10-Q 1 d798387d10q.htm 10-Q 10-Q

 

 

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 30, 2014

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-34699

 

 

MITEL NETWORKS CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

 

Canada   98-0621254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

350 Legget Drive,

Ottawa, Ontario Canada

  K2K 2W7
(Address of principal executive offices)   (Zip Code)

(613) 592-2122

(Registrant’s telephone number, including area code)

 

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated Filer   ¨
Non-accelerated filer   ¨  (do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

As of October 31, 2014, there were 99,883,441 common shares outstanding.

 

 

 


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED BALANCE SHEETS

(in U.S. dollars, millions)

(Unaudited)

 

     September 30,
2014
    December 31,
2013
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 120.1      $ 40.2   

Accounts receivable (net of allowance for doubtful accounts of $12.0 and $5.3, respectively)

     207.8        104.3   

Sales-type lease receivables (net) (note 5)

     20.2        13.9   

Inventories (net) (note 6)

     93.0        36.9   

Deferred tax asset

     27.6        17.3   

Other current assets (note 7)

     61.9        26.5   
  

 

 

   

 

 

 
     530.6        239.1   

Non-current portion of sales-type lease receivables (net) (note 5)

     21.1        12.1   

Deferred tax asset

     127.0        127.5   

Property and equipment (net)

     49.9        28.5   

Identifiable intangible assets (net) (note 8)

     189.9        50.7   

Goodwill

     334.1        147.3   

Other non-current assets

     18.8        15.3   
  

 

 

   

 

 

 
   $ 1,271.4      $ 620.5   
  

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable and accrued liabilities (note 9)

   $ 228.9      $ 82.8   

Current portion of deferred revenue

     69.1        39.4   

Current portion of long-term debt

     6.1        5.3   
  

 

 

   

 

 

 
     304.1        127.5   

Long-term debt (note 11)

     311.0        264.2   

Lease recourse liability (note 5)

     2.4        3.5   

Long-term portion of deferred revenue

     37.2        16.6   

Deferred tax liability

     12.5        14.4   

Pension liability (note 12)

     112.4        57.3   

Other non-current liabilities

     25.3        18.6   
  

 

 

   

 

 

 
     804.9        502.1   
  

 

 

   

 

 

 

Commitments, guarantees and contingencies (note 13)

    

Shareholders’ equity:

    

Common shares, without par value—issued and outstanding: 99.9 and 54.4, respectively

     1,215.2        814.9   

Preferred shares—issued and outstanding: nil

              

Warrants (note 15)

     39.1        39.1   

Additional paid-in capital

     36.8        35.3   

Accumulated deficit

     (709.4     (691.3

Accumulated other comprehensive loss

     (115.2     (79.6
  

 

 

   

 

 

 
     466.5        118.4   
  

 

 

   

 

 

 
   $ 1,271.4      $ 620.5   
  

 

 

   

 

 

 

(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)

 

1


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED STATEMENTS OF OPERATIONS

(in U.S. dollars, millions, except per share amounts)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

Revenues:

        

Product

   $ 182.3      $ 85.0      $ 549.7      $ 266.4   

Services

     68.4        35.9        191.2        118.6   

Cloud recurring

     21.7        14.1        61.7        39.7   
  

 

 

   

 

 

   

 

 

   

 

 

 
     272.4        135.0        802.6        424.7   

Cost of revenues:

        

Product

     78.4        26.8        231.6        89.1   

Services

     39.8        22.1        115.0        74.2   

Cloud recurring

     11.3        7.4        31.9        21.3   
  

 

 

   

 

 

   

 

 

   

 

 

 
     129.5        56.3        378.5        184.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

     142.9        78.7        424.1        240.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses:

        

Selling, general and administrative

     87.4        49.2        256.1        148.8   

Research and development

     30.3        14.2        88.5        41.5   

Special charges and restructuring costs (note 17)

     31.6        6.4        55.7        10.5   

Amortization of acquisition-related intangible assets

     14.0        6.5        39.3        17.7   
  

 

 

   

 

 

   

 

 

   

 

 

 
     163.3        76.3        439.6        218.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss) from continuing operations

     (20.4     2.4        (15.5     21.6   

Interest expense

     (5.2     (6.5     (16.6     (18.2

Debt retirement costs (note 11)

     (0.7            (16.2     (2.6

Other income (expense)

     2.9               4.7        (0.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations, before income taxes

     (23.4     (4.1     (43.6     0.6   

Current income tax recovery (expense)

     3.1        (2.7     2.8        1.2   

Deferred income tax recovery (expense)

     15.0        5.4        22.7        0.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (5.3     (1.4     (18.1     2.6   

Net loss from discontinued operations

                          (3.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (5.3   $ (1.4   $ (18.1   $ (0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per common share—Basic

        

Net income (loss) per share from continuing operations

   $ (0.05   $ (0.03   $ (0.19   $ 0.05   

Net loss per share from discontinued operations

   $      $      $      $ (0.06

Net loss per share

   $ (0.05   $ (0.03   $ (0.19   $ (0.01

Net income (loss) per common share—Diluted

        

Net income (loss) per share from continuing operations

   $ (0.05   $ (0.03   $ (0.19   $ 0.05   

Net loss per share from discontinued operations

   $      $      $      $ (0.06

Net loss per share

   $ (0.05   $ (0.03   $ (0.19   $ (0.01

Weighted-average number of common shares outstanding (note 16)

        

Basic

     99.6        53.8        94.1        53.7   

Diluted

     99.6        53.8        94.1        56.4   

(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)

 

2


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in U.S. dollars, millions)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

Net loss

   $ (5.3   $ (1.4   $ (18.1   $ (0.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Foreign currency translation adjustments

     (9.4     (3.3     (7.3     (3.1

Pension liability adjustments

     (8.6     33.1        (28.3     11.8   
  

 

 

   

 

 

   

 

 

   

 

 

 
     (18.0     29.8        (35.6     8.7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (23.3     28.4        (53.7     8.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)

 

3


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in U.S. dollars, millions)

(Unaudited)

 

    

 

Common Shares

     Warrants      Additional
Paid-in
Capital
    Accumulated
Deficit
    Accumulated
Other
Comprehensive
Income (Loss)
    Total
Shareholders’
Equity
 
     Number     Amount              

Balance at December 31, 2012

     53.7      $ 810.3       $ 39.1       $ 32.4      $ (688.1   $ (91.0   $ 102.7   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

                                   (1.7     (16.6     (18.3

Stock-based compensation

                            1.1                      1.1   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

     53.7      $ 810.3       $ 39.1       $ 33.5      $ (689.8   $ (107.6   $ 85.5   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

                                   2.7        (4.5     (1.8

Exercise of stock options

     (1)      0.1                                      0.1   

Stock-based compensation

                            1.0                      1.0   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

     53.7      $ 810.4       $ 39.1       $ 34.5      $ (687.1   $ (112.1   $ 84.8   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

                                   (1.4     29.8        28.4   

Exercise of stock options

     0.2        0.5                 (0.1                   0.4   

Stock-based compensation

                            1.2                      1.2   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

     53.9      $ 810.9       $ 39.1       $ 35.6      $ (688.5   $ (82.3   $ 114.8   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

                                   (2.8     2.7        (0.1

Exercise of stock options

     0.5        4.0                 (1.6                   2.4   

Stock-based compensation

                            1.3                      1.3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

     54.4      $ 814.9       $ 39.1       $ 35.3      $ (691.3   $ (79.6   $ 118.4   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

                                   (13.6     (5.6     (19.2

Exercise of stock options

     0.3        2.3                 (0.7                   1.6   

Stock-based compensation

                            1.3                      1.3   

Issuance of shares (note 3)

     44.2        391.3                                      391.3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

     98.9      $ 1,208.5       $ 39.1       $ 35.9      $ (704.9   $ (85.2   $ 493.4   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

                                   0.8        (12.0     (11.2

Exercise of stock options

     0.5        3.9                 (1.5                   2.4   

Stock-based compensation

                            1.7                      1.7   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

     99.4      $ 1,212.4       $ 39.1       $ 36.1      $ (704.1   $ (97.2   $ 486.3   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss

                                   (5.3     (18.0     (23.3

Exercise of stock options

     0.5        2.8                 (0.8                   2.0   

Stock-based compensation

                            1.5                      1.5   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

     99.9      $ 1,215.2       $ 39.1       $ 36.8      $ (709.4   $ (115.2   $ 466.5   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

  

 

(1) Issuance of shares was less than 0.1 for the period.

(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)

 

4


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in U.S. dollars, millions)

(Unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

CASH PROVIDED BY (USED IN)

        

Operating activities:

        

Net loss

   $ (5.3   $ (1.4   $ (18.1   $ (0.4

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Amortization and depreciation

     19.7        9.7        55.5        27.6   

Stock-based compensation

     1.5        1.2        4.5        3.3   

Deferred income taxes

     (15.0     (5.4     (22.7     (0.8

Goodwill impairment (note 4)

                          1.9   

Non-cash charge relating to acquisitions

                          0.4   

Debt retirement costs (note 11)

     0.7               15.7        2.4   

Non-cash movements in provisions

     (0.5     (0.9     (2.4       

Change in non-cash operating assets and liabilities (note 19)

     19.3        6.8        40.5        10.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     20.4        10.0        73.0        45.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Additions to property, equipment and intangible assets

     (2.4     (0.9     (9.9     (4.9

Acquisitions, net of cash acquired (note 3)

     (2.0            (8.2     (23.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (4.4     (0.9     (18.1     (28.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Proceeds from issuance of long-term debt (note 11)

                   353.2        276.4   

Repayment of long-term debt (note 11)

     (25.0     (0.5     (309.4     (305.0

Prepayment fees relating to prior credit facilities (note 11)

                   (4.2       

Payment of deferred financing costs (note 11)

                   (11.0     (8.5

Repayment of capital lease liabilities and other long-term debt

     (1.6     (1.1     (5.7     (3.3

Proceeds from issuance of common shares from option exercises

     2.0        0.4        6.0        0.5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (24.6     (1.2     28.9        (39.9
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (5.5     1.7        (3.9     (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (14.1     9.6        79.9        (23.0

Cash and cash equivalents, beginning of period

     134.2        37.6        40.2        70.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 120.1      $ 47.2      $ 120.1      $ 47.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Note 19 contains supplementary cash flow information)

(The accompanying notes are an integral part of these unaudited interim consolidated financial statements)

 

5


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2014 and September 30, 2013

(in U.S. dollars, millions, except per share amounts)

1. BASIS OF PRESENTATION

These unaudited interim consolidated financial statements have been prepared by Mitel Networks Corporation (“Mitel” or the “Company”) in United States (“U.S.”) dollars, unless otherwise stated, and in accordance with accounting principles generally accepted in the U.S. (“GAAP”) for interim financial statements. Accordingly, these unaudited interim consolidated financial statements do not include all information and footnotes normally included in financial statements prepared in accordance with GAAP and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for complete financial statements. In the opinion of management of the Company, these unaudited interim consolidated financial statements reflect all adjustments necessary to present fairly the financial position at September 30, 2014 and the results of operations and cash flows of the Company for each of the three and nine months ended September 30, 2014 and September 30, 2013 in accordance with GAAP applied on a consistent basis.

These unaudited interim consolidated financial statements and the accompanying notes should be read in conjunction with the audited annual consolidated financial statements and notes thereto for the eight months ended December 31, 2013 and each of the years in the three years ended April 30, 2013, 2012 and 2011 contained in the Company’s Transition Report on Form 10-K filed with the SEC on March 31, 2014 (the “audited annual consolidated financial statements”). The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year or future periods.

2. SIGNIFICANT ACCOUNTING POLICIES

The Company’s significant accounting policies at December 31, 2013 are described in note 2 to the audited annual consolidated financial statements. In addition, in connection with the acquisition of Aastra Technologies Ltd. (“Aastra”), the Company changed its operating segments, as described in note 18.

Reclassification

In conjunction with the acquisition of Aastra, in the first quarter of 2014, we reclassified service inventory from other current assets to inventory on the consolidated balance sheets. To conform to the current years’ presentation, $2.9 of service inventory, consisting of gross service inventory of $5.1 and a provision against service inventory of $2.2, was reclassified from other current assets to inventory at December 31, 2013.

In addition, amortization of acquisition-related intangible assets has been reclassified out of selling, general and administrative expenses and into a separate line item on the consolidated statements of operations. Prior period amounts have been reclassified to conform to the current period’s presentation.

Recently issued accounting pronouncements

Classification of unrecognized tax benefits

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11 to include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss carryforward or a tax credit carryforward exists. The ASU provides amendments to the Income Taxes subtopic of the FASB Accounting Standards Codification (“ASC”), such that generally, unrecognized tax benefits should be presented as a reduction of deferred tax assets created by net operating losses or tax credit carryforwards in the same jurisdiction. The Company adopted this ASU prospectively in the first quarter of 2014. The adoption did not have a material impact on the consolidated financial statements.

Discontinued operations

In April 2014, the FASB issued ASU 2014-08 to change the criteria for reporting discontinued operations such that disposals of small groups of assets will no longer qualify for discontinued operations presentation. The ASU provides amendments to the Presentation of Financial Statements and Property, Plant and Equipment subtopics of the FASB ASC. As a result of the ASU, only those disposals of components that represent a strategic shift that has or will have a major effect on the entity’s operations will be reported as discontinued operations. The Company will adopt this ASU prospectively, no later than the first quarter of 2015.

 

6


Revenue recognition

In May 2014, the FASB issued ASU 2014-09 to provide a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The ASU adds a Revenue from Contracts with Customers subtopic to the FASB ASC and supersedes most current revenue recognition guidance, including industry-specific guidance. The amendment becomes effective for the Company in the first quarter of 2017 and early adoption is not permitted. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.

Going concern assessment and disclosure requirements

In May 2014, the FASB issued ASU 2014-15 to provide guidance in relation to management’s assessment of an entity’s ability to continue as a going concern and to provide disclosure requirements in certain circumstances. The amendment becomes effective for the Company in the first quarter of 2016. The Company does not expect the adoption to have a material impact on its consolidated financial statements.

3. ACQUISITIONS

a) Aastra – January 2014

On November 10, 2013, Mitel and Aastra entered into a definitive arrangement agreement under which Mitel agreed to acquire all of the outstanding Aastra common shares in exchange for cash consideration of $80.0 as well as the issuance of approximately 44.2 million Mitel common shares. Aastra was a global provider of unified communications and collaboration software, solutions and services with annual revenues of approximately $600.0 Canadian Dollars (“CAD”) for the year ended December 31, 2013, of which approximately 75% were generated in Europe. The transaction was completed on January 31, 2014. In conjunction with the acquisition the Company completed a refinancing of its long-term senior debt, as described in note 11.

Under the terms of the agreement, on January 31, 2014, Mitel increased the number of directors on its board of directors from eight to nine, and two members of Mitel’s then-existing board of directors resigned. Mitel’s board of directors appointed three new board members, as selected by the former board of directors of Aastra, to fill the vacancies.

