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 30, 2000
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 August 4, 2000 was 114,458,446.
Page 1 of 21
<PAGE>
MITEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
June 30, 2000 and March 31, 2000 ................................. 3
Consolidated Statements of Retained Earnings -
Three months ended June 30, 2000 and June 25, 1999 ............... 4
Consolidated Statements of Income -
Three months ended June 30, 2000 and June 25, 1999 ............... 5
Consolidated Statements of Cash Flows -
Three months ended June 30, 2000 and June 25, 1999 ............... 6
Notes to the Consolidated Financial Statements ................... 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .............................. 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK ...................................................... 20
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ................................. 21
2
<PAGE>
Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
(Unaudited)
June 30, March 31,
2000 2000
--------------------
ASSETS
Current assets:
Cash and cash equivalents $ 94.0 $ 195.5
Short-term investments 71.9 32.9
Accounts receivable 294.6 288.2
Inventories (note 4) 197.4 187.7
Prepaid expenses and other 39.7 37.2
Future income tax assets 9.5 9.5
--------------------
707.1 751.0
Long-term receivables (note 5) 22.5 21.7
Fixed assets (note 6) 445.0 457.4
Acquired intangible assets (note 7) 1.2 3.0
Patents, trademarks and other (note 8) 8.9 11.3
--------------------
$1,184.7 $1,244.4
====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 9) $ 190.4 $ 215.4
Income and other taxes payable 10.8 26.2
Future income tax liabilities 11.7 11.7
Deferred revenue 43.6 44.1
Current portion of long-term debt 30.5 57.9
--------------------
287.0 355.3
Long-term debt 211.1 217.5
Pension liability 17.7 13.4
Future income tax liabilities 24.7 27.2
--------------------
540.5 613.4
--------------------
Shareholders' equity:
Capital stock (note 10)
Preferred shares 37.0 37.0
Common shares 328.2 325.6
Contributed surplus 9.2 9.2
Retained earnings 283.3 262.6
Translation account (note 11) (13.5) (3.4)
--------------------
644.2 631.0
--------------------
$1,184.7 $1,244.4
====================
(See accompanying notes to the consolidated financial statements)
3
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Mitel Corporation
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(in millions of Canadian dollars)
(Unaudited)
Three Months Ended
June 30, June 25,
2000 1999
------------------
Retained earnings, beginning of period (as previously
reported) $267.4 $218.4
Change in accounting policy for income taxes (note 2) (4.8) --
----------------
Retained earnings, beginning of period (as restated) 262.6 218.4
Net income (loss) for the period 21.5 (4.6)
----------------
284.1 213.8
Cost of common share repurchase (note 10) -- (0.7)
Dividends on preferred shares (note 10) (0.8) (0.8)
----------------
Retained earnings, end of period $283.3 $212.3
================
(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)
Three Months Ended
June 30, June 25,
2000 1999
--------------------
Revenue $ 328.8 $ 311.2
-------------------
Cost of sales:
Cost of sales other than amortization 150.4 151.2
Amortization of manufacturing assets 17.0 17.5
-------------------
167.4 168.7
-------------------
Gross margin 161.4 142.5
-------------------
Expenses:
Selling and administrative 87.7 85.4
Research and development (net) (note 13) 39.7 38.8
Amortization of acquired intangibles 3.2 17.1
-------------------
130.6 141.3
-------------------
Operating income 30.8 1.2
Interest income 3.0 1.9
Interest expense (5.3) (5.2)
Debt issue costs (0.6) --
-------------------
Income (loss) before income taxes 27.9 (2.1)
Income tax expense 6.4 2.5
-------------------
Net income (loss) for the period $ 21.5 $ (4.6)
===================
Net income (loss) attributable to common
shareholders after preferred share dividends $ 20.7 $ (5.4)
===================
Net income (loss) per common share (notes 3 & 10):
Basic and fully diluted $ 0.18 $ (0.05)
===================
Weighted average number of common shares
outstanding (millions):
Basic 114.2 116.5
===================
Fully diluted 122.6 116.5
===================
(See accompanying notes to the consolidated financial statements)
5
<PAGE>
Mitel Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions of Canadian dollars)
(Unaudited)
Three Months Ended
June 30, June 25,
2000 1999
--------------------
CASH PROVIDED BY (USED IN)
Operating activities:
Net income (loss) for the period $ 21.5 $ (4.6)
Amortization of capital and other assets 31.1 43.4
Investment tax credits -- 1.4
Loss (gain) on sale of capital assets 2.0 (0.1)
Future income taxes (2.5) (3.1)
Change in pension liability 0.1 0.3
(Increase) decrease in working capital
(note 17) (51.5) 20.2
------------------
Total 0.7 57.5
------------------
Investing activities:
Change in short-term investments (38.7) (48.2)
Additions to capital and other assets (24.6) (13.6)
Proceeds from disposal of capital assets 0.6 0.1
Net change in non-cash balances related
