<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 January 30, 2000
Commission file number 1-13316
Newbridge Networks Corporation
(Exact name of registrant as specified in its charter)
Canada 98-0077506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 March Road, Kanata, Ontario, Canada K2K 2E6
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (613) 591-3600
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes N No
--- ---
The number of Common Shares of the registrant outstanding as at March 9, 2000
was 182,697,521.
(Exhibit index located on Page 52)
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C> <C>
Consolidated Statements of Earnings and Retained
Earnings -- Fiscal quarters and three fiscal quarters
ended January 30, 2000 and January 31, 1999....................... 3
Consolidated Balance Sheets --
January 30, 2000 and May 2, 1999.................................. 4
Consolidated Statements of Cash Flows --
Three fiscal quarters ended January 30, 2000
and January 31, 1999.............................................. 5
Notes to the Consolidated Financial Statements...................... 6-25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 26-47
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................. 48
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 49
Item 5. Other Information................................................... 49
Item 6. Exhibits and Reports on Form 8-K.................................... 50
SIGNATURES.......................................................................... 51
</TABLE>
<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 Three fiscal quarters ended
--------------------------- -----------------------------
January 30, January 31, January 30, January 31,
2000 1999 2000 1999
---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 520,630 $450,753 $1,496,544 $1,333,590
Cost of sales 240,770 187,962 671,622 553,848
Inventory write-down (Note 3) 50,435 -- 50,435 --
---------- -------- ---------- ----------
Gross margin 229,425 262,791 774,487 779,742
Expenses
Selling, general and administrative 141,805 129,630 438,455 393,500
Research and development 74,239 65,191 212,690 195,888
Amortization of acquired
intangibles (Note 2) 60,551 821 87,139 2,616
Compensation associated with
acquisitions (Note 4) 23,651 -- 33,879 --
Management severance (Note 5) 14,529 -- 14,529 --
Restructuring costs (Note 6) 73,805 -- 73,805 44,460
Global service outsourcing (Note 7) 23,187 -- 23,187 --
---------- -------- ---------- ----------
Income (loss) from operations (182,342) 67,149 (109,197) 143,278
Interest income 6,896 10,472 20,349 23,844
Interest expense on long term obligations (6,270) (7,633) (18,527) (21,111)
Net gain (loss) on investments (Note 8) (137,985) 116,182 335,202 183,034
Other expenses (15,161) (2,881) (24,428) (7,526)
---------- -------- ---------- ----------
Earnings (loss) before income taxes
and non-controlling interest (334,862) 183,289 203,399 321,519
Provision for income taxes (61,054) 62,019 125,575 112,841
Non-controlling interest 838 1,151 3,475 (275)
---------- -------- ---------- ----------
Net earnings (loss) (274,646) 120,119 74,349 208,953
Retained earnings,beginning of the period 1,277,986 838,664 928,991 749,830
---------- -------- ---------- ----------
Retained earnings, end of the period $1,003,340 $958,783 $1,003,340 $ 958,783
========== ======== ========== ==========
Earnings (loss) per share (Note 9)
Basic $(1.51) $0.68 $0.41 $1.18
Fully diluted $(1.51) $0.64 $0.41 $1.16
Weighted average number of shares
Basic 181,406 177,596 180,889 176,814
Fully diluted 181,406 199,951 180,889 198,028
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED BALANCE SHEETS
(Canadian dollars in thousands)
<TABLE>
<CAPTION>
January 30, May 2,
2000 1999
---------- ----------
(unaudited)
Assets
<S> <C> <C>
Cash and cash equivalents $ 299,607 $ 666,019
Marketable securities 11,919 213,675
Accounts receivable, net of provision for returns and
doubtful accounts of $33,148 (May 2, 1999 - $16,217) 604,143 472,811
Inventories (Note 12) 326,125 210,286
Deferred compensation (Note 4) 49,026 --
Prepaid expenses 53,333 46,753
Other current assets 77,888 46,160
---------- ----------
1,422,041 1,655,704
Property, plant and equipment 458,794 455,483
Software development costs 41,609 35,909
Acquired intangibles (Note 4) 154,199 --
Goodwill (Note 13) 449,429 40,022
Future tax benefits 84,406 59,999
Other assets (Note 14) 300,595 223,507
---------- ----------
$2,911,073 $2,470,624
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Accounts payable $ 204,476 $ 190,630
Accrued liabilities 412,724 201,361
Income taxes 190,844 16,853
Current portion of long term obligations 1,859 2,869
---------- ----------
809,903 411,713
Long term obligations 426,428 384,021
Future tax obligations 34,029 123,088
Non-controlling interest 22,962 22,583
---------- ----------
1,293,322 941,405
---------- ----------
Common shares - 181,406,347 outstanding
(May 2, 1999 - 180,104,582 outstanding) 609,849 572,990
Accumulated foreign currency translation adjustment 4,562 27,238
Retained earnings 1,003,340 928,991
---------- ----------
1,617,751 1,529,219
---------- ----------
$2,911,073 $2,470,624
========== ==========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Canadian dollars in thousands, unaudited)
<TABLE>
<CAPTION>
Three fiscal quarters ended
-----------------------------
January 30, January 31,
<S> <C> <C>
2000 1999
--------- ---------
Cash effect of operating activities
Net earnings $ 74,349 $ 208,953
Items not affecting cash
Amortization 145,424 134,177
Future tax benefits and obligations (113,303) 39,801
Inventory write-down 50,435 --
Amortization of acquired intangibles 87,139 2,616
Amortization of deferred compensation 25,280 --
Restructuring and global service outsourcing costs 40,611 44,460
Net gain on investments (335,202) (185,840)
Foreign currency translation (11,719) (121,387)
Other 6,858 (2,457)
Changes in non-cash working capital:
Accounts receivable (154,634) (15,465)
Inventories (162,573) (19,533)
Prepaid expenses and other current assets (39,113) (7,029)
Accounts payable and accrued liabilities 171,969 85,252
Income taxes 174,145 37,637
--------- ---------
(40,334) 201,185
--------- ---------
Cash effect of investing activities
Sales and maturities of marketable securities 385,408 112,686
Purchases of marketable securities (183,652) (319,546)
Additions to property, plant and equipment (145,170) (165,772)
Proceeds from sale of investments 504,593 434,612
Acquisition of subsidiaries, excluding cash acquired (898,479) --
Capitalized software development costs (16,748) (15,614)
Additions to other assets (281,526) (127,975)
--------- ---------
(635,574) (81,609)
--------- ---------
Cash effect of financing activities
Issue of common shares 35,901 69,625
Increase in long term obligations 12,660 43,149
Repayment of long term obligations (18,192) (16,231)
--------- ---------
30,369 96,543
--------- ---------
Increase (decrease) in cash and cash equivalents (645,539) 216,119
Effect of foreign currency translation on cash (5,094) 6,748
Cash from acquisition of subsidiaries 284,221 --
--------- ---------
(366,412) 222,867
Cash and cash equivalents, beginning of period 666,019 467,464
--------- ---------
Cash and cash equivalents, end of period $ 299,607 $ 690,331
========= =========
</TABLE>
See accompanying Notes to the Consolidated Financial Statements.
<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 accounting for purchased research and development in
process, as disclosed in Note 4, the inclusion of certain asset impairments in
restructuring costs, as disclosed in Note 6, and the method of calculation of
earnings per share, as disclosed in Note 9.
Under U.S. GAAP the inventory write-down disclosed in Note 3 would be included
in cost of sales and the compensation associated with acquisitions and
management severance disclosed in Notes 4 and 5 would be included in selling,
general and administrative expenses and research and development in the
Statement of Earnings.
