<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 October 31, 1999
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) (ZipCode)
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 10,
1999 was 181,265,584.
(Exhibit index located on page 49)
(Page 1 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Consolidated Statements of Earnings and Retained
Earnings -- Fiscal quarters and two fiscal quarters
ended October 31, 1999 and November 1, 1998......................... 3
Consolidated Balance Sheets --
October 31, 1999 and May 2, 1999.................................... 4
Consolidated Statements of Cash Flows --
Two fiscal quarters ended October 31, 1999
and November 1, 1998................................................ 5
Notes to the Consolidated Financial Statements...................... 6-20
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 21-43
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................... 44
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 45
Item 4. Submission of Matters to a Vote of Security Holders................. 45
Item 5. Other Information................................................... 46
Item 6. Exhibits and Reports on Form 8-K.................................... 47
SIGNATURES........................................................................ 48
</TABLE>
(Page 2 of 52)
<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
-------------------------- ---------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
Sales $ 480,844 $456,781 $ 975,914 $882,837
Cost of sales 215,331 189,324 430,852 365,886
---------- -------- ---------- --------
Gross margin 265,513 267,457 545,062 516,951
Expenses
Selling, general and administrative 155,613 134,831 296,650 263,870
Research and development 70,830 63,541 138,451 130,697
Amortization of acquired
Intangibles (Note 2) 23,843 868 26,588 1,795
Compensation associated with
acquisitions (Note 3) 10,228 -- 10,228 --
Restructuring costs (Note 5) -- 44,460 -- 44,460
---------- -------- ---------- --------
Income from operations 4,999 23,757 73,145 76,129
Interest income 6,108 6,761 13,453 13,372
Interest expense on long term obligations (6,198) (6,775) (12,257) (13,478)
Net gain on investments (Note 6) 469,675 66,852 473,187 66,852
Other expenses (6,649) (3,139) (9,267) (4,645)
---------- -------- ---------- --------
Earnings before income taxes
and non-controlling interest 467,935 87,456 538,261 138,230
Provision for income taxes 164,924 35,844 186,629 50,822
Non-controlling interest 1,302 (1,702) 2,637 (1,426)
---------- -------- ---------- --------
Net earnings 301,709 53,314 348,995 88,834
Retained earnings, beginning of the period 976,277 785,350 928,991 749,830
---------- -------- ---------- --------
Retained earnings, end of the period $1,277,986 $838,664 $1,277,986 $838,664
========== ======== ========== ========
Earnings per share (Note 7)
Basic $1.67 $0.30 $1.93 $0.50
Fully diluted $1.52 $0.30 $1.83 $0.50
Weighted average number of shares
Basic 180,863 176,766 180,631 176,430
Fully diluted 205,941 176,766 203,492 176,430
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
(Page 3 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
<TABLE>
<CAPTION>
October 31, May 2,
1999 1999
------------ ----------
(unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents $ 688,885 $ 666,019
Marketable securities 143,606 213,675
Accounts receivable, net of provision for returns and
doubtful accounts of $23,126 (May 2, 1999 - $16,217) 589,929 472,811
Inventories (Note 10) 347,879 210,286
Deferred compensation (Note 3) 45,945 --
Prepaid expenses 56,706 46,753
Other current assets 32,250 46,160
---------- ----------
1,905,200 1,655,704
Property, plant and equipment 491,072 455,483
Software development costs 39,709 35,909
Acquired intangibles (Note 3) 53,693 --
Goodwill (Note 11) 198,964 40,022
Future tax benefits 56,911 59,999
Other assets (Note 12) 430,995 223,507
---------- ----------
$3,176,544 $2,470,624
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 227,860 $ 190,630
Accrued liabilities 311,985 201,361
Income taxes 220,655 16,853
Current portion of long term obligations 2,433 2,869
---------- ----------
762,933 411,713
Long term obligations 430,062 384,021
Future tax obligations 57,510 123,088
Non-controlling interest 23,624 22,583
---------- ----------
1,274,129 941,405
---------- ----------
Common shares - 181,068,634 outstanding
(May 2, 1999 - 180,104,582 outstanding) 600,947 572,990
Accumulated foreign currency translation adjustment 23,482 27,238
Retained earnings 1,277,986 928,991
---------- ----------
1,902,415 1,529,219
---------- ----------
$3,176,544 $2,470,624
========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
(Page 4 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Two fiscal quarters ended
---------------------------
October 31, November 1,
1999 1998
------------- ------------
<S> <C> <C>
Cash effect of operating activities
Net earnings $ 348,995 $ 88,834
Items not affecting cash
Amortization 90,810 82,399
Future tax benefits and obligations (62,327) 18,330
Non-controlling interest 665 (1,404)
Amortization of acquired intangibles 26,588 1,795
Amortization of deferred compensation 10,228 --
Restructuring costs -- 44,460
Net gain on investments (473,187) (69,658)
Foreign currency translation (5,139) (145,869)
Other 5,714 (1,095)
Changes in non-cash working capital:
Accounts receivable (117,118) 20,245
Inventories (137,593) 20,357
Prepaid expenses and other current assets 3,957 (4,088)
Accounts payable and accrued liabilities 101,909 90,121
Income taxes 203,802 (5,851)
--------- ---------
(2,696) 138,576
--------- ---------
Cash effect of investing activities
Sales of marketable securities 241,802 3,131
Purchases of marketable securities (171,733) (93,560)
Additions to property, plant and equipment (112,417) (120,396)
Proceeds from sale of investments 486,821 255,708
Acquisition of subsidiaries, excluding cash acquired (208,569) --
Capitalized software development costs (12,086) (10,428)
Additions to other assets (226,619) (69,437)
--------- ---------
(2,801) (34,982)
--------- ---------
Cash effect of financing activities
Issue of common shares 27,153 26,883
Increase in long term obligations 12,660 29,104
Repayment of long term obligations (13,304) (7,739)
--------- ---------
26,509 48,248
--------- ---------
Increase in cash and cash equivalents 21,012 151,842
Effect of foreign currency translation on cash 1,657 19,728
Cash from acquisition of subsidiaries 197 --
--------- ---------
22,866 171,570
Cash and cash equivalents, beginning of period 666,019 467,464
--------- ---------
Cash and cash equivalents, end of period $ 688,885 $ 639,034
========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
(Page 5 of 52)
<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 supplementary measures of net earnings and earnings per share as
disclosed in Note 2, the write off of purchased research and development in
process, as disclosed in Note 3, the inclusion of certain asset impairments in
restructuring costs, as disclosed in Note 5, and the method of calculation of
earnings per share, as disclosed in Note 7.
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 October 31, 1999 are not necessarily indicative of the results to be
expected for the fiscal year ending April 30, 2000.
2. Supplementary Measure of Net Earnings and Earnings Per Share
Management uses supplementary measures of net earnings and earnings per share to
evaluate the financial performance of the Company. These supplementary measures
are consistent with the net earnings and earnings per share disclosed in these
Consolidated Financial Statements except for the impact of items related to
acquisitions, divestitures and non-recurring gains and charges. The
supplementary measures of net earnings and earnings per share are as follows:
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
--------------------- --------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net earnings $ 301,709 $ 53,314 $ 348,995 $ 88,834
--------- -------- --------- --------
Adjustments:
Amortization of acquired intangibles
Purchased research and
development in process 16,142 -- 16,142 --
Goodwill 7,325 868 10,070 1,795
Other 376 -- 376 --
--------- -------- --------- --------
23,843 868 26,588 1,795
Compensation associated with
acquisitions 10,228 -- 10,228 --
Restructuring costs -- 44,460 -- 44,460
Net gain on investments (469,675) (66,852) (473,187) (66,852)
Net tax impact 155,386 16,650 156,571 16,650
--------- -------- --------- --------
Total adjustments to net earnings (280,218) (4,874) (279,800) (3,947)
--------- -------- --------- --------
Supplementary measure of net earnings $ 21,491 $ 48,440 $ 69,195 $ 84,887
========= ======== ========= ========
</TABLE>
(Page 6 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
---------------------------- ---------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Supplementary measure of earnings per share
Canadian GAAP
Basic $ 0.12 $ 0.27 $ 0.38 $ 0.48
======== ======== ======== ========
Fully diluted $ 0.12 $ 0.27 $ 0.38 $ 0.48
======== ======== ======== ========
Weighted average number of shares
Basic 180,863 176,766 180,631 176,430
======== ======== ======== ========
Fully diluted 180,863 176,766 180,631 176,430
======== ======== ======== ========
U.S. GAAP
Basic $ 0.12 $ 0.27 $ 0.38 $ 0.48
======== ======== ======== ========
Diluted $ 0.12 $ 0.27 $ 0.38 $ 0.47
======== ======== ======== ========
Weighted average number of shares
Basic 180,863 176,766 180,631 176,430
======== ======== ======== ========
Diluted 182,950 176,766 183,273 180,663
======== ======== ======== ========
</TABLE>
3. Acquisitions of Northchurch Communications and TimeStep Corporation
In August 1999, the Company acquired Northchurch Communications Inc.
("Northchurch"), a privately-held developer of Internet Protocol (IP) edge
routers for service providers. Northchurch is based in Andover, Massachusetts.
The Company held a minority equity interest of 34% in Northchurch before
acquiring all of the remaining outstanding shares of Northchurch for total cash
consideration of US$82,560,000 (Cdn$123,022,000), including acquisition related
costs. The acquisition has been accounted for using the purchase method of
accounting. The majority of the aggregate purchase price was allocated to
goodwill (Cdn$90,062,000) and purchased research and development in process
(Cdn$42,420,000) with the balance of the purchase price allocated to the net
liabilities assumed on the acquisition. The goodwill is being amortized on a
straight line basis over its estimated useful life of five years. Under Canadian
GAAP, the purchased research and development in process asset is being amortized
straight line over its expected useful life of six months. Under U.S. GAAP,
purchased research and development in process would have been written off at the
time of acquisition.
As part of the purchase agreement, the Company also agreed to make future
payments to participating Northchurch employees of approximately US$62,357,000
(Cdn$91,891,000) over a period up to eighteen months after the acquisition in
exchange for the employees' continued employment services during that period.
The deferred compensation expense associated with the Company's obligation to
make these payments is being amortized on a straight line basis over the related
eighteen month employment period. Accordingly, the Company recorded amortization
of the deferred compensation associated with the acquisition of $10,228,000 in
the second quarter of fiscal 2000. The current portion of deferred compensation
expense was $45,945,000 as at October 31, 1999.
(Page 7 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
In September 1999, the Company acquired TimeStep Corporation ("TimeStep"), a
provider of encryption solutions for secure virtual private networks to service
providers and large enterprises. TimeStep is headquartered in Kanata, Ontario.
The Company held a minority equity interest in TimeStep of 30% before acquiring
all of the remaining outstanding shares of TimeStep for total cash consideration
of $85,547,000 including acquisition related costs. The acquisition has been
accounted for using the purchase method of accounting with the majority of the
purchase price allocated to goodwill ($63,185,000), purchased research and
development in process ($12,010,000) and acquired technologies associated with
completed research and development projects ($10,185,000). The goodwill and
completed technology assets are being amortized on a straight line basis over
their estimated useful lives of five years and three years, respectively. Under
Canadian GAAP, the purchased research and development in process asset is being
amortized straight line over its expected useful life of six months. Under U.S.