The total value of consideration given by Mitel was $471.3, consisting of $80.0 of cash and 44.2 million Mitel common shares valued at $391.3 on January 31, 2014. Mitel management believes the transaction provides the Company with the financial scale and operating leverage to capitalize on the global growth opportunity as the market begins a long-term migration to the cloud. The transaction will allow the combined company to leverage the research and development workforce acquired as well as realize synergies, primarily through general and administrative and procurement savings. These factors contributed to the recognition of goodwill for the acquisition.

The Company is required to allocate the purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values. The excess of the purchase price over those fair values is recorded as goodwill. The accounting for the acquisition, including estimating the fair values of assets and liabilities acquired, is still being completed. As a result, the final purchase price allocation may differ significantly from the estimates. The purchase price and estimated allocation of the purchase price is as follows:

 

     January 31, 2014  

Net assets:

  

Cash and cash equivalents

   $ 79.4   

Accounts receivable(1)

     111.6   

Sales-type lease receivables, current

     10.1   

Inventories(2)

     62.6   

Deferred tax asset, current

     8.1   

Other current assets

     31.2   

Sales-type lease receivables, non-current

     13.3   

Deferred tax asset, non-current

     4.6   

Property and equipment

     23.9   

Intangible assets – customer relationships(3)(7)

     13.0   

 

7


     January 31, 2014  

Intangible assets – developed technology(4)(7)

     152.6   

Intangible assets – trade name(5)(7)

     9.0   

Goodwill(6)(7)

     181.3   

Other non-current assets

     0.5   

Accounts payable and accrued liabilities

     (118.3

Deferred revenue, current

     (25.8

Current portion of long-term debt

     (1.8

Deferred revenue, non-current

     (15.2

Pension liability(8)

     (31.7

Deferred tax liability

     (22.7

Other non-current liabilities

     (14.4
  

 

 

 

Net assets acquired

   $ 471.3   
  

 

 

 

Consideration given:

  

Amount paid, cash

   $ 80.0   

Value of Mitel common shares issued

     391.3   
  

 

 

 

Total consideration given

   $ 471.3   
  

 

 

 

 

(1) Fair value of accounts receivable consists of gross contractual amounts receivable of $118.8, less best estimate of amounts not expected to be collected of $7.2.
(2) Fair value of inventory consists of inventory with a historical cost of $89.7 less a historical provision of $27.1.
(3) Intangible assets – customer relationships are expected to be amortized over the estimated useful life of the asset of 7 years.
(4) Intangible assets – developed technology is expected to be amortized over the estimated useful life of the asset of 6 years.
(5) Intangible assets – trade name is expected to be amortized over the estimated useful life of the asset of 4 years.
(6) Goodwill will be allocated to the new reporting segments on a relative fair value basis once the purchase price allocation is finalized.
(7) Neither the goodwill nor the intangible assets are expected to be deductible for tax purposes.
(8) The amounts recorded for pension liability consist primarily of unfunded defined benefit pension plans in France and Germany as well as a pro-rata share of liability for a multiple employer defined benefit plan in Switzerland. At January 31, 2014, Aastra’s share of the plan’s assets and projected benefit obligation was $98.4 and $104.1, respectively.

Aastra’s results of operations are included in the consolidated statements of operations of the combined entity from the date of acquisition. The amount of revenue from the acquisition included in the Company’s results of operations for the three and nine months ended September 30, 2014 was $134.9 and $369.0, respectively, which includes a reduction of $1.6 and $7.4, respectively, as a result of the valuation of the deferred revenue liabilities acquired being below Aastra’s historical book value and the corresponding decrease in revenues in subsequent periods. The amount of net loss from the acquisition included in the Company’s results of operations for the three and nine months ended September 30, 2014 was $8.1 and $8.6, respectively, which includes the adjustment to revenues described above, as well as amortization of acquired intangible assets of $7.3 and $19.6, respectively.

The following unaudited pro-forma financial information presents the Company’s consolidated financial results as if the acquisition had occurred at the beginning of the year:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

Operations

        

Revenues

   $ 272.4      $ 270.1      $ 838.5      $ 836.6   

Net loss

     (5.3     (1.6     (35.3     (12.0

These pro-forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations that actually would have resulted had the acquisition been effected at the beginning of the respective periods and are not necessarily representative of future results. The pro-forma results include the following adjustments:

 

    Amortization of intangible assets that arose from the acquisition of $29.5 per year

 

8


    A reduction to revenue as a result of the valuation of the deferred revenue acquired being below Aastra’s historical book value and the corresponding decrease in revenues in subsequent periods. The reduction for the three and nine months ended September 30, 2014 was nil and $1.1 (relating to the pro-forma period from January 1, 2014 to January 31, 2014). When added to the reduction in revenue as a result of the valuation of deferred revenue already recorded in the actual results, the total reduction to revenue for the three and nine months ended September 30, 2014 was $1.6 and $8.5, respectively. The reduction to revenue as a result of the valuation of deferred revenue for the three and nine months ended September 30, 2013 was $1.6 and $8.5, respectively.

 

    Tax provision based on an estimated effective tax rate of approximately 20%

b) Oaisys – March 2014

On March 4, 2014, Mitel completed the acquisition of Oaisys, a leading developer of integrated call recording and quality management solutions. The acquisition of Oaisys further strengthens Mitel’s position in the growing contact center market. Mitel paid $5.9 for all of the outstanding equity of Oaisys at the time of the acquisition, plus an additional $2.0 of contingent consideration paid in July 2014 for Oaisys meeting certain revenue targets for the year ended April 30, 2014. The purchase price and allocation of the purchase price is as follows:

 

     March 4, 2014  

Net assets:

  

Cash and cash equivalents

   $ 0.3   

Accounts receivable

     1.8   

Inventories

     0.1   

Deferred tax asset, current

     0.5   

Other current assets

     0.2   

Deferred tax asset, non-current

     0.2   

Property and equipment

     0.1   

Intangible assets – developed technology(1)(2)

     4.0   

Goodwill(2)

     5.5   

Other non-current assets

     0.6   

Accounts payable and accrued liabilities

     (1.2

Deferred revenue, current

     (1.9

Deferred revenue, non-current

     (0.8

Deferred tax liability, non-current

     (1.5
  

 

 

 

Net assets acquired

   $ 7.9   
  

 

 

 

Consideration given:

  

Cash paid, March 2014

   $ 5.9   

Cash paid, July 2014

     2.0   
  

 

 

 

Total consideration given

   $ 7.9   
  

 

 

 

 

(1) Intangible assets – developed technology is expected to be amortized over the estimated useful life of the asset of 4 years.
(2) Neither the goodwill nor the intangible assets are expected to be deductible for tax purposes.

Oaisys’ results of operations are included in the consolidated statements of operations of the combined entity from the date of acquisition, March 4, 2014. Oaisys’ annual revenues were approximately $8.1 for the year ended December 31, 2013.

c) prairieFyre – June 2013

On June 17, 2013, the Company completed the acquisition of prairieFyre Software Inc. (“prairieFyre”), a global provider of contact center, business analytics, and workforce optimization software and services. The acquisition provided Mitel with a cornerstone development platform to address increasing demand for cloud-based contact center solutions. The net cash cost to Mitel for the acquisition was $20.0 for a 100% equity ownership interest in prairieFyre. The net cash cost consisted of cash paid of $27.3 less cash and cash equivalents acquired of $4.2 and acquired accounts receivable due from Mitel of $3.1. Additional details, including the allocation of the purchase price to the net assets acquired is included in note 3 to the audited annual consolidated financial statements.

 

9


4. DISCONTINUED OPERATIONS

On March 1, 2013, the Company completed the sale of its DataNet and CommSource business (“DataNet”), which distributed a wide variety of third-party telephony and data products and related services. As a result, the operating results have been reported as discontinued operations on the consolidated statements of operations. Summarized financial information for DataNet, up to the date of sale, are shown below:

 

     Nine months ended
September 30, 2013
 

Operations

  

Revenues

   $ 7.7   
  

 

 

 

Loss from discontinued operations, before taxes

     (3.6

Income tax recovery

     0.6   
  

 

 

 

Net loss from discontinued operations, net of tax

   $ (3.0
  

 

 

 

For the nine months ended September 30, 2013, the loss from discontinued operations, before taxes, consists of a loss from operations up to the time of sale of $0.1, a non-cash impairment of goodwill of $1.9, a non-cash impairment of inventory of $0.7 and a net loss on the sale of $0.9 (consisting of proceeds from disposition of $2.1, less the net book value of accounts receivable and inventory sold of $1.6 and costs and expenses related to the sale of $1.4).

5. NET INVESTMENT IN SALES-TYPE LEASES

Net investment in sales-type leases represents the value of sales-type leases held under the TotalSolution® program in the U.S., as well as, primarily from the acquisition of Aastra (as described in note 3), sales-type leases in Europe. The Company currently sells the rental payments due to the Company from some of the sales-type leases in the U.S. The Company maintains reserves against its estimate of potential recourse for the balance of sales-type leases (recorded net, against the receivable) and for the balance of sold rental payments remaining unbilled (recorded separately as a lease recourse liability). The following table provides detail on the sales-type leases:

 

     September 30, 2014      December 31, 2013  
     Gross      Allowance     Net      Gross      Allowance     Net  

Lease balances included in consolidated accounts receivable

   $ 7.7       $ (1.1   $ 6.6       $ 7.0       $ (0.5   $ 6.5   

Current portion of investment in sales-type leases

     20.8         (0.6     20.2         14.4         (0.5     13.9   

Non-current portion of investment in sales-type leases

     21.6         (0.5     21.1         12.6         (0.5     12.1   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total unsold sales-type leases (recorded as assets, net, on the consolidated balance sheets)

     50.1         (2.2     47.9         34.0         (1.5     32.5   

Sold rental payments remaining unbilled

     69.8         (2.4 )(1)      67.4         91.3         (3.5 )(1)      87.8   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total of sales-type leases unsold and sold

   $ 119.9       $ (4.6   $ 115.3       $ 125.3       $ (5.0   $ 120.3   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Allowance for sold rental payments is recorded as a lease recourse liability on the consolidated balance sheets

A sale of rental payments represents the total present value of the payment stream on the sale of the rental payments to third parties. For the three months ended September 30, 2014, the Company sold $4.0 of rental payments and recorded gains on sale of those rental payments of $0.7 (three months ended September 30, 2013—sold $6.1 and recorded gains of $1.0). For the nine months ended September 30, 2014, the Company sold $13.2 of rental payments and recorded gains on sale of those rental payments of $2.3 (nine months ended September 30, 2013—sold $21.7 and recorded gains of $3.4). Sold rental payments remaining unbilled at the end of the period represents the total balance of leases that are not included in the Company’s consolidated balance sheets. The Company is compensated for administration and servicing of rental payments sold.

 

10


Financing receivables

The Company considers its lease balances included in consolidated accounts receivable and its investment in sales-type leases to be financing receivables. Additional disclosures on the credit quality of the Company’s sold and unsold sales-type leases and lease balances included in accounts receivable are as follows:

Aging Analysis as of September 30, 2014

 

     Not past due     1-90 days
past due
    Greater than
90 days past
due
    Total past
due
    Total sales-type
leases
 

Lease balances included in accounts receivable

   $ 5.0      $ 1.5      $ 1.2      $ 2.7      $ 7.7   

Investment in sold and unsold sales-type lease receivables

     101.5        9.7        1.0        10.7        112.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross sales-type leases

     106.5        11.2        2.2        13.4        119.9   

Allowance

     (2.2     (1.1     (1.3     (2.4     (4.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales-type leases

   $ 104.3      $ 10.1      $ 0.9      $ 11.0      $ 115.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Aging Analysis as of December 31, 2013

 

     Not past due     1-90 days
past due
    Greater than
90 days past
due
    Total past
due
    Total sales-type
leases
 

Lease balances included in accounts receivable

   $ 4.0      $ 2.3      $ 0.7      $ 3.0      $ 7.0   

Investment in sold and unsold sales-type lease receivables

     98.6        18.7        1.0        19.7        118.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross sales-type leases

     102.6        21.0        1.7        22.7        125.3   

Allowance

     (2.3     (1.6     (1.1     (2.7     (5.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales-type leases

   $ 100.3      $ 19.4      $ 0.6      $ 20.0      $ 120.3   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for credit losses

The Company’s allowance for credit losses is based on management’s assessment of the collectability of customer accounts. A considerable amount of judgment is required in order to make this assessment including a detailed analysis of the aging of the lease receivables, the current creditworthiness of our customers and an analysis of historical bad debts and other adjustments. If there is a deterioration of a major customer’s creditworthiness or actual defaults are higher than historical experience, the estimate of the recoverability of amounts due could be adversely affected. The Company reviews in detail the allowance for doubtful accounts on a quarterly basis and adjusts the allowance estimate to reflect actual portfolio performance and any changes in future portfolio performance expectations.

The following table shows the activity of the allowance for credit losses on sales-type leases:

 

Allowance for credit losses on sales-type leases, April 30, 2012

   $ (9.4

Write-offs

     3.4   

Recoveries

     (0.1

Provision

     (0.6
  

 

 

 

Allowance for credit losses on sales-type leases, April 30, 2013

   $ (6.7
  

 

 

 

Write-offs

     2.8   

Recoveries

     (0.1

Provision

     (1.0
  

 

 

 

Allowance for credit losses on sales-type leases, December 31, 2013

   $ (5.0
  

 

 

 

Additions due to the acquisition of Aastra

     (1.1

 

11


Write-offs

     0.6   

Provision

     (0.1
  

 

 

 

Allowance for credit losses on sales-type leases, March 31, 2014

   $ (5.6
  

 

 

 

Write-offs

     1.0   

Provision

     (0.1
  

 

 

 

Allowance for credit losses on sales-type leases, June 30, 2014

   $ (4.7
  

 

 

 

Write-offs

     0.1   

Provision

       
  

 

 

 

Allowance for credit losses on sales-type leases, September 30, 2014

   $ (4.6
  

 

 

 

The amount of gross sales-type leases individually and collectively evaluated for impairment is as follows:

 

     September 30, 2014     December 31, 2013  

Individually evaluated for impairment

    

Sales-type leases individually evaluated for impairment, gross

   $ 4.7      $ 4.9   

Allowance against sales-type leases individually evaluated for impairment

     (2.1     (2.2
  

 

 

   

 

 

 

Sales-type leases individually evaluated for impairment, net

   $ 2.6      $ 2.7   
  

 

 

   

 

 

 

 

     September 30, 2014     December 31, 2013  

Collectively evaluated for impairment

    

Sales-type leases collectively evaluated for impairment, gross

   $ 115.2      $ 120.4   

Allowance against sales-type leases collectively evaluated for impairment

     (2.5     (2.8
  

 

 

   

 

 

 

Sales-type leases collectively evaluated for impairment, net

   $ 112.7      $ 117.6   
  

 

 

   

 

 

 

6. INVENTORIES

 

     September 30, 2014     December 31, 2013  

Raw materials and work in process

   $ 4.3      $ 2.5   

Finished goods

     87.6 (1)      35.0   

Service inventory

     6.9        5.1   

Less: provision for obsolete inventory

     (5.8 )(1)      (5.7
  

 

 

   

 

 

 
   $ 93.0      $ 36.9   
  

 

 

   

 

 

 

 

(1) At September 30, 2014, finished goods are recorded net of approximately $24.6 of historical inventory provision remaining from the acquisition of Aastra, as discussed in note 3. This amount will decrease as the related inventory acquired from Aastra is sold or written off.