to investing activities (2.3) (9.4)
------------------
Total (65.0) (71.1)
------------------
Financing activities:
Repayment of long-term debt (27.1) (2.7)
Repayment of capital lease liabilities (12.0) (9.9)
Dividends on preferred shares (0.8) (0.8)
Issue of common shares (note 10) 2.6 0.1
Repurchase of common shares (note 10) -- (6.4)
------------------
Total (37.3) (19.7)
------------------
Effect of currency translation on cash 0.1 (1.8)
------------------
Decrease in cash and cash equivalents (101.5) (35.1)
Cash and cash equivalents, beginning of period 195.5 125.3
------------------
Cash and cash equivalents, end of period $ 94.0 $ 90.2
==================
(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 30, 2000 and the results of operations and the changes in
financial position for the three month periods ended June 30, 2000 and
June 25, 1999, in accordance with accounting principles generally accepted
in Canada. (See also Note 16).
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 31, 2000. The Company's
fiscal year-end is the last Friday in March.
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.
2. Change in accounting policies
a) Income taxes
In the first quarter ended June 30, 2000, the Company adopted the new
recommendations of Section 3465 of the Canadian Institute of Chartered
Accountants ("CICA") Handbook "Income Taxes" and has applied the
provisions retroactively without restatement of the prior periods'
financial statements. The cumulative adjustment to opening retained
earnings was a reduction of $4.8 as a result of the change in accounting
policy. In addition, current future income tax assets increased by $9.5;
current investment tax credits ("ITCs") recoverable increased by $6.4;
long-term ITCs recoverable increased by $3.0; current income taxes payable
decreased by $5.4; current future income tax liabilities increased by
$11.7; and long-term future income tax liabilities increased by $17.4.
The new recommendations require the Company and its subsidiaries to adopt
the liability method of accounting for income taxes. Under this method,
future income tax assets and liabilities are determined based on
differences between the tax and accounting bases of assets and liabilities
as well as for the benefit of losses available to be carried forward to
future years for tax purposes that are likely to be realized. Future
income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which temporary
differences are expected to be recovered or settled. Future income tax
assets are evaluated and if realization is not considered "more likely
than not", then a valuation allowance is recorded.
b) Employee future benefits
In the first quarter ended June 30, 2000, the Company also adopted the new
CICA recommendations for employee future benefits. Under these new rules,
the costs of retirement benefits, other than pensions, and certain
post-employment benefits are recognized over the period in which the
employees render services in return for those benefits. Other
post-employment benefits are recognized when the event triggering the
obligation occurs. The new CICA recommendations were adopted prospectively
with the transition obligation amortized over the average period on which
benefits are expected to be paid. Adopting the new rules for employee
future benefits resulted in no material impact on the Company's financial
position or results of operations.
7
<PAGE>
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:
Three Months Ended
June 30, June 25,
2000 1999
--------------------
Net income (loss) as reported $ 21.5 $ (4.6)
Adjusted Net Income, as adjusted for:
Amortization of acquired intangibles 3.2 17.1
Debt issue costs 0.6 --
------------------
Adjusted Net Income $ 25.3 12.5
==================
Adjusted Net Income per common share - basic $ 0.21 $ 0.10
==================
4. Inventories:
June 30, March 31,
2000 1999
--------------------
Raw materials $ 55.8 $ 53.5
Work-in-process 78.1 68.3
Finished goods 63.5 65.9
==================
$197.4 $187.7
==================
5. Long-term receivables
June 30, March 31,
2000 1999
--------------------
Investment tax credits recoverable $ 7.8 $ 7.8
Promissory note, bearing interest at 8%,
payable annually, due in June 2004
and against which a first deed on real
property was pledged as security 6.7 6.1
Other long-term receivables 8.0 7.8
------------------
$ 22.5 $ 21.7
==================
6. Fixed assets:
June 30, March 31,
2000 1999
--------------------
Cost $832.4 $826.9
Accumulated amortization (387.4) (369.5)
==================
$445.0 $457.4
==================
8
<PAGE>
7. Acquired intangible assets
June 30, March 31,
2000 1999
--------------------
Cost:
In-process technology $ -- $ 5.2
Developed technology -- 23.7
Customer base and work force 1.3 11.6
Goodwill -- 6.3
------------------
1.3 46.8
------------------
Less accumulated amortization:
In-process technology -- 4.7
Developed technology -- 22.4
Customer base and work force 0.1 10.9
Goodwill -- 5.8
------------------
0.1 43.8
------------------
$ 1.2 $ 3.0
==================
Fully amortized acquired intangibles of $46.8 were removed from the
accounts of the Company at June 30, 2000.
