-----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, V70rI0WnSi6ZkChhluHjnphdHyuUggFvOCh16kcPqLjPfIQJQonm3x/mCFxJYuPb zbMYJiWU/ccEI6YmvkDJ/Q== 0000928385-97-001141.txt : 19970716 0000928385-97-001141.hdr.sgml : 19970716 ACCESSION NUMBER: 0000928385-97-001141 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19970430 FILED AS OF DATE: 19970714 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13316 FILM NUMBER: 97640333 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-K405 1 FORM 10-K405 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 1997 Commission file number 1-13316 Newbridge Networks Corporation (Exact name of registrant as specified in its charter) Canada 98-0077506 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 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 Securities registered pursuant to Section 12(b) of the Act: Common Shares, no par value New York Stock Exchange (Title of class) (Name of each exchange on which registered) The common shares are also listed on The Toronto Stock Exchange in Canada. Securities registered pursuant to Section 12(g) of the Act: None 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 ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] At June 12, 1997 the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately Cdn$7,177,000,000. The number of common shares of the registrant outstanding as at June 12, 1997 was 172,825,492. Exhibit index begins on Page 66 Page 1 of 193 EXCHANGE RATES Financial information herein is expressed in Canadian dollars ($ or Cdn$), unless expressly stated in United States dollars (US$) or otherwise. The Company maintains its financial data in Canadian dollars. The high and low exchange rates (the highest and lowest rates at which Canadian dollars were sold), the average exchange rate (the average of the exchange rates on the last day of each month during the period), and the period end exchange rate of the Canadian dollar in exchange for United States dollars in each of the five 12 month periods ended April 30, 1997, as calculated from the exchange rates reported by the Federal Reserve Bank of New York, are set forth below.
12 Month Period Ended April 30, ------------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- High US$0.7513 US$0.7527 US$0.7457 US$0.7933 US$0.8453 Low 0.7145 0.7224 0.7023 0.7166 0.7761 Average 0.7319 0.7345 0.7248 0.7536 0.8067 Period End 0.7158 0.7345 0.7355 0.7237 0.7873
On June 12, 1997, the noon buying rate in New York City for the Canadian dollar as reported by the Federal Reserve Bank of New York was US$1.00 = Cdn$1.3825 (equivalent to US$0.7233 = Cdn$1.00). ------------------------- The following trademarks are mentioned in this Report on Form 10-K: Newbridge(R), MainStreetXpress(TM), VIVID(R) and MainStreet(R) which are trademarks of Newbridge Networks Corporation; and ACC(R), which is a trademark of Advanced Computer Communications. Page 2 NEWBRIDGE NETWORKS CORPORATION TABLE OF CONTENTS
Page ---- PART I Item 1. Business General................................................................................. 4 Networking Industry..................................................................... 4 Business Strategy....................................................................... 5 Products................................................................................ 6 Research and Product Development........................................................ 8 Sales, Marketing and Distribution....................................................... 8 Customer Service and Support............................................................ 9 Manufacturing........................................................................... 9 Competition.............................................................................10 Government Regulation...................................................................10 Proprietary Rights......................................................................11 Employees...............................................................................11 Item 2. Properties................................................................................11 Item 3. Legal Proceedings.........................................................................12 Item 4. Submission of Matters to a Vote of Security Holders.......................................12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Common Share Price Range and Dividends..................................................13 Cautionary Statement Regarding Forward-Looking Information..............................14 Certain Tax Considerations..............................................................17 Item 6. Selected Financial Data...................................................................18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................20 Item 8. Financial Statements and Supplementary Data...............................................28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................54 PART III Item 10. Directors and Executive Officers of the Registrant........................................55 Item 11. Executive Compensation....................................................................57 Item 12. Security Ownership of Certain Beneficial Owners and Management..........................................................................57 Item 13. Certain Relationships and Related Transactions............................................59 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.................................................................60 SIGNATURES...............................................................................................63
Page 3 PART I Item 1. BUSINESS GENERAL Newbridge Networks Corporation (the "Company" or "Newbridge") is a world leader in designing, manufacturing, marketing and servicing a comprehensive desktop-to-desktop family of networking products and systems that enables customers in more than 100 countries to access the power of multimedia communications. The Company was incorporated in June 1986 in Ontario under the Canada Business Corporations Act. NETWORKING INDUSTRY The networking industry encompasses a broad array of communications services and equipment. An increasing variety and volume of communications in the form of voice, data, text, electronic mail, graphics, video, imaging, facsimile, videoconferencing, online transaction processing and others are transmitted across communications networks. Networks are experiencing robust growth, driven by the demand for networking solutions from both consumers and corporations. Information networks are becoming essential to companies in the emerging global, networked economy, as more and more companies are networked together and electronic commerce enhances and even supplants traditional business transactions. Computer networks have become the electronic matrix through which vital business information flows, as large and small organizations alike seek to communicate more rapidly and efficiently with their key stakeholder groups, including branch offices, field force, telecommuters, customers and suppliers. In addition, the number of households throughout the world connected to the Internet is projected to increase from around 20 million in 1996 to more than 60 million by the year 2000 (source: Forrester Research). For corporations, the demand for equipment to create intranets, a term used increasingly to describe enterprise networks, continues to increase at a compound annual growth rate of more than 30% (source: Forrester Research). The key driver for growth in network capacity starts with the desktop computer where processing power continues to increase dramatically. At the same time, software suppliers leverage this growing computing power by creating increasingly power-intensive software applications. This constant upgrade of the power of the desktop computer pressures network managers to expand the size and traffic-handling capacity of their networks. In addition, companies are increasingly reliant on networked computers. The enterprise network in today's global economy is much more geographically dispersed than in the past. As well, it is faced with an increasing number of users demanding higher quality of service. Companies have discovered that software applications in a client/server environment require larger amounts of switching and transmission capacity, or bandwidth, which is increasingly stretched in traditional local area networks (LANs). In addition, the advent and growth of bandwidth-intensive multimedia applications have subjected networks to greater quality-of-service (QoS) and capacity pressures. Multimedia is defined as the combination of multiple media forms for conveying information. While formats vary and will continue to evolve, they usually involve elements such as voice, text, image, video, audio and animation. Combinations of these media provide powerful communications tools, but they are not tolerant of the quality impairing delays associated with the "store-and-forward" nature of router-based networks. Page 4 The term "local area network" is becoming an anachronism as the majority of network traffic today moves off the LAN on which it originated. In most cases the network traffic traverses some form of local and/or long distance telephone company's (carrier) network thus extending the bandwidth pressure to the wide area network (WAN). To meet the growing customer demand for network resources, carriers have deployed new technologies, as they have become available, in a myriad of special services networks. The networking equipment for special services networks typically resides as part of the carrier switching and transmission infrastructure, but separate from the voice-oriented equipment of the public switched telephone network (PSTN). Carriers also face a significant second challenge stemming from deregulation and increased competition. Internet service providers, competitive access providers and cable television operators have entered the market and provide both indirect competition through the offering of new services and direct competition through the offering of lower cost traditional services. This competitive challenge requires them to reduce costs and optimize network resources while the challenge of growing demand for new communications services requires carriers to invest in new infrastructures. In order to reconcile these conflicting needs, carriers are migrating the disparate array of networks and services offered from these networks onto a single, unifying, flexible infrastructure. The scalability and flexibility of asynchronous transfer mode (ATM) switching technology make it well suited for multiple traffic types, or services, enabling carriers to launch new higher margin value-added services. At the same time carriers can lower their up-front and operating costs and improve the manageability of their overall network infrastructure by consolidating their present networks onto one ATM-based network. BUSINESS STRATEGY The Company's business strategy is to provide comprehensive fully managed end-to-end networking solutions to carriers and corporate customers based on a broad product family which cost effectively addresses their current and future communications requirements. Newbridge products are designed in accordance with a common, flexible, architecture to provide customers with a seamless migration and integration path across the product family. The full product family is modular for flexibility and highly scalable to meet evolving customer requirements. Products are software controlled and remotely manageable for customer ease of use and efficiency. All Newbridge products are designed to comply with industry standards throughout the world in order to deliver optimal interoperability and performance in multiprotocol, multivendor networks. The markets for Newbridge products are characterized by rapid technological change. To maintain its leadership position in advanced networking technologies, Newbridge is committed to research and development. The Company conducts the majority of its research and development in a lower cost environment compared with many competitors. Because of the Company's focus on and commitment to research and development, coupled with the cost advantages, Newbridge's strategy has been oriented towards in-house product development. This is in contrast with some other networking vendors who devote proportionately fewer resources to research and development and who have more often taken the approach of obtaining technology and products through acquisitions of other companies. Newbridge believes that its strategy results in a more cohesive product solution set for delivering seamless end-to-end networking solutions. Page 5 For example, common ATM hardware and software development undertaken by the Company is shared by the VIVID switched routing system for the enterprise networking market and the MainStreetXpress product line for the wide area network space. This approach results in lower overall development costs and allows Newbridge to leverage product functionality developed for one market to products addressing other markets. The Company's architectural approach for ATM networks is directed towards providing solutions