-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WoPN+IudLQOXOr7jlH+8qRMgs7UtiVinflQz9iYxSchwgdh/ehjMzsllcMaQYPWs Y10UYeIrGqMXrXTPT16HxA== 0000928385-96-001639.txt : 19961211 0000928385-96-001639.hdr.sgml : 19961211 ACCESSION NUMBER: 0000928385-96-001639 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961027 FILED AS OF DATE: 19961210 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWBRIDGE NETWORKS CORP CENTRAL INDEX KEY: 0000827301 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 980077506 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13316 FILM NUMBER: 96678739 BUSINESS ADDRESS: STREET 1: 600 MARCH ROAD PO BOX 13600 STREET 2: KANATA ONTARIO CANADA CITY: K2K 2E6 STATE: A6 BUSINESS PHONE: 6135913600 MAIL ADDRESS: STREET 1: 600 MARCH ROAD STREET 2: KANATA ONTARIO CANADA CITY: K2K 2E6 STATE: A6 10-Q 1 QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 27, 1996 Commission file number 1-13316 NEWBRIDGE NETWORKS CORPORATION (Exact name of registrant as specified in its charter) Canada 98-0077506 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 March Road, Kanata, Ontario, Canada K2K 2E6 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (613) 591-3600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of Common Shares of the registrant outstanding as at December 6, 1996 was 170,914,469. (Exhibit index located on page 18) (Page 1 of 20) NEWBRIDGE NETWORKS CORPORATION TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings and Retained Earnings -- Fiscal quarter and two fiscal quarters ended October 27, 1996 and October 29, 1995....................3 Consolidated Balance Sheets -- October 27, 1996 and April 30, 1996............................4 Consolidated Statements of Cash Flows -- Fiscal quarter and two fiscal quarters ended October 27, 1996 and October 29, 1995....................5 Notes to the Consolidated Financial Statements................6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.........................10-15 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................16 Item 5. Other Information................................................16 Item 6. Exhibits and Reports on Form 8-K.................................16 SIGNATURES....................................................................17 (Page 2 of 20) 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)
Fiscal quarter ended Two fiscal quarters ended ---------------------------- ---------------------------- October 27, October 29, October 27, October 29, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Sales $316,082 $217,116 $602,119 $412,626 Cost of sales 112,185 75,385 212,928 141,349 -------- -------- -------- -------- Gross margin 203,897 141,731 389,191 271,277 Expenses Selling, general and administration 78,138 56,287 144,396 110,336 Research and development 35,167 22,688 65,402 45,510 -------- -------- -------- -------- Income from operations 90,592 62,756 179,393 115,431 Interest income 5,320 5,742 10,792 11,514 Interest expense on long term obligations (186) (137) (258) (289) Other expenses (2,734) (1,179) (4,879) (5,027) -------- -------- -------- -------- Earnings before income taxes and non-controlling interest 92,992 67,182 185,048 121,629 Provision for income taxes 29,776 22,506 59,473 40,840 Non-controlling interest 435 (700) 1,993 (1,699) -------- -------- -------- -------- Net earnings 62,781 45,376 123,582 82,488 Retained earnings, beginning of the period 672,032 445,479 611,231 408,367 -------- -------- -------- -------- Retained earnings, end of the period $734,813 $490,855 $734,813 $490,855 ======== ======== ======== ======== Earnings per share (Note 5) Basic $0.37 $0.27 $0.73 $0.50 Fully diluted $0.36 $0.27 $0.71 $0.49 Weighted average number of shares Basic 170,232 165,864 169,736 165,489 Fully diluted 184,131 179,637 182,934 179,231
See accompanying Notes to the Consolidated Financial Statements. (Page 3 of 20) NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED BALANCE SHEETS (Canadian dollars in thousands)
October 27, April 30, 1996 1996 ----------- --------- (unaudited) Assets Cash and cash equivalents (Note 2) $ 481,897 $ 455,749 Accounts receivable, net of provision for returns and doubtful accounts of $8,381 (April 30, 1996 - $6,651) 308,782 244,784 Inventories (Note 3) 115,327 103,555 Prepaid expenses and other current assets 31,469 21,107 ---------- ---------- 937,475 825,195 Property, plant and equipment 217,969 193,796 Goodwill (Note 4) 70,630 26,672 Software development costs 20,027 18,285 Other assets 55,231 29,469 ---------- ---------- $1,301,332 $1,093,417 ========== ========== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 73,486 $ 64,289 Accrued liabilities 57,673 46,033 Income taxes 68,499 54,484 Current portion of long term obligations 4,685 2,302 ---------- ---------- 204,343 167,108 Long term obligations 5,065 860 Deferred income taxes 15,904 9,902 Non-controlling interest 16,011 12,861 ---------- ---------- 241,323 190,731 Common shares - 170,741,237 outstanding (April 30, 1996 - 164,514,616 outstanding) 327,877 290,170 Accumulated foreign currency translation adjustment (2,681) 1,285 Retained earnings 734,813 611,231 ---------- ---------- 1,060,009 902,686 ---------- ---------- $1,301,332 $1,093,417 ========== ==========
