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 25, 1999
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 2W7
(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 July 29, 1999 was 115,524,031.
1
<PAGE>
MITEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 25, 1999 and March 26, 1999 . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Retained Earnings -
Three months ended June 25, 1999 and June 26, 1998 . . . . . . . . . 4
Consolidated Statements of Income -
Three months ended June 25, 1999 and June 26, 1998. . . . . . . . . . 5
Consolidated Statements of Cash Flows -
Three months ended June 25, 1999 and June 26, 1998. . . . . . . . . . 6
Notes to the Consolidated Financial Statements . . . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . 25
2
<PAGE>
Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 90.2 $ 125.3
Short-term investments 48.2 -
Accounts receivable 280.6 326.3
Inventories (note 4) 190.4 198.1
Prepaid expenses and other 23.4 27.4
------- -------
632.8 677.1
Long-term receivables (note 5) 38.7 35.4
Fixed assets (note 6) 482.4 507.7
Acquired intangible assets (note 7) 40.0 56.7
Patents, trademarks and other (note 8) 10.7 23.4
------- -------
$1,204.6 $1,300.3
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 9) $ 223.1 $ 254.1
Income and other taxes payable 12.2 11.8
Deferred revenue 31.6 36.6
Current portion of long-term debt 37.7 37.6
------- -------
304.6 340.1
Long-term debt 261.4 276.5
Pension liability 13.0 13.2
Deferred income taxes 17.6 23.2
------- -------
596.6 653.0
------- -------
Shareholders' equity:
Capital stock (note 10)
Preferred shares 37.2 37.2
Common shares 328.4 331.2
Contributed surplus (note 10) 29.4 32.3
Retained earnings 212.3 218.4
Translation account (note 11) 0.7 28.2
------- -------
608.0 647.3
------- -------
$1,204.6 $1,300.3
======= =======
</TABLE>
(See accompanying notes to the consolidated financial statements)
3
<PAGE>
Mitel Corporation
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
Retained earnings, beginning of period $ 218.4 $ 202.9
Net income (loss) for the period (4.6) 14.6
------- -------
213.8 217.5
Cost of common share repurchase (note 10) (0.7) -
Dividends on preferred shares (note 10) (0.8) (0.8)
------- -------
Retained earnings, end of period $ 212.3 $ 216.7
======= =======
</TABLE>
(See accompanying notes to the consolidated financial statements)
4
<PAGE>
Mitel Corporation
CONSOLIDATED STATEMENTS OF INCOME
(in millions of Canadian dollars, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
Revenue $ 311.2 $ 289.6
------- -------
Cost of sales:
Cost of sales other than amortization 151.2 143.2
Amortization of manufacturing assets 17.5 16.6
------- -------
168.7 159.8
------- -------
Gross margin 142.5 129.8
------- -------
Expenses:
Selling and administrative 85.4 67.2
Research and development (net) (note 13) 38.8 35.4
Amortization of acquired intangibles 17.1 1.4
------- -------
141.3 104.0
------- -------
Operating income from continuing operations 1.2 25.8
Interest income 1.9 1.6
Interest expense (5.2) (6.6)
------- -------
Income (loss) from continuing operations
before income taxes (2.1) 20.8
Income tax expense (2.5) (5.1)
------- -------
Net income (loss) from continuing operations for the period (4.6) 15.7
Loss from discontinued operations for the period (note 14) - (1.1)
------- -------
Net income (loss) for the period $ (4.6) $ 14.6
======= =======
Net income (loss) attributable to common shareholders
after preferred share dividends $ (5.4) $ 13.8
======= =======
Net income per common share (notes 3 & 10):
Net income (loss) per common share from continuing operations:
Basic $ (0.05) $ 0.14
======= =======
Fully diluted $ (0.05) $ 0.13
======= =======
Net income (loss) per common share:
Basic $ (0.05) $ 0.13
======= =======
Fully diluted $ (0.05) $ 0.13
======= =======
Weighted average number of common shares outstanding (millions):
Basic 116.5 108.5
======= =======
Fully diluted 116.5 108.5
======= =======
</TABLE>
(See accompanying notes to the consolidated financial statements)
5
<PAGE>
Mitel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities:
Net income (loss) for the period $ (4.6) $ 14.6
Amortization of capital and other assets 43.4 29.4
Investment tax credits 1.4 (3.5)
Gain on sale of capital assets (0.1) (0.4)
Deferred income taxes (3.1) -
Change in pension liability 0.3 0.3
Decrease (increase) in working capital (note 18) 20.2 (69.4)
------- -------
Total 57.5 (29.0)
------- -------
Investing activities:
Change in short-term investments (48.2) 34.5
Additions to capital and other assets (13.6) (9.7)
Proceeds from disposal of capital assets 0.1 0.8
Acquisitions - (46.6)
Net change in non-cash balances related to
investing activities (9.4) (5.0)
------- -------
Total (71.1) (26.0)
------- -------
Financing activities:
Repayment of long-term debt (2.7) -
Repayment of capital lease liabilities (9.9) (1.3)
Debt issue costs - (1.9)
Dividends on preferred shares (0.8) (0.8)
Issue of common shares (note 10) 0.1 0.6
Repurchase of common shares (note 10) (6.4) -
------- -------
Total (19.7) (3.4)
------- -------
Effect of currency translation on cash (1.8) 2.0
------- -------
Decrease in cash and cash equivalents (35.1) (56.4)
Cash and cash equivalents, beginning of period 125.3 117.2
------- -------
Cash and cash equivalents, end of period $ 90.2 $ 60.8
======= =======
</TABLE>
(See accompanying notes to the consolidated financial statements)
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 June 25, 1999
and the results of operations and the changes in financial position for the
three month periods ended June 25, 1999 and June 26, 1998, in accordance with
accounting principles generally accepted in Canada. (See also Note 17).
