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 September 29, 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 November 6, 2000 was 127,724,688.
1
<PAGE>
MITEL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION (Unaudited)
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets -
September 29, 2000 and March 31, 2000 .......................... 3
Consolidated Statements of Retained Earnings -
Three months ended September 29, 2000 and September 24, 1999 ... 4
Six months ended September 29, 2000 and September 24, 1999 ..... 4
Consolidated Statements of Income -
Three months ended September 29, 2000 and September 24, 1999 ... 5
Six months ended September 29, 2000 and September 24, 1999 ..... 5
Consolidated Statements of Cash Flows -
Six months ended September 29, 2000 and September 24, 1999 ..... 6
Notes to the Consolidated Financial Statements ................. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS .................................17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK .........................................................25
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ....................................26
2
<PAGE>
Mitel Corporation
(incorporated under the laws of Canada)
CONSOLIDATED BALANCE SHEETS
(in millions of Canadian dollars)
(Unaudited)
Sept. 29, March 31,
2000 2000
--------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 227.6 $ 195.5
Short-term investments 2.4 32.9
Accounts receivable 288.4 288.2
Inventories (note 4) 190.1 187.7
Prepaid expenses and other 35.2 37.2
Future income tax assets 5.7 9.5
---------- ----------
749.4 751.0
Long-term receivables (note 5) 22.6 21.7
Fixed assets (note 6) 439.2 457.4
Goodwill and acquired intangible assets (note 7) 262.7 3.0
Patents, trademarks and other (note 8) 9.4 11.3
---------- ----------
$ 1,483.3 $ 1,244.4
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 9) $ 189.6 $ 215.4
Income and other taxes payable 9.3 26.2
Future income tax liabilities 6.6 11.7
Deferred revenue 39.9 44.1
Current portion of long-term debt 30.3 57.9
---------- ----------
275.7 355.3
Long-term debt 208.9 217.5
Pension liability 16.8 13.4
Future income tax liabilities 23.6 27.2
---------- ----------
525.0 613.4
---------- ----------
Shareholders' equity:
Capital stock (note 10)
Preferred shares 36.9 37.0
Common shares 634.0 325.6
Contributed surplus 9.2 9.2
Retained earnings 288.4 262.6
Translation account (note 11) (10.2) (3.4)
---------- ----------
958.3 631.0
---------- ----------
$ 1,483.3 $ 1,244.4
========== ==========
(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 Six Months Ended
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Retained earnings, beginning of period (as
previously reported) $ 283.3 $ 212.3 $ 267.4 $ 218.4
Change in accounting policy for income taxes (note 2) -- -- (4.8) --
-------- -------- -------- --------
Retained earnings, beginning of period (as restated) 283.3 212.3 262.6 218.4
Net income for the period 6.6 12.5 28.1 7.9
-------- -------- -------- --------
289.9 224.8 290.7 226.3
Cost of common share issue (note 10) (0.7) -- (0.7) --
Cost of common share repurchase (note 10) -- (1.5) -- (2.2)
Dividends on preferred shares (note 10) (0.8) (0.8) (1.6) (1.6)
-------- -------- -------- --------
Retained earnings, end of period $ 288.4 $ 222.5 $ 288.4 $ 222.5
======== ======== ======== ========
</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 Six Months Ended
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue $ 359.8 $ 348.8 $ 688.6 $ 660.0
--------- --------- --------- ---------
Cost of sales:
Cost of sales other than amortization 169.4 166.8 319.8 318.0
Amortization of manufacturing assets 15.5 17.4 32.5 34.9
--------- --------- --------- ---------
184.9 184.2 352.3 352.9
--------- --------- --------- ---------
Gross margin 174.9 164.6 336.3 307.1
--------- --------- --------- ---------
Expenses:
Selling and administrative 85.1 88.0 172.8 173.4
Research and development (net) (note 13) 45.9 33.7 85.6 72.5
Amortization of acquired intangibles 23.9 15.2 27.1 32.3
--------- --------- --------- ---------
154.9 136.9 285.5 278.2
--------- --------- --------- ---------
Operating income 20.0 27.7 50.8 28.9
Interest income 3.4 1.7 6.4 3.6
Interest expense (4.8) (5.2) (10.1 (10.4)
Debt issue costs -- -- (0.6 --
--------- --------- --------- ---------
Income before income taxes 18.6 24.2 46.5 22.1
Income tax expense 12.0 11.7 18.4 14.2
--------- --------- --------- ---------
Net income for the period $ 6.6 $ 12.5 $ 28.1 $ 7.9
========= ========= ========= =========
Net income attributable to common shareholders
after preferred share dividends $ 5.8 $ 11.7 $ 26.5 $ 6.3
========= ========= ========= =========
Net income per common share (note 3 & 10):
Basic $ 0.05 $ 0.10 $ 0.23 $ 0.05
========= ========= ========= =========