8. Patents, trademarks and other
June 30, March 31,
2000 1999
--------------------
Cost:
Patents, trademarks and other $ 15.3 $ 16.3
Deferred debt issue costs 7.6 8.5
------------------
22.9 24.8
------------------
Less accumulated amortization:
Patents and trademarks 10.1 9.7
Deferred debt issue costs 3.9 3.8
------------------
14.0 13.5
------------------
$ 8.9 $ 11.3
==================
9. Accounts payable and accrued liabilities
June 30, March 31,
2000 1999
--------------------
Trade payables $ 53.6 $ 68.5
Employee-related payables 34.1 34.9
Other accrued liabilities 102.7 112.0
------------------
$190.4 $215.4
==================
10. Capital stock:
a)
June 30, March 31,
2000 1999
------------------------
Shares outstanding:
Preferred shares - R&D Series 1,607,900 1,607,900
Common shares 114,333,671 113,997,734
There were nil preferred shares repurchased during the three months ended
June 30, 2000.
9
<PAGE>
On June 5, 2000, the Company announced its intention to continue its
normal course issuer bid program for up to 5,706,196 common shares (5
percent of 114,123,921 common shares issued and outstanding at May 30,
2000) between June 9, 2000 and June 8, 2001. All repurchased shares will
be cancelled. In the quarter ended June 30, 2000, no shares were
repurchased under the normal course issuer bid.
b) A summary of the Company's stock option activity is as follows:
Three Months Ended
June 30, June 25,
2000 1999
------------------------------
Outstanding options:
Balance, beginning of period 9,017,262 5,918,988
Granted 284,500 2,454,100
Exercised (335,937) (12,225)
Forfeited (168,788) (336,600)
-----------------------------
Balance, end of period 8,797,037 8,024,263
=============================
Available for grant at June 30, 2000 were 6,575,536 (March 31, 2000 -
6,691,248) common shares. The exercise prices on stock options outstanding
range from $1.10 to $38.23 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. The calculation of fully diluted earnings per
share assumes that, if a dilutive effect is produced, all
outstanding options had been exercised at the later of the beginning
of the fiscal year and the option issue date, and includes an
allowance for imputed earnings net of tax derived from the
investment of funds that would have been received.
11. The following table summarizes changes in the translation account:
Three Months Ended
June 30, June 25,
2000 1999
--------------------
Balance, beginning of period $ (3.4) $ 28.2
Increase:
Movements in exchange rates -
United Kingdom Pound Sterling (17.2) (17.0)
United States Dollar 5.7 (8.8)
Swedish Krona 1.5 (1.2)
Other currencies (0.1) (0.5)
------------------
Balance, end of period $(13.5) $ 0.7
==================
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.
13. Research and Development
The research and development expenses were net of $3.4 in R&D government
assistance, including ITCs, for the three month period ended June 30, 2000
(three months ended June 25, 1999 - $1.2).
10
<PAGE>
14. Acquisition
On July 28, 2000, the Company acquired privately-held Vertex Networks,
Incorporated ("Vertex"), a California-based fabless semiconductor company
providing silicon solutions for the enterprise switching and Wide Area
Network access markets. Mitel acquired Vertex in a share transaction for
11 million newly issued common shares valued at approximately $300. The
fair value of the consideration was determined by the fair value of the
Company's common shares near the effective date of acquisition. The
acquisition will be accounted for by application of the purchase method of
accounting.