See accompanying Notes to the Consolidated Financial Statements. (Page 4 of 20) NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Canadian dollars in thousands) (Unaudited)
Fiscal quarter ended Two fiscal quarters ended ---------------------------- ---------------------------- October 27, October 29, October 27, October 29, 1996 1995 1996 1995 ------------ ------------ ------------ ------------ Operating activities Net earnings $ 62,781 $ 45,376 $ 123,582 $ 82,488 Items not affecting cash Depreciation and amortization 19,124 12,987 36,808 26,271 Deferred income taxes 1,760 2,071 5,871 1,984 Non-controlling interest 435 (674) 1,993 (1,669) Other 768 528 2,322 1,056 Cash effect of changes in: Accounts receivable (41,968) (35,304) (62,973) (14,495) Inventories (6,504) (2,334) (4,706) (20,618) Prepaid expenses and other current assets (3,043) 2,834 (9,049) (536) Account payable and accrued liabilities 15,566 406 (2,214) (4,083) Income taxes 17,399 5,290 17,341 1,965 -------- -------- --------- -------- 66,318 31,180 108,975 72,363 -------- -------- --------- -------- Investing activities Additions to property, plant and equipment (28,390) (16,701) (48,439) (32,881) Acquisition of subsidiaries, excluding cash acquired (Note 4) (34,231) -- (35,097) (1,622) Capitalized software development costs (3,024) (2,375) (5,964) (5,004) Additions to other assets (20,061) (3,013) (25,602) (7,494) -------- -------- --------- -------- (85,706) (22,089) (115,102) (47,001) -------- -------- --------- -------- Financing activities Issue of common shares 14,290 1,763 31,888 9,051 Purchase of common shares -- (7,277) -- (7,277) Increase in long term obligations 1,026 -- 1,026 -- Repayment of long term obligations (2,097) (739) (3,356) (1,865) -------- -------- --------- -------- 13,219 (6,253) 29,558 (91) -------- -------- --------- -------- Increase in cash and cash equivalents (6,169) 2,838 23,431 25,271 Effect of foreign currency translation on cash (3,731) 1,286 (3,448) 2,204 Cash from acquisition of controlling interest of subsidiaries (Note 4) 6,165 -- 6,165 -- -------- -------- --------- -------- (3,735) 4,124 26,148 27,475 Cash and cash equivalents, beginning of period 485,632 371,508 455,749 348,157 -------- -------- --------- -------- Cash and cash equivalents, end of period $481,897 $375,632 $ 481,897 $375,632 ======== ======== ========= ========
See accompanying Notes to the Consolidated Financial Statements. (Page 5 of 20) 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 in all material respects except for the disclosure of certain cash equivalents on the Consolidated Balance Sheets and investing activities on the Consolidated Statements of Cash Flows, as disclosed in Note 2, and the method of calculation of earnings per share, as disclosed in Note 5. In the opinion of Management, the unaudited interim consolidated financial statements reflect all normal and recurring adjustments considered necessary for fair presentation. The results of operations for the second fiscal quarter and the two fiscal quarters ended October 27, 1996 are not necessarily indicative of the results to be expected for the fiscal year ending April 30, 1997. 2. Cash and Cash Equivalents Components of cash and cash equivalents are:
October 27, April 30, 1996 1996 ----------- --------- Cash $211,944 $285,054 Held to maturity marketable securities (at amortized cost, which approximates fair market value) 268,076 152,280 Available for sale marketable securities (at fair market value) 1,877 18,415 -------- -------- $481,897 $455,749 ======== ========
Held to maturity marketable securities are investments with original maturities of three months or more. Available for sale marketable securities are common shares of publicly traded companies acquired upon the Company's disposition of minority interests in privately held companies. Under accounting principles generally accepted in the United States ("U.S. GAAP"), marketable securities would be disclosed as a separate caption on the Consolidated Balance Sheets. (Page 6 of 20) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) If the Consolidated Statements of Cash Flows were prepared under U.S. GAAP, maturities, purchases and sales of marketable securities would be disclosed as an investing activity. Disclosure in the Consolidated Statements of Cash Flows prepared under U.S. GAAP would be as follows.