GAAP, purchased research and development in process would have been written off
at the time of acquisition.
As part of the purchase agreement, participating employees of TimeStep may
receive up to an additional $25,000,000 in compensation associated with the
acquisition. The additional compensation is contingent upon TimeStep achieving
certain specified financial performance targets and is payable at various dates
ending in August 2001.
Intangible assets acquired on the acquisitions of Northchurch and TimeStep and
related amortization are as follows:
<TABLE>
<CAPTION>
Opening Balance Ending Balance
May 2, 1999 Additions Amortization October 31, 1999
<S> <C> <C> <C> <C>
Purchased research and
development in process --$ $54,429 $(16,142) $38,287
Acquired technology -- 10,185 (283) 9,902
Other intangibles -- 5,597 (93) 5,504
------ ------- -------- -------
--$ $70,211 $(16,518) $53,693
====== ======= ======== =======
</TABLE>
(Page 8 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
4. Acquisition of Stanford Telecommunications Inc.
In June 1999, the Company announced a definitive agreement to acquire Stanford
Telecommunications Inc. ("STII") (STII: NASDAQ), a leading supplier of broadband
wireless technology and products based in Sunnyvale, California. The boards of
directors of the Company and STII had approved the agreement and plan of merger,
subject to conditions including approval by STII's stockholders, whereby the
Company would acquire all of the outstanding shares of common stock of STII in a
tax-free, stock-for-stock exchange. In November 1999, the boards of directors of
the Company and STII approved a renegotiated agreement and plan of merger by
which the Company will acquire all the outstanding common stock of STII for cash
consideration. Under the terms of the renegotiated agreement, the aggregate net
purchase price is estimated at US$265,000,000 (Cdn$390,000,000) after
divestiture of certain divisions of STII that are unrelated to the Company's
core business and including acquisition related costs. The acquisition was
completed in December 1999 and will be accounted for using the purchase method
of accounting.
5. Restructuring Costs
Restructuring costs were comprised of the following:
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
------------------------ -------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Layer 2 Switching End of Life $ -- $37,928 $ -- $37,928
Asia Pacific Resources Relocation -- 6,532 -- 6,532
----- ------- ----- -------
$ -- $44,460 $ -- $44,460
===== ======= ===== =======
</TABLE>
In October 1998, the Company decided to discontinue the sale and development of
local area network (LAN) Layer 2 Switching products as part of the enhancement
of the focus on the Company's dominant and more profitable products. The Layer 2
Switching End of Life program created impairment losses associated with certain
assets deployed in this business and obligations related to fulfilling previous
customer commitments. The program was completed during fiscal 1999. End of life
program costs of $37,928,000 were comprised of the following:
Total
Asset impairment losses
Accounts receivable $ 7,762
Inventory 22,928
-------
30,690
Customer obligations 7,238
-------
Layer 2 Switching End of Life program costs $37,928
=======
(Page 9 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
Impairment losses related to accounts receivable and inventory were recorded to
the extent that the net book value of these assets, including related reserves,
exceeded their fair value. The fair value was based on the estimated net
realizable value of the underlying assets. The net carrying amount of inventory
affected by the Layer 2 Switching End of Life program was reduced to $1,458,000
given demand for the affected products and the Company's estimated proceeds of
disposition, net of the costs of disposal. This inventory was substantially
disposed of during fiscal 1999.
Customer obligations related to the cost to the Company of acquiring products
from third parties and providing them to customers in order to meet the
Company's commitments with respect to providing certain network functionality.
In October 1998, the Company commenced 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 for relocation of $6,532,000 and the
related costs incurred are as follows:
<TABLE>
<CAPTION>
Reduction in Reduction Other
Work Force in Facilities Relocation Total
<S> <C> <C> <C> <C>
Provision recorded upon
adoption of the
relocation plan $3,407 $2,600 $ 525 $ 6,532
Incurred in the fiscal year
ended May 2, 1999 (690) -- (525) (1,215)
------ ------------- ---------- -------
Provision at May 2, 1999 $2,717 $2,600 $ -- $ 5,317
Incurred in the fiscal quarter
ended August 1, 1999 (755) -- -- (755)
Incurred in the fiscal quarter
ended October 31, 1999 (922) -- -- (922)
------ ------------- ---------- -------
Provision at October 31, 1999 $1,040 $2,600 $ -- $ 3,640
====== ============= ========== =======
</TABLE>
The provision for restructuring is reflected in accrued liabilities at October
31, 1999 and May 2, 1999.
The provision for workforce terminations reflects the accrual of involuntary
termination benefits for 27 employees. The provision for reduction in facilities
comprises lease cancellation penalties associated with relocating facilities to
Hong Kong and Malaysia. Other relocation costs consist of direct incremental
costs associated with the relocation. The balance of the provision for Asia
Pacific resources relocation is included in accrued liabilities at May 2, 1999.
(Page 10 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
Additional costs related to the transfer of personnel and equipment, the
recruitment of new staff and the expansion of facilities in Hong Kong are not
included in the Asia Pacific Resources relocation charge and are being expensed
as incurred. These additional costs are estimated at $9,000,000, with the
majority of the costs to be incurred during the first two quarters of fiscal
2000.
In April 1999, the Company decided to streamline the operations of regional
sales and support organizations as well as its marketing and product development
organizations. The restructuring costs associated with the sales, support and
marketing organizations ("Sales and Marketing") consisted primarily of costs
related to workforce and facilities reductions, as the Company has announced a
reduction in the number of locations in which it will have a physical presence
in favour of distributors in certain markets, and subcontractors for certain
functions. Restructuring costs associated with product development relate
primarily to asset impairment losses related to the discontinuation or
divestiture of the development of certain products, and the centralization of
development laboratories to make the development process more efficient. The
components of restructuring costs of $73,570,000 were as follows:
<TABLE>
<CAPTION>
Sales and Product
Marketing Development Total
<S> <C> <C> <C>
Asset impairment losses
Inventory $ 2,606 $ 8,994 $11,600
Property, plant and equipment 6,576 29,104 35,680
Other current and non-current assets 568 2,249 2,817
------- ------- -------
9,750 40,347 50,097
------- ------- -------
Provision for restructuring
Reduction in work force 14,595 427 15,022
Reduction in facilities 6,627 -- 6,627
Other restructuring costs 1,653 171 1,824
------- ------- -------
22,875 598 23,473
------- ------- -------
Restructuring costs $32,625 $40,945 $73,570
======= ======= =======
</TABLE>
Asset impairment losses relate to assets affected by the Company's restructuring
plan that could not be deployed within the streamlined organizations or
elsewhere within the Company. Impairment losses were recorded to the extent the
net book value of these assets, including related reserves, exceeded the
estimated net realizable value of the underlying assets. Substantially all of
the net book values of the inventory and property, plant and equipment affected
by the restructuring programs were reflected as asset impairment losses since
the Company estimates that the proceeds of disposition of these assets will
approximate the costs of disposal. These asset impairment losses will reduce
amortization expense in fiscal 2000 by approximately $11,700,000. The Company
anticipates that assets impaired as a result of the restructuring programs will
be disposed of by the end of fiscal 2000.
(Page 11 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars,cd tabular amounts in thousands except per share data)
(Unaudited)
The provision for restructuring and the related spending on the programs
instituted to streamline the sales and support organizations as well as the
marketing and product development organizations to the end of the second quarter
of fiscal 2000 is as follows:
<TABLE>
<CAPTION>
Reduction in Reduction Other
Work Force in Facilities Restructuring Total
<S> <C> <C> <C> <C>
Provision recorded upon
formulation of the
restructuring plan $15,022 $ 6,627 $1,824 $ 23,473
Incurred in the fiscal quarter
ended August 1, 1999 (7,765) (2,815) (658) (11,238)
Incurred in the fiscal quarter
ended October 31, 1999 (3,631) (2,513) (726) (6,870)
------- ------- ------ --------
Provision at October 31, 1999 $ 3,626 $ 1,299 $ 440 $ 5,365
======= ======= ====== ========
</TABLE>
The provision for restructuring is reflected in accrued liabilities at October
31, 1999 and May 2, 1999.
The provision for the reduction in work force included severance, related
medical and other benefits, and other obligations to employees. The provision
includes termination benefits for 137 employees. The work force reductions will
occur in Japan, Russia and various other countries. The Company anticipates that
the remaining costs associated with the work force reductions will be paid in
the third quarter of fiscal 2000.
The provision for the reduction in facilities comprises lease payments and fixed
costs associated with the closure of sales, support and administrative
facilities in Europe, Japan and the United States. The Company expects to
complete these facilities closures in fiscal 2000.
The provision for other restructuring costs comprises certain consulting costs
associated with establishing termination benefits for employees in addition to
outplacement and counseling services as well as various other direct incremental
costs associated with the restructuring plan.
In accordance with Canadian GAAP, impairments to accounts receivable and
inventory attributable to restructuring activities have been included in
restructuring costs. Under U.S. GAAP, impairments to accounts receivable and
inventory attributable to restructuring activities would be included in the
calculation of gross margin. In accordance with U.S. GAAP, the calculation of
gross margin would have included restructuring costs of $30,690,000 for the
quarter and first six months ended November 1, 1998.
(Page 12 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
6.Net Gain on Investments
<S> <C> <C> <C> <C>
Fiscal quarters ended Two fiscal quarters ended
-------------------- -------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
-------- -------- -------- -----------
Juniper Networks Inc. $464,756 $ -- $464,756 $ --
Cambrian Systems Corporation 4,276 -- 7,110 --
Advanced Computer Communications -- 128,336 -- 128,336
Other divestitures 643 -- 1,321 --
West End Systems Corp. -- (13,527) -- (13,527)
Investment impairment write downs -- (47,957) -- (47,957)
-------- -------- -------- --------
$469,675 $ 66,852 $473,187 $ 66,852
======== ======== ======== ========
</TABLE>
In October 1999, the Company sold 1,525,000 of its shares in Juniper Networks
Inc ("Juniper") (JNPR: NASDAQ) as part of Juniper's second public offering. The
Company's remaining 238,718 shares in Juniper were subsequently sold as part of
an over allotment option granted to the underwriters of Juniper's offering. The
Company received cash proceeds of US$323,378,000 (Cdn$474,480,000) for its
investment in Juniper.
In December 1998, the Company sold its minority ownership position in Cambrian
Systems Corporation ("Cambrian") to Nortel for cash proceeds of US$100,511,000
(Cdn$154,268,000). The proceeds included earn-out payments of US$6,772,000
(Cdn$9,965,000) received by the Company as a result of certain specified
financial performance targets being met by Cambrian. The Company received earn-
out payments in June 1999 and October 1999 totaling US$4,837,000
(Cdn$7,110,000). Additional future potential earn-out payments of up to
approximately US$16,000,000 will be received by the Company if certain specified
financial performance targets are met by Cambrian.
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 (Cdn$258,308,000). ACC's results of
operations were consolidated with the Company's results for the first six months
of fiscal 1999 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 periods
presented.
(Page 13 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
In the second quarter of fiscal 1999, the Company recorded an investment write
down of $13,527,000 attributable to its minority equity investment in West End
Systems Corp. ("West End"), a manufacturer of access and transmission products
for the communications and cable television industries. In February 1999, West
End filed an assignment in bankruptcy under the Canadian Bankruptcy and
Insolvency Act and the Company recorded a further loss of $19,994,000
attributable to the remaining carrying value of its investment in West End and
unsecured trade accounts outstanding.
