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EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - MITEL NETWORKS CORPdex311.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350 - MITEL NETWORKS CORPdex321.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350 - MITEL NETWORKS CORPdex322.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - MITEL NETWORKS CORPdex312.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

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

For the quarterly period ended January 31, 2011

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  þ    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  ¨    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   ¨    Accelerated Filer   ¨
Non-accelerated filer   þ  (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  þ

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

As of February 24, 2011, there were 52,909,001 common shares outstanding.

 

 

 


PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

2


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED BALANCE SHEETS

(in U.S. dollars, millions)

(Unaudited)

 

     January 31,
2011
    April 30,
2010
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 90.7      $ 76.6   

Accounts receivable (net of allowance for doubtful accounts of $9.6 and $11.9, respectively)

     120.1        121.5   

Sales-type lease receivables (net) (note 3)

     22.2        33.8   

Inventories (net) (note 4)

     31.6        26.7   

Deferred tax asset

     11.6        15.0   

Other current assets (note 5)

     41.9        46.5   
                
     318.1        320.1   

Non-current portion of sales-type lease receivables (net) (note 3)

     31.5        29.2   

Deferred tax asset

     85.5        5.0   

Property and equipment (net)

     15.8        17.0   

Identifiable intangible assets (net) (note 6)

     106.2        123.1   

Goodwill

     134.5        134.5   

Other non-current assets

     9.5        12.1   
                
   $ 701.1      $ 641.0   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIENCY)

    

Current liabilities:

    

Accounts payable and accrued liabilities (note 7)

   $ 109.1      $ 107.7   

Due to related parties (note 8)

     0.3        7.2   

Current portion of deferred revenue

     44.4        46.2   

Current portion of long-term debt

     4.2        4.1   
                
     158.0        165.2   

Long-term debt

     344.4        345.7   

Lease recourse liability (note 3)

     6.9        7.9   

Long-term portion of deferred revenue

     10.5        14.1   

Deferred tax liability

     57.3        70.9   

Pension liability (note 9)

     72.1        68.1   

Other non-current liabilities

     20.6        24.0   
                
     669.8        695.9   
                

Commitments, guarantees and contingencies (note 10)

    

Shareholders’ equity (deficiency):

    

Common shares, without par value—unlimited shares authorized, issued and outstanding: 52.9 at January 31, 2011 and 52.8 at April 30, 2010 (note 11)

     803.3        802.8   

Preferred shares—unlimited shares authorized, nil issued and outstanding

     —          —     

Warrants (note 12)

     55.6        55.6   

Additional paid-in capital

     11.1        7.7   

Accumulated deficit

     (746.2     (829.9

Accumulated other comprehensive loss

     (92.5     (91.1
                
     31.3        (54.9
                
   $ 701.1      $ 641.0   
                

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

 

3


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     Nine Months Ended  
     January 31,
2011
    January 31,
2010
    January 31,
2011
    January 31,
2010
 

Revenues:

        

Telecommunications

   $ 141.9      $ 143.2      $ 424.2      $ 427.2   

Network services

     20.1        19.0        58.9        56.8   
                                
     162.0        162.2        483.1        484.0   
                                

Cost of revenues:

        

Telecommunications

     73.6        73.0        219.9        217.4   

Network services

     11.1        10.4        32.3        32.6   
                                
     84.7        83.4        252.2        250.0   
                                

Gross margin

     77.3        78.8        230.9        234.0   
                                

Expenses:

        

Selling, general and administrative

     55.9        52.9        164.1        159.7   

Research and development

     13.8        12.9        40.2        39.2   

Special charges and restructuring costs (note 14)

     7.4        0.8        11.7        3.5   
                                
     77.1        66.6        216.0        202.4   
                                

Operating income

     0.2        12.2        14.9        31.6   

Interest expense

     (5.0     (6.1     (15.2     (23.8

Fair value adjustment on derivative instruments (note 15)

     —          23.3        1.0        —     

Other income (expense), net

     (0.1     0.9        (0.4     0.5   
                                

Income (loss) before income taxes

     (4.9     30.3        0.3        8.3   

Current income tax recovery (expense)

     (0.6     (2.1     (0.1     (1.3

Deferred income tax recovery (note 16)

     1.5        5.0        83.5        8.2   
                                

Net income (loss)

   $ (4.0   $ 33.2      $ 83.7      $ 15.2   
                                

Net income (loss) per common share (note 13)

        

Basic

   $ (0.08   $ 0.59      $ 1.58      $ (1.44

Diluted

   $ (0.08   $ 0.59      $ 1.49      $ (1.44

Weighted-average number of common shares outstanding (note 13)

        

Basic

     52.9        14.3        52.9        14.3   

Diluted

     52.9        14.3        56.1        14.3   

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

 

4


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)

AND COMPREHENSIVE INCOME (LOSS)

(in U.S. dollars, millions)

(Unaudited)

 

    

 

Common Shares

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

Balance at April 30, 2010

     52.8      $ 802.8       $ 55.6       $ 7.7       $ (829.9   $ (91.1   $ (54.9
                                                           

Net income

     —          —           —           —           6.8        —          6.8   

Foreign currency translation adjustments

     —          —           —           —           —          (0.9     (0.9
                                                           

Comprehensive income

     —          —           —           —           6.8        (0.9     5.9   

Issue of shares

     —  (1)      0.1         —           —           —          —          0.1   

Stock-based compensation

     —          —           —           0.8         —          —          0.8   
                                                           

Balance at July 31, 2010

     52.8      $ 802.9       $ 55.6       $ 8.5       $ (823.1   $ (92.0   $ (48.1
                                                           

Net income

     —          —           —           —           80.9        —          80.9   

Foreign currency translation adjustments

     —          —           —           —           —          (0.5     (0.5
                                                           

Comprehensive income

     —          —           —           —           80.9        (0.5     80.4   

Issue of shares

     —  (1)      0.1         —           —           —          —          0.1   

Stock-based compensation

     —          —           —           1.5         —          —          1.5   
                                                           

Balance at October 31, 2010

     52.8      $ 803.0       $ 55.6       $ 10.0       $ (742.2   $ (92.5   $ 33.9   
                                                           

Net loss

     —          —           —           —           (4.0     —          (4.0

Foreign currency translation adjustments

     —          —           —           —           —          —          —     
                                                           

Comprehensive loss

     —          —           —           —           (4.0     —          (4.0

Issue of shares

     0.1        0.3         —           —           —          —          0.3   

Stock-based compensation

     —          —           —           1.1         —          —          1.1   
                                                           

Balance at January 31, 2011

     52.9      $ 803.3       $ 55.6       $ 11.1       $ (746.2   $ (92.5   $ 31.3   
                                                           

 

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

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

 

5


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIENCY)

AND COMPREHENSIVE INCOME (LOSS) (continued)

(in U.S. dollars, millions)

(Unaudited)

 

    

 

Common Shares

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

Balance at April 30, 2009

     14.3      $ 277.8       $ 56.6      $ 4.4       $ (728.0   $ (40.9   $ (430.1
                                                          

Adoption of the ASC Derivatives and Hedging Topic

     —          —           (1.0     —           1.0        —          —     
                                                          

Balance at May 1, 2009

     14.3        277.8         55.6        4.4         (727.0     (40.9     (430.1
                                                          

Net income

     —          —           —          —           2.0        —          2.0   

Unrealized derivative gain on cash flow hedges

     —          —           —          —           1.8        —          1.8   

Foreign currency translation adjustments

     —          —           —          —           —          5.0        5.0   
                                                          

Comprehensive income

     —          —           —          —           3.8        5.0        8.8   

Stock-based compensation

     —          —           —          0.6         —          —          0.6   

Accretion of interest on redeemable preferred shares

     —          —           —          —           (11.4     —          (11.4
                                                          

Balance at July 31, 2009

     14.3      $ 277.8       $ 55.6      $ 5.0       $ (734.6   $ (35.9   $ (432.1
                                                          

Net loss

     —          —           —          —           (20.0     —          (20.0

Unrealized derivative gain on cash flow hedges

     —          —           —          —           2.6        —          2.6   

Foreign currency translation adjustments

     —          —           —          —           —          (1.3     (1.3
                                                          

Comprehensive loss

     —          —           —          —           (17.4     (1.3     (18.7

Stock-based compensation

     —          —           —          1.2         —          —          1.2   

Accretion of interest on redeemable preferred shares

     —          —           —          —           (11.9     —          (11.9
                                                          

Balance at October 31, 2009

     14.3      $ 277.8       $ 55.6      $ 6.2       $ (763.9   $ (37.2   $ (461.5
                                                          

Net income

     —          —           —          —           33.2        —          33.2   

Defined benefit pension obligation

     —          —           —          —           —          (60.7     (60.7

Foreign currency translation adjustments

     —          —           —          —           —          (1.4     (1.4
                                                          

Comprehensive income (loss)

