<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED NOVEMBER 1, 1998
Commission file number 1-13316
NEWBRIDGE NETWORKS CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 98-0077506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 MARCH ROAD, KANATA, ONTARIO, CANADA K2K 2E6
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (613) 591-3600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
- -
The number of Common Shares of the registrant outstanding as at December 9, 1998
was 177,545,968.
(Exhibit index located on page 27)
(Page 1 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
TABLE OF CONTENTS
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Earnings and Retained
Earnings -- Fiscal quarters and two fiscal quarters
ended November 1, 1998 and November 2, 1997........... 3
Consolidated Balance Sheets --
November 1, 1998 and April 30, 1998................... 4
Consolidated Statements of Cash Flows --
Two fiscal quarters ended November 1, 1998 and
November 2, 1997...................................... 5
Notes to the Consolidated Financial Statements.......... 6-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 14-24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 25
Item 5. Other Information......................................... 25
Item 6. Exhibits and Reports on Form 8-K.......................... 25
SIGNATURES.............................................................. 26
(Page 2 of 30)
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(Canadian dollars, amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
-------------------------- --------------------------
November 1, November 2, November 1, November 2,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $456,781 $432,169 $882,837 $866,907
Cost of sales 189,324 159,801 365,886 320,531
-------- -------- -------- --------
Gross margin 267,457 272,368 516,951 546,376
Expenses
Selling, general and administrative 134,831 123,402 263,870 247,259
Research and development 63,541 66,169 130,697 125,852
Layer 2 switching end of life (Note 6) 37,928 -- 37,928 --
Asia Pacific resources relocation (Note 7) 6,532 -- 6,532 --
-------- -------- -------- --------
Income from operations 24,625 82,797 77,924 173,265
Interest income 6,761 2,792 13,372 5,814
Interest expense on long term obligations (6,775) (207) (13,478) (491)
Gain on sale of ACC (Note 8) 128,336 -- 128,336 --
Write down of investments (Note 9) (61,484) -- (61,484) --
Other expenses (4,007) (2,957) (6,440) (5,142)
-------- -------- -------- --------
Earnings before income taxes
and non-controlling interest 87,456 82,425 138,230 173,446
Provision for income taxes 35,844 24,324 50,822 51,358
Non-controlling interest (1,702) 108 (1,426) (259)
-------- -------- -------- --------
Net earnings 53,314 57,993 88,834 122,347
Retained earnings, beginning of the period 785,350 832,502 749,830 768,148
-------- -------- -------- --------
Retained earnings, end of the period $838,664 $890,495 $838,664 $890,495
======== ======== ======== ========
Earnings per share (Note 10)
Basic $0.30 $0.33 $0.50 $0.70
Fully diluted $0.30 $0.33 $0.50 $0.69
Weighted average number of shares
Basic 176,766 174,733 176,430 173,830
Fully diluted 176,766 190,516 176,430 189,783
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
(Page 3 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
<TABLE>
<CAPTION>
November 1, April 30,
1998 1998
------------ ----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 2) $ 761,277 $ 499,278
Accounts receivable, net of provision for returns and
doubtful accounts of $14,069 (April 30, 1998 - $13,067) 408,282 428,527
Inventories (Note 3) 175,928 196,285
Prepaid expenses and other current assets 81,688 77,600
---------- ----------
1,427,175 1,201,690
Property, plant and equipment 498,302 450,735
Goodwill (Note 4) 42,910 72,719
Software development costs 32,109 28,299
Future tax benefits 67,246 50,443
Other assets 197,932 162,939
---------- ----------
$2,265,674 $1,966,825
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 144,529 $ 127,040
Accrued liabilities 191,403 118,771
Income taxes -- 5,851
Current portion of long term obligations 2,600 4,136
---------- ----------
338,532 255,798
Long term obligations 404,060 383,311
Future tax obligations 103,372 71,197
Non-controlling interest 18,919 22,899
---------- ----------
864,883 733,205
---------- ----------
Common shares - 176,877,423 outstanding
(April 30, 1998 - 175,686,083 outstanding) 484,638 456,510
Accumulated foreign currency translation adjustment 77,489 27,280
Retained earnings 838,664 749,830
---------- ----------
1,400,791 1,233,620
---------- ----------
$2,265,674 $1,966,825
========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
(Page 4 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Two fiscal quarters ended
---------------------------
November 1, November 2,
1998 1997
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 88,834 $ 122,347
Items not affecting cash
Amortization 82,399 60,004
Future income tax benefits and obligations 18,330 19,021
Non-controlling interest (1,404) (2,278)
Layer 2 switching end of life 37,928 --
Asia Pacific resource relocation 6,532 --
Gain on sale of ACC (128,336) --
Write down of investments 58,678 --
Other 700 4,359
Cash effect of changes in:
Accounts receivable (10,127) (25,206)
Inventories 12,038 (49,857)
Prepaid expenses and other current assets (20,367) (34,916)
Accounts payable and accrued liabilities 20,956 (3,117)
Income taxes (4,109) 23,802
--------- ---------
162,052 66,255
--------- ---------
INVESTING ACTIVITIES
Additions to property, plant and equipment (120,396) (125,006)
Proceeds from sale of ACC 255,708 --
Acquisition of subsidiaries -- (5,260)
Capitalized software development costs (10,428) (7,235)
Additions to other assets (69,437) (30,115)
--------- ---------
55,447 (167,616)
--------- --------
FINANCING ACTIVITIES
Issue of common shares 26,883 80,531
Increase in long term obligations 29,104 4,060
Repayment of long term obligations (7,739) (5,192)
--------- ---------
48,248 79,399
--------- ---------
Increase (decrease) in cash and cash equivalents 265,747 (21,962)
Effect of foreign currency translation on cash (3,748) 5,573
--------- ---------
261,999 (16,389)
Cash and cash equivalents, beginning of period 499,278 333,904
--------- ---------
Cash and cash equivalents, end of period $ 761,277 $ 317,515
========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
(Page 5 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements of
Newbridge Networks Corporation (the "Company") have been prepared in accordance
with accounting principles generally accepted in Canada for interim financial
information. These accounting principles are also generally accepted in the
United States ("U.S. GAAP") in all material respects except for the disclosure
of certain cash equivalents on the Consolidated Balance Sheets and investing
activities on the Consolidated Statements of Cash Flows, as disclosed in Note 2,
and the method of calculation of earnings per share, as disclosed in Note 10.
In the opinion of Management, the unaudited interim consolidated financial
statements reflect all normal and recurring adjustments considered necessary for
fair presentation.
The results of operations for the second fiscal quarter and two fiscal quarters
ended November 1, 1998 are not necessarily indicative of the results to be
expected for the fiscal year ending May 2, 1999.