7. OTHER CURRENT ASSETS

 

     September 30, 2014      December 31, 2013  

Prepaid expenses and deferred charges

   $ 25.4       $ 14.4   

Unbilled receivables

     4.2         3.0   

Due from related parties (note 10)

     0.4         1.2   

Income tax receivable

     15.4         1.8   

Other receivables

     16.0         5.7   

Restricted cash

     0.5         0.4   
  

 

 

    

 

 

 
   $ 61.9       $ 26.5   
  

 

 

    

 

 

 

 

12


8. IDENTIFIABLE INTANGIBLE ASSETS

 

     September 30, 2014      December 31, 2013  
     Cost      Accumulated
amortization
    Net      Cost      Accumulated
amortization
    Net  

Patents, trademarks and other

   $ 30.2       $ (18.4   $ 11.8       $ 20.0       $ (15.2   $ 4.8   

Customer relationships

     113.2         (90.5     22.7         100.2         (79.8     20.4   

Developed technology

     246.4         (91.0     155.4         89.8         (64.3     25.5   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 389.8       $ (199.9   $ 189.9       $ 210.0       $ (159.3   $ 50.7   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The increase in cost for intangible assets primarily relates to the acquisitions, as described in note 3.

9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

     September 30, 2014      December 31, 2013  

Trade payables

   $ 60.6       $ 24.1   

Employee-related payables

     51.1         12.3   

Accrued liabilities

     59.7         33.2   

Restructuring, warranty and other provisions

     37.5         5.7   

Due to related parties (note 10)

     1.1         0.6   

Other payables

     18.9         6.9   
  

 

 

    

 

 

 
   $ 228.9       $ 82.8   
  

 

 

    

 

 

 

10. RELATED PARTY TRANSACTIONS

The Matthews Group

Dr. Terence Matthews (“Dr. Matthews”), a director of the Company, and certain entities controlled by Dr. Matthews (collectively, the “Matthews Group”) is a shareholder of the Company and is party to a Shareholders’ Agreement, as disclosed in note 16 to the audited annual financial statements. Significant transactions with the Matthews Group include the following:

Leased properties

The Company leases its Ottawa-based headquarter facilities from the Matthews Group. During the three and nine months ended September 30, 2014, Mitel recorded lease expense for base rent and operating costs of $1.3 and $3.9, respectively (three and nine months ended September 30, 2013—$1.3 and $3.6, respectively).

Investment

The Company has paid $1.0 for an option to invest in a company in India, over which company the Matthews Group has significant influence. For the three months ended September 30, 2014, sales to and purchases from this venture, arising in the normal course of the Company’s business, were nil and nil, respectively, (three months ended September 30, 2013— nil and nil, respectively). For the nine months ended September 30, 2014, sales to and purchases from this venture, arising in the normal course of the Company’s business, were $0.2 and $0.2, respectively, (nine months ended September 30, 2013—$0.2 and $0.3, respectively).

Other

Other sales to and purchases from companies related to the Matthews Group arising in the normal course of the Company’s business were $0.1 and $0.8, respectively, for the three months ended September 30, 2014 (three months ended

 

13


September 30, 2013—$0.3 and $0.5, respectively) and $0.5 and $3.6, respectively, for the nine months ended September 30, 2014 (nine months ended September 30, 2013—$0.8 and $1.5, respectively). Included in purchases for the three and nine months ended September 30, 2014 is $0.2 and $2.0, respectively related to leasehold improvements and similar costs at the Ottawa-based headquarter facilities completed on the Company’s behalf by the Matthews Group. In addition, in connection with the integration of Aastra, in June 2014, the Company terminated a distribution agreement with a company related to the Matthews Group. Costs related to the termination agreement of $0.8 were recorded in special charges and restructuring costs in the second quarter of 2014.

The amounts receivable and payable as a result of all of the above transactions are included in note 7 and note 9, respectively.

11. LONG-TERM DEBT

August 2014 voluntary debt repayment

In August 2014, Mitel made a voluntary prepayment of $25.0 on its term loan. As a result, the Company recorded debt retirement costs of $0.7 in the third quarter of 2014 for the write-off of the pro-rata portion of unamortized debt issue costs and original issue discount.

May 2014 voluntary debt repayment

In May 2014, Mitel made a voluntary prepayment of $25.0 on its term loan. As a result, the Company recorded debt retirement costs of $0.8 in the second quarter of 2014 for the write-off of the pro-rata portion of unamortized debt issue costs and original issue discount.

January 2014 refinancing

On January 31, 2014, in conjunction with the acquisition of Aastra, Mitel refinanced its credit facilities. The new credit facilities consist of a $355.0 term loan and a $50.0 revolving facility (the “January 2014 Credit Facilities”). Proceeds of $353.2 (net of original discount of $1.8), along with cash on hand, were used to repay the remaining $258.5 outstanding on the prior credit facilities, the $80.0 of cash consideration paid for the acquisition of Aastra, as well as fees and expenses in connection with the refinancing and the acquisition of Aastra.

Total fees and expenses related to the January 2014 Credit Facilities of $11.0 have been deferred and are being amortized over the term of the credit facilities using the effective interest method when related to the term loan and the straight-line method when related to the revolving facility. Original issue discount of $1.8 has been recorded net against the term loan and is being amortized over the term of the credit facilities using the effective interest method. In addition, the Company expensed $10.0 of unamortized debt issue costs and unamortized original issue discount, $4.2 of prepayment fees relating to the prior credit facilities and $0.5 of other costs relating to the refinancing.

The undrawn $50.0 revolving credit facility bears interest at LIBOR plus 4.25%, or, at the option of the Company, a base rate plus an applicable margin, and matures in January 2019. The Company may borrow Canadian dollars under the revolving credit facility. Such borrowings bear interest at the Canadian prime rate plus an applicable margin. The $355.0 term loan bears interest at LIBOR (subject to a 1.00% floor) plus 4.25%, or, at the option of the Company, a base rate plus an applicable margin, and matures in January 2020. The term loan requires quarterly principal repayments of 0.25% of the original outstanding principal.

The Company is also required to make annual principal repayments on the term loan based on a percentage of excess cash flow (as defined in the January 2014 Credit Facilities). The annual excess cash flow repayments are required to be paid within 100 days of the end of the fiscal year. The first annual excess cash flow payment is required be paid within 100 days of December 31, 2014.

Voluntary prepayments are applied against mandatory principal repayments. As a result of the May 2014 and August 2014 voluntary prepayments, the Company estimates that its annual principal repayments due in the next twelve months, including the 2014 annual excess cash flow payment, are expected to be nil. The annual excess cash flow payment may vary significantly from the estimate based on the Company’s operating results and changes in working capital.

The term loan can be repaid without premium or penalty. The January 2014 Credit Facilities have customary default clauses, wherein repayment of the credit facilities may be accelerated in the event of an uncured default. The proceeds from the issuance of debt, and proceeds from the sale of Company assets, may also be required to be used, in whole or in part, to make mandatory prepayments under the credit facilities.

 

14


The January 2014 Credit Facilities contained affirmative and negative covenants, including: (a) periodic financial reporting requirements, (b) a maximum ratio of Consolidated Total Debt (net of up to $50.0 of unrestricted cash) to the trailing twelve months Consolidated EBITDA (“Leverage Ratio”), as defined in the credit facilities, (c) limitations on the incurrence of subsidiary indebtedness and also the borrowers themselves, (d) limitations on liens, (e) limitations on investments and (f) limitations on the payment of dividends. The maximum Leverage Ratio applies to the Company for the period ending June 30, 2014 and for all fiscal quarters thereafter until maturity in January 2020, and is as follows:

 

Fiscal Quarters Ending

   Maximum Consolidated
Leverage Ratio
 

June 30, 2014 through March 31, 2015

     3.00:1.00   

June 30, 2015 through March 31, 2016

     2.50:1.00   

June 30, 2016 through March 31, 2017

     2.25:1.00   

June 30, 2017 and thereafter

     2.00:1.00   

The Company’s Leverage Ratio at September 30, 2014 was 1.6. At September 30, 2014, the Company was in compliance with all applicable covenants included in the January 2014 Credit Facilities.

12. PENSION PLANS

The Company maintains defined contribution pension plans that cover a significant number of employees. In addition, the Company maintains defined benefit pension plans in the U.K., France, Germany and Switzerland. At September 30, 2014, the pension liability was $112.4 (December 31, 2013—$57.3). The increase in the liability was primarily due to the additions of the Germany, France and Switzerland plans ($16.0, $7.4 and $4.9 at September 30, 2014, respectively) as a result of the Aastra acquisition, as described in note 3, as well as an increase in the U.K. pension plan from $57.3 at December 31, 2013 to $82.4 at September 30, 2014 due to an updated pension valuation.

At September 30, 2014, the U.K. pension valuation was updated for actual investment performance and certain changes in assumptions. The increase in the U.K. pension liability was primarily due to an increase in the accrued benefits obligation resulting from a decrease in the discount rate from 4.7% at December 31, 2013 to 4.1% at September 30, 2014, as well as a lower return on assets when compared to the expected return. The discount rate assumption was determined on a consistent basis and reflects prevailing rates available on high-quality, fixed income debt instruments.

The Company’s net periodic benefit cost was as follows:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

Defined contribution plans

        

Contribution expense

   $ 3.5      $ 0.7      $ 9.5      $ 2.8   

Defined benefit plans

        

Current service cost

     0.5               1.5          

Interest cost

     3.5        2.5        10.1        7.1   

Expected return on plan assets

     (3.4     (2.0     (10.0     (5.6

Recognized actuarial loss(1)

     0.2        0.3        0.6        1.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total periodic benefit cost, net

   $ 4.3      $ 1.5      $ 11.7      $ 5.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Recognized actuarial loss represents the amortization of unrecognized actuarial loss out of the accumulated other comprehensive loss into selling, general and administrative expense.

13. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Intellectual Property Indemnification Obligations

The Company enters into agreements on a regular basis with customers and suppliers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of these intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers. Historically, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in the unaudited interim consolidated financial statements with respect to these guarantees.

 

15


Contingencies

The Company is party to a small number of legal proceedings, claims or potential claims arising in the normal course of business. In the opinion of the Company’s management and legal counsel, any monetary liability or financial impact of such claims or potential claims to which the Company might be subject after final adjudication would not be material to the consolidated financial position of the Company, its results of operations or its cash flows. In circumstances where the outcome of the lawsuit is expected to be unfavorable, the Company has recorded a provision for the expected settlement amount. Where the expected settlement amount is a range, the Company has provided for the best estimate within that range. If no amount within the range is more likely, then the company has provided for the minimum amount of the range.

Bid and Performance Related Bonds

The Company enters into bid and performance related bonds related to various customer contracts. Performance related bonds usually have a term of twelve months and bid bonds generally have a much shorter term. Potential payments due under these bonds may be related to the Company’s performance and/or the Company’s resellers’ performance under the applicable contract. The Company must measure and recognize a liability equal to the fair value of bid and performance related bonds involving the performance of the Company’s resellers. At September 30, 2014 and December 31, 2013, the liability recognized in accounts payable and accrued liabilities related to these bid and performance related bonds, based on past experience and management’s best estimate, was not significant. At September 30, 2014, the total maximum potential amount of future payments the Company could be required to make under bid and performance related bonds was $0.4 (December 31, 2013—$0.3).

Letters of Credit and Guarantees

Requests for providing commitments to extend credit and financial guarantees are reviewed and approved by management. Management regularly reviews all outstanding commitments, letters of credit and financial guarantees, and the results of these reviews are considered in assessing the adequacy of the Company’s reserve for possible credit and guarantee losses. Letters of credit, bank guarantees and other similar instruments amounted to $4.3 as of September 30, 2014 (December 31, 2013—$1.2). The estimated fair value of letters of credit, bank guarantees and similar instruments, which is equal to the fees paid to obtain the obligations, was not significant as of September 30, 2014 and December 31, 2013.

14. SHARE CAPITAL

Share Capital

At September 30, 2014 and December 31, 2013, the Company’s authorized capital stock consisted of an unlimited number of common shares and an unlimited number of preferred shares. The holders of common shares are entitled to one vote per share and are entitled to dividends when and if declared by the Board of Directors.

Secondary Offering

In the second quarter of 2014, a CAD $94.3 secondary offering of common shares was completed. The Company did not issue or sell any common shares and did not receive any proceeds from the offering. Two of the selling shareholders, Francisco Partners GP II Management (Cayman) Limited and Francisco Partners GP II Management, LLC and certain of their affiliates (collectively, “the Francisco Group”) and the Matthews Group, are, together with the Company, parties to a Shareholders’ Agreement, as disclosed in note 16 to the audited annual financial statements. As a result of the secondary offering, the percentage of Mitel’s common shares controlled by the Matthews Group is now greater than 5.0% but below 10.0% and therefore the number of members that the Matthews Group is entitled to nominate to Mitel’s board of directors under the Shareholders’ Agreement has decreased from two to one.

2014 Equity Incentive Plan

In the second quarter of 2014, the 2014 Equity Incentive Plan (the “2014 Plan”) was approved by the Company’s shareholders. The 2014 Plan permits grants of stock options, deferred share units, restricted stock units, performance share units and other stock-based awards. Under the 2014 Plan, options are generally granted for a fixed number of shares with an exercise price at least equal to the fair market value of the shares at the date of grant. Options granted vest 1/16 over each of the first 16 quarters, and expire seven years after the date of grant. The Company’s Board of Directors has the discretion to amend general vesting provisions and the term of any option, subject to limits contained in the 2014 Plan. The aggregate

 

16


number of common shares that may be issued for all purposes pursuant to the 2014 Plan must not exceed 8.9 million common shares. Common shares subject to outstanding awards under the 2014 Plan which lapse, expire or are forfeited or terminated will, subject to plan limitations, again become available for grants under the 2014 Plan.

The number of options (and all other security-based compensation) available for grant under the Company’s 2014 Equity Incentive Plan at September 30, 2014 was 8.4 million (available for grant under the 2006 Equity Incentive Plan at December 31, 2013—2.1 million).

