities - U.S. GAAP (14.1) (8.3)
------- -------
Effect of currency translation on cash flows 1.5 3.3
------- -------
Increase (decrease) in cash 9.0 (20.5)
Cash position, beginning of period 55.5 52.4
------- -------
Cash position, end of period $ 64.5 $ 31.9
======= =======
</TABLE>
Balance sheet items in conformity with U.S. GAAP
and SEC requirements:
<TABLE>
<CAPTION>
Dec. 26, March 28,
1997 1997
------- -------
<S> <C> <C>
Cash $ 64.5 $ 55.5
Short-term investments 75.4 87.8
Investment tax credits recoverable 10.7 6.1
Other assets 38.3 19.4
Accounts payable and accrued liabilities 129.6 128.3
Redeemable preferred shares 34.4 34.4
Common shares 601.1 599.2
Contributed surplus 2.5 2.5
Deficit (241.1) (292.9)
</TABLE>
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 26,
1999 year end. The Company has not determined the impact, if any, of these
pronouncements on its consolidated financial statements.
13
<PAGE>
13. Net change in non-cash working capital balances related to operating
activities:
<TABLE>
<CAPTION>
Nine Months Ended
Dec. 26, Dec. 27,
1997 1996
------- -------
<S> <C> <C>
Accounts receivable $ (17.4) $ 0.2
Inventories (6.4) (13.6)
Accounts payable and accrued liabilities (6.5) (19.9)
Deferred revenue (3.0) (2.3)
Other (0.7) 1.7
------- -------
$ (34.0) $ (33.9)
======= =======
</TABLE>
14. Certain of the Fiscal 1997 comparative figures have been reclassified so
as to conform to the presentation adopted in Fiscal 1998.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in millions of Canadian dollars, except per share amounts)
The Company remained on track with higher sales and earnings relative to last
year. Total third quarter revenue of $215.5, an all-time Company record, was
24 percent higher than Fiscal 1997's third quarter revenue of $173.1. By
product group, Business Communications Systems (BCS) quarterly revenue was up
25 percent and Semiconductor quarterly revenue grew by 23 percent from the
same period last year. The BCS revenue growth was driven by higher sales
volumes of SX-2000(R) and SX-200(R) systems, including the recently launched
SX-200 ML, telephone sets, new convergent systems and increased service
revenue. The Semiconductor growth rate was mainly attributable to increased
shipments of integrated and hybrid circuits. During the first nine months of
Fiscal 1998, revenue grew by 21 percent to $602.5 from $496.5 last year. The
year-to-date revenue growth rates were 27 percent for Semiconductor and 18
percent for BCS when compared to the first nine months of Fiscal 1997.
The Company reported record quarterly net income of $25.6, or $0.23 per share,
for the quarter ended December 26, 1997, an improvement of $14.1, or $0.13 per
share, over the third quarter of Fiscal 1997. Net income in the quarter
benefited from an accrual for investment tax credits (ITCs) amounting to $5.4,
or $0.05 per share, related to ITCs expected to be realized in the foreseeable
future. The improvement over the third quarter of Fiscal 1997 was due to the
higher sales volumes and lower expenses as a percentage of sales resulting
from actions taken to focus operations and improve the sales channels. For
the nine months ended December 26, 1997, net income was $67.1, or $0.60 per
share, as against net income of $38.7, or $0.34 per share, for the nine month
period ended December 27, 1996.
On August 8, 1997, the Company acquired the assets and technology business of
Gandalf Technologies Inc. (Gandalf) for cash consideration of $21.6. The
technology business principally addresses the remote access market with
leading edge high volume data and voice communications products. The Gandalf
business, now a division of Mitel Corporation, was substantially integrated
into Mitel's operations at the end of the second quarter of Fiscal 1998.
Net income and cash flows for each period as determined in accordance with
United States generally accepted accounting principles are detailed in Note 12
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 three and nine months
ended December 26, 1997 compared with the same periods 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 consolidated
financial statements and notes included elsewhere in this Form 10-Q, 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
15
<PAGE>
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
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, ASIC components, 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>
Nine Months Nine Months
Ended % of Ended % of
Dec. 26, 1997 Total Dec. 27, 1996 Total
------------- ----- ------------- -----
<S> <C> <C> <C> <C>
United States $ 288.6 48 % $ 229.2 46 %
Europe 182.9 30 162.0 33
Other Regions 91.8 15 68.4 14
Canada 39.2 7 36.9 7
------- ----- ------- -----
$ 602.5 100 % $ 496.5 100 %
======= ===== ======= =====
</TABLE>
For the quarter ended December 26, 1997, the net movement in exchange rates
from Fiscal 1997 favorably impacted total revenue by 4 percent ($7.4)
primarily as a result of changes in the UK pound sterling and US dollar
exchange rates. The year-to-date favorable impact of net movements in exchange
rates from Fiscal 1997 on Fiscal 1998 revenues amounted to 2 percent ($11.0).