Fully diluted $ 0.05 $ 0.10 $ 0.22 $ 0.05
========= ========= ========= =========
Weighted average number of common shares
outstanding (millions):
Basic 121.3 114.9 117.7 115.6
========= ========= ========= =========
Fully diluted 122.6 121.1 120.8 116.0
========= ========= ========= =========
</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>
Six Months Ended
Sept. 29, Sept. 24,
2000 1999
--------- ---------
<S> <C> <C>
CASH PROVIDED BY (USED IN)
Operating activities:
Net income for the period $ 28.1 $ 7.9
Amortization of capital and other assets 83.4 84.4
Investment tax credits 5.2 4.5
Loss (gain) on sale of capital assets 2.4 (0.1)
Future income taxes (3.4) (2.8)
Change in pension liability 0.3 0.6
(Increase) decrease in working capital (note 17) (45.8) 5.6
------- -------
Total 70.2 100.1
------- -------
Investing activities:
Change in short-term investments 39.3 (27.8)
Additions to capital and other assets (44.0) (28.1)
Proceeds from disposal of capital assets 1.1 0.1
Acquisitions (notes 14 and 17) 10.3 -
Net change in non-cash balances related to investing activities (3.6) (7.8)
------- -------
Total 3.1 (63.6)
------- -------
Financing activities:
Repayment of long-term debt (27.1) (5.3)
Repayment of capital lease liabilities (19.3) (16.4)
Dividends on preferred shares (1.6) (1.6)
Issue of common shares - net (note 10) 7.0 0.3
Repurchase of common and preferred shares (note 10) (0.1) (26.1)
Net change in non-cash balances related to financing activities - (0.1)
------- -------
Total (41.1) (49.2)
------- -------
Effect of currency translation on cash (0.1) (0.6)
------- -------
Increase (decrease) in cash and cash equivalents 32.1 (13.3)
Cash and cash equivalents, beginning of period 195.5 125.3
------- -------
Cash and cash equivalents, end of period $ 227.6 $ 112.0
------- -------
</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 September 29, 2000 and the results of operations and the changes in
financial position for the three and six month periods ended September 29,
2000 and September 24, 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 adoption of this recommendation has no impact on
the results of operations in Fiscal 2001. 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 income taxes payable decreased by $5.4; current
future income tax liabilities increased by $5.3; and long-term future
income tax liabilities increased by $14.4.
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. For fiscal years prior
to the adoption of the new recommendations, income taxes were accounted
for using the deferred tax allocation method, under which the income tax
provision is based on the income reported in the accounts.
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 adoption of the new CICA recommendations for
employee future benefits resulted in no significant impact on the
Company's financial position or results of operations.
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) and non-cash debt issue costs expensed on an early
7
<PAGE>
partial debt repayment. The Adjusted Net Income and Adjusted Net Income
per common share are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income for the period as reported $ 6.6 $ 12.5 $ 28.1 $ 7.9
Adjusted Net Income, as adjusted for:
Amortization of acquired intangibles 23.9 15.2 27.1 32.3
Debt issue costs -- -- 0.6 --
--------- --------- --------- ---------
Adjusted Net Income for the period $ 30.5 $ 27.7 $ 55.8 $ 40.2
========= ========= ========= =========
Adjusted Net Income per common share (after
preferred share dividends) - basic $ 0.24 $ 0.23 $ 0.46 $ 0.33
========= ========= ========= =========
</TABLE>
4. Inventories:
Sept. 29, March 31,
2000 2000
--------- ---------
Raw materials $ 54.3 $ 53.5
Work-in-process 74.2 68.3
Finished goods 61.6 65.9
======== ========
$ 190.1 $ 187.7
======== ========
5. Long-term receivables
Sept. 29, March 31,
2000 2000
--------- ---------
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 6.8 6.1
Other long-term receivables 8.0 7.8
-------- --------
$ 22.6 $ 21.7
======== ========
6. Fixed assets:
Sept. 29, March 31,
2000 2000
--------- ---------
Cost $ 849.9 $ 826.9
Accumulated amortization (410.7) (369.5)
======== ========
$ 439.2 $ 457.4
======== ========
8
<PAGE>
7. Acquired intangible assets
Sept. 29, March 31,
2000 2000
--------- ---------
Cost:
In-process technology $ 5.9 $ 5.2
Developed technology 30.6 23.7
Customer base and work force 3.1 11.6
Goodwill 247.1 6.3
-------- --------
286.7 46.8
-------- --------
Less accumulated amortization:
In-process technology 0.5 4.7
Developed technology 2.6 22.4
Customer base and work force 0.4 10.9
Goodwill 20.5 5.8
-------- --------
24.0 43.8
-------- --------
$ 262.7 $ 3.0
======== ========
Fully amortized acquired intangibles of $46.8 were removed from the
accounts of the Company at September 29, 2000.