2. CASH AND CASH EQUIVALENTS
Components of cash and cash equivalents are:
November 1, April 30,
1998 1998
----------- ---------
Cash $639,034 $467,464
Held to maturity marketable securities
Maturing within one year:
Corporate debt securities 115,681 22,447
Available for sale marketable securities
Equity securities 6,562 9,367
-------- --------
$761,277 $499,278
======== ========
Held to maturity marketable securities are investments with original maturities
of three months or more. Available for sale marketable securities are common
shares of publicly traded companies acquired upon the Company's disposition of
minority interests in privately held companies. Under U.S. GAAP, marketable
securities would be disclosed as a separate caption on the Consolidated Balance
Sheets.
(Page 6 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
Held to maturity marketable securities are carried at amortized cost. The
unrealized gains and losses are not included in the Consolidated Statements of
Earnings as these gains and losses are unlikely to be realized due to the
Company's intent to hold the underlying securities to maturity. Available for
sale securities are carried at the lower of cost and market.
If the Consolidated Statements of Cash Flows were prepared under U.S. GAAP,
maturities, purchases and sales of marketable securities would be disclosed as
an investing activity. Disclosure in the Consolidated Statements of Cash Flows
under U.S. GAAP would be as follows.
<TABLE>
<CAPTION>
Two fiscal quarters ended
-------------------------
November 1, November 2,
1998 1997
----------- -----------
<S> <C> <C>
Investing activities in short
term marketable securities:
Held to maturity securities
Maturities $ 326 $ 156,386
Purchases (93,560) (50,018)
-------- ---------
(93,234) 106,368
Available for sale securities
Sales 2,805 569
-------- ---------
(90,429) 106,937
Investing activities, as reported 55,447 (167,616)
-------- ---------
Investing activities, U.S. GAAP $(34,982) $ (60,679)
======== =========
Net increase (decrease) in cash and cash equivalents, as reported $261,999 $ (16,389)
Investing activities in short term marketable securities (90,429) 106,937
-------- ---------
Increase in cash and cash equivalents, U.S. GAAP $171,570 $ 90,548
======== =========
</TABLE>
3. INVENTORIES
<TABLE>
<CAPTION>
November 1, April 30,
1998 1998
-------- ---------
<S> <C> <C>
Finished goods $112,509 $ 129,850
Work in process 17,752 18,178
Raw materials 45,667 48,257
-------- ---------
$175,928 $ 196,285
======== =========
</TABLE>
(Page 7 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
4. GOODWILL
<TABLE>
<CAPTION>
November 1, April 30,
1998 1998
------------ ----------
<S> <C> <C>
Goodwill $48,857 $ 83,817
Accumulated amortization (5,947) (11,098)
------- --------
$42,910 $ 72,719
======= ========
</TABLE>
5. COMPREHENSIVE INCOME
The Company has adopted the United States Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income. This statement requires disclosure of Comprehensive Income which
includes reported net earnings adjusted for other comprehensive income. Other
comprehensive income includes items that cause changes in shareholders' equity
but are not related to share capital or net earnings which, in the Company's
case, comprises only foreign currency translation adjustment.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
------------------------ -------------------------
November 1, November 2, November 1, November 2,
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Comprehensive income for the period:
Net earnings $53,314 $57,993 $ 88,834 $122,347
Other comprehensive income
Foreign currency translation
adjustment 26,228 23,806 $ 50,209 13,739
------- ------- -------- --------
Comprehensive income $79,542 $81,799 $139,043 $136,086
======= ======= ======== ========
</TABLE>
6. LAYER 2 SWITCHING END OF LIFE
In the second quarter of fiscal 1999 ended November 1, 1998, the Company decided
to discontinue the sale and development of local area network (LAN) Layer 2
Switching products as part of its determination to enhance the focus on the
Company's dominant and more profitable products. This program creates impairment
losses associated with certain assets deployed in this business (predominantly
inventory) and obligations related to fulfilling previous customer commitments.
The program associated with meeting these obligations is expected to be
substantially completed by the end of fiscal 1999.
(Page 8 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
7. ASIA PACIFIC RESOURCES RELOCATION
In the second quarter of fiscal 1999 ended November 1, 1998, the Company
commenced the process of relocating certain employees and activities that
support the Asia Pacific region from Kanata, Ontario to Hong Kong and Malaysia
in order to provide more efficient and cost effective services to customers in
that region. The charge of $6,532,000 incurred in the second fiscal quarter
reflects involuntary termination benefits, lease cancellation penalties and
other direct costs associated with executing the transition. Additional costs
associated with the relocation, estimated at $9,000,000, have been have been
excluded from the charge recorded in the second fiscal quarter and will be
expensed in subsequent quarters as incurred. These costs are expected to include
moving personnel and equipment, recruiting employees in Hong Kong, retention
payments to employees not being relocated but required to support the
transition, and facilities expansion in Asia Pacific.
8. SALE OF ADVANCED COMPUTER COMMUNICATIONS (ACC)
In October 1998, the Company completed the sale of its majority ownership
position in Advanced Computer Communications ("ACC") to Telefonaktiebolaget LM
Ericsson for cash proceeds of US$167,319,000 million (Cdn$258,308,000). The
Company recorded a gain of Cdn$128,336,000 in the second quarter of fiscal 1999
related to the sale.
Because the transaction was completed at the end of October 1998, ACC's results
of operations were consolidated with the Company's results for the second fiscal
quarter ended November 1, 1998. The results of operations and the financial
position of ACC were not significant relative to the Company's consolidated
results of operations and financial position for all fiscal periods presented.
9. WRITE DOWN OF INVESTMENTS
The Company evaluates on an ongoing basis the value of its long term investments
considering the evolution of the market segments of investee companies, any
impact of deteriorating economic conditions in various countries, and any other
specific information which indicates impairment of value of these investments.
In the second quarter of fiscal 1999 the Company determined that the values of
certain investee companies were impaired based on the market valuations
associated with recent equity transactions in those companies and that
deteriorating economic conditions in certain regions caused impairment of the
investments in other investee companies. The Company recognized a write down of
$61,484,000 in the second quarter of fiscal 1999 associated with these
impairments.
(Page 9 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
10. EARNINGS PER SHARE
Basic earnings per share has been calculated as net earnings for the period
divided by the daily weighted average number of Common Shares outstanding during
the fiscal quarter. Fully diluted earnings per share has been calculated as net
earnings plus after tax imputed earnings on the cash which would have been
received on the exercise of options, divided by the daily weighted average
number of Common Shares and common share equivalents outstanding during the
period.
Under U.S. GAAP, basic earnings per share has been calculated as net earnings
for the period divided by the daily weighted average number of Common Shares
outstanding during the fiscal quarter, consistent with the calculation of basic
earnings per share under accounting principles generally accepted in Canada.
Diluted earnings per share is calculated using the treasury stock method.