16
<PAGE>
Revenue, by product group, was distributed as follows:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended % of Ended % of
Dec. 26, 1997 Total Dec. 27, 1996 Total
------------- ----- ------------- -----
<S> <C> <C> <C> <C>
Business Communications
Systems $ 398.7 66 % $ 336.5 68 %
Semiconductors 203.8 34 160.0 32
------- ----- ------- -----
$ 602.5 100 % $ 496.5 100 %
======= ===== ======= =====
</TABLE>
Business Communications Systems
Business Communications Systems (BCS) comprise PBX equipment and peripherals,
CTI products and applications, client server telecom products, call controller
products, remote access products, and the GX5000 (R). All of the Company's
service revenue relates to BCS, primarily PBX.
Compared to the first nine months of last year, BCS product revenue increased
by 18 percent due to higher sales volumes of SX-2000 and SX-200 systems,
including the associated pull-through of system sets; incremental sales of
remote access products; new convergence system sales of networked voice and
data products; increased shipments of call controllers; and higher service
revenue.
The U.S. indirect sales channel benefited from a strong North American economy
and the successful launch of the SX-200 ML, late in the fourth quarter of
Fiscal 1997. The SX-200 ML voice system is aimed at the fast-growing small
business, under-100 line, market in the United States and other countries.
The SX-200 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 began their launch early
in the second quarter of this fiscal year to stimulate additional sales
through the channel.
The U.S. direct sales channel benefited from strong growth in the installation
of new systems as well as from upgrades in the existing customer base.
With respect to call controllers, European sales increased in Fiscal 1998 as a
result of recently deregulated network access services in the UK which created
a strong demand by alternate carriers for Mitel's call controllers. European
PBX sales are also up on upgrades sold through the installed base.
BCS sales into the Asia Pacific region continue to be adversely affected by
the ongoing effects of weakened economies and intense price competition in
that region. Management believes this trend will continue for the foreseeable
future without a significant impact on the Company's results of operations.
In proportion to total revenue, BCS service revenue remained steady at
approximately 10 percent of total revenue. Service revenue grew mainly due to
the managed service business in the United Kingdom where telecom product-
related services are channeled through outsourcing companies. The program was
introduced in the second half of Fiscal 1997.
17
<PAGE>
On August 8, 1997 and as noted above, the Company acquired for cash
consideration of $21.6 the assets and technology business (principally its
remote access business) of Gandalf. The acquired assets include Gandalf's
leading edge remote access products and technology, which facilitate high
volume data and voice communications between the corporate office, local
branches, teleworkers and agents in the field in a cost-effective manner.
The technology acquisition also included Gandalf's other product inventory and
rights to the Gandalf tradename and trademarks. The agreement did not include
Gandalf's service business. The acquisition complements Mitel's other
initiatives in bringing telecommunications and computers together, and the
recent purchase of the UK assets of Global Village Communications (UK) Limited
(Global Village) which occurred in January of 1997.
Semiconductors
Semiconductor revenue increased by 27 percent from the first nine months of
last year as a result of increased demand for the Company's integrated
circuits and thick film hybrid products, primarily in the U.S. and Asia
Pacific 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 application-specific integrated circuits (ASICs),
particularly for medical applications. Increased demand for communications
products 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 nine month period last year. The
Company's recent investments in production and testing equipment also
increased manufacturing capacity leading to a reduction in product lead times
and in the order backlog.
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.
Subsequent to the quarter ended December 26, 1997, Mitel's Bromont wafer plant
was out of operation for thirteen days due to an ice storm in Eastern Canada.
The Company will be filing a claim under its business interruption insurance
policy. Discussions will be held with the insurers in order to recover
proceeds relating to the lost sales and increased operating costs as a result
of the shutdown. The proceeds from the insurance claim will be netted against
the related expenses incurred due to the ice storm.
GROSS MARGIN
As a percentage of total revenue, total gross margin was 51 percent and 50
percent for the respective three and nine months ended December 26, 1997,
equal to and 1 percentage point lower than the respective periods in Fiscal
18
<PAGE>
1997. The product gross margin was 53 percent and 52 percent in the third
quarter and first nine months of Fiscal 1998 respectively, equal to and 1
percentage point lower than in the comparative periods of Fiscal 1997.
Product gross margin declined mainly due to pricing pressures for the BCS
products, which were partially offset by higher sales volumes of BCS and
semiconductor products. The service gross margin improved to 37 percent and
39 percent for the three and nine month periods ended December 26, 1997, an
improvement of 5 percentage points and 4 percentage points over the respective
comparative periods. The service margin improvement was due to service call
efficiencies and better technician utilization resulting from higher system
sales in North America.