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 26, 1999. 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. Supplementary income information
As a supplementary measure to assess financial performance, management utilizes
Adjusted Net Income and Adjusted Net Income per common share which exclude the
impact of amortization of acquired intangibles, special charges (net), non-cash
debt issue and other costs expensed on an early partial debt repayment and
discontinued operations. The Adjusted Net Income and Adjusted Net Income per
common share are as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
Net income (loss) as reported $ (4.6) $ 14.6
Adjusted Net Income, as adjusted for:
Amortization of acquired intangibles 17.1 1.4
Loss from discontinued operations - 1.1
------- -------
Adjusted Net Income $ 12.5 $ 17.1
======= =======
Adjusted Net Income per common share - basic $ 0.10 $ 0.15
======= =======
</TABLE>
4. Inventories:
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
Raw materials $ 47.8 $ 47.8
Work-in-process 83.0 86.1
Finished goods 59.6 64.2
------- -------
$ 190.4 $ 198.1
======= =======
</TABLE>
7
<PAGE>
5. Long-term receivables
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
Investment tax credits recoverable $ 20.9 $ 17.3
Promissory note, bearing interest at 10%, due in
March 2011 and against which a first deed on real
property was pledged as security 10.2 10.5
Other long-term receivables 7.6 7.6
------- -------
$ 38.7 $ 35.4
======= =======
</TABLE>
6. Fixed assets:
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
Cost $ 870.0 $ 884.4
Accumulated amortization (387.6) (376.7)
------- -------
$ 482.4 $ 507.7
======= =======
</TABLE>
7. Acquired intangible assets
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
Cost:
In-process technology $ 7.9 $ 8.1
Developed technology 33.7 34.4
Customer base and work force 11.7 11.9
Goodwill 25.9 24.8
------- -------
79.2 79.2
------- -------
Less accumulated amortization:
In-process technology 4.3 1.7
Developed technology 16.9 10.9
Customer base and work force 4.8 2.9
Goodwill 13.2 7.0
------- -------
39.2 22.5
------- -------
$ 40.0 $ 56.7
======= =======
</TABLE>
8
<PAGE>
8. Patents, trademarks and other
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
Cost:
Patents and trademarks $ 15.8 $ 16.3
Deferred debt issue costs 8.5 8.5
Deferred foreign exchange loss - 10.5
------- -------
24.3 35.3
------- -------
Less accumulated amortization:
Patents and trademarks 11.1 9.8
Deferred debt issue costs 2.5 2.1
------- -------
13.6 11.9
------- -------
$ 10.7 $ 23.4
======= =======
</TABLE>
9. Accounts payable and accrued liabilities
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
Trade payables $ 70.2 $ 79.4
Restructuring and other provisions (see also note 15) 25.3 35.3
Employee-related payables 34.3 38.4
Other accrued liabilities 71.5 75.0
Provision for estimated loss on disposal of discontinued
operations (note 14) 21.8 26.0
------- -------
$ 223.1 $ 254.1
======= =======
</TABLE>
10. Capital stock:
a)
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
Shares outstanding:
Preferred shares - R&D Series 1,616,200 1,616,300
Common shares 116,198,856 116,705,531
</TABLE>
There were 100 preferred shares repurchased during the three months ended June
25, 1999.
9
<PAGE>
On June 7, 1999, the Company announced its intention to make a normal course
issuer bid for up to 5,835,645 common shares (5 percent of 116,712,906 common
shares issued and outstanding at May 28, 1999) between June 9, 1999 and June 8,
2000. All repurchased shares will be cancelled. As at June 25, 1999, 661,900
shares have been purchased (518,900 cancelled) under the normal course issuer
bid for a cash consideration of $6.4, including costs to acquire the shares.
The amount paid to acquire the shares over and above the average carrying value
has been charged pro rata to contributed surplus and retained earnings.
b)A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
--------- ---------
<S> <C> <C>
Outstanding options:
Balance, beginning of period 5,918,988 6,251,888
Granted 2,454,100 169,250
Exercised (12,225) (124,625)
Cancelled (336,600) (28,500)
--------- ---------
Balance, end of period 8,024,263 6,268,013
========= =========
</TABLE>
Available for grant at June 25, 1999 were 8,348,025 (March 26, 1999 -
10,465,525) common shares. The exercise prices on stock options issued range
from $1.10 to $30.00 per share with exercise periods extending to January,
2008.
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.