to issues facing both carriers and corporate network managers. For carriers, the Company' product strategy emphasizes robustness and scalability in the core of the carrier network, versatility and high scalability at the edge, and a fully-featured, low cost access solution from the customer premise. This approach enables carriers to reduce infrastructure costs and differentiate service offerings by provisioning multiple services on a single network. The enterprise networking solution, VIVID, is designed to integrate networking capabilities for video, voice, image and data based on Multi Protocol Over ATM (MPOA), the only industry standard for switched routing. The VIVID architecture addresses issues inherent in today's traditional router-based networks with by optimally handling delay-sensitive multimedia traffic with QoS. VIVID can deliver significant performance improvements addressing capacity constraints created by growing demands for connectivity and the changing nature of network traffic towards bandwidth-intensive multimedia applications. The Company extends its business strategy through various alliances and strong relations with affiliated companies. In March 1996 Newbridge and Siemens formed an alliance to address emerging ATM implementations for carriers. The alliance incorporates collaborative research and development activities, common branding under the MainStreetXpress name and joint sales and marketing efforts. Newbridge maintains other strategic alliances and also works with a family of affiliated companies. The affiliated companies, in which Newbridge owns an equity stake, generally address markets within the networking industry which are complementary to the Newbridge product offering. PRODUCTS Newbridge has developed a broad family of digital narrowband and broadband networking products that are effective in carrier, corporate and hybrid networks. These products operate under a center-weighted network management system, which is advantageous for scalable networks, and offer software controlled end-to-end connectivity. Newbridge products employ a common architecture that allows time division multiplexing (TDM), X.25, frame relay, ATM and LAN internetworking to coexist within the same network and provides a migration path from narrowband to broadband networks. TDM products from Newbridge, such as the 3600 and 3645 MainStreet Bandwidth Managers, are leading platforms for private line services throughout the world because of their wide range of voice and data interfaces, adherence to the range of domestic and international standards, quality and reliability, end-to-end network manageability, and flexibility for seamless expansion and migration as networks grow and applications evolve. Based on the 3600 MainStreet Bandwidth Manager, the 36120 MainStreet can be used to deploy frame relay or X.25 networks over a TDM circuit switched network infrastructure. Network bandwidth can be flexibly divided between frame relay and circuit switching applications. With just one network architecture handling circuit and packet switching, network design tasks are simplified and network efficiency is enhanced. The 36120 MainStreet frame relay switch interworks with the Company's ATM systems so end-to-end network conversion is not required to take advantage of the benefits of a high capacity ATM-based core network. Page 6 The Newbridge family of ATM products represents a broad and flexible array of end-to-end managed networking solutions. The Newbridge ATM product family includes high performance enterprise, access, edge and core switches for corporate and wide area networks. Network operators can build consolidated networks that deliver services for a variety of applications managed by a single network management system. This approach enables operators to reduce infrastructure costs and differentiate service offerings by provisioning multiple services on a single network. The MainStreetXpress 36170 Multiservices Switch is a high capacity platform, designed to scale from 800 Mbit/s (millions of bits per second) to 51.2 Gbit/s (billions of bits per second). It supports multiple services, including native cell relay, frame relay, circuit emulation for private line services, LAN connectivity, internetworking and wireless broadband. The modular architecture of the MainStreetXpress 36170 switch enables network operators to expand from a single-shelf system to a large multi-shelf system in an as-needed fashion. The high port density of the system translates into competitive per-port pricing. The Company's MainStreetXpress product line also includes the MainStreetXpress 36150 Access Switch, which provides a wide variety of service and transmission interfaces, and the MainStreetXpress 36190 Core Services Switch, a high performance ATM backbone or core switch, designed to scale beyond one Terabit (a trillion bits) per second. The VIVID switched routing system is an internetworking solution that optimally supports high bandwidth, delay-sensitive applications such as desktop videoconferencing, distance learning and collaborative work sessions, while integrating seamlessly with existing LANs. VIVID uses MPOA switching technology to combine the performance and simplicity of switching with routing functionality. The VIVID system also includes a variety of integrated products for LAN switching and distribution to the desktop, generally acquired as part of the Company's purchase of Ungermann-Bass Networks, Inc. ("UB Networks") in fiscal 1997. Newbridge also addresses the access market segment with products which allow carriers to deploy multiple services and permit access to those services for customers with multiple applications. These products include a variety of primary rate WAN access devices, as well as narrowband WAN access devices for connecting remote and small sites. In addition, the MainStreet Data Termination Units extend the network beyond the multiplexer to the end point of both circuit and packet switched connections. Through its subsidiary ACC, the Company has also developed a range of bridge/routers for enterprise-wide remote access. In May 1997 Newbridge and its subsidiary ACC jointly announced the Tigris remote access concentrator to address a new high growth segment of the networking market. Tigris was designed as an integrated access platform to deliver Internet access over both dial-in (modem and ISDN) and dedicated (frame relay, SMDS, X.25, private line) services. Newbridge complements products providing connectivity with an extensive suite of network and service management software products ranging from configuration and alarm monitoring to interfaces to umbrella management systems and customer service management systems. The MainStreetXpress 46020 Network Manager provides unified management of Newbridge, Siemens and third-party LANs and WANs across multiple technologies, including circuit switching, packet switching, LAN internetworking and ATM. It features a rich, object-oriented user interface for efficient user navigation, and a scalable client/server architecture to provide simultaneous access for up to 128 operators and cost-effective management for networks containing up to 5,000 nodes and 100,000 network paths. Sales of networking products and related services accounted for 100% of the Company's sales in fiscal 1997 and 99% of the Company's sales in fiscal 1996 and fiscal 1995. Page 7 RESEARCH AND PRODUCT DEVELOPMENT The Company's research and product development activities apply the latest technologies to the development of advanced functionality in networking hardware and software. In its product development strategy, Newbridge employs an "evergreen" approach in which new products and features are designed to accommodate the architecture of existing products. This approach protects customers' investment in their installed base of networking equipment. In addition to the ongoing evolution of product functionality, a significant portion of the research and development effort is directed towards the development of new products for new applications and markets. Major initiatives include development efforts on new networking products, features and interfaces for ATM platforms in carrier, carrier access and enterprise network applications and network and service management software. In addition to the Company's internal research and product development, the Newbridge development strategy includes relationships with affiliated companies developing technology complementary to Newbridge, strategic partnering, such as joint research and development programs with Siemens, and acquisitions. Research and development project schedules for high technology products are inherently difficult to predict, and there can be no assurance that the Company will achieve its expected initial shipment dates of products in development. Because timely availability of new and enhanced products is critical to the success of the Company, delays in availability of these products, or lack of market acceptance of such products, could adversely affect the Company. The Company's ability to anticipate changes in technology, industry standards and communications service provider offerings, and to develop and introduce new and enhanced products on a timely basis that are successful in the market will be a significant factor in the Company's competitive position and its prospects for growth. For additional discussion of the Company's research and development expenditures in fiscal 1997, 1996 and 1995, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." SALES, MARKETING AND DISTRIBUTION Newbridge sells its products in more than 100 countries. The Company has established direct sales forces throughout the world, as well as marketing and distribution arrangements with telephone companies, original equipment manufacturers (OEMs), distributors and dealers. In March 1996, the Company formed an alliance with Siemens which includes common branding under the MainStreetXpress name for ATM products and joint sales and marketing efforts. Siemens sells the Company's circuit switched networking products, ATM products and network and service management products, primarily to carriers in Europe, Latin America, Asia and North America. Newbridge products are also distributed throughout the world by Alcatel, Lucent Technologies, Cable and Wireless, Nippon Telegraph and Telephone and other telecommunications equipment suppliers as well as by global carriers and consortia. In acquiring UB Networks in January 1997, the Company added sales, pre-sales and support personnel located throughout the world focused on enterprise network sales to large corporate and government customers. The acquisition also provided a global network of distributors, value added resellers and dealers specializing in enterprise networking equipment. The Newbridge sales force in the United States and Canada sells directly to carriers and other communications service providers such as AT&T, Regional Bell Operating Companies (RBOCs) Page 8 and MCI for central office applications for tariffed services, internal network applications, as well as for resale to users. Newbridge also sells to Fortune 1000 sized companies and institutions directly and through distributors. The product line is sold throughout Europe, the Middle East and Africa by a direct sales force as well as through OEM partners and distributors. During fiscal 1997 the Company enhanced its direct sales presence in Europe through acquisitions of Ouest Standard Telematique S.A. in France and Danring A/S in Denmark. In Latin America and the Asia Pacific area, networking products are sold primarily through distributors, which are supported by local Newbridge sales and support offices. The Company extended its distribution capabilities during fiscal 1997 through acquisitions of systems integrators in Chile, Brazil, Costa Rica and Argentina. The Newbridge sales organization throughout the world receives support from business unit management groups which provide product strategy and consultation on industry trends and pricing, and which solicit customer feedback for research and product development planning. The Company's marketing activities are centrally coordinated and emphasize complete network solutions for the carrier market and the enterprise network market. The amount of sales, operating income and identifiable assets attributable to the Company's principal geographical regions and the amount of export sales from the Company's operations in Canada for each of the last three fiscal years are set forth in Note 17 to the Consolidated Financial Statements. For additional discussion of the Company's geographic segments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." CUSTOMER SERVICE AND SUPPORT Reliability, performance, up-time and mean-time-to-repair are important factors customers consider in developing long term relationships with potential suppliers of networking systems. The increasing dependency of many domestic and international customers upon information networks has generated a demand for a very rapid problem response time. To satisfy this customer demand, the Company offers 24-hour Network Technical Assistance Centers, complemented by the service support organizations of the Company's distributors. Because of remote diagnostic capabilities of the Company's products, support engineers