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 third fiscal quarter and three fiscal quarters
ended January 30, 2000 are not necessarily indicative of the results to be
expected for the fiscal year ending April 30, 2000.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
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 derived from 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 Three fiscal quarters ended
--------------------------- -----------------------------
January 30, January 31, January 30, January 31,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net earnings (loss) $(274,646) $ 120,119 $ 74,349 $ 208,953
--------- --------- --------- ---------
Adjustments:
Amortization of acquired intangibles
Purchased research and
development in process 40,475 -- 56,617 --
Goodwill 16,922 821 26,992 2,616
Acquired technology 1,876 -- 2,159 --
Other 1,278 -- 1,371 --
--------- --------- --------- ---------
60,551 821 87,139 2,616
Compensation associated with
acquisitions 23,651 -- 33,879 --
Inventory write down 50,435 -- 50,435 --
Management severance 14,529 -- 14,529 --
Restructuring costs 73,805 -- 73,805 44,460
Global service outsourcing 23,187 -- 23,187 --
Net gain (loss) on investments 137,985 (116,182) (335,202) (183,034)
Net tax impact (75,592) 42,223 80,979 58,873
--------- --------- --------- ---------
Total adjustments to net earnings 308,551 (73,138) 28,751 (77,085)
--------- --------- --------- ---------
Supplementary measure of net earnings $ 33,905 $ 46,981 $ 103,100 $ 131,868
========= ========= ========= =========
Supplementary measure of earnings per share
Basic $ 0.19 $ 0.26 $ 0.57 $ 0.73
Fully diluted $ 0.19 $ 0.26 $ 0.57 $ 0.73
Weighted average number of shares
Basic 181,406 177,596 180,889 176,814
Fully diluted 181,406 177,596 180,889 176,814
</TABLE>
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
3. Inventory Write-down
The Company recorded an inventory write-down of $50,435,000 during the third
quarter of fiscal 2000 on excess inventory levels of certain products and
components. The Company's management wrote this inventory down to the lower of
cost and net realizable value, based upon a reevaluation of future demand for
the Company's products in light of certain strategic decisions. These decisions
included a narrowing of the Company's product portfolio and a reallocation of
sales, marketing and development resources toward the Company's higher growth
Asynchronous Transfer Mode and Internet Protocol ("ATM+IP") and broadband access
product offerings.
4. Acquisitions of Subsidiaries
In December 1999, the Company acquired Stanford Telecommunications Inc.
("Stanford Telecom"), a leading supplier of broadband wireless technology and
products based in Sunnyvale, California. The Company acquired all of the
outstanding common stock of Stanford Telecom for total cash consideration of
US$466,518,000 (Cdn$689,910,000): including acquisition related costs. The total
cash consideration excludes proceeds received from the divestiture of certain
divisions of Stanford Telecom that are unrelated to the Company's core business.
The acquisition has been accounted for using the purchase method of accounting.
Allocation of the aggregate purchase price was as follows:
<TABLE>
<S> <C>
Cash and cash equivalents $284,024
Net liabilities (13,662)
--------
Net tangible assets acquired 270,362
Intangible assets acquired
Purchased research and
development in process 81,238
Acquired technology 25,199
Patents 40,723
Goodwill 272,388
--------
Total purchase price $689,910
========
</TABLE>
The goodwill, patents and completed technology assets are being amortized on a
straight line basis over their estimated useful lives ranging from three to 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.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
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 $15,052,000 in
the third quarter of fiscal 2000 and $25,280,000 in the first nine months of
fiscal 2000. The current portion of deferred compensation expense was
$45,945,000 as at January 30, 2000.
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.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
The Company recorded compensation associated with the acquisition of $8,599,000
in the third quarter of fiscal 2000 as a result of TimeStep having achieved
certain specified financial performance targets included as part of the purchase
agreement. Under the terms of the purchase agreement, participating employees of
TimeStep may receive additional compensation associated with the acquisition of
$16,400,000. The additional compensation is contingent upon TimeStep further
achieving certain specified financial performance targets and is payable at
various dates ending in August 2001.
Intangible assets acquired on the acquisitions of Stanford Telecom, Northchurch
and TimeStep and related accumulated amortization are as follows:
<TABLE>
<CAPTION>
January 30,
2000
--------
<S> <C>
Purchased research and
development in process $135,667
Acquired technology 35,385
Patents 40,723
Other 5,611
--------
217,386
Accumulated amortization (60,147)
Foreign exchange adjustment (3,040)
------
$154,199
=======
</TABLE>
5. Management Severance
The Company incurred severance costs of $14,529,000 during the third quarter of
fiscal 2000 associated with replacing ten members of its senior management team.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
6. Restructuring Costs
Restructuring costs were comprised of the following:
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
------------------------- ---------------------------
January 30, January 31, January 30, January 31,
2000 1999 2000 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Restructuring programs, November 1999 $73,805 $ -- $73,805 $ --
Layer 2 Switching End of Life -- -- -- 37,928
Asia Pacific Resources Relocation -- -- -- 6,532
----------- ----------- ------- ------------
$73,805 $ -- $73,805 $44,460
=========== =========== ======= ============
</TABLE>
In November 1999, the Company announced strategic and operational plans designed
to leverage its core competencies, particularly its product portfolio, to
increase shareholder value. Management reviewed the functional organizations'
resource requirements and approaches to service delivery and committed the
Company to a restructuring plan targeted at reducing operating costs,
streamlining operations and realigning research and development efforts with the
Company's higher growth product offerings. The principal activities committed to
during the third quarter of fiscal 2000 included an overall reduction in the
employment level, closure of a research and development facility and a
manufacturing facility in Europe, and a reduction in the number of sales offices
throughout Europe and the United States. The components of restructuring costs
of $73,805,000 were as follows:
<TABLE>
<CAPTION>
Asset impairment losses
<S> <C>
Accounts receivable $24,188
Property, plant and equipment 4,748
-------
28,936
-------
Provision for restructuring
Reduction in workforce 29,214
Reduction in facilities 11,387
Other restructuring costs 4,268
-------
44,869
-------
Restructuring costs $73,805
=======
</TABLE>
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
Impairment losses associated with accounts receivable were
recorded to the extent that the net book value of these assets, including
related reserves, exceeded their fair value. Fair value was determined by
establishing the estimated net realizable value to the Company of the underlying
assets. Substantially all of the net book value of the property, plant and
equipment affected by the restructuring programs were reflected as asset
impairment losses since the Company expects that the proceeds of disposition of
these assets will approximate the costs of disposal. The Company anticipates
that assets impaired as a result of the restructuring programs will be disposed
of by the end of the first quarter of fiscal 2001.
The provision for restructuring and the related spending on restructuring
activities during the third 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
commitment to the
restructuring plan $ 29,214 $11,387 $ 4,268 $ 44,869
Incurred in the fiscal quarter
ended January 30, 2000 (17,904) (5,879) (1,192) (24,975)
-------- ------- ------- --------
Provision at January 30, 2000 $ 11,310 $ 5,508 $ 3,076 $ 19,894
======== ======= ======= ========
</TABLE>
The provision for restructuring is reflected in accrued liabilities at January
30, 2000.
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 761 employees. The work force reductions
occurred in all geographic regions and throughout all functional areas of the
Company. The Company anticipates that the remaining costs associated with the
work force reductions will be substantially paid by the end of fiscal 2000.
The provision for the reduction in facilities comprises lease payments and fixed
costs associated with the closure of facilities in Europe and the United States.
The Company expects to complete these facilities closures by the end of the
first quarter of fiscal 2001.
The provision for other restructuring costs comprises the costs of terminating
certain contracts associated with projects that were discontinued as a result of
the restructuring plan in addition to consulting costs associated with
establishing termination benefits for employees and various other direct
incremental costs associated with the restructuring plan.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
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:
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
=======
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.