OPERATING EXPENSES
Selling and Administrative
Selling and administrative (S&A) expenses in the third quarter of Fiscal 1998
were $57.8, or 27 percent of sales, compared with $53.3, and 31 percent of
sales, for the comparable period in Fiscal 1997. Year-to-date S&A expenses
were 27 percent of sales, 3 percentage points lower than the first nine months
of the last fiscal year.
S&A expenses decreased as a percentage of sales primarily due to spending
restraints applied to marketing programs, higher efficiencies and focus in the
sales channels and reduced corporate overhead costs. The improvement was
partially offset by the effects of consolidating the businesses acquired from
Global Village and Gandalf. The Company acquired the business and assets of
Global Village, an ISDN solution provider based in the United Kingdom, during
the fourth quarter of Fiscal 1997. The Company acquired certain assets and
the technology business of Gandalf on August 8, 1997.
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. During the nine month period ended December 26, 1997, restructuring
charges amounting to $6.1 were charged to the provision; actions and charges
related to the remaining provision of $1.3 will be substantially completed by
the end of Fiscal 1998.
Research and Development
R&D expenses amounted to $17.9 and $51.4, each at 8 and 9 percent of revenue,
for the respective three and nine month periods ended December 26, 1997. This
compares to $14.1 and $40.9, or 8 percent of revenue, in the respective third
quarter and first nine months of Fiscal 1997. These amounts are exclusive of
related R&D capital asset amortization and net of Canadian federal 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; remote access; new ISDN applications; and real-
time applications microelectronic components.
19
<PAGE>
For the respective three and nine month periods ended December 26, 1997, the
Company recorded a total of $9.9 and $26.8 for Canadian ITCs related to prior
years' R&D. The ITC accrual was comprised of two components. The first
component amounted to $4.5 in the third quarter and $12.8 year-to-date which
related to ITCs that are expected to be realized for tax purposes in Fiscal
1998. In the respective comparative periods of Fiscal 1997, the Company
recorded an amount of $2.8 and $7.6 under the same circumstances. The benefit
of recording these ITCs reduced the impact of a higher effective income tax
rate in Canada. These ITC's, when netted against the Canadian income tax
expense, resulted in an insignificant impact to net earnings. The second
component of the accrual amounted to $5.4 and $14.0, or $0.05 and $0.13 per
share, for the respective three and nine month periods in Fiscal 1998, 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 third quarter of Fiscal 1998 to $10.0 from $8.5
for the comparable period in Fiscal 1997. For the nine months ended December
26, 1997, amortization increased by $4.3 to $28.5 compared to the first half
of 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 $0.4 in the three month period
ended December 26, 1997 compared to $0.8 for the same period in Fiscal 1997.
Interest income decreased from 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.
INCOME TAXES
Income tax expense for the third quarter and first nine months of Fiscal 1998
was $9.6 and $21.4 respectively and compares to $4.9 and $13.1 for the same
periods in Fiscal 1997. Before accounting for the ITCs, income tax expense
for the third quarter and first nine months of Fiscal 1998 was $5.1 and $8.6
compared to $2.1 and $5.5 in the respective periods of last year. A lower
effective tax rate through the first nine months of Fiscal 1998 was due to
lower UK earnings, partially offset by higher provincial income taxes in
Canada. The Fiscal 1997 effective tax rate was higher due to the sale of an
investment in Esprit Telecom (Jersey) Ltd. which occurred in the second
quarter of that fiscal year.
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
20
<PAGE>
reasonable assurance for accruing a future benefit of $14.0 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 December
26, 1997, order backlog was $148.1 compared to $135.1 at March 28, 1997. The
increase in backlog was attributable to increased BCS bookings offset by a
lower semiconductor backlog. However recent investments in semiconductor
production capacity have shortened product lead times resulting in higher
shipments and a draw-down against the backlog. Most of the backlog is
scheduled for delivery in the next twelve months.
YEAR 2000
Management has formed a Year 2000 Compliance Project and Program Office to
establish and ensure Mitel's compliance with what is commonly known as the
"Year 2000 problem". In addition, consultants were engaged to assist with a
comprehensive review of the Company's supporting information technology
systems, product lines, and supply chain management to ensure a state of
readiness for the Year 2000 date change. Based on tests conducted to date,
management believes the Company's systems and products are substantially
compliant and that the cost of remaining actions to be taken will not have a
significant impact on the results of operations. Additional information
regarding product line compliance with Year 2000 issues, including testing
methodology, is available on the Company's web site at http://www.mitel.com.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and short-term investment balances of $139.9 at December
26, 1997 compared to $143.3 at March 28, 1997. The decrease of $3.4 from the
end of Fiscal 1997 was mainly due to the acquisition of Gandalf for $21.6 on
August 8, 1997, increased working capital requirements and additions to
capital assets during the first nine months of Fiscal 1998 offset by cash flow
provided by operations and an increase in capital leases.