Earnings per share in U.S. dollars is disclosed for the convenience of the
reader. The exchange rates used for translation are based on the average of the
daily noon buying rates for Canadian dollars in U.S. dollars as reported by the
Federal Reserve Bank of New York. The calculation of earnings per share under
U.S. GAAP is as follows.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
------------------------ -------------------------
November 1, November 2, November 1, November 2,
1998 1997 1998 1997
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Earnings per share
Basic $ 0.30 $ 0.33 $ 0.50 $ 0.70
======== ======== ======== ========
Diluted $ 0.30 $ 0.32 $ 0.49 $ 0.68
======== ======== ======== ========
Earnings per share - in U.S. dollars
Basic $ 0.20 $ 0.24 $ 0.34 $ 0.51
======== ======== ======== ========
Diluted $ 0.20 $ 0.23 $ 0.33 $ 0.49
======== ======== ======== ========
Weighted average number of shares
Basic 176,766 174,733 176,430 173,830
======== ======== ======== ========
Diluted 176,766 182,728 180,663 181,036
======== ======== ======== ========
</TABLE>
(Page 10 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
11. BUSINESS SEGMENT INFORMATION
Management organizes the Company into four principal operating segments for
making operating decisions and assessing performance. The four operating
segments comprise three sales and support organizations (North and South
America, Europe Middle East and Africa, and Asia Pacific) and one Corporate
resource group which develops and manufactures products, provides marketing and
operational support and makes strategic investments. Revenues generated by the
Corporate group are predominantly derived from the consolidation of non-wholly
owned subsidiaries. Effective in the first quarter of fiscal 1999 the three
sales and support organizations are no longer responsible for general and
administrative activities with these activities now managed by the Corporate
group. Prior periods presented have been restated to reflect this change.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
-------------------------- ---------------------------
November 1, November 2, November 1, November 2,
1998 1997 1998 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
NORTH AND SOUTH AMERICA
Sales $ 190,943 $ 175,838 $ 379,609 $ 340,291
Cost of sales and expenses 96,470 93,786 187,364 190,639
--------- --------- --------- ---------
Operating contribution 94,473 82,052 192,245 149,652
--------- --------- --------- ---------
EUROPE, MIDDLE EAST AND AFRICA
Sales $ 144,904 $ 134,496 $ 276,799 $ 282,283
Cost of sales and expenses 75,166 65,397 137,630 131,318
--------- --------- --------- ---------
Operating contribution 69,738 69,099 139,169 150,965
--------- --------- --------- ---------
ASIA PACIFIC
Sales $ 61,729 $ 75,899 $ 120,806 $ 155,436
Cost of sales and expenses 32,904 32,651 63,208 65,167
--------- --------- --------- ---------
Operating contribution 28,825 43,248 57,598 90,269
--------- --------- --------- ---------
CORPORATE
Sales $ 59,205 $ 45,936 $ 105,623 $ 88,897
Cost of sales and expenses 183,156 157,538 372,251 306,518
--------- --------- --------- ---------
Operating contribution (123,951) (111,602) (266,628) (217,621)
--------- --------- --------- ---------
TOTAL
Sales $ 456,781 $ 432,169 $ 882,837 $ 866,907
Cost of sales and expenses 387,696 349,372 760,453 693,642
--------- --------- --------- ---------
Operating contribution 69,085 82,797 122,384 173,265
Layer 2 switching end of life (37,928) -- (37,928) --
Asia Pacific resources relocation (6,532) -- (6,532) --
--------- --------- --------- ---------
Income from operations 24,625 82,797 77,924 173,265
Gain on sale of ACC (Note 8) 128,336 -- 128,336 --
Write down of investments (Note 9) (61,484) -- (61,484) --
Other expenses (4,021) (372) (6,546) 181
Provision for income taxes (35,844) (24,324) (50,822) (51,358)
Non-controlling interest 1,702 (108) 1,426 259
--------- --------- --------- ---------
Net earnings $ 53,314 $ 57,993 $ 88,834 $ 122,347
========= ========= ========= =========
</TABLE>
(Page 11 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
11. LITIGATION
In the fourth quarter of fiscal 1998 the Company reached an agreement in
principle to settle the class action lawsuit which was filed in United States
District Court in Washington, D.C. during the fiscal year ended April 30, 1995.
The lawsuit purported to be a class action on behalf of a class of persons who
purchased securities of the Company between March 29 and August 1, 1994 and
alleged that the Company made false and misleading statements in violation of
United States securities law and common law. The Court entered an order and
final judgment approving the settlement and dismissing the lawsuit with
prejudice on October 23, 1998. The Company recorded the expense in connection
with the settlement of $2,642,000 in the fourth quarter of fiscal 1998
representing the direct costs incurred.
Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the
fiscal year ended April 30, 1998 in United States District Court in Delaware
against the Company and its United States subsidiary, Newbridge Networks Inc.
Lucent Technologies manufactures and sells telecommunications systems, software
and products, and is both a distributor of the Company's products and a
competitor of the Company. The complaint alleges that the Company's manufacture
and sale in the United States of Newbridge frame relay and ATM (asynchronous
transfer mode) switch products infringe certain United States patent rights
claimed by Lucent Technologies, and requests actual and trebled damages in an
unspecified amount. Based upon its present understanding of the laws in the
United States and the facts, the Company believes it has meritorious defenses to
these claims. The Company has filed an answer to the complaint, as well as a
counterclaim alleging unfair competition by Lucent Technologies, and intends to
defend this action vigorously. Because the outcome of the action is not certain
at this time, no provision for any liability that may result upon adjudication
has been made in these Consolidated Financial Statements.
From time to time, the Company receives notifications that it is or may be
infringing the intellectual property rights of third parties. There can be no
assurance that any such claims or potential claims will not require the Company
to enter into license agreements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms.
12. SUBSEQUENT EVENT
On December 9, 1998 the Company announced that it has agreed to sell its
minority ownership position in Cambrian Systems Corporation to Northern Telecom
Limited for cash proceeds of approximately US$90,000,000. The proceeds exclude
potential earn-out payments of approximately US$23,000,000 payments which are to
be received by the Company if certain specified financial performance targets
are met. The Company will record a non-recurring gain in the third quarter of
fiscal 1999 associated with the transaction.
(Page 12 of 30)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the United States Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. SFAS 133 requires that an entity
recognize all derivative instruments as either assets or liabilities on its
balance sheet and requires that the instruments be recorded at fair value. SFAS
133 is effective for fiscal periods beginning after June 15, 1999. The Company
is currently assessing the impact that SFAS 133 will have on its financial
statements.
(Page 13 of 30)
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain parts of the following discussion and analysis may be forward-looking
statements that involve a number of risks and uncertainties. As a consequence,
actual results might differ materially from results forecast or suggested in any
forward-looking statements. See "Market for Registrant's Common Equity and
Related Stockholder Matters -- Cautionary Statement Regarding Forward-Looking
Information" in the Company's Annual Report on Form 10-K, which is incorporated
by reference herein.
During the second quarter ended November 1, 1998, the Company sold its majority
equity interest in Advanced Computer Communications ("ACC"), a manufacturer of
local area network equipment based in Santa Barbara, California, for cash
consideration of $258,308,000. Because the transaction was completed at the end
of October 1998, ACC's results of operations were consolidated with the
Company's results for the second fiscal quarter ended November 1, 1998. The
results of operations and the financial position of ACC were not significant
relative to the Company's consolidated results of operations and financial
position for all fiscal periods presented.