15. Information on business segments
The Company's reportable business segments include the Mitel Semiconductor
("Semiconductor") group and the Mitel Communications Systems ("Systems")
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 of each business segment 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 and 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 30, 2000 Semiconductor Systems Costs Total
------------- ------- ----------- -----
<S> <C> <C> <C> <C>
Total external sales revenue $ 183.8 $ 145.0 $ -- $ 328.8
Amortization of buildings and equipment 18.8 5.1 -- 23.9
Amortization of acquired intangibles -- -- 3.2 3.2
Segment's operating income 44.5 (10.5) (3.2) 30.8
<CAPTION>
Unallocated
Three Months Ended June 25, 1999 Semiconductor Systems Costs Total
------------- ------- ----------- -----
<S> <C> <C> <C> <C>
Total external sales revenue $ 125.2 $ 186.0 $ -- $ 311.2
Amortization of buildings and equipment 20.1 4.5 -- 24.6
Amortization of acquired intangibles -- -- 17.1 17.1
Segment's operating income 5.1 13.2 (17.1) 1.2
</TABLE>
11
<PAGE>
16. 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 23 to the consolidated financial statements as at March 31, 2000.
The following table reconciles the net income (loss) as reported on the
consolidated statements of income to the net income (loss) that would have
been reported had the financial statements been prepared in accordance
with U.S. GAAP and the requirements of the SEC:
Three Months Ended
June 30, June 25,
2000 1999
--------------------
Net income (loss) for the period in
accordance with Canadian GAAP $ 21.5 $ (4.6)
Acquirer's redundancy provisions 0.5 --
Amortization of acquired in-process technology 0.5 1.8
Effect of deferral accounting related to
foreign exchange contracts 7.6 0.9
Translation of foreign currency denominated debt (3.5) 5.2
------------------
U.S. GAAP and SEC requirements:
Net income for the period 26.6 3.3
Less: dividends on cumulative preferred shares (0.8) (0.8)
------------------
Net income attributable to common shareholders $ 25.8 $ 2.5
==================
Net income per common share:
Basic $ 0.23 $ 0.02
==================
Diluted $ 0.22 $ 0.02
==================
Weighted average shares for basic EPS
(millions) 114.2 116.5
Weighted average shares on conversion
of stock options (millions) 5.1 0.9
------------------
Adjusted weighted average shares and
share equivalents (millions) 119.3 117.4
==================
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 30, 2000 to
purchase 158,500 shares of common stock at an average price of
$35.27 per share.
ii) 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.
12
<PAGE>
The components of comprehensive income were as follows:
Three Months Ended
June 30, June 25,
2000 1999
--------------------
Net income for the period $ 26.6 $ 3.3
Other comprehensive income (loss) -
Foreign currency adjustment (10.1) (27.5)
------------------
Comprehensive income (loss) for the period $ 16.5 $(24.2)
==================
Balance sheet items, which vary, in conformity with U.S. GAAP and SEC
requirements:
June 30, March 31,
2000 1999
--------------------
Fixed assets $ 433.9 $ 445.6
Acquired intangible assets $ 1.2 $ 2.5
Accounts payable and accrued liabilities $ 187.4 $ 217.0
Shareholders' equity:
Redeemable preferred shares $ 34.2 $ 34.2
Common shares $ 765.7 $ 763.1
Contributed surplus $ -- $ --
Accumulated other comprehensive income (loss) $ (13.5) $ (3.4)
Deficit $(150.2) $(176.0)
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, if
any, of this pronouncement on its consolidated financial statements.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" ("SAB 101"), which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic
criteria that must be met in order to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Although
the Company is still in the process of assessing the impact of adopting
SAB 101 on its financial position and results of operations in Fiscal 2001
and thereafter, management does not expect the effect, if any, to be
material.
17. Net change in non-cash working capital balances related to operating
activities:
Three Months Ended
June 30, June 25,
2000 1999
--------------------
Accounts receivable $ (9.1) $ 37.2
Inventories (14.9) 1.0
Accounts payable and accrued liabilities (27.2) (14.0)
Deferred revenue 0.2 (3.7)
Other (0.5) (0.3)
------------------
$(51.5) $ 20.2
==================
18. Comparative figures
Certain of the 2000 comparative figures have been reclassified to conform
to the presentation adopted in 2001.