Fiscal quarter ended Two fiscal quarters ended --------------------------- --------------------------- October 27, October 29, October 27, October 29, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Investing activities in short term marketable securities: Held to maturity securities Maturities $ 41,791 $ 20,076 $ 165,674 $ 60,275 Purchases (163,624) (147,707) (281,470) (226,649) Sales -- -- -- -- --------- --------- --------- --------- (121,833) (127,631) (115,796) (166,374) Available for sale securities Sales 11,208 -- 16,538 -- --------- --------- --------- --------- (110,625) (127,631) (99,258) (166,374) Investing activities, as reported (84,019) (22,089) (115,102) (47,001) --------- --------- --------- --------- Investing activities, U.S. GAAP $(194,644) $(149,720) $(214,360) $(213,375) ========= ========= ========= ========= Increase (decrease) in cash and cash equivalents, as reported $ (3,735) $ 4,124 $ 26,148 $ 27,475 Investing activities in short term marketable securities (110,625) (127,631) (99,258) (166,374) --------- --------- --------- --------- Increase (decrease) in cash and cash equivalents, U.S. GAAP $(114,360) $(123,507) $ (73,110) $(138,899) ========= ========= ========= =========
3. Inventories October 27, April 30, 1996 1996 -------- -------- Finished goods $ 73,338 $ 60,824 Work in process 14,672 12,711 Raw materials 27,317 30,020 --------- --------- $ 115,327 $ 103,555 ========= =========
(Page 7 of 20) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 4. Acquisition of Ouest Standard Telematique In August 1996, the Company acquired a 100% equity interest in Ouest Standard Telematique S.A. (OST), a manufacturer of local area network equipment based in France, by the purchase of shares in the amount of $34,231,000. The purchase price excludes additional contingent payments which may be made over the next three years depending on the financial performance of OST, up to a maximum of US$10,000,000. The acquisition has been accounted for by the purchase method of accounting. Goodwill is being amortized on a straight line basis over a twenty year period, commencing in the period in which the investment was made. The Company's investment in OST is summarized below.
Non-cash current assets $ 9,984 Property, plant and equipment 6,157 Other long term assets 490 -------- Non-cash assets acquired 16,631 Current liabilities (27,017) Long term liabilities assumed (6,313) -------- Net non-cash assets acquired (16,699) Cash acquired 6,165 -------- (10,534) Goodwill upon acquisition 44,765 -------- Total consideration paid $ 34,231 ========
5. Earnings per Share Under accounting principles generally accepted in Canada, basic earnings per share is calculated as net earnings for the period divided by the daily weighted average number of Common Shares outstanding during the period. Fully diluted earnings per share is 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 earnings per share is calculated using the treasury stock method. Earnings per share in U.S. dollars is disclosed for the convenience of the reader. The exchange rates used for translation are based on the daily average exchange rate of a Canadian dollar for U.S. dollars as reported by the Federal Reserve Bank of New York. The calculation of earnings per share under U.S. GAAP is as follows. (Page 8 of 20) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited)
Fiscal quarter ended Two fiscal quarters ended -------------------- ------------------------- October 27, October 29, October 27, October 29, 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Earnings per share Primary $0.36 $0.27 $0.71 $0.49 =========== =========== =========== =========== Fully diluted $0.36 $0.27 $0.71 $0.49 =========== =========== =========== =========== Earnings per share--in U.S. dollars Primary $0.26 $0.20 $0.52 $0.36 =========== =========== =========== =========== Fully diluted $0.26 $0.20 $0.52 $0.36 =========== =========== =========== =========== Weighted average number of shares Primary 174,747 167,672 174,837 168,260 =========== =========== =========== =========== Fully diluted 174,747 167,672 174,837 168,260 =========== =========== =========== ===========