can immediately begin to diagnose field problems. When necessary, support engineers are dispatched from the Company's sales and support offices or by third party service providers. The Company's standard product warranty covers defects in material and workmanship and generally applies for 3 to 15 months after shipment. MANUFACTURING The principal steps in the manufacturing process are the purchase and management of materials, assembly, testing and final inspection. Because Newbridge manufactures and assembles virtually all of its products, the Company maintains direct control over production, quality and product availability. The Company purchases parts and components for assembly of its products from a large number of suppliers through a worldwide sourcing program. Although the Company single sources certain components, no single supplier has accounted for more than 10% of the Company's total purchases in any of the past three fiscal years. Newbridge has established strong relationships with key vendors to reduce the risk of significant shortages or delays relating to availability of materials. Shortages or delays in the supply of components, however, could adversely affect the Company's ability to meet scheduled product shipments in any particular fiscal quarter, which could materially affect the Company's operating results. Page 9 The Company currently has manufacturing, logistics and warehousing facilities in Canada, the United Kingdom and France. The Company also has logistics and warehousing facilities in the United States, Ireland, Hong Kong and Malaysia. The Company schedules some production of its products based on internal sales forecasts. The Company's manufacturing procedures are designed to assure rapid response to customer orders, but may, in certain circumstances, create risk of excess or inadequate inventory if orders do not match forecast. Because a substantial portion of customer orders are filled within the fiscal quarter of receipt, and because of the ability of customers to revise or cancel orders and change delivery schedules without significant penalty, Management believes that the Company's backlog as of any given date is not necessarily indicative of actual revenues for any succeeding period. COMPETITION The market for the Company's products is characterized by rapid technological change, evolving standards and regulatory developments. Many of the Company's competitors and potential competitors have greater financial, technological, manufacturing, marketing, and personnel resources than the Company. In the market for core network products, the Company's competitors include Alcatel, Cascade Communications, Cisco Systems and Northern Telecom, as well as traditional circuit switched multiplexer vendors such as Ascom/Timeplex, Network Equipment Technologies and Tellabs. In the market for network access products for both service providers and enterprise networks, the Company competes with Ascend Communications, Cisco Systems and U.S. Robotics, among others. In addition, the Company's enterprise networking products compete with product offerings from various vendors including Bay Networks, Cabletron Systems and Cisco Systems. Principal competitive factors are product line capabilities including integration of multiple applications on to a single network, price, ability to offer complete end-to-end networking solutions, reliability, adherence to standards, network management capabilities and market presence. Certain competitors, including traditional carrier core switch suppliers such as Ericsson, Fujitsu and Lucent Technologies, have a very large installed base of existing products in carrier and enterprise networks, some of which can be upgraded to accommodate new technologies and features. The networking industry recently has been consolidating through strategic alliances, mergers and acquisitions and joint technology agreements. As a result, boundaries between different segments of the networking industry are being blurred as competitors attempt to position their product lines to address a broader spectrum of networking requirements. GOVERNMENT REGULATION The sale of networking products may be affected by governmental regulatory policies, the imposition of carrier tariffs, and taxation of telecommunications services, which may also affect the availability of high speed digital transmission lines. These policies are under continuous review and are subject to change. In the United States, regulatory policies are likely to have a significant impact on the competitive environment in which the Company operates. The Telecommunications Act of 1996 and associated regulatory developments will eliminate or modify many regulatory restrictions in the telecommunications market. Deregulation enables local exchange telephone companies, RBOCs, long distance carriers, and other communications service providers as well as cable television operators and electric utilities to compete with each other in offering local and long Page 10 distance telephone and multimedia communications services. In addition, the RBOCs are now permitted to manufacture and sell telecommunications equipment under certain conditions. Given the substantial resources and large customer base of the RBOCs, Newbridge could face competition from these companies should they satisfy these conditions and elect to manufacture networking products. The regulatory environment in the European Union continues to increase competition and to open markets for telecommunications equipment vendors. Since July 1996 the only service which Member States can reserve exclusively for their public switched network operators is voice telephony. Voice telephony must be liberalized by January 1, 1998, subject to certain limited exclusions, and by that date the Member States which have not already fully liberalized their telecommunications markets are required to have in place the regulatory and licensing structures that will enable new operators to enter their markets. Deregulation may also permit mergers among the RBOCs and other major telecommunications companies throughout the world. Although the impact of mergers that have been announced or are in the process of consummation cannot be predicted, greater concentration in the market for telecommunications services could adversely affect the market for networking products. Governmental communications regulatory authorities have promulgated regulations which, among other things, set installation and equipment standards for private telecommunications systems and require that all newly installed hardware be registered and meet certain governmental approval standards. Management believes that the Company currently complies with, and expects to be able to continue to comply with these requirements. PROPRIETARY RIGHTS The name Newbridge, the Company's corporate logo, MainStreet and VIVID are registered trademarks of the Company in Canada, the United States, the United Kingdom, Germany, France and many other countries. A number of the Company's other trademarks and service marks are registered in Canada as well as in various other jurisdictions. The Company also claims rights to a number of unregistered trademarks, including MainStreetXpress, and other intellectual property rights. The Company protects its trademarks, inventions, trade secrets, and other proprietary rights by contract, trademark registration, patent registration and appropriate trademark and copyright markings, as well as with internal security. The Company licenses certain intellectual property rights from third parties. Management believes that the Company's competitive success will not depend on the ownership of intellectual property rights, but primarily on the innovative skills, technical competence and marketing abilities of the Company's employees. EMPLOYEES As of April 30, 1997, the Company had 5,761 employees. None of the Company's employees is represented by a collective bargaining agreement nor has the Company ever experienced any work stoppage. Management believes the Company's relations with its employees are good. Item 2. PROPERTIES The Company owns its corporate headquarters in Kanata, Ontario as well as facilities for research and development, manufacturing, sales and marketing. The Company also owns facilities in Newport, Wales for sales, marketing, network services and manufacturing. Newbridge leases other facilities in Kanata primarily used for manufacturing from companies owned by Mr. Terence H. Matthews, Chairman of the Board and Chief Executive Officer of the Company and its largest single shareholder. In addition to Kanata, Ontario and Newport, Page 11 Wales, the Company also leases manufacturing and warehouse space in Herndon, Virginia; Rennes, France; Shannon, Ireland; Ogdensburg, New York; Hong Kong and Kuala Lumpur, Malaysia. The Company conducts research and development in leased facilities in Herndon, Virginia; Rennes, France; metropolitan London, England; Santa Clara, California; Andover, Massachusetts; Santa Barbara, California and Vancouver, British Columbia. The Company also leases sales and support facilities throughout the United States and Canada, and in over 40 locations throughout Europe, the Middle East and Africa, in over 25 locations in Asia Pacific and Russia, and over 10 locations in Latin America. A facility owned by the Company in Wales is subject to a mortgage. The outstanding balance and scheduled payments of this mortgage at April 30, 1997 are disclosed in Note 10 to the Consolidated Financial Statements. Item 3. LEGAL PROCEEDINGS Subsequent to the close of the fiscal year ended April 30, 1997, Lucent Technologies Inc. ("Lucent Technologies") filed a complaint dated June 24, 1997 in United States District Court in Delaware against the Company and its United States subsidiary, Newbridge Networks Inc. Lucent Technologies manufactures and sells telecommunications systems, software and products, and is both a distributor of the Company's products and a competitor of the Company. The complaint alleges that the Company's manufacture and sale in the United States of Newbridge frame relay and ATM switch products infringe certain United States patent rights claimed by Lucent Technologies, and requests actual and trebled damages in an unspecified amount. The Company is in the process of responding to the complaint, and intends 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 these claims. 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. On April 10, 1997, the Court issued an order granting in part and denying in part the defendants' motion to dismiss the Second Amended Complaint. Among other things, the Court dismissed with prejudice a substantial portion of plaintiffs' allegations. The Company has served an answer denying plaintiffs' claims. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Page 12 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS COMMON SHARE PRICE RANGE AND DIVIDENDS Market Price The Common Shares are listed for trading on the New York Stock Exchange in the United States under the symbol NN and are listed for trading on The Toronto Stock Exchange in Canada under the symbol NNC. The following table sets forth the range of high and low sale prices for the Company's Common Shares during the current fiscal year through June 12, 1997 and the fiscal years ended April 30, 1997 and 1996. The reported sales prices have been adjusted to reflect the two for one stock split effected in the form of a stock dividend, effective September 30, 1996.
New York Toronto Stock Exchange Stock Exchange Price Range Price Range ------------------------------ ------------------------------ High Low High Low ---- --- ---- --- Fiscal year 1998: First quarter (through June 12, 1997) US$43 1/2 US$31 1/2 Cdn$60.00 Cdn$43.80 Fiscal year 1997: Fourth quarter US$35 1/8 US$27 1/4 Cdn$47.25 Cdn$38.25 Third quarter 35 1/4 26 1/2 47.15 35.75 Second quarter 36 7/16 20 5/8 50.00 28.25 First quarter 37 1/8 20 3/16 51.00 27.75 Fiscal year 1996: Fourth quarter US$33 1/16 US$22 13/16 Cdn$45 1/4 Cdn$28 1/16 Third quarter 26 5/8 14 7/16 36 3/8 19 5/8 Second quarter 16 3/16 12 9/16 22 1/4 17 First quarter 18 15/16 14 1/2 26 1/16 20