13
<PAGE>
ITEM 2. 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
provider of semiconductors and communications systems for converging voice and
data networks in a rapidly evolving Internet economy. Mitel employs some 6,000
people worldwide.
The following discussion and analysis explains trends in Mitel's financial
condition and results of operations for the first quarter ended June 30, 2000
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 31, 2000.
RECENT SIGNIFICANT EVENTS
Acquisition of Vertex Networks, Incorporated
On June 6, 2000, the Company entered into an agreement to acquire 100 percent of
the common stock of privately-held Vertex Networks, Incorporated ("Vertex"), for
total consideration of 11 million common shares newly issued by Mitel with a
fair value of approximately $300. The acquisition will be accounted for by the
purchase method. Accordingly, Vertex's results from operations will be included
in the consolidated accounts of the Company from the effective date of
acquisition which occurred on July 28, 2000.
Vertex is a fabless semiconductor company providing high-performance network
packet processing, switching and routing silicon solutions for the enterprise
and wide area network ("WAN") access markets. Vertex provides integrated
circuits for Layer 3 Internet Protocol ("IP") routing switches and developing
chipsets, reference designs, and software for intelligent packet switching
applications. Vertex's products encompass Quality of Service ("QoS")-enabled IP
switching for enterprise communications, WAN traffic concentration, and fiber to
the home ("FTTH") markets. Vertex, which was founded in 1995, is based in
Irvine, California, United States, and has design centers in San Jose,
California, and Taiwan. Vertex employed approximately 75 people as at June 30,
2000.
Management believes the acquisition of Vertex will allow Mitel to enter the
packet processing and switch fabric market to offer system-wide, IP-based, QoS
for convergent networks. QoS is a term that qualifies certain performance
attributes of voice transmission over IP networks, and usually refers to
measures of delay, latency and jitter. Mitel's focus will be to deliver wire
speed non-blocking scalability for the edge of WANs, providing the maximum
packet-switching throughput required by systems designers and their customers.
Management believes the approach will introduce Local Area Network ("LAN") cost
structures into WAN applications to provide a more competitive solution that
accommodates diverse switching technologies in use at the edge of the network.
Common Share Repurchase Program
On June 5, 2000, the Company announced its Board of Directors had authorized the
continuation of its normal course issuer bid program to repurchase up to
5,706,196 common shares, representing 5% of 114,123,921 common shares issued and
outstanding at May 18, 2000. The purchases will take place on the open market
through the stock exchanges of New York and Toronto over a twelve-month period
14
<PAGE>
beginning on June 9, 2000 and ending on June 8, 2001, or on such earlier date as
the Company may complete its purchases pursuant to the notice of intention to
make a normal course issuer bid filed with The Toronto Stock Exchange. The
Company, which intends to cancel the repurchased shares, believes that at
present no director, senior officer or insider of the Company intends to sell
any common shares under this program.
RESULTS OF OPERATIONS
Mitel operates through two reportable business segments - Mitel Semiconductor
("Semiconductor") and Mitel Communications Systems ("Systems"). 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.
Semiconductor provides specialty microelectronic solutions for the
communications and medical marketplaces. In the communications market,
Semiconductor specializes in broadband connectivity solutions over wired,
wireless and optical media. Mitel's medical applications-specific integrated
circuits ("ASICs") provide solutions for applications such as pacemakers and
hearing aids and portable instruments.
Systems provides enterprises with voice and data communications systems;
complete private networks including remote teleworking solutions; unified
messaging and call-center applications; computer telephony integration ("CTI")
systems and applications; and it also supplies competitive carriers with public
network access products.
Consolidated Summary
Revenue, based on the geographic location of Mitel's customers, was distributed
as follows:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
(millions of Canadian dollars) June 30, 2000 % of Total June 25, 1999 % of Total
------------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
United States $144.2 44% $138.7 45%
Europe 112.6 34 105.8 34
Asia/Pacific 52.2 16 34.2 11
Other Regions 5.8 2 16.0 5
Canada 14.0 4 16.5 5
------ --- ------ ---
Total $328.8 100% $311.2 100%
====== === ====== ===
</TABLE>
For the three months ended June 30, 2000, the net movement in exchange rates
from Fiscal 2000 unfavorably impacted total revenue by 2 percent ($6.4)
primarily as a result of changes in the UK pound sterling exchange rate.