The Company fulfilled its obligations to customers during fiscal 1999.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
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)
Incurred in the fiscal quarter
ended January 30, 2000 (108) -- -- (108)
------ -------- -------- -------
Provision at January 30, 2000 $ 932 $ 2,600 $ -- $ 3,532
====== ======== ======== =======
</TABLE>
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 reflected in accrued liabilities at January 30,
2000 and May 2, 1999. The relocation program will be completed by April 30,
2000.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
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 assets
impaired as a result of the restructuring programs are expected to be
disposed of by the end of fiscal 2000.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, 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 third 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)
Incurred in the fiscal quarter
ended January 30, 2000 (1,631) (627) (24) (2,282)
------- ------- ------ --------
Provision at January 30, 2000 $ 1,995 $ 672 $ 416 $ 3,083
======= ======= ====== ========
</TABLE>
The provision for restructuring is reflected in accrued liabilities at January
30, 2000 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 remaining costs
associated with the work force reductions will be paid in the fourth 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 $24,188,000 for the
quarter and first nine months ended January 30, 2000 and $30,690,000 for the
first nine months ended November 1, 1998.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
7. Global Service Outsourcing
In November 1999, the Company made the decision to outsource global customer
service as part of its efforts to reduce operating costs. During the third
quarter of fiscal 2000 the Company signed a letter of intent with International
Business Machines Corporation ("IBM") for the global supply of field services to
its customers and commenced implementing the detailed operating model agreed to
with IBM. The Company expects to finalize its agreement with IBM for the supply
of global services and complete implementation of the operating model early in
fiscal 2001. As a result of the service outsourcing initiative, the Company has
identified certain assets which are currently not required and are being held
for disposal, and recorded costs associated with the project of $23,187,000
comprised of the following:
<TABLE>
<S> <C>
Fixed asset impairment losses $12,617
Consulting fees 7,846
Implementation costs 2,411
Other outsourcing costs 313
-------
$23,187
=======
</TABLE>
Impairment losses were recorded to the extent the net book value of these assets
exceeded their estimated net realizable value. All of the net book values of the
fixed assets affected by the outsourcing were reflected as impairment losses
since the Company expects the net realizable value of these assets to be nil.
The Company anticipates that assets impaired as a result of the outsourcing
program will be disposed of by the end of fiscal 2000.
Consulting fees associated with the outsourcing initiative relate to project
management services provided to the Company by a third party consultant to
assist the Company in consolidating and outsourcing support functions to IBM.
Implementation costs relate to charges from IBM for implementing regional
operating models in anticipation of signing a global service supply agreement
with the Company.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
8. Net Gain (Loss) on Investments
Fiscal quarters ended Three fiscal quarters ended
--------------------------- -----------------------------
January 30, January 31, January 30, January 31,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------- -------- --------- --------
Juniper Networks Inc. $ -- $ -- $ 464,756 $ --
Cambrian Systems Corporation 8,606 128,893 15,716 128,893
nCipher Corporation Limited 8,051 -- 8,051 --
Vienna Systems Corporation 2,496 15,846 2,496 15,846
Advanced Computer Communications 13,301 -- 13,301 128,336
Other divestitures 594 -- 1,915 --
West End Systems Corp. -- (19,994) -- (33,521)
Investment impairment write downs (171,033) (8,563) (171,033) (56,520)
--------- -------- --------- --------
$(137,985) $116,182 $ 335,202 $183,034
========= ======== ========= ========
</TABLE>
In January 2000, the Company sold its minority ownership position in nCipher
Corporation Limited for cash proceeds of US$6,329,000 (Cdn$9,166,000).
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$106,446,000
(Cdn$162,874,000). The proceeds included earn-out payments of US$12,707,000
(Cdn$18,571,000) received by the Company as a result of certain specified
financial performance targets being met by Cambrian. The Company received earn-
out payments in fiscal 2000 totaling US$10,772,000 (Cdn$15,716,000).
In December 1998, the Company sold its minority ownership position in Vienna
Systems Corporation to Nokia Corporation for cash proceeds of $39,716,000.
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). In January 2000,
the Company recorded an additional gain of $13,301,000 attributable to the
fulfillment of its obligations to make certain volume purchases from ACC as part
of the divestiture agreement. 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>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
In February 1999, West End Systems Corp., a manufacturer of access and
transmission products for the communications and cable television industries,
filed an assignment in bankruptcy under the Canadian Bankruptcy and Insolvency
Act. As a result, the Company recorded losses related to the Company's minority
ownership position in West End Systems Corp. and unsecured trade accounts
outstanding.
As a result of the financial performance of four investee companies, the Company
recorded investment impairment write downs of $171,033,000 in the third quarter
of fiscal 2000. The write downs relate to the Company's minority ownership
positions and loan advances with the investee companies. Substantially all of
the write downs are attributable to three investee companies that are
investigating all strategic options to enable the continuing viability of their
operations including searching for potential acquirors and alternative sources
of financing. The Company established fair value for its investment in these
investee companies by assessing the potential cash flows the Company expects to
receive from these investments.
In the first nine months of fiscal 1999, the Company recorded investment
impairment write downs of $56,520,000 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 first nine
months 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. The Company also divested its ownership
position in a Brazilian subsidiary and recognized a loss of $14,902,000
associated with the carrying value of its investment and related disposition
costs. 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
$12,922,000 in the first nine months 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>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
9. 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 Three fiscal quarters ended
-------------------------- ----------------------------
January 30, January 31, January 30, January 31,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
-------- -------- --------- --------
Net earnings (loss), as reported
under Canadian GAAP $(274,646) $120,119 $ 74,349 $208,953
Add back:
Amortization of purchased research
and development in process (Note 2) 40,475 -- 56,617 --
Less:
Write off of purchased research and
development in process (Note 4) (81,238) -- (135,667) --
--------- -------- --------- --------
Net earnings (loss), U.S. GAAP $(315,409) $120,119 $ (4,701) $208,953
========= ======== ========= ========
Earnings (loss) per share
Basic $ (1.74) $ 0.68 $ (0.03) $ 1.18
Diluted $ (1.74) $ 0.66 $ (0.03) $ 1.18
Weighted average number of shares
Basic 181,406 177,596 180,889 176,814
Diluted 181,406 182,030 180,889 176,814
</TABLE>
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
10. 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 Three fiscal quarters ended
--------------------------- -----------------------------
January 30, January 31, January 30, January 31,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------- --------- ---------- ----------
North and South America
Sales $ 229,708 $ 201,135 $ 632,633 $ 580,744
Cost of sales and expenses 124,534 104,275 365,505 291,639
--------- --------- ---------- ----------
Operating contribution 105,174 96,860 267,128 289,105
--------- --------- ---------- ----------
Europe, Middle East and Africa
Sales $ 185,580 $ 151,017 $ 572,667 $ 427,816
Cost of sales and expenses 104,769 78,263 296,960 215,893
--------- --------- ---------- ----------
Operating contribution 80,811 72,754 275,707 211,923
--------- --------- ---------- ----------
Asia Pacific
Sales $ 78,597 $ 64,239 $ 182,705 $ 185,045
Cost of sales and expenses 36,320 34,498 89,931 97,706
--------- --------- ---------- ----------
Operating contribution 42,277 29,741 92,774 87,339
--------- --------- ---------- ----------
Corporate
Sales $ 26,745 $ 34,362 $ 108,539 $ 139,985
Cost of sales and expenses 191,191 165,747 570,371 537,998
--------- --------- ---------- ----------
Operating contribution (164,446) (131,385) (461,832) (398,013)
--------- --------- ---------- ----------
Total
Sales $ 520,630 $ 450,753 $1,496,544 $1,333,590
Cost of sales and expenses 456,814 382,783 1,322,767 1,143,236
--------- --------- ---------- ----------
Operating contribution 63,816 67,970 173,777 190,354
Inventory write-down (50,435) -- (50,435) --
Acquisition related costs (84,202) (821) (121,018) (2,616)
Restructuring and outsourcing costs (111,521) -- (111,521) (44,460)
--------- --------- ---------- ----------
Income from operations (182,342) 67,149 (109,197) 143,278
Net gain on investments (137,985) 116,182 335,202 183,034
Net interest and other (14,535) (42) (22,606) (4,793)
Provision for income taxes 61,054 (62,019) (125,575) (112,841)
Non-controlling interest (838) (1,151) (3,475) 275
--------- --------- ---------- ----------
Net earnings $(274,646) $ 120,119 $ 74,349 $ 208,953
========= ========= ========== ==========
</TABLE>
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
11. 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 Three fiscal quarters ended
--------------------------- ----------------------------
January 30, January 31, January 30, January 31,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
--------- -------- --------- ----------
Comprehensive income for the period:
Net earnings (loss) $(274,646) $120,119 $ 74,349 $208,953
Other comprehensive income:
Foreign currency translation
adjustment (18,920) (21,631) (22,676) 28,578
--------- -------- -------- --------
Comprehensive income (loss) $(293,566) $ 98,488 $ 51,673 $237,531
========= ======== ======== ========
12. Inventories
January 30, May 2,
2000 1999
------ ------
Finished goods $178,545 $118,251
Work in process 23,005 27,807
Raw materials 124,575 64,228
-------- --------
$326,125 $210,286
======== ========
</TABLE>
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
13. Goodwill
January 30,
<S> <C> <C>
2000
-----------
Goodwill, beginning of the period $ 40,022
Additions associated with acquisitions 438,384
Amortization (23,366)
Foreign exchange adjustment (5,611)
-----------
Goodwill, end of the period $449,429
========
Accumulated goodwill amortization $ 30,497
========
14. Other Assets
January 30, May 2,
2000 1999
---------- ------
Long term investments
Accounted for by the equity method $ 38,900 $ 29,236
Accounted for by the cost method 207,300 161,901
-------- --------
246,200 191,137
Long term deferred compensation 20,069 --
Other Assets 34,326 32,370
-------- --------
$300,595 $223,507
======== ========
</TABLE>
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 fiscal 2000 (Note 3).