On July 28, 2000, the Company purchased completed and in-process research
and development (R&D), an assembled work-force and goodwill, amounting to
$285.4 in connection with the acquisition of Vertex Networks, Incorporated
("Vertex") (see also note 14).
8. Patents, trademarks and other
Sept. 29, March 31,
2000 2000
--------- ---------
Cost:
Patents, trademarks and other $ 16.5 $ 16.3
Deferred debt issue costs 7.5 8.5
-------- --------
24.0 24.8
-------- --------
Less accumulated amortization:
Patents and trademarks 10.5 9.7
Deferred debt issue costs 4.1 3.8
-------- --------
14.6 13.5
======== ========
$ 9.4 $ 11.3
======== ========
9. Accounts payable and accrued liabilities
Sept. 29, March 31,
2000 2000
--------- ---------
Trade payables $ 52.9 $ 68.5
Employee-related payables 30.0 34.9
Other accrued liabilities 106.7 112.0
-------- --------
$ 189.6 $ 215.4
======== ========
9
<PAGE>
10. Capital stock:
a) Sept. 29, March 31,
2000 2000
----------- -----------
Shares outstanding:
Preferred shares - R&D Series 1,605,300 1,607,900
Common shares 125,998,788 113,997,734
There were 2,600 preferred shares repurchased for cash consideration of
$0.1 during the six months ended September 29, 2000.
An analysis of the changes in the number of common shares and the amount
of share capital for the six months ended September 29, 2000, is as
follows:
Number Amount
----------- ------
Balance, beginning of period 113,997,734 $325.6
Shares issued relating to acquisitions
(see also note 14) 10,997,968 300.7
Exercise of employee stock options 1,003,086 7.7
=========== ======
Balance, end of period 125,998,788 $634.0
=========== ======
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 six month period ended September 29, 2000, no shares
were repurchased under the normal course issuer bid.
b) A summary of the Company's stock option activity is as follows:
Six Months Ended
Sept. 29, Sept. 24,
2000 1999
---------- ----------
Outstanding options:
Balance, beginning of period 9,017,262 5,918,988
Granted 1,255,400 3,586,467
Exercised (1,003,086) (57,600)
(406,164) (2,215,850)
========== ==========
Balance, end of period 8,863,412 7,232,005
========== ==========
Available for grant at September 29, 2000 were 5,842,012 (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. In addition,
fully diluted earnings per share calculation includes common shares
issued with restrictions (see also note 14).
10
<PAGE>
11. The following table summarizes changes in the translation account:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance, beginning of period $ (13.5) $ 0.7 $ (3.4) $ 28.2
Increase (decrease):
Movements in exchange rates -
United Kingdom Pound Sterling 1.5 12.1 (15.7) (4.9)
United States Dollar 6.2 3.1 11.9 (5.7)
Swedish Krona (1.7) 0.5 (1.8) (0.7)
Other currencies (2.7) 2.5 (1.2) 2.0
Reduction of net investments in subsidiaries -- (0.3) -- (0.3)
------- ------ ------- ------
Balance, end of period $ (10.2) $ 18.6 $ (10.2) $ 18.6
======= ====== ======= ======
</TABLE>
12. The Company has not declared or paid any dividends on its common shares.
During the second 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 $3.5 and $6.9 in R&D
government assistance, including ITCs, for the three and six month periods
ended September 29, 2000, respectively (three months ended September 24,
1999 - $6.0; six months ended September 24, 1999 - $7.2).
14. Acquisition
On July 28, 2000, the Company acquired privately-held 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 approximately 11 million newly
issued common shares valued at $300.7. Approximately 1.1 million shares or
10 percent of the issued shares were placed in escrow for a two-year
period to indemnify the Company for representations made by Vertex. In
addition, approximately 535 thousand issued shares are subject to certain
restrictions over a two-year period. The fair value of the consideration
was based on the average closing price of the Company's common shares on
the Toronto Stock Exchange shortly before and after the date of
acquisition. The acquisition was accounted for by the purchase accounting
method. The purchase price allocation was based on preliminary fair values
assigned to net assets as determined by an independent valuation firm
using standard valuation techniques. The purchase price allocation is not
complete and, accordingly, this allocation may be adjusted subsequently.
An amount of $285.4 was allocated to intangible assets which include
completed and in-process research and development and other intangible
assets. The difference between the purchase price and the fair value of
the identifiable net assets amounted to $247.1, which was recorded as
goodwill. The identifiable intangible assets and the goodwill are
amortized over a two year period. The allocation to net assets included
$8.6 in respect of acquisition costs and costs to integrate the operations
of the acquired company. As at September 29, 2000, the liability in
respect of acquisition and integration costs was $7.7.