Cash flow provided by operations amounted to $47.6 during the nine months
ended December 26, 1997. This compares to the first nine months of Fiscal
1997 when cash provided by operations was $25.5. Since March 28, 1997, the
Company's working capital has increased by $48.4 to $254.7 primarily due to
increased accounts receivable on higher revenues and to higher inventory
levels. Inventory levels increased in order to meet future higher demand for
both semiconductor and BCS products. Other liabilities decreased due, in part,
to charges against the restructuring provision recorded in the fourth quarter
of Fiscal 1997 and on payments relating to sales incentive programs.
Fixed asset additions were $32.8 during the first nine months of Fiscal 1998.
The additions were primarily related to semiconductor manufacturing capacity
and technology enhancements as well as upgrades to the Company's information
21
<PAGE>
technology resources. The semiconductor capacity expansion program is
comprised of two phases as described earlier in this management's discussion
and analysis. Phase one, which was substantially completed in the second
quarter of Fiscal 1998, cost approximately $8.6. The total cost of phase two
is expected to be $40.5. At the end of the third quarter of Fiscal 1998,
approximately $36.0 was spent on the phase two project. Management expects
that Fiscal 1998 capital expenditures will be lower than Fiscal 1997 levels of
$73.9.
As at December 26, 1997, there were no assets held for resale. Land
previously held for resale with a carrying value of $1.5 was reclassified to
fixed assets during the second quarter of Fiscal 1998. Management intends to
hold the land to meet future requirements.
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 retire the Florida industrial revenue and
development bonds (IRBs) of $4.1, to which the facility was pledged as
security.
Total long-term debt, net of repayments, increased by $7.1 from the end of
Fiscal 1997 due to new capital leases. The increase in capital leases was
partially offset by the repayment of the Florida industrial revenue and
development bonds on July 3, 1997.
As at December 26, 1997, the Company's capitalization was comprised of 16
percent debt, 8 percent preferred equity, and 76 percent common equity. This
compares to 17 percent debt, 9 percent preferred equity and 74 percent common
equity at the end of Fiscal 1997.
In addition to cash and short-term investment balances of $139.9 as at
December 26, 1997, the Company has unused lines of credit in North America and
the UK of approximately $33.9.
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.
_________
M Mitel (design) Mitel, SX-200, SX-2000 and GX5000 are registered.
22
<PAGE>
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K
a) Reports on Form 8-K
There were no reports on Form 8-K filed for the three months ended
December 26, 1997.
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.
<TABLE>
<S> <C>
MITEL CORPORATION
----------------------------
February 9, 1998 JEAN-JACQUES CARRIER
- ---------------- ----------------------------
Date Jean-Jacques Carrier
Vice President of Finance
and Chief Financial Officer
</TABLE>
23
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
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 nine months ended December 26, 1997 and the
Consolidated Balance Sheets as at December 26, 1997 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-27-1998
<PERIOD-END> DEC-26-1997
<EXCHANGE-RATE> 1.43495<F1>
<CASH> 15,534
<SECURITIES> 124,415
<RECEIVABLES> 183,248
<ALLOWANCES> 10,771
<INVENTORY> 96,279
<CURRENT-ASSETS> 429,891
<PP&E> 458,211
<DEPRECIATION> 266,651
<TOTAL-ASSETS> 657,423
<CURRENT-LIABILITIES> 175,230
<BONDS> 46,630
0
37,180
<COMMON> 155,198
<OTHER-SE> 220,933
<TOTAL-LIABILITY-AND-EQUITY> 657,423
<SALES> 602,522
<TOTAL-REVENUES> 602,522
<CGS> 299,126
<TOTAL-COSTS> 299,126
<OTHER-EXPENSES> 215,884
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,916
<INCOME-PRETAX> 88,521
<INCOME-TAX> 21,353
<INCOME-CONTINUING> 67,168
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67,168
<EPS-PRIMARY> 0.60<F2>
<EPS-DILUTED> 0.59<F3>
<FN>
<F1>The period ended foreign exchange rate of 1.434947 is used to translate the
balance sheet items from Canadian Dollars (figures above) to U.S. Dollars.
The nine month moving average foreign exchange rate of 1.391869 is used to
translate the income statement items from Canadian Dollars (figures above) to
U.S. Dollars.
<F2>The figure quoted is EPS-Basic under Canadian Generally Accepted Accounting
Principles.
<F3>The figure quoted is EPS-Fully Diluted under Canadian Generally Accepted
Accounting Principles.
</FN>
</TABLE>