     —          —           —          —           33.2        (62.1     (28.9

Cancellation of employee share loan

     —  (1)      0.1        —          —           —          —          0.1   

Exercise of stock options

     —  (1)      —           —          —           —          —          —     

Stock-based compensation

     —          —           —          0.6         —          —          0.6   

Accretion of interest on redeemable preferred shares

     —          —           —          —           (12.4     —          (12.4
                                                          

Balance at January 31, 2010

     14.3      $ 277.9       $ 55.6      $ 6.8       $ (743.1   $ (99.3   $ (502.1
                                                          

 

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

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

 

6


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in U.S. dollars, millions)

(Unaudited)

 

     Three Months Ended     Nine Months Ended  
     January 31,
2011
    January 31,
2010
    January 31,
2011
    January 31,
2010
 

CASH PROVIDED BY (USED IN)

        

Operating activities:

        

Net income (loss)

   $ (4.0   $ 33.2      $ 83.7      $ 15.2   

Adjustments to reconcile net income to net cash from (used in) operating activities:

        

Amortization and depreciation

     8.4        8.9        25.4        25.8   

Fair value adjustment on derivative instruments

     —          (23.3     (1.0     —     

Stock-based compensation

     1.3        0.6        3.4        2.4   

Loss (gain) on disposal of assets

     —          (0.3     —          0.7   

Investment impairment

     —          —          —          0.9   

Accretion of interest on litigation settlement obligation

     0.2        0.4        0.5        1.0   

Unrealized foreign exchange loss (gain)

     —          (0.2     —          1.3   

Deferred income taxes

     (1.5     (3.8     (83.5     (8.2

Non-cash movements in provisions

     2.5        (0.1     (0.4     —     

Non-cash change in operating assets and liabilities (note 18)

     (2.1     9.8        (6.6     (8.9
                                

Net cash from operating activities

     4.8        25.2        21.5        30.2   
                                

Investing activities:

        

Additions to property and equipment and intangible assets

     (2.8     (2.0     (4.4     (5.4

Change in restricted cash

     —          —          0.9        1.2   

Realized foreign exchange loss on hedging activities

     —          —          —          (0.1
                                

Net cash used in investing activities

     (2.8     (2.0     (3.5     (4.3
                                

Financing activities:

        

Increase in bank indebtedness

     —          (0.1     —          (0.1

Repayment of capital lease liabilities

     (0.5     (0.3     (1.4     (1.6

Repayment of long-term debt

     (0.5     (0.5     (1.5     (1.5

Repayment of employee share loans

     —          0.2        —          0.2   

Payment of litigation settlement obligation

     (0.8     (1.1     (2.7     (2.8

Issuance of shares from option exercises

     0.3        —          0.5        —     
                                

Net cash used in financing activities

     (1.5     (1.8     (5.1     (5.8
                                

Effect of exchange rate changes on cash and cash equivalents

     0.2        (0.5     1.2        1.3   
                                

Net increase in cash and cash equivalents

     0.7        20.9        14.1        21.4   

Cash and cash equivalents, beginning of period

     90.0        28.9        76.6        28.4   
                                

Cash and cash equivalents, end of period

   $ 90.7      $ 49.8      $ 90.7      $ 49.8   
                                

(Note 18 contains supplementary cash flow information)

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

 

7


MITEL NETWORKS CORPORATION

(incorporated under the laws of Canada)

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended January 31, 2011 and January 31, 2010

(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 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 January 31, 2011 and the results of operations and cash flows of the Company for each of the three-month and nine-month periods ended January 31, 2011 and January 31, 2010 in accordance with GAAP applied on a consistent basis. The consolidated financial statements include the accounts of Mitel and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated.

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 each of the three years ended April 30, 2010, 2009 and 2008 contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on July 27, 2010 (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 are described in note 2 to the audited annual consolidated financial statements. There have been no significant changes to these policies. With the exception of the accounting pronouncements below, there have been no recent accounting pronouncements that are expected to have a significant effect on the consolidated financial statements.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-14 to address concerns raised by constituents relating to the accounting for revenue arrangements that contain tangible products and software. The amendments in this ASU change the accounting model for revenue arrangements that include both tangible products and software elements. Tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality will no longer be within the scope of guidance in the Software—Revenue Recognition Subtopic of the FASB Accounting Standards Codification (“FASB ASC”). The amendments in this ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is required to adopt this ASU in the first quarter of fiscal 2012. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.

In October 2009, the FASB issued ASU 2009-13 to address the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (deliverables) separately rather than as a combined unit. This ASU provides amendments to the criteria in the Revenue Recognition—Multiple-Element Arrangements Subtopic of the FASB ASC. As a result of those amendments, multiple-deliverable arrangements will be separated in more circumstances than under existing GAAP. The amendments in this ASU will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company is required to adopt this ASU in the first quarter of fiscal 2012. The Company is currently evaluating the effect that the adoption of this ASU will have on its consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20 to enhance disclosure about the credit quality of financing receivables and the related allowance for credit losses. The Company has adopted this ASU in the third quarter of fiscal 2011. As a result of this ASU, the Company has provided additional disclosures surrounding its sales-type lease receivables and the related allowances within note 3 of these unaudited interim financial statements.

 

8


3. NET INVESTMENT IN SALES-TYPE LEASES

Net investment in sales-type leases represents the value of sales-type leases presently held under the TotalSolution® program. The Company currently sells the rental payments due to the Company from some of the sales-type leases. 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). For accounts receivable and investments in sales-type leases, the Company writes off uncollectible accounts when there appears to be no possibility of collecting the related amount outstanding.

The following table provides detail on the sales-type leases:

 

     January 31, 2011      April 30, 2010  
     Gross      Allowance     Net      Gross      Allowance     Net  

Lease balances included in consolidated accounts receivable

   $ 12.4       $ (3.9   $ 8.5       $ 13.4       $ (4.1   $ 9.3   

Current portion of investment in sales-type leases

     23.3         (1.1     22.2         35.3         (1.5     33.8   

Non-current portion of investment in sales-type leases

     32.6         (1.1     31.5         30.5         (1.3     29.2   
                                                   

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

     68.3         (6.1     62.2         79.2         (6.9     72.3   

Sold rental payments remaining unbilled

     168.4         (6.9 )(1)      161.5         184.9         (7.9 )(1)      177.0   
                                                   

Total of sales-type leases unsold and sold

   $ 236.7       $ (13.0   $ 223.7       $ 264.1       $ (14.8   $ 249.3   
                                                   

 

(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-month period ended January 31, 2011, the Company sold $16.2 of rental payments and recorded gains on sale of those rental payments of $2.6 (three-month period ended January 31, 2010—sold $26.0 and recorded gains of $3.6). For the nine-month period ended January 31, 2011, the Company sold $45.6 of rental payments and recorded gains on sale of those rental payments of $7.1 (nine-month period ended January 31, 2010—sold $50.5 and recorded gains of $6.4). Sold rental payments remaining unbilled at the end of the period represents the total balance of leases that are not included in our consolidated balance sheets. The Company is compensated for administration and servicing of rental payments sold.

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:

 

9


Age analysis as at January 31, 2011

 

     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 consolidated accounts receivable

   $ 4.4         $ 3.3      $ 4.7      $ 8.0         $ 12.4   

Investment in sold and unsold sales-type lease receivables(1)

     184.8           34.7        4.8        39.5           224.3   
                                              

Total gross sales-type leases

   $ 189.2         $ 38.0      $ 9.5      $ 47.5         $ 236.7   
                                              

Allowance

     (5.2        (1.8     (6.0     (7.8        (13.0
                                              

Total net sales-type leases

   $ 184.0         $ 36.2      $ 3.5      $ 39.7         $ 223.7   
                                              

 

(1) Remaining unbilled amounts related to past-due billed amounts

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 and the current credit worthiness of our customers and an analysis of historical bad debts and other adjustments. If there is a deterioration of a major customer’s credit worthiness 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 amount estimate to reflect actual portfolio performance and change in future portfolio performance expectations.