11. The following table summarizes changes in the translation account:
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
Balance, beginning of period $ 28.2 $ 5.8
Increase:
Movements in exchange rates -
United Kingdom Pound Sterling (17.0) 6.1
United States Dollar (8.8) 10.0
Swedish Krona (1.2) 2.0
Other currencies (0.5) 1.3
------- -------
Balance, end of period $ 0.7 $ 25.2
======= =======
</TABLE>
12. 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
<PAGE>
13. Research and Development
The research and development expenses were net of $1.2 in R&D government
assistance, including ITCs, for the three month period ended June 25, 1999
(three months ended June 26, 1998 - $7.6).
14. Discontinued operations
On March 26, 1999, the Company adopted formal plans to pursue divestiture
opportunities related to the distinct operations of the Lincoln Power and
Automotive business segment ("Lincoln") which was part of the Plessey
Semiconductors Group acquired in Fiscal 1998. Management expects to sell or
otherwise dispose of the Lincoln business within this fiscal year. Accordingly,
the operations related to this business are accounted for as discontinued
operations.
Sales applicable to Lincoln for the three month periods ended June 25, 1999 and
June 26, 1998 were $11.3 and $21.0, respectively. At March 26, 1999, the
estimated loss on disposal of Lincoln was $16.3, net of estimated income tax
recoveries of $9.7, and remained unchanged at June 25, 1999.
As at June 25, 1999, total net assets related to Lincoln included inventories of
$16.8 (March 26, 1999 - $18.2), fixed assets of $13.2 (March 26, 1999 - $13.6)
and current liabilities of $4.4 (March 26, 1999 - $14.3).
15. Acquisitions
On February 12, 1998, the Company and certain of its wholly owned subsidiaries
acquired 100 percent of the capital stock of the Plessey Semiconductors Group.
As at June 25, 1999, the liability in respect of integration costs was $7.7
(March 26, 1999 - $10.6).
16. Information on business segments
The Company's reportable business segments include the Mitel Communications
Systems ("Systems") group and the Mitel Semiconductor ("Semiconductor") group.
Reportable segments are business units that offer different products and
services and are managed separately because of their different manufacturing and
distribution processes.
The Company evaluates the performance and allocates resources based on operating
income from continuing operations, which excludes any intersegment sales of
products and services. Mitel does not allocate amortization of intangibles,
special charges, interest income or interest expense or income taxes to its
reportable segments. In addition, total assets are not allocated to each
segment; however, depreciation of capital assets is allocated to the segments
based on the asset usage. The accounting policies of the reportable segments
are the same as those described in the summary of significant accounting
policies.
<TABLE>
<CAPTION>
Unallocated
Three Months Ended June 25, 1999 Systems Semiconductor costs Total
------- ------------- ----------- -----
<S> <C> <C> <C> <C>
Total external sales revenue $ 186.0 $ 125.2 $ - $ 311.2
Amortization of buildings and
equipment 4.5 20.1 - 24.6
Amortization of acquired intangibles - - 17.1 17.1
Segment's operating income from
continuing operations 13.2 5.1 (17.1) 1.2
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Unallocated
Three Months Ended June 26, 1998 Systems Semiconductor costs Total
------- ------------- ----------- -----
<S> <C> <C> <C> <C>
Total external sales revenue $ 155.9 $ 133.7 $ - $ 289.6
Amortization of buildings and equipment 4.8 21.8 - 26.6
Amortization of acquired intangibles - - 1.4 1.4
Segment's operating income from
continuing operations 14.4 12.8 (1.4) 25.8
</TABLE>
17. 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 25 to the
consolidated financial statements as at March 26, 1999.
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:
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
Net income (loss) from continuing operations for the period in
accordance with Canadian GAAP $ (4.6) $ 15.7
Write-off of acquired in-process technology - (5.2)
Amortization of acquired in-process technology 1.8 0.1
Effect of deferral accounting related to foreign
exchange contracts 0.9 ( 9.5)
Translation of foreign currency denominated debt 5.2 (11.7)
Adjustment to deferred income taxes - (3.5)
------- -------
U.S. GAAP and SEC requirements:
Net income (loss) from continuing operations for the period 3.3 (14.1)
Loss from discontinued operations for the period - (1.1)
------- -------
Net income (loss) for the period 3.3 (15.2)
Less: dividends on cumulative preferred shares (0.8) (0.8)
Net income (loss) attributable to common shareholders $ 2.5 $ (16.0)
======= =======
Net income (loss) per common share from continuing operations:
Basic and diluted $ 0.02 $ (0.14)
======= =======
Net income (loss) per common share:
Basic and diluted $ 0.02 $ (0.15)
======= =======
Weighted average shares for basic EPS (millions) 116.5 108.5
Weighted average shares on conversion of stock
options (millions) 0.9 -
------- -------
Adjusted weighted average shares and share equivalents
(millions) 117.4 108.5
======= =======
</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 three months ended June 25, 1999 to
purchase 3,654,500 shares of common stock at an average price of
$16.18 per share.
ii) All options outstanding at June 26, 1998.