RESULTS OF OPERATIONS
Sales increased in the second quarter of fiscal 1999 ended November 1, 1998 by
6% compared to sales in the second quarter of fiscal 1998 ended November 2,
1997. Sales for the first six months of fiscal 1999 increased by 2% over sales
for the first six months of fiscal 1998. The increase in sales was more than
offset by a decline in the gross margin as a percentage of sales and an increase
in operating expenses, resulting in net earnings of $53,314,000 for the second
quarter of fiscal 1999, a decrease of 8% from net earnings for the second
quarter of fiscal 1998, and net earnings of $88,834,000 for the first six months
of fiscal 1999, a decrease of 27% from net earnings for the first six months of
fiscal 1998.
<TABLE>
<CAPTION>
SALES
Fiscal Quarters Ended Two Fiscal Quarters Ended
----------------------------- ----------------------------
Nov 1, Nov 2, % Nov 1, Nov 2, %
1998 1997 Increase 1998 1997 Increase
-------- -------- -------- -------- -------- --------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales $456,781 $432,169 6% $882,837 $866,907 2%
======== ======== ======== ========
</TABLE>
Growth in sales in the second quarter and first six months of fiscal 1999
compared to the second quarter and first six months of fiscal 1998 was
principally due to an increase in sales of products based on packet technologies
for wide area network applications (WAN Packet products), partially offset by a
decline in revenues from products based on packet technologies for local area
network applications (LAN Packet products).
Sales of WAN Packet products grew approximately 25% in the second quarter and
first six months of fiscal 1999 as compared to the second quarter and first six
months of fiscal 1998. Sales of WAN Packet products represented over 50% of
total product sales in the second quarter and first six months of fiscal 1999,
compared to approximately 40% of total product sales in the second quarter and
first six months of fiscal 1998.
(Page 14 of 30)
<PAGE>
Product line enhancements and new product lines introduced in fiscal 1997 and
1998 resulted in increased sales, predominantly through increased acceptance and
demand by carriers throughout the world for the Company's asynchronous transfer
mode (ATM) products.
Sales of circuit switched networking products in the second quarter and first
six months of fiscal 1999 were approximately the same as sales in the second
quarter and first six months of fiscal 1998. Sales of these networking products
have been and are expected to be subject to potential declines and quarterly
variability as customers throughout the world increasingly adopt packet
technologies.
LAN Packet product revenues have declined by approximately 65% in the first six
months of fiscal 1999 as compared to the first six months of fiscal 1998. The
decline was the result of sharp decreases in revenue derived from products
associated with the former Ungermann-Bass Networks Inc. ("UB") organization,
which the Company acquired in January 1997. The Company restructured its
activities in the LAN business, including the former UB, in the third quarter of
fiscal 1998. In the second quarter and first six months of fiscal 1999, sales of
LAN Packet products represented less than 5% of total revenues.
The Company expects the proportion of sales derived from WAN Packet products to
continue to increase relative to sales derived from circuit switched networking
products in fiscal 1999 when compared to fiscal 1998. As a result, sales growth
may be impeded due to longer sales cycles often associated with the adoption of
newer, less established technologies.
The Company's sales in the second quarter and first six months of fiscal 1999 to
carriers for applications that provide a range of value-added services, such as
Virtual Private Networks (VPNs), wide area network support and Internet access,
and for resale to end users represented 75% of total sales and 73% of sales,
respectively, as compared to 70% in the second quarter of fiscal 1998 and 67% in
the first six months of fiscal 1998. The proportion of revenue derived from
carriers increased relative to the second quarter and first six months of fiscal
1998 due to the decline in revenues of former UB Networks products, which
largely serve enterprise customers. Deliveries to original equipment
manufacturers (OEMs) for carrier customers and deliveries under certain large
contracts with carriers contributed significantly to sales in the second quarter
and first six months of fiscal 1999 and fiscal 1998. Sales to Siemens A.G. and
subsidiaries, generally under OEM arrangements for resale to end users, were 15%
of total sales for the second quarter and first six months of fiscal 1999 as
compared to 18% of sales in the second quarter of fiscal 1998 and 19% of sales
for the first six months of fiscal 1998.
The sales increase in the second quarter of fiscal 1999 relative to the second
quarter of fiscal 1998 reflects sales increases in the Americas Region
(consisting of North and South America) and the European Region (consisting of
Europe, the Middle East and Africa), net of a decline in sales in the Asia
Pacific Region due to the recent downturn in economic activity in that region.
The sales increase for the first six months of fiscal 1999 over sales for the
first six months of fiscal 1998 was the result of an increase in the Americas
Region, net of a decline in sales in the European Region associated with the
sharp decline in sales of former UB products and a decline in sales in the Asia
Pacific Region due to the recent economic downturn. All business regions
achieved revenue growth in the second quarter of fiscal 1999 over the first
quarter of fiscal 1999.
The Company derives a significant portion of its sales from products shipped
against orders received in each fiscal quarter and from products shipped against
firm purchase orders released in that fiscal quarter. As is prevalent in
emerging segments of the networking industry, a disproportionate amount of the
Company's shipments occur in the third month of each fiscal quarter. In
addition, customers have the ability to revise or cancel orders and change
delivery
(Page 15 of 30)
<PAGE>
schedules without significant penalty. As a result, the Company operates without
significant backlog and schedules some production and budgets expenses based on
forecasts of sales, which are difficult to predict. Unforeseen delays in product
deliveries or closing large sales, introductions of new products by the Company
or its competitors, seasonal patterns of customer capital expenditures or other
conditions affecting the networking industry in particular or the economy
generally during any fiscal quarter could cause quarterly revenue and, to a
greater degree, net earnings, to vary greatly. Quarterly operating results are
consequently difficult to predict, even towards the end of a given fiscal
quarter.
Because substantial portions of the Company's sales, cost of sales and other
expenses are denominated in U.S. dollars and Pounds Sterling, the Company's
results of operations are subject to change based on fluctuations in the rates
of exchange of those currencies for the Canadian dollar. During the second
quarter of fiscal 1999, the decrease in the value of the Canadian dollar against
the Pound Sterling and the U.S. dollar, relative to exchange rates for the
second quarter of fiscal 1998, resulted in a 7% or $33,405,000 positive variance
in reported sales as compared to the second quarter of fiscal 1998. During the
first six months of fiscal 1999, the decrease in the value of the Canadian
dollar against the Pound Sterling and the U.S. dollar, relative to exchange
rates for the first six months of fiscal 1998, resulted in a 6% or $47,818,000
positive variance in reported sales as compared to the first six months of
fiscal 1998. As substantial portions of the Company's cost of sales and other
expenses are also incurred in U.S. dollars and Pounds Sterling, the variations
in rates of exchange did not result in a material variance in net earnings for
the second quarter and first six months of fiscal 1999.