11
<PAGE>
The purchase transaction is summarized as follows:
Net assets acquired, at approximate fair value:
Current assets $ 29.9
Capital assets 2.3
Goodwill and acquired intangible assets 285.4
-------
Total assets 317.6
Current liabilities (16.9)
-------
Total net assets $ 300.7
========
Common share consideration $ 300.7
========
Unaudited Pro Forma financial information for the acquisition as if the
business had been acquired at the beginning of each respective fiscal
period is presented as follows:
Six Months Ended
Sept. 29, Sept. 24,
2000 1999
--------- ---------
Revenue $ 694.0 $ 662.2
Net loss $ (53.4) $ (70.7)
Net loss attributable to common
shareholders after preferred dividends $ (55.0) $ (72.3)
Net loss per common share:
Basic and fully diluted $ (0.44) $ (0.58)
Weighted average number of common shares
Outstanding (millions):
Basic 123.9 125.0
Fully diluted 128.0 127.0
The unaudited Pro Forma information does not include the operating savings
or synergies as a result of the combined operations.
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
12
<PAGE>
products and services. Mitel does not allocate amortization of
intangibles, special charges, interest income, 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 September 29, 2000 Semiconductor Systems Costs Total
------------- ------- ----------- -------
<S> <C> <C> <C> <C>
Total external sales revenue $ 194.3 $ 165.5 $ -- $ 359.8
Amortization of buildings and equipment 22.7 5.2 -- 27.9
Amortization of acquired intangibles -- -- 23.9 23.9
Segment's operating income 40.2 3.7 (23.9) 20.0
Unallocated
Three Months Ended September 24, 1999 Semiconductor Systems Costs Total
------------- ------- ----------- -------
Total external sales revenue $ 139.4 $ 209.4 $ -- $ 348.8
Amortization of buildings and equipment 20.4 4.4 -- 24.8
Amortization of acquired intangibles -- -- 15.2 15.2
Segment's operating income 16.6 26.3 (15.2) 27.7
Unallocated
Six Months Ended September 29, 2000 Semiconductor Systems Costs Total
------------- ------- ----------- -------
Total external sales revenue $ 378.1 $ 310.5 $ -- $ 688.6
Amortization of buildings and equipment 44.1 11.1 -- 55.2
Amortization of acquired intangibles -- -- 27.1 27.1
Segment's operating income (loss) 84.7 (6.8) (27.1) 50.8
Unallocated
Six Months Ended September 24, 1999 Semiconductor Systems Costs Total
------------- ------- ----------- -------
Total external sales revenue $ 264.6 $ 395.4 $ -- $ 660.0
Amortization of buildings and equipment 40.5 8.9 -- 49.4
Amortization of acquired intangibles -- -- 32.3 32.3
Segment's operating income 21.7 39.5 (32.3) 28.9
</TABLE>
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, and
as explained below:
Under Canadian GAAP, the fair value of the share consideration in a
business combination is based on the quoted market value of the shares
shortly before and after the date of acquisition. Under US GAAP, the fair
value of the share consideration is based on the quoted market value of
the shares shortly before and after the first date on which the number of
shares becomes fixed without subsequent revision. This can result in a
difference in the fair value of the purchase price and the resulting
valuation of goodwill at the time of the purchase and in the subsequent
amortization of the goodwill.
13
<PAGE>
Accordingly, for the purpose of reporting under U.S. GAAP, the aggregate
purchase price of Vertex was $312.0, which was based on the average
closing price of the Company's common shares on the Toronto Stock Exchange
on or about June 6, 2000 (the date of the announcement of the transaction)
(see also note 14).
Under U.S. GAAP, a stock option compensation expense must be recorded in
the Company's results of operations when the terms of a previously fixed
stock option are modified. Under Canadian GAAP, there is no such
requirement.
The following table reconciles the net income 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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
2000 1999 2000 1999
------------- ------------- ------------ -------------
Net income for the period in accordance with Canadian
<S> <C> <C> <C> <C>
GAAP $ 6.6 $ 12.5 $ 28.1 $ 7.9
Acquirer's redundancy provisions 0.8 -- 1.3 --
Write-off of acquired in-process technology (5.9) -- (5.9) --
Amortization of acquired in-process technology 0.5 1.4 1.0 3.2
Amortization of incremental acquired goodwill (0.9) -- (0.9) --
Stock option compensation expense (1.7) -- (1.7) --
Effect of deferral accounting related to foreign
exchange contracts 2.3 6.0 9.9 6.9
Translation of foreign currency denominated debt (3.2) (0.4) (6.7) 4.8
----------- --------- ---------- ----------
U.S. GAAP and SEC requirements:
Net income (loss) for the period (1.5) 19.5 25.1 22.8
Less: dividends on cumulative preferred shares (0.8) (0.8) (1.6) (1.6)
Net income (loss) attributable to common shareholders $ (2.3) $ 18.7 $ 23.5 $ 21.2
=========== ========= ========= ==========
Net income (loss) per common share:
Basic $ (0.02) $ 0.16 $ 0.20 $ 0.18
=========== ========= ========= ==========
Diluted $ (0.02) $ 0.16 $ 0.19 $ 0.18
=========== ========= ========= ==========
Weighted average shares for basic EPS (millions) 121.3 114.9 117.7 115.6
Weighted average issued shares subject to
restrictions (millions) 1.1 -- 0.6 --
Weighted average shares on conversion of stock
options (millions) 4.7 1.8 4.5 1.3
----------- --------- ---------- ---------
Adjusted weighted average shares and share
equivalents (millions) 127.1 116.7 122.8 116.9
=========== ========= ========== =========
</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:
14
<PAGE>
i) All options outstanding for the three months ended September 29,
2000.