13
<PAGE>
The components of comprehensive income were as follows:
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
Comprehensive income (loss) for the period:
Net income (loss) for the period $ 3.3 $ (15.2)
Other comprehensive income -
Foreign currency adjustment (27.5) 19.4
------- -------
Comprehensive income (loss) for the period $ (24.2) $ 4.2
======= =======
</TABLE>
Balance sheet items in conformity with U.S. GAAP and SEC requirements:
<TABLE>
<CAPTION>
June 25, March 26,
1999 1999
------- -------
<S> <C> <C>
Prepaid and other assets: current deferred tax asset $ 4.5 $ 8.8
Fixed assets 462.3 487.6
Acquired intangible assets 36.2 51.1
Long-term receivables: long-term deferred tax asset 23.4 20.5
Accounts payable and accrued liabilities 226.9 261.2
Shareholders' equity:
Redeemable preferred shares 34.4 34.4
Common shares 768.9 772.4
Contributed surplus (0.4) 2.5
Accumulated other comprehensive income 0.7 28.2
Deficit (219.0) (221.6)
</TABLE>
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities ("SFAS 133") which will be effective for the Company's March 31,
2002 year end. The Company has not determined the impact of this pronouncement
on its consolidated financial statements.
14
<PAGE>
18. Net change in non-cash working capital balances related to operating
activities:
<TABLE>
<CAPTION>
Three Months Ended
June 25, June 26,
1999 1998
------- -------
<S> <C> <C>
Accounts receivable $ 37.2 $ (0.5)
Inventories 1.0 (15.7)
Accounts payable and accrued liabilities (14.0) (52.9)
Deferred revenue (3.7) (1.5)
Other (0.3) 1.2
------- -------
$ 20.2 $ (69.4)
======= =======
</TABLE>
19. Year 2000 issue
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information which
uses year 2000 dates is processed. In addition, similar problems may arise in
some systems that use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or
after January 1, 2000, and, if not addressed, the impact on operations and
financial reporting may range from minor errors to significant systems failure
that could affect an entity's ability to conduct normal business operations. It
is not possible to be certain that all aspects of the Year 2000 Issue affecting
an entity, including those related to the efforts of customers, suppliers or
other third parties, will be fully resolved.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(in millions of Canadian dollars, except per share amounts)
Headquartered near the capital city of Ottawa in Canada, Mitel is a global
designer, manufacturer and marketer of networked systems and specialty
semiconductors for the communications industry. Mitel has approximately 6,100
employees worldwide.
The following discussion and analysis explains trends in Mitel's financial
condition and results of operations for the first quarter ended June 25, 1999
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 consolidated financial statements and notes thereto
included elsewhere in this Form 10-Q, and with the Company's audited
consolidated financial statements and notes thereto for the fiscal year ended
March 26, 1999.
RESULTS OF OPERATIONS
Mitel operates through two reportable business segments - Mitel Communications
Systems ("Systems") and Mitel Semiconductor ("Semiconductor"). Mitel 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.
Systems provides enterprises with voice and data communications systems;
complete private networks including remote teleworking solutions; unified
messaging and call-center applications; CTI systems and applications; and it
supplies competitive carriers with public network access products.
Semiconductor specializes in connectivity solutions for the communications and
medical industries with a product range which includes components for both wired
and wireless networks; microelectronics for enabling the convergence of voice
and data; optoelectronic devices for high-speed Internet systems; and
applications-specific integrated circuits (ASICs) for medical applications such
as pacemakers and hearing aids.
Consolidated Summary
Revenue, based on the geographic location of Mitel's customers, was distributed
as follows: (millions of Canadian dollars)
<TABLE>
<CAPTION>
Three months Three months
Ended % of Ended % of
June 25, 1999 Total June 26, 1998 Total
------------- ----- ------------- -----
<S> <C> <C> <C> <C>
United States $ 138.7 45% $ 138.7 48%
Europe 105.8 34 84.7 29
Other Regions 50.2 16 50.7 18
Canada 16.5 5 15.5 5
------- ---- ------- ----
Total $ 311.2 100% $ 289.6 100%
======= ==== ======= ====
</TABLE>
16
<PAGE>
For the three months ended June 25, 1999, the net movement in exchange rates
from Fiscal 1999 positively impacted total revenue by less than one percent
($1.4) primarily as a result of changes in the US dollar exchange rate,
partially offset by changes in the UK pound sterling exchange rate.
Total first quarter revenue from continuing operations grew by 7 percent
compared to the same quarter of last year. Mitel's revenue growth was driven
by strong Systems sales in Europe, offset by expected lower sales in the
Semiconductor business.
Adjusted Net Income (see below) for the quarter was $12.5, or $0.10 per share,
compared to $17.0, or $0.15 per share, in Fiscal 1999. The reduction in adjusted
net income from a year ago was mainly attributable to lower sales and an
unfavorable product mix in Mitel Semiconductor and to increased R&D and selling
and administrative expenses. Including amortization of intangibles (see below)
of $17.1, Mitel recorded a net loss of $4.6 in the first quarter of Fiscal 2000,
or $0.05 per share, as against net income of $14.5, or $0.13 per share, in the
first quarter of Fiscal 1999. In the first quarter of Fiscal 1999, amortization
of acquired intangibles amounted to only $1.4 as accounting for revisions to the
estimated useful lives of the corresponding assets were not made until the
fourth quarter of Fiscal 1999.