Total first quarter revenue grew by 6 percent compared to the same quarter of
last year. Mitel's revenue growth was driven by strong Semiconductor sales in
high growth areas such as broadband networking, wireless and optical components.
The strong semiconductor growth, however, was mostly offset by lower sales in
the Systems business. Adjusted Net Income (see below) for the quarter was $25.3,
or $0.21 per share, compared to $12.5, or $0.10 per share, for the comparable
period in Fiscal 2000. The increase in adjusted net income from a year ago was
mainly attributable to the 47 percent increase in Semiconductor sales and to
improved manufacturing efficiencies in the Company's semiconductor fabs.
Including amortization of intangibles (see below) of $3.2, Mitel recorded net
income of $21.5 in the first
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quarter of Fiscal 2001, or $0.18 per share, as against a net loss of $4.6, or
$0.05 per share, in the first quarter of Fiscal 2000. In the first quarter of
Fiscal 2000, amortization of acquired intangibles amounted to $17.1.
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.
Three Months Ended
(millions of Canadian dollars, June 30, June 25,
except per share amounts) 2000 1999
--------------------
Consolidated revenue $ 328.8 $ 311.2
Semiconductor segment revenue $ 183.8 $ 125.2
Systems segment revenue $ 145.0 $ 186.0
Operating income $ 30.8 $ 1.2
Semiconductor segment operating income $ 44.5 $ 5.1
Systems segment operating income (loss) $ (10.5) $ 13.2
Unallocated costs - amortization of acquired intangibles $ (3.2) $ (17.1)
Net income (loss) $ 21.5 $ (4.6)
Net income (loss) per common share $ 0.18 $ (0.05)
Adjusted net income $ 25.3 $ 12.5
Adjusted net income per common share $ 0.21 $ 0.10
Weighted average common shares outstanding 114.2 116.5
Net income and cash flows for each period, as determined by U.S. accounting
principles, are detailed and discussed in note 16 to the consolidated financial
statements included elsewhere in this Form 10-Q.
Business Segment Review
Mitel Semiconductor
Semiconductor sales increased by 47 percent from Fiscal 2000's first quarter
and, sequentially, by 5 percent from the fourth quarter of Fiscal 2000. In
proportion to total company sales, Semiconductor revenue increased by 9
percentage points from the first quarter of last year to represent 56 percent of
total company sales in the first quarter of Fiscal 2001.
Much of the growth resulted from higher sales to manufacturers in the
Asia/Pacific region. Sales into this region began to improve in the latter half
of Fiscal 2000 and this trend has continued into the beginning of Fiscal 2001.
The industry is experiencing intense demand by end customers for converged
network infrastructure featuring QoS. It is this demand which in turn drives the
sales growth for Mitel's broadband networking and optical components. Management
believes that this trend will continue through Fiscal 2001 with double-digit
growth over Fiscal 2000.
Semiconductor's operating income increased from $5.1 last year to $44.5 as a
result of the higher sales volumes combined with improved manufacturing
efficiencies in the division's fabrication facilities. Since last year, a
continuing focus on improving manufacturing yields and optimizing fab
utilization has had a significant and favorable impact on the division's
operating margins.
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Mitel Communications Systems
Systems revenue decreased by 22 percent from the first quarter of last year and,
sequentially, by 27 percent from the fourth quarter of Fiscal 2000. Systems
revenue accounted for 44% of total company revenue in the first quarter and
represented a decrease of 9 percentage points in the sales mix from the first
quarter of last year.
The sales decrease was principally due to industry-wide market softness while
end customers delay capital spending on systems and applications. Management
believes recent industry and Mitel announcements regarding new voice
communications systems moving to an IP platform have resulted in certain
customers deferring discretionary capital spending in order to acquire the
advanced functionality afforded by the new IP platforms that are expected to
become widely available in 2001. In addition, management believes that certain
customers have reduced or delayed their capital requirements due to a lingering
overhang from Year 2000 issue spending. Management also believes that higher
interest rates in the U.S. have caused capital spending to contract somewhat in
that region, the Company's largest geographic market. Based on recent bid
activity experienced by Mitel, management believes that sales levels will begin
to show momentum in the second quarter of Fiscal 2001. However, it is not
expected that the revenue in Fiscal 2001 will be sufficient to surpass the sales
levels of Fiscal 2000 which partially benefited from the market's pre-Year 2000
issue capital spending. Management believes the sales growth will be more
evident beyond Fiscal 2001 when Voice over IP ("VoIP") platforms are likely to
reach market acceptance and begin to ramp up.