ii) Options outstanding for the six months ended September 29, 2000 to
purchase 189,500 shares of common stock at an average price of
$34.64 per share.
iii) Options outstanding for the three months ended September 24, 1999 to
purchase 1,054,000 shares of common stock at an average price of
$18.05 per share.
iv) Options outstanding for the six months ended September 24, 1999 to
purchase 2,188,867 shares of common stock at an average price of
$13.87 per share.
US GAAP net income (loss) included foreign exchange gains of $0.4 for the
three months ended September 29, 2000 and $4.1 for the six months ended
September 29, 2000 (three months ended September 24, 1999 - $5.6; six
months ended September 24, 1999 - $11.7).
The components of comprehensive income were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
Sept. 29, Sept. 24, Sept. 29, Sept. 24,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Comprehensive income (loss) for the period:
Net income (loss) for the period $ (1.5) $ 19.5 $ 25.1 $ 22.8
Other comprehensive income (loss) -
Foreign currency adjustment 3.3 17.9 (6.8) (9.6)
-------- --------- -------- ---------
Comprehensive income for the period $ 1.8 $ 37.4 $ 18.3 $ 13.2
======== ========= ======== =========
</TABLE>
Balance sheet items, which vary, in conformity with U.S. GAAP and SEC
requirements:
Sept. 29, March 31,
2000 2000
--------- ---------
Fixed assets $ 428.6 $ 445.6
Acquired intangible assets $ 262.9 $ 2.5
Patents, trademarks and other $ 11.0 $ 11.3
Accounts payable and accrued liabilities $ 184.7 $ 217.0
Shareholders' equity:
Redeemable preferred shares $ 34.1 $ 34.2
Common shares $ 1,083.8 $ 763.1
Contributed surplus $ - $ -
Accumulated other comprehensive loss $ (10.2) $ (3.4)
Deficit $ (153.3) $ (176.8)
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.
15
<PAGE>
17. Consolidated statements of cash flows
a) Net change in non-cash working capital balances related to operating
activities:
Six Months Ended
Sept. 29, Sept. 24,
2000 1999
--------- ---------
Net change in non-cash working capital
balances related to operating
activities:
Accounts receivable $ 4.7 $ 20.2
Inventories (1.2) 0.3
Accounts payable and accrued liabilities (43.8) (12.2)
Deferred revenue (3.5) (1.6)
Other (2.0) (1.1)
--------- ---------
$(45.8) $ 5.6
========= ==========
b) Acquisitions:
The following table summarizes the Company's cash flows from investing
activities resulting from acquisitions (there were no acquisitions in the
comparative period):
Six Months
Ended
Sept. 29, 2000
---------------
Vertex:
Cash acquired $ 11.1
Net assets acquired other than cash 289.6
----------
Total purchase price 300.7
Less: cash acquired (11.1)
Less: non-cash consideration paid (300.7)
----------
Cash acquired for Vertex 11.1
Less: cash paid for other acquisitions (0.8)
==========
Cash acquired net of cash paid $ 10.3
==========
18. Subsequent event
On November 3, 2000, the Company announced that its Board of Directors
intends to separate Mitel's Systems segment from the Semiconductor
segment. The mechanism or method to effect the separation of the
businesses has not yet been determined. The impact, if any, on the
Company's financial position or results of operations cannot be determined
at this time.
19. Comparative figures
Certain of the 2000 comparative figures have been reclassified to conform
to the presentation adopted in 2001.
16
<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 three and six months ended September
29, 2000 compared with the corresponding periods in the previous year, and is
intended to help shareholders and other readers understand the dynamics of the
Company's business and the key factors underlying its financial results. This
discussion should be read in conjunction with the consolidated financial
statements and notes 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
Separation of the Semiconductor and Systems Businesses
On November 3, 2000, the Company announced that its Board of Directors intends
to separate Mitel's Systems segment from its high-growth Semiconductor segment.
The mechanism or method to effect the separation of the businesses has not yet
been determined. The impact, if any, on the Company's financial position or
results of operations cannot be determined at this time. The decision was
developed in response to increasing differences in customer types, technology
roadmaps, investment requirements and, most importantly, the competitive needs
of the two businesses. Management believes this decision will eliminate any
confusion and uncertainty among the largest customers of one segment who happen
to be the largest competitors of the other segment. The Company's objective is
optimizing the business prospects for each division and, hence, shareholder
value.