Stock Options

Following is a summary of the Company’s stock option activity (in millions, except per option amounts):

 

     Nine months ended September 30, 2014      Eight months ended December 31, 2013  
     Number of
Options
    Weighted Average
Exercise Price
per Option
     Number of
Options
    Weighted Average
Exercise Price
per Option
 

Outstanding options:

         

Balance, beginning of period

     7.2      $ 5.10         6.4      $ 5.15   

Granted

     1.3      $ 9.76         1.7      $ 4.64   

Exercised

     (1.3   $ 4.70         (0.7   $ 4.39   

Forfeited

     (0.1   $ 5.09         (0.1   $ 4.56   

Expired

     (0.1   $ 4.80         (0.1   $ 6.11   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

     7.0      $ 6.03         7.2      $ 5.10   
  

 

 

   

 

 

    

 

 

   

 

 

 

Number of options exercisable

     3.6      $ 5.81         3.8      $ 5.37   
  

 

 

   

 

 

    

 

 

   

 

 

 

The Company used the Black-Scholes option-pricing model to determine the fair value of the stock option grants during the period. The assumptions used are summarized as follows:

 

     Three months ended
September 30, 2014
    Three months ended
June 30, 2014
    Three months ended
March 31, 2014
    Eight months ended
December 31, 2013
 

Number of options granted

     0.2        0.8        0.3        1.7   

Risk-free interest rate

     1.7     1.6     1.5     1.3

Dividends

     0.0     0.0     0.0     0.0

Expected volatility

     55.0     55.0     55.0     55.0

Annual forfeiture rate

     10.0     10.0     10.0     10.0

Expected life of the options

     5 years        5 years        5 years        5 years   

Weighted average fair value per option

   $ 4.63      $ 4.70      $ 4.06      $ 2.16   

Restricted Stock Units (“RSU”)

In April 2014, the Company granted 0.3 million RSU. Mitel’s stock price at date of grant was $10.11 per share. In August 2014, the Company granted 0.4 million additional RSU. Mitel’s stock price at date of grant was $10.44 per share. RSU vest one-quarter annually over 4 years. An RSU, once vested, entitles the holder to a Mitel common share issued out of treasury. RSU are accounted for as equity-settled stock-based compensation and therefore the grant-date fair value of the awards is amortized on a straight-line basis over the vesting period of the award. At September 30, 2014, 0.7 million restricted stock units were outstanding.

15. WARRANTS

The following table outlines the carrying value of warrants outstanding:

 

     September 30, 2014      December 31, 2013  

Warrants issued in connection with government funding(1)

   $ 39.1       $ 39.1   
  

 

 

    

 

 

 

 

17


 

(1) At September 30, 2014, there were 2.48 million warrants outstanding that were issued in connection with government funding (December 31, 2013—2.48 million). The warrants have an exercise price of nil, are exercisable at any time at the option of the holder and have no expiry date.

16. WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

The following table sets forth the basic and diluted weighted average common shares outstanding as required for earnings per share calculations as disclosed on the consolidated statements of operations:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Weighted average common shares outstanding during the period, basic

     99.6         53.8         94.1         53.7   

Dilutive effect of options

                             0.2   

Dilutive effect of restricted stock units

                               

Dilutive effect of warrants

                             2.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding during the period, diluted

     99.6         53.8         94.1         56.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following securities have been excluded from the diluted weighted average common shares outstanding because they were anti-dilutive based on the exercise price of the securities:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 

(Average number outstanding, in millions)

   2014      2013      2014      2013  

Stock options

     1.2         4.3         0.8         4.9   

The following securities have been excluded from the diluted weighted average common shares outstanding because they were anti-dilutive based on having a net loss attributable to common shareholders from continuing operations for the following periods:

 

(Average number outstanding, in millions)

   Three months ended
September 30, 2014
     Three months ended
September 30, 2013
     Nine months ended
September 30, 2014
 

Stock options

     5.2         2.4         5.8   

Restricted stock units

     0.7                 0.3   

Warrants

     2.5         2.5         2.5   

Additionally, for the three and nine months ended September 30, 2014, 0.5 million options (three and nine months ended September 30, 2013—0.5 million), which could potentially dilute basic earnings per share in the future, were also excluded from the above tables since they were contingently issuable and the conditions for issuance had not been met by the end of the period.

17. SPECIAL CHARGES AND RESTRUCTURING COSTS

Special charges and restructuring costs of $31.6 were recorded in the three months ended September 30, 2014. The costs consisted of $24.7 of employee-related charges, $1.0 of facility-related charges and $5.9 of integration-related charges. The employee-related charges consisted of costs related to headcount reductions of approximately 200 people, primarily in Europe. Integration-related charges primarily consist of professional fees and incidental costs relating to the integration of Aastra.

Special charges and restructuring costs of $10.9 were recorded in the three months ended June 30, 2014. The costs consisted of $3.9 of employee-related charges, $2.8 of facility-related charges and $4.2 of integration-related charges. The employee-related charges consisted of costs related to headcount reductions of approximately 50 people, primarily in North America and Europe. Facility-related charges consisted primarily of lease termination obligations for facilities, primarily in Europe. Integration-related charges include professional fees and incidental costs relating to the integration of Aastra.

 

18


Special charges and restructuring costs of $13.2 were recorded in the three months ended March 31, 2014, primarily relating to the acquisition and integration of Aastra. The costs consisted of $2.2 of employee-related charges, $1.1 of facility-related charges, $4.9 of integration-related charges as well as $5.0 of acquisition-related charges. The employee-related charges consisted of costs related to headcount reductions of approximately 50 people, primarily in North America. Facility-related charges consisted primarily of lease termination obligations for facilities, primarily in North America. Integration-related charges include professional fees and incidental costs relating to the integration of Aastra. Acquisition-related charges consisted primarily of legal and advisory fees incurred to close the Aastra acquisition in January 2014.

A description of the provision and the related activities for the eight months ended December 31, 2013 and the years ended April 30, 2013, 2012 and 2011 is included in note 20 to the audited annual consolidated financial statements. At September 30, 2014 the current portion of the provision of $24.6 (December 31, 2013—$4.9) is included in accounts payable and accrued liabilities while the long-term portion is included in other non-current liabilities on the consolidated balance sheets.

The following table summarizes the change in provision during the nine months ended September 30, 2014:

 

Description

   Workforce
Reduction
    Facility-Related,
Including Lease
Termination
Obligations
    Total  

Balance of provision as of December 31, 2013

   $ 1.7      $ 5.4      $ 7.1   

Restructuring liabilities acquired relating to the acquisition of Aastra

     2.0        0.3        2.3   

Charges

     2.2        1.1        3.3   

Cash payments

     (2.3     (1.0     (3.3
  

 

 

   

 

 

   

 

 

 

Balance of provision as of March 31, 2014

   $ 3.6      $ 5.8      $ 9.4   
  

 

 

   

 

 

   

 

 

 

Charges

     3.9        2.8        6.7   

Cash payments

     (4.6     (0.4     (5.0
  

 

 

   

 

 

   

 

 

 

Balance of provision as of June 30, 2014

   $ 2.9      $ 8.2      $ 11.1   
  

 

 

   

 

 

   

 

 

 

Charges

     24.7        1.0        25.7   

Cash payments

     (7.3     (1.4     (8.7
  

 

 

   

 

 

   

 

 

 

Balance of provision as of September 30, 2014

   $ 20.3      $ 7.8      $ 28.1   
  

 

 

   

 

 

   

 

 

 

The following table summarizes the change in provision during the eight months ended December 31, 2013:

 

Description

   Workforce
Reduction
    Facility-Related,
Including Lease
Termination
Obligations
    Total  

Balance of provision as of April 30, 2013

   $ 2.3      $ 6.2      $ 8.5   

Charges

     5.3        2.7        8.0   

Cash payments

     (5.9     (3.5     (9.4
  

 

 

   

 

 

   

 

 

 

Balance of provision as of December 31, 2013

   $ 1.7      $ 5.4      $ 7.1   
  

 

 

   

 

 

   

 

 

 

18. SEGMENT INFORMATION

The Company’s Chief Executive Officer (“CEO”) has been identified as the chief operating decision maker. The CEO evaluates the performance of the segments and allocates resources based on information provided by the Company’s internal management system.

During the first quarter of 2014, in connection with the acquisition of Aastra, the Company reorganized its business. As a result, the CEO now evaluates performance and allocates resources based on two key business units, Premise and Cloud. Therefore, beginning in the first quarter of 2014, the Company has reported its financial performance based on the new segments, Premise and Cloud, as described below. Prior period amounts have been presented on the same basis.

The primary financial measures of performance of the segments are revenues and gross margin, which includes segment revenues less cost of revenues. The Company does not allocate operating expenses to its segments as management does not use this information to measure the performance of the individual operating segments. In addition, total asset

 

19


information by segment is not presented because the CEO does not use such segmented measures to allocate resources and assess performance. The accounting policies of reported segments are the same as those described in the summary of significant accounting policies. Revenue and cost of revenue are generally directly attributed to the segments. Cost of revenue is directly charged to the segments in most cases and, in certain cases, on a pro-rata basis based on revenue.

The Premise segment sells and supports products and services for premise-based customers. This includes the Company’s premise-based IP and TDM telephony platforms, desktop devices and unified communications and collaboration (“UCC”) and contact centre applications that are deployed on the customer’s premise. Premise-based sales are typically sold as an initial sale of hardware and software, with ongoing recurring revenue from hardware and software maintenance and other managed services that we may also offer.

The Cloud segment sells and supports products that are deployed in a cloud environment. The Cloud segment is comprised of a retail offering and a wholesale offering. The retail cloud offering, branded MiCloud, provides hosted cloud and related services directly to the end user. The Company is typically paid a monthly recurring fee for these services, which include UCC applications, voice and data telecommunications and desktop devices. The wholesale offering, branded Powered by Mitel, enables service providers to provide a range of hosted communications offerings to their end customers. The hosted offering include hosted PBX, voice and video calling, SIP Trunking, voicemail, call center, audio conferencing and video and web collaboration services. The wholesale cloud offering is also sold to large enterprise customers who run their own data centers in private cloud or hybrid cloud networks with management provided by Mitel, or one of Mitel’s channel partners. Revenue in the wholesale cloud offering is billed either as monthly recurring fees or as an upfront sale of hardware and software.

The following table presents the results of operations for the Company’s segments:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Revenues

           

Premise segment – product

   $ 173.5       $ 80.4       $ 528.0       $ 257.5   

Premise segment – service

     68.2         35.9         190.6         118.6   

Cloud segment – product

     8.8         4.6         21.7         8.9   

Cloud segment – non-recurring service

     0.2                 0.6           

Cloud segment – recurring service

     21.7         14.1         61.7         39.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 272.4       $ 135.0       $ 802.6       $ 424.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross margin

           

Premise segment – product

   $ 99.1       $ 55.7       $ 306.4       $ 172.2   

Premise segment – service

     28.5         13.8         75.9         44.4   

Cloud segment – product

     4.8         2.5         11.7         5.1   

Cloud segment – non-recurring service

     0.1                 0.3           

Cloud segment – recurring service

     10.4         6.7         29.8         18.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 142.9       $ 78.7       $ 424.1       $ 240.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Geographic information

In conjunction with the reorganization of the business, the Company now reviews revenues by geography as follows:

 

    Americas, consisting of the continents of North America and South America;

 

    EMEA, consisting of the continent of Europe, including Russia, as well as the Middle East and Africa;

 

    Asia-Pacific, consisting of the continent of Asia and the pacific region, including Australia and New Zealand.

Revenues from external customers are attributed to the following countries based on location of the customers.

 

20


     Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Canada

   $ 8.6       $ 8.4       $ 28.6       $ 25.4   

United States

     104.9         84.4         314.9         271.1   

Rest of Americas

     6.2         2.8         17.1         7.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Americas

     119.7         95.6         360.6         304.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Germany

     35.6         0.3         93.7         1.2   

U.K.

     28.6         26.1         91.0         80.9   

Rest of EMEA

     79.6         8.0         230.6         25.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

EMEA

     143.8         34.4         415.3         107.4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Asia-Pacific

     8.9         5.0         26.7         13.2   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 272.4       $ 135.0       $ 802.6       $ 424.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

19. SUPPLEMENTARY CASH FLOW INFORMATION

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

Changes in non-cash operating assets and liabilities:

        

Accounts receivable and sales-type lease receivables

   $ 16.8      $ 15.8      $ 11.4      $ 26.9   

Inventories

     (9.0     1.1        3.0        7.4   

Other current assets

     (8.4     (0.9     (5.4     (6.3

Other non-current assets

     (0.3     1.1        0.3        0.2   

Accounts payable and accrued liabilities

     24.3        (12.3     31.0        (18.1

Deferred revenue

     (1.0     1.6        9.0        4.3   

Other non-current liabilities

     (4.9     0.8        (7.3     (2.3

Change in pension liability

     1.8        (0.4     (1.5     (1.5
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 19.3      $ 6.8      $ 40.5      $ 10.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other items:

        

Interest payments

   $ 4.9      $ 6.0      $ 14.0      $ 15.9   

Income tax payments

   $ 5.2      $ 2.7      $ 16.1      $ 8.7   

Property and equipment additions financed through capital lease

   $ 1.7      $ 1.5      $ 4.4      $ 3.7   

Cash and cash equivalents at September 30, 2014 consisted of cash of $118.5 (December 31, 2013—$40.2) and cash equivalents of $1.6 (December 31, 2013—nil).

20. HEDGING ACTIVITIES

The Company operates globally, and therefore incurs expenses in currencies other than its various functional currencies and its U.S. dollar reporting currency. The Company has used, and may use in the future, foreign currency forward contracts to hedge the fair value of certain assets and liabilities as well as to hedge likely future cash flows denominated in a currency other than the functional currency of the entity. The Company does not enter into forward contracts for speculative purposes.

Fair value hedging

The Company has used, and may use in the future, foreign currency forward contracts to minimize the short-term impact of currency fluctuations on foreign currency receivables, payables and intercompany balances. Foreign currency contracts used to hedge the fair value of foreign currency receivables, payables and intercompany balances are recorded at fair value, with changes in the fair value recorded as other income (expense) in the consolidated statements of operations. At December 31, 2013, all of the Company’s outstanding forward contracts used for fair value hedging had a term of one month or less. The Company did not have any forward contracts used for fair value hedging outstanding at September 30, 2014.

At December 31, 2013, to hedge the fair value of certain assets and liabilities, the Company held forward contracts to sell Australian dollars, British pounds sterling and Euros at a fixed rate on a notional amount of $21.0 U.S. dollars. In

 

21


addition, the Company held forward contracts to buy Canadian dollars and British pounds sterling at a fixed rate on a total notional amount of $7.1 U.S. dollars. At December 31, 2013, the Company had a net unrealized loss on fair value adjustments on the outstanding forward contracts used for fair value hedging of less than $0.1.