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
15. 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 after 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.
Brian Jervis was Executive Vice President, Switching Products, with Newbridge
from October 1998 through November 2, 1999. A written Employment Agreement dated
October 6, 1998 was signed between Newbridge and Mr. Jervis. In January 2000,
Mr. Jervis filed a Statement of Claim against Newbridge claiming damages for
breach of contract, wrongful dismissal and breach of fiduciary duty totaling
$15,000,000. The claim bearing Court File No. 00-CV-12680 will be heard by the
Ontario Superior Court of Justice.
16. 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. Although the change in date has occurred, it is not possible to conclude
that all aspects of the Year 2000 Issue that may affect the entity, including
those related to customers, suppliers, or other third parties, have been fully
resolved.
<PAGE>
NEWBRIDGE NETWORKS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Canadian dollars, tabular amounts in thousands except per share data)
(Unaudited)
17. Subsequent Event
In February 2000, the Company announced that it had entered into a Merger
Agreement with Alcatel, a leader in end-to-end voice and data communications
solutions systems headquartered in Paris, France. Under the terms of the
agreement, the Company's shareholders will be asked to approve a Plan of
Arrangement through which the authorized share capital of Newbridge will be
reorganized by creating a new class of shares to be designated as Exchangeable
Shares. Holders of common shares of Newbridge will receive 0.81 Exchangeable
Shares (the "Exchange Ratio") for each common share of Newbridge held. At the
option of the shareholder, as part of the Plan of Arrangement each Exchangeable
Share resulting from the change of Newbridge common shares into Exchangeable
Shares may be retained by the holder or else each Exchangeable Share will be
simultaneously exchanged for one American Depository Share (ADS) of Alcatel.
Thereafter, each Exchangeable Share will be exchangeable at any time at the
option of the holder. Each Newbridge option granted under any of the Newbridge
stock option plans will be replaced with an option to acquire the number of
Alcatel ADS equal to the Exchange Ratio multiplied by the number of common
shares of Newbridge that may be purchased as if such original Newbridge option
were exercisable and exercised immediately prior to the effective date of the
Plan of Arrangement. The merger is expected to be accounted forby Alcatel as a
pooling-of-interests under French generally accepted accounting principles, is
subject to Newbridge and Alcatel shareholder approval and standard regulatory
approvals, and is expected to close during the first quarter of fiscal 2001. In
the event the merger is not completed, the Company's results of operations and
common share price could be materially adversely affected.
<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 February 2000, the Company announced that it had entered into a Merger
Agreement with Alcatel, a leader in end-to-end voice and data communications
solutions systems headquartered in Paris, France. Under the terms of the
agreement, the Company's shareholders will be asked to approve a Plan of
Arrangement through which the authorized share capital of Newbridge will be
reorganized by creating a new class of shares to be designated as Exchangeable
Shares. Holders of common shares of Newbridge will receive 0.81 Exchangeable
Shares (the "Exchange Ratio") for each common share of Newbridge held. At the
option of the shareholder, as part of the Plan of Arrangement each Exchangeable
Share resulting from the change of Newbridge common shares into Exchangeable
Shares may be retained by the holder or else each Exchangeable Share will be
simultaneously exchanged for one American Depositary Share (ADS) of Alcatel.
Thereafter, each Exchangeable Share will be exchangeable at any time at the
option of the holder. Each Newbridge option granted under any of the Newbridge
stock option plans will be replaced with an option to acquire the number of
Alcatel ADS equal to the Exchange Ratio multiplied by the number of common
shares of Newbridge that may be purchased as if such original Newbridge option
were exercisable and exercised immediately prior to the effective date of the
Plan of Arrangement. The merger is expected to be accounted for by Alcatel as a
pooling-of-interests under French generally accepted accounting principles, is
subject to Newbridge and Alcatel shareholder approval and standard regulatory
approvals, and is expected to close during the first quarter of fiscal 2001. In
the event the merger is not completed, the Company's financial position, results
of operations and common share price could be materially adversely affected.
In December 1999, the Company acquired Stanford Telecommunications Inc.
"Stanford Telecom", a leading supplier of broadband wireless technology and
products based in Sunnyvale, California. The Company acquired all of the
outstanding common stock of Stanford Telecom for total cash consideration of
US$466,518,000 (Cdn$689,910,000): including acquisition related costs. The total
cash consideration excludes proceeds received from the divestiture of certain
divisions of Stanford Telecom that are unrelated to the Company's core business.
The acquisition has been accounted for using the purchase method of accounting.
Allocation of the aggregate purchase price was as follows:
<TABLE>
<S> <C>
Cash and cash equivalents $284,024
Net liabilities (13,662)
--------
Net tangible assets acquired 270,362
Intangible assets acquired
Purchased research and
development in process 81,238
Acquired technology 25,199
Patents 40,723
Goodwill 272,388
--------
Total purchase price $689,910
========
</TABLE>
The goodwill, patents and completed technology assets are being amortized on a
straight-line basis over their estimated useful lives ranging from three to five
years. Under Canadian GAAP, the purchased research and development in process
asset is being amortized straight line over
<PAGE>
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.
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 $15,052,000 in
the third quarter of fiscal 2000 and $25,280,000 in the first nine months of
fiscal 2000. The current portion of deferred compensation expense was
$45,945,000 as at January 30, 2000.
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.
The Company recorded compensation associated with the acquisition of $8,599,000
in the third quarter of fiscal 2000 as a result of TimeStep having achieved
certain specified financial performance targets included as part of the purchase
agreement. Under the terms of the purchase agreement, participating employees of
TimeStep may receive additional compensation associated with the acquisition of
$16,400,000. The additional compensation is contingent upon TimeStep further
achieving certain specified financial performance targets and is payable at
various dates ending in August 2001.