The following table shows the activity of the allowance for credit losses on sales-type leases during the nine months ended January 31, 2011:

 

 

Allowance for credit losses on sales-type leases, April 30, 2010

   $ (14.8

Write-offs

     4.4   

Recoveries

     (0.1

Provision

     (2.5
        

Allowance for credit losses on sales-type leases, January 31, 2011

   $ (13.0
        

Ending balance of allowance: individually evaluated for impairment

     (6.8

Ending balance of allowance: collectively evaluated for impairment

     (6.2
        
   $ (13.0
        

Total sales-type leases, gross:

  

Ending balance, gross: individually evaluated for impairment

     10.7   

Ending balance, gross: collectively evaluated for impairment

     226.0   
        
   $ 236.7   
        

 

10


4. INVENTORIES

 

     January 31, 2011     April 30, 2010  

Raw materials and work in process

   $ 6.1      $ 5.1   

Finished goods

     33.0        30.0   

Less: provision for obsolete inventory

     (7.5     (8.4
                
   $ 31.6      $ 26.7   
                

5. OTHER CURRENT ASSETS

 

     January 31, 2011      April 30, 2010  

Prepaid expenses and deferred charges

   $ 17.8       $ 16.5   

Unbilled receivables

     8.7         14.3   

Other receivables

     7.3         6.7   

Service inventory

     6.7         6.7   

Restricted cash

     1.4         2.3   
                 
   $ 41.9       $ 46.5   
                 

6. IDENTIFIABLE INTANGIBLE ASSETS

 

     January 31, 2011      April 30, 2010  
     Cost      Accumulated
amortization
    Net      Cost      Accumulated
amortization
    Net  

Patents, trademarks and other

   $ 14.0       $ (9.0   $ 5.0       $ 12.8       $ (7.7   $ 5.1   

Customer relationships

     99.9         (43.4     56.5         99.9         (34.0     65.9   

Developed technology

     78.8         (34.1     44.7         78.8         (26.7     52.1   

Trade name

     —           —          —           2.3         (2.3     —     
                                                   

Intangible assets

   $ 192.7       $ (86.5   $ 106.2       $ 193.8       $ (70.7   $ 123.1   
                                                   

7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

     January 31, 2011      April 30, 2010  

Trade payables

   $ 30.5       $ 27.5   

Employee-related payables

     18.9         16.4   

Restructuring, warranty and other provisions

     8.6         6.2   

Other accrued liabilities

     51.1         57.6   
                 
   $ 109.1       $ 107.7   
                 

8. RELATED PARTY TRANSACTIONS

The Matthews Group

Dr. Terence Matthews (“Dr. Matthews”) and certain entities controlled by Dr. Matthews (collectively, the “Matthews Group”) are significant shareholders of the Company. In addition, the Matthews Group holds certain warrants and options of the Company. Significant transactions with companies controlled by or related to Dr. Matthews include the following:

BreconRidge manufacturing agreement

Throughout fiscal 2010, the Matthews Group had a significant interest in BreconRidge Manufacturing Solutions (“BreconRidge”), a significant supplier to Mitel. In May 2010, the Matthews Group and other BreconRidge shareholders sold their interest in BreconRidge to Sanmina–SCI. As a result, for fiscal 2011, BreconRidge is no longer a related party to Mitel. The Company does not currently anticipate significant changes to its manufacturing supply agreement as a result of this transaction.

In the three- and nine-month periods ended January 31, 2010, the Company purchased $6.9 and $25.6 of products and services and sold $0.2 and $0.6 of raw material inventory, respectively, under a manufacturing supply agreement with BreconRidge. As of April 30, 2010, balances payable pursuant to this agreement amounted to $6.6 and balances receivable pursuant to this agreement amounted to $0.7.

 

11


Leased properties

Up to the end of the second quarter of fiscal 2011, the Company leased its Ottawa-based headquarter facilities from the Matthews Group under a 10-year lease which was to expire in February 2011. During the third quarter of fiscal 2011, the Company negotiated a new lease with the Matthews Group under terms and conditions which management believes reflect current market rates. The new lease has a term of 5 years and 3 months, and can be renewed at the option of the Company for an additional 5 years. The new lease contains property reinstatement terms which have not been accrued at this time as the amount is not estimable. The new lease contains certain changes in the rental rate over the term of the lease. The changes in the rental rate have been recorded on a straight-line basis over the term of the lease. The total annual expense for base rent under the lease is expected to be approximately $2.3 Canadian dollars.

During the three- and nine-month periods ended January 31, 2011, Mitel recorded lease payments for base rent and operating costs of $1.6 and $6.1, respectively (three- and nine-month periods ended January 31, 2010—$2.2 and $6.7, respectively). At January 31, 2011, balances payable relating to the lease totaled $nil (April 30, 2010—$0.7).

Other

During the three- and nine-month periods ended January 31, 2011, other transactions with companies related to Dr. Matthews arising in the normal course of operations consisted of sales of $0.3 and $1.1 and purchases of $0.3 and $1.4, respectively (three and nine-month periods ended January 31, 2010—sales of $0.3 and $0.9, and purchases of $0.2 and $1.1, respectively). At January 31, 2011, the net balance receivable as a result of these transactions was $1.1 (April 30, 2010—$1.5) and is included in accounts receivable in the consolidated balance sheet.

In the second quarter of fiscal 2010, the Company recorded an impairment charge of $1.1 related to its investment in Natural Convergence Inc. (“NCI”). Dr. Matthews had a significant ownership interest in NCI. The impairment charge was included in special charges and restructuring costs in the consolidated statement of operations.

The Francisco Group

Francisco Partners Management, LLC and certain of its affiliates (collectively, “the Francisco Group”) are significant shareholders of the Company. In addition, the Francisco Group holds certain warrants and options of the Company. Significant transactions with companies controlled by or related to the Francisco Group include the following:

Second Lien Debt

During the third quarter of fiscal 2010, an affiliate of the Francisco Group purchased $21.2 in principal of the outstanding second lien term debt. The Matthews Group had a 40% participating interest in the second lien debt held by such affiliate of the Francisco Group but was neither a party to nor a lender under the second lien term loan and has no contractual rights or enforcement rights against Mitel in connection with its participating interest in such second lien debt. In the third quarter of fiscal 2011, the affiliate sold $11.2 of face value of the debt, which included the Matthews Group’s 40% participating interest. At January 31, 2011, the affiliate of the Francisco Group held $10.0 of the Company’s second lien debt.

Interest of $0.2 and $1.0 was expensed during the third quarter and first nine months of fiscal 2011, respectively, relating to the second lien debt held by an affiliate of the Francisco Group (third quarter of fiscal 2010, interest expense of $0.2).

9. PENSION PLANS

The Company and its subsidiaries maintain defined contribution pension plans that cover substantially all employees. In addition, the Company’s United Kingdom (“U.K.”) subsidiary maintains a defined benefit pension plan. At January 31, 2011, the pension liability was $72.1 (April 30, 2010—$68.1). The Company’s net periodic benefit cost was as follows:

 

     Three months ended     Nine months ended  
     January 31,
2011
    January 31,
2010
    January 31,
2011
    January 31,
2010
 

Defined Contribution

        

Current service cost

   $ 0.7      $ 0.4      $ 1.8      $ 1.0   

Defined Benefit

        

Current service cost

     0.4        0.2        1.1        0.6   

Interest cost

     2.5        1.9        7.3        5.7   

Expected return on plan assets

     (2.1     (1.6     (6.0     (4.6

 

12


     Three months ended      Nine months ended  
     January 31,
2011
     January 31,
2010
     January 31,
2011
     January 31,
2010
 

Amortization of actuarial loss

     0.7         0.1         2.0         0.3   
                                   

Total periodic benefit cost, net

   $ 2.2       $ 1.0       $ 6.2       $ 3.0   
                                   

The Company’s annual funding requirement for its U.K. defined benefit plan is determined every three years in accordance with U.K. regulations, and is based on a calendar year. In October 2010, the Company’s annual funding requirement for the calendar year 2011 was determined to be £2.5, and will increase at an annual rate of 3% for calendar years 2012 and 2013.

As a result of changes in the valuation assumptions, most significantly a decrease in the estimated discount rate, the valuation of the Company’s pension liability was updated in the third quarter of fiscal 2010. As a result of this valuation, the pension liability increased by $60.7 during the third quarter of fiscal 2010.

10. COMMITMENTS, GUARANTEES AND CONTINGENCIES

Product warranties

The Company provides its customers with standard warranties on hardware and software for periods of up to 15 months. At January 31, 2011, the warranty accrual was $1.1 (April 30, 2010—$1.6).

Intellectual property indemnification obligations

The Company enters on a regular basis into agreements 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 consolidated financial statements with respect to these guarantees.