6. Litigation During the fiscal year ended April 30, 1995, the Company was served with one of several complaints filed in United States District Court in Washington, D.C. by certain persons purporting to be purchasers of Common Shares of the Company. On or about May 8, 1995 these complaints were combined into a single consolidated and amended complaint (the "First Amended Complaint") which named the Company and certain of its executive officers as defendants. The First Amended Complaint purported to be a class action on behalf of a class of persons who purchased securities of the Company between March 29 and August 1, 1994 and alleged that the Company made false and misleading statements in violation of United States securities law and common law, for which damages were sought in unspecified amounts. On June 3, 1996, the Court issued an order granting in part and denying in part the defendants' motion to dismiss. Among other things, the Court dismissed with prejudice the claim alleging violation of common law. The Court also dismissed the majority of plaintiffs' allegations of violation of United States securities law, but granted plaintiffs leave to replead these allegations in a Second Amended Complaint, which plaintiffs filed on July 3, 1996. The Court further conditionally certified the action as a class action without prejudice to the Company's right to renew its objection to class action certification upon completion of discovery. The defendants have moved to dismiss the Second Amended Complaint. The Company intends to continue to defend this action vigorously. Based upon its present understanding of the laws in the United States and the facts, the Company believes it has meritorious defenses to the action. Because the outcome of the action is not certain at this time, no provision for any liability that may result upon adjudication has been made in these financial statements. (Page 9 of 20) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Sales increased in the second fiscal quarter and for the first six months of fiscal 1997 ended October 27, 1996 by 46% compared to sales in the second quarter and for the first six months of fiscal 1996 ended October 29, 1995. The increase in sales resulted in net earnings of $62,781,000 for the second quarter of fiscal 1997, an increase of 38% over net earnings for the second quarter of fiscal 1996, and net earnings of $123,582,000 for the first six months of fiscal 1997, an increase of 50% over net earnings for the first six months of fiscal 1996.
Sales Fiscal Quarter Ended Two Fiscal Quarters Ended ----------------------------------- -------------------------------- Oct 27, Oct 29, % Oct 27, Oct 29, % 1996 1995 Increase 1996 1995 Increase -------- -------- -------- -------- -------- -------- (Canadian dollars in thousands) Sales $316,082 $217,116 46% $602,119 $412,626 46% ======== ======== ======== ========
Product line enhancements and new products introduced in fiscal 1995 and fiscal 1996 resulted in increased sales in the second quarter and first six months of fiscal 1997 relative to the second quarter and first six months of fiscal 1996 in the public networking and private corporate networking markets worldwide. This increase principally reflected growth in sales in the Asia Pacific region and Europe, as well as higher sales of advanced circuit switched networking multiplexers and products based on ATM (asynchronous transfer mode) technology. The Company's sales in the second quarter and first six months of fiscal 1997 to telephone companies and other carriers for central office applications for tariffed services, for use within their internal networks and for resale to end users increased relative to the overall increase in sales compared to the second quarter and first six months of fiscal 1996. Sales to carriers represented 70% of total sales in the second quarter of fiscal 1997 and 69% for the first six months of fiscal 1997, compared to 64% of total sales in the second quarter and first six months of fiscal 1996. Deliveries to original equipment manufacturers (OEMs) for carrier customers and deliveries under certain large contracts with carriers contributed significantly to sales in the second quarter and first six months of fiscal 1997 and the second quarter and first six months of fiscal 1996. Sales to Siemens A.G. and subsidiaries, generally under OEM arrangements for resale to end users, were greater than 10% of total sales for the second quarter and first six months of fiscal 1997. The Company expects the proportion of sales derived from products based on packet technologies to increase relative to sales derived from circuit switched networking multiplexers in fiscal 1997 when compared to fiscal 1996. The Company is also subject to a greater degree of variation in quarterly sales of circuit switched networking multiplexers as an increasing proportion of sales of these products is expected to be derived from less mature, high growth markets outside of North America. A significant portion of the Company's sales are derived from products shipped against orders received in each fiscal quarter and from products shipped against firm purchase orders released in that fiscal quarter. 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. (Page 10 of 20) Because substantial portions of the Company's sales, cost of sales and other expenses are denominated in U.S. dollars and Pounds Sterling, the Company's results of operations are subject to change based on fluctuations in the rates of exchange of those currencies for the Canadian dollar. During the second quarter of fiscal 1997, the decrease in the value of the Canadian dollar against the Pound Sterling and the U.S. dollar, relative to exchange rates in the second quarter of fiscal 1996, resulted in no material variance in reported sales, gross margin or income from operations. During the first six months of fiscal 1997, the decrease in the value of the Canadian dollar against the U.S. dollar, offset by an increase in the value of the Canadian dollar against the Pound Sterling, relative to exchange rates in the first six months of fiscal 1996, resulted in no material variance in reported sales, gross margin or income from operations. Cost of Sales and Gross Margin