Cash flow hedging

The Company has used, and may use in the future, foreign currency forward contracts to hedge probable future cash flows. Cash flow hedges are assessed for effectiveness at the time of inception and again at each reporting period. Foreign currency forward contracts that are assessed as effective are recorded at fair value at each reporting period, with changes in the fair value recorded through other comprehensive income (loss) in the consolidated statements of operations, net of tax. When foreign currency forward contracts are settled, the unrealized gain or loss is removed from accumulated other comprehensive income (loss) and recorded as an increase or decrease to the hedged transaction.

At September 30, 2014, to hedge probable future cash outflows of Canadian payroll, the Company held forward contracts with durations of up to three months on a notional amount of $14.0 U.S. dollars. At September 30, 2014, the Company had a net unrealized loss on fair value adjustments on the outstanding forward contracts used for cash flow hedging of $0.2. For the three and nine months ended September 30, 2013 no forward contracts were used to hedge probable future cash flows.

21. SUBSEQUENT EVENTS

On October 20, 2014, the Company announced that it had made an unsolicited non-binding proposal to the Board of Directors of ShoreTel, Inc. (“ShoreTel”) (NASDAQ:SHOR) on October 2, 2014 to acquire all of the outstanding common shares of ShoreTel for $8.10 per share in cash, representing a total consideration of approximately $540.0. While the Board of Directors of ShoreTel publicly rejected the offer on October 27, 2014, the Company intends to keep the offer open until November 20, 2014. The Company is uncertain whether this offer, or any new or amended offer, will result in the consummation of a transaction with ShoreTel.

 

22


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q (“Report”) and our audited annual financial statements included in our Transition Report on Form 10-K for the eight months ended December 31, 2013 (“Annual Report”). All amounts are expressed in U.S. dollars unless otherwise noted.

Certain information contained in this Report, including information regarding future financial results, performance and plans, expectations, and objectives of management, constitute forward-looking information within the meaning of Canadian securities laws and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We refer to all of these as forward-looking statements. Statements that include the words “may,” “will,” “should,” “could,” “target,” “outlook,” “estimate,” “continue,” “expect,” “intend,” “plan,” “predict,” “potential,” “believe,” “project,” “anticipate” and similar statements of a forward-looking nature, or the negatives of those statements, identify forward-looking statements. In particular, this Report contains forward-looking statements pertaining to, among other matters: the Company’s ability to achieve or sustain profitability in the future; fluctuations in quarterly and annual revenues and operating results; fluctuations in foreign exchange rates; general global economic conditions; our business strategy; our plans and objectives for future operations; our industry; our future economic performance, profitability and financial condition; the costs of operating as a public company; our R&D expenditures; our ability to successfully implement our restructuring plans; our ability to successfully integrate the acquisition of Aastra Technologies Limited (“Aastra”) and realize certain synergies; our ability to successfully implement and achieve our business strategies; intense competition; our reliance on channel partners for a significant component of our sales; and our dependence upon a small number of outside contract manufacturers to manufacture our products. Forward-looking statements are subject to a variety of known and unknown risks, uncertainties, assumptions and other factors that could cause actual events or results to differ from those expressed or implied by the forward-looking statements.

These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. We operate in a very competitive and rapidly changing environment. New risks emerge from time to time. In making these statements we have made certain assumptions. While we believe our plans, intentions, expectations, assumptions and strategies reflected in these forward-looking statements are reasonable, we cannot assure you that these plans, intentions, expectations assumptions and strategies will be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Report as a result of various factors, including the risks and uncertainties discussed elsewhere in this Report and in our Annual Report.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Report. Except as required by law, we are under no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise. Please refer to the section entitled “Risk Factors” included in our Annual Report for a further discussion of risk and uncertainties affecting our business and financial results.

Overview

Mitel is a global provider of business communications and collaboration software and services. Our communication solutions meet the needs of customers in over 100 countries. On January 31, 2014, Mitel completed the acquisition of Aastra, as described below. In conjunction with the transaction, the Company reorganized its business into two new business units: Premise and Cloud.

Premise

The Premise segment sells and supports products and services for premise-based customers. This includes the Company’s premise-based IP and TDM telephony platforms, desktop devices and unified communications and collaboration (“UCC”) and contact centre applications that are deployed on the customer’s premises. Premise-based sales are typically sold as an initial sale of hardware and software, with ongoing recurring revenue from hardware and software maintenance and other managed services that we also offer.

Cloud

The Cloud segment sells and supports products that are deployed in a cloud environment. The Cloud segment is comprised of a retail offering and a wholesale offering. The retail cloud offering, branded MiCloud, provides hosted cloud and related services directly to the end user. The Company is typically paid a monthly recurring fee for these services, which

 

23


include UCC applications, voice and data telecommunications and desktop devices. The wholesale offering, branded Powered by Mitel, enables service providers to provide a range of hosted communications offerings to their end customers. The hosted offering includes hosted PBX, voice and video calling, SIP Trunking, voicemail, call center, audio conferencing and video and web collaboration services. The wholesale cloud offering is also sold to large enterprise customers who run their own data centers in private cloud or hybrid cloud networks with management provided by Mitel, or one of Mitel’s channel partners. Revenue in the wholesale cloud offering is billed either as monthly recurring fees or as an upfront sale of hardware and software.

Significant Events and Recent Developments:

Non-binding proposal to acquire ShoreTel

On October 20, 2014, we announced that we made an unsolicited non-binding proposal to the Board of Directors of ShoreTel, Inc. (“ShoreTel”) (NASDAQ:SHOR) on October 2, 2014 to acquire all of the outstanding common shares of ShoreTel for $8.10 per share in cash, representing a total consideration of approximately $540.0 million. While the Board of Directors of ShoreTel publicly rejected the offer on October 27, 2014, we intend to keep the offer open until November 20, 2014. The Company is uncertain whether this offer, or any new or amended offer, will result in the consummation of a transaction with ShoreTel.

Voluntary prepayments of term loan – August 2014 and May 2014

We made voluntary prepayments on our term loan of $25.0 million in August 2014 and $25.0 million in May 2014.

Secondary offering – May 2014

In the second quarter of 2014, a CAD $94.3 million secondary offering of common shares was completed. The Company did not issue or sell any common shares and did not receive any proceeds from the offering.

Acquisition of Oaisys – March 2014

On March 4, 2014, Mitel completed the acquisition of Oaisys, a leading developer of integrated call recording and quality management solutions. We believe the acquisition of Oaisys further strengthens Mitel’s position in the growing contact center market. The cost of the acquisition was $7.9 million.

Acquisition of Aastra – January 2014

On January 31, 2014, Mitel completed the acquisition of Aastra. Aastra was a global provider of unified communications and collaboration software, solutions and services with annual revenues of approximately CAD $600 million for the year ended December 31, 2013, of which approximately 75% were generated in Europe. Mitel acquired all of the outstanding Aastra common shares in exchange for $80.0 million cash as well as the issuance of 44.2 million Mitel common shares. In conjunction with the acquisition, Mitel refinanced its then-existing credit facilities with a $355.0 million term loan and an undrawn revolving facility of $50.0 million.

Acquisition of prairieFyre – June 2013

On June 17, 2013, we completed the acquisition of prairieFyre Software Inc. (“prairieFyre”), a global provider of contact center, business analytics, and workforce optimization software and services. The acquisition provided us with a cornerstone development platform to address increasing demand for cloud-based contact center solutions. Our net cash cost for the acquisition was $20.0 million for a 100% equity ownership interest in prairieFyre.

As a highly integrated original equipment manufacturer (“OEM”), substantially all of prairieFyre’s revenues were derived from Mitel and our channel partners. As a result, upon acquisition, substantially all of prairieFyre’s revenues are eliminated against Mitel’s cost of revenues, resulting in an increase in our consolidated gross margin and gross margin percentage. prairieFyre’s operations have been included in the consolidated results of operations since the date of acquisition.

Sale of DataNet – March 2013

On March 1, 2013, we completed the sale of our DataNet business, which distributed a wide variety of third-party telephony and data products and related services. As a result, the operating results of DataNet have been reported as discontinued operations on the consolidated statement of operations up to the time of sale.

 

24


Refinancing of Credit Agreement – February 2013

In February 2013, we completed a refinancing of our senior long-term debt by entering into new credit agreements, consisting of an undrawn $40.0 million first lien revolving credit facility, a $200.0 million first lien term loan and an $80.0 million second lien term loan (the “February 2013 Credit Facilities”). Proceeds of $276.4 million from the February 2013 Credit Facilities (net of original issue discount of $3.6 million), along with $36.4 million of cash on hand, were used to repay the remaining $174.0 million outstanding first lien term loan and $130.0 million outstanding second lien term loan, as well as fees and expenses related to the transaction. In January 2014 we refinanced our credit facilities in connection with the acquisition of Aastra, as described above.

Operating Results

Total revenues for the three months ended September 30, 2014 were $272.4 million compared to $135.0 million for the three months ended September 30, 2013. The revenue increase was primarily due to the acquisition of Aastra on January 31, 2014, which contributed approximately $134.9 million of revenues. Excluding the acquisition of Aastra, revenue increased by $2.5 million primarily due to continued growth in the cloud segment. Our operating loss for the three months ended September 30, 2014 was $20.4 million compared to operating income of $2.4 million for the three months ended September 30, 2013. The decrease in operating income was largely driven by higher amortization of acquisition-related intangible assets primarily due to the Aastra acquisition as well as higher special charges and restructuring costs incurred as a result of restructuring and integration actions related to the Aastra acquisition, which offset income from the operations of the Aastra business.

Comparability of Periods

Our functional currency is the U.S. dollar and our consolidated financial statements are prepared with U.S. dollar reporting currency using the current rate method. With the acquisition of Aastra, a significant portion of our revenues are now earned in Euros. Changes in foreign-exchange rates from period to period can have a significant impact on our results of operations and financial position, which may also make the comparability of periods complex.

The results of operations from acquisitions are included in our results from operations from the date of acquisition. In addition, we have incurred various costs related to acquisitions and the integration of those acquisitions, which have been recorded in special charges and restructuring costs, as described below.

Selected Consolidated Financial Data

The following tables set forth our comparative results of operations, both in dollars and as a percentage of total revenues:

 

     Three months ended September 30,     Change*  
     2014     2013    
     Amounts     % of
Revenue
    Amounts     % of
Revenue
    Amount  
     (in millions, except percentages and per share amounts)  

Revenues

   $ 272.4        $ 135.0        $ 137.4   

Cost of revenues

     129.5        47.5     56.3        41.7     73.2   
  

 

 

     

 

 

     

 

 

 

Gross margin

     142.9        52.5     78.7        58.3     64.2   
  

 

 

     

 

 

     

 

 

 

Expenses:

      

Selling, general and administrative

     87.4        32.1     49.2        36.4     38.2   

Research and development

     30.3        11.1     14.2        10.5     16.1   

Special charges and restructuring costs

     31.6        11.6     6.4        4.7     25.2   

Amortization of acquisition-related intangible assets

     14.0        5.1     6.5        4.8     7.5   
  

 

 

     

 

 

     

 

 

 
     163.3        59.9     76.3        56.5     87.0   
  

 

 

     

 

 

     

 

 

 

Operating income (loss)

     (20.4     (7.5 )%      2.4        1.8     (22.8

Interest expense

     (5.2     (1.9 )%      (6.5     (4.8 )%      1.3   

Debt retirement costs

     (0.7     (0.3 )%                    (0.7

Other income

     2.9        1.1                   2.9   
  

 

 

     

 

 

     

 

 

 

Loss from operations, before taxes

     (23.4     (8.6 )%      (4.1     (3.0 )%      (19.3

Income tax recovery

     18.1        6.6     2.7        2.0     15.4   
  

 

 

     

 

 

     

 

 

 

 

25


     Three months ended September 30,     Change*  
     2014     2013    
     Amounts     % of
Revenue
    Amounts     % of
Revenue
    Amount  
     (in millions, except percentages and per share amounts)  

Net loss

   $ (5.3     (1.9 )%    $ (1.4     (1.0 )%    $ (3.9
  

 

 

     

 

 

     

 

 

 

Adjusted EBITDA, a non-GAAP measure(1)

   $ 34.6        12.7   $ 19.2        14.2   $ 15.4   
  

 

 

     

 

 

     

 

 

 

*  The percentage change has not been presented as the comparison is not meaningful, largely as a result of the acquisition of Aastra.

     

Net loss per common share

          

Net loss per common shareBasic

   $ (0.05     $ (0.03    

Net loss per common shareDiluted

   $ (0.05     $ (0.03    

Weighted-average number of common shares outstanding 

          

Basic

     99.6          53.8       

Diluted

     99.6          53.8       

 

     Nine months ended September 30,        
     2014     2013     Change*  
     Amounts     % of
Revenue
    Amounts     % of
Revenue
    Amount  
     (in millions, except percentages and per share amounts)  

Revenues

   $ 802.6        $ 424.7        $ 377.9   

Cost of revenues

     378.5        47.2     184.6        43.5     193.9   
  

 

 

     

 

 

     

 

 

 

Gross margin

     424.1        52.8     240.1        56.5     184.0   
  

 

 

     

 

 

     

 

 

 

Expenses:

    

Selling, general and administrative

     256.1        31.9     148.8        35.0     107.3   

Research and development

     88.5        11.0     41.5        9.8     47.0   

Special charges and restructuring costs

     55.7        6.9     10.5        2.5     45.2   

Amortization of acquisition-related intangible assets

     39.3        4.9     17.7        4.2     21.6   
  

 

 

     

 

 

     

 

 

 
     439.6        54.8     218.5        51.4     221.1   
  

 

 

     

 

 

     

 

 

 

Operating income (loss) from continuing operations

     (15.5     (1.9 )%      21.6        5.1     (37.1

Interest expense

     (16.6     (2.1 )%      (18.2     (4.3 )%      1.6   

Debt retirement costs

     (16.2     (2.0 )%      (2.6     (0.6 )%      (13.6

Other income (loss)

     4.7        0.6     (0.2            4.9   
  

 

 

     

 

 

     

 

 

 

Income (loss) from operations, before taxes

     (43.6     (5.4 )%      0.6        0.1     (44.2

Income tax recovery

     25.5        3.2     2.0        0.5     23.5   
  

 

 

     

 

 

     

 

 

 

Net income (loss) from continuing operations

     (18.1     (2.3 )%      2.6        0.6     (20.7

Net loss from discontinued operations

                   (3.0     (0.7 )%      3.0   
  

 

 

     

 

 

     

 

 

 

Net loss

   $ (18.1     (2.3 )%    $ (0.4     (0.1 )%    $ (17.7
  

 

 

     

 

 

     

 

 

 

Adjusted EBITDA, a non-GAAP measure(1)

   $ 109.0        13.6   $ 63.6        15.0   $ 45.4   
  

 

 

     

 

 

     

 

 

 

*  The percentage change has not been presented as the comparison is not meaningful, largely as a result of the acquisition of Aastra.