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. For the periods reported, the liability recognized related to these bid and performance related bonds was insignificant. At January 31, 2011, the total maximum potential amount of future payments the Company could be required to make under bid and performance related bonds was $2.1 (April 30, 2010—$4.8).

Contingencies

On February 27, 2008, the Company issued a statement of claim against one of its customers for non-payment of invoices arising from the provision of hardware, software and services. The customer responded with a counterclaim for a return of amounts paid plus other unquantified costs. In September 2010, the parties reached a settlement, including a consent to dismiss all outstanding claims and counterclaims in the matter.

The Company is also party to a small number of other 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 at least the minimum amount of the range.

Commitments

During the third quarter of fiscal 2011, the Company signed a new lease agreement with the Matthews Group as described in Note 8.

 

13


11. SHARE CAPITAL

Share Capital

At January 31, 2011 and April 30, 2010, the Company’s authorized share capital 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. No preferred shares were outstanding at January 31, 2011 or April 30, 2010.

Stock Options

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

 

     Nine months ended  
     January 31, 2011      January 31, 2010  
     Number of
Options
    Weighted Average
Exercise Price per
Option
     Number of
Options
    Weighted Average
Exercise Price per

Option
 

Outstanding options:

         

Balance, beginning of period:

     2.6      $ 4.02         2.1      $ 14.55   

Granted

     3.7      $ 6.64         0.8      $ 4.35   

Exercised

     (0.1   $ 3.75         —  (1)    $ 3.75   

Forfeited

     (0.1   $ 6.12         (0.1   $ 5.95   

Expired

     —  (1)    $ 6.52         (0.1   $ 13.38   
                                 

Balance, end of period:

     6.1      $ 5.64         2.7      $ 4.22  (2) 
                                 

Number of options exercisable

     1.9      $ 4.55         1.0      $ 4.33  (2) 
                                 

 

(1) Number of options is less than 0.1 for the period.
(2) Weighted average exercise price at January 31, 2010 reflects a July 2009 stock option modification that lowered the exercise price of substantially all outstanding stock options.

The Company uses the Black-Scholes-Merton option-pricing model to determine the fair value of the stock option grants during the period. The assumptions and fair value for the three months ended are as follows:

 

     January 31, 2011     October 31, 2010     July 31, 2010     January 31, 2010     October 31, 2009     July 31, 2009  

Number of options granted

     2.0        0.3        1.4        0.1        0.2        0.5   

Risk-free interest rate

     1.94     1.43     1.76     2.3     2.38     2.30

Dividends

     0     0     0     0     0     0

Expected volatility

     55.0     55.0     55.0     75.0     85.0     85.0

Annual forfeiture rate

     10     10     10     10     10     10

Expected life of the options (1)

     4.6 years        4.6 years        4.6 years        5.0 years        5.0 years        5.0 years   

Fair value per option (2)

   $ 2.32      $ 2.78      $ 4.45      $ 2.76      $ 1.32      $ 1.32   

 

(1) In accordance with the Stock Compensation topic of the FASB ASC, the Company determined the expected life of the options for fiscal 2011 using a simplified method due to the Company’s short history as a publicly-traded company. As a result, the expected life was calculated using an average of the original contract term (seven years) and the vesting term, taking into account graded vesting. The expected term for options granted in the first nine months fiscal 2010 was based on the contract term of the options as the Company was privately held.
(2) The fair value per option is also dependent on the exercise price and stock price on the day of grant. Options granted in the nine-month period ended January 31, 2010 had an exercise price below the fair value of the stock price on day of grant. All other options granted had an exercise price that approximated the stock price on the day of grant.
(3)

During the third quarter of fiscal 2011, the Company granted options to the new Chief Executive Officer to purchase 2.0 common shares. Of the grant, 1.5 options were subject to the regular vesting schedule of 1/16th each quarter, and have a seven year contractual life. The remaining 0.5 options vest as follows: 12.5% of the options vest on the “trigger date” and the remainder vest monthly over an 18-month period following the trigger date. The trigger date is defined as the date that is one month following the month in which the five-day average trading price of the Company’s common shares is equal to or greater than $16.80 per share. All unexercised options expire on the earlier of 24 months after the trigger date or five years from the date of grant.

 

14


Deferred Share Unit (“DSU”) Plans

At January 31, 2011, there were 0.05 million (April 30, 2010—0.04 million) DSUs outstanding with a fair value of $0.3 (April 30, 2010—$0.4) recorded as a liability in accounts payable and accrued liabilities on the consolidated balance sheets.

12. WARRANTS

The following table outlines the carrying value of warrants outstanding as of January 31, 2011 and April 30, 2010:

 

     January 31, 2011      April 30, 2010  

Warrants issued in connection with government funding (a)

   $ 39.1       $ 39.1   

Warrants issued in connection with Senior Secured Convertible Notes (b)

     10.5         10.5   

Warrants issued in connection with Class 1 Preferred Shares (c)

     6.0         6.0   

Warrants issued in connection with Series A Preferred Shares (d)

     —           —     
                 
   $ 55.6       $ 55.6   
                 

 

(a) At January 31, 2011, there were 2.48 million warrants outstanding that were issued in connection with government funding (April 30, 2010—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.
(b) At January 31, 2011, there were 1.35 million warrants outstanding that were issued in connection with the issuance of the Senior Secured Convertible Notes (April 30, 2010—1.35 million). The warrants have an exercise price of $15.69 per share, are exercisable at any time at the option of the holder and expire in August 2012.
(c) At January 31, 2011, there were 1.83 million warrants outstanding that were issued in connection with the issuance of Class 1 Preferred Shares (April 30, 2010—1.81 million). The warrants have an exercise price of $16.25 per share, are exercisable at any time at the option of the holder and expire in August 2012.
(d) At January 31, 2011, there were 0.44 million warrants outstanding that were issued in connection with Series A Preferred Shares (April 30, 2010—0.44 million). The warrants have an exercise price of C$14.18 per share, are exercisable at any time at the option of the holder and expire in April 2011. As a result of the exercise price being in a currency other than U.S. dollars, the warrants are recorded as a liability at fair value in the consolidated balance sheets. The fair value at January 31, 2011 was less than $0.1 (April 30, 2010—$1.0) and was included in other non-current liabilities.

13. EARNINGS (LOSS) PER SHARE (“EPS”)

During the first nine months of fiscal 2010, the Company had Class 1 Preferred Shares outstanding. Because the holders of the Class 1 Preferred Shares were entitled to dividends on a basis equivalent to holders of common shares, the Company used the two-class method to determine income attributable to common shareholders and then divided it by the weighted-average common shares outstanding for the period to determine basic EPS. The Class 1 Preferred Shares were converted into common shares in April 2010 and therefore the use of the two-class method was no longer necessary for fiscal 2011.

The following table sets forth the computation of basic and diluted EPS (in millions, except per share amounts):

 

     Three months ended     Nine months ended  
     January 31,
2011
    January 31,
2010
    January 31,
2011
     January 31,
2010
 

Net income (loss), as reported

   $ (4.0   $ 33.2      $ 83.7       $ 15.2   

Accreted interest on redeemable shares

     —          (12.4     —           (35.8
                                 

Net income (loss) available for distribution

   $ (4.0   $ 20.8      $ 83.7       $ (20.6

Allocation of income to preferred shareholders

     —        $ (12.3     —           —     
                                 

Net income (loss) available to common shareholders

   $ (4.0     8.5      $ 83.7       $ (20.6
                                 

Weighted average common shares outstanding during the period, basic

     52.9        14.3        52.9         14.3   
                                 

Income (loss) per common share, basic

   $ (0.08   $ 0.59      $ 1.58       $ (1.44
                                 

Weighted average common shares outstanding during the period, basic

     52.9        14.3        52.9         14.3   

Dilutive effect of options

     —          —          0.7         —     

Dilutive effect of warrants

     —          —          2.5         —     
                                 

Weighted average common shares outstanding during the period, diluted

     52.9        14.3        56.1         14.3   
                                 

Income (loss) per common share, diluted

   $ (0.08   $ 0.59      $ 1.49       $ (1.44
                                 

 

15


The following securities have been excluded in the computation of diluted earnings per share because to do so would have been anti-dilutive based on the terms of the securities:

 

     Three Months Ended      Nine Months Ended  

(Number outstanding, in millions)

   January 31,
2011
     January 31,
2010
     January 31,
2011
     January 31,
2010
 

Stock options

     2.0         2.7         1.3         2.5   

Warrants

     3.2         2.5         3.2         2.5   

Convertible, redeemable preferred shares

     —           20.5         —           19.4   

The following securities have been excluded in the computation of diluted earnings per share because to do so would have been anti-dilutive based on having a net loss attributable to common shareholders for the three months ended January 31, 2011:

 

     Three Months Ended  

(Number outstanding, in millions)

   January 31,
2011
 

Stock options

     2.4   

Warrants

     2.5   

Additionally, for the three and nine months ended January 31, 2010, warrants to acquire 1.1 million common shares were 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. For the three and nine months ended January 31, 2011, the warrants were excluded in the diluted EPS calculation because the exercise price exceeded the average market price of the common shares and as such, they are included in the tables above.