Fiscal Quarter Ended Two Fiscal Quarters Ended -------------------- ------------------------- Oct 27, Oct 29, Oct 27, Oct 29, 1996 1995 1996 1995 -------- -------- --------- -------- (Canadian dollars in thousands) Gross margin $203,897 $141,731 $389,191 $271,277 ======= ======= ======= ======= As % of sales 65% 65% 65% 66%
Cost of sales consists of manufacturing costs, warranty expense and costs associated with the provision of services. The gross margin as a percentage of sales remained consistent in the second quarter and first six months of fiscal 1997 relative to the second quarter and first six months of fiscal 1996. The acquisition in August 1996 of Ouest Standard Telematique S.A. (OST), a manufacturer of local area network equipment based in France, resulted in a decrease in gross margin as a percentage of sales because gross margins earned on OST products are below the average gross margins earned on the Company's other products. This decrease was largely offset by increases in gross margins on newer products based on ATM technologies. If the proportion of revenues derived from service and lower margin products increases or selling prices decline, the gross margin expressed as a percentage of sales could decline further. Selling, General and Administration Expenses
Fiscal Quarter Ended Two Fiscal Quarters Ended --------------------------------- -------------------------- Oct 27, Oct 29, % Oct 27, Oct 29, % 1996 1995 Increase 1996 1995 Increase -------- -------- --------- ------- ------- -------- (Canadian dollars in thousands) Selling, general and administration expenses $78,138 $56,287 39% $144,396 $110,336 31% ====== ====== ======= ======= Net expenses as a % of sales 25% 26% 24% 27%
Selling, general and administration expenses increased in the second quarter and first six months of fiscal 1997 relative to the second quarter and first six months of fiscal 1996 primarily as a result of increases in sales and service personnel as the Company invested in programs to strengthen its sales and support infrastructure throughout the world and to market new products. The growth in sales and service personnel from the second quarter of fiscal 1996 to (Page 11 of 20) the second quarter of fiscal 1997 was less than the rate of growth in sales over the same period, and as a result, selling, general and administration expenses decreased as a percentage of sales. Research and Development
Fiscal Quarter Ended Two Fiscal Quarters Ended ----------------------------------- ----------------------------- Oct 27, Oct 29, % Oct 27, Oct 29, % 1996 1995 Increase 1996 1995 Increase ------- ------- -------- ------- ------- -------- (Canadian dollars in thousands) Gross research and development expenditures $43,920 $31,010 42% $83,371 $60,945 37% Investment tax credits 6,000 5,347 12% 11,800 10,152 16% Customer, government and other funding 1,840 2,281 (19%) 4,427 3,641 22% Net deferral (amortization) of software development costs 913 694 32% 1,742 1,642 6% ------- ------- ------- ------- Net research and development expenses $35,167 $22,688 55% $65,402 $45,510 44% ======= ======= ======= ======= Gross expenditures as a % of sales 14% 14% 14% 15% Recoveries as a % of gross expenditures 20% 27% 22% 25% Net expenses as a % of sales 11% 10% 11% 11%
Research and development expenditures consist primarily of software and hardware engineering personnel expenses, subcontracted research and development costs and costs associated with equipment and facilities. The increased costs in the second quarter and first six months of fiscal 1997 compared to the second quarter and first six months of fiscal 1996 reflect spending on new networking products and features and product enhancements, particularly for integral ATM and frame relay products in both wide area network and local area network interworking applications. Recoveries decreased as a percentage of gross expenditures in the second quarter and first six months of fiscal 1997 compared to the second quarter and first six months of fiscal 1996 due to a decline in investment tax credits and customer, government and other funding as a proportion of gross research and development expenditures. Based on Management's estimates of the proportion of fiscal 1997 gross research and development expenditures eligible for investment tax credits, current levels of committed funding, and estimated amortization of deferred software development costs, Management expects the level of recoveries as a percentage of gross research and development expenditures in fiscal 1997 to decline relative to fiscal 1996. The markets for the Company's products are characterized by continuing technological change. As a result, Management believes that continued significant expenditures for research and development will be required in the future. (Page 12 of 20) Interest and Other Expenses