COST OF SALES AND GROSS MARGIN
<TABLE>
<CAPTION>
Fiscal Quarters Ended Two Fiscal Quarters Ended
--------------------- -------------------------
Nov 1, Nov 2, Nov 1, Nov 2,
1998 1997 1998 1997
--------- -------- ----------- --------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C>
Gross margin $267,457 $272,368 $516,951 $546,376
======== ======== ======== ========
As % of sales 59% 63% 59% 63%
</TABLE>
Cost of sales consists of manufacturing costs, warranty expense and costs
associated with the provision of services. The gross margin as a percentage of
sales declined in the second quarter and first six months of fiscal 1999
relative to the second quarter and first six months of fiscal 1998 as the result
of a decline in the proportion of revenues from circuit switched networking
products, which carry gross margins above the average gross margins earned on
the Company's other products, as well as the result of increased competition on
product pricing, particularly in the market for products based on packet
technologies.
(Page 16 of 30)
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Fiscal Quarters Ended Two Fiscal Quarters Ended
-------------------------------------- ---------------------------------
Nov 1, Nov 2, % Nov 1, Nov 2, %
1998 1997 Increase 1998 1997 Increase
----------- ---------- ------------- ------------ -------- ---------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
and administrative $134,831 $123,402 9% $263,870 $247,259 7%
======== ======== ======== ========
As % of sales 30% 29% 30% 29%
</TABLE>
Selling, general and administrative expenses increased in the second quarter and
first six months of fiscal 1999 relative to the second quarter and first six
months of fiscal 1998 principally as a result of increased remuneration costs
associated with annual salary increases as well as depreciation costs associated
with upgrading the information technology infrastructure.
The increase in selling, general and administrative expenses as a percentage of
sales in the second quarter and first six months of fiscal 1999 over the second
quarter and first six months of fiscal 1998 resulted from the increase in
expenditures relative to the comparatively lower increase in revenues over the
same periods. Management anticipates that selling, general and administrative
expenses as a percentage of sales will decline in fiscal 1999 relative to fiscal
1998.
RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>
Fiscal Quarters Ended Two Fiscal Quarters Ended
----------------------------- ---------------------------------
Nov 1, Nov 2, % Nov 1, Nov 2, %
1998 1997 Increase 1998 1997 Increase
-------- ------- -------- -------- -------- --------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross research and
development expenditures $ 87,096 $77,479 12% $170,842 $148,296 15%
Investment tax credits (10,257) (8,600) 19% (19,369) (17,000) 14%
Customer, government
and other funding (11,397) (1,435) 694% (17,011) (2,937) 479%
Net deferral (amortization) of
software development costs (1,901) (1,275) 49% (3,765) (2,507) 50%
-------- ------- -------- --------
Net research and
development expenses $ 63,541 $66,169 (4%) $130,697 $125,852 4%
======== ======= ======== ========
Gross expenditures
as a % of sales 19% 18% 19% 17%
Recoveries as a %
of gross expenditures 27% 15% 23% 15%
Net expenses as a % of sales 14% 15% 15% 15%
</TABLE>
(Page 17 of 30)
<PAGE>
Research and development expenditures consist primarily of software and hardware
engineering personnel expenses, costs associated with equipment and facilities,
and subcontracted research and development costs. The increased gross research
and development expenditures in the second quarter and first six months of
fiscal 1999 relative to the second quarter and first six months of fiscal 1998
reflect spending to expand the breadth of network solutions for new value-added
service capabilities and access technologies, particularly with respect to ATM
platforms and network and service management software in carrier and carrier
access applications. The majority of the increase resulted from annual salary
increases for engineering staff and increased depreciation associated with
capital expenditures.
Recoveries increased as a percentage of gross expenditures in the second quarter
and first six months of fiscal 1999 compared to the second quarter and first six
months of fiscal 1998 due to an increase in customer, government and other
funding. The increase in customer, government and other funding is mainly as a
result of funding secured for the Company's wireless access product initiative.
Based on Management's estimates of the proportion of fiscal 1999 gross research
and development expenditures to be incurred in Canada and therefore eligible for
investment tax credits, and current levels of committed and expected funding,
Management expects the level of recoveries as a percentage of gross research and
development expenditures in fiscal 1999 to exceed the level in fiscal 1998.
The markets for the Company's products are characterized by continuing
technological change. The Company plans to increase gross research and
development expenditures in fiscal 1999 relative to fiscal 1998 to address the
requirements of carriers as they invest in new infrastructures to meet the
challenges of growing demand for new communications services and increased
competition.
LAYER 2 SWITCHING END OF LIFE
In the second quarter of fiscal 1999 ended November 1, 1998, the Company decided
to discontinue the sale and development of local area network (LAN) Layer 2
Switching products as part of its determination to enhance the focus on the
Company's dominant and more profitable products. This program creates impairment
losses associated with certain assets deployed in this business (predominantly
inventory) and obligations related to fulfilling previous customer commitments.
The program associated with meeting these obligations is expected to be
substantially completed by the end of fiscal 1999.
ASIA PACIFIC RESOURCES RELOCATION
In the second quarter of fiscal 1999 ended November 1, 1998, the Company
commenced the process of relocating certain employees and activities that
support the Asia Pacific region from Kanata, Ontario to Hong Kong and Malaysia
in order to provide more efficient and cost effective services to customers in
that region. The charge of $6,532,000 incurred in the second fiscal quarter
reflects involuntary termination benefits, lease cancellation penalties and
other direct costs associated with executing the transition. Additional costs
associated with the relocation, estimated at $9,000,000, have been have been
excluded from the charge recorded in the second fiscal quarter and will be
expensed in subsequent quarters as incurred. These costs are expected to include
moving personnel and equipment, recruiting employees in Hong Kong, retention
payments to employees not being relocated but required to support the
transition, and facilities expansion in Asia Pacific.
(Page 18 of 30)
<PAGE>
INTEREST AND OTHER EXPENSES
<TABLE>
<CAPTION>
Fiscal Quarters Ended Two Fiscal Quarters Ended
------------------------------ --------------------------------
Nov 1, Nov 2, % Nov 1, Nov 2, %
1998 1997 Increase 1998 1997 Increase
------- ------- ---------- -------- ---------- --------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 6,761 $ 2,792 142% $ 13,372 $ 5,814 130%
Interest expense on
long term obligations (6,775) (207) 3173% (13,478) (491) 2645%
Other expenses (4,007) (2,957) 36% (6,440) (5,142) 25%
</TABLE>
Interest income and interest expense on long term obligations for the second
quarter and first six months of fiscal 1999 both increased compared to the
second quarter and first six months of fiscal 1998 primarily as a result of
interest income earned and interest expense incurred on the proceeds of the
issuance of US$225,000,000 of Senior Notes due 2003 at the end of the fourth
quarter of fiscal 1998. Other expenses represented less than 1% of sales in the
second quarter and first six months of fiscal 1999 and fiscal 1998.
SALE OF ADVANCED COMPUTER COMMUNICATIONS (ACC)
In October 1998, the Company completed the sale of its majority ownership
position in Advanced Computer Communications ("ACC") to Telefonaktiebolaget LM
Ericsson for cash proceeds of US$167,319,000 million (Cdn$258,308,000). The
Company recorded a gain of Cdn$128,336,000 in the second quarter of fiscal 1999
related to the sale.