     

Net income (loss) per common share—Basic

          

Net income (loss) per common share from continuing operations

   $ (0.19     $ 0.05       

Net loss per common share from discontinued operations

   $        $ (0.06    

Net loss per common share

   $ (0.19     $ (0.01    

Net income (loss) per common share—Diluted

          

Net income (loss) per common share from continuing operations

   $ (0.19     $ 0.05       

Net loss per common share from discontinued operations

   $        $ (0.06    

 

26


     Nine months ended September 30,     
     2014    2013    Change*
     Amounts     % of
Revenue
   Amounts     % of
Revenue
   Amount
     (in millions, except percentages and per share amounts)

Net loss per common share

   $ (0.19      $ (0.01     

Weighted-average number of common shares outstanding 

            

Basic

     94.1           53.7        

Diluted

     94.1           56.4        

(1) Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”)

The following table presents a reconciliation of Adjusted EBITDA to net income, the most directly comparable U.S. GAAP measure:

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  
     (in millions)  

Net loss

   $ (5.3   $ (1.4   $ (18.1   $ (0.4

Net loss from discontinued operations

                          3.0   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (5.3     (1.4     (18.1     2.6   

Adjustments:

        

Interest expense

     5.2        6.5        16.6        18.2   

Income tax expense (recovery)

     (18.1     (2.7     (25.5     (2.0

Amortization and depreciation

     19.7        9.7        55.5        27.6   

Debt retirement costs

     0.7               16.2        2.6   

Foreign exchange loss (gain)

     (2.3     (0.5     (3.3     0.5   

Special charges and restructuring costs

     31.6        6.4        55.7        10.5   

Stock-based compensation

     1.5        1.2        4.5        3.3   

Acquisition accounting for deferred revenue(1)

     1.6               7.4          

Other

                          0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA from continuing operations

     34.6        19.2        109.0        63.7   

Adjusted EBITDA from discontinued operations(2)

                          (0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 34.6      $ 19.2      $ 109.0      $ 63.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) In accordance with the fair value provisions applicable to the accounting for business combinations, acquired deferred revenue relating to the Aastra acquisition was recorded on the opening balance sheet at an amount that was lower than the historical carrying value. Although this purchase accounting requirement has no impact on the Company’s business or cash flow, it adversely impacts the Company’s reported GAAP revenue in the reporting periods following the acquisition. In order to provide investors with financial information that facilitates comparison of results, the Company provides non-GAAP financial measures which exclude the impact of the acquisition accounting adjustments. The Company believes that this non-GAAP financial adjustment is useful to investors because it allows investors to compare reports of financial results of the Company as the revenue reduction related to acquired deferred revenue will not recur when similar software maintenance and service contracts are recorded in future periods.
(2) The reconciliation from net loss from discontinued operations to Adjusted EBITDA from discontinued operations for the nine months ended September 30, 2013 consists of special charges and restructuring costs of $1.6 million, non-cash impairment of goodwill of $1.9 million and an income tax recovery of $0.6 million.

We define Adjusted EBITDA as net income (loss), adjusted for the items as noted in the above tables. Adjusted EBITDA is not a measure calculated in accordance with U.S. GAAP. Adjusted EBITDA should not be considered as an alternative to net income, income from operations or any other measure of financial performance calculated and presented in accordance with U.S. GAAP. We prepare Adjusted EBITDA to eliminate the impact of items that we do not consider indicative of our core operating performance. We encourage you to evaluate these adjustments and the reasons we consider them appropriate, as well as the material limitations of non-GAAP measures and the manner in which we compensate for those limitations.

 

27


We use Adjusted EBITDA:

 

    as a measure of operating performance;

 

    for planning purposes, including the preparation of our annual operating budget;

 

    to allocate resources to enhance the financial performance of our business; and

 

    in communications with our board of directors concerning our financial performance.

We believe that the use of Adjusted EBITDA provides consistency and comparability of, and facilitates, period to period comparisons, and also facilitates comparisons with other companies in our industry, many of which use similar non-GAAP financial measures to supplement their U.S. GAAP results.

We believe Adjusted EBITDA may also be useful to investors in evaluating our operating performance because securities analysts use Adjusted EBITDA as a supplemental measure to evaluate the overall operating performance of companies. Our investor and analyst presentations also include Adjusted EBITDA. However, we also caution you that other companies in our industry may calculate Adjusted EBITDA or similarly titled measures differently than we do, which limits the usefulness of Adjusted EBITDA as a comparative measure.

Moreover, although Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA and similar non-GAAP measures have limitations as analytical tools, and you should not consider them in isolation or as a substitute for an analysis of our results of operations as reported under U.S. GAAP.

Some of the limitations of Adjusted EBITDA are that it does not reflect:

 

    interest income or interest expense;

 

    cash requirements for income taxes;

 

    foreign exchange gains or losses;

 

    significant cash payments made in connection with special charges and restructuring costs;

 

    employee stock-based compensation; and

 

    cash requirements for the replacement of assets that have been depreciated or amortized.

We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of such limitations, presentation of our financial statements in accordance with U.S. GAAP and reconciliation of Adjusted EBITDA to the most directly comparable U.S. GAAP measure, net income (loss).

Results of Operations

Revenues

The following tables set forth revenues by business segment in dollars and as a percentage of total revenues:

 

     Three months ended September 30,     Change  
     2014     2013    
     Revenues      % of
Revenues
    Revenues      % of
Revenues
    Amount      %  
     (in millions, except percentages)  

Premise segment – product

   $ 173.5         63.7   $ 80.4         59.6   $ 93.1         115.8   

Premise segment – service

     68.2         25.0     35.9         26.6     32.3         90.0   

Cloud segment – product

     8.8         3.2     4.6         3.4     4.2         91.3   

Cloud segment – non-recurring service

     0.2         0.1                    0.2         *   

Cloud segment – recurring service

     21.7         8.0     14.1         10.4     7.6         53.9   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    
   $ 272.4         100.0   $ 135.0         100.0   $ 137.4         101.8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

* The comparison is not meaningful.

 

28


     Nine months ended September 30,     Change  
     2014     2013    
     Revenues      % of
Revenues
    Revenues      % of
Revenues
    Amount      %  
     (in millions, except percentages)  

Premise segment – product

   $ 528.0         65.8   $ 257.5         60.6   $ 270.5         105.0   

Premise segment – service

     190.6         23.7     118.6         27.9     72.0         60.7   

Cloud segment – product

     21.7         2.7     8.9         2.1     12.8         143.8   

Cloud segment – non-recurring service

     0.6         0.1                    0.6         *   

Cloud segment – recurring service

     61.7         7.7     39.7         9.4     22.0         55.4   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    
   $ 802.6         100.0   $ 424.7         100.0   $ 377.9         89.0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

* The comparison is not meaningful.

Revenues increased across all segments as a result of the acquisitions made in the last twelve months and, in particular, the acquisition of Aastra in January 2014. In addition, our revenues were favorably impacted by a general strengthening of foreign currencies when compared against the U.S. dollar. In particular, the British pound sterling was stronger against the U.S. dollar by an average of 10.3% in the third quarter of 2014 when compared to the third quarter of 2013 and 8.3% in the first nine months of 2014 when compared to the first nine months of 2013.

Revenue for the three and nine months ended September 30, 2014 includes a reduction in revenue of $1.6 million and $7.4 million, respectively (three and nine months ended September 30, 2013—nil and nil), relating to purchase accounting. In accordance with the fair value provisions applicable to the accounting for business combinations, acquired deferred revenue relating to the Aastra acquisition was recorded on the opening balance sheet at an amount that was lower than the historical carrying value. Although this purchase accounting adjustment has no impact on the Company’s business or cash flow, it adversely impacts the Company’s reported GAAP revenue in the reporting periods following the acquisition. Based on the fair value of deferred revenue recorded in the initial purchase price allocation, we expect that revenue will be adversely affected by a total of $11.3 million over the two years ending December 31, 2015.

Excluding the results of operations from the acquisition of Aastra, Premise segment product revenues increased by $0.2 million, or 0.2%, to $80.6 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 and increased by $1.8 million, or 0.7%, to $259.3 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. The increases in revenues for the three and nine months ending September 30, 2014 when compared to the same 2013 periods were due to the favorable impact of changes in foreign exchange rates, which was partially offset by a decrease in revenues due to customers migrating to a cloud recurring model.

Excluding the results of operations from the acquisition of Aastra, Cloud segment product revenues decreased by $0.5 million to $4.1 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013. Cloud segment product revenues increased by $4.2 million to $13.0 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily due to sales to cloud service providers.

Excluding the results of operations from the acquisition of Aastra, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, Premise segment service revenues decreased by $1.6 million, or 4.5%, to $34.3 million while Cloud segment recurring service revenues increased by $4.5 million, or 31.9%, to $18.6 million. For the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, Premise segment service revenues decreased by $11.3 million, or 9.5%, to $107.3 million while Cloud segment recurring service revenues increased by $14.3 million, or 35.9%, to $54.0 million. The decrease in Premise segment service revenues was primarily due to lower legacy services such as hardware maintenance as well as customers transitioning from a premise solution to a cloud solution. The increase in Cloud segment recurring revenues reflects new and existing customer migrating to our cloud solutions.

Gross Margin

The following table sets forth gross margin, both in dollars and as a percentage of revenues:

 

29


     Three months ended September 30,     Change  
     2014     2013    
     Gross
Margin
     % of
Segment
Revenues
    Gross
Margin
     % of
Segment
Revenues
    Amount      Absolute
%
 
     (in millions, except percentages)  

Premise segment – product

   $ 99.1         57.1   $ 55.7         69.3   $ 43.4         (12.2

Premise segment – service

     28.5         41.8     13.8         38.4     14.7         3.4   

Cloud segment – product

     4.8         54.5     2.5         54.3     2.3         0.2   

Cloud segment – non-recurring service

     0.1         50.0                    0.1         *   

Cloud segment – recurring service

     10.4         47.9     6.7         47.5     3.7         0.4   
  

 

 

      

 

 

      

 

 

    
   $ 142.9         52.5   $ 78.7         58.3   $ 64.2         (5.8
  

 

 

      

 

 

      

 

 

    

 

* The comparison is not meaningful.

 

     Nine months ended September 30,     Change  
     2014     2013    
     Gross
Margin
     % of
Segment
Revenues
    Gross
Margin
     % of
Segment
Revenues
    Amount      Absolute
%
 
     (in millions, except percentages)  

Premise segment – product

   $ 306.4         58.0   $ 172.2         66.9   $ 134.2         (8.9

Premise segment – service

     75.9         39.8     44.4         37.4     31.5         2.4   

Cloud segment – product

     11.7         53.9     5.1         57.3     6.6         (3.4

Cloud segment – non-recurring service

     0.3         50.0                    0.3         *   

Cloud segment – recurring service

     29.8         48.3     18.4         46.3     11.4         2.0   
  

 

 

      

 

 

      

 

 

    
   $ 424.1         52.8   $ 240.1         56.5   $ 184.0         (3.7
  

 

 

      

 

 

      

 

 

    

 

* The comparison is not meaningful.

In the third quarter of 2014, overall gross margin percentage decreased by an absolute 5.8% to 52.5% compared to 58.3% for the third quarter of 2013 primarily as a result of the acquisition of Aastra, which contributed $60.0 million of gross margin, a gross margin percentage of 44.5%, to the third quarter of 2014. Excluding the effect of the Aastra acquisition, Mitel’s gross margin percentage increased by an absolute 2.0% to 60.3%, primarily due to product mix as well as the acquisition of Oaisys in March 2014.

For the nine months ended September 30, 2014, overall gross margin percentage decreased by an absolute 3.7% to 52.8% compared to 56.5% for the nine months ended September 20, 2013 primarily as a result of the acquisition of Aastra, which contributed $166.0 million of gross margin, a gross margin percentage of 45.0%, to the nine months ended September 30, 2014. Excluding the effect of the Aastra acquisition, Mitel’s gross margin percentage increased by an absolute 3.0% to 59.5%, primarily due to the acquisitions of prairieFyre in June 2013 and Oaisys in March 2014 as well as product mix.

Excluding the effect of the acquisition of Aastra, Premise segment product gross margin percentage increased by an absolute 3.0% to 72.3% for the third quarter of 2014 and increased by an absolute 3.5% to 70.4% for the nine months ended September 30, 2014 when compared to the 2013 periods while Premise segment service gross margin percentage increased by an absolute 1.8% to 40.3% in the third quarter of 2014 and by an absolute 3.4% to 40.8% in the nine months ended September 30, 2014 when compared to the 2013 periods. The increases in Premise segment product and service gross margin percentages were primarily as a result of the acquisitions of prairieFyre in June 2013 and Oaisys in March 2014 as well as cost reductions from restructuring and integration actions taken during the year.

Excluding the effect of the acquisition of Aastra, Cloud segment product gross margin percentage decreased to 48.6% for the third quarter and decreased to 47.6% for the nine months ended September 30, 2014 primarily due to the mix of product sales. Cloud segment recurring service gross margin percentage decreased by an absolute 1.3% to 46.3% in the third quarter of 2014 primarily due to competitive price pressures during the quarter. Cloud segment recurring service gross margin increased by an absolute 0.9% to 47.2% in the first nine months of 2014 when compared to the 2013 period due primarily due to increases in revenues as certain costs of revenues remain fixed.

 

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Operating Expenses

Selling, General and Administrative (“SG&A”)

SG&A expenses decreased to 32.1% of revenues in the third quarter of 2014 from 36.4% in the third quarter of 2013, an increase of $38.2 million in absolute dollars. SG&A expenses decreased to 31.9% of revenues for the nine months ended September 30, 2014 from 35.0% for the nine months ended September 30, 2013, an increase of $107.3 million in absolute dollars. The increase in absolute dollars is primarily due to the acquisitions of Aastra, prairieFyre and Oaisys. Our SG&A expenses for the three and nine months ended September 30, 2014 included $1.5 million and $4.5 million, respectively (three and nine months ended September 30, 2013—$1.2 million and $3.3 million, respectively), of stock-based compensation expense.

Excluding the acquisitions made in the last 12 months, SG&A expenses increased to 39.1% of revenues for the third quarter of 2014 compared to 36.4% in the third quarter of 2013 and increased to 37.1% of revenues for the nine months ended September 30, 2014 compared to 35.0% the nine months ended September 30, 2013, largely due to increased spending on sales growth initiatives, in particular Mitel cloud offerings, as well as increased variable compensation.

Research and Development (“R&D”)

R&D expenses in the third quarter of 2014 increased to 11.1% of revenues compared to 10.5% of revenues for the third quarter of 2013, an increase of $16.1 million in absolute dollars. R&D expenses for the nine months ended September 30, 2014 increased to 11.0% of revenues compared to 9.8% for the nine months ended September 30, 2013, an increase of $47.0 million in absolute dollars. The increase was largely driven by the acquisitions of Aastra, prairieFyre and Oaisys. Excluding acquisitions made in the last 12 months, R&D expenses increased to 10.6% of revenues in the third quarter of 2014 compared to 10.5% of revenues in the third quarter of 2013 and 10.1% of revenues in the nine months ended September 30, 2014 compared to 9.8% of revenues in the nine months ended September 30, 2013. The increases were primarily due to increased spending on contact center initiatives.