Fiscal Quarter Ended Two Fiscal Quarters Ended ----------------------------- ------------------------------- Oct 27, Oct 29, % Oct 27, Oct 29, % 1996 1995 Increase 1996 1995 Increase -------- ------- -------- ------- ------- -------- (Canadian dollars in thousands) Interest income $5,320 $5,742 (7%) $10,792 $11,514 (6%) Interest expense on long term obligations 186 137 36% 258 289 (11%) Other expenses 2,734 1,179 132% 4,879 5,027 (3%)
Interest income for the second quarter and first six months of fiscal 1997 decreased compared to the second quarter and first six months of fiscal 1996 despite the increased cash position maintained throughout the first six months of fiscal 1997 due to a decline in interest rates earned on investments. Interest expense on long term obligations increased in the second quarter of fiscal 1997 due to the assumption of long term obligations of OST, a manufacturer of local area network equipment based in France, which was acquired by the Company in August 1996. Other expenses represented less than 1% of sales in the second quarter and first six months of fiscal 1997 and the second quarter of fiscal 1996. Other expenses in the first quarter of fiscal 1996 include a restructuring charge of $1,928,000 incurred by the Company's subsidiary, Advanced Computer Communications (ACC), related to the consolidation of its two main facilities into a single facility in Santa Barbara, California. Income Taxes
Fiscal Quarter Ended Two Fiscal Quarters Ended -------------------- ------------------------- Oct 27, Oct 29, Oct 27, Oct 29, 1996 1995 1996 1995 ------- ------- ------- ------- Income tax rate 32% 34% 32% 34%
The composite rates of income tax for the second quarter and first six months of fiscal 1997 and fiscal 1996 were reduced from the statutory rate primarily as a result of the application of certain deductions related to manufacturing and processing activities and to research and development expenditures in Canada. Future changes in the composite rate 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 through the application of deductions related to manufacturing and processing activities and research and development expenditures in Canada as well as other tax planning measures undertaken by the Company. Non-Controlling Interest The non-controlling interests' share of net earnings of $435,000 in the second quarter ($1,993,000 in the first six months) of fiscal 1997 was derived from net earnings of Transistemas S.A., an Argentine systems integrator of networking products, and ACC, a manufacturer of local area network bridges and routers. The Company has a 51% equity interest in both Transistemas S.A. and ACC. The non- controlling interests' share of net losses of $700,000 in the second quarter of fiscal 1996 and $1,699,000 in the first six months of fiscal 1996 was due primarily to the operating losses and restructuring costs incurred by ACC. (Page 13 of 20) Net Earnings An increase in sales resulted in net earnings of $62,781,000 for the second quarter of fiscal 1997, an increase of 38% over net earnings for the second quarter of fiscal 1996. Net earnings of $123,582,000 for the first six months of fiscal 1997 increased 50% relative to net earnings of $82,488,000 for the first six months of fiscal 1996 principally due to the increase in sales of 46% over the same period. Financial Condition During the first six months of fiscal 1997 ended October 27, 1996 working capital increased from $658,087,000 to $733,132,000. As at October 27, 1996 the Company had $481,897,000 of cash and cash equivalents, which increased by $26,148,000 during the first six months of fiscal 1997. Two principal components of the Company's working capital are accounts receivable and inventory. Management believes that the payment terms and conditions extended to the Company's customers, arrangements with the Company's suppliers, and the levels of inventory the Company carries relative to its levels of sales are consistent with practices generally prevailing in the networking industry. Existing short term bank credit facilities consist of operating lines of credit with certain banks in the aggregate amount of $59,979,000. At October 27, 1996 there were no outstanding borrowings under these lines of credit. Management anticipates that capital expenditures for fiscal 1997 will exceed