In the second quarter of fiscal 1999, the Company recorded investment impairment
write downs of $47,957,000 attributable to the financial performance of certain
investee companies as well as deteriorating economic conditions in certain
geographic regions. Investment impairment write downs in the second quarter of
fiscal 1999 included $17,247,000 related to the carrying value of the Company's
investment in a subsidiary company that developed packet voice technology and
network access products. As a result of deteriorating economic conditions in
Russia, the Company recognized a loss of $11,449,000 attributable to its
investment in a joint venture in that country. The Company recorded investment
impairments of $19,261,000 in the second quarter of fiscal 1999 as a result of
the deteriorating financial condition of three investee companies.
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 in these
investments. The Company establishes fair value of its long term investments in
investee companies by referring to quoted market values or reviewing valuations
implicit in recent private financings. The Company also utilizes a variety of
valuation techniques which include assessing potential proceeds that could be
expected to be received on a disposition of the Company's investment,
discounting future cash flows expected to be received from holding the
investment and reviewing recent acquisitions and divestitures of companies in
the industry that are comparable to the investee company.
(Page 14 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
7. 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. The
calculation of earnings per share under U.S. GAAP is as follows.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
------------------------- --------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Net earnings, as reported
under Canadian GAAP $301,709 $ 53,314 $348,995 $ 88,834
Add back:
Amortization of purchased research
and development in process (Note 4) 16,142 -- 16,142 --
Less:
Write off of purchased research and
development in process (54,430) -- (54,430) --
-------- -------- -------- --------
Net earnings, U.S. GAAP $263,421 $ 53,314 $310,707 $ 88,834
======== ======== ======== ========
Earnings per share
Basic $ 1.46 $ 0.30 $ 1.72 $ 0.50
======== ======== ======== ========
Diluted $ 1.44 $ 0.30 $ 1.70 $ 0.49
======== ======== ======== ========
Weighted average number of shares
Basic 180,863 176,766 180,631 176,430
======== ======== ======== ========
Diluted 182,950 176,766 183,273 180,663
======== ======== ======== ========
</TABLE>
(Page 15 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
8. Business Segment Information
The Company designs, manufactures, markets and services networking solutions to
customers in more than 100 countries. 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 resources 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. Cost of sales for the
three sales and support organizations is stated at the cost to manufacture and
does not include any markups.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
-------------------------- ---------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
North and South America
Sales $ 194,636 $ 190,943 $ 402,925 $ 379,609
Cost of sales and expenses 114,943 96,470 240,971 187,364
--------- --------- --------- ---------
Operating contribution 79,693 94,473 161,854 192,245
--------- --------- --------- ---------
Europe, Middle East and Africa
Sales $ 199,806 $ 144,904 $ 387,087 $ 276,799
Cost of sales and expenses 101,255 75,166 192,191 137,630
--------- --------- --------- ---------
Operating contribution 98,551 69,738 194,896 139,169
--------- --------- --------- ---------
Asia Pacific
Sales $ 51,474 $ 61,729 $ 104,108 $ 120,806
Cost of sales and expenses 28,083 32,904 53,611 63,208
--------- --------- --------- ---------
Operating contribution 23,391 28,825 50,497 57,598
--------- --------- --------- ---------
Corporate
Sales $ 34,928 $ 59,205 $ 81,794 $ 105,623
Cost of sales and expenses 197,493 183,156 379,180 372,251
--------- --------- --------- ---------
Operating contribution (162,565) (123,951) (297,386) (266,628)
--------- --------- --------- ---------
Total
Sales $ 480,844 $ 456,781 $ 975,914 $ 882,837
Cost of sales and expenses 441,774 387,696 865,953 760,453
--------- --------- --------- ---------
Operating contribution 39,070 69,085 109,961 122,384
Amortization of acquired intangibles (23,843) (868) (26,588) (1,795)
Compensation associated with
acquisitions (10,228) -- (10,228) --
Restructuring costs -- (44,460) -- (44,460)
--------- --------- --------- ---------
Income from operations 4,999 23,757 73,145 76,129
Net gain on investments 469,675 66,852 473,187 66,852
Net interest, taxes and other (172,965) (37,295) (197,337) (54,147)
--------- --------- --------- ---------
Net earnings $ 301,709 $ 53,314 $ 348,995 $ 88,834
========= ========= ========= =========
</TABLE>
(Page 16 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
9. 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, for the Company,
comprises only foreign currency translation adjustment.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
------------------------- --------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Comprehensive income for the period:
Net earnings $301,709 $53,314 $348,995 $ 88,834
Other comprehensive income:
Foreign currency translation
adjustment (9,931) 26,228 (3,756) 50,209
-------- ------- ------------ -----------
Comprehensive income $291,778 $79,542 $345,239 $139,043
======== ======= ============ ===========
10. Inventories
October 31, May 2,
1999 1999
----- -----
Finished goods $239,248 $118,251
Work in process 17,041 27,807
Raw materials 91,590 64,228
------------ -----------
$347,879 $210,286
============ ===========
</TABLE>
(Page 17 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
11. Goodwill
October 31,
1999
------
Goodwill, beginning of the period $ 40,022
Additions associated with acquisitions 165,996
Amortization (7,054)
------
Goodwill, end of the period $198,964
========
Accumulated goodwill amortization $ 14,185
========
12. Other Assets
October 31, May 2,
1999 1999
------ -------
Long term investments
Accounted for by the equity method $114,617 $ 29,236
Accounted for by the cost method 231,107 161,901
-------- -----------
345,724 191,137
Long term deferred compensation 35,735 --
Other Assets 49,536 32,370
-------- -----------
$430,995 $223,507
======== ===========
Long term investments accounted for by the equity method represent investments
in companies over which the Company has significant influence. Under the equity
method, the carrying value of the investment includes the Company's
proportionate share of earnings of the investee company since acquisition.
Investee companies which are not subject to significant influence by the Company
are accounted for by the cost method. In accordance with Canadian and U.S. GAAP,
the carrying value of long term investments in common shares that are publicly
traded or privately held are not adjusted to reflect increases in fair value but
are adjusted to reflect non-temporary impairments in fair value.
In May 1999, the Company completed its investment in TeraBridge Technologies
Corporation ("TeraBridge"), which specializes in delivering intelligent call and
service control products to service providers and is headquartered in Gurnee,
Illinois. The Company acquired a 19% equity ownership position at a total
purchase price of US$60,200,000 (Cdn$90,813,000). The majority of the purchase
price was assigned to goodwill (Cdn$30,549,000) and to the Company's option
(Cdn$51,079,000) to increase its equity ownership position to 50% by May 2000
for US$10,000,000. The Company is accounting for its investment in TeraBridge
using the equity method of accounting and is amortizing the goodwill acquired on
a straight line basis over five years.
Long term deferred compensation relates to the Company's acquisition of
Northchurch Communications during the second quarter of fiscal 2000 ended
October 31, 1999 (Note 3).
(Page 18 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
13. Litigation
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 some of the standardized functions on the
Newbridge frame relay and ATM switch products, along with its ADPCM (adaptive
differential pulse code modulation) and card initialization implementations,
infringe certain United States patent rights claimed by Lucent Technologies. The
Complaint requests actual and trebled damages in an unspecified amount.
On November 18, 1999, after a lengthy trial of certain of the Company's
defenses, the jury ruled against the Company. This ruling set damages at
US$9,590,000. The trial of the balance of the Company's defenses is expected to
be held before the United States District Court Judge sometime before the end of
the fiscal year. Until this trial is completed there will be no final judgement
entered against the Company. If the Judge finds for the Company at this
subsequent trial, the jury's verdict could be partially or completely
overturned. The Company also believes that it has strong grounds for an appeal,
should one become necessary. Because the action is still pending before the
Court and the final outcome is not certain, no provision for any liability
resulting upon final adjudication has been made in the Consolidated Financial
Statements.
14. Uncertainty Due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information that
uses year 2000 dates is processed. In addition, similar problems may arise in
some systems that use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure that could
affect an entity's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
entity, including those related to the efforts of customers, suppliers, or other
third parties, will be fully resolved.
(Page 19 of 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
15. Subsequent Event
In November 1999, the Company announced strategic and operational plans designed
to leverage its core competencies, particularly its product portfolio, to create
shareholder value, and is accordingly committed to considering all strategic
options. The execution of the operational plan will result in a significant
restructuring of the Company and will serve to reduce operating costs,
streamline operations and realign resources within the Company's research and
development efforts. Operational actions taken subsequent to the end of the
second quarter of fiscal 2000 resulted in workforce reductions of approximately
800 employees and the Company plans to outsource volume manufacturing and global
customer service. The Company expects that the majority of actions to be
undertaken under the plan will be completed by the end of fiscal 2000.
16. Recent Accounting Pronouncements
In June 1998, FASB issued SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS 133 requires all derivatives to be recorded on the
balance sheet at fair value. SFAS 133 is effective for fiscal years beginning
after June 15, 2000. The Company is in the process of evaluating the impact of
the reporting requirements of SFAS 133.
CICA Handbook - Accounting Section 1540, Cash Flow Statements, which replaces
existing Section 1540 Statement of Changes in Financial Position was issued in
June 1998 and is effective for fiscal years beginning after July 31, 1998. The
impact of this standard is the disclosure of purchases, maturities and sales of
marketable securities as an investing activity on the Statement of Cash Flows,
in a manner consistent with U.S. GAAP. Under this new standard, investing and
financing activities that do not require the use of cash or cash equivalents are
excluded from the Statement of Cash Flows but disclosed elsewhere in the
consolidated financial statements. The Company has adopted CICA Handbook -
Accounting Section 1540 for all periods presented in these Consolidated
Financial Statements.
(Page 20 of 52)
<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.
RECENT DEVELOPMENTS
In August 1999, the Company acquired Northchurch Communications Inc.
("Northchurch"), a privately-held developer of Internet Protocol (IP) edge
routers for service providers. Northchurch is based in Andover, Massachusetts.
The Company held a minority equity interest of 34% in Northchurch before
acquiring all of the remaining outstanding shares of Northchurch for total cash
consideration of US$82,560,000 (Cdn$123,022,000) including acquisition related
costs. The acquisition has been accounted for using the purchase method of
accounting. The majority of the aggregate purchase price was allocated to
goodwill (Cdn$90,062,000) and purchased research and development in process
(Cdn$42,420,000) with the balance of the purchase price allocated to the net
liabilities assumed on the acquisition. The goodwill is being amortized on a
straight line basis over its estimated useful life of five years. Under Canadian
GAAP, the purchased research and development in process asset is being amortized
straight line over its expected useful life of six months. Under U.S. GAAP,
purchased research and development in process would have been written off at the
time of acquisition.
As part of the purchase agreement, the Company also agreed to make future
payments to participating Northchurch employees of approximately US$62,357,000
(Cdn$91,891,000) over a period up to eighteen months after the acquisition in
exchange for the employees' continued employment services during that period.
The deferred compensation expense associated with the Company's obligation to
make these payments is being amortized on a straight line basis over the related
eighteen month employment period. Accordingly, the Company recorded amortization
of the deferred compensation associated with the acquisition of $10,228,000 in
the second quarter of fiscal 2000. The current portion of deferred compensation
expense was $45,945,000 as at October 31, 1999.