14. SPECIAL CHARGES AND RESTRUCTURING COSTS

The following tables summarize the change in provision for special charges and restructuring costs during the first nine months of fiscal 2011 and the first nine months of fiscal 2010:

 

Description

   Workforce
Reduction
    Lease
Termination
Obligation
    Total  

Balance of provision as of April 30, 2010

   $ 0.3      $ 6.5      $ 6.8   

Charges (reversals)

     0.1        (0.2     (0.1

Cash payments

     (0.4     (0.6     (1.0
                        

Balance of provision as of July 31, 2010

   $ —        $ 5.7      $ 5.7   
                        

Charges

     3.7        0.7        4.4   

Cash payments

     (1.7     (0.5     (2.2
                        

Balance of provision as of October 31, 2010

   $ 2.0      $ 5.9      $ 7.9   
                        

Charges

     3.6        3.8        7.4   

Cash payments

     (2.3     (2.4     (4.7
                        

Balance of provision as of January 31, 2011

   $ 3.3      $ 7.3      $ 10.6   
                        

In the second and third quarter of fiscal 2011, the Company undertook additional actions to reduce its cost structure and improve operational efficiency. The third quarter charge consists of $3.6 of workforce reduction related charges, including severance for approximately 50 employees, which are expected to be paid within the next two years, as well as $3.8 of lease termination obligations primarily related to costs to reinstate, back to their original condition, certain leased premises that had been previously provided for. The current portion of the workforce reduction liability of $3.3 and lease termination obligation liability of $4.2 are included in accounts payable and accrued liabilities, with the remaining balance included in other non-current liabilities.

 

16


Description

   Workforce
Reduction
    Lease
Termination
Obligation
    Assets Written
Off
    Total  

Balance of provision as of April 30, 2009

   $ 2.7      $ 8.1      $ —        $ 10.8   

Charges

     0.2        0.2        —          0.4   

Cash payments

     (1.3     (0.1     —          (1.4

Foreign currency impact

     0.4        0.1        —          0.5   
                                

Balance of provision as of July 31, 2009

   $ 2.0      $ 8.3      $ —        $ 10.3   
                                

Charges

     0.9        0.3        1.1        2.3   

Cash payments

     (1.5     (2.0     —          (3.5

Assets written off

     —          —          (1.1     (1.1

Foreign currency impact

     (0.1     (0.1     —          (0.2
                                

Balance of provision as of October 31, 2009

   $ 1.3      $ 6.5      $ —        $ 7.8   
                                

Charges

     0.8        —          —          0.8   

Cash payments

     (1.5     (0.5     —          (2.0
                                

Balance of provision as of January 31, 2010

   $ 0.6      $ 6.0      $ —        $ 6.6   
                                

In the first nine months of fiscal 2010, the Company recorded $2.4 of workforce reduction and lease termination obligation charges in order to better strategically align its U.S. and European operations. In addition, in the second quarter for fiscal 2010, the Company recorded an asset impairment related to NCI, as described in note 8.

In the first nine months of fiscal 2011 and fiscal 2010, the Company made payments on previously accrued restructuring charges, as described in note 7 to the audited annual consolidated financial statements.

15. FAIR VALUE ADJUSTMENT ON DERIVATIVE INSTRUMENTS

The change in fair value of the Company’s derivative instruments that are required to be recorded as a liability is as follows:

 

     Three Months Ended     Nine Months Ended  
     January 31,
2011
     January 31,
2010
    January 31,
2011
     January 31,
2010
 

Gain on change in fair value of Class 1 Preferred Shares (a)

   $ —         $ 23.4      $ —         $ 0.3   

Warrants with an exercise price denominated in Canadian dollars (b)

     —           (0.1     1.0         (0.3
                                  
   $ —         $ 23.3      $ 1.0       $ —     
                                  

 

(a) As further described in notes 21 and 22 to the audited annual consolidated financial statements, as a result of the features of the Class 1 Preferred Shares, the conversion option was required to be recorded at fair value each reporting period, with changes in fair value recorded in the consolidated statements of operations. The change in fair value of the derivative for the three- and nine- month periods ended January 31, 2010 was a decrease in the liability of $23.4 and $0.3, respectively resulting in a corresponding gain to the consolidated statements of operations. As described in note 1 to the audited annual consolidated financial statements, in connection with the April 2010 initial public offering, the Class 1 Preferred Shares were converted into common shares.
(b) At January 31, 2011 there were 0.44 million warrants outstanding with an exercise price of C$14.18 (January 31, 2010 – 0.44 million warrants outstanding). These warrants expire in April 2011. Since the warrants are exercisable in a currency other than U.S. dollars, the fair value of the warrants is recorded as a liability, with changes in fair value recorded in the consolidated statements of operations. For the three and nine months ended January 31, 2011, the Company has recorded a gain of $nil and $1.0, respectively (three and nine months ended January 31, 2010, loss of $0.1 and $0.3, respectively).

16. DEFERRED TAXES

In the second quarter of fiscal 2011, the Company updated its assessment of the realizability of its deferred tax assets. Based on a number of factors, including completion of a reorganization of certain subsidiaries, cumulative income for the last 36 months and forecasted income for fiscal 2011, the Company determined that the weight of the evidence indicated that it was more likely than not that the Company will realize a benefit from a portion of its deferred tax assets in Canada. At April 30, 2010, the Company completed

 

17


an assessment of the realizability of its deferred tax assets and determined that a substantial valuation allowance was appropriate due to the uncertainty surrounding the Company’s ability to earn taxable income in certain jurisdictions. In the second quarter of fiscal 2011, the Company relieved a valuation allowance of approximately $80.0, net of a provision for uncertain tax provisions, primarily relating to its deferred tax assets in Canada.

There were no significant changes in the assessment of the realizability of deferred taxes in the first or third quarter of fiscal 2011. At January 31, 2011, there continues to be a valuation allowance of $76.9 against deferred tax assets, primarily in Canada and the U.K.

17. SEGMENT INFORMATION

Mitel’s portfolio of solutions provide advanced voice, video and data communications platforms, desktop phones and Internet appliances, applications for customer relationship management and mobility, messaging and multimedia collaboration. The Company’s reportable segments are represented by the four geographic areas: United States, Europe, Middle East and Africa (“EMEA”), Canada and Caribbean and Latin America (“Canada and CALA”), and Asia Pacific. Financial information by geographic area for the three and nine months ended January 31, 2011 and January 31, 2010 is summarized below.

 

     United
States
     EMEA      Canada
and
CALA
     Asia
Pacific
     Corporate
and
Other
    Total  

Three months ended—January 31, 2011

                

Revenue

                

Telecommunications

   $ 89.4       $ 36.2       $ 11.9       $ 4.4       $ —        $ 141.9   

Services and other

     20.1         —           —           —           —          20.1   
                                                    
     109.5         36.2         11.9         4.4         —          162.0   
                                                    

Contribution margin

     38.4         12.8         5.7         1.0         —          57.9   

Shared and unallocated costs

     —           —           —           —           (57.7     (57.7
                                                    

Operating income (loss)

   $ 38.4       $ 12.8       $ 5.7       $ 1.0       $ (57.7   $ 0.2   
                                                    

Three months ended—January 31, 2010

                

Revenue

                

Telecommunications

   $ 86.7       $ 41.4       $ 12.1       $ 3.0       $ —        $ 143.2   

Services and other

     19.0         —           —           —           —          19.0   
                                                    
     105.7         41.4         12.1         3.0         —          162.2   
                                                    

Contribution margin

     39.1         16.8         5.0         0.4         —          61.3   

Shared and unallocated costs

     —           —           —           —           (49.1     (49.1
                                                    

Operating income (loss)

   $ 39.1       $ 16.8       $ 5.0       $ 0.4       $ (49.1   $ 12.2   
                                                    

Nine months ended—January 31, 2011

                

Revenue

                