those of fiscal 1996 as the Company invests in new facilities in Canada, in research and development and manufacturing equipment and in information systems. The Company also anticipates increasing its current investments in subsidiaries and associated companies, and intends to extinguish its existing long term obligations as they become due. The Company intends to fund the increased capital expenditures, increased investments and retirement of long term obligations with existing cash and cash generated from operations during fiscal 1997. In addition, the Company may use a portion of its cash resources, supplemented as appropriate by the issuance of shares, to extend or enhance its business and diversify its marketing and distribution channels through acquisitions of or investments in businesses, products or technologies or through the formation of strategic partnerships with other companies. In November 1996, the Company announced it had entered into negotiations to acquire a majority interest in Coasin Chile S.A., a South American telecommunications engineering, distribution, and marketing company, which has been a distributor of the Company's products. In August 1996, the Company acquired a 100% equity interest in OST, a manufacturer of local area network equipment based in France, by the purchase of shares in the amount of $34,231,000. The purchase price excludes additional contingent payments which may be made over the next three years depending on the financial performance of OST, up to a maximum of US$10,000,000. The acquisition was accounted for by the purchase method of accounting. The acquisition was not materially dilutive to the Company's net earnings during the second quarter of fiscal 1997. During August 1996, the Company filed a notice of intention with The Toronto Stock Exchange to make a normal course issuer bid for common share repurchases in open market transactions in the United States and Canada. The Company may purchase up to 4,000,000 outstanding Common Shares in future if Management considers such investments appropriate. Management believes that the Company's liquidity in the form of existing cash resources and its credit facilities, as well as cash generated from operations, will prove adequate to meet its (Page 14 of 20) operating and capital expenditure requirements through the end of fiscal 1997 and into the foreseeable future. Certain parts of the foregoing 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. (Page 15 of 20) PART II. OTHER INFORMATION Item 1. Legal Proceedings During the fiscal year ended April 30, 1995, the Company was served with one of several complaints filed in United States District Court in Washington, D.C. by certain persons purporting to be purchasers of Common Shares of the Company. On or about May 8, 1995 these complaints were combined into a single consolidated and amended complaint (the "First Amended Complaint") which named the Company and certain of its executive officers as defendants. The First Amended Complaint purported to be a class action on behalf of a class of persons who purchased securities of the Company between March 29 and August 1, 1994 and alleged that the Company made false and misleading statements in violation of United States securities law and common law, for which damages were sought in unspecified amounts. On June 3, 1996, the Court issued an order granting in part and denying in part the defendants' motion to dismiss. Among other things, the Court dismissed with prejudice the claim alleging violation of common law. The Court also dismissed the majority of plaintiffs' allegations of violation of United States securities law, but granted plaintiffs leave to replead these allegations in a Second Amended Complaint, which plaintiffs filed on July 3, 1996. The Court further conditionally certified the action as a class action without prejudice to the Company's right to renew its objection to class action certification upon completion of discovery. The defendants have moved to dismiss the Second Amended Complaint. The Company intends to continue to defend this action vigorously. Based upon its present understanding of the laws in the United States and the facts, the Company believes it has meritorious defenses to the action. Item 5. Other Information The "Cautionary Statement Regarding Forward-Looking Information" contained in "Market for Registrant's Common Equity and Related Stockholder Matters" in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1996 is incorporated herein by reference and made a part hereof. On November 19, 1996, Peter D. Charbonneau was appointed as a Director of the Company. He has held a variety of positions with the Company since January 1987 and has been Executive Vice President and Chief Financial Officer of the Company since June 1993. 