Adjusted Net Income excludes the impact of amortization of acquired intangibles,
special charges (net), non-cash debt issue and other costs expensed on an early
partial debt repayment and discontinued operations. Although not a substitute
for net income or net income per common share, management utilizes Adjusted Net
Income and Adjusted Net Income per common share as a supplementary measure to
assess financial performance.
Net income and cashflows for each period, as determined by U.S. accounting
principles, are detailed and discussed in note 17 to the consolidated financial
statements included elsewhere in this Form 10-Q.
<TABLE>
<CAPTION>
Three months Three months
(millions of Canadian dollars, Ended Ended
except per share amounts) June 25, 1999 June 26, 1998
------------- -------------
<S> <C> <C>
Consolidated revenue $ 311.2 $ 289.6
Systems segment revenue $ 186.0 $ 155.9
Semiconductor segment revenue $ 125.2 $ 133.7
Operating income from continuing operations $ 1.2 $ 25.8
Systems segment operating income $ 13.2 $ 14.4
Semiconductor segment operating income $ 5.1 $ 12.8
Unallocated costs - amortization of
acquired intangibles $ (17.1) $ (1.4)
Net income (loss) $ (4.6) $ 14.6
Net income (loss) per common share $ (0.05) $ 0.13
Adjusted net income $ 12.5 $ 17.1
Adjusted net income per common share $ 0.10 $ 0.15
Weighted average common shares outstanding 116.5 108.5
</TABLE>
17
<PAGE>
Business Segment Review
Mitel Communications Systems
Compared to Fiscal 1999's first quarter, Systems revenue increased by 19 percent
due to higher sales volumes of SX-2000 and SX-200 systems, growing demand for
new voice messaging products and increased demand for Mitel's network access
solutions. Systems revenue accounted for 60% of total revenue in the first
quarter and represented an increase of 6 percentage points in the sales mix
from the first quarter of last year.
U.S. indirect channel sales benefited from increased demand by the small to
medium sized business segment for Mitel's SX-200 ML and SX-200 EL switches.
European sales increased in the quarter due to the success of Mitel's recently
introduced digital key systems product, strong growth in new system sales and
system upgrades sold to the installed base, and continued higher demand for
Mitel's network access solutions products. Systems sales into the Asia/Pacific
region were lower due to a reduced focus by Mitel to compete in that region for
enterprise communications systems.
Despite the higher sales, Systems' operating income declined to $13.2 from $14.4
last year, chiefly as a result of increased research and development expenses
and higher selling and administrative expenses related principally to the
advanced messaging and ISDN PBX operations which were acquired mid-way through
the first quarter of Fiscal 1999.
Mitel Semiconductor
Semiconductor sales decreased by 6 percent from Fiscal 1999's first quarter
mainly as a result of lower sales to the Asia/Pacific region. The decrease was
principally due to lower media sales, partially offset by stronger ASIC sales.
In proportion to total revenue, total Semiconductor revenue decreased by 6
percentage points from the first quarter of last year to 40 percent in the
first quarter of Fiscal 2000.
During the first quarter, Mitel reached an agreement with the relevant Swedish
Trade Unions concerning the transfer of all semiconductor CMOS manufacturing
operations from Sweden to Mitel's other more technologically advanced
fabrication sites. The proposed transfer affects approximately 200 employees in
Mitel's plant in Jarfalla, Sweden and the program is expected to be
completed within the next twelve months.
The Swedish operation will operate as an IC fabless facility focused on the
design, marketing and sales of ASICs and as a manufacturer and marketer of
optoelectronic devices.
Semiconductor's operating income decreased from $12.8 last year to $5.1 as a
result of the lower sales volumes combined with an unfavorable product mix.
GROSS MARGIN
As a percentage of total revenue, total gross margin was 46 percent in the three
first months of Fiscal 2000, 1 percentage point higher than the corresponding
period of Fiscal 1999 due to higher sales volumes of Systems products which
helped to reduce the negative impact of lower margins in some semiconductor
products and of certain unfavorable manufacturing variances.
OPERATING EXPENSES
Selling and Administrative
Selling and administrative ("S&A") expenses in the first quarter of Fiscal 2000
were $85.4, or 27 percent of sales, compared with $67.2, or 23 percent of sales,
for the comparable period in Fiscal 1999. S&A increased as a percentage of
salesprimarily due to higher investments for marketing new advanced messaging
applications as well as developing new channels in Europe for the ISDN PBX
products.
18
<PAGE>
Research and Development ("R&D")
R&D expenses amounted to $38.8, or 12 percent of revenue, for the quarter ended
June 25, 1999. This compares to $35.4, or 12 percent of revenue, in the
corresponding period of Fiscal 1999. These amounts were net of $1.2 (1999-$7.6)
in R&D government assistance, including ITCs. Mitel's R&D spending is directed
toward investments in high-growth communications market segments.
Amortization of Acquired Intangibles
Amortization of acquired intangibles increased in the first quarter of Fiscal
2000 to $17.1 from $1.4 for the comparable period in Fiscal 1999. In the fourth
quarter of Fiscal 1999, the estimated useful life of acquired intangibles was
reduced to two years from an average of five to fifteen years to better reflect
the estimated period of advantage achieved by Mitel's recent acquisitions, and
to be in line with evolving industry practices.