Telecommunications

   $ 267.8       $ 109.5       $ 32.9       $ 14.0       $ —        $ 424.2   

Network services

     58.9         —           —           —           —          58.9   
                                                    
     326.7         109.5         32.9         14.0         —          483.1   
                                                    

Contribution margin

     119.6         40.2         15.0         4.4         —          179.2   

Shared and unallocated costs

     —           —           —           —           (164.3     (164.3
                                                    

Operating income (loss)

   $ 119.6       $ 40.2       $ 15.0       $ 4.4       $ (164.3   $ 14.9   
                                                    

Nine months ended January 31, 2010

                

Revenue

                

Telecommunications

   $ 266.1       $ 118.6       $ 32.5       $ 10.0       $ —        $ 427.2   

Network services

     56.8         —           —           —           —          56.8   
                                                    
     322.9         118.6         32.5         10.0         —          484.0   
                                                    

Contribution margin

     117.3         45.2         13.3         1.7         —          177.5   

Shared and unallocated costs

     —           —           —           —           (145.9     (145.9
                                                    

Operating income (loss)

   $ 117.3       $ 45.2       $ 13.3       $ 1.7       $ (145.9   $ 31.6   
                                                    

 

18


Geographic information

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

 

     Three months ended      Nine months ended  
     January 31,
2011
     January 31,
2010
     January 31,
2011
     January 31,
2010
 

United States

   $ 109.5       $ 105.8       $ 326.7       $ 323.9   

United Kingdom

     25.2         26.5         76.7         81.1   

Canada

     8.8         8.5         25.0         23.4   

Other foreign countries

     18.5         21.4         54.7         55.6   
                                   
   $ 162.0       $ 162.2       $ 483.1       $ 484.0   
                                   

 

19


18. SUPPLEMENTARY CASH FLOW INFORMATION

Cash and cash equivalents at January 31, 2011 consist of cash of $50.2 (April 30, 2010—$46.6) and cash equivalents of $40.5 (April 30, 2010—$30.0). Cash interest and cash taxes paid during three months ended January 31, 2011 were $4.5 and $1.8, respectively (three months ended January 31, 2010 —$5.5 and $0.1, respectively) and for the nine months ended January 31, 2011 were $13.5 and $5.5, respectively (nine months ended January 31, 2010 —$22.2 and $0.8, respectively). Additions to property and equipment and intangible assets for the three and nine months ended January 31, 2011 are shown in the consolidated statements of cash flows net of property and equipment acquired through capital leases of $0.5 and $1.9, respectively (three and nine months ended January 31, 2010 – $0.2 and $0.3, respectively).

 

     Three months ended     Nine months ended  
     January 31,
2011
    January 31,
2010
    January 31,
2011
    January 31,
2010
 

Non-cash changes in operating assets and liabilities:

        

Accounts receivable and sales-type lease receivables

   $ 7.4      $ 5.8      $ 15.1      $ (5.5

Inventories

     0.8        (2.0     (3.6     0.8   

Other current assets(1)

     (0.8     1.2        0.6        10.2   

Other non-current assets

     (1.3     —          (0.1     —     

Accounts payable and accrued liabilities

     (15.5     7.1        (16.8     (2.8

Due to related parties

     (0.1     (1.1     (0.4     0.4   

Deferred revenue

     3.3        (0.3     (2.0     (4.1

Other non-current liabilities(2)

     3.5        (0.6     (0.5     (7.1

Change in pension liability

     0.6        (0.3     1.1        (0.8
                                
   $ (2.1   $ 9.8      $ (6.6   $ (8.9
                                

 

(1) Included in other current assets on the consolidated balance sheets is restricted cash, the change in which is presented separately on the consolidated statements of cash flows.
(2) Included in other non-current liabilities on the consolidated balance sheets are the derivative instrument liability and the litigation settlement obligation, the changes in which are presented separately on the consolidated statements of cash flows.

19. 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 utilizes forward contracts to enhance its ability to manage foreign currency exchange rate risk that exists as part of its ongoing operations. The Company does not use derivative contracts for speculative purposes. At January 31, 2011 and April 30, 2010, all of the Company’s outstanding forward contracts had a term of one month or less.

At January 31, 2011, the Company held forward option contracts to sell Euros, Canadian dollars and Australian dollars at a fixed rate on a notional amount of $7.0 U.S. dollars. As well, the Company held forward option contracts to buy British pounds sterling at a fixed rate on a total notional amount of $4.7 U.S. dollars. At January 31, 2011, the Company recorded a net unrealized loss on fair value adjustments on the outstanding forward contracts of less than $0.1.

At April 30, 2010, the Company held forward contracts to sell Euros and Australian dollars at a fixed rate on a notional amount of $2.8 U.S. dollars. As well, the Company held forward option contracts to buy British pounds sterling and Canadian dollars at a fixed rate on a notional amount of $12.9 U.S. dollars. At April 30, 2010, the Company had an unrealized loss on fair value adjustments on the outstanding forward contracts of $0.1.

 

20


20. FAIR VALUE MEASUREMENTS

The Fair Value Measurements and Disclosure Topic of the FASB ASC requires that financial assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

Assets/Liabilities Measured at Fair Value on a Recurring Basis

 

     Fair Value Measurement at Reporting Date  
     Quoted Price in
Active Markets
for Identical
Instruments
     Significant
Other
Observable
Inputs
     Significant
Unobservable
Inputs
     Total  
     Level 1      Level 2      Level 3         

January 31, 2011

           

Assets

           

Cash equivalents

   $ —         $ 40.5       $ —         $ 40.5   

Restricted cash

     1.4         —           —           1.4   

Forward contracts

     —           0.1         —           0.1   

Liabilities

           

Forward contracts

     —           0.1         —           0.1   

April 30, 2010

           

Assets

           

Cash equivalents

   $ —         $ 30.0       $ —         $ 30.0   

Restricted cash

     2.3         —           —           2.3   

Liabilities

           

Derivative liability instrument

     —           —           1.0         1.0   

Forward contracts

     —           0.1         —           0.1   

 

The decrease in the derivative liability instrument (classified as a Level 3 financial liability) from April 30, 2010 to January 31, 2011 was due to a decrease in the Company’s share price and the fact that the warrants are nine months closer to expiry.

21. SUBSEQUENT EVENT

In March 2011, the Company made a prepayment of $25.0, plus certain fees and expenses, against its outstanding debt under its first lien credit agreement. In connection with the prepayment, the maximum consolidated debt to EBITDA covenant under the first lien credit agreement has been increased for the fourth quarter of fiscal 2011 and for subsequent quarters up to and including the second quarter of fiscal 2014.

 

21


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. All amounts are expressed in U.S. dollars unless otherwise noted.

Certain information contained in this Quarterly 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,” “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 Quarterly Report contains forward-looking statements pertaining to, among other matters: 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; and our R&D expenditures. 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, including, without limitation:

 

   

our ability to achieve profitability in the future;

 

   

fluctuations in our quarterly and annual revenues and operating results;

 

   

fluctuations in foreign exchange rates;

 

   

global economic conditions;

 

   

intense competition;

 

   

our ability to keep pace with technological developments and evolving industry standards;

 

   

failure of the market for unified communications and collaboration (“UCC”) to become more widespread;

 

   

risks related to the rate of adoption of IP telephony by our customers;

 

   

fluctuations in our working capital requirements and cash flows;

 

   

our ability to access additional sources of funds;

 

   

risks related to our level of indebtedness;

 

   

our ability to protect our intellectual property and our possible infringement of the intellectual property rights of third parties;

 

   

our reliance on channel partners for a significant component of our sales;

 

   

our dependence upon a small number of outside contract manufacturers to manufacture our products;

 

   

our dependence on sole source and limited source suppliers for key components;

 

   

possible delays in the delivery of, or lack of access to, software or other intellectual property licensed from our suppliers;

 

   

uncertainties arising from our foreign operations;

 

   

fluctuations in interest rates;

 

   

our ability to realize our deferred tax assets;

 

   

challenges to our transfer pricing policies by tax authorities;

 

   

our ability to sell leases derived from our managed services offering or a breach of our obligations in respect of such sales;

 

   

the financial condition of our customers;

 

   

reliance on our key personnel;

 

   

the transition to a new Chief Executive Officer;

 

   

design defects, errors, failures or “bugs” in our solutions;

 

   

our ability to successfully integrate future strategic acquisitions;

 

   

problems with the infrastructure of carriers; and

 

   

our ability to successfully implement and achieve our business strategies.