In September 1999, the Company acquired TimeStep Corporation ("TimeStep"), a
provider of encryption solutions for secure virtual private networks to service
providers and large enterprises. TimeStep is headquartered in Kanata, Ontario.
The Company held a minority equity interest in TimeStep of 30% before acquiring
all of the remaining outstanding shares of TimeStep for total cash consideration
of $85,547,000 including acquisition related costs. The acquisition has been
accounted for using the purchase method of accounting with the majority of the
purchase price allocated to goodwill ($63,185,000), purchased research and
development in process ($12,010,000) and acquired technologies associated with
completed research and development projects ($10,185,000). The goodwill and
completed technology assets are being amortized on a straight line basis over
their estimated useful lives of five years and three years, respectively. Under
Canadian GAAP, the purchased research and development in process asset is being
amortized straight line over its expected useful life of six months. Under U.S.
(Page 21 of 52)
<PAGE>
GAAP, purchased research and development in process would have been written off
at the time of acquisition.
As part of the purchase agreement, participating employees of TimeStep may
receive up to an additional $25,000,000 in compensation associated with the
acquisition. The additional compensation is contingent upon TimeStep achieving
certain specified financial performance targets and is payable at various dates
ending in August 2001.
In June 1999, the Company announced a definitive agreement to acquire Stanford
Telecommunications Inc. ("STII") (STII: NASDAQ), a leading supplier of broadband
wireless technology and products based in Sunnyvale, California. The boards of
directors of the Company and STII had approved the agreement and plan of merger,
subject to conditions including approval by STII's stockholders, whereby the
Company would acquire all of the outstanding shares of common stock of STII in a
tax-free, stock-for-stock exchange. In November 1999, the boards of directors of
the Company and STII approved a renegotiated agreement and plan of merger by
which the Company will acquire all the outstanding common stock of STII for cash
consideration. Under the terms of the renegotiated agreement, the aggregate net
purchase price is estimated at US$265,000,000 (Cdn$390,000,000) after
divestiture of certain divisions of STII that are unrelated to the Company's
core business and including acquisition related costs. The acquisition was
completed in December 1999 and will be accounted for using the purchase method
of accounting.
In November 1999, the Company announced strategic and operational plans designed
to leverage its core competencies, particularly its product portfolio, to
create shareholder value, and is accordingly committed to considering all
strategic options. The execution of the operational plan will result in a
significant restructuring of the Company and will serve to reduce operating
costs, streamline operations and realign resources within the Company's research
and development efforts. Operational actions taken subsequent to the end of the
second quarter of fiscal 2000 resulted in workforce reductions of approximately
800 employees and the Company plans to outsource volume manufacturing and global
customer service. The Company expects that the majority of actions to be
undertaken under the plan will be completed by the end of fiscal 2000.
(Page 22 of 52)
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
sales represented by certain items in the Company's Consolidated Statements of
Earnings.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
----------------------- ---------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.8 41.4 44.1 41.4
----- ---- ---- ----
Gross margin 55.2 58.6 55.9 58.6
Expenses
Selling, general and administrative 32.4 29.5 30.4 29.9
Research and development 14.7 13.9 14.2 14.8
Amortization of acquired intangibles 5.0 0.2 2.8 0.2
Compensation associated with
acquisitions 2.1 -- 1.0 --
Restructuring costs -- 9.8 -- 5.1
----- --- ---- ----
Income from operations 1.0 5.2 7.5 8.6
Interest income, net (0.0) (0.0) 0.1 (0.0)
Net gain on investments 97.7 14.6 48.5 7.6
Other expenses (1.4) (0.7) (0.9) (0.5)
----- --- ---- ----
Earnings before income taxes
and non-controlling interest 97.3 19.1 55.2 15.7
Provision for income taxes 34.3 7.8 19.1 5.8
Non-controlling interest 0.3 (0.4) 0.3 (0.2)
----- --- ---- ----
Net earnings 62.7% 11.7% 35.8% 10.1%
===== ==== ==== ====
</TABLE>
Sales
<TABLE>
<CAPTION>
Fiscal Quarters Ended Two Fiscal Quarters Ended
----------------------- ------------------------------
Oct 31, Nov 1, % Oct 31, Nov 1, %
1999 1998 Increase 1999 1998 Increase
-------- -------- -------- -------- -------- --------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales $480,844 $456,781 5% $975,914 $882,837 11%
======== ======== ======== ========
</TABLE>
The increase in sales in the first quarter and first six months of fiscal 2000
compared to the first quarter and first six months of fiscal 1999 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
declines in revenues from circuit switched networking products and products
based on packet technologies for local area network applications (LAN Packet
products). Excluding the impact of exchange rates of the Canadian dollar for the
Pound Sterling and the U.S. dollar, sales increased 10% in the second quarter of
fiscal 2000 over the
(Page 23 of 52)
<PAGE>
second quarter of fiscal 1999, and 14% for the first six months of fiscal 2000
compared to the first six months of fiscal 1999.
Sales for the second quarter of fiscal 2000 of $480,844,000 declined 3% compared
with sales of $495,070,000 for the first quarter of fiscal 2000. The decrease
was principally the result of a decline in WAN Packet product revenues in North
America.
The following table illustrates, for the periods indicated, the percentage of
sales that comprise each of the Company's major product lines.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
----------------------- ---------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
WAN Packet 71% 53% 71% 53%
Circuit switched networking 29 43 29 43
LAN Packet -- 4 -- 4
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
Sales of WAN Packet products grew approximately 39% in the second quarter of
fiscal 2000 compared to the second quarter of fiscal 1999 and approximately 50%
in the first six months of fiscal 2000 compared to the first six months of
fiscal 1999. Growth in sales of WAN Packet products was predominantly the result
of increased acceptance and demand by service providers throughout the world for
the Company's asynchronous transfer mode (ATM) products.
Sales of circuit switched networking products in the second quarter of fiscal
2000 declined 28% relative to sales in the second quarter of fiscal 1999 and
sales for the first six months of fiscal 2000 declined 26% relative to sales in
the comparable period of fiscal 1999. 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.
The Company did not have sales of LAN Packet products in the first six months of
fiscal 2000 because the Company instituted a program in the second quarter of
fiscal 1999 to discontinue the sale and development of LAN Layer 2 Switching
products. Throughout fiscal 1998 and fiscal 1999 the Company experienced 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 previously restructured its activities in the LAN business,
including the former UB, in the third quarter of fiscal 1998.
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 2000 when compared to fiscal 1999.
(Page 24 of 52)
<PAGE>
The Company sells its products to service providers 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. Sales to service providers and enterprises as a percentage of total
sales were as follows.
Fiscal quarters ended Two fiscal quarters ended
----------------------- ---------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
----------- ---------- ------------- ------------
Service providers 82% 75% 81% 73%
Enterprises 18 25 19 27
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
Sales to Siemens A.G. 18% 15% 17% 15%
==== ==== ==== ====
The proportion of revenue derived from service providers in the second quarter
and first six months of fiscal 2000 increased relative to the comparable periods
in fiscal 1999 due to the discontinuance of sales of the Company's LAN Packet
products, which largely served enterprise customers. Deliveries to original
equipment manufacturers (OEMs) for service provider customers and deliveries
under certain large contracts with service providers contributed significantly
to sales in the second quarter and first six months of fiscal 2000 and fiscal
1999. Sales to Siemens A.G. and subsidiaries were generally under OEM
arrangements for resale to end users.
The following table sets forth, for the periods indicated, the percentage of
consolidated sales derived by sales management in each of the principal
geographic regions in which the Company operates. For additional geographic
segment information, see Note 8 to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
----------------------- ---------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Americas Region 48% 53% 49% 53%
European Region 41 33 40 33
Asia Pacific Region 11 14 11 14
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
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. The increase in
exchange rates of the Canadian dollar for the Pound Sterling and the U.S. dollar
during the second quarter of fiscal 2000, relative to exchange rates during the
second quarter of fiscal 1999, resulted in a 5% or $21,944,000 negative variance
in reported sales as compared to the second quarter of fiscal 1999. The increase
in exchange rates of the Canadian dollar for the Pound Sterling and the U.S.
dollar during the first six months of fiscal 2000, relative to exchange rates
during the first six months of fiscal 1999, resulted in a 3% or $27,894,000
negative variance in reported sales as compared to the first six months of
fiscal 1999. 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 2000.
(Page 25 of 52)
<PAGE>
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 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.
The Company may be subject to sales fluctuations related to the issue of Year
2000 date compliance. Sales mix shifts may occur due to customers limiting their
purchases of networking equipment to products that they have already tested for
Year 2000 Compliance within their networks, which would shift sales mix away
from emerging product offerings and software upgrades. Sales declines could
result if customers decide to delay expansion of their networks to after January
1, 2000. The majority of the Company's current product offerings have Year 2000
Compliant versions available and all emerging offerings are designed to be Year
2000 Compliant. Discussion of the Company's program for ensuring that all of its
products are Year 2000 date compliant is outlined in the "Year 2000 Date
Compliance" section of this report.
<TABLE>
<CAPTION>
Cost of Sales and Gross Margin
Fiscal Quarters Ended Two Fiscal Quarters Ended
--------------------- -------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
-------- -------- -------- --------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C>
Gross margin $265,513 $267,457 $545,062 $516,951
======== ======== ======== ========
As % of sales 55% 59% 56% 59%
</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 2000
relative to the second quarter and first six months of fiscal 1999 principally
due to the decline in the proportion of revenues derived from the Company's
circuit switched networking products, which carry gross margins above the
average gross margins earned on the Company's other products. Gross margins in
fiscal 2000 have also declined relative to the comparable periods in fiscal 1999
due to lower average selling prices for products based on packet technologies as
a result of increased competition on product pricing and increased sales into
broadband access applications.
(Page 26 of 52)
<PAGE>
Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
Fiscal Quarters Ended Two Fiscal Quarters Ended
------------------------------- -------------------------------
Oct 31, Nov 1, % Oct 31, Nov 1, %
1999 1998 Increase 1999 1998 Increase
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(Canadian dollars in thousands)
Selling, general and
and administrative $155,613 $134,831 15% $296,650 $263,870 12%
======== ======== ======== ========
As % of sales 32% 30% 30% 30%
</TABLE>
Selling, general and administrative expenses increased in the second quarter and
first six months of fiscal 2000 relative to the second quarter and first six
months of fiscal 1999 principally as a result of increased remuneration costs
associated with salary increases and sales commissions, consulting fees related
to the Company's decision to outsource global customer service, increased
spending on marketing programs to promote the introduction of new products, and
amortization costs associated with upgrading the Company's information
technology infrastructure. These costs were partially offset by the impact of
initiatives in the fourth quarter of fiscal 1999 to streamline regional sales
and support organizations.
The increase in selling, general and administrative expenses as a percentage of
sales in the second quarter of fiscal 2000 when compared to the second quarter
of fiscal 1999 is a result of the higher percentage increase in expenditures as
compared to the smaller percentage increase in revenues over the same period. As
a result of the impact of the streamlining initiatives undertaken in the fourth
quarter of fiscal 1999 and the strategic actions announced by the Company in
November 1999 aimed specifically at reducing operating costs, Management
anticipates that selling, general and administrative expenses as a percentage of
sales will decline in fiscal 2000 relative to fiscal 1999.