<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 Three fiscal quarters ended
--------------------- ---------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
------ ------ ------- -------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 46.2 41.7 44.8 41.5
Inventory write-down 9.7 -- 3.4 --
----- ----- ----- -----
Gross margin 44.1 58.3 51.8 58.5
Expenses
Selling, general and administrative 27.2 28.8 29.3 29.5
Research and development 14.3 14.4 14.2 14.7
Amortization of acquired intangibles 11.6 -- 5.8 0.2
Compensation associated with
acquisitions 4.5 -- 2.3 --
Management severance 2.8 -- 1.0 --
Restructuring costs 14.2 -- 4.9 3.3
Global service outsourcing 4.5 -- 1.6 --
----- ----- ----- -----
Income from operations (35.0) 15.1 (7.3) 10.8
Interest income, net 0.1 0.6 0.1 0.2
Net gain on investments (26.5) 25.8 22.4 13.7
Other expenses (2.9) (0.8) (1.6) (0.6)
----- ----- ----- -----
Earnings before income taxes
and non-controlling interest (64.3) 40.7 13.6 24.1
Provision for income taxes (11.7) 13.8 8.4 8.4
Non-controlling interest 0.2 0.3 0.2 0.0
----- ----- ----- -----
Net earnings (52.8)% 26.6% 5.0 % 15.7%
===== ===== ===== =====
</TABLE>
Sales
<TABLE>
<CAPTION>
Fiscal Quarters Ended Three Fiscal Quarters Ended
--------------------------- --------------------------------
Jan 30, Jan 31, % Jan 30, Jan 31, %
2000 1999 Increase 2000 1999 Increase
------- ------- -------- -------- -------- ---------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Sales $520,630 $450,753 16% $1,496,544 $1,333,590 12%
======== ======== ========== ==========
</TABLE>
The increase in sales in the third quarter and first nine months of fiscal 2000,
compared to the third quarter and first nine 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). Much of the growth in
sales from WAN Packet products was derived from increased demand for these
products in broadband access applications. This increase was partially offset
<PAGE>
by declines in revenues from circuit switched networking products and products
based on packet technologies for local area network applications (LAN Packet
products).
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 Three fiscal quarters ended
----------------------- -----------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
WAN Packet 78% 62% 74% 56%
Circuit switched networking 22 37 26 41
LAN Packet -- 1 -- 3
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
Sales of WAN Packet products grew approximately 46% in the third quarter of
fiscal 2000 compared to the third quarter of fiscal 1999 and 40% in the first
nine months of fiscal 2000 compared to the first nine 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 third quarter of fiscal
2000 declined 32% relative to sales in the third quarter of fiscal 1999 and
sales for the first nine months of fiscal 2000 declined 28% 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 nine 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.
The Company sells its products to communications 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.
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
----------------------- -----------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Service providers 85% 75% 82% 74%
Enterprises 15 25 18 26
---- ---- ---- ----
100% 100% 100% 100%
==== ==== ==== ====
Sales to Siemens A.G. 20% 20% 18% 16%
==== ==== ==== ====
</TABLE>
<PAGE>
The proportion of revenue derived from service providers in the third quarter
and first nine 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 third quarter and first nine 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 10 to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
----------------------- -----------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Americas Region 51% 52% 50% 52%
European Region 36 34 38 33
Asia Pacific Region 13 14 12 15
--- --- --- ---
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 third quarter and first nine months of fiscal 2000 relative
to corresponding exchange rates in fiscal 1999, did not result in material
variances in reported sales, cost of sales or other expenses.
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 did not experience sales declines or significant mix shifts in the
third quarter of fiscal 2000 related to the issue of Year 2000 date compliance.
<PAGE>
Cost of Sales and Gross Margin
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
--------------------- ---------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
------- ------- ------- -------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C>
Gross margin $229,425 $262,791 $774,487 $779,742
======== ======== ======== ========
As % of sales 44% 58% 52% 58%
</TABLE>
Cost of sales consists of manufacturing costs, warranty expense and costs
associated with the provision of services. The gross margin and the gross margin
as a percentage of sales in the third quarter of fiscal 2000 relative to the
third quarter of fiscal 1999 declined originally as of a result of the
$50,435,000 inventory write-down discussed below. The gross margin as a
percentage of sales in the third quarter and first nine months of fiscal 2000
relative to the third quarter and first nine months of fiscal 1999 also declined
because of the decrease 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.
Inventory Write-down
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
--------------------- ---------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
------ ------- ------- -------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C>
Inventory Write-down $50,435 $ -- $50,435 $ --
======= ====== ======= =====
As % of sales 10% -- 3% --
</TABLE>
The Company recorded an inventory write-down of $50,435,000 during the third
quarter of fiscal 2000 on excess inventory levels of certain products and
components. The Company's Management wrote this inventory down to the lower of
cost and net realizable value, based upon a reevaluation of future demand for
the Company's products in light of certain strategic decisions. These decisions
included a narrowing of the Company's product portfolio and a reallocation of
sales, marketing and development resources toward the Company's higher growth
Asynchronous Transfer Mode and Internet Protocol ("ATM+IP") and broadband
access product offerings.
<PAGE>
Selling, General and Administrative Expenses
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
--------------------------------- ---------------------------------
Jan 30, Jan 31, % Jan 30, Jan 31, %
2000 1999 Increase 2000 1999 Increase
-------- -------- --------- -------- -------- -----------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Selling, general and
and administrative $141,805 $129,630 9% $438,455 $393,500 11%
======== ======== ======== ========
As % of sales 27% 29% 29% 30%
</TABLE>
Selling, general and administrative expenses increased in the third quarter and
first nine months of fiscal 2000 relative to the third quarter and first nine
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
cost reduction initiatives during the third quarter of fiscal 2000 and during
the fourth quarter of fiscal 1999. For further discussion of these initiatives
see the "Restructuring Costs" section of this report.
The decline in selling, general and administrative expenses as a percentage of
sales in the third quarter and first nine months of fiscal 2000 when compared to
the third quarter and first nine months of fiscal 1999 is the result of higher
sales volumes combined with the impact of cost reduction initiatives taken
subsequent to the third quarter of fiscal 1999. 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 Three fiscal quarters ended
----------------------------- ----------------------------------
Jan 30, Jan 31, % Jan 30, Jan 31, %
2000 1999 Increase 2000 1999 Increase
------- ------- -- -------- -------- --------
(Canadian dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Gross research and
development expenditures $93,999 $83,039 13% $267,128 $253,881 5%
Investment tax credits (9,093) (9,215) (1%) (26,868) (28,584) (6%)
Customer, government
and other funding (8,767) (6,733) 30% (21,870) (23,744) (8%)
Net deferral of software
development costs (1,900) (1,900) 0% (5,700) (5,665) 1%
------- ------- -------- --------
Net research and
development expenses $74,239 $65,191 14% $212,690 $195,888 9%
======= ======= ======== ========
Gross expenditures
as a % of sales 18% 18% 18% 19%
Recoveries as a %
of gross expenditures 21% 21% 20% 23%
Net expenses as a % of sales 14% 14% 14% 15%
</TABLE>
<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 in the third quarter and first nine months of fiscal 2000 as
compared to the third quarter and first nine months of fiscal 1999 primarily as
a result of acquisitions (TimeStep, Stanford Telecom and Northchurch) but were
also the result of increased costs associated with salary increases for
engineering staff. These increases were reduced somewhat by the impact of cost
reduction initiatives taken in the third quarter of fiscal 2000 and the fourth
quarter of fiscal 1999. See the "Restructuring Costs" section of this report for
further discussion of these initiatives.
Recoveries as a percentage of gross expenditures in the third quarter and first
nine months of fiscal 2000 declined relative to the comparable periods of fiscal
1999. Management expects recoveries as a percentage of gross expenditures for
fiscal 2000 to be consistent or slightly below the percentage achieved during
the first nine months of fiscal 2000.
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. Gross and net expenditures as a percentage of sales for fiscal 2000
are expected to be slightly below fiscal 1999 primarily due to higher relative
sales volume as the Company strives to achieve a lower cost structure.