INTEREST INCOME AND EXPENSE
Interest income was $1.9 for the quarter ended June 25, 1999, up from $1.6
recorded in the corresponding quarter of Fiscal 1999 due to higher average cash
balances.
Interest expense was $5.2 for the first quarter of Fiscal 2000 compared to $6.6
in the corresponding period of Fiscal 1999. The lower interest expense was
mostly due to the early partial repayment of $123.1 against the U.S. dollar term
loans on July 23, 1998 and to regularly scheduled repayments of long-term debt.
INCOME TAXES
Income tax expense for the three months ended June 25, 1999 was $2.5 compared to
$5.1 for the comparable period in Fiscal 1999. The effective income tax rate,
as a percentage of pre-tax income from continuing operations and before the
effect of amortization of acquired intangibles, was 17 percent for the first
quarter of Fiscal 2000 compared to 23 percent for the corresponding period in
Fiscal 1999. The lower effective tax rate in Fiscal 2000 was mainly due to
permanent differences and tax recoveries associated with European operations.
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 Systems since manufacturing lead times for
semiconductor products are generally longer because of the nature of the
production process. At June 25, 1999, order backlog from continuing operations
was $239.8, up from last year-end's total of $179.8 at March 26, 1999. The
increase in backlog was attributable to an improved book-to-bill ratio through
higher semiconductor orders. Most of the backlog is scheduled for delivery in
the next twelve months.
LIQUIDITY AND CAPITAL RESOURCES
At June 25, 1999, cash, cash equivalents and short-term investment balances
totaled $138.4, up from $125.3 at March 26, 1999. The increase of $13.1 was
mainly due to cash provided by operating activities.
Cash flow from operations before working capital changes amounted to $37.3
during the first quarter of Fiscal 2000 compared to $40.4 in Fiscal 1999. Since
March 26, 1999, Mitel's working capital, as reflected in the consolidated
statements of cash flows, decreased by $20.2 primarily due to strong collections
of trade receivables, partially offset by reduced payables typical in the
quarter following a year-end. Mitel maintains a minimum of critical inventory
to ensure continuity of supply for its manufacturing requirements. Most of the
security supply inventory is carried at Mitel's semiconductor plants.
19
<PAGE>
Fixed asset and other additions were $13.6 during the first quarter of Fiscal
2000 compared with $9.7 in the corresponding period of Fiscal 1999, excluding
additions of $4.2 and $3.6 financed by capital lease for the two respective
periods. The additions were primarily related to continuing improvements to
Mitel's information technology resources as well as Semiconductor manufacturing
capacity and technology enhancements.
Mitel has two term loans, respectively the AXELsSM* Series B loan and the
Tranche A Term Loan, that were entered into on February 12, 1998 with a
syndicate of banks led by Goldman, Sachs Credit Partners L.P. as the syndication
agent and the Canadian Imperial Bank of Commerce as the administrative agent.
The principal of the AXELs Series B loan is payable quarterly on a graduated
basis over five years and matures on December 2003. The principal of the Tranche
A Term Loan is payable quarterly on a graduated basis over five years and
matures on February 2003. The term loans bear interest at a variable interest
rate based on the lower of a defined base rate or the London Inter Bank Offer
Rate ("LIBOR") plus a premium. Mitel entered into an interest rate swap to fix
the base interest rate on a portion of each of the term loans. The interest
rate swap is considered to be an effective hedge of the variable interest
rates on the term loans. Mitel is subject to certain restrictive covenants
and commitments and is required to maintain certain financial ratios for the
purpose of ensuring Mitel's ability to meet its obligations under the credit
agreement. The term loans are subject to mandatory prepayments out of certain
insurance proceeds, and defined excess cash flow received by Mitel and in the
event of asset sales (other than inventory), equity offerings or debt issuance
by Mitel. Mandatory prepayments range from 75 percent to 100 percent of the net
cash proceeds and would be paid on a pro-rata basis subject to certain
constraints toward the senior secured term loans. Management believes Mitel
is in compliance with the obligations and restrictive covenants under the credit
agreement.
Long-term debt decreased due to scheduled repayments of $2.7 against the
syndicated term loans.
On June 7, 1999, Mitel announced its intention to make a normal course issuer
bid for up to 5,835,645 common shares (5 percent of 116,712,906 common shares
issued and outstanding at May 28, 1999). These purchases will take place on the
open market through the stock exchanges of New York, London, Toronto and
Montreal over a twelve-month period which commenced on June 9, 1999 and ends on
June 8, 2000 or on such earlier date as the Company may complete its purchases
pursuant to the normal course issuer bid filed with the Toronto and Montreal
exchanges. All repurchased shares will be cancelled. As at June 25, 1999,
661,900 shares were purchased under the normal course issuer bid for cash
consideration of $6.4, including costs to acquire the shares.
As at June 25, 1999, Mitel's capitalization was comprised of 33 percent debt, 4
percent preferred equity, and 63 percent common equity. This compares to 32
percent debt, 4 percent preferred equity, and 64 percent common equity at the
end of Fiscal 1999.
In addition to cash, cash equivalent and short-term investment balances of
$138.4 as at June 25, 1999, Mitel has an unused revolving credit facility of
approximately $108.0 (U.S.$73.4). Management believes Mitel 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.