Our R&D expenses in absolute dollars can fluctuate depending on the timing and number of development initiatives in any given quarter. R&D expenses as a percentage of revenues is highly dependent on revenue levels and could vary significantly depending on actual revenues achieved.

Special Charges and Restructuring Costs

Special charges and restructuring costs of $31.6 million were recorded in the three months ended September 30, 2014. The costs consisted of $24.7 million of employee-related charges, $1.0 million of facility-related charges and $5.9 million of integration-related charges. The employee-related charges consisted of costs related to headcount reductions of approximately 200 people, primarily in Europe. Integration-related charges consist primarily of professional fees relating to the integration of the Aastra business.

Special charges and restructuring costs of $10.9 million were recorded in the three months ended June 30, 2014. The costs consisted of $3.9 million of employee-related charges, $2.8 million of facility-related charges and $4.2 million of integration-related charges. The employee-related charges consisted of headcount reductions of approximately 50 people and related costs, primarily in North America and Europe. Facility-related charges consisted primarily of lease termination obligations for facilities, primarily in North America. Integration-related charges include professional fees and incidental costs relating to the integration of the Aastra business.

We recorded special charges and restructuring costs of $13.2 million in the first quarter of 2014, primarily relating to the acquisition and integration of the Aastra business. The costs consisted of $2.2 million of employee-related charges, $1.1 million of facility-related charges, $4.9 million of integration-related charges as well as $5.0 million of acquisition-related charges. The employee-related charges consisted of termination and related costs related to headcount reductions of approximately 50 people, primarily in North America. Facility-related charges consisted primarily of lease termination obligations for facilities, primarily in North America. Integration-related charges include professional fees and incidental costs relating to the integration of the Aastra business. Acquisition-related charges consisted primarily of legal and advisory fees incurred to close the Aastra acquisition in January 2014.

We recorded special charges and restructuring costs of $1.5 million in the first quarter of 2013, $2.6 million in the second quarter of 2013 and $6.4 million in the third quarter of 2013. The charges primarily relate to headcount reductions and additional lease termination obligations as we reduced our cost structure as well as costs relating to merger and acquisition activity.

We expect to incur additional costs in the future to reduce our operating expenses and gain operating efficiencies. The timing and potential amount of such costs will depend on several factors, including future revenue levels and opportunities

 

31


for operating efficiencies identified by management. We expect to incur approximately $83.0 million of costs relating to the integration of the Aastra business, which we expect to create approximately $75.0 million of annualized synergies. We expect to complete these initiatives in early 2017.

Amortization of acquisition-related intangible assets

In the three and nine months ended September 30, 2014 amortization of acquisition-related intangible assets increased to $14.0 million and $39.3 million, respectively, compared to $6.5 million and $17.7 million, respectively, for the three and nine months ended September 30, 2013. The increase is due primarily to the acquisition of Aastra in January 2014.

Operating Income (Loss) from Continuing Operations

We reported an operating loss of $20.4 million in the third quarter of 2014 compared to operating income of $2.4 million in the third quarter of 2013 and an operating loss of $15.5 million in the nine months ended September 30, 2014 compared to operating income from continuing operations of $21.6 million in the nine months ended September 30, 2013. The operating loss was driven by higher special charges and restructuring costs and higher amortization of acquired intangible assets, which offset higher gross margin from the legacy Mitel business as well income from the operations of Aastra, prairieFyre and Oaisys.

Non-Operating Expenses

Interest Expense

Interest expense was $5.2 million in the third quarter of 2014 compared to $6.5 million in the third quarter 2013 and $16.6 million in the nine months ended September 30, 2014 compared to $18.2 million in the nine months ended September 30, 2013. The decrease in interest expense was due to the refinancing of our credit facilities in conjunction with the acquisition of Aastra in January 2014 as a lower interest rate margin and a lower LIBOR floor on the refinanced debt (4.25% and 1.00%, respectively, at September 30, 2014 compared to 5.75% and 1.25% at September 30, 2013) was partially offset by higher debt levels.

Debt retirement costs

In the third quarter of 2014, we recorded debt retirement costs of $0.7 million relating to a write-off of the pro-rata share of unamortized debt issue costs and original issue discount as a result of a $25.0 million voluntary prepayment of our term loan in August 2014.

In the second quarter of 2014, we recorded debt retirement costs of $0.8 million relating to a write-off of the pro-rata share of unamortized debt issue costs and original issue discount as a result of a $25.0 million voluntary prepayment of our term loan in May 2014.

In the first quarter of 2014, we recorded debt retirement costs of $14.7 million relating to the refinancing of our debt in January 2014. These costs consisted of $10.0 million of unamortized debt issue costs and unamortized original issue discount, $4.2 million of prepayment fees relating to repaying our prior credit facilities and $0.5 million of other costs relating to the refinancing.

For the first quarter of 2013, we recorded debt retirement costs of $2.6 million relating to the refinancing our debt in February 2013. These costs consisted of $2.6 million of unamortized debt issue costs and unamortized original issue discount relating to repaying our prior credit facilities.

Income tax expense

For the third quarter of 2014, we recorded a net income tax recovery of $18.1 million compared to a recovery of $2.7 million for the third quarter of 2013. For the nine months ended September 30, 2014, we recorded a net income tax recovery of $25.5 million compared to a recovery of $2.0 million for the nine months ended September 30, 2013. The income tax recoveries for the three and nine months ended September 30, 2014 were primarily due to tax recoveries on certain non-recurring items primarily related to the Aastra acquisition. The tax recovery in the third quarter of 2013 was primarily driven by the expected effective tax rate for the year.

 

32


Net Loss from Discontinued Operations

Net loss from discontinued operations for the nine months ended September 30, 2013 consists of the operations of DataNet, which was sold in March 2013. Further information on the sale of DataNet can be found under Item 7 of our Annual Report.

Net Income (Loss)

Our net loss for the third quarter of 2014 was $5.3 million compared to a net loss of $1.4 million in the third quarter of 2013. The higher net loss was primarily due to the operating loss, as described above.

Our net loss for the nine months ended September 30, 2014 was $18.1 million compared to a net loss of $0.4 million for the nine months ended September 30, 2013. The higher net loss was primarily due to the operating loss as well as higher debt retirement costs, as described above.

Other Comprehensive Income (Loss)

Other comprehensive loss of $23.3 million for the three months ended September 30, 2014 and $53.7 million for nine months ended September 30, 2014 was due to pension liability adjustments for the U.K. pension plan and foreign currency translation adjustments due to the strengthening of the U.S dollar in September 2014. The U.K. pension plan was updated at September 30, 2014 for actual investment performance and certain changes in assumptions. The increase in pension liability and corresponding other comprehensive loss in the three and nine months ended September 30, 2014 was primarily due to an increase in the accrued benefit obligation from a decrease in the discount rate from 4.7% at December 31, 2013 to 4.4% at June 30, 2014 and to 4.1% at September 30, 2014. The discount rate assumption was determined on a consistent basis and reflects prevailing rates available on high-quality, fixed income debt instruments.

Other comprehensive income for the three months ended September 30, 2013 includes $33.1 million recorded in the third quarter of 2013 related to pension liability adjustments as the U.K. pension plan’s valuation was updated for actual investment performance and certain changes in assumptions.

Adjusted EBITDA

Adjusted EBITDA, a non-GAAP measure, was $34.6 million in the third quarter of 2014 compared to $19.2 million in the third quarter of 2013, an increase of $15.4 million. Adjusted EBITDA was $109.0 million for the nine months ended September 30, 2014 compared to $63.6 million for the nine months ended September 30, 2013, an increase of $45.4 million. The increases were driven primarily by Adjusted EBITDA from acquisitions in addition to higher gross margin from the legacy Mitel business.

For a definition and explanation of Adjusted EBITDA and why we believe it is useful in evaluating our financial condition, as well as a reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss), see “Selected Consolidated Financial Data—Adjusted EBITDA” elsewhere in this Report.

Cash Flows

Below is a summary of comparative results of cash flows and a discussion of the results for the three and nine months ended September 30, 2014 and September 30, 2013.

 

     Three months ended
September 30,
          Nine months ended
September 30,
    Change  
     2014     2013     Change     2014     2013    
           (in millions)  

Net cash provided by (used in)

            

Operating activities

   $ 20.4      $ 10.0      $ 10.4      $ 73.0      $ 45.0      $ 28.0   

Investing activities

     (4.4     (0.9     (3.5     (18.1     (28.0     9.9   

Financing activities

     (24.6     (1.2     (23.4     28.9        (39.9     68.8   

Effect of exchange rate changes on cash and cash equivalents

     (5.5     1.7        (7.2     (3.9     (0.1     (3.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

   $ (14.1   $ 9.6      $ (23.7   $ 79.9      $ (23.0   $ 102.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

33


Cash Provided by Operating Activities

Net cash generated from operating activities in the third quarter of 2014 was $20.4 million compared to $10.0 million in the third quarter of 2013. The increase was due to operating cash flow from the acquisition of Aastra as favorable changes to the non-cash operating assets and liabilities were largely offset by increased special charges and restructuring costs.

Net cash generated from operating activities for the nine months ended September 30, 2014 was $73.0 million compared to $45.0 million for the nine months ended September 30, 2013. The increase was due to favorable changes in non-cash operating assets of $40.5 million for the nine months ended September 30, 2014 compared to $10.6 million for the nine months ended September 30, 2013 as well as operating cash flow from the acquisition of Aastra, which was partially offset by increased special charges and restructuring costs.

Cash Used in Investing Activities

Net cash used for investing activities was $4.4 million in the third quarter of 2014 compared to $0.9 million in the third quarter of 2013. The cash used for investing activities for the three months ended September 30, 2014 includes a $2.0 million contingent payment made in July 2014 related to the acquisition of Oaisys.

Net cash used for investing activities was $18.1 million for the nine months ended September 30, 2014 compared to $28.0 million for the nine months ended September 30, 2013. The cash used in investing activities for the nine months ended September 30, 2014 includes $8.2 million for acquisitions consisting of $0.6 million for the January 2014 acquisition of Aastra (cash paid of $80.0 million, net of cash acquired of $79.4 million) and $7.6 million for the March 2014 acquisition of Oaisys (cash paid of $7.9 million net of cash acquired of $0.3 million). Net cash used in investing for the nine months ended September 30, 2013 includes $23.1 million for the June 2013 acquisition of prairieFyre (cash paid of $27.3 million net of cash acquired of $4.2 million).

Cash used in investing activities also includes acquisitions of property, plant and equipment, which increased due to acquisitions.

Cash Used in Financing Activities

Net cash used in financing activities in the third quarter of 2014 was $24.6 million compared to $1.2 million during the third quarter of 2013. Cash used in financing activities in the third quarter of 2014 included a $25.0 million voluntary repayment of our term loan made in August 2014.

Net cash provided by financing activities for the nine months ended September 30, 2014 was $28.9 million compared to cash used in financing activities of $39.9 million for the nine months ended September 30, 2013. Cash provided by financing for the nine months ended September 30, 2014 consists primarily of net proceeds from the January 2014 refinancing, partially offset by the $25.0 million voluntary repayment of our term loan made in August 2014 and the $25.0 million voluntary repayment of our term loan made in May 2014. The proceeds from the new credit facility of $353.2 million were partially offset by repayments of the prior credit facilities of $258.5 million as well as fees and costs related to the refinancing of $15.2 million. The use of cash for the nine months ended September 30, 2013 consisted primarily of a net repayment of long-term debt as a result of the February 2013 refinancing.

Liquidity and Capital Resources

As of September 30, 2014, our liquidity consisted primarily of cash and cash equivalents of $120.1 million and an undrawn $50.0 million revolving facility. At September 30, 2014, we had $304.1 million outstanding under our secured credit facilities, which consists of $355.0 million term loan and a $50.0 million revolving facility. At December 31, 2013 we had $258.5 million outstanding under our then-existing credit facilities consisting of a first lien term loan due 2019 and second lien term loan due 2020.

On January 31, 2014, in conjunction with the acquisition of Aastra, we refinanced our credit facilities. The new credit facilities consist of a $355.0 million term loan and a $50.0 million revolving facility (the “January 2014 Credit Facilities”). Proceeds of $353.2 million (net of original discount of $1.8 million), along with cash on hand, were used to repay the remaining $258.5 million outstanding on the prior credit facilities, the $80.0 million of cash consideration paid for the acquisition of Aastra, as well as fees and expenses in connection with the refinancing and the acquisition of Aastra. In May 2014, we made a $25.0 million voluntary repayment of our term loan. In August 2014 we made an additional $25.0 million voluntary repayment of our term loan.

The undrawn $50.0 million revolving credit facility bears interest at LIBOR plus 4.25%, or, at the option of the Company, a base rate plus an applicable margin, and matures in January 2019. The Company may borrow Canadian dollars

 

34


under the revolving credit facility. Such borrowings bear interest at the Canadian prime rate plus an applicable margin. The $355.0 million term loan bears interest at LIBOR (subject to a 1.00% floor) plus 4.25%, or, at the option of the Company, a base rate plus an applicable margin, and matures in January 2020.

As a result of our operating performance and our assessment of debt market conditions, we may seek to amend our existing credit facility to reduce the variable interest rates on our term loan facility. Any amendment to the term loan facility would be subject to the approval of the holders of our term loan and other conditions. As such, there is no guarantee that we would be able to obtain such an amendment.

The term loan requires quarterly principal repayments of 0.25% of the original outstanding principal. In addition, we are required to make annual principal repayments on the term loan based on a percentage of excess cash flow (as defined in the January 2014 Credit Facilities). The annual excess cash flow repayments are required to be paid within 100 days following the end of the fiscal year. The first annual excess cash flow payment is required be paid within 100 days of December 31, 2014.

Voluntary prepayments are applied against mandatory principal repayments. As a result of the $25.0 million voluntary prepayment in May 2014 and the additional $25.0 million voluntary prepayment in August 2014, we estimate that our annual principal repayments due in the next twelve months, including the 2014 annual excess cash flow payment, will be nil. The annual excess cash flow payment may vary significantly from the estimate based on our operating results and changes in working capital during the remainder of 2014.

The term loan can be repaid without premium or penalty. The January 2014 Credit Facilities have customary default clauses, wherein repayment of the credit facilities may be accelerated in the event of an uncured default. The proceeds from the issuance of debt, and proceeds from the sale of Company assets, may also be required to be used, in whole or in part, to make mandatory prepayments under the credit facilities.