At June 12, 1997 there were 1,309 shareholders of record of the Company. Under the provisions of the Investment Canada Act, as amended (the "IC Act"), the acquisition by non-Canadians, or by corporations in which non-Canadians have a majority controlling interest, of control of a corporation incorporated in Canada and carrying on business in Canada is subject to notification and may be subject to review and approval in certain instances. Given the current value of the gross assets of the Company, the IC Act requires a non-Canadian who makes an investment to acquire control of the Company to file an application for review and obtain an approval. Dividends The Company has not paid cash dividends on its Common Shares, and it presently intends to continue this policy for the foreseeable future in order to retain earnings for the development of the Company's business. Page 13 CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION The Company cautions that certain statements in this Report and in the Company's other periodic reports filed pursuant to the United States Securities Exchange Act of 1934, as amended (the "Exchange Act"), in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, may be forward-looking statements within the meaning of Section 21E of the Exchange Act, the "safe harbor" for forward-looking statements enacted in the Private Securities Litigation Reform Act of 1995. The forward-looking statements that may be contained in the Company's reports under the Exchange Act and in other oral or written statements made by the Company or by its authorized representatives involve a number of risks and uncertainties. As a consequence, actual results might differ materially from results forecast or suggested in these forward-looking statements. Some of these risks and uncertainties are identified in the discussion to follow. Additional information regarding these factors and other important factors that could cause actual results to differ materially may be referred to as part of particular forward-looking statements. The forward-looking statements made by the Company or on its behalf are qualified in their entirety by reference to the important factors discussed below and to those that may be discussed as part of particular forward-looking statements. The Company cautions that the following important factors, among others, could cause actual results for the fiscal year ending April 30, 1998 and for subsequent financial reporting periods to differ materially from those forecast or suggested in any forward-looking statement made by the Company or on its behalf, in this Report or otherwise. A number of these important factors have been discussed in this Annual Report on Form 10-K for the fiscal year ended April 30, 1997 and its quarterly reports on Form 10-Q previously filed with the United States Securities and Exchange Commission. Potential Fluctuations in Quarterly Results and Growth Rate A significant portion of the Company's quarterly 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. The Company schedules some production of its products and budgets expenses based on forecasts of sales, which are difficult to predict. The Company's manufacturing procedures are designed to assure rapid response to customer demand, but may, in certain circumstances, create risk of excess or inadequate inventory if orders do not match forecast. Moreover, shortages or delays in the supply of manufacturing components at acceptable prices could adversely affect the Company's ability to meet scheduled product shipments in any particular quarter, which could materially affect the Company's operating results. Because a substantial portion of customer orders are filled within the fiscal quarter of receipt, and because of the ability of customers to revise or cancel orders and change delivery schedules without significant penalty, quarter to quarter revenues and, to a greater degree, net earnings, may be subject to greater variability and less predictability. The Company cautions that its sales may grow at a slower rate in the future than historical rates of sales growth. The growth of the Company's sales may be subject to the rate at which carriers deploy service offerings based on newer technologies such as ATM. The Company expects the proportion of sales derived from products based on ATM and other packet based technologies to increase relative to sales derived from circuit switched networking products in fiscal 1998. As a result quarter to quarter revenues may be subject to greater variability due to longer sales cycles often associated with the adoption of new technologies. In addition, the Company is subject to a degree of variation in quarterly sales as a substantial portion of sales is derived from less mature, higher growth markets outside of North America and Western Europe. Sales in these markets are often subject to customer financing, licensing or other import or foreign exchange controls, and other pre-conditions that can result in delays or substantial modifications of orders. Page 14 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Manufacturing". Technological Changes The market for the Company's products is characterized by rapid technological change, evolving industry standards, frequent product introductions and evolving methods used by carriers and corporations in building and managing networks. Such changes in the market for networking products may adversely affect the Company's ability to sell its products. The Company's operating results will depend in significant part upon its ability to maintain the competitiveness of its product offerings while reducing unit manufacturing costs. In fiscal 1998, the Company expects that the demand for networking products in more advanced markets such as North America will continue the trend toward ATM and other packet based technologies and away from circuit switched networking products. The Company's ability to anticipate changes in technology, industry standards and the evolution in methods of building and managing networks, and to develop and introduce new and enhanced products on a timely basis that are successful in the market, will be significant factors in the Company's competitive position and its prospects for growth. Moreover, if technologies or standards supported by the Company's products or carrier service offerings based on the Company's products become obsolete or fail to gain widespread commercial acceptance, the Company's business may be adversely affected. As a result, Management believes that continued significant expenditures for research and development will be required in the future. Research and development project schedules for high technology products are inherently difficult to predict, and there can be no assurance that the Company will achieve its expected initial shipment dates of products in development. Because timely availability of new and enhanced products is critical to the success of the Company, delays in availability of these products, or lack of market acceptance of such products, could adversely affect the Company. See "Business". Competition The market for the Company's products is also characterized by intense competition. With the development of the worldwide communications market and the growing demand for related equipment, numerous manufacturers such as the Company have emerged to offer products for these markets in competition with traditional communications equipment suppliers. Competition could further increase if new companies enter the market or if existing competitors expand their product lines or upgrade existing products to accommodate new technologies and features. The Company competes for customers on the basis of product line capabilities, including integration of multiple applications on to a single network, price, ability to offer complete end-to-end networking solutions, reliability, adherence to standards, network management capabilities, and market presence. An increase in competition could require increased spending by the Company on research and development and sales and marketing and may otherwise adversely affect the Company's business. Many of the Company's competitors and potential competitors have greater financial, technological, manufacturing, marketing, and personnel resources than the Company. The networking industry recently has been consolidating through strategic alliances, mergers and acquisitions and joint technology agreements. As a result, boundaries between different segments of the networking industry are being blurred as competitors attempt to position their product lines to address a broader spectrum of networking requirements. Continued consolidation of the networking industry could result in a strengthening of the Company's competitors and may adversely affect the Company's competitive position. See "Business--Competition". Page 15 Dependence on Key Employees The Company's success depends upon the continued contributions of its employees, many of whom would be difficult to replace. Newbridge believes that its future success will depend in significant part upon its ability to attract and retain skilled and talented engineers, sales and marketing personnel, and management. Failure to attract and retain key employees could adversely affect the Company's business and operating results. Acquisitions The Company's strategy includes acquisitions to enhance its business, diversify its marketing and distribution, and supplement its product development. Acquisitions involve numerous risks, including difficulties in the integration of the operations, technologies and products of the acquired enterprises with those of the Company, the diversion of management and financial resources to the task of integration of the respective businesses, the entry into markets in which Newbridge has limited direct prior experience and where competitors have stronger market positions, and the potential loss of key employees of the acquired enterprises. In view of these challenges, if the Company is unable to integrate acquired enterprises efficiently and effectively, it may not obtain the anticipated benefits of acquisitions, and its business and operating results could be adversely affected. In addition, acquisitions may affect financial results. For example, in fiscal 1997 the Company acquired Ungermann-Bass Networks, Inc. and charged to net earnings $96,940,000 related to a write off of purchased research and development in process. Market Price Volatility of Common Shares The Company's Common Shares have been subject to substantial market price volatility, some of which has occurred when there have been variations between the Company's actual or anticipated financial results and the published expectations of investment analysts and in the aftermath of public announcements by the Company and its competitors. In addition, the stock market has experienced extreme price and volume fluctuations from time to time which have affected the market price of many technology companies in particular and which have often been unrelated to the operating performance of these companies. These broad market fluctuations, as well as general economic and political conditions, may adversely affect the market price of the Company's Common Shares. Because of the Company's reliance on stock options as an incentive to its employees, changes in the market price of the Company's Common Shares could adversely affect the Company's ability to attract and retain key employees. Regulation The sale of networking products may be affected by governmental regulatory policies, the imposition of carrier tariffs, and taxation of telecommunications services, which may also affect the availability of high speed digital transmission lines. These policies are under continuous review and are subject to change. In the United States, regulatory policies are likely to have a significant impact on the competitive environment in which the Company operates. The Telecommunications Act of 1996 and associated regulatory developments will eliminate or modify many regulatory restrictions in the telecommunications market. Deregulation may facilitate the increasingly competitive offerings by communications service providers. In addition, the RBOCs are now permitted to manufacture and sell telecommunications equipment under certain conditions. Given the substantial resources and large customer base of the RBOCs, Newbridge could face competition from these companies should they satisfy these conditions and elect to manufacture networking products. Notwithstanding the deregulatory process in the United States and elsewhere, governmental communications regulatory authorities have promulgated regulations which, among other things, set installation and equipment standards for private telecommunications systems and require that all newly Page 16 installed hardware be registered and meet certain governmental standards. Carriers also establish standards for interconnection and integration of network equipment with public switched telephone networks. Although the Company designs its products to comply with international standards, to the extent those standards are changed or if the Company is unable to manufacture standards compliant products on a cost effective basis, the Company's business may be adversely affected. See "Business -- Government Regulation" and "-- Networking Industry". Foreign Currency Exposure and Concentration of Credit Risk 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 Company uses financial instruments, principally forward exchange contracts, in its management of foreign currency exposures. Realized and unrealized foreign exchange contracts are recognized and offset foreign exchange gains and losses on the underlying net asset or net liability position. These contracts primarily require the Company to purchase and sell certain foreign currencies with or for Canadian dollars at contractual rates. Several major financial institutions are counterparties to the Company's financial instruments. It is Company practice to monitor the financial standing of the counterparties and limit the amount of exposure to any one institution. The Company may be exposed to a credit loss in the event of nonperformance by the counterparties to these contracts. With respect to accounts receivable, concentration of credit risk is limited due to the diverse areas covered by the Company's operations. The Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks. Anticipated bad debt loss has been provided for in the allowance for doubtful accounts. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". Other Factors The Company further cautions that the factors referred to above and those referred to as part of particular forward-looking statements may not be exhaustive, and that new risk factors emerge from time to time in its rapidly changing business. The Company does not undertake to update any forward-looking statements it may make or has made on its behalf to reflect changes in its expectations or assumptions or the risks and uncertainties referred to. CERTAIN TAX CONSIDERATIONS The following discussion outlines Canadian and United States federal income tax consequences of ownership of the Company's Common Shares that could be relevant for persons who are not residents of Canada. Gains on Disposition of Common Shares Under the provisions of the 1980 Convention between Canada and the United States with respect to Taxes on Income and on Capital, as amended by the 1983, 1984 and 1995 Protocols thereto (the "Convention"), United States corporations or individual residents of the United States ("U.S. Shareholders") that do not, and are not deemed to, use or hold the Common Shares in carrying on a business in Canada ("Unconnected U.S. Shareholders") generally will not be subject to Canadian federal income tax on any capital gain recognized upon the disposition of their Common Shares, provided that the value of the Common Shares is not derived principally from real estate situated in Canada, as determined at the time of their disposition. The Company is of the view that the Common Shares currently do not derive their value principally from such real estate. Page 17 For United States federal income tax purposes, an Unconnected U.S. Shareholder generally will recognize a capital gain or loss on the disposition of Common Shares in an amount equal to the difference between the amount realized upon the disposition and the U.S. Shareholder's adjusted basis in the Common Shares. Capital losses are deductible to the extent of capital gains and, in the case of non-corporate U.S. Shareholders, may be used to offset up to US$3,000 of ordinary income (US$1,500 in the case of married individuals filing separately). Taxation of Dividends Dividends paid to Unconnected U.S. Shareholders owning less than 10% of the voting shares of the Company generally are subject to Canadian withholding tax at the reduced rate of 15% under the Convention. In the case of a corporate Unconnected U.S. Shareholder owning 10% or more of such shares, the withholding tax rate generally is reduced to 5% under the Convention. Unconnected U.S. Shareholders generally will treat the gross amount of dividends paid by the Company, without reduction for Canadian withholding taxes, as ordinary taxable income for United States federal income tax purposes. In certain circumstances, however, Unconnected U.S. Shareholders may be eligible to receive a foreign tax credit for such taxes and, in the case of a corporate Unconnected U.S. Shareholder owning 10% or more of the voting shares of the Company, for a portion of the Canadian taxes paid by the Company itself. Dividends paid by the Company to United States corporations will not, however, give rise to the dividends received deduction generally allowed those corporations under United States federal income tax law. Item 6. SELECTED FINANCIAL DATA The income statement data of the Company presented below for each of the five fiscal years ended April 30, 1997 and the balance sheet data as at April 30, 1997, 1996, 1995, 1994, and 1993 have been derived from the audited Consolidated Financial Statements of the Company that are included as part of this Annual Report on Form 10-K and the Company's Annual Reports on Form 10-K for the prior three fiscal years. The selected consolidated financial data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. Page 18
Fiscal Year Ended April 30, ------------------------------------------------------ 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Canadian dollars, in thousands, except per share data) Income Statement Data: Sales $1,376,727 $921,244 $800,523 $552,521 $307,570 Cost of sales 507,588 319,745 260,471 171,922 115,949 --------- ------- ------- ------- ------- Gross margin 869,139 601,499 540,052 380,599 191,621 Expenses Selling, general and administrative 346,106 231,060 196,073 115,670 78,225 Research and development 155,330 97,205 66,066 38,578 26,746 Purchased research and development in process /(1)/ 96,940 -- -- -- -- --------- ------- ------- ------- ------- Income from operations 270,763 273,234 277,913 226,351 86,650 Interest income, net 18,605 22,607 15,952 8,941 181 Gain on sale of long term investments -- 12,715 -- -- -- Other expenses (9,615) (3,443) (6,512) (1,389) (2,611) --------- ------- ------- ------- ------- Earnings before income taxes and non-controlling interest 279,753 305,113 287,353 233,903 84,220 Provision for income taxes 117,718 100,779 96,944 76,092 24,198 Non-controlling interest 5,118 1,470 2,019 -- -- --------- ------- ------- ------- ------- Net earnings $ 156,917 $202,864 $188,390 $157,811 $ 60,022 ========= ======= ======= ======= ======= Net earnings per share Basic 92(c) $1.22 $1.16 99(c) 41(c) Fully diluted 91 1.19 1.11 94 38 Weighted average number of shares Basic 170,510 165,842 162,891 159,427 147,428 Fully diluted 184,595 179,665 175,823 171,868 161,049 U.S. GAAP /(2)/ Net earnings $156,917 $202,864 $188,390 $157,811 $60,022 Net earnings per share Primary 90(c) $1.19 $1.13 94(c) 38(c) Fully diluted 90 1.17 1.13 94 38 Fully diluted-- US$ US$0.66 US$0.86 US$0.82 US$0.71 US$0.31 Weighted average number of shares Primary 174,525 170,990 166,646 167,137 157,336 Fully diluted 174,525 172,780 166,646 167,137 158,077
Page 19
As at April 30, ------------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (Canadian dollars in thousands) Balance Sheet Data: Working capital $ 638,392 $ 658,087 $491,888 $351,458 $219,964 Total assets 1,496,703 1,093,417 827,163 584,764 383,877 Short term debt (including current portion of long term obligations) 7,353 2,302 2,562 7,272 18,731 Long term obligations 10,817 860 3,493 7,767 14,447 Shareholders' equity 1,126,499 902,686 674,645 473,572 288,154
- -------------- /(1)/ See Note 5 to the Consolidated Financial Statements. /(2)/ Financial information in this Annual Report on Form 10-K is presented in accordance with accounting principles generally accepted in Canada, which also conform in all material respects with accounting principles generally accepted in the United States ("U.S. GAAP"), 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, the write off of purchased research and development in process, as disclosed in Note 5, and the method of calculation of earnings per share, as reconciled in Note 15. Item 7. 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". During the fiscal year ended April 30, 1997, the Company acquired a 100% equity interest in Ungermann-Bass Networks, Inc. ("UB Networks"), a manufacturer of local area network equipment based in Santa Clara, California, for cash consideration of $146,590,000. The operating results of UB Networks are consolidated into the operating results of the Company commencing in the fourth fiscal quarter ended April 30, 1997. During fiscal 1997 the Company also acquired controlling interests in Coasin Chile S.A. ("Coasin"), a Chilean systems integrator of networking products; Danring A/S ("Danring"), a Danish systems integrator of networking products; Ouest Standard Telematique S.A. ("OST"), a manufacturer of local area network equipment based in France; and Acacia S.A. ("Acacia"), a holding company with controlling interests in systems integrators of networking products in Brazil, Costa Rica and Argentina. Total consideration paid during fiscal 1997 for these acquisitions was $69,218,000. The Company's sales of $1,376,727,000 represented an increase of 49% over sales of $921,244,000 for fiscal 1996. Net earnings for fiscal 1997 were $156,917,000 compared to $202,864,000 for fiscal 1996. Net earnings for fiscal 1997 on a pro forma basis, excluding the write off of $96,940,000 of purchased research and development in process related to the acquisition of UB Networks, were $253,857,000, which would represent a 25% increase over net earnings for fiscal 1996. An increase in sales, offset by a decrease in the gross margin and an increase in operating expenses, both expressed as a percentage of sales, resulted in the increase in net earnings on a pro forma basis in fiscal 1997, but the write off of purchased research and development in process resulted in a decrease in actual net earnings. Page 20 The Company's sales of $921,244,000 for fiscal 1996 represented an increase of 15% over sales of $800,523,000 for fiscal 1995. Net earnings for fiscal 1996 were $202,864,000 compared to $188,390,000 for fiscal 1995. Although an increase in sales for fiscal 1996 over sales for fiscal 1995 was offset by an increase in operating expenses and a decrease in gross margin, both expressed as a percentage of sales, a gain on the sale of a long term investment of $12,715,000 resulted in an improvement in net earnings. RESULTS OF OPERATIONS The following table sets forth, for the fiscal years indicated, the percentage of sales represented by certain items in the Company's Consolidated Statements of Earnings.
Fiscal Year Ended April 30, ------------------------------------ 1997 1996 1995 ---- ---- ---- Sales 100.0% 100.0% 100.0% Cost of sales 36.9 34.7 32.5 ----- ----- ----- Gross margin 63.1 65.3 67.5 Expenses Selling, general and administrative 25.1 25.1 24.5 Research and development 11.3 10.5 8.3 Purchased research and development in process 7.0 -- -- ----- ----- ----- Income from operations 19.7 29.7 34.7 Interest income, net 1.3 2.4 2.0 Other income (expenses) (0.7) 1.0 (0.8) ----- ----- ----- Earnings before income taxes and non-controlling interest 20.3 33.1 35.9 Provision for income taxes 8.5 10.9 12.1 Non-controlling interest 0.4 0.2 0.3 ----- ----- ----- Net earnings 11.4% 22.0% 23.5% ===== ===== ===== Sales Fiscal Year Ended April 30, ------------------------------------------ 1997 1996 1995 ---------- ---------- ---------- (Canadian dollars in thousands) Sales $1,376,727 $921,244 $800,523 ========= ======= ======= Increase over prior year 49% 15% 45% Proportion of revenue from: Carriers 66% 65% 66% Corporate networks 34% 35% 34%
Product line enhancements and new product lines introduced in fiscal 1996 and 1997 resulted in increased sales to the carrier and corporate networking markets worldwide. These increases Page 21 primarily reflected growth in sales in Asia, Latin America and Europe. Sales in fiscal 1997 included approximately $90,000,000 of product and service revenue generated by UB Networks, which the Company acquired in January 1997. Deliveries to original equipment manufacturers (OEMs) for carrier customers and deliveries under certain large contracts with carriers contributed significantly to sales in fiscal 1997, fiscal 1996 and fiscal 1995. Sales to Siemens A.G. and subsidiaries, generally under OEM arrangements for resale to end users, were 18% of total sales for fiscal 1997 (less than 10% in fiscal 1996 and fiscal 1995). The Company's sales in fiscal 1997 to carriers for central office applications for tariffed services, for use within their internal networks and for resale to end users increased proportionately with the overall increase in sales relative to fiscal 1996 and fiscal 1995. With the acquisition of UB Networks, Management expects the proportion of revenues derived from corporate network customers to increase in fiscal 1998 relative to fiscal 1997. The number of networking switches and other products supplied by the Company continued to increase in each of the last two fiscal years. Average selling prices declined slightly in fiscal 1997 relative to fiscal 1996 and in fiscal 1996 relative to fiscal 1995, primarily due to discounts on certain large contracts for products for more basic networking applications outside of North America and Western Europe. Increases in sales for fiscal 1997 and fiscal 1996 reflected growth in sales of products based on ATM (asynchronous transfer mode) and other packet-based technologies worldwide and advanced circuit switched networking products in Asia, Latin America and Europe. The proportion of product sales from products based on packet technologies was in excess of 40% in fiscal 1997 compared to less than 30% for fiscal 1996. The Company expects the proportion of sales derived from products based on packet technologies to increase relative to sales derived from circuit switched networking products in fiscal 1998 when compared to fiscal 1997. As a result quarter to quarter revenues may be subject to greater variability due to longer sales cycles often associated with the adoption of new technologies. The Company's sales and service functions are divided into three main geographic regions: (1) the Americas Region (consisting of North and South America); (2) the European Region (consisting of Europe, the Middle East and Africa); and (3) the Asia Pacific Region (consisting of countries in the Asia Pacific region and Russia). The percentage of consolidated sales derived by sales management in each geographic region for fiscal 1997, 1996 and 1995 are set forth below.