Acquisition of Vertex Networks, Incorporated
On July 28, 2000, the Company acquired 100 percent of the capital stock of
privately-held Vertex Networks, Incorporated ("Vertex"), for total consideration
of approximately 11 million common shares newly issued by Mitel with a fair
value of $300.7. The acquisition was accounted for by the purchase method.
Accordingly, Vertex's results from operations have been included in the
consolidated accounts of the Company from the date of acquisition.
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 the date
of acquisition.
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
17
<PAGE>
("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 percent 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 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. No common shares were
repurchased under this program during the period from June 9, 2000 to November
9, 2000.
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>
Six Months Ended % of Six Months Ended % of
(millions of Canadian dollars) Sept. 29, 2000 Total Sept. 24, 1999 Total
---------------- ----- ---------------- -----
<S> <C> <C> <C> <C>
United States $ 314.9 46% $ 302.1 46%
Europe 235.7 34 215.3 33
Asia/Pacific 95.2 14 72.6 11
Canada 29.1 4 36.3 5
Other Regions 13.7 2 33.7 5
---------------- ----- ---------------- -----
Total $ 688.6 100% $ 660.0 100%
================ ====== ================ =====
</TABLE>
For the three months ended September 29, 2000, the net movement in exchange
rates from Fiscal 2000 negatively impacted total revenue by 4 percent ($12.8).
For the six months ended September 29, 2000, the net movement in exchange rates
from Fiscal 2000 negatively impacted total revenue by 3 percent
18
<PAGE>
($19.2). The negative foreign exchange impacts were primarily a result of
changes in the UK pound sterling exchange rate, partially offset by changes in
the U.S. dollar exchange rate.
Total second quarter revenue grew by 3 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 digital television.
The semiconductor sales growth rate of 39 percent, however, was mostly offset by
lower sales in the Systems business. Management believes the Systems business is
experiencing industry-wide effects of reduced capital spending by enterprise
customers. Adjusted Net Income (see below) for the quarter was $30.5, or $0.24
per share, compared to $27.7, or $0.23 per share, for the comparable period in
Fiscal 2000. The increase in Adjusted Net Income from a year ago was
attributable to higher Semiconductor sales and improved manufacturing
efficiencies in the Company's semiconductor fabs, which more than offset the
weaker operating performance in the Systems business.
Including amortization of intangibles (see below) of $23.9, Mitel recorded net
income of $6.6 in the second quarter of Fiscal 2001, or $0.05 per share, as
against $12.5, or $0.10 per share, in the second quarter of Fiscal 2000. In the
second quarter of Fiscal 2000, amortization of acquired intangibles amounted to
$15.2. Net income for the first half of Fiscal 2001 was $28.1, or $0.23 per
share, after deducting amortization of acquired intangibles of $27.1. This
compares to $7.9, or $0.05 per share, for the first half of Fiscal 2000. The
amortization of acquired intangibles amounted to $32.3 for the first half of
Fiscal 2000.
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.
<TABLE>
<CAPTION>
Six Months Ended
Sept. 29, Sept. 24,
(millions of Canadian dollars, except per share amounts) 2000 1999
--------- ---------
<S> <C> <C>
Consolidated revenue $688.6 $660.0
Semiconductor segment revenue $378.1 $264.6
Systems segment revenue $310.5 $395.4
Operating income $ 50.8 $ 28.9
Semiconductor segment operating income $ 84.7 $ 21.7
Systems segment operating income (loss) $ (6.8) $ 39.5
Unallocated costs - amortization of acquired intangibles $ 27.1 $ 32.3
Net income $ 28.1 $ 7.9
Net income per common share $ 0.23 $ 0.05
Adjusted net income $ 55.8 $ 40.2
Adjusted net income per common share $ 0.46 $ 0.33
Weighted average common shares outstanding 117.7 115.6
</TABLE>
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.
19
<PAGE>
Business Segment Review
Mitel Semiconductor
Semiconductor second quarter revenue of $194.3 increased by 39 percent from
Fiscal 2000's second quarter and, sequentially, by 6 percent from the first
quarter of this fiscal year. In proportion to total company sales in the second
quarter of Fiscal 2001, Semiconductor revenue increased by 14 percentage points
from the corresponding period of last year to represent 54 percent of total
company sales. Year to date, Semiconductor revenue of $378.1 increased by 43
percent over last year's same period to account for 55 percent of total company
sales in the first half of Fiscal 2001.
The industry is experiencing intense demand by end customers as a result of the
expansion and convergence of the network infrastructure. It is this demand that
in turn drives the sales growth for Mitel's broadband networking components.
Digital Television components are also in demand as manufacturers move to
address the market growth in advanced media applications and products.
Management believes that this trend will continue through Fiscal 2001 with
double-digit growth over Fiscal 2000.