Because the transaction was completed at the end of October 1998, ACC's results
of operations were consolidated with the Company's results for the second fiscal
quarter ended November 1, 1998. The results of operations and the financial
position of ACC were not significant relative to the Company's consolidated
results of operations and financial position for all fiscal periods presented.
WRITE DOWN OF INVESTMENTS
The Company evaluates on an ongoing basis the value of its long term investments
considering the evolution of the market segments of investee companies, any
impact of deteriorating economic conditions in various countries, and any other
specific information which indicates impairment of value of these investments.
In the second quarter of fiscal 1999 the Company determined that the values of
certain investee companies were impaired based on the market valuations
associated with recent equity transactions in those companies and that
deteriorating economic conditions in certain regions caused impairment of the
investments in other investee companies. The Company recognized a write down of
$61,484,000 in the second quarter of fiscal 1999 associated with these
impairments.
(Page 19 of 30)
<PAGE>
INCOME TAXES
<TABLE>
<CAPTION>
Fiscal Quarter Ended Two Fiscal Quarters Ended
-------------------- --------------------------
Nov 1, Nov 2, Nov 1, Nov 2,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Income tax rate 41% 30% 37% 30%
Income tax rate, excluding
non-recurring gains and charges 30% 30% 30% 30%
</TABLE>
The income tax rates for the second quarter and first six months of fiscal 1999
exceed the rates for the second quarter and first six months of fiscal 1998 due
to the income tax on various non-recurring gains and charges reported in the
second quarter of fiscal 1999. See "Net Earnings" below. Excluding the impact of
these non-recurring gains and charges, the income tax rates reported in the
second quarter and first six months of fiscal 1999 are consistent with the
corresponding periods in fiscal 1998. The composite rates of income tax for the
second quarter and first six months of fiscal 1999 and the second quarter and
first six months of fiscal 1998 were reduced from the statutory rate primarily
as a result of the application of certain deductions related to manufacturing
and processing activities and to research and development expenditures in
Canada. Future changes in the composite rates of income tax will be primarily
due to the relative profitability of operations and the national tax policies in
each of the various countries in which the Company operates. Management believes
that the composite rate of income tax will remain lower than the statutory rate
because of the availability of deductions related to manufacturing and
processing activities and research and development expenditures in Canada as
well as other tax planning measures undertaken by the Company.
NON-CONTROLLING INTEREST
The non-controlling interests' share of subsidiary net losses of $1,702,000 in
the second quarter of fiscal 1999 and $1,426,000 in the first six months of
fiscal 1999 relate principally to losses incurred by ACC. The non-controlling
interests' share of subsidiary income of $108,000 in the second quarter of
fiscal 1998 and the non-controlling interests' share of subsidiary net losses of
$259,000 in the first six months of fiscal 1998 were derived principally from
the activities of Transistemas S.A., an Argentine systems integrator of
networking products.
(Page 20 of 30)
<PAGE>
NET EARNINGS
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
--------------------- -------------------------
Nov 1, Nov 2, Nov 1, Nov 2,
1998 1997 1998 1997
--------- ------- ----------- --------
<S> <C> <C> <C> <C>
Net earnings $ 53,314 $57,993 $ 88,834 $122,347
Non recurring gains and charges
Layer 2 switching end of life 37,928 -- 37,928 --
Asia Pacific resources relocation 6,532 -- 6,532 --
Gain on sale of ACC (128,336) -- (128,336) --
Investment write down 61,484 -- 61,484 --
Provision for income taxes on
non-recurring gains and charges 16,650 -- 16,650 --
--------- ------- --------- --------
Pro forma net earnings, excluding
non-recurring gains and charges $ 47,572 $57,993 $ 83,092 $122,347
========= ======= ========= ========
Pro forma net earnings, excluding non-recurring
gains and charges, as a percent of sales 10% 13% 9% 14%
Pro forma net earnings, excluding non-recurring
gains and charges, per share
Canadian GAAP
Basic $ 0.27 $ 0.33 $ 0.47 $ 0.70
Fully Diluted $ 0.27 $ 0.33 $ 0.47 $ 0.69
U.S. GAAP
Basic $ 0.27 $ 0.33 $ 0.47 $ 0.70
Diluted $ 0.27 $ 0.32 $ 0.46 $ 0.68
Diluted - US US$ 0.18 US$ 0.23 US$ 0.31 US$ 0.49
</TABLE>
Net earnings of $53,314,000 for the second quarter and $88,834,000 for the first
six months of fiscal 1999 represented declines of 8% and 27% from the respective
corresponding periods in fiscal 1998. The declines were primarily associated
with declines in the gross margin expressed as a percentage of sales and
increases in operating expenses that more than offset the impact of sales
increases in the second quarter and first six months of fiscal 1999 as compared
to the second quarter and first six months of fiscal 1998. Net earnings in the
second quarter and first six months of fiscal 1999 included a non-recurring gain
on the sale of ACC, and three non-recurring charges related to the
discontinuance of Layer 2 switching products, the relocation of resources to the
Asia Pacific region and a write down of investments held by the Company.
Net earnings for the second quarter for fiscal 1999 on a pro forma basis,
excluding non-recurring gains and charges, were $47,572,000 compared to net
earnings of $57,993,000 for the second quarter of fiscal 1998. The decline in
pro forma net earnings, excluding non-recurring gains and charges, was due to
the increase of $11,429,000 in selling, general and administrative expenses and
the decline of 4% in the gross margin expressed as a percentage of sales, offset
partially by the increase of 6% in sales compared to the second quarter of
fiscal 1998.
Net earnings for the first six months for fiscal 1999 on a pro forma basis,
excluding non-recurring gains and charges, were $83,092,000 compared to net
earnings of $122,347,000 for the first six
(Page 21 of 30)
<PAGE>
months of fiscal 1998. The decline in pro forma net earnings, excluding non-
recurring gains and charges, was due to the increase of $16,611,000 in selling,
general and administrative expenses, the increase of $4,845,000 in research and
development expenses and the decline of 4% in the gross margin as a percentage
of sales, offset partially by the increase of 2% in sales compared to the first
six months of fiscal 1998.
FINANCIAL CONDITION
During the first six months of fiscal 1999 ended November 1, 1998, working
capital increased from $945,892,000 to $1,008,643,000. The Company's cash and
equivalents of $761,277,000 represented an increase of $261,999,000 during the
first six months of fiscal 1999, due mainly to the Company's sale of ACC which
yielded proceeds of $258,308,000 and cash from stock option exercises of
$26,883,000. Cash flow from operations of $162,052,000 during the first six
months of fiscal 1999, due mainly to net earnings of $88,834,000 and
improvements in certain working capital ratios, was more than offset by
additions to property, plant and equipment of $120,396,000 and additions to
other assets of $34,993,000.
Two principal components of the Company's working capital are accounts
receivable and inventory. Management believes that the payment terms and
conditions extended to the Company's customers, arrangements with the Company's
suppliers, and the levels of inventory the Company carries relative to its
levels of sales are consistent with practices generally prevailing in the
networking industry.