Amortization of Acquired Intangibles
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
---------------------- ----------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
------- ----- ------- -------
<S> <C> <C> <C> <C>
Purchased research and
development in process $40,475 $ -- $56,617 $ --
Goodwill 16,922 821 26,992 2,616
Acquired technology 1,876 -- 2,159 --
Other 1,278 -- 1,371 --
------- ------- ------- -------
$60,551 $ 821 $87,139 $ 2,616
======= ======= ======= =======
As a % of sales 12% 0% 6% 0%
</TABLE>
The increase in amortization of acquired intangibles for the third quarter of
fiscal 2000 relative to the third quarter of fiscal 1999 and for the first nine
months of fiscal 2000 relative to the first nine months of fiscal 1999 is
principally the result of the Company's recent acquisitions of Stanford Telecom
("Stanford"), Northchurch Communications Inc., TimeStep Corporation and
TeraBridge Technologies Corporation ("TeraBridge"). Based on these recent
acquisitions the Company expects that amortization of acquired intangibles as a
percentage of sales will increase in fiscal 2000 relative to fiscal 1999.
<PAGE>
<TABLE>
<CAPTION>
Restructuring Costs
<S> <C> <C> <C> <C>
Fiscal quarters ended Three fiscal quarters ended
--------------------- ---------------------------
January 30, January 31, January 30, January 31,
2000 1999 2000 1999
----------- ---------- ------ ------
Restructuring programs, November 1999 $73,805 $ -- $73,805 $ --
Layer 2 Switching End of Life -- -- -- 37,928
Asia Pacific Resources Relocation -- -- -- 6,532
----------- --------- ------- ------
$73,805 $ -- $73,805 $44,460
=========== =========== ======= =======
</TABLE>
In November 1999, the Company announced strategic and operational plans designed
to leverage its core competencies, particularly its product portfolio, to
increase shareholder value. Management reviewed the functional organizations'
resource requirements and approaches to service delivery and committed the
Company to a restructuring plan targeted at reducing operating costs,
streamlining operations and realigning research and development efforts with the
Company's higher growth product offerings. The principal activities committed to
during the third quarter of fiscal 2000 included an overall reduction in the
employment level, closure of a research and development facility and a
manufacturing facility in Europe, and a reduction in the number of sales offices
throughout Europe and the United States. The components of restructuring costs
of $73,805,000 were as follows:
<TABLE>
<CAPTION>
Asset impairment losses
<S> <C>
Accounts receivable $24,188
Property, plant and equipment 4,748
------
28,936
------
Provision for restructuring
Reduction in workforce 29,214
Reduction in facilities 11,387
Other restructuring costs 4,268
------
44,869
------
Restructuring costs $73,805
======
</TABLE>
Impairment losses associated with accounts receivable were recorded to the
extent that the net book value of these assets, including related reserves,
exceeded their fair value. Fair value was determined by establishing the
estimated net realizable value to the Company of the underlying assets.
Substantially all of the net book value of the property, plant and
equipment affected by the restructuring programs were reflected as asset
impairment losses since the Company expects that the proceeds of disposition of
these assets will approximate the costs of disposal. The Company anticipates
that assets impaired as a result of the restructuring programs will be disposed
of by the end of the first quarter of fiscal 2001.
<PAGE>
The provision for restructuring and the related spending on restructuring
activities during the third 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
commitment to the
restructuring plan $ 29,214 $11,387 $ 4,268 $ 44,869
Incurred in the fiscal quarter
ended January 30, 2000 (17,904) (5,879) (1,192) (24,975)
-------- ------- ------- --------
Provision at January 30, 2000 $ 11,310 $ 5,508 $ 3,076 $ 19,894
======== ======= ======= ========
</TABLE>
The provision for restructuring is reflected in accrued liabilities at January
30, 2000.
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 761 employees. The work force reductions
occurred in all geographic regions and throughout all functional areas of the
Company. The Company anticipates that the remaining costs associated with the
work force reductions will be substantially paid by the end of fiscal 2000.
The provision for the reduction in facilities comprises lease payments and fixed
costs associated with the closure of facilities in Europe and the United States.
The Company expects to complete these facilities closures by the end of the
first quarter of fiscal 2001.
The provision for other restructuring costs comprises the costs of terminating
certain contracts associated with projects that were discontinued as a result of
the restructuring plan in addition to consulting costs associated with
establishing termination benefits for employees and various other direct
incremental costs associated with the restructuring plan.
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>
Asset impairment losses
<S> <C>
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
<PAGE>
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.
The Company fulfilled its obligations to customers during fiscal 1999.
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)
Incurred in the fiscal quarter
ended January 30, 2000 (108) -- -- (108)
------ ------------- ---------- -------
Provision at January 30, 2000 $ 932 $2,600 $ -- $ 3,532
====== ============= ========== =======
</TABLE>
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 reflected in accrued liabilities at January 30,
2000 and May 2, 1999.
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
<PAGE>
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 assets
impaired as a result of the restructuring programs are expected to be disposed
of by the end of fiscal 2000.
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 third 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)
Incurred in the fiscal quarter
ended January 30, 2000 (1,631) (627) (24) (2,282)
------- ------- ------ --------
Provision at January 30, 2000 $ 1,995 $ 672 $ 416 $ 3,083
======= ======= ====== ========
</TABLE>
<PAGE>
The provision for restructuring is reflected in accrued liabilities at January
30, 2000 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 remaining costs
associated with the work force reductions will be paid in the fourth 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 $24,188,000 for the
quarter and first nine months ended January 30, 2000 and $30,690,000 for the
first nine months ended November 1, 1998.
Global Service Outsourcing
In November 1999, the Company made the decision to outsource global customer
service as part of its efforts to reduce operating costs. During the third
quarter of fiscal 2000 the Company signed a letter of intent with International
Business Machines Corporation ("IBM") for the global supply of field services to
its customers and commenced implementing the detailed operating model agreed to
with IBM. The Company expects to finalize its agreement with IBM for the supply
of global services and complete implementation of the operating model early in
fiscal 2001. As a result of the service outsourcing initiative, the Company
recorded costs associated with the project of $23,187,000 comprised of the
following:
Fixed asset impairment losses $12,617
Consulting fees 7,846
Implementation costs 2,411
Other outsourcing costs 313
-------
$23,187
=======
Fixed asset impairment losses relate to assets used by the Company in global
customer support functions that are redundent under the operating agreement with
IBM. Impairment losses were recorded to the extent the net book value of these
assets exceeded their estimated net realizable value. All of the net book
values of the fixed assets affected by the outsourcing were reflected as
impairment losses since the Company expects the net realizable value of these
assets to be nil. The Company anticipates that assets impaired as a result of
the outsourcing program will be disposed of by the end of fiscal 2000.
<PAGE>
Consulting fees associated with the outsourcing initiatives relate to project
management services provided to the Company by a third party consultant to
assist the Company in consolidating and outsourcing support functions to IBM.
Implementation costs relate to charges from IBM for implementing regional
operating models in anticipating of signing a global service supply agreement
with the Company.
Net Gain (Loss) on Investments
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
--------------------------- -----------------------------
January 30, January 31, January 30, January 31,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Juniper Networks Inc. $ -- $ -- $ 464,756 $ --
Cambrian Systems Corporation 8,606 128,893 15,716 128,893
nCipher Corporation Limited 8,051 -- 8,051 --
Vienna Systems Corporation 2,496 15,846 2,496 15,846
Advanced Computer Communications 13,301 -- 13,301 128,336
Other divestitures 594 -- 1,915 --
West End Systems Corp. -- (19,994) -- (33,521)
Investment impairment write downs (171,033) (8,563) (171,033) (56,520)
--------- -------- --------- --------
$(137,985) $116,182 $ 335,202 $183,034
========= ======== ========= ========
</TABLE>
In January 2000, the Company sold its minority ownership position in nCipher
Corporation Limited for cash proceeds of US$6,329,000 (Cdn$9,166,000).