The January 2014 Credit Facilities contain affirmative and negative covenants, including: (a) periodic financial reporting requirements, (b) a maximum ratio of Consolidated Total Debt (net of up to $50.0 million of unrestricted cash) to the trailing twelve months Consolidated EBITDA (“Leverage Ratio”), as defined in the credit facilities, (c) limitations on the incurrence of subsidiary indebtedness and also the borrowers themselves, (d) limitations on liens, (e) limitations on investments and (f) limitations on the payment of dividends. The maximum Leverage Ratio applies to the Company for the period ending June 30, 2014 and for all fiscal quarters thereafter until maturity in January 2020, and is as follows:

 

Fiscal Quarters Ending

   Maximum Consolidated
Leverage Ratio
 

June 30, 2014 through March 31, 2015

     3.00:1.00   

June 30, 2015 through March 31, 2016

     2.50:1.00   

June 30, 2016 through March 31, 2017

     2.25:1.00   

June 30, 2017 and thereafter

     2.00:1.00   

The following table presents our maximum Leverage Ratio and our actual Leverage Ratio:

 

Period Ending

   Maximum
Leverage Ratio
     Actual
Leverage Ratio
 

June 30, 2014

     3.0         1.9   

September 30, 2014

     3.0         1.6   

At September 30, 2014 and December 31, 2013, our cash equivalents consist of short-term, investment-grade commercial paper and government debt. We classify our cash equivalents as current based on their nature and their availability for use in current operations. We believe the overall credit quality of our portfolio is strong, with a majority of our cash equivalents invested in federal government treasury bills of Canada, the U.S. and the U.K.

We follow an investment policy where our excess cash is invested in investment-grade commercial paper and government debt, generally with a maturity of less than three months. There is no limit on the investments in the federal governments of Canada, the U.S. or the U.K. We diversify our portfolio by limiting the amount invested in any other single institution.

We have defined benefit plans, primarily in the U.K., France, Germany and Switzerland.

 

35


Our defined benefit pension plan in the U.K. is in place for a number of our past and present employees in the U.K. The plan has been closed to new members since 2001 and closed to new service since 2012. The plan is partially funded. At September 30, 2014, the plan had an unfunded pension liability of $82.4 million (December 31, 2013—$57.3 million). Contributions to fund the benefit obligations under this plan are based on actuarial valuations, which themselves are based on certain assumptions about the long-term operations of the plan, including the life expectancy of members, the performance of the financial markets and interest rates. The amount of annual employer contributions required to fund the pension deficit annually is determined every three years, in accordance with U.K. regulations and is based on a calendar year. In June 2013, the Company’s annual funding requirement to fund the pension deficit for the 2014 calendar year was determined to be $5.3 million (£3.2 million), and will increase at an annual rate of 3% for the calendar years 2015 and 2016.

As part of the acquisition of Aastra, we assumed certain unfunded pension obligations related to entities in France and Germany. In France, retirees generally benefit from a lump sum payment upon retirement or departure. In Germany, retirees generally benefit from the receipt of a perpetual annuity at retirement, based on their years of service and ending salary. At September 30, 2014, we had unfunded pension liabilities in France and Germany of $7.4 million and $16.0 million, respectively. In addition, as part of the acquisition of Aastra, we assumed a partially funded multiple employer pension plan in Switzerland. In Switzerland, retirees generally benefit from the receipt of a perpetual annuity at retirement based on an accrued value at the date of retirement. The accrued value is related to the actual returns on contributions during the working period. At September 30, 2014, a liability of $4.9 million has been recorded for Mitel’s pro-rata share of the net benefit obligation. Mitel’s pro-rata share of the plan’s assets and projected benefit obligation at the date of acquisition was $98.4 million and $104.1 million, respectively.

We believe we will have sufficient liquidity to support our business operations for the next 12 months. However, we may elect to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including our rate of revenue growth, the timing and extent of spending on restructuring and integration actions, the timing and extent of spending to support product development efforts and expansion of sales and marketing, the timing of introductions of new products and enhancements to existing products, market acceptance of our products and the cost and timing of potential acquisitions, including the proposal to acquire ShoreTel. Additional equity or debt financing may not be available on acceptable terms or at all. In addition, any proceeds from the issuance of debt may be required to be used, in whole or in part, to make mandatory payments under our existing credit agreements.

Contractual Obligations

The following table sets forth our contractual obligations as of September 30, 2014:

 

     Payments Due by Fiscal Year  

Contractual Obligations

   Last three
months
of 2014
     2015      2016      2017      2018      2019
and
beyond
     Total  
     (in millions)  

Long-term debt obligations(1)

   $ 4.0       $ 15.9       $ 15.9       $ 15.9       $ 15.9       $ 321.4       $ 389.0   

Capital lease obligations(2)

     1.5         5.5         4.4         2.4         0.6                 14.4   

Operating lease obligations(3)

     7.8         23.1         19.7         15.4         13.6         27.9         107.5   

U.K. defined benefit pension plan contributions(4)

     1.3         5.4         5.6                                 12.3   

Other(5)

     2.0         3.3                                         5.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16.6       $ 53.2       $ 45.6       $ 33.7       $ 30.1       $ 349.3       $ 528.5   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Represents the principal and interest payments on our term loan. Interest on our term loan is based on LIBOR plus 4.25% with LIBOR subject to a 1.00% floor. For the purposes of estimating the variable interest, the greater of the average 3-month LIBOR from the last three years (0.3%) and the LIBOR floor (1.00%) has been used. No amounts have been included for potential repayments relating to the annual repayment of excess cash flows as an estimate is not practicable.
(2) Represents the principal and interest payments for capital lease obligations. Interest rates on these obligations range from 5.1% to 9.0%.
(3) Operating lease obligations exclude payments to be received by us under sublease arrangements.
(4) Represents the expected contribution to our defined benefit pension plan in the U.K. The amount of annual employer contributions required to fund the U.K. plan’s deficit is determined every three years in accordance with U.K. regulations. Future funding requirements after calendar year 2016 are dependent on the unfunded pension liability and the time period over which the deficit is amortized and have been excluded from the table. In addition, no amounts have been included for pension liabilities in France, Germany or Switzerland. Total cash payments under the defined benefit pension plans in France, Germany and Switzerland for the year-ended December 31, 2014 are expected to be approximately $3.0 million.

 

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(5) Primarily represents payments under an information technology outsourcing agreement.

Total contractual obligations listed do not include contractual obligations recorded on the balance sheet as current liabilities, except for those associated with a long-term liability. Contractual obligations also exclude $12.5 million of non-current tax liabilities primarily relating to uncertain tax positions due to the uncertainty of the timing of any potential payments.

Purchase orders or contracts for the purchase of raw materials and other goods and services are not included in the table above. We are not able to determine the aggregate amount of such purchase orders that represent contractual obligations, as purchase orders may represent authorizations to purchase rather than binding agreements.

Off-Balance Sheet Arrangements

Off-balance sheet arrangements that have material changes from those disclosed in our Annual Report are as follows:

Sales-type leases

We offer our customers lease financing and other services under our managed services offering. We fund this offering, which we have branded as the TotalSolution® program, in part through the sale to financial institutions of rental payment streams under the leases. Such financial institutions have the option to require us to repurchase such income streams, subject to limitations, in the event of defaults by lease customers and, accordingly, we maintain reserves based on loss experience and past due accounts. In addition, such financial institutions have the option to require us to repurchase such income streams upon any uncured breach by us under the terms of the underlying sale agreements. At September 30, 2014, sold payments remaining unbilled net of lease recourse reserves, which represents the total balance of leases that are not included in our balance sheet, were $67.4 million (December 31, 2013—$87.8 million).

Critical Accounting Policies

The preparation of our consolidated financial statements and related disclosures in conformity with GAAP requires us to make estimates and assumptions about future events that can have a material impact on the amounts reported in our consolidated financial statements and accompanying notes. The determination of estimates requires the use of assumptions and the exercise of judgment and, as such, actual results could differ from those estimated. Our significant accounting policies are described in note 2 to our audited annual consolidated financial statements included in our Annual Report. The following critical accounting policies have been updated to reflect results to September 30, 2014:

Sales-Type Leases, reserves

Our total reserve for losses related to the entire lease portfolio, including amounts classified as accounts receivable on our balance sheet, was 3.8% of the ending aggregate lease portfolio as of September 30, 2014 compared to 4.0% at December 31, 2013. The reserve is based on a review of our past write-off experience and a review of the accounts receivable aging as of September 30, 2014. We believe our reserves are adequate to cover future potential write-offs. Should, however, the financial condition of our customers deteriorate in the future, additional reserves in amounts that could be material to the financial statements could be required.

Allowance for Doubtful Accounts

Our allowance for doubtful accounts is based on our assessment of the collectability of customer accounts. A considerable amount of judgment is required in order to make this assessment, including a detailed analysis of the aging of our accounts receivable, the current creditworthiness of our customers and an analysis of historical bad debts and other adjustments. If there is a deterioration of a major customer’s creditworthiness or actual defaults are higher than our historical experience, our estimate of the recoverability of amounts due could be adversely affected. We review in detail our allowance for doubtful accounts on a quarterly basis and adjust the allowance amount estimate to reflect actual portfolio performance and change in future portfolio performance expectations. As of September 30, 2014 and December 31, 2013, the provision represented 5.5% and 4.8% of gross receivables, respectively.

Stock-Based Compensation

The fair value of the stock options granted is estimated on the grant date using the Black-Scholes option-pricing model for each award, net of estimated forfeitures, and is recognized over the employee’s requisite service period, which is generally the vesting period. The assumptions used in the Black-Scholes option-pricing model for the options granted in the first nine months of 2014 are included in note 14 to the unaudited interim consolidated financial statements.

 

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For the three and nine months ended September 30, 2014, stock-based compensation expense was $1.5 million and $4.5 million, respectively (three and nine months ended September 30, 2013—$1.2 million and $3.3 million, respectively). As of September 30, 2014, there was $13.6 million of unrecognized stock-based compensation expense (December 31, 2013—$6.0 million). We expect this cost to be recognized over a weighted average period of 3.3 years (December 31, 2013—2.3 years).

Recent Accounting Pronouncements

Classification of unrecognized tax benefits

In July 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2013-11 to include explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss carryforward or a tax credit carryforward exists. The ASU provides amendments to the Income Taxes subtopic of the FASB Accounting Standards Codification (“ASC”), such that generally, unrecognized tax benefits should be presented as a reduction of deferred tax assets created by net operating losses or tax credit carryforwards in the same jurisdiction. We adopted this ASU prospectively in the first quarter of 2014. The adoption did not have a material effect to our consolidated financial statements.

Discontinued operations

In April 2014, the FASB issued ASU 2014-08 to change the criteria for reporting discontinued operations such that disposals of small groups of assets will no longer qualify for discontinued operations presentation. The ASU provides amendments to the Presentation of Financial Statements and Property, Plant and Equipment subtopics of the FASB ASC. As a result of the ASU, only those disposals of components that represent a strategic shift that has or will have a major effect on the entity’s operations will be reported as discontinued operations. We will adopt this ASU prospectively, no later than the first quarter of 2015.

Revenue recognition

In May 2014, the FASB issued ASU 2014-09 to provide a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The ASU adds a Revenue from Contracts with Customers subtopic to the FASB ASC and supersedes most current revenue recognition guidance, including industry-specific guidance. The amendment becomes effective for us in the first quarter of 2017 and early adoption is not permitted. We are currently evaluating the effect that the adoption of this ASU will have on our consolidated financial statements.

Going concern assessment and disclosure requirements

In May 2014, the FASB issued ASU 2014-15 to provide guidance in relation to management’s assessment of an entity’s ability to continue as a going concern and to provide disclosure requirements in certain circumstances. The amendment becomes effective for us in the first quarter of 2016. We do not expect the adoption to have a material impact on the consolidated financial statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Management believes there have been no material changes to our quantitative and qualitative disclosures about market risk during the nine months ended September 30, 2014, as compared to those discussed in our Annual Report.

 

Item 4. Controls and Procedures.

a) Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of September 30, 2014. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported within the time period specified in the rules and forms of the SEC.

 

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For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives, and management necessarily is required to use its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

b) Changes in Internal Controls

The acquisition of Aastra on January 31, 2014, represents a material change in internal control over financial reporting since management’s last assessment of the Company’s internal control over financial reporting which was completed as of December 31, 2013. Tangible assets of approximately $263.9 million related to the Aastra business were included in Mitel’s consolidated balance sheet at September 30, 2014 and total revenues of approximately $369.0 million and a net loss of approximately $8.6 million were included in the consolidated statement of operations for the nine months ended September 30, 2014 (representing operations of the Aastra business from the acquisition date of January 31, 2014). The Aastra business utilizes separate information and accounting systems and processes. The Company intends to extend its Sarbanes-Oxley Section 404 compliance program to include the Aastra business. However, the Company does not anticipate completing an evaluation and review of Aastra’s internal control over financial reporting by December 31, 2014, the date of management’s next assessment of the Company’s internal control over financial reporting (the “2014 Assessment”). Accordingly, management anticipates excluding the Aastra business from the 2014 Assessment in accordance with the guidance from the Division of Corporation Finance and Office of the Chief Accountant of the Securities and Exchange Commission contained in the release captioned Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports Frequently Asked Questions (revised October 6, 2004).

Other than the acquisition of Aastra, there were no significant changes in the Company’s internal control over financial reporting during the nine months ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings.

None.

 

Item 1A. Risk Factors.

In addition to the other information set forth in this Report, you should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report for the fiscal period ended December 31, 2013, none of which have materially changed other than described below. Those risks, which could materially affect our business, financial condition or future results, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition and/or operating results.

As described in the “Significant events and recent developments” section above, on October 20, 2014, we announced that we made an unsolicited non-binding proposal to the Board of Directors of ShoreTel on October 2, 2014 to acquire all of the common shares of ShoreTel for $8.10 per share in cash, representing total consideration of approximately $540.0 million. While the Board of Directors of ShoreTel publicly rejected the offer on October 27, 2014, the Company intends to keep the offer open until November 20, 2014. The Company is uncertain whether this offer, or any other new or amended offer, will result in the consummation of a transaction with ShoreTel. Please refer to the risk factor “We have made strategic acquisitions and may make strategic acquisitions in the future. We may not be successful in operating or integrating these acquisitions.” in our Annual Report for a description of the significant risks relating to acquisitions.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

 

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Item 3. Defaults Upon Senior Securities.

None.

 

Item 4. (Removed and Reserved).

 

Item 5. Other Information.

None.

 

Item 6. Exhibits.

See Index to Exhibits following the signature page to this Form 10-Q, which is incorporated by reference herein.

 

40


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on November 6, 2014.

 

MITEL NETWORKS CORPORATION
By:  

/s/ Steven Spooner

  Steven Spooner
  Chief Financial Officer


EXHIBIT INDEX

 

Exhibit

Number

  

Description

  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a)/15d-14(a).
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act and Rules 13a-14(a)/15d-14(a).
  32.1    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  32.2    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from Mitel Network Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2014 and December 31, 2013; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and September 30, 2013; (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and September 30, 2013; (iv) Consolidated Statements of Shareholders’ Equity for the three and nine months ended September 30, 2014 and September 30, 2013; (v) Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2014 and September 30, 2013; and (vi) Notes to the Unaudited Interim Consolidated Financial Statements.