<TABLE>
<CAPTION>
Research and Development
Fiscal Quarters Ended Two Fiscal Quarters Ended
----------------------- -------------------------------
Oct 31, Nov 1, % Oct 31, Nov 1, %
1999 1998 Increase 1999 1998 Increase
----------- ---------- --------- --------- --------- ---------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross research and
development expenditures $88,989 $ 87,096 2% $173,129 $170,872 1%
Investment tax credits (8,746) (10,257) (15)% (17,775) (19,369) (8)%
Customer, government
and other funding (7,513) (11,397) (34)% (13,103) (17,011) (23)%
Net deferral of software
development costs (1,900) (1,901) 0% (3,800) (3,765) 1%
------- -------- -------- --------
Net research and
development expenses $70,830 $ 63,541 11% $138,451 $130,697 6%
======= ======== ======== ========
Gross expenditures
as a % of sales 19% 19% 18% 19%
Recoveries as a %
of gross expenditures 20% 27% 20% 23%
Net expenses as a % of sales 15% 14% 14% 15%
</TABLE>
(Page 27 of 52)
<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. Gross research and development
spending increased slightly in the second quarter and first six months of fiscal
2000 as compared to the second quarter and first six months of fiscal 1999 as
increased costs associated with salary increases for engineering staff were
largely offset by a reduction in amortization and overhead costs generated
through restructuring programs initiated in the fourth quarter of fiscal 1999.
Recoveries as a percentage of gross expenditures in the second quarter and first
six months of fiscal 2000 declined relative to the comparable periods of fiscal
1999. Management, however, expects the level of recoveries in fiscal 2000, as a
percentage of gross expenditures, to approximate the level in fiscal 1999 based
on current levels of committed customer, government and other funding relative
to planned spending levels.
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 2000 relative to fiscal 1999 to address the
requirements of service providers as they invest in new infrastructures to meet
the challenges of growing demand for new communications services and increased
competition.
Amortization of Acquired Intangibles
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
---------------------- --------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Purchased research and
development in process $16,142 $ -- $16,142 $ --
Acquired technology 283 -- 283 --
Other 93 -- 93 --
Goodwill 7,325 868 10,070 1,795
------- ----- ------- ------
$23,843 $ 868 $26,588 $1,795
======= ===== ======= ======
As a % of sales 5% 0% 3% 0%
= = = =
</TABLE>
The increase in amortization of acquired intangibles for the second quarter of
fiscal 2000 relative to the second quarter of fiscal 1999 and for the first six
months of fiscal 2000 relative to the first six months of fiscal 1999 is
principally the result of the Company's recent acquisitions of Northchurch
Communications Inc., TimeStep Corporation and TeraBridge Technologies
Corporation ("TeraBridge"). Based on the recent acquisitions of Northchurch,
TimeStep, TeraBridge, and Stanford Communications Inc., Management expects that
amortization of acquired intangibles as a percentage of sales will increase in
fiscal 2000 relative to fiscal 1999.
(Page 28 of 52)
<PAGE>
Restructuring Costs
Restructuring costs were comprised of the following:
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
--------------------- -------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
---------- --------- ----------- ------------
<S> <C> <C> <C> <C>
Layer 2 Switching End of Life $ -- $37,928 $ -- $37,928
Asia Pacific Resources Relocation -- 6,532 -- 6,532
----- ------- ----- -------
$ -- $44,460 $ -- $44,460
===== ======= ===== =======
</TABLE>
In October 1998, the Company decided to discontinue the sale and development of
local area network (LAN) Layer 2 Switching products as part of the enhancement
of the focus on the Company's dominant and more profitable products. The Layer 2
Switching End of Life program created impairment losses associated with certain
assets deployed in this business and obligations related to fulfilling previous
customer commitments. The program was completed during fiscal 1999. End of life
program costs of $37,928,000 were comprised of the following:
<TABLE>
<CAPTION>
Total
<S> <C>
Asset impairment losses
Accounts receivable $ 7,762
Inventory 22,928
-------
30,690
Customer obligations 7,238
-------
Layer 2 Switching End of Life program costs $37,928
=======
</TABLE>
Impairment losses related to accounts receivable and inventory were recorded to
the extent that the net book value of these assets, including related reserves,
exceeded their fair value. The fair value was based on the estimated net
realizable value of the underlying assets. The net carrying amount of inventory
affected by the Layer 2 Switching End of Life program was reduced to $1,458,000
given demand for the affected products and the Company's estimated proceeds of
disposition, net of the costs of disposal. This inventory was substantially
disposed of during fiscal 1999.
Customer obligations related to the cost to the Company of acquiring products
from third parties and providing them to customers in order to meet the
Company's commitments with respect to providing certain network functionality.
(Page 29 of 52)
<PAGE>
In October 1998, the Company commenced 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 for relocation of $6,532,000 and the
related costs incurred are as follows:
<TABLE>
<CAPTION>
Reduction in Reduction Other
Work Force in Facilities Relocation Total
<S> <C> <C> <C> <C>
Provision recorded upon
adoption of the
relocation plan $3,407 $2,600 $ 525 $ 6,532
Incurred in the fiscal year
ended May 2, 1999 (690) -- (525) (1,215)
------ ------- --- -------
Provision at May 2, 1999 $2,717 $2,600 $ -- $ 5,317
Incurred in the fiscal quarter
ended August 1, 1999 (755) -- -- (755)
Incurred in the fiscal quarter
ended October 31, 1999 (922) -- -- (922)
------ ------ ---- ------
Provision at October 31, 1999 $1,040 $2,600 $ -- $ 3,640
====== ===== ==== =======
</TABLE>
The provision for restructuring is reflected in accrued liabilities at October
31, 1999 and May 2, 1999.
The provision for workforce terminations reflects the accrual of involuntary
termination benefits for 27 employees. The provision for reduction in facilities
comprises lease cancellation penalties associated with relocating facilities to
Hong Kong and Malaysia. Other relocation costs consist of direct incremental
costs associated with the relocation. The balance of the provision for Asia
Pacific resources relocation is included in accrued liabilities at May 2, 1999.
Additional costs related to the transfer of personnel and equipment, the
recruitment of new staff and the expansion of facilities in Hong Kong are not
included in the Asia Pacific Resources relocation charge and are being expensed
as incurred. These additional costs are estimated at $9,000,000, with the
majority of the costs to be incurred during the first two quarters of fiscal
2000.
(Page 30 of 52)
<PAGE>
In April 1999, the Company decided to streamline the operations of regional
sales and support organizations as well as its marketing and product development
organizations. The restructuring costs associated with the sales, support and
marketing organizations ("Sales and Marketing") consisted primarily of costs
related to workforce and facilities reductions, as the Company has announced a
reduction in the number of locations in which it will have a physical presence
in favour of distributors in certain markets, and subcontractors for certain
functions. Restructuring costs associated with product development relate
primarily to asset impairment losses related to the discontinuation or
divestiture of the development of certain products, and the centralization of
development laboratories to make the development process more efficient. The
components of restructuring costs of $73,570,000 were as follows:
<TABLE>
<CAPTION>
Sales and Product
Marketing Development Total
<S> <C> <C> <C>
Asset impairment losses
Inventory $ 2,606 $ 8,994 $11,600
Property, plant and equipment 6,576 29,104 35,680
Other current and non-current assets 568 2,249 2,817
------- ------- -------
9,750 40,347 50,097
------- ------- -------
Provision for restructuring
Reduction in work force 14,595 427 15,022
Reduction in facilities 6,627 -- 6,627
Other restructuring costs 1,653 171 1,824
------- ------- -------
22,875 598 23,473
------- ------- -------
Restructuring costs $32,625 $40,945 $73,570
======= ======= =======
</TABLE>
Asset impairment losses relate to assets affected by the Company's restructuring
plan that could not be deployed within the streamlined organizations or
elsewhere within the Company. Impairment losses were recorded to the extent the
net book value of these assets, including related reserves, exceeded the
estimated net realizable value of the underlying assets. Substantially all of
the net book values of the inventory and property, plant and equipment affected
by the restructuring programs were reflected as asset impairment losses since
the Company estimates that the proceeds of disposition of these assets will
approximate the costs of disposal. These asset impairment losses will reduce
amortization expense in fiscal 2000 by approximately $11,700,000. The Company
anticipates that assets impaired as a result of the restructuring programs will
be disposed of by the end of fiscal 2000.
(Page 31 of 52)
<PAGE>
The provision for restructuring and the related spending on the programs
instituted to streamline the sales and support organizations as well as the
marketing and product development organizations to the end of the second quarter
of fiscal 2000 is as follows:
<TABLE>
<CAPTION>
Reduction in Reduction Other
Work Force in Facilities Restructuring Total
<S> <C> <C> <C> <C>
Provision recorded upon
formulation of the
restructuring plan $15,022 $ 6,627 $1,824 $ 23,473
Incurred in the fiscal quarter
ended August 1, 1999 (7,765) (2,815) (658) (11,238)
Incurred in the fiscal quarter
ended October 31, 1999 (3,631) (2,513) (726) (6,870)
------- ------- ------ --------
Provision at October 31, 1999 $ 3,626 $ 1,299 $ 440 $ 5,365
======= ======= ====== ========
</TABLE>
The provision for restructuring is reflected in accrued liabilities at October
31, 1999 and May 2, 1999.
The provision for the reduction in work force included severance, related
medical and other benefits, and other obligations to employees. The provision
includes termination benefits for 137 employees. The work force reductions will
occur in Japan, Russia and various other countries. The Company anticipates that
the remaining costs associated with the work force reductions will be paid in
the third quarter of fiscal 2000.
The provision for the reduction in facilities comprises lease payments and fixed
costs associated with the closure of sales, support and administrative
facilities in Europe, Japan and the United States. The Company expects to
complete these facilities closures in fiscal 2000.
The provision for other restructuring costs comprises certain consulting costs
associated with establishing termination benefits for employees in addition to
outplacement and counseling services as well as various other direct incremental
costs associated with the restructuring plan.
In accordance with Canadian GAAP, impairments to accounts receivable and
inventory attributable to restructuring activities have been included in
restructuring costs. Under U.S. GAAP, impairments to accounts receivable and
inventory attributable to restructuring activities would be included in the
calculation of gross margin. In accordance with U.S. GAAP, the calculation of
gross margin would have included restructuring costs of $30,690,000 for the
quarter and first six months ended November 1, 1998.
(Page 32 of 52)
<PAGE>
<TABLE>
<CAPTION>
Interest and Other Expenses
Fiscal Quarters Ended Two Fiscal Quarters Ended
---------------------------- ---------------------------
Oct 31, Nov 1, % Oct 31, Nov 1, %
1999 1998 Increase 1999 1998 Increase
------- ------- -------- -------- -------- --------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income $ 6,108 $ 6,761 (10)% $ 13,453 $ 13,372 1%
Interest expense on
long term obligations (6,198) (6,775) (9)% (12,257) (13,478) (9)%
Other expenses (6,649) (3,139) 118% (9,267) (4,645) 100%
</TABLE>
Interest income and interest expense for the second quarter and first six months
of fiscal 2000 are comparable to the same periods in fiscal 1999 because the
Company maintained comparable average cash balances. The increase in other
expenses during the second quarter and first six months of fiscal 2000 relative
to the second quarter and first six months of fiscal 1999 is due to the
Company's proportionate share of the net losses of TeraBridge Technologies
Corporation.