20
<PAGE>
YEAR 2000
What is referred to as the Year 2000 problem ("Year 2000 problem") is the result
of computer programs being written using two digits rather than four to define
the applicable year, resulting in the possibility that computer systems and
products that have date-sensitive software may recognize a date using "00" as
the Year 1900 rather than the Year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. Mitel has been working on the Year 2000
problem since 1997. A dedicated Year 2000 Program Management Office ("PMO") was
established in February 1998 to address compliance both externally, by our
customers and suppliers, and internally for Mitel's business processes.
Mitel's internal processes include network and communications infrastructure,
business software applications, manufacturing, distribution, facilities
management, product development, sales, finance and human resources.
Management presently believes that with modifications to Mitel's existing
software and hardware and conversions to new software, the Year 2000 problem can
be mitigated. Despite the extensive efforts dedicated to the Year 2000
problem, there can be no assurance that all Year 2000 date compliance activities
will be completed before problems associated with the Year 2000 transition
potentially occur.
Mitel has completed the evaluation of its major product offerings, including
current and discontinued business telephone systems, peripherals and
applications. The majority of products have been classified as compliant or
having compliant versions.
Mitel has established a three-phase Year 2000 Readiness Program (the "Year 2000
Program") that addresses its key internal business processes and systems. Phase
I was the Initial Assessment and included an overview of Mitel and an assessment
of its awareness and readiness for Year 2000. Consultants were engaged to
assist with this review and with any necessary remedial plans. Phase II was
referred to as the Discovery and Strategy and involved the collection and
assessment of a comprehensive inventory of all internal information systems
equipment as well as a detailed assessment of the suppliers deemed to be
affected by the Year 2000 problem.
The third and current phase is the Implementation and consists of conversion,
testing and deployment of identified mission critical systems as well as
company-wide risk and contingency management activities. Presently the majority
of Mitel's identified mission critical systems are Year 2000 ready. However, a
small number of remediation projects are dependent upon third-party software and
hardware upgrades, and are on schedule to be brought to a compliant status
during the summer of calendar 1999. Mitel has started to address its non-
mission critical systems and plans to have the majority of these systems Year
2000 ready by the end of calendar 1999. End to end testing of targeted internal
systems is planned for the summer of calendar 1999. Mitel also conducted an
internal Year 2000 Program review process under which most of its major sites
were visited to ensure corporate guidelines and procedures are consistently
applied.
Under its comprehensive Vendor Management Program, initiated during Phase II of
the Year 2000 Program, Mitel is actively working with its suppliers to determine
the extent to which their operations and the products and services they provide
are Year 2000 ready and to monitor their progress toward Year 2000 capability.
The highest priority is given to suppliers that are critical to the business.
The program includes awareness letters, site visits, questionnaires as well as
compliance agreements and warranties. Contingency plans, such as planned
increased inventory levels or substitute suppliers, are being developed to
address issues related to suppliers that are not considered to be making
sufficient progress in becoming Year
21
<PAGE>
2000 capable in a timely manner. Mitel has also developed contingency plans to
address possible changes in customer order patterns due to Year 2000 issues.
Management believes that Mitel achieved its target to have all "high risk"
suppliers' assessments of their Year 2000 readiness completed and to have
necessary contingency plans in place by March 31, 1999. Contingency plans will
be reviewed on a regular basis as Mitel learns more about its suppliers' state
of readiness. Mitel also conducts on-going monitoring of local utility
suppliers and is presently updating its comprehensive Disaster Recovery Plan to
accommodate Year 2000 related issues.
Mitel also initiated a comprehensive Distribution Management Program in the
fourth quarter of Fiscal 1999, in order to assess the Year 2000 state of
readiness of its distributors in a manner similar to its Vendor Management
Program. The assessment phase is completed and contingency plans are presently
being developed and should be completed by September 1999.
It is currently expected that the total incremental direct costs of the Year
2000 Program will not exceed $13.6. Approximately $7.6 has been spent on direct
Year 2000 Program costs to date and was funded through operating cash flows.
The program costs are primarily attributable to the purchase of new software and
equipment and do not include estimates for potential litigation. As Mitel
continues to assess the last phases of the Year 2000 Program, estimated costs
may change.
Based on currently available information, management does not believe that the
modifications and conversions discussed above, related to Mitel's internal
systems or products sold to customers, will have a material adverse impact on
Mitel's business, financial condition or results of operations. However, if
such modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 problem could have a material adverse effect on
Mitel's business, financial condition and results of operations. Management
believes that the most reasonably likely worst case Year 2000 scenarios would
relate to third party systems rather than Mitel's internal systems or products.
Mitel believes the risks are greatest with utilities (e.g. electricity supply,
water), telecommunications, transportation and critical suppliers that are
outside Mitel's control.
OTHER
Asia/Pacific Economic Risk
The Asia/Pacific region encountered unstable local economies and significant
devaluation in its currencies during Fiscal 1999 and through the first three
months of Fiscal 2000. This region represented 11 percent of Mitel's revenue
from continuing operations for the three months ended June 25, 1999 and 13
percent of revenue from continuing operations in the corresponding period of
Fiscal 1999. The majority of the Asia/Pacific sales relate to Semiconductor
operations. Asia/Pacific receivables, net of reserves, were approximately 2
percent of Mitel's total assets as at June 25, 1999 (March 26, 1999-2 percent).