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$106,446,000
(Cdn$162,874,000)
In December 1998, the Company sold its minority ownership position in Cambrian
Systems Corporation ("Cambrian") to Nortel for cash proceeds of US$106,446,000
(Cdn$162,874,000). The proceeds included earn-out payments of US$12,707,000
(Cdn$18,571,000) received by the Company as a result of certain specified
financial performance targets being met by Cambrian. The Company received earn-
out payments in fiscal 2000 totaling US$10,772,000 (Cdn$15,716,000).
In December 1998, the Company sold its minority ownership position in Vienna
Systems Corporation to Nokia Corporation for cash proceeds of $39,716,000.
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). In January 2000,
the Company recorded an additional gain of $13,301,000 attributable to the
fulfillment of its obligations to make certain volume purchases from ACC as part
of the divestiture agreement. 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>
In February 1999, West End Systems Corp., a manufacturer of access and
transmission products for the communications and cable television industries,
filed an assignment in bankruptcy under the Canadian Bankruptcy and Insolvency
Act. As a result, the Company recorded losses related to the Company's minority
ownership position in West End Systems Corp. and unsecured trade accounts
outstanding.
As a result of the financial performance of four investee companies, the Company
recorded investment impairment write downs of $171,033,000 in the third quarter
of fiscal 2000. The write downs relate to the Company's minority ownership
positions and loan advances with the investee
companies. Substantially all of the write downs are attributable to three
investee companies that are investigating all strategic options to enable the
continuing viability of their operations including searching for potential
acquirors and alternative sources of financing. The Company established fair
value for its investment in these investee companies by assessing the potential
cash flows the Company expects to receive from these investments.
In the first nine months of fiscal 1999, the Company recorded investment
impairment write downs of $56,520,000 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 first nine
months 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. The Company also divested its ownership
position in a Brazilian subsidiary and recognized a loss of $14,902,000
associated with the carrying value of its investment and related disposition
costs. 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
$12,922,000 in the first nine months 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 financing rounds. 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.
Income Taxes
<TABLE>
<CAPTION>
Fiscal Quarter Ended Three Fiscal Quarters Ended
-------------------- -----------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
------ ------- ------- -------
<S> <C> <C> <C> <C>
Income tax rate 18% 34% 62% 35%
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 third quarter and first nine 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 third quarters and first nine 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.
<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 derived from 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 Three fiscal quarters ended
------------------------ -----------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
--------- --------- ------- -------
<S> <C> <C> <C> <C>
Net earnings $(274,646) $ 120,119 $ 74,349 $ 208,953
------- --------- --------- ---------
Adjustments:
Amortization of acquired intangibles
Purchased research and
development in process 40,475 -- 56,617 --
Goodwill 16,922 821 26,992 2,616
Other 3,154 -- 3,530 --
------ ----- ------ -----
60,551 821 87,139 2,616
Inventory write-down 50,435 -- 50,435 --
Compensation associated with
acquisitions 23,651 -- 33,879 --
Management severance 14,529 -- 14,529 --
Restructuring costs 73,805 -- 73,805 44,460
Global service outsourcing 23,187 -- 23,187 --
Net (gain) loss on investments 137,985 (116,182) (335,202) (183,034)
Net tax impact (75,592) 42,223 80,979 58,873
------ ------- ------- -------
Total adjustments to net earnings 308,551 (73,138) 28,751 (77,805)
------- ------ ------ ------
Supplementary measure of net earnings $ 33,905 $ 46,981 $ 103,100 $ 131,148
========= ========= ========= =========
Supplementary measure of net earnings,
as a percent of sales 7% 10% 7% 10%
Supplementary measure of earnings per share
Canadian GAAP
Basic $ 0.19 $ 0.26 $ 0.57 $ 0.73
Fully diluted $ 0.19 $ 0.26 $ 0.57 $ 0.73
Weighted average number of shares
Basic 181,406 177,596 180,889 176,814
Fully diluted 181,406 177,596 180,889 176,814
</TABLE>
<PAGE>
The primary reason for the decline in supplementary net earnings as a percentage
of sales, in the third quarter and first nine months of fiscal 2000 as compared
to corresponding periods of fiscal 1999 is the decline in the gross margin as a
percentage of sales. Also, other expenses have risen significantly as percentage
of sales, throughout the first nine months of fiscal 2000 mainly due to higher
equity losses from investee companies and an increase in financing fees.
Net Earnings
A reconciliation of the major components of the change in net earnings for the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999 and
the first nine months of fiscal 2000 compared to the first nine months of fiscal
1999 is as follows.
<TABLE>
<CAPTION>
Fiscal Three fiscal
quarter ended quarters ended
-------------- ---------------
<S> <C> <C>
Jan 30, Jan 30,
2000 2000
------- -------
Gross margin from sales increase $ 40,739 $ 95,278
(Decrease) in product gross margins
as a percentage of sales (23,670) (50,098)
(Increase) in operating expenses (21,223) (61,757)
(Increase) in net interest and other expenses (14,493) (17,813)
Decrease in income taxes on
supplementary net earnings 5,258 9,372
(Increase) in non-controlling interest 313 (3,750)
------ ------
(Decrease) in supplementary net earnings (13,076) (28,768)
Change in items excluded from supplementary
net earnings, net of income taxes (381,689) (105,836)
------- -------
Decrease in net earnings (394,765) (134,604)
Net earnings in comparable period of prior year 120,119 208,953
------- -------
Net earnings $(274,646) $ (74,349)
======= =========
</TABLE>
<PAGE>
FINANCIAL CONDITION
During the first nine months of fiscal 2000 ended January 30, 2000, working
capital decreased from $1,243,991,000 to $612,138,000. As at January 30, 2000
the Company had $311,526,000 in cash, cash equivalents and marketable securities
which represented a decrease of $568,168,000 during the first nine months of
fiscal 2000. The decline relates primarily to the net cash purchase of Stanford
Telecom for $405,886,000 (Note 4 to the Consolidated Financial Statements). A
summary of major cash flow components by activity for the first nine months of
fiscal 2000 is as follows.
<TABLE>
<CAPTION>
Three fiscal
quarters ended
--------------
Jan 30,
2000
---------
<S> <C>
Net earnings $ 74,349
Add back items not affecting cash
Amortization and other non-cash charges (104,477)
(Increase) decrease in working capital,
excluding cash and cash equivalents (10,206)
---------
Cash flow from operating activities (40,334)
---------
Net sales (purchases) of marketable securities 201,756
Additions to property, plant and equipment (145,170)
Proceeds from sale of Juniper Networks Inc. 474,480
Acquisition of Stanford Telecom (689,910)
Acquisition of Northchurch Communications (123,022)
Acquisition of TimeStep Corporation (85,547)
Investment in TeraBridge Technologies (90,813)
Additions to long term investments and other (177,348)
Cash flow from investing activities (635,574)
Proceeds from stock option exercises 35,901
Net repayment of long term obligations (5,532)
---------
Cash flow from financing activities 30,369
---------
Impact of foreign currency translation on cash (5,094)
Cash from acquisition of subsidiaries 284,221
---------
</TABLE>
Net cash flow during the period $ (366,412)
===========
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 nine 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 $115,839,000 and is mainly related to high levels
of components and work in process for new products that will soon be going into
volume production. 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 $211,363,000 during the first nine months of
<PAGE>
fiscal 2000 mainly due to accruals associated with the Stanford acquisition, the
accrual of deferred compensation associated with the acquisition of Northchurch
(Note 4 to the Consolidated Financial Statements), and the accrual of severance
and other restructuring costs. Current income taxes payable increased by
$173,991,000 during the first nine months of fiscal 2000. The increase was
predominantly related to income tax liabilities associated with investment gains
realized in the first nine months of fiscal 2000.