Fiscal Year Ended April 30, ------------------------------------ 1997 1996 1995 -------- -------- -------- Americas Region 49% 55% 59% European Region 33% 30% 28% Asia Pacific Region 18% 15% 13%
The Company is subject to a degree of variation in quarterly sales as a substantial proportion of sales is derived from less mature, high growth markets outside of North America and Western Europe. For additional geographic segment information, see Note 17 to the Consolidated Financial Statements. 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. 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 Page 22 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. 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 fiscal 1997, the decrease in the value of the Canadian dollar against the U.S. dollar and the Pound Sterling relative to exchange rates in fiscal 1996, resulted in no material variance in reported sales, gross margin or income from operations. During fiscal 1996, the increase in the value of the Canadian dollar against the U.S. dollar and the Pound Sterling relative to exchange rates in fiscal 1995, resulted in no material variance in reported sales, gross margin or income from operations. For information related to the Company's policies in its management of foreign exchange exposures, see Note 11 to the Consolidated Financial Statements. Cost of Sales and Gross Margin
Fiscal Year Ended April 30, ------------------------------------------ 1997 1996 1995 -------- -------- -------- (Canadian dollars in thousands) Gross margin $869,139 $601,499 $540,052 ======= ======= ======= As a percent of sales 63% 65% 67%
Cost of sales consists of manufacturing costs, warranty expense and costs associated with the provision of services. The decline in the gross margin as a percentage of sales in fiscal 1997 relative to fiscal 1996 was primarily the result of gross margins earned on product sales and service revenues of UB Networks and other companies acquired during fiscal 1997, which have been below the average gross margins earned on the Company's other products. The Company expects the impact of these acquisitions on the gross margin to be greater in fiscal 1998 compared to fiscal 1997, particularly as only one fiscal quarter of the operating results of UB Networks are included in the fiscal 1997 results. The decline in gross margin as a percentage of sales in fiscal 1996 relative to fiscal 1995 was principally due to a decline in gross margins derived from the provision of services as the Company invested in programs to strengthen its customer support and network services organizations as well as an increase in the proportion of sales derived from service revenues, which yield lower gross margins than do product sales. The slight declines in average selling prices in fiscal 1997 relative to fiscal 1996 and in fiscal 1996 relative to fiscal 1995 were generally offset by reductions in per unit costs of manufacturing, resulting in no material impact on gross margins. Many component prices are negotiated by the Company with its suppliers. Component price decreases have been principally due to increases in volumes purchased. Shortages of certain components can result in increased component prices. Page 23 Selling, General and Administrative Expenses
Fiscal Year Ended April 30, ------------------------------------------ 1997 1996 1995 -------- -------- -------- (Canadian dollars in thousands) Selling, general and administrative expenses $346,106 $231,060 $196,073 ======= ======= ======= As a percent of sales 25% 25% 24% Increase over prior year 50% 18% 70%
Selling, general and administrative expenses increased in fiscal 1997 and in fiscal 1996 primarily as a result of increases in sales personnel. The majority of the increase in personnel in fiscal 1997 was the result of acquisitions made to enhance the Company's business and diversify its marketing and distribution channels. Incremental hiring and spending made during fiscal 1997 and 1996 was directed at programs to strengthen the Company's sales and support infrastructure throughout the world and to market new products. Research and Development
Fiscal Year Ended April 30, ------------------------------------------ 1997 1996 1995 -------- -------- -------- (Canadian dollars in thousands) Gross research and development expenditures $195,229 $130,851 $97,905 Investment tax credits 26,400 21,974 22,504 Customer, government and other funding 9,484 7,919 6,509 Net deferral (amortization) of software development costs 4,015 3,753 2,826 ------- ------ ------ Net research and development expenses $155,330 $97,205 $66,066 ======= ====== ====== Gross expenditures as a percent of sales 14% 14% 12% Recoveries as a percent of gross expenditures 20% 26% 33% Net research and development expenses as a percent of sales 11% 11% 8%
Research and development expenditures consist primarily of software and hardware engineering personnel expenses, costs associated with equipment and facilities, and subcontracted research and development costs. The increased costs in fiscal 1997 and fiscal 1996 reflect spending on new networking products, features and interfaces, particularly for ATM platforms in carrier, carrier access and enterprise network applications and network and service management software. Recoveries decreased as a percentage of gross expenditures in fiscal 1997 compared to fiscal 1996, and in fiscal 1996 compared to fiscal 1995, due to a decline in the proportion of research and development expenditures eligible for investment tax credits and due to other forms of recoveries increasing at rates less than the growth of gross research and development expenditures. Based on Management's estimates of the proportion of fiscal 1998 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 1998 to decline relative to fiscal 1997. Page 24 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. Purchased Research and Development In Process Purchased research and development in process of $96,940,000 in fiscal 1997 related to the acquisition of UB Networks. The amount of the purchase price of UB Networks allocated to purchased research and development in process was determined through valuation techniques common in the high technology industry. Under U.S. GAAP, research and development in process acquired by the Company on the acquisition of UB Networks was written off against net earnings upon acquisition in the third fiscal quarter ended January 26, 1997. Under accounting principles generally accepted in Canada research and development in process acquired by the Company on the acquisition of UB Networks was capitalized upon acquisition and disclosed on the Consolidated Balance Sheet as at January 26, 1997. Upon review of the recoverability of the research and development in process, undertaken during the fourth quarter of the fiscal year ended April 30, 1997, the Company determined that the purchased research and development in process no longer met all the criteria for deferral and accordingly the balance has been written off as a charge to earnings for the fourth fiscal quarter. The Company has significantly altered product plans associated with the research and development projects and has concluded that recoverability cannot be reasonably regarded as assured. In addition, Management has determined that adequate resources may not be made available in future to complete the projects associated with the purchased in process research and development, as originally defined. Interest and Other Expenses
Fiscal Year Ended April 30, ------------------------------------------ 1997 1996 1995 -------- -------- -------- (Canadian dollars in thousands) Interest income $19,956 $23,193 $17,059 Interest expense on long term obligations 1,351 586 1,107 Other expenses 9,615 3,443 6,512
Interest income for fiscal 1997 declined compared to fiscal 1996 due to a decline in the cash position maintained, particularly in the latter part of fiscal 1997, and due to a decline in interest rates earned on investments. Interest income for fiscal 1996 increased over fiscal 1995 as a result of the increased cash position maintained throughout fiscal 1996. Interest expense on long term obligations increased in fiscal 1997 due to the assumption of long term obligations of companies acquired by the Company during fiscal 1997. Reduced borrowings in fiscal 1996 relative to fiscal 1995 resulted in a decline in interest expense on long term obligations. Other expenses represented less than 1% of sales in fiscal 1997, fiscal 1996 and fiscal 1995. Gain on Sale of Long Term Investment In fiscal 1996 the Company sold its minority equity interest in InSoft, Inc. ("InSoft"), a privately held multimedia software company. The disposition was effected through a merger in which InSoft shares were exchanged for common shares of the acquirer, which are publicly traded. The Company recognized a gain in fiscal 1996 of $12,715,000 on the sale of its InSoft shares, representing the excess of the market value of the shares of the acquirer received, discounted to reflect certain restrictions on resale, over the cost to the Company of the InSoft shares exchanged. Page 25 Income Taxes
Fiscal Year Ended April 30, ------------------------------------------ 1997 1996 1995 -------- -------- -------- Income tax rate 42% 33% 34%
The income tax rate for fiscal 1997 was 31% of earnings before income taxes and non-controlling interest, excluding the expense related to purchased research and development in process. The composite rates of income tax for fiscal 1997, 1996 and 1995 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 because of the deductibility related to manufacturing and processing activities and research and development expenditures in Canada as well as other tax planning measures undertaken by the Company. See Note 14 to the Consolidated Financial Statements. Non-Controlling Interest The non-controlling interests' share of net earnings of $5,118,000 in fiscal 1997, $1,470,000 in fiscal 1996 and $2,019,000 in fiscal 1995 was due primarily to net earnings of Transistemas S.A., an Argentine systems integrator of networking products. The Company has a 51% equity interest in Transistemas S.A. Net Earnings Net earnings for fiscal 1997 were $156,917,000 compared to $202,864,000 for fiscal 1996. Net earnings for fiscal 1997 on a pro forma basis, excluding the write off of $96,940,000 of purchased research and development in process related to the acquisition of UB Networks, were $253,857,000, which would represent a 25% increase over net earnings for fiscal 1996. Although sales increased 49% in fiscal 1997 over fiscal 1996, a decline in the gross margin and an increase in operating expenses, both expressed as a percentage of sales, offset a portion of the incremental profitability associated with the sales increase. In addition, net earnings of fiscal 1996 included a gain on the sale of a long term investment of $12,715,000. Net earnings for fiscal 1996 were $202,864,000 compared to $188,390,000 for fiscal 1995. Although an increase in sales for fiscal 1996 over sales for fiscal 1995 was offset by an increase in operating expenses and a decrease in gross margin, both expressed as a percentage of sales, a gain on the sale of a long term investment of $12,715,000 resulted in an improvement in net earnings. RECONCILIATION OF FINANCIAL RESULTS TO UNITED STATES ACCOUNTING PRINCIPLES The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in Canada, which also conform in all material respects with accounting principles generally accepted in the United States, 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, the write off of purchased research and development in process, as disclosed in Note 5, and the method of calculation of earnings per share, as reconciled in Note 15. Other than the accounting treatment associated with any future acquisitions or mergers, Management expects that the differences in future years will not be significant. Page 26 FINANCIAL CONDITION During the fiscal year ended April 30, 1997 working capital decreased from $658,087,000 to $638,392,000. As at April 30, 1997 the Company had $333,904,000 of cash and cash equivalents, which represented a decrease of $121,845,000 during fiscal 1997. The decrease was primarily the result of cash outlays associated with acquisitions made in fiscal 1997 of $220,645,000. Offsetting the cash outflow related to acquisitions was net earnings of $156,917,000 plus the non-cash expense of $96,940,000 associated with the write off of purchased research and development in process, less additions to property, plant and equipment of $131,641,000. On January 17, 1997, the Company acquired a 100% equity interest in UB Networks, a manufacturer of local area network equipment based in Santa Clara, California, by the purchase of shares for cash consideration of $146,590,000. The purchase price includes professional fees and other direct costs of the acquisition, and excludes additional contingent payments which may be made over the next two years calculated as 50% of the gross margin earned on UB Networks' products above a certain amount which approximates the gross margin earned on the products prior to the acquisition, up to a maximum of 50% of the purchase price paid to the seller. The acquisition has been accounted for by the purchase method of accounting. Also during fiscal 1997 the Company acquired controlling interests in Coasin, a Chilean systems integrator of networking products; Danring, a Danish systems integrator of networking products; OST, a manufacturer of local area network equipment based in France; and Acacia, a holding company with controlling interests in systems integrators of networking products in Brazil, Costa Rica and Argentina. The cash consideration paid for the controlling interests acquired was $69,218,000 in aggregate. Certain of these acquisitions have provisions for contingent payments based on financial performance. The maximum incremental contingent payments total $19,888,000. All of these acquisitions were accounted for by the purchase method of accounting. 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 $106,135,000. At April 30, 1997 Coasin and Acacia were utilizing $12,820,000 under these lines of credit. Management anticipates that capital expenditures for fiscal 1998 will exceed those of fiscal 1997 as the Company plans to invest in new facilities in Canada, in land and facilities in the metropolitan area of Washington, D.C., in research and development and manufacturing equipment and in information systems. The Company intends to extinguish its existing long term obligations as they become due, and may also increase its current investments in subsidiaries and associated companies. The Company intends to fund the increased capital expenditures, retirement of long term obligations and increased investments with existing cash and cash expected to be generated from operations during fiscal 1998. In addition, the Company may use a portion of its cash resources, supplemented as appropriate by the issuance of shares or debt, 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. Page 27 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. During fiscal 1997, the Company did not purchase any of its Common Shares. During fiscal 1996, the Company purchased 1,000,000 (fiscal 1995 -- 200,000) of its issued and outstanding Common Shares for $28,209,000 (fiscal 1995 -- $4,674,000) in open market transactions. 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 operating and capital expenditure requirements through the end of fiscal 1998 and into the foreseeable future. Management believes that inflation did not have a material effect on operations during the fiscal year ended April 30, 1997. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following financial statements and supplementary data are filed as part of this Annual Report on Form 10-K: Financial Statements Auditors' Report to the Shareholders Consolidated Statements of Earnings and Retained Earnings for the years ended April 30, 1997, 1996 and 1995 Consolidated Balance Sheets as at April 30, 1997 and 1996 Consolidated Statements of Cash Flows for the years ended April 30, 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity for the years ended April 30, 1997, 1996 and 1995 Notes to the Consolidated Financial Statements Selected Quarterly Financial Data (unaudited) Page 28 AUDITORS' REPORT To the Shareholders of Newbridge Networks Corporation: We have audited the consolidated balance sheets of Newbridge Networks Corporation as at April 30, 1997 and 1996 and the consolidated statements of earnings, shareholders' equity and cash flows for the years ended April 30, 1997, 1996 and 1995. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the company as at April 30, 1997 and 1996 and the results of its operations and the changes in its financial position for the years ended April 30, 1997, 1996 and 1995 in accordance with accounting principles generally accepted in Canada which, except as disclosed in Note 2, Note 5 and Note 15 to the consolidated financial statements, also conform in all material respects with accounting principles generally accepted in the United States. /s/ Deloitte and Touche Chartered Accountants Ottawa, Canada June 2, 1997 (June 24, 1997 for Note 18) Page 29 NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (Canadian dollars, amounts in thousands except per share data)