To the extent the Asia/Pacific region grows in importance to Mitel, or that the
factors affecting the region begin to adversely affect customers in other
geographic locations, Mitel's business, operating results and financial
condition could be adversely affected.
22
<PAGE>
Foreign Currency Translation
Management periodically evaluates the financial and operational independence of
its foreign operations and the resulting accounting classification of the
foreign subsidiaries as self-sustaining enterprises. Should a foreign subsidiary
cease to be classified as self-sustaining, then translation gains or losses on
consolidating the foreign subsidiary's financial statements would be charged to
operating income instead of a separate component of shareholders' equity. At
June 25, 1999, the translation account balance was $0.7 as compared to $28.2
at the end of Fiscal 1999. The decrease was due to a stronger Canadian dollar
as measured against other currencies, principally the U.K. pound sterling and
the U.S. dollar.
European Union and the Euro
On January 1, 1999, eleven of fifteen member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency - the Euro. The Euro trades on currency
exchanges and may be used in business transactions. The conversion to the Euro
eliminates currency exchange rate risk between the member countries. Mitel's
operating subsidiaries that are affected by the Euro conversion have established
plans to address the issues raised by the Euro currency conversion. These issues
include, among others, the need to adapt computer and financial systems,
competitive impacts of cross-border price transparency, and recalculating
currency risk. Mitel does not expect any required system conversion costs to be
material due to the existing ability to transact in multiple currencies. Due to
significant uncertainties, Mitel cannot reasonably estimate the effects one
common currency will have on pricing and the resulting impact, if any, on
Mitel's financial condition or its results of operations.
Forward Looking Statements
Certain statements in this management's discussion and analysis constitute
forward-looking statements. Such forward-looking statements involve known
and unknown risks, uncertainties, and other factors which may cause the actual
results, performance or achievements of Mitel, 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 Mitel to attract and
retain key employees.
SM* AXEL is a registered service mark of Goldman, Sachs and Co.
23
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Market risk represents the risk of loss that may impact Mitel's financial
statements due to adverse changes in financial markets. Mitel is exposed to
market risk from changes in interest rates and foreign exchange rates. To
manage these risks, Mitel uses certain derivative financial instruments
including interest rate swaps, forward contracts and other derivative
instruments from time to time, that have been authorized pursuant to board-
approved policies and procedures. Mitel does not hold or issue financial
instruments for trading or speculative purposes. As at June 25, 1999, there
were no material changes in information about market risks as disclosed in the
Company's Form 10-K for the fiscal year ended March 26, 1999.
24
<PAGE>
PART II - OTHER INFORMATION
Item 6. Reports on Form 8-K
a) Reports on Form 8-K
1. The Company filed a Current Report on Form 8-K in the first quarter of the
fiscal year ended March 31, 2000. The Report was filed April 22, 1999 and
related to a press release announcing preliminary unaudited financial results
for the fourth quarter and the fiscal year ended March 26, 1999, the adoption
of new amortization periods for intangibles and the approval of certain special
charges.
2. The Company filed a Current Report on Form 8-K in the first quarter of the
fiscal year ended March 31, 2000. The Report was filed June 7, 1999 and related
to announcing the Board of Directors' approval of a normal course issuer bid for
the purchase and cancellation of up to 5,835,645 common shares.
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
--------------------------------
August 4, 1999 //S/JEAN-JACQUES CARRIER
- -------------- --------------------------------
Date Jean-Jacques Carrier
Senior Vice President of Finance
and Chief Financial Officer
25
<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 25, 1999 and the
Consolidated Balance Sheets as at June 25, 1999 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-31-2000
<PERIOD-END> JUN-25-1999
<EXCHANGE-RATE> 1.46890<F1>
<CASH> 32,148
<SECURITIES> 106,286
<RECEIVABLES> 268,540
<ALLOWANCES> 8,484
<INVENTORY> 190,385
<CURRENT-ASSETS> 632,791
<PP&E> 869,973
<DEPRECIATION> 387,618
<TOTAL-ASSETS> 1,204,576
<CURRENT-LIABILITIES> 304,589
<BONDS> 261,412
0
37,173
<COMMON> 328,382
<OTHER-SE> 242,466
<TOTAL-LIABILITY-AND-EQUITY> 1,204,576
<SALES> 311,182
<TOTAL-REVENUES> 311,182
<CGS> 168,716
<TOTAL-COSTS> 168,716
<OTHER-EXPENSES> 141,231
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,199
<INCOME-PRETAX> (2,123)
<INCOME-TAX> 2,500
<INCOME-CONTINUING> (4,623)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,623)
<EPS-BASIC> (0.05)<F2>
<EPS-DILUTED> (0.05)<F3>
<FN>
<F1>The foreign exchange rate of 1.46890 should be used to translate the balance
sheet items from Canadian Dollars (figures above) to U.S. Dollars. The three
months moving average foreign exchange rate of 1.47403 should be 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>