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

 

22


these statements we have made assumptions regarding, among other things: stable foreign exchange rates; no unforeseen changes occurring in the competitive landscape that would affect our industry; a stable or recovering economic environment; no significant event occurring outside the ordinary course of our business; stable interest rates; and certain other assumptions that are set out proximate to the applicable forward-looking statements contained in this Quarterly Report. 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 Quarterly Report as a result of various factors, including the risks and uncertainties discussed below.

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 Quarterly 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 on Form 10-K for the fiscal year ended April 30, 2010 (the “Annual Report”) for a further discussion of risks and uncertainties affecting our business and financial results.

Overview

We are a leading provider of integrated communications solutions focused on the small-to-medium sized enterprise, or SME, market. We also have a strong and growing presence in the large enterprise market with a portfolio of products that support up to 65,000 users. Our IP-based communications solutions consist of a combination of IP telephony platforms, which we deliver as software, appliances and desktop devices, and a suite of UCC applications that integrate voice, video and data communications with business applications. We believe that our solutions, including associated managed and network services, enable our customers to realize significant cost benefits and to conduct their business more effectively.

In April 2010, we completed our initial public offering (“IPO”) on the The NASDAQ Global Market. The net proceeds of $130.7 million were used to repay $30.0 million outstanding under our revolving credit facility and to prepay $72.0 million of our first lien term loan, with the remainder held for general corporate purposes. In conjunction with our IPO, we converted all of our outstanding Class 1 Preferred Shares into common shares.

In the first half of fiscal 2011, our operating results were affected by the global economic downturn, which started in mid-calendar year 2008. Many of our customers, particularly in the United States (“U.S.”), responded to the financial and credit crises and general macroeconomic uncertainty by suspending, delaying or reducing their capital expenditures. These conditions negatively impacted our sales since the second half of fiscal 2009. The tightened credit markets also affected our sales of net rental payments under sales-type leases, resulting in lower cash flows generated from such sales, compared to historical levels. We responded to the negative effect of the downturn by implementing cost reduction programs to re-align our operating model. These programs, which were implemented during the second half of fiscal 2009 and throughout fiscal 2010, included headcount reductions, reduced discretionary spending, closure of excess facilities across our geographic regions and renegotiation of key supplier contracts. In fiscal 2009, we implemented a temporary reduced work-week program, which remained in effect throughout fiscal 2010. In June 2010, we made the decision to phase out the reduced work-week program gradually during fiscal 2011.

We continue to monitor our cost structure so that it is appropriate for our revenue levels. Depending on the future macroeconomic climate and its impact on our revenues, we may implement additional cost reduction programs in an effort to keep operating expenses in line with revenues. Conversely, if our revenues improve above current levels we may gradually increase our expenditures while ensuring that our operating expense to revenue ratio remains within our target level. In either scenario, we plan to continue to invest in new product development and other significant R&D initiatives. However, there is no certainty that these investments will allow us to develop and introduce new IP-based communications solutions in a timely manner to allow us to compete effectively against existing and new competitors and meet customer requirements.

During fiscal 2011, we announced some changes to our senior management team. In January 2011, Richard McBee became our new Chief Executive Officer, following the retirement of Don Smith. Mr. Smith continues to serve as a director of Mitel.

Further, in August 2010, we announced that Paul Butcher, our president and chief operating officer, in addition to his current responsibilities, and on an interim basis, has taken direct responsibility for the management and direction of Mitel’s U.S. operations. He assumed this role following the departure of the former president of our Mitel U.S. division.

Total revenue for the quarter ended January 31, 2011 was $162.0 million compared to $162.2 million for the quarter ended January 31, 2010. Increased revenue in both the telecommunications business and networks services business in the U.S., our target segment, as well as increased revenue in the Asia Pacific region was offset by lower revenues in Europe, Middle East and Africa (collectively “EMEA”) due to changes in foreign exchange rates as well as decreased volumes. Increased revenue in the U.S. telecommunications business was driven by increased volumes with our channel partners, while the network services business revenue increased due to an increased spend per customer during the quarter.

Our operating income decreased to $0.2 million in the third quarter of fiscal 2011 compared with operating income of $12.2 million in the third quarter of fiscal 2010. The decrease in operating income was largely due to an increase in special charges resulting

 

23


from restructuring activity in the quarter and an increase in SG&A and R&D expenses as a result of the phase-out of the reduced work-week program.

Our net income for the first nine months of fiscal 2011 included a deferred income tax recovery of approximately 80.0 million recorded in the second quarter of fiscal 2011 relating primarily to a reduction of the valuation allowance we had previously recorded against certain deferred tax assets. Upon updating our assessment of the realizability of our deferred tax assets, we concluded that it was now more-likely-than-not that we would be able to realize a benefit on certain deferred tax assets, primarily in Canada. Excluding income taxes, our net income for the nine month period decreased primarily from an increase in special charges due to restructuring activity during the year.

In March 2011, we made a prepayment of $25.0 million, plus certain fees and expenses, against our outstanding debt under our first lien credit agreement. In connection with the prepayment, the maximum consolidated debt to EBITDA covenant under the first lien credit agreement has been increased for the fourth quarter of fiscal 2011 and for subsequent quarters up to and including the second quarter of fiscal 2014 as more fully described in the amendment to our first lien credit agreement filed as Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 1, 2011.

 

24


Selected consolidated financial data

The following table sets forth our comparative results of operations, both in dollars and as a percentage of total revenues, for the three months ended January 31, 2011 and January 31, 2010:

 

     Three months ended January 31,     Change  
     2011     2010    
     Amounts     % of
Revenue
    Amounts     % of
Revenue
    Amount     %  
     (in millions, except percentages and per share amounts)  

Revenues:

            

Telecommunications

   $ 141.9        $ 143.2        $ (1.3     (0.9

Network services

     20.1          19.0          1.1        5.8   
                              
     162.0        100.0     162.2        100.0     (0.2     (0.1
                              

Cost of revenues:

            

Telecommunications

     73.6          73.0          0.6        0.8   

Network services

     11.1          10.4          0.7        6.7   
                              
     84.7        52.3     83.4        51.4     1.3        1.6   
                              

Gross margin

     77.3        47.7     78.8        48.6     (1.5     (1.9
                              

Expenses:

            

Selling, general and administrative

     55.9        34.5     52.9        32.6     3.0        5.7   

Research and development

     13.8        8.5     12.9        8.0     0.9        7.0   

Special charges and restructuring costs

     7.4        4.6     0.8        0.5     6.6        +   
                              
     77.1        47.6     66.6        41.1     10.5        15.8   
                              

Operating income

     0.2        0.1     12.2        7.5     (12.0     +   

Interest expense

     (5.0     (3.1 )%      (6.1     (3.8 )%      1.1        (18.0

Fair value adjustment on derivative instruments

     —          —          23.3        14.4     (23.3     +   

Other income (expense)

     (0.1     (0.1 )%      0.9        0.6     (1.0     +   
                              

Income (loss) before taxes

     (4.9     (3.0 )%      30.3        18.7     (35.2     +   

Income tax recovery

     0.9        0.6     2.9        1.8     (2.0     +   
                              

Net income (loss)

   $ (4.0     (2.5 )%    $ 33.2        20.5   $ (37.2     +   
                              

Adjusted EBITDA, a non-GAAP measure

   $ 17.6        10.9   $ 23.0        14.2   $ (5.4     (23.5
                              

Net income (loss) per share:

            

Net income (loss) attributable to common shareholders (1)

   $ (4.0     $ 8.5         

Weighted average number of common shares outstanding—basic

     52.9          14.3         

Weighted average number of common shares outstanding—diluted

     52.9          14.3         

Net income (loss) per common share—basic

   $ (0.08     $ 0.59         

Net income (loss) per common share—diluted

   $ (0.08     $ 0.59         

 

+ The comparison is not meaningful.
(1) Included in the net income attributable to common shareholders for the three months ended January 31, 2010 is an accreted interest charge of $12.4 on the then-outstanding Class 1 Preferred Shares. The Class 1 Preferred Shares were converted in April 2010, therefore no charge was recorded for the three months ended January 31, 2011.