As a result of this low sales volume, Systems incurred an operating loss of
$10.5 as compared to operating income of $13.2 in the first quarter of last
year. During the quarter, the division continued to make significant investments
in research and development, principally directed toward networked IP
communications systems and applications.
GROSS MARGIN
As a percentage of total revenue, total gross margin was 49 percent in the first
three months of Fiscal 2001, 3 percentage points higher than the corresponding
period of Fiscal 2000. The improvement was due to higher sales volumes of
semiconductor products, a favorable semiconductor sales mix and positive
manufacturing variances resulting from improved semiconductor manufacturing
utilization. These factors combined to more than offset the negative impacts of
lower system sales.
OPERATING EXPENSES
Selling and Administrative ("S&A")
S&A expenses in the first quarter of Fiscal 2001 were $87.7, or 27 percent of
sales, compared with $85.4, and also 27 percent of sales, for the comparable
period in Fiscal 2000. Sequentially from the fourth quarter of Fiscal 2000, S&A
as a percentage of sales increased by 2 percentage points primarily due to the
lower systems sales. In addition, the Company made significant investments
during the quarter in sales channels development for the new VoIP systems and
component portfolio.
Research and Development ("R&D")
R&D expenses amounted to $39.7, or 12 percent of revenue, for the quarter ended
June 30, 2000. This compares to $38.8, or 12 percent of revenue, in the
corresponding period of Fiscal 2000. These amounts were net of $3.4 (2000 -
$1.2) in R&D government assistance, including ITCs.
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Mitel's R&D spending is directed toward investments in high-growth
communications market segments. The Semiconductor R&D programs primarily consist
of developing intellectual property in the areas of IC process development,
communications ICs, optoelectronic components, SLI or "System-On-A-Chip", as
well as low power and high voltage semiconductors. Systems R&D programs are
primarily directed at advancing call processing for enterprises on an IP centric
platform, the development of a series of desktop devices and network gateways
for both TDM and IP to provide enhanced access to converged networks, and to
leveraging the power of emerging xDSL access technology.
Amortization of Acquired Intangibles
Amortization of acquired intangibles decreased in the first quarter of Fiscal
2001 to $3.2 from $17.1 for the comparable period in Fiscal 2000. The Fiscal
2000 amount included amortization related to Fiscal 1998 acquisitions that were
fully written off by the end of last year. Management expects the amortization
of acquired intangibles to increase significantly during the balance of Fiscal
2001 in connection with the previously announced Vertex acquisition which closed
on July 28, 2000. The increase will not affect the Adjusted Net Income
supplementary metric.
INTEREST INCOME AND EXPENSE
Interest income was $3.0 for the quarter ended June 30, 2000, up from $1.9
recorded in the corresponding quarter of Fiscal 2000 due to higher average cash
balances in the quarter. Interest expense was $5.3 for the first quarter of
Fiscal 2001 compared to $5.2 in the corresponding period of Fiscal 2000.
INCOME TAXES
Effective for Fiscal 2001, new rules were applied for corporate income tax
accounting which require Mitel to apply the "liability" method instead of the
"deferral" method. Under the new standard, tax assets and liabilities must be
measured using income tax rates and applying tax laws which are expected to
apply to taxable income in periods in which the tax assets or liabilities are
expected to be realized or settled. The impact of this change on the Company is
described in Note 2 to the unaudited consolidated financial statements for the
quarter ended June 30, 2000.
Income tax expense for the three months ended June 30, 2000 was $6.4 compared to
$2.5 for the comparable period in Fiscal 2000. 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 21 percent for the first quarter of
Fiscal 2001. This compares to 17 percent for the corresponding period in Fiscal
2000. The higher effective tax rate in Fiscal 2001 was mainly due to higher
Semiconductor income generated in Canada. The sequential decrease from Fiscal
2000's effective tax rate of 25 percent was principally due to lower first
quarter earnings in the 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 30, 2000, order backlog was $322.8, up from the
total of $280.0 at March 31, 2000. The increase in backlog was attributable to
an improved book-to-bill ratio through higher semiconductor orders, principally
in the areas of broadband networking. Most of the backlog is scheduled for
delivery in the next twelve months.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, cash, cash equivalents and short-term investment balances
totaled $165.9, down from $228.4 at March 31, 2000. The decrease of $62.5 was
mainly due to pre-payments on the long-term debt and to a significant reduction
from the Fiscal 2000 year-end account payable balances.