<TABLE>
<CAPTION>
Net Gain on Investments
Fiscal quarters ended Two fiscal quarters ended
--------------------- -------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Juniper Networks Inc $464,756 $ -- $464,756 $ --
Cambrian Systems Corporation 4,276 -- 7,110 --
Advanced Computer Communications -- 128,336 -- 128,336
Other divestitures 643 -- 1,321 --
West End Systems Corp. -- (13,527) -- (13,527)
Investment impairment write downs -- (47,957) -- (47,957)
-------- -------- -------- -----------
$469,675 $ 66,852 $476,187 $ 66,852
======== ======== ======== ===========
</TABLE>
In October 1999, the Company sold 1,525,000 of its shares in Juniper Networks
Inc ("Juniper") (JNPR: NASDAQ) as part of Juniper's second public offering. The
Company's remaining 238,718 shares in Juniper were subsequently sold as part of
an over allotment option granted to the underwriters of Juniper's offering. The
Company received cash proceeds of US$323,378,000 (Cdn$474,480,000) for its
investment in Juniper.
In December 1998, the Company sold its minority ownership position in Cambrian
Systems Corporation ("Cambrian") to Nortel for cash proceeds of US$100,511,000
(Cdn$154,268,000). The proceeds included earn-out payments of US$6,772,000
(Cdn$9,965,000) received by the Company as a result of certain specified
financial performance targets being met by Cambrian. The Company received earn-
out payments in June 1999 and October 1999 totaling US$4,837,000
(Cdn$7,110,000). Additional future potential earn-out payments of up to
approximately US$16,000,000 will be received by the Company if certain specified
financial performance targets are met by Cambrian.
(Page 33 of 52)
<PAGE>
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 (Cdn$258,308,000). ACC's results of
operations were consolidated with the Company's results for the first six months
of fiscal 1999 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 periods
presented.
In the second quarter of fiscal 1999, the Company recorded an investment write
down of $13,527,000 attributable to its minority equity investment in West End
Systems Corp. ("West End"), a manufacturer of access and transmission products
for the communications and cable television industries. In February 1999, West
End filed an assignment in bankruptcy under the Canadian Bankruptcy and
Insolvency Act and the Company recorded a further loss of $19,994,000
attributable to the remaining carrying value of its investment in West End and
unsecured trade accounts outstanding.
In the second quarter of fiscal 1999, the Company recorded investment impairment
write downs of $47,957,000 attributable to the financial performance of certain
investee companies as well as deteriorating economic conditions in certain
geographic regions. Investment impairment write downs in the second quarter of
fiscal 1999 included $17,247,000 related to the carrying value of the Company's
investment in a subsidiary company that developed packet voice technology and
network access products. As a result of deteriorating economic conditions in
Russia, the Company recognized a loss of $11,449,000 attributable to its
investment in a joint venture in that country. The Company recorded investment
impairments of $19,261,000 in the second quarter of fiscal 1999 as a result of
the deteriorating financial condition of three investee companies.
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 in these
investments. The Company establishes fair value of its long term investments in
investee companies by referring to quoted market values or reviewing valuations
implicit in recent private financings. The Company also utilizes a variety of
valuation techniques which include assessing potential proceeds that could be
expected to be received on a disposition of the Company's investment,
discounting future cash flows expected to be received from holding the
investment and reviewing recent acquisitions and divestitures of companies in
the industry that are comparable to the investee company.
(Page 34 of 52)
<PAGE>
<TABLE>
<CAPTION>
Income Taxes
<S> <C> <C> <C> <C>
Fiscal Quarter Ended Two Fiscal Quarters Ended
-------------------- -------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
---- ---- ---- ----
Income tax rate 35% 41% 35% 37%
Income tax rate, excluding items
related to acquisitions,
divestitures and non-recurring
gains and charges 30% 30% 30% 30%
</TABLE>
The income tax rates for the second quarter and first six months of fiscal 2000
vary from the rates of the comparable periods of fiscal 1999 due to the effect
of income taxes on amortization of acquired intangibles, restructuring costs and
net gains on investments. Excluding the impact of these items, the income tax
rates reported in the second quarters and first six months of fiscal 2000 and
fiscal 1999 are consistent. The composite rates of income tax have been reduced
from the statutory rates 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 net earnings in the second quarters and
first six months of fiscal 2000 and fiscal 1999 represented less than 1% of the
Company's sales in those quarters. The non-controlling interests' share of net
earnings in fiscal 2000 and fiscal 1999 related to profits from the operations
of the Company's non-wholly owned subsidiaries in Latin America. These
subsidiaries are systems integrators of networking products.
(Page 35 of 52)
<PAGE>
Supplementary Measure of Net Earnings and Earnings Per Share
Management uses supplementary measures of net earnings and earnings per share to
evaluate the financial performance of the Company. These supplementary measures
are consistent with the net earnings and earnings per share disclosed in these
Consolidated Financial Statements except for the impact of items related to
acquisitions, divestitures and non-recurring gains and charges. The
supplementary measures of net earnings and earnings per share are as follows:
<TABLE>
<CAPTION>
Fiscal quarters ended Two fiscal quarters ended
----------------------- ---------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
----------- ---------- ------------- ------------
<S> <C> <C> <C> <C>
Net earnings $ 301,709 $ 53,314 $ 348,995 $ 88,834
--------- -------- --------- --------
Adjustments:
Amortization of acquired intangibles
Purchased research and
development in process 16,142 -- 16,142 --
Goodwill 7,325 868 10,070 1,795
Other 376 -- 376 --
--------- -------- --------- --------
23,843 868 26,588 1,795
Compensation associated with
acquisitions 10,228 -- 10,228 --
Restructuring costs -- 44,460 -- 44,460
Net gain on investments (469,675) (66,852) (473,187) (66,852)
Net tax impact 155,386 16,650 156,571 16,650
--------- -------- --------- --------
Total adjustments to net earnings (280,218) (4,874) (279,800) (3,947)
--------- -------- --------- --------
Supplementary measure of net earnings $ 21,491 $ 48,440 $ 69,195 $ 84,887
========= ======== ========= ========
Supplementary measure of net earnings,
as a percent of sales 4% 11% 7% 10%
========= ======== ========= ========
Supplementary measure of earnings per share
Canadian GAAP
Basic $ 0.12 $ 0.27 $ 0.38 $ 0.48
========= ======== ========= ========
Fully diluted $ 0.12 $ 0.27 $ 0.38 $ 0.48
========= ======== ========= ========
Weighted average number of shares
Basic 180,863 176,766 180,631 176,430
========= ======== ========= ========
Fully diluted 180,863 176,766 180,631 176,430
========= ======== ========= ========
U.S. GAAP
Basic $ 0.12 $ 0.27 $ 0.38 $ 0.48
========= ======== ========= ========
Diluted $ 0.12 $ 0.27 $ 0.38 $ 0.47
========= ======== ========= ========
Weighted average number of shares
Basic 180,863 176,766 180,631 176,430
========= ======== ========= ========
Diluted 182,950 176,766 183,273 180,663
========= ======== ========= ========
</TABLE>
(Page 36 of 52)
<PAGE>
Net Earnings
A reconciliation of the major components of the change in net earnings for the
second quarter of fiscal 2000 compared to the second quarter of fiscal 1999 and
the first six months of fiscal 2000 compared to the first six months of fiscal
1999 is as follows.
<TABLE>
<CAPTION>
Fiscal Two fiscal
quarter ended quarters ended
-------------- ---------------
<S> <C> <C>
Oct 31, Oct 31,
1999 1999
-------- --------
Gross margin from sales increase $ 14,090 $ 54,504
(Decrease) in product gross margins
as a percentage of sales (16,034) (26,393)
(Increase) in operating expenses (28,071) (40,534)
(Increase) in net interest and other expenses (3,586) (3,320)
Decrease in income taxes on
supplementary net earnings 9,656 4,114
(Increase) in non-controlling interest (3,004) (4,063)
-------- --------
(Decrease) in supplementary net earnings (26,949) (15,692)
Change in amortization of intangibles and net gain
on investments, net of income taxes 275,344 275,853
-------- --------
Increase in net earnings 248,395 260,161
Net earnings in comparable period of prior year 53,314 88,834
-------- --------
Net earnings $301,709 $348,995
======== ========
</TABLE>
(Page 37 of 52)
<PAGE>
Financial Condition
During the first six months of fiscal 2000 ended October 31, 1999, working
capital decreased from $1,243,991,000 to $1,142,267,000. As at October 31, 1999
the Company had $832,491,000 in cash, cash equivalents and marketable securities
which represented a decrease of $47,203,000 during the first six months of
fiscal 2000. Investments by the Company in subsidiaries (Note 3 to the
Consolidated Financial Statements) and certain associated companies (Note 12
to the Consolidated Financial Statements) were largely offset with proceeds
received by the Company on its divestiture of it's investment in Juniper
Networks (Note 6 to the Consolidated Financial Statements. A summary of
major cash flow components by activity for the first six months of fiscal 2000
is as follows.
Two fiscal
quarters ended
--------------
Oct 31,
1999
----------
Net earnings $ 348,995
Add back items not affecting cash
Amortization and other non-cash charges (406,648)
(Increase) decrease in working capital,
excluding cash and cash equivalents 54,957
---------
Cash flow from operating activities (2,696)
---------
Sales (purchases) of marketable securities 70,069
Additions to property, plant and equipment (112,417)
Proceeds from sale of Juniper Networks Inc. 474,480
Acquisition of Northchurch Communications Inc. (123,022)
Acquisition of TimeStep Corporation (85,547)
Investment in TeraBridge Technologies (90,813)
Additions to long term investments and other (135,551)
---------
Cash flow from investing activities (2,801)
---------
Proceeds from stock option exercises 27,153
Net increase (decrease) in long term obligations (644)
---------
Cash flow from financing activities 26,509
---------
Impact of foreign currency translation on cash 1,657
---------
Cash from acquisition of subsidiaries 197
---------
Net cash flow during the period $ 22,866
=========
Principal components of the Company's working capital are accounts receivable,
inventory, accounts payable, accrued liabilities and current income taxes
payable. Accounts receivable as a proportion of revenue increased during the
first six months of fiscal 2000 due to the increase in the proportion of the
accounts receivable balance represented by sales under extended credit terms.
Inventory levels increased by $137,593,000 in the first six months of fiscal
2000 as a result of efforts to improve the Company's ability to meet customer
demand for WAN packet products and as insurance against manufacturing
interruptions associated with the November
(Page 38 of 52)
<PAGE>
implementation of the Company's new production management system. Management
believes that the payment terms and conditions extended to the Company's
customers, arrangements with the Company's suppliers, and its practices
associated with the levels of inventory are consistent with practices generally
prevailing in the networking industry. Accrued liabilities increased
$110,624,000 during the first six months of fiscal 2000 mainly due to the
accrual of deferred compensation associated with the acquisition of Northchurch.
Current income taxes payable increased by $203,802,000 during the first six
months of fiscal 2000. The increase was predominantly related to income tax
liabilities associated with investment gains realized in the first six months of
fiscal 2000.