Semiconductor's second quarter operating income increased by 142 percent from
Fiscal 2000's second quarter to $40.2 and by 290 percent to $84.7 on a year to
date basis. This profitability improvement resulted from higher sales volumes
combined with improved manufacturing efficiencies in the division's fabrication
facilities. In recent quarters, a continuing focus on improving manufacturing
yields and optimizing fab utilization has had a significant and favorable impact
on the division's operating margins.
Mitel Communications Systems
Systems revenue of $165.5 decreased by 21 percent from the second quarter of
last year but, sequentially, increased by 14 percent from the first quarter of
this fiscal year. Systems revenue accounted for 46 percent of total company
revenue in the second quarter and represented a decrease of 14 percentage points
in the Company's sales mix from the second quarter of last year. Compared to the
first half of Fiscal 2000, Systems revenue for the six months ended September
29, 2000 decreased by 21 percent to $310.5.
The revenue decrease in the quarter and year to date periods compared to last
fiscal year was principally due to industry-wide market softness while end
customers delayed capital spending on systems and applications. Management
believes recent industry announcements regarding new voice communications
systems moving to an IP platform have resulted in certain customers deferring
capital spending in order to acquire the advanced functionality afforded by the
new IP platforms in the future. Selling activity has started to show signs of
recovery as evidenced by the sales improvement over the first quarter of this
fiscal year. However, it is expected that the revenue in Fiscal 2001 will be
below the sales levels of Fiscal 2000 which partially benefited from the
market's pre-Year 2000 issue capital spending. Management believes the sales
will increase beyond Fiscal 2001 when Mitel's Voice over IP ("VoIP") platforms
are likely to reach market acceptance and begin to ramp up.
As a result of reduced sales volume, Systems operating income decreased from a
record high of $26.3 in the second quarter of Fiscal 2000 to $3.7 this year. The
second quarter profit reduced the Systems operating loss to $6.8 for the first
half of Fiscal 2001, as against an operating income of $39.5 for the
corresponding period 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.
20
<PAGE>
GROSS MARGIN
As a percentage of total revenue, total gross margin was 49 percent for both the
three and six month periods ended September 29, 2000. This represents an
improvement of 2 percentage points over each of the two respective periods last
year. 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 systems sales.
OPERATING EXPENSES
Selling and Administrative ("S&A")
S&A expenses in the second quarter of Fiscal 2001 were $85.1, or 24 percent of
sales, compared with $88.0, or 25 percent of sales, for the comparable period in
Fiscal 2000. Sequentially from the first quarter of this fiscal year, S&A as a
percentage of sales decreased by 3 percentage points. Year to date, S&A expenses
were 25 percent of sales and 1 percentage point lower than the first half of
Fiscal 2000. The improvement was due primarily to lower compensation costs and
discretionary spending in the Systems business. In addition, during the second
quarter of last fiscal year, the Company had made significant marketing
investments to promote the product portfolio of its advanced messaging
applications and ISDN PBX products.
Research and Development ("R&D")
R&D expenses amounted to $45.9, or 13 percent of revenue, for the quarter ended
September 29, 2000. This compares to $33.7, or 10 percent of revenue, in the
corresponding period of Fiscal 2000. Year to date, R&D expenses amounted to
$85.6 or 12 percent of sales and 1 percentage point higher than the first half
of Fiscal 2000. The increase was attributable to higher investments in
Semiconductor R&D programs and the impact of consolidating the R&D activities of
Vertex, which was acquired on July 28, 2000. The second quarter amount was net
of $3.5 (2000 - $6.0) in R&D government assistance, including ITCs. The year to
date amount was net of $6.9 (2000 - $7.2) in R & D government assistance,
including ITC's.
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.
Amortization of Acquired Intangibles
Amortization of acquired intangibles increased in the second quarter of Fiscal
2001 to $23.9 from $15.2 for the comparable period in Fiscal 2000. Year to date,
acquired intangibles amortization amounted to $27.1 as compared to $32.3 for the
first six months of Fiscal 2000. The Fiscal 2000 amounts included amortization
related to Fiscal 1998 acquisitions that were fully written off by the end of
last year. The Fiscal 2001 amounts included amortization related to the
acquisition of Vertex on July 28, 2000. Total intangible assets acquired in the
second quarter of Fiscal 2001 amounted to $285.4 and will be amortized over a
two-year period.
21
<PAGE>
INTEREST INCOME AND EXPENSE
Interest income was $3.4 and $6.4 for the three and six months ended September
29, 2000, up from $1.7 and $3.6 recorded in the respective corresponding periods
of Fiscal 2000, due to higher average cash balances. Interest expense was $4.8
and $10.1 for the three and six months ended September 29, 2000, down from $5.2
and $10.4 in the respective corresponding periods of Fiscal 2000, mainly due to
long-term debt repayments in the second half of Fiscal 2000 and the first
quarter of Fiscal 2001.
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
three and six months ended September 29, 2000.