Existing short term bank credit facilities consist of operating lines of credit
with certain banks in the aggregate amount of $165,631,000, primarily with banks
in Canada, the United Kingdom, Chile and Argentina. At January 30, 2000,
$10,609,000 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. In December 1999, the Company acquired Stanford
Telecommunications Inc. ("STII") (STII: NASDAQ), a leading supplier of broadband
wireless technology and products based in Sunnyvale, California. The Company
acquired all of the outstanding common stock of STII for total cash
consideration of US$466,518,000 (Cdn$689,910,000) including acquisition related
costs. The net cash consideration included proceeds received from the
divestiture of certain divisions of STII that are unrelated to the Company's
core business was US$274,470,000 (Cdn$405,886,000). The acquisition has been
accounted for using the purchase method of accounting (Note 4 to the
Consolidated Financial Statements).
Management anticipates that the level of capital expenditures for fiscal 2000
will be slightly below the level of capital expenditures incurred in fiscal
1999. 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.
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.
In February 2000, the Company announced that it had entered into a Merger
Agreement with Alcatel, which is discussed in Recent Developments above. In the
event the merger is not completed, the Company's financial position could be
materially adversely affected due to the potential negative response from
customers and investors which would negatively impact results of operations and
the market value of the Company's common shares.
<PAGE>
potential negative response from customers and investors which would negatively
impact results of operations and the market value of the Company's common
shares.
YEAR 2000 DATE COMPLIANCE
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 Company acknowledged the Year 2000 transition as a serious business
issue and committed to addressing the challenge of becoming Year 2000 date
compliant. The Company's program ("Year 2000 Date Compliance") addressed
compliance both externally, to our customers, suppliers, and other associates,
and internally for the Company's systems and procedures. The Year 2000 rollover
was uneventful and the program was deemed to be successfully completed on March
1, 2000 in that no business disruptions related to Year 2000 date compliance
have occurred for the Company, its customers or its critical suppliers. The cost
to the Company for its compliance program was less than 1% of sales and was
financed within the framework of normal operating group spending budgets.
Although the change in date has occurred, it is not possible to conclude that
all aspects of the Year 2000 Issue that may affect the company, including those
related to customers, suppliers, or other third parties, have been fully
resolved.
<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 January 30,
2000 for all currencies in which the Company had hedged a foreign currency
exposure was $271,129,000. This represents a decrease of $91,899,000 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 January
30, 2000 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>
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 after 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.
Brian Jervis was Executive Vice President, Switching Products, with Newbridge
from October 1998 through November 2, 1999. A written Employment Agreement dated
October 6, 1998, was signed between Newbridge and Mr. Jervis. In January 2000,
Mr. Jervis filed a Statement of Claim against Newbridge claiming damages for
breach of contract, wrongful dismissal and breach of fiduciary duty totaling
$15,000,000. This claim bearing Court File No. 00-CV-12680 will be heard by the
Ontario Superior Court of Justice.
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.
<PAGE>
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, Mr. Minshull 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.
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
b) Reports on Form 8-K
During the quarter of the period for which this Report is filed,
the Company filed a Current Report on Form 8-K dated Novemeber 18,
1999 and a Current Report on Form 8-K dated December 17, 1999, and
subsequent the Company filed a Current Report on Form 8-K dated
February 23, 2000.
<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: March 9, 2000 By: /s/ Terence H. Matthews
-----------------------
Terence H. Matthews,
Chairman of the Board of
Directors and Chief
Executive Officer
Date: March 9, 2000 By: /s/ Kenneth B. Wigglesworth
---------------------------
Kenneth B. Wigglesworth,
Executive Vice President,Finance,
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page No.
---------
<S> <C> <C>
11.1 Computation of earnings per share under accounting
principles generally accepted in Canada...........................53
11.2 Computation of earnings per share under accounting
principles generally accepted in the United States................54
27 Financial data schedule...........................................55
</TABLE>
<PAGE>
EXHIBIT 11.1
NEWBRIDGE NETWORKS CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(Accounting principles generally accepted in Canada)
(Canadian dollars, amounts in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Fiscal quarters ended Three fiscal quarters ended
--------------------- ---------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
------ ------- ------- -------
Basic earnings (loss) per share
<S> <C> <C> <C> <C>
Net earnings (loss) $(274,646) $120,119 $ 74,349 $208,953
========= ======== ======== ========
Common Shares outstanding
at the beginning of the period 181,069 176,877 180,105 175,686
Weighted average number of Common Shares
issued during the period 337 719 784 1,128
--------- -------- -------- --------
Weighted average number of Common Shares
outstanding during the period 181,406 177,596 180,889 176,814
======= ======= ======= =======
Basic earnings (loss) per share $ (1.51) $ 0.68 $ 0.41 $ 1.18
========= ======== ======== ========
Fully diluted earnings (loss) per share
Earnings (loss) before imputed earnings $(274,646) $120,119 $ 74,349 $208,953
After tax imputed earnings from the investment
of funds received through dilution -- 7,353 -- 21,006
--------- -------- -------- --------
Adjusted net earnings (loss) $(274,646) $127,472 $ 74,349 $229,959
========= ======== ======== ========
Weighted average number of Common Shares
outstanding during the period 181,406 177,596 180,889 176,814
Weighted average common share
equivalents based on conversion of
outstanding stock options -- 22,355 -- 21,214
--------- -------- -------- --------
Weighted average number of Common
Shares and equivalents outstanding
during the period 181,406 199,951 180,889 198,028
========= ======== ======== ========
Fully diluted earnings (loss) per share $ (1.51) $ 0.64 $ 0.41 $ 1.16
========= ======== ======== ========
</TABLE>
<PAGE>
$/nofolio
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 Three fiscal quarters ended
--------------------- ---------------------------
Jan 30, Jan 31, Jan 30, Jan 31,
2000 1999 2000 1999
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Net earnings (loss) - U.S. GAAP
Net earnings (loss), as reported, Cdn GAAP $(274,646) $120,119 $ 74,349 $208,953
Write off of purchased research and
development in process (81,238) -- (135,667) --
Amortization of purchased research and
development in process, Cdn GAAP 40,475 -- 56,617 --
--------- -------- --------- --------
Net earnings (loss), U.S. GAAP $(315,409) $120,119 $ (4,701) $208,953
========= ======== ========= ========
Earnings (loss) per share (U.S. GAAP - Basic)
Net earnings (loss) $(315,409) $120,119 $ (4,701) $208,953
========= ======== ========= ========
Weighted average number of Common
Shares outstanding during the period 181,406 177,596 180,889 176,814
========= ======== ========= ========
Earnings (loss) per share (U.S. GAAP) $(1.74) $0.68 $(0.03) $1.18
========= ======== ========= ========
Earnings (loss) per share (U.S. GAAP- Diluted)
Net earnings (loss) $(315,409) $120,119 $ (4,701) $208,953
========= ======== ========= ========
Weighted average number of Common Shares
outstanding during the period 181,406 177,596 180,889 176,814
Net effect of dilutive stock options
based on the treasury stock method -- 4,434 -- --
--------- -------- --------- --------
Weighted average number of Common
Shares and equivalents outstanding
during the period 181,406 182,030 180,889 176,814
========= ======== ========= ========
Earnings (loss) per share (U.S. GAAP) $ (1.74) $ 0.66 $ (0.03) $ 1.18
========= ======== ========= =======
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> APR-30-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-30-2000
<EXCHANGE-RATE> 0.6833
<CASH> 299,607
<SECURITIES> 11,919
<RECEIVABLES> 637,291
<ALLOWANCES> 33,148
<INVENTORY> 326,125
<CURRENT-ASSETS> 1,422,041
<PP&E> 1,115,257
<DEPRECIATION> 656,463
<TOTAL-ASSETS> 2,911,073
<CURRENT-LIABILITIES> 809,903
<BONDS> 0
0
0
<COMMON> 609,849
<OTHER-SE> 1,007,902
<TOTAL-LIABILITY-AND-EQUITY> 2,911,073
<SALES> 520,630
<TOTAL-REVENUES> 520,630
<CGS> 291,205
<TOTAL-COSTS> 702,972
<OTHER-EXPENSES> 15,161
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,270
<INCOME-PRETAX> (334,862)
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</TABLE>