Existing short term bank credit facilities consist of operating lines of credit
with certain banks in the aggregate amount of $187,305,000, primarily with banks
in Canada, the United Kingdom, the United States, Chile and Brazil. At October
31, 1999, $9,852,000 was being utilized under these credit facilities.
In May 1999, the Company completed its investment in TeraBridge Technologies
Corporation for a total purchase price of US$60,200,000 (Cdn$90,813,000). In
August and September of 1999, the Company acquired Northchurch and TimeStep for
total cash consideration of $208,569,000. In October 1999, the Company disposed
of its minority interest in Juniper Networks Inc. receiving proceeds of
$474,480,000 before taxes. Subsequent to the end of the second quarter of fiscal
2000, the Company announced it had renegotiated its definitive agreement and
plan of merger with Stanford Telecommunications Inc. ("STII"). The Company now
plans to acquire all of the outstanding common shares of STII for cash
consideration and has arranged the sale of STII divisions that are not related
to STII's broadband wireless operations. After completion of the STII
transactions, the Company expects the net purchase price, including acquisition
costs, to be approximately US$265,000,000 (Cdn$390,000,000).
Management anticipates that the level of capital expenditures for fiscal 2000
will be approximately consistent with the level of capital expenditures incurred
in fiscal 1999. 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 2000, 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. See "Recent Developments."
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 2000 and into the foreseeable
future.
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") 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 senior
(Page 39 of 52)
<PAGE>
management and regular progress meetings are conducted, including formal
quarterly reports to a senior management committee. 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.
Year 2000 Date Compliance program activities have been organized across fourteen
"Program Areas" of which each of the Company's operating groups is represented
by at least one. The program areas can be considered to reflect the following
business domains:
A) Products
B) Information Technology (Infrastructure and Business Application Systems)
C) Manufacturing and Logistics
D) Customer Service and Rollover Preparation
E) Facilities
F) Supply Chain - Critical Supplier Assessment
G) Contingency Planning and Rollover Management
Co-ordination and direction are provided by the corporate Program Office,
established in May 1997. Before this time, a variety of independent initiatives
had been launched within a number of different departments. A core team, led by
the Program Director, is tasked with leading and reporting progress on each of
the program areas and for escalating issues. Each team leader is responsible for
five stages that address the exposure of their program areas relative to the
above business domains. The five stages occur during one of two major phases:
Phase 1 (assessment, remediation and testing) and Phase 2 (implementation and
adoption). The Company considers that Phase 1 is 100% completed and Phase 2 is
approximately 98% complete with remaining activities scheduled to be completed
before the Year 2000 rollover. Failures of certain third party declared Year
2000 ready software products have necessitated duplicating internal compliance
tasks and have prevented the completion of Phase 2. However, all critical
internal infrastructure and systems elements have been made Year 2000 compliant.
Progress of the Year 2000 Date Compliance program in each of the business
domains is described below.
A) Products: The Company has conducted extensive testing and has completed the
evaluation of its product offerings with the possible exception of some early
legacy products from company acquisitions. The majority of products are
classified as either Compliant, having Compliant versions currently available or
are Date Compliance Not Applicable. The older or "discontinued" product
offerings (including products from the former UB Networks, OST and Castleton
companies) have been reviewed, with certain offerings found to be Non-Compliant,
and others that will not be evaluated for Year 2000 Date Compliance. Former
TimeStep products were evaluated as part of the TimeStep Corporation Year 2000
Program activities and retain their original compliance classifications. Various
formal messages for conveying Year 2000 Date Compliance information to customers
and other external parties have been developed for Company products. In
addition, certain Year 2000 Date Compliance product Interoperability Tests have
been conducted. A report on these together with all formal product related
messages and Year 2000 Date Compliance Additional Notes are available on the
Company's worldwide web site at http://www.newbridge.com/year2000/.
(Page 40 of 52)
<PAGE>
B) Information Technology: The IT infrastructure and business application
systems have been subject to extensive evaluation. The Company believes that its
business application systems, WAN infrastructure, LAN infrastructure, operations
and collaboration tools are overall Year 2000 ready and these aspects of the
program are completed. The Company is in sustaining mode in the area of PC
desktop and Unix environments, since the Year 2000 compliance status of certain
third party software products has proven to be subject to change by the third
party vendor. Repeatable automated inventory and remediation procedures are
being used to monitor, install and maintain compliance in these environments.
For telephony, less than 9% of equipment upgrades remain, all are associated
with small offices and scheduled to be completed before the Year 2000 rollover.
C) Manufacturing and Logistics: This aspect of the program is concerned with the
non-IT systems and equipment used in the Company's production and distribution
environments. This includes, but is not limited to, production line machinery,
inspection and test, manufacturing support, warehouse tools and shipping
systems. The Company believes this part of the program to be completed with the
exception of minor software upgrades in manufacturing support. These are not
critical to product manufacturing.
D) Customer Service and Rollover Preparation: The Company recognizes that
customers view the Year 2000 rollover as a sensitive time for their networks and
are looking for reassurance that their organizations will continue to receive
service support during this time. It is the Company's intent to fulfill our
contractual obligations to customers during this period. Throughout the Year
2000 rollover the three regional Newbridge Technical Assistance Centers will be
operating under the normal practice of 24 hour, 365 days a year service
coverage, but with resources strengthened in readiness to address potential Year
2000 issues. The Company has completed additional staffing arrangements during
the rollover period of its Strategic Network Services and Network Design groups.
The Service Organization shift schedules will operate on overlapping eight-hour
cycles to ensure continuity of event management. Specialized network restoration
techniques have been developed and will be invoked under the guidance of the
Third Level Support (3LS) and design organizations. The Company has identified
and is working with a significant Asia Pacific customer to be on-site and
electronically linked into their networks and believes that these steps will
provide a clear indication of events to come and enable the Company to observe
and learn from them. Formal messages from the Company's service organizations to
customers and other external parties are available on the Company's worldwide
web site located at:
http://www.newbridge.com/year2000/service planning.html.
E) Facilities: The Company has included the assessment of building facilities
(for example, building environmental and security systems), concentrating on
critical locations occupied by large number of employees, or locations having
significant operations. The remaining offices are handled through third party
landlords and/or property managers and the Company has applied considerable
effort in seeking confirmation of compliance. The Company believes that these
assessments are substantially complete. As part of its contingency planning, the
Company has installed additional diesel back up generators in some locations.
F) Supply Chain - Critical Supplier Assessment: The Company has a formal
approach to assist with and standardize the task of identifying, analyzing and
assessing the Year 2000
(Page 41 of 52)
<PAGE>
readiness of critical suppliers of products and services. The purpose of the
assessments is to determine the potential risk of supply disruptions and other
Year 2000 impacts. Assurances that equipment supplied is date compliant, the
supplier is also diligently undertaking a Year 2000 readiness plan with respect
to its own internal systems and that contingency planning activities are active
are judged. The Company's supplier assessment initiatives commenced in April
1998 with a mass mailing of formal readiness questionnaires to over 11,500
vendors. Further targeted mailings and direct communications with vendors have
since occurred. The Company has obtained information from over 94% of suppliers
it has identified as being critical. Less than 6% of suppliers identified as
being critical have not provided adequate assurances with respect to their Year
2000 readiness. The Company continues to solicit information and assess the risk
based on any information received. Risks are addressed using the contingency
plans.
G) Contingency Planning and Rollover Management: A formal Year 2000 Date
Compliance Contingency Planning process has been used to identify, review and
address:
. methods by which the potential of Year 2000 related risks can be mitigated
before they occur
. criteria for invoking a contingency plan
. steps that may be necessary to cope with actual operational problems
including, as an integral part, increases in service and support resources.
A standard approach and templates for documentation have been created and
released for use, following a business function review and Year 2000 risk
exposure assessment exercise, completed in February 1999. An essential part of
this assessment was the recognition of certain risk scenarios and duration, for
example loss of power, problems in our products or core business applications
and the potential impact on Company business operations were considered. A
number of business processes or technologies were determined as requiring a Year
2000 contingency plan. Over 94% of these plans have been completed or are
nearing completion. Those that are completed include, but are not limited to,
Manufacturing Operations, Logistics, Finance, Facilities for the Corporate
campus, Regional headquarters and Newbridge Technical Assistance Center
locations plus a variety of IT related services.
The Company is preparing a rollover command center (RCC) which will manage all
internal Year 2000 rollover events and conduct regular health checks on internal
communications and services availability and operational viability. The RCC will
also support the Company's service organization by providing quick entry to
senior management levels for internal escalations. In addition to extra
resources in place for the Service and Design organizations, further
supplementary internal on-site and on-call rollover staffing requirements have
been determined and competitive compensation strategies approved. Whilst the RCC
will not be visible to the Company's customers, it will endeavour to provide
regular rollover bulletins via e-mail, to customers that have registered for
this free service. Information on this service is available on the Company's
worldwide web site located at:
http://www.newbridge.com/year2000/
The Company believes that as a result of the program it has addressed and has
planned for the most likely worst-case scenarios that can reasonably be
expected. The Company believes that the most probable Year 2000 related issues
would result from the following:
1. Customers that have not completed the required activities to make their
Newbridge products Year 2000 compliant or adopt compliant versions. The
Company has made
(Page 42 of 52)
<PAGE>
information on product requirements available on its dedicated Year 2000
Date Compliance worldwide web site and has responded to product information
requests received from its customers and distributors, including those
submitted through the web enquiry service provided for this purpose.
Additionally, the Company has made product compliance presentations to a
number of customers and industry forums and has also provided regular
program updates via the quarterly external Company news publication
Newbridge News.
2. Supply chain issues may be manifested by potential business interruptions
and/or delays incurred by the Company's suppliers. Given the nature of the
Company's worldwide presence some countries and their infrastructure are
more vulnerable to Year 2000 related problems - these may cause disruption
the Company's operations in those geographical locations. The Company's
contingency plans have attempted to address these possibilities, where
practical, and within the scope of existing business drivers.
3. IT and other internal systems or services may incur some isolated
disruptions due to pockets of non-compliance or as a result of extended
service failure from external providers. To mitigate this possibility, the
Company has provisioned for additional on-site, on-call IT resources and has
extended certain vendor supplier maintenance services for further support
coverage. Some additional redundancy of IT services have been implemented.
In September 1999, following the acquisition of TimeStep Corporation and
Northchurch Communications Inc., the Company commenced the integration of these
companies Year 2000 activities into the Corporate Year 2000 Program. The Year
2000 integration exercise is completed. The Company has not fully assessed the
Year 2000 date compliance of Stanford Telecommunications Inc. ("STII") relative
to the business domains noted above. The acquisition of STII is expected to be
complete in December 1999. Compliance of STII products which are currently
purchased by the Company for internal use and for integration into the Company's
product offerings was subject to evaluation in the Product and Supply Chain
domains as described above. A description STII's own Year 2000 compliance
initiative was most recently filed in the their quarterly report on Form 10-Q
for the period ended September 30, 1999.
The costs incurred for Year 2000 Date Compliance are financed internally by the
operating groups within the framework of their operating budgets, and have not
had a material impact on the Company's financial results. 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. Incremental spending incurred in
fiscal periods reported to date and projected to be spent in 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 and greater certainty regarding costs, particularly related to
remediation and contingency plans for identified risks, will be possible.
The Company currently cannot 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 critical
suppliers or customers to address the issue on a timely basis could result in
material financial risk to the Company.