 

25


The following table sets forth our comparative results of operations, both in dollars and as a percentage of total revenues, for the nine months ended January 31, 2011 and January 31, 2010:

 

     Nine months ended January 31,     Change  
     2011     2010    
     Amounts     % of
Revenue
    Amounts     % of
Revenue
    Amount     %  
     (in millions, except percentages and per share amounts)  

Revenues:

            

Telecommunications

   $ 424.2        $ 427.2        $ (3.0     (0.7

Network services

     58.9          56.8          2.1        3.7   
                              
     483.1        100.0     484.0        100.0     (0.9     (0.2
                              

Cost of revenues:

            

Telecommunications

     219.9          217.4          2.5        1.1   

Network services

     32.3          32.6          (0.3     (0.9
                              
     252.2        52.2     250.0        51.7     2.2        0.9   
                              

Gross margin

     230.9        47.8     234.0        48.3     (3.1     (1.3
                              

Expenses:

            

Selling, general and administrative

     164.1        34.0     159.7        33.0     4.4        2.8   

Research and development

     40.2        8.3     39.2        8.1     1.0        2.6   

Special charges and restructuring costs

     11.7        2.4     3.5        0.7     8.2        +   
                              
     216.0        44.7     202.4        41.8     13.6        6.7   
                              

Operating income

     14.9        3.1     31.6        6.5     (16.7     (52.8

Interest expense

     (15.2     (3.1 )%      (23.8     (4.9 )%      8.6        (36.1

Fair value adjustment on derivative instruments

     1.0        0.2     —          —          1.0        +   

Other income (expense)

     (0.4     (0.1 )%      0.5        0.1     (0.9     +   
                              

Income before taxes

     0.3        0.1     8.3        1.7     (8.0     +   

Income tax recovery

     83.4        17.3     6.9        1.4     76.5        +   
                              

Net income

   $ 83.7        17.3   $ 15.2        3.1   $ 68.5        +   
                              

Adjusted EBITDA, a non-GAAP measure

   $ 56.2        11.6   $ 64.5        13.3   $ (8.3     (12.9
                              

Net income (loss) per share:

            

Net income (loss) attributable to common shareholders(1)

   $ 83.7        $ (20.6      

Weighted average number of common shares outstanding—basic

     52.9          14.3         

Weighted average number of common shares outstanding—diluted

     56.1          14.3         

Net income (loss) per common share—basic

   $ 1.58        $ (1.44      

Net income (loss) per common share—diluted

   $ 1.49        $ (1.44      

 

+ The comparison is not meaningful.
(1) Included in the net loss attributable to common shareholders for the nine months ended January 31, 2010 is an accreted interest charge of $35.8 on the then-outstanding Class 1 Preferred Shares. The Class 1 Preferred Shares were converted in April 2010, therefore no charge was recorded in the nine months ended January 31, 2011.

 

26


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, for the three and nine months ended January 31, 2011 and January 31, 2010:

 

     Three months ended January 31     Nine months ended January 31  
     2011     2010     2011     2010  
     (in millions)     (in millions)  

Net income (loss)

   $ (4.0   $ 33.2      $ 83.7      $ 15.2   

Adjustments:

        

Interest expense

     5.0        6.1        15.2        23.8   

Income tax recovery

     (0.9     (2.9     (83.4     (6.9

Amortization and depreciation

     8.4        8.9        25.4        26.1   

Foreign exchange loss (gain)

     0.4        (0.4     1.2        0.4   

Fair value adjustment on derivative instruments

     —          (23.3     (1.0     —     

Special charges and restructuring costs

     7.4        0.8        11.7        3.5   

Stock-based compensation

     1.3        0.6        3.4        2.4   
                                

Adjusted EBITDA

   $ 17.6      $ 23.0      $ 56.2      $ 64.5   
                                

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, and our investor and analyst presentations 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.

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. Our use of Adjusted EBITDA and its limitations are further discussed under Item 6 of our Annual Report.

Results of operations

Revenues and Geographic Segment Revenues

Our reportable segments are represented by the following four geographic sales regions: the United States; Europe, Middle East and Africa (collectively “EMEA”); Canada and Caribbean and Latin America (collectively “Canada and CALA”); and Asia Pacific. Our telecommunications business segment generates revenues throughout our geographic regions, while our network services business segment generates revenue solely in the United States. The following tables set forth total revenues by geographic regions and by business segment in dollars and as a percentage of total revenues:

 

27


     Three months ended January 31,     Change  
     2011     2010    
     Revenues      % of
Revenues
    Revenues      % of
Revenues
    Amount     %  
     (in millions, except percentages)  

Telecommunications revenues:

              

United States

   $ 89.4         55.2   $ 86.7         53.5   $ 2.7        3.1   

EMEA

     36.2         22.4     41.4         25.5     (5.2     (12.6

Canada and CALA

     11.9         7.3     12.1         7.5     (0.2     (1.7

Asia Pacific

     4.4         2.7     3.0         1.8     1.4        46.7   
                                            
     141.9         87.6     143.2         88.3     (1.3     (0.9

Network services revenues:

              

United States

     20.1         12.4     19.0         11.7     1.1        5.8   
                                            
   $ 162.0         100.0   $ 162.2         100.0   $ (0.2     (0.1
                                            

 

     Nine months ended January 31,     Change  
     2011     2010    
     Revenues      % of
Revenues
    Revenues      % of
Revenues
    Amount     %  
     (in millions, except percentages)  

Telecommunications revenues:

              

United States

   $ 267.8         55.4   $ 266.1         55.0   $ 1.7        0.6   

EMEA

     109.5         22.7     118.6         24.5     (9.1     (7.7

Canada and CALA

     32.9         6.8     32.5         6.7     0.4        1.2   

Asia Pacific

     14.0         2.9     10.0         2.1     4.0        40.0   
                                            
     424.2         87.8     427.2         88.3     (3.0     (0.7

Network services revenues:

              

United States

     58.9         12.2     56.8         11.7     2.1        3.7   
                                            
   $ 483.1         100.0   $ 484.0         100.0   $ (0.9     (0.2
                                            

Our revenues in the first half of fiscal 2011 were affected by the global economic downturn. In the weakened economic climate, many of our existing and prospective customers reduced their capital expenditures or delayed new equipment purchases. For the three and nine months ended January 31, 2011 versus the comparable periods of fiscal 2010, decreased revenues in our EMEA region, a portion of which was due to changes in foreign exchange rates, were partially offset by increased revenues in the Asia Pacific region.

Telecommunication revenues in the United States increased by $2.7 million, or 3.1%, in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010. For the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010, revenue increased by $1.7 million, or 0.6%. The increase in telecommunications revenues was primarily due to increased volumes through our channel partners.

Revenues in EMEA decreased by $5.2 million, or 12.6%, in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010. As approximately 90% of this region’s revenues are generated in currencies other than the U.S. dollar, most significantly the British pound sterling and the Euro, our revenues, as reported in U.S. dollars, are impacted by significant changes in exchange rates. Revenues in the EMEA segment decreased 3.9% due to lower average exchange rates, primarily the British pound sterling, during the third quarter of fiscal 2011 versus the third quarter of fiscal 2010. Excluding the impact of foreign exchange, revenues in EMEA were down 8.7% quarter over quarter as a result of lower volumes through our channel partners in Europe as well as the timing of certain projects in the third quarter of fiscal 2010.

Revenues in EMEA decreased by $9.1 million, or 7.7%, in the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. Revenues in the EMEA segment decreased 4.3% due to lower average exchange rates, primarily the British pound sterling for the first nine months of fiscal 2011. Excluding the impact of foreign exchange, revenues in EMEA were down 3.4% period over period, primarily due to the decrease in the third quarter of fiscal 2011, as described above.

 

28


Revenues in Canada and CALA were effectively flat for the three and nine months ended January 31, 2011 versus the comparable periods of fiscal 2010.

Revenues in Asia Pacific increased by $1.4 million in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 and increased by $4.0 million for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010 as we continue our efforts to grow the business in this region.

Network services revenues in the United States increased by $1.1 million, or 5.8%, in the third quarter of fiscal 2011 compared to the third quarter of fiscal 2010 and increased by $2.1 million, or 3.7% for the first nine months of fiscal 2011 compared to the first nine months of fiscal 2010. The increases in revenues from network services were due primarily to an increase in spend per customer compared to prior periods.

Gross Margin

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

 

     Three months ended January 31,     Nine months ended January 31,  
     2011     2010     2011     2010  
     Gross
Margin
     Gross
Margin %
    Gross
Margin
     Gross
Margin %
    Gross
Margin
     Gross
Margin %
    Gross
Margin
     Gross
Margin %
 
     (in millions, except percentages)  

Telecommunications

     68.3         48.1     70.2         49.0     204.3         48.2     209.8         49.1

Network Services

     9.0         44.8     8.6         45.3     26.6         45.2     24.2         42.6
                                            

Total

     77.3         47.7     78.8         48.6     230.9         47.8     234.0         48.3