Existing short term bank credit facilities consist of operating lines of credit
with certain banks in the aggregate amount of $177,702,000, primarily with banks
in Canada, the United Kingdom, the United States, Chile and Brazil. At November
1, 1998, $6,137,000 was being utilized under these credit facilities, all of
which was attributable to Coasin S.A. and Acacia S.A. The Company has a 51%
equity interest in each of Coasin S.A. and Acacia S.A.
In October 1998, the Company completed the sale of its majority ownership
position in Advanced Computer Communications to Telefonaktiebolaget LM Ericsson
for cash proceeds of US$167,319,000 million (Cdn$258,308,000).
On December 9, 1998 the Company announced that it has agreed to sell its
minority ownership position in Cambrian Systems Corporation to Northern Telecom
Limited for cash proceeds of approximately US$90,000,000. The proceeds exclude
potential earn-out payments of approximately US$23,000,000 payments which are to
be received by the Company if certain specified financial performance targets
are met.
Management anticipates that the level of capital expenditures for fiscal 1999
will be approximately the same as capital expenditures incurred in fiscal 1998.
The Company may also increase its current investments in associated companies.
The Company intends to fund capital expenditures and investments with existing
cash and cash expected to be generated from operations during fiscal 1999,
supplemented as appropriate by divestitures or the issuance of shares or debt.
In addition, the Company may use a portion of its cash resources to extend or
enhance its business and diversify its marketing and distribution channels
through acquisitions of or investments in businesses, products or technologies
or through the formation of strategic partnerships with other companies.
Management believes that the Company's liquidity in the form of existing cash
resources, its credit facilities, as well as cash generated from operations and
financing activities, will prove adequate to meet its operating and capital
expenditure requirements through the end of fiscal 1999 and into the foreseeable
future.
(Page 22 of 30)
<PAGE>
YEAR 2000 DATE COMPLIANCE
The Company acknowledges the Year 2000 transition as a serious business issue
and is committed to addressing the challenge of becoming Year 2000 date
compliant. The Company's program ("Year 2000 Date Compliance"), established in
May 1997, addresses compliance both externally, to our customers, suppliers, and
other associates, and internally for the Company's systems and procedures. The
program continues to receive sponsorship and support from the highest levels of
the Company's Management and regular progress meetings are conducted, including
formal quarterly reports to the President of the Company. Despite the extensive
efforts dedicated to the program, there can be no assurance that all Year 2000
Date Compliance activities will be completed before problems associated with the
Year 2000 transition potentially occur.
Various formal messages for conveying Year 2000 Date Compliance information to
customers and other external parties have been developed for Company products.
. Year 2000 Date Compliance Statement to Customers, which indicates how the
Company interprets "Year 2000 Date Compliance";
. The Year 2000 Date Compliance Requirements Specification, which sets forth
for evaluation of products for Year 2000 Date Compliance;
. Year 2000 Date Compliance Product List, which lists the Year 2000 Date
Compliance characterization for the majority of the Company's products and
releases, including many "discontinued" product offerings.
The Company has completed the evaluation of its major product offerings. The
majority of products have been classified as either Compliant, having Compliant
versions currently available or are Date Compliance Not Applicable. The majority
of older or "discontinued" product offerings have been reviewed, with certain
offerings found to be Non-Compliant, and others that will not be evaluated for
Year 2000 Date Compliance. All the formal messages and Year 2000 Date Compliance
Additional Notes are available on the Company's world wide web site at
http://www.newbridge.com/year2000/index.html.
All operating groups within the Company are addressing the Year 2000 date
compliance issue as it pertains to assessment, remediation and testing of
information technology (IT) systems and non-IT systems both internal and
external to their organizations. The costs incurred by each operating group are
financed internally by those groups within the framework of their operating
budgets and are assumed not to cause any change in the structure of the
Company's financial results (operating expenses as a percentage of sales, for
example). Incremental spending on the Year 2000 date compliance issue is limited
to specific program costs which are outside of the normal course of business and
are necessitated purely as a result of Year 2000 date compliance. For example,
the Company's operating groups regularly update IT infrastructure in order to
better service their customers and operate more efficiently; the fact that a
normal course upgrade moves the organization to a Year 2000 compliant system is
obviously beneficial to achieving Company-wide compliance but the cost is not
considered to be incremental to the Company's normal spending. Incremental
spending incurred in fiscal periods reported to date and projected to be spent
in fiscal 1999 and fiscal 2000 associated with the Year 2000 transition
represent less than 1% of the Company's revenues and expected revenues. There
can be no assurance that these costs will not be greater than anticipated,
however, as the Company progresses through its program greater certainty
(Page 23 of 30)
<PAGE>
regarding costs, particularly related to remediation and contingency plans for
identified risks, will be possible.
The Company introduced a formal supplier contact process in March 1998 and the
subsequent assessment of Year 2000 responses is active with priority allocated
to critical suppliers. The process of obtaining information on Year 2000 date
compliance from certain suppliers has not been completed.
The Company is still assessing the potential impact of Year 2000 date compliance
on its suppliers and customers and is currently not able to fully determine the
effect on its operations and financial condition if key suppliers or customers
do not adequately prepare for Year 2000 date compliance transition on a timely
basis. Failure of suppliers on which the Company relies or customers to address
this issue in a timely manner could result in a material financial risk to the
Company. As a result, the Company is actively undertaking Year 2000 Date
Compliance contingency planning as an integral part of the overall program.
Included in the contingency plan the Company is addressing the service and
support requirements for its customers over the Year 2000 rollover period.
(Page 24 of 30)
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the fourth quarter of fiscal 1998 the Company reached an agreement in
principle to settle the class action lawsuit which was filed in United States
District Court in Washington, D.C. during the fiscal year ended April30, 1995.
The lawsuit purported to be a class action on behalf of a class of persons who
purchased securities of the Company between March 29 and August 1, 1994 and
alleged that the Company made false and misleading statements in violation of
United States securities law and common law. The Court entered an order and
final judgment approving the settlement and dismissing the lawsuit with
prejudice on October 23, 1998. The Company recorded the expense in connection
with the settlement of $2,642,000 in the fourth quarter of fiscal 1998
representing the direct costs incurred.
Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the
fiscal year ended April 30, 1998 in United States District Court in Delaware
against the Company and its United States subsidiary, Newbridge Networks Inc.
Lucent Technologies manufactures and sells telecommunications systems, software
and products, and is both a distributor of the Company's products and a
competitor of the Company. The complaint alleges that the Company's manufacture
and sale in the United States of Newbridge frame relay and ATM (asynchronous
transfer mode) switch products infringe certain United States patent rights
claimed by Lucent Technologies, and requests actual and trebled damages in an
unspecified amount. Based upon its present understanding of the laws in the
United States and the facts, the Company believes it has meritorious defenses to
these claims. The Company has filed an answer to the complaint, as well as a
counterclaim alleging unfair competition by Lucent Technologies, and intends to
defend this action vigorously.