Income tax expense for the three and six months ended September 29, 2000 was
$12.0 and $18.4, respectively, compared to $11.7 and $14.2 for the comparable
periods in Fiscal 2000. The effective income tax rate, as a percentage of
pre-tax income and before the effect of amortization of acquired intangibles,
was 28 percent for the second quarter of Fiscal 2001 as compared to 30 percent
for the corresponding period in Fiscal 2000. Year to date, the effective tax
rate was 25 percent as compared to 26 percent for the first half of Fiscal 2000,
as a result of higher income in the U.S. and in Europe. The lower effective tax
rate in Fiscal 2001 was mainly due to lower income generated in Canada,
partially offset by higher Semiconductor income in Europe. The sequential
increase from the effective tax rate of 21 percent in the first quarter of this
fiscal year was principally due to higher second 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 September 29, 2000, order backlog was $312.5, down from
$322.8 at the end of the first quarter of Fiscal 2001 and up from $280.0 at
March 31, 2000. The increase in backlog from the beginning of the year was
attributable to higher semiconductor orders, principally in the areas of
broadband networking. Most of the backlog is scheduled for delivery in the next
twelve months.
LIQUIDITY AND CAPITAL RESOURCES
At September 29, 2000, cash, cash equivalents and short-term investment balances
totaled $230.0, up from $228.4 at March 31, 2000, and up from $165.9 at June 30,
2000.
Cash flow from operations before working capital changes amounted to $116.0
during the first half of Fiscal 2001 compared to $94.5 in Fiscal 2000. Since
March 31, 2000, Mitel's working capital, as reflected in the consolidated
statements of cash flows, increased by $45.8 mostly due to lower payables that
were paid down from the higher year-end balances. 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.
Fixed asset and other additions were $44.0 during the first half of Fiscal 2001
compared with $28.1 in the corresponding period of Fiscal 2000, excluding
additions of $4.6 and $8.7 financed by capital lease for each of the two
respective periods. The additions were primarily related to continuing
improvements to
22
<PAGE>
Mitel's information technology resources as well as for Semiconductor
manufacturing capacity and design tools. Cash flow from investing activities
also included cash acquired from the Vertex acquisition in the amount of $11.1.
On February 12, 1998, Mitel entered into two term loans, respectively the
AXELsSM* 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. Management believes that
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 $19.3 against capital lease
liabilities.
In the quarter ended September 29, 2000, approximately 11 million common shares
valued at $300.7 were issued by the Company to acquire all of the capital stock
of Vertex. Approximately 1.1 million shares or 10 percent of the issued shares
were placed in escrow for a two-year period to indemnify the Company for
representations made by Vertex. In addition, approximately 535 thousand issued
shares are subject to certain restrictions over a two-year period.
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 and Toronto 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 Stock Exchange. All repurchased
shares will be cancelled. As at November 9, 2000, no shares were purchased under
the normal course issuer bid.
As at September 29, 2000, Mitel's capitalization was comprised of 21 percent
debt, 3 percent preferred equity, and 76 percent common equity. This compares to
27 percent debt, 4 percent preferred equity, and 69 percent common equity at the
end of Fiscal 2000.
In addition to cash, cash equivalent and short-term investment balances of
$230.0 as at September 29, 2000, Mitel has an unused revolving credit facility
of approximately $110.6 (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.
23
<PAGE>
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
September 29, 2000, the translation account balance was in a debit position of
$10.2 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.
Recently Issued Accounting Standards
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.
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.
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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 September 29, 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders was held on July 20, 2000 at the Chateau
Laurier Hotel, Ottawa, Canada. At the Annual Meeting, the following matters were
presented to shareholders for approval:
Motion 1: In respect of electing eleven directors to the Board;
Motion 2: In respect of appointing Ernst & Young LLP as the Company's auditors;
The results of matters submitted to a vote of shareholders were as follows:
Motion 1: Shares
For 70,861,950
Withheld 35,788
Motion 2: Shares
For 70,861,950
Withheld 62,668
The following eleven directors were re-elected at the 2000 Annual Meeting: Mr.
Andre Borrel, Mr. Jean-Jacques Carrier, Mr. Anthony L. Craig, Mr. Hubert T.
Lacroix, Mr. Kirk Mandy, Mr. Donald G. McIntyre, Mr. Donald W. Paterson, Dr.
Henry Simon, Dr. Semir D. Sirazi, Dr. Peter Van Cuylenburg and Mr. Jonathan I.
Wener. Mr. Kent H.E. Plumley was appointed on August 22, 2000.
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
September 29, 2000. The Report was dated July 28, 2000 and related to the
acquisition of privately-held Vertex Networks, Incorporated. The report was
amended by a Current Report on Form 8-K/A dated July 28, 2000 and filed on
October 11, 2000, that included the pro forma and other financial information
with respect to the acquisition.
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
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November 9, 2000 JEAN-JACQUES CARRIER
---------------- ---------------------
Date Jean-Jacques Carrier
Senior Vice President of Finance
and Chief Financial Officer
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