Years Ended April 30, --------------------------------------------- 1997 1996 1995 Sales $1,376,727 $921,244 $800,523 Cost of sales 507,588 319,745 260,471 --------- ------- ------- Gross margin 869,139 601,499 540,052 Expenses Selling, general and administrative 346,106 231,060 196,073 Research and development 155,330 97,205 66,066 Purchased research and development in process (Note 5) 96,940 -- -- --------- ------- ------- Income from operations 270,763 273,234 277,913 Interest income 19,956 23,193 17,059 Interest expense on long term obligations (1,351) (586) (1,107) Gain on sale of long term investment (Note 13) -- 12,715 -- Other expenses (9,615) (3,443) (6,512) --------- ------- ------- Earnings before income taxes and non-controlling interest 279,753 305,113 287,353 Provision for income taxes (Note 14) 117,718 100,779 96,944 Non-controlling interest 5,118 1,470 2,019 --------- ------- ------- Net earnings $ 156,917 $202,864 $188,390 ========= ======= ======= Earnings per share (Note 15) Basic 92(c) $1.22 $1.16 Fully diluted 91(c) $1.19 $1.11 Weighted average number of shares Basic 170,510 165,842 162,891 Fully diluted 184,595 179,665 175,823
See accompanying Notes to the Consolidated Financial Statements. Page 30 NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED BALANCE SHEETS (Canadian dollars in thousands)
April 30, April 30, 1997 1996 Assets Cash and cash equivalents (Note 2) $ 333,904 $ 455,749 Accounts receivable, net of provision for returns and doubtful accounts of $10,572 (April 30, 1996 - $6,651) 387,338 244,784 Inventories (Note 3) 159,495 103,555 Prepaid expenses and other current assets 64,191 21,107 --------- --------- 944,928 825,195 Property, plant and equipment (Note 4) 294,939 193,796 Deferred income taxes 37,393 -- Goodwill (Note 6) 125,565 26,672 Software development costs (Note 7) 22,299 18,285 Other assets (Note 8) 71,579 29,469 --------- --------- $1,496,703 $1,093,417 ========= ========= Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 105,884 $ 64,289 Accrued liabilities 95,804 46,033 Provision for restructuring (Note 5) 35,944 -- Income taxes 61,551 54,484 Current portion of long term obligations 7,353 2,302 --------- --------- 306,536 167,108 Long term obligations (Note 10) 10,817 860 Deferred income taxes 32,439 9,902 Non-controlling interest 20,412 12,861 --------- --------- 370,204 190,731 --------- --------- Share capital (Note 12) Common shares - 171,858,984 outstanding (April 30, 1996 - 168,676,280 outstanding) 351,388 290,170 Accumulated foreign currency translation adjustment 6,963 1,285 Retained earnings 768,148 611,231 --------- --------- 1,126,499 902,686 --------- --------- $1,496,703 $1,093,417 ========= =========
See accompanying Notes to the Consolidated Financial Statements. Page 31 NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Canadian dollars in thousands)
Years Ended April 30, -------------------------------------------- 1997 1996 1995 Operating activities Net earnings $156,917 $202,864 $188,390 Items not affecting cash Amortization 82,987 58,189 37,607 Deferred income taxes 22,989 4,046 3,166 Non-controlling interest 5,118 1,470 2,019 Purchased research and development in process 96,940 -- -- Gain on sale of long term investment -- (12,715) -- Other 7,002 (1,857) 2,545 Cash effect of changes in: Accounts receivable (87,976) (63,392) (48,858) Inventories (20,767) (40,785) (20,099) Prepaid expenses and other current assets (13,668) (627) (7,083) Accounts payable and accrued liabilities (34,615) 20,840 12,133 Income taxes 8,447 23,757 17,176 ------- ------- ------- 223,374 191,790 186,996 ------- ------- ------- Investing activities Additions to property, plant and equipment (131,641) (96,235) (81,763) Acquisitions of subsidiaries, excluding cash acquired (Note 5) (220,645) (1,622) (19,748) Capitalized software development costs (12,457) (10,476) (8,575) Proceeds on sale of long term investment (Note 13) -- 18,364 -- Additions to other assets (34,858) (14,983) (5,723) ------- ------- ------- (399,601) (104,952) (115,809) ------- ------- ------- Financing activities Issue of common shares 54,096 50,068 12,079 Purchase of common shares -- (28,209) (4,674) Increase in long term obligations 1,515 -- 753 Repayment of long term obligations (6,733) (2,765) (10,340) ------- ------- ------- 48,878 19,094 (2,182) ------- ------- ------- Increase (decrease) in cash and cash equivalents (127,349) 105,932 69,005 Effect of foreign currency translation on cash (2,585) 2,186 1,467 Cash from acquisition of subsidiaries 8,089 (526) 1,900 ------- ------- ------- (121,845) 107,592 72,372 Cash and cash equivalents, beginning of the year 455,749 348,157 275,785 ------- ------- ------- Cash and cash equivalents, end of the year $333,904 $455,749 $348,157 ======= ======= =======
See accompanying Notes to the Consolidated Financial Statements. Page 32 NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Canadian dollars in thousands)
Common Shares Accumulated -------------------------- Foreign Retained Shareholders' Number Amount Currency Earnings Equity At April 30, 1994 161,564,936 $247,362 $6,233 $219,977 $473,572 Exercise of employees' and directors' options 3,149,680 12,079 12,079 Purchase of the Company's shares (200,000) (4,674) (4,674) Income tax benefit related to stock options 7,679 7,679 Effect of foreign currency translation (2,401) (2,401) Net earnings 188,390 188,390 ----------- ------- ----- ------- --------- At April 30, 1995 164,514,616 262,446 3,832 408,367 674,645 Exercise of employees' and directors' options 5,161,664 50,068 50,068 Purchase of the Company's shares (1,000,000) (28,209) (28,209) Income tax benefit related to stock options 5,865 5,865 Effect of foreign currency translation (2,547) (2,547) Net earnings 202,864 202,864 ----------- ------- ----- ------- --------- At April 30, 1996 168,676,280 290,170 1,285 611,231 902,686 Exercise of employees' and directors' options 3,182,704 54,096 54,096 Income tax benefit related to stock options 7,122 7,122 Effect of foreign currency translation 5,678 5,678 Net earnings 156,917 156,917 ----------- ------- ----- ------- --------- At April 30, 1997 171,858,984 $351,388 $6,963 $768,148 $1,126,499 =========== ======= ===== ======= =========
See accompanying Notes to the Consolidated Financial Statements. Page 33 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) 1. Significant Accounting Policies The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in Canada. These 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, the write off of purchased research and development in process, as disclosed in Note 5, and the method of calculation of earnings per share, as reconciled in Note 15. Basis of Consolidation The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. Investments in companies in which the Company has significant influence are accounted for by the equity method. Investments in which the Company does not control or have significant influence over the investee are accounted for by the cost method. Fiscal Year The Company's fiscal year ends April 30. Interim fiscal quarters are 13 weeks long and close on a Sunday except the fourth fiscal quarter, which closes April 30. Revenue Recognition and Warranties Revenue from product sales is generally recorded on shipment, with a provision for estimated returns recorded at that time. In addition, a provision for potential warranty claims is provided for at the time of sale, based on warranty terms and prior claims experience. Service revenue is recognized when the service is performed, or, in the case of maintenance contracts, is recognized as costs are incurred to secure and fulfill the contract. Government Incentives and Investment Tax Credits Government incentives and investment tax credits are recorded as a reduction of the expense or the cost of the asset acquired to which the incentive applies. The benefits are recognized when the Company has complied with the terms and conditions of the approved grant program or the applicable tax legislation. Software Development Costs Certain applications and systems software development costs are capitalized once technical feasibility has been established for the product, the Company has identified a market for the product and intends to market the developed product. No other development costs are capitalized. Such capitalized costs are amortized over the expected life of the related product. Page 34 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) Inventories Finished goods are valued at the lower of cost (first in, first out) and net realizable value. Work in process and raw materials are valued at the lower of cost and replacement cost. Property, Plant and Equipment Property, plant and equipment are stated at cost. Buildings and equipment are generally amortized on a declining balance basis at rates calculated to amortize the cost of the assets over their estimated useful lives. Leasehold improvements are amortized using a straight line basis over the term of the lease. Goodwill Goodwill is stated at the difference between the Company's cost of the investments less its proportionate share of the fair value of the net assets of the subsidiaries. Goodwill is amortized on a straight line basis over the estimated useful life of the goodwill, generally between ten and twenty years. The recoverability of such costs is reviewed on an ongoing basis. Foreign Currency Translation The Consolidated Financial Statements are prepared using Canadian dollars. All operations whose principal economic activities are undertaken in currencies other than Canadian dollars have been determined to be self-sustaining. The assets and liabilities of non-Canadian operations are translated at fiscal year end exchange rates and the resulting unrealized exchange gains or losses are accumulated as a separate component of shareholders' equity described in the Consolidated Balance Sheets as "Accumulated foreign currency translation adjustment." The income statements of such operations are translated at exchange rates prevailing during the fiscal year. Other monetary assets and liabilities, which are denominated in currencies foreign to the local currency of any one operation, are translated to the local currency at fiscal year end exchange rates, and transactions included in earnings are translated at rates prevailing during the fiscal year. Exchange gains and losses resulting from the translation of these amounts are included in the Consolidated Statements of Earnings. Use of Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods presented. Actual results could differ from the estimates made by management. Page 35 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) Accounting for Stock-Based Compensation The United States Financial Accounting Standards Board ("FASB") Statement of Accounting Standard No. 123 ("SFAS 123") maintains that the compensation cost for stock-based plans should be measured using a fair value based method. The Company currently calculates the compensation cost for its Consolidated Key Employee Stock Option Plan in compliance with the provisions of the United States Accounting Principles Board Opinion No. 25 ("APB 25") which allows no compensation cost to be recorded provided that the exercise price of the options granted is equal to the fair market value of the Company's stock as at the date of the grant. The Company discloses, in the notes to the Consolidated Financial Statements, the pro forma net earnings and earnings per share as if the fair value method of measurement had been applied, as is permitted by SFAS 123. Calculation of Earnings per Share The United States Financial Accounting Standards Board ("FASB") issued the Statement of Accounting Standard No. 128 ("SFAS 128") in February 1997 related to changes to the methodologies used in calculating earnings per share under U.S. GAAP. Under SFAS 128 primary earnings per share would be replaced by basic earnings per share, the calculation of which, given the Company's capital structure, would be the same as the calculation of basic earnings per share under accounting principles generally accepted in Canada. The calculation of fully diluted earnings per share under U.S. GAAP would be replaced by diluted earnings per share, the calculation of which, given the Company's capital structure, would be the same as the calculation of primary earnings per share under U.S. GAAP. 2. Cash and Cash Equivalents Components of cash and cash equivalents are:
April 30, 1997 April 30, 1996 ---------------------- ---------------------- Amortized Market Amortized Market Cost Value Cost Value ------- ------- ------- ------- Cash $197,007 $197,007 $285,054 $285,074 ------- ------- ------- ------- Held to maturity marketable securities, maturing within one year: Debt issued or guaranteed by the U.S. Government -- -- 24,550 24,547 Debt issued or guaranteed by Provincial governments in Canada -- -- 13,552 13,585 Corporate debt securities 136,278 136,322 114,178 114,187 ------- ------- ------- ------- 136,278 136,322 152,280 152,319 ------- ------- ------- -------- Available for sale marketable securities Equity securities 619 619 18,415 18,415 ------- ------- ------- -------- $333,904 $333,948 $455,749 $455,808 ======= ======= ======= =======
Page 36 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) Held to maturity marketable securities are investments with original maturities of three months or more. Available for sale securities are common shares of publicly traded companies, which have certain resale restrictions, principally acquired upon the Company's disposition of its minority interest in InSoft, Inc. (Note 13). Under U.S. GAAP held to maturity and available for sale marketable securities would be disclosed as a separate caption on the Consolidated Balance Sheets. Held to maturity marketable securities are carried at amortized cost. The unrealized gains and losses are not included in the Consolidated Statements of Earnings as these gains and losses are unlikely to be realized due to the Company's intent to hold the underlying securities to maturity. Available for sale securities are carried at the lower of cost and market. Gains and losses on marketable securities were as follows.