From time to time, the Company receives notifications that it is or may be
infringing the intellectual property rights of third parties. There can be no
assurance that any such claims or potential claims will not require the Company
to enter into license agreements or result in protracted and costly litigation,
regardless of the merits of such claims. No assurance can be given that any
necessary licenses will be available or that, if available, such licenses can be
obtained on commercially reasonable terms.
ITEM 5. OTHER INFORMATION
The "Cautionary Statement Regarding Forward-Looking Information" contained in
"Market for Registrant's Common Equity and Related Stockholder Matters" in the
Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1998 is
incorporated herein by reference and made a part hereof.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit 11.1 Computation of earnings per share under
accounting principles generally accepted in
Canada.
Exhibit 11.2 Computation of earnings per share under
accounting principles generally accepted in the
United States.
Exhibit 27 Financial data schedule
(Page 25 of 30)
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWBRIDGE NETWORKS CORPORATION
(Registrant)
Date: December 9, 1998 By: /s/Terence H. Matthews
----------------------
Terence H. Matthews,
Chairman of the Board of
Directors and Chief
Executive Officer
Date: December 9, 1998 By: /s/Kenneth B. Wigglesworth
--------------------------
KENNETH B. WIGGLESWORTH,
Vice President,
Chief Financial Officer
(Page 26 of 30)
<PAGE>
EXHIBIT INDEX
Page No.
--------
11.1 Computation of earnings per share under accounting
principles generally accepted in Canada............. 28
11.2 Computation of earnings per share under accounting
principles generally accepted in the United States.. 29
27 Financial data schedule............................... 30
(Page 27 of 30)
<PAGE>
EXHIBIT 11.1
NEWBRIDGE NETWORKS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(Accounting principles generally accepted in Canada)
(Canadian dollars, amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED TWO FISCAL QUARTERS ENDED
--------------------- ---------------------------
Nov 1, Nov 2, Nov 1, Nov 2,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net earnings $ 53,314 $ 57,993 $ 88,834 $122,347
======== ======== ======== ========
Common Shares outstanding
at the beginning of the period 176,558 174,245 175,686 171,859
Weighted average number of Common Shares
issued during the period 208 488 744 1,971
-------- -------- -------- --------
Weighted average number of Common Shares
outstanding during the period 176,766 174,733 176,430 173,830
======== ======== ======== ========
Basic earnings per share $ 0.30 $ 0.33 $ 0.50 $ 0.70
======== ======== ======== ========
FULLY DILUTED EARNINGS PER SHARE
Earnings before imputed earnings $ 53,314 $ 57,993 $ 88,834 $122,347
After tax imputed earnings from the investment
of funds received through dilution -- 4,363 -- 8,342
-------- -------- -------- --------
Adjusted net earnings $ 53,314 $ 62,356 $ 88,834 $130,689
======== ======== ======== ========
Weighted average number of Common Shares
outstanding during the period 176,766 174,733 176,430 173,830
Weighted average common share
equivalents based on conversion of
outstanding stock options -- 15,783 -- 15,953
-------- -------- -------- --------
Weighted average number of Common
Shares and equivalents outstanding
during the period 176,766 190,516 176,430 189,783
======== ======== ======== ========
Fully diluted earnings per share $ 0.30 $ 0.33 $ 0.50 $ 0.69
======== ======== ======== ========
EARNINGS PER SHARE EXPRESSED IN U.S. DOLLARS
Daily average exchange rate of a Canadian
dollar for U.S. dollars as reported by the
Federal Reserve Bank of New York $ 0.6520 $ 0.7204 $ 0.6667 $ 0.7223
Basic earnings per share, in U.S. dollars $ 0.20 $ 0.24 $ 0.34 $ 0.51
======== ======== ======== ========
Fully diluted earnings per share, in U.S. dollars $ 0.20 $ 0.24 $ 0.34 $ 0.50
======== ======== ======== ========
</TABLE>
(Page 28 of 30)
<PAGE>
EXHIBIT 11.2
NEWBRIDGE NETWORKS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(Accounting principles generally accepted in the United States)
(Canadian dollars, amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
FISCAL QUARTERS ENDED TWO FISCAL QUARTERS ENDED
--------------------- -------------------------
Nov 1, Nov 2, Nov 1, Nov 2,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EARNINGS PER SHARE (U.S. GAAP - BASIC)
Net earnings $ 53,314 $ 57,993 $ 88,834 $122,347
======== ======== ======== ========
Weighted average number of Common
Shares outstanding during the period 176,766 174,733 176,430 173,830
======== ======== ======== ========
Earnings per share (U.S. GAAP) $ 0.30 $ 0.33 $ 0.50 $ 0.70
======== ======== ======== ========
EARNINGS PER SHARE (U.S. GAAP - DILUTED)
Net earnings $ 53,314 $ 57,993 $ 88,834 $122,347
======== ======== ======== ========
Weighted average number of Common Shares
outstanding during the period 176,766 174,733 176,430 173,830
Net effect of dilutive stock options
based on the treasury stock method -- 7,995 4,233 7,206
-------- -------- -------- --------
Weighted average number of Common
Shares and equivalents outstanding
during the period 176,766 182,728 180,663 181,036
======== ======== ======== ========
Earnings per share (U.S. GAAP) $ 0.30 $ 0.32 $ 0.49 $ 0.68
======== ======== ======== ========
EARNINGS PER SHARE EXPRESSED IN U.S. DOLLARS
Daily average exchange rate of a Canadian
dollar for U.S. dollars as reported by the
Federal Reserve Bank of New York $ 0.6520 $ 0.7204 $ 0.6667 $ 0.7223
Basic earnings per share (U.S. GAAP), in U.S. dollars $ 0.20 $ 0.24 $ 0.34 $ 0.51
======== ======== ======== ========
Diluted earnings per share (U.S. GAAP), in U.S. dollars $ 0.20 $ 0.23 $ 0.33 $ 0.49
======== ======== ======== ========
</TABLE>
(Page 29 of 30)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated statement of earnings, consolidated balance sheet and consolidated
statement of cash flows included in the Company's Form 10-Q for the fiscal
quarter ending November 1, 1998, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-01-1998
<PERIOD-START> AUG-03-1998
<PERIOD-END> NOV-01-1998
<EXCHANGE-RATE> 0.6520
<CASH> 639,034
<SECURITIES> 122,243
<RECEIVABLES> 422,351
<ALLOWANCES> 14,069
<INVENTORY> 175,928
<CURRENT-ASSETS> 1,427,175
<PP&E> 1,006,349
<DEPRECIATION> 508,047
<TOTAL-ASSETS> 2,265,674
<CURRENT-LIABILITIES> 338,532
<BONDS> 0
0
0
<COMMON> 484,638
<OTHER-SE> 916,153
<TOTAL-LIABILITY-AND-EQUITY> 2,265,674
<SALES> 456,781
<TOTAL-REVENUES> 456,781
<CGS> 189,324
<TOTAL-COSTS> 432,156
<OTHER-EXPENSES> 4,007
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,775
<INCOME-PRETAX> 87,456
<INCOME-TAX> 35,844
<INCOME-CONTINUING> 53,314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,314
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