Cash flow from operations before working capital changes amounted to $52.2
during the first quarter of Fiscal 2001 compared to $37.3 in Fiscal 2000. Since
March 31, 2000, Mitel's working capital, as reflected in the consolidated
statements of cash flows, increased by $51.5. The increase was primarily due to
typically lower payables in the quarter following a year-end and to higher
inventory levels normally built prior to the summer manufacturing maintenance
shutdown. Mitel also 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.
Fixed asset and other additions were $23.8 during the first quarter of Fiscal
2001 compared with $13.6 in the corresponding period of Fiscal 2000, excluding
additions of $2.5 and $4.2 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 for Semiconductor
manufacturing capacity and design tools.
On February 12, 1998, Mitel entered into two term loans, respectively the
AXELs(SM)* Series B loan and the Tranche A Term Loan, 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 in four quarterly installments commencing
March 2003. The principal of the Tranche A Term Loan was fully repaid in June
2000 as a result of a mandatory prepayment required to be made from Mitel's
defined excess cash flow in Fiscal 2000 (see below).
The remaining AXELs Series B loan bears 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
effective interest rate on a portion of the term loan. The interest rate swap is
considered to be an effective hedge of the variable interest rates on the term
loan. Mitel is subject to certain restrictive covenants and commitments and is
required to maintain certain financial ratios for the purpose of ensuring the
Company's ability to meet its obligations under the credit agreement. The term
loan is subject to mandatory prepayments out of certain insurance proceeds,
defined excess cash flow generated by Mitel, and the proceeds of certain asset
sales (other than inventory), equity offerings or debt issuances by Mitel.
Mandatory prepayments range from 50% to 100% of the applicable net cash
proceeds. Prior to February 2003, mandatory prepayments are restricted to paying
down the amounts, if any, that are drawn on the revolving credit facility.
Management believes Mitel is in compliance with the obligations and restrictive
covenants under the credit agreement.
Long-term debt decreased principally due to the mandatory prepayment, mentioned
above, in the amount of $27.1 against the syndicated term loans. Long-term debt
also decreased due to scheduled repayments of $12.0 against capital lease
liabilities.
On June 5, 2000, Mitel announced its intention to make a normal course issuer
bid for up to 5,706,196 common shares (5 percent of 114,123,921 common shares
issued and outstanding at May 30, 2000). 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, 2000 and ends on
June 8, 2001 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 30, 2000, no
shares were purchased under the normal course issuer bid.
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As at June 30, 2000, Mitel's capitalization was comprised of 27 percent debt, 4
percent preferred equity, and 69 percent common equity. This compares to 30
percent debt, 4 percent preferred equity, and 66 percent common equity at the
end of Fiscal 2000.
In addition to cash, cash equivalent and short-term investment balances of
$165.9 as at June 30, 2000, Mitel has an unused revolving credit facility of
approximately $108.4 (U.S.$73.3). 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.
OTHER
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 30, 2000, the translation account balance was in a debit position of $13.5
as compared to a debit position of $3.4 at the end of Fiscal 2000. The increase
in the debit was due to a stronger Canadian dollar as measured against other
currencies, principally the U.K. pound sterling.
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.
ITEM 3. 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.
Mitel currently uses forward contracts and foreign currency options to reduce
the exposure to foreign exchange risk. The most significant foreign exchange
exposures for Mitel relate to the U.S. dollar, U.K. pound sterling and the Euro.
As at June 30, 2000, 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
31, 2000.
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PART II - OTHER INFORMATION
ITEM 6. Reports on Form 8-K
a) Reports on Form 8-K
The Company filed a Current Report on Form 8-K in the three months ended June
30, 2000. The Report was dated June 5, 2000 and related to the continuation of
the common stock repurchase program and to the Company's announcement that it
had entered into an agreement to acquire privately-held Vertex Networks,
Incorporated.
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 10, 2000 JEAN-JACQUES CARRIER
--------------- --------------------------------
Date Jean-Jacques Carrier
Senior Vice President of Finance
and Chief Financial Officer
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