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. b) Reports on Form 8-K The Company filed no reports on Form 8-K during the fiscal quarter ended October 27, 1996. (Page 16 of 20) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEWBRIDGE NETWORKS CORPORATION (Registrant) Date: December 9, 1996 By: /s/ Terence H. Matthews ----------------------- Terence H. Matthews, Chairman of the Board of Directors and Chief Executive Officer Date: December 9, 1996 By: /s/ Peter D. Charbonneau ------------------------ Peter D. Charbonneau, Executive Vice President and Chief Financial Officer (Page 17 of 20) EXHIBIT INDEX Page No. -------- 11.1 Computation of earnings per share under accounting principles generally accepted in Canada................19 11.2 Computation of earnings per share under accounting principles generally accepted in the United States.....20 (Page 18 of 20) EX-11.1 2 COMP OF EARNINGS (CANADA) 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)
Fiscal quarter ended Two fiscal quarters ended -------------------- ------------------------- Oct 27, Oct 29, Oct 27, Oct 29, 1996 1995 1996 1995 ------- ------- ------- ------- Basic earnings per share Net earnings $ 62,781 $ 45,376 $123,582 $ 82,488 ======== ======== ======== ======== Common Shares outstanding at the beginning of the period 169,754 165,766 168,676 164,515 Weighted average number of Common Shares issued, net of Common Shares repurchased, during the period 478 98 1,060 974 -------- -------- -------- -------- Weighted average number of Common Shares outstanding at the end of the period 170,232 165,864 169,736 165,489 ======== ======== ======== ======== Basic earnings per share $0.37 $0.27 $0.73 $0.50 ======== ======== ======== ======== Fully diluted earnings per share Earnings before imputed earnings $ 62,781 $ 45,376 $123,582 $ 82,488 After tax imputed earnings from the investment of funds received through dilution 2,715 2,503 5,598 4,867 -------- -------- -------- -------- Adjusted net earnings $ 65,496 $ 47,879 $129,180 $ 87,355 ======== ======== ======== ======== Weighted average number of Common Shares outstanding at the end of the period 170,232 165,864 169,736 165,489 Weighted average common share equivalents based on conversion of outstanding stock options 13,899 13,773 13,198 13,742 -------- -------- -------- -------- Weighted average number of Common Shares and equivalents outstanding at the end of the period 184,131 179,637 182,934 179,231 ======== ======== ======== ======== Fully diluted earnings per share $0.36 $0.27 $0.71 $0.49 ======== ======== ======== ======== Earnings per share expressed in U.S. Dollars Daily average exchange rate of a Canadian dollar for U.S. dollars as reported by the Federal Reserve Bank of New York $0.7322 $0.7401 $0.7316 $0.7361 Basic earnings per share, in U.S. dollars $0.27 $0.20 $0.53 $0.37 ======== ======== ======== ======== Fully diluted earnings per share, in U.S. dollars $0.26 $0.20 $0.52 $0.36 ======= ======= ======= =======
(Page 19 of 20) EX-11.2 3 COMP OF EARNINGS (USA) 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)
Fiscal quarter ended Two fiscal quarters ended -------------------- ------------------------- Oct 27, Oct 29, Oct 27, Oct 29, 1996 1995 1996 1995 -------- -------- -------- -------- Earnings per share (U.S. GAAP) - Primary Net earnings $ 62,781 $ 45,376 $123,582 $ 82,488 ======== ======== ======== ======== Weighted average number of Common Shares outstanding at the end of the period 170,232 165,864 169,736 165,489 Net effect of dilutive stock options based on the treasury stock method 4,515 1,808 5,101 2,771 -------- -------- -------- -------- Weighted average number of Common Shares and equivalents outstanding at the end of the period 174,747 167,672 174,837 168,260 ======== ======== ======== ======== Earnings per share (U.S. GAAP) $0.36 $0.27 $0.71 $0.49 ======== ======== ======== ======== Earnings per share (U.S. GAAP) - Fully Diluted Net earnings $ 62,781 $ 45,376 $123,582 $ 82,488 ======== ======== ======== ======== Weighted average number of Common Shares outstanding at the end of the period 170,232 165,864 169,736 165,489 Net effect of dilutive stock options based on the treasury stock method 4,515 1,808 5,101 2,771 -------- -------- -------- -------- Weighted average number of Common Shares and equivalents outstanding at the end of the period 174,747 167,672 174,837 168,260 ======== ======== ======== ======== Earnings per share (U.S. GAAP) $0.36 $0.27 $0.71 $0.49 ======== ======== ======== ======== Earnings per share expressed in U.S. Dollars Daily average exchange rate of a Canadian dollar for U.S. dollars as reported by the Federal Reserve Bank of New York $0.7322 $0.7401 $0.7316 $0.7361 Earnings per share (U.S. GAAP) - Primary, in U.S. dollars $0.26 $0.20 $0.52 $0.36 ======== ======== ======== ======== Earnings per share (U.S. GAAP) - Fully diluted, in U.S. dollars $0.26 $0.20 $0.52 $0.36 ======== ======== ======== ========
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