(Page 43 of 52)
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company conducts business in several major international currencies through
its worldwide operations. The Company uses financial instruments, principally
forward exchange contracts, in its management of foreign currency exposures. The
Company does not enter into forward exchange contracts for trading purposes. The
Company's management of foreign currency exposures is based upon estimates of
the net asset or net liability position of various currencies, and to the extent
that these estimates are over or understated during periods of currency
volatility, the Company could experience unanticipated currency gains or losses.
Realized and unrealized gains and losses on foreign exchange contracts are
recognized and offset foreign exchange gains and losses on the underlying net
asset or net liability position. The net foreign currency gains and losses, if
any, are recognized in the Consolidated Statements of Earnings as "Other
expenses".
The forward exchange contracts primarily require the Company to purchase and
sell certain foreign currencies with or for Canadian dollars at contractual
rates. The value of forward exchange rate contracts outstanding at October 31,
1999 for all currencies in which the Company had hedged a foreign currency
exposure was $223,080,000. This represents a decrease of $139,948,000 from the
value of forward exchange rate contracts outstanding at May 2, 1999 of
$363,028,000. The term of all forward exchange contracts outstanding at October
31, 1999 was less than one year. The values of forward exchange rate contracts
are the Canadian dollar values of the agreed upon amounts for each foreign
currency that will be delivered to a third party on the agreed upon date.
The unrealized gains or losses on these contracts represent hedges of foreign
exchange gains and losses on the Company's underlying net asset or net liability
position of the various currencies. As a result, Management does not expect
future gains or losses on these contracts to have a material impact on the
Company's financial results.
The Company maintains an investment portfolio consisting of debt securities of
various issuers, types and maturities. The securities that are classified as
held to maturity are recorded on the balance sheet at amortized cost. Due to the
average maturities and conservative nature of the investment portfolio, a sudden
change in interest rates would not have a material effect on the value of the
portfolio.
(Page 44 of 52)
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 some of the standardized functions on the
Newbridge frame relay and ATM switch products, along with its ADPCM (adaptive
differential pulse code modulation) and card initialization implementations,
infringe certain United States patent rights claimed by Lucent Technologies.
The Complaint requests actual and trebled damages in an unspecified amount.
On November 18, 1999, after a lengthy trial of certain of the Company's
defenses, the jury ruled against the Company. This ruling set damages at
US$9,590,000. The trial of the balance of the Company's defenses is expected to
be held before the United States District Court Judge sometime before the end of
the fiscal year. Until this trial is completed there will be no final judgement
entered against the Company. If the Judge finds for the Company at this
subsequent trial, the jury's verdict could be partially or completely
overturned. The Company also believes that it has strong grounds for an appeal,
should one become necessary.
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 4. Submission of Matters To A Vote of Security Holders
The Company solicited proxies pursuant to the Canada Business Corporations Act
from the holders of record of Common Shares of the Company as at August 6, 1999.
At August 1, 1999 there were 180,596,954 Common Shares issued and outstanding.
The total representation at the meeting of shareholders was 125,674,086 Common
Shares. The holders of 122,520,359 Common Shares were represented by proxy and
the holders of 3,153,727 Common Shares were present at the meeting. The
shareholders voted on the election of directors, the appointment of auditors,
the authorization of amendments to the Company's 1999 Key Employee Stock
Option Plan, and the authorization of amendments to the Company's Employee Stock
Purchase Plan. The shareholders elected all of the nominees for the board of
directors and approved the appointment of auditors and the authorization of the
amendments to the 1999 Key Employee Stock Option Plan and to the Employee Stock
Purchase Plan. No votes were cast against any of the nominees or against the
appointment of auditors. The following number of votes were withheld from each
of the nominees and from the appointment of auditors: Peter D. Charbonneau,
452,403; Denzil J. Doyle, 453,250; Alan D. Horn, 480,391; Trevor G. Jones,
459,478; Alan G. Lutz, 467,041; Terence H. Matthews, 610,796; Graham C. C.
Miller, 452,940; Donald Mills, 456,598; Kent H. E. Plumley, 452,710; John C. J.
Thynne, 466,560; and the auditors, 97,605. 48,640,616 votes were cast against or
withheld from the authorization of amendments to the 1999 Key Employee Stock
Option Plan and 4,199,525 votes were cast against or withheld from the
authorization of amendments to the Employee Stock Purchase Plan.
(Page 45 of 52)
<PAGE>
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 May 2, 1999 is
incorporated herein by reference and made a part hereof.
Changes in Executive Officers
Strategic and operational actions that were taken in November 1999 included
several changes to the Company's executive officers. These changes included the
following appointments and related departures from the Company.
Pearse J. Flynn was appointed President, Chief Operating Officer and a Director
of the Company in November 1999, replacing Alan G. Lutz. Mr. Flynn was most
recently Executive Vice President, European Region. Prior to joining the
Company, from June 1987 to January 1999, Mr. Flynn served in various
capacities at Compaq Computer Corporation, a leading information technology
company and supplier of personal computers.
Edward A. Ogonek was appointed as Executive Vice President, Switching and
Routing Products, replacing Brian M. Jervis. Mr. Ogonek joined the Company in
August 1999 as Vice President, Broadband Products Group. Prior to joining the
Company, Mr. Ogonek served in various capacities at Alcatel, a leading
supplier of networking equipment headquartered in France, most recently as
Vice President and General Manager, Broadband Transport Products.
Andreas P. Dohmen was appointed Executive Vice President and General Manager,
European Region following the appointment of his predecessor, Pearse J. Flynn,
to the position of President and Chief Operating Officer. Mr. Dohmen joined the
Company in January 1997 as General Manager, Germany and most recently served as
Vice President Carrier Sales, European Region. Prior to joining the Company,
Mr. Dohmen served as Sales and Marketing director for Huber & Suhner Ltd. in
Germany and for 5 years prior to that, served in various product management
roles in the network technology group of Siemens A.G.
Edward P. Minshull was appointed Executive Vice President and General Manager,
Americas Region replacing Giulio M. Gianturco. Mr. Minshull joined the Company
in May 1999 as Vice President, Channels and Alliances in Europe. Prior to
joining the Company, Eddie served in various capacities at Compaq Computer
Corporation, most recently as Channel Services Director.
James D. Arseneault, who served most recently as Executive Vice President,
Internetworking Products Group, left the Company in November 1999. Mr.
Arseneault was not replaced because the former Internetworking product portfolio
was integrated into the Switching and Routing Products group and the Broadband
Access Products group.
(Page 46 of 52)
<PAGE>
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 47 of 52)
<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 10, 1999 By: /s/ Terence H. Matthews
-----------------------
Terence H. Matthews,
Chairman of the Board of
Directors and Chief
Executive Officer
Date: December 10, 1999 By: /s/ Kenneth B. Wigglesworth
---------------------------
Kenneth B. Wigglesworth,
Executive Vice President, Finance,
Chief Financial Officer
(Page 48 of 52)
<PAGE>
EXHIBIT 11.1
NEWBRIDGE NETWORKS CORPORATION
COMPUTATION OF EARNINGS PER SHAdE
(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
--------------------- -------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
-------- --------- -------- --------
<S> <C> <C> <C> <C>
Basic earnings per share
Net earnings $301,709 $ 53,314 $348,995 $ 88,834
======== ======== ======== ========
Common Shares outstanding
at the beginning of the period 180,597 176,558 180,105 175,686
Weighted average number of Common Shares
issued during the period 266 208 526 744
-------- -------- -------- --------
Weighted average number of Common Shares
outstanding during the period 180,863 176,766 180,631 176,430
======== ======== ======== ========
Basic earnings per share $ 1.67 $ 0.30 $ 1.93 $ 0.50
======== ======== ======== ========
Fully diluted earnings per share
Earnings before imputed earnings $301,709 $ 53,314 $348,995 $ 88,834
After tax imputed earnings from the investment
of funds received through dilution 11,826 -- 22,719 --
-------- -------- -------- --------
Adjusted net earnings $313,535 $ 53,314 $371,714 $ 88,834
======== ======== ======== ========
Weighted average number of Common Shares
outstanding during the period 180,863 176,766 180,631 176,430
======== ======== ======== ========
Weighted average common share
equivalents based on conversion of
outstanding stock options 25,078 -- 22,861 --
-------- -------- -------- --------
Weighted average number of Common
Shares and equivalents outstanding
during the period 205,941 176,766 203,492 176,430
======== ======== ======== ========
Fully diluted earnings per share $ 1.52 $ 0.30 $ 1.83 $ 0.50
======== ======== ======== ========
</TABLE>
(Page 50 of 52)
<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
--------------------- -------------------------
Oct 31, Nov 1, Oct 31, Nov 1,
1999 1998 1999 1998
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net earnings - U.S. GAAP
Net earnings, as reported, Cdn GAAP $301,709 $ 53,314 $348,995 $ 88,834
Write off of purchased research and
development in process (54,430) -- (54,430) --
Amortization of purchased research and
development in process, Cdn GAAP 16,142 -- 16,142 --
-------- -------- -------- --------
Net earnings, U.S. GAAP $263,421 $ 53,314 $310,707 $ 88,834
======== ======== ======== ========
Earnings per share (U.S. GAAP - Basic)
Net earnings $263,421 $ 53,314 $310,707 $ 88,834
======== ======== ======== ========
Weighted average number of Common
Shares outstanding during the period 180,863 176,766 180,631 176,430
======== ======== ======== ========
Earnings per share (U.S. GAAP) $1.46 $0.30 $1.72 $0.50
======== ======== ======== ========
Earnings per share (U.S. GAAP- Diluted)
Net earnings $263,421 $ 53,314 $310,707 $ 88,834
======== ======== ======== ========
Weighted average number of Common Shares
outstanding during the period 180,863 176,766 180,631 176,430
Net effect of dilutive stock options
based on the treasury stock method 2,087 -- 2,642 4,233
-------- -------- -------- --------
Weighted average number of Common
Shares and equivalents outstanding
during the period 182,950 176,766 183,273 180,633
======== ======== ======== ========
Earnings per share (U.S. GAAP) $ 1.44 $ 0.30 $ 1.70 $ 0.49
======== ======== ======== ========
</TABLE>
(Page 51 of 52)
<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 October 31, 1999, and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> CANADIAN
<CAPTION>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> AUG-02-1999
<PERIOD-END> OCT-31-1999
<EXCHANGE-RATE> 0.6744
<CASH> 688,885
<SECURITIES> 143,606
<RECEIVABLES> 613,055
<ALLOWANCES> 23,126
<INVENTORY> 347,879
<CURRENT-ASSETS> 1,905,200
<PP&E> 1,097,196
<DEPRECIATION> 606,124
<TOTAL-ASSETS> 3,176,544
<CURRENT-LIABILITIES> 762,933
<BONDS> 0
0
0
<COMMON> 600,947
<OTHER-SE> 1,301,468
<TOTAL-LIABILITY-AND-EQUITY> 3,176,544
<SALES> 480,844
<TOTAL-REVENUES> 480,844
<CGS> 215,331
<TOTAL-COSTS> 475,845
<OTHER-EXPENSES> 6,649
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,198
<INCOME-PRETAX> 467,935
<INCOME-TAX> 164,924
<INCOME-CONTINUING> 301,709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 301,709
<EPS-BASIC> 1.67
<EPS-DILUTED> 1.52
</TABLE>