1997 1996 -------- ------ Held to maturity marketable securities Unrealized gains $ 44 $72 Unrealized losses -- 13 Realized gains -- -- Realized losses -- -- Available for sales marketable securities Unrealized gains -- -- Unrealized losses -- -- Realized gains -- -- Realized losses 866 --
If the Consolidated Statements of Cash Flows were prepared under U.S. GAAP, purchases, maturities 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.
1997 1996 1995 ------- ------- ------- Investing activities in short term marketable securities: Held to maturity securities Maturities $ 508,890 $ 343,000 $314,659 Purchases (475,092) (397,140) (205,439) ------- ------- ------- 33,798 (54,140) 109,220 Investing activities, as reported (399,601) (104,952) (115,809) -------- -------- ------- Investing activities, U.S. GAAP $(365,803) $(159,092) $ (6,589) ======= ======= ======== Increase (decrease) in cash and cash equivalents, as reported $(121,845) $ 107,592 $ 72,372 Non-cash investing activities Available for sale securities (Note 13) -- (18,415) -- Investing activities in short term marketable securities 33,798 (54,140) 109,220 --------- ------- ------- Increase (decrease) in cash and cash equivalents, U.S. GAAP $ (88,047) $ 35,037 $181,592 ========= ======== =======
Page 37 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data)
3. Inventories April 30, April 30, 1997 1996 -------- ------ Finished goods $100,405 $ 60,824 Work in process 20,938 12,711 Raw materials 38,152 30,020 ------- ------- $159,495 $103,555 ======= ======= 4. Property, Plant and Equipment Amortization April 30, April 30, Rate 1997 1996 --------------- -------- ------ Land -- $ 5,571 $ 4,770 Buildings 2.5%--5% 72,779 49,128 Equipment 10%--50% 500,602 260,195 Furniture and fixtures 20% 34,485 16,256 Leasehold improvements Lease term 9,512 6,758 ------- -------- 622,949 337,107 Accumulated amortization (328,010) (143,311) ------- -------- $294,939 $193,796 ======= ======== Capital leases included above $ 6,918 $ 6,466 ======= ======= 1997 1996 1995 -------- -------- -------- Amortization on property, plant and equipment $73,364 $48,662 $29,770 ====== ====== ====== Amortization on property, plant and equipment under capital leases $ 1,523 $ 1,627 $ 2,016 ====== ====== ======
Page 38 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) 5. Acquisitions of Subsidiaries Cash utilized in the acquisitions of subsidiaries is summarized as follows.
1997 1996 1995 -------- -------- ------ Acquisition of subsidiaries excluding cash acquired Ungermann-Bass Networks Inc. $(146,590) $ -- $ -- Coasin Chile S.A. (14,129) -- -- Danring A/S (11,144) -- -- Ouest Standard Telematique S.A. (34,231) -- -- Acacia S.A. (9,714) -- -- Advanced Computer Communications (3,971) -- (1,394) Transistemas S.A. (866) (1,622) (18,354) --------- ------ ------- $(220,645) $(1,622) $(19,748) ======== ====== =======
Acquisition of Ungermann-Bass Networks Inc. On January 17, 1997, the Company acquired a 100% equity interest in Ungermann-Bass Networks, Inc. ("UB Networks"), a manufacturer of local area network equipment based in Santa Clara, California, by the purchase of shares for cash consideration of $146,590,000. The purchase price includes professional fees and other direct costs of the acquisition, and excludes additional contingent payments which may be made over the next two years calculated as 50% of the gross margin earned on UB Networks' products above a certain amount which approximates the gross margin earned on the products prior to the acquisition, up to a maximum of 50% of the purchase price paid to the seller. The acquisition has been accounted for by the purchase method of accounting. Goodwill is being amortized on a straight line basis over a ten year period, commencing in the fiscal period following that in which the investment was made. The recoverability of goodwill is reviewed on an ongoing basis. The Company's investment in UB Networks is summarized below. Non-cash current assets $ 64,985 Property, plant and equipment 24,708 Deferred income tax assets 36,769 Purchased research and development in process 96,940 Goodwill 7,331 Other long term assets 8,290 -------- Non-cash assets acquired 239,023 -------- Provision for restructuring (53,979) Other current liabilities (64,419) Long term obligations assumed (836) Non-controlling interest (1,060) -------- Liabilities acquired (120,294) -------- Net non-cash assets acquired 118,729 Cash acquired 11,981 -------- 130,710 Goodwill upon acquisition 15,880 -------- Total consideration paid $146,590 ========
Page 39 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) The amount allocated to purchased research and development in process was determined through valuation techniques common in the high technology industry. Under U.S. GAAP, research and development in process acquired by the Company on the acquisition of UB Networks was written off against net earnings upon acquisition. Under accounting principles generally accepted in Canada research and development in process acquired by the Company on the acquisition of UB Networks was capitalized upon acquisition and disclosed on the Consolidated Balance Sheet at January 26, 1997. Upon review of the recoverability of the research and development in process, undertaken during the fourth quarter of the fiscal year ended April 30, 1997, the Company determined that the purchased research and development in process no longer met all the criteria for deferral and accordingly the balance has been written off as a charge to earnings for the fourth fiscal quarter. The Company has significantly altered product plans associated with the research and development projects and has concluded that recoverability cannot be reasonably regarded as assured. In addition, Management has determined that adequate resources may not be made available in future to complete the projects associated with the purchased in process research and development, as originally defined. The provision for restructuring relates to programs instituted by the Company to integrate the operations of UB Networks with the Company and to eliminate redundant functions. The components of the provision for restructuring and related spending to April 30, 1997 are as follows.
Reduction in Reduction Discontinued Other Work Force in Facilities Activities Restructuring Total ------------ ------------- ------------ ------------- ----- Provision upon acquisition $26,153 $11,582 $9,787 $6,457 $53,979 Incurred to April 30, 1997 9,496 970 4,478 3,091 18,035 ------- ------- ----- ----- ------ Provision balances at April 30, 1997 $16,657 $10,612 $5,309 $3,366 $35,944 ====== ====== ===== ===== ======
The provision for reduction in work force includes severance, related medical and other benefits, relocation costs and other obligations to employees. The provision includes termination benefits for approximately 300 employees. The work force reductions are in all functions and in all regions in which UB Networks operates. The Company anticipates that these work force reductions will be substantially completed by the second quarter of fiscal 1998. The provision for reduction in facilities comprises primarily lease payments and fixed costs associated with plans to close sales, support and administrative facilities in the Americas, Europe and Asia Pacific geographic areas. The provision for discontinued activities includes costs associated with the disposition of assets and fulfilling prior commitments related to certain discontinued product lines and activities. The Company anticipates these costs to be incurred over the next year. The provision for other restructuring costs comprises various direct incremental costs associated with the integration of operations of UB Networks with the Company. The operating results of UB Networks are consolidated into the operating results of the Company commencing in the fourth fiscal quarter ended April 30, 1997. Page 40 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) Acquisitions of Coasin Chile S.A., Danring A/S, Ouest Standard Telematique and Acacia S.A. During fiscal 1997 the Company acquired controlling interests in Coasin Chile S.A. ("Coasin"), a Chilean systems integrator of networking products; Danring A/S ("Danring"), a Danish systems integrator of networking products; Ouest Standard Telematique S.A. ("OST"), a manufacturer of local area network equipment based in France; and Acacia S.A. ("Acacia"), a holding company with controlling interests in systems integrators of networking products in Brazil, Costa Rica and Argentina. The investments are summarized as follows.
Coasin Danring OST Acacia ------ ------- --- ------ Month of acquisition Nov 1996 Jan 1997 Aug 1996 Apr 1997 Equity interest acquired 51% 100% 100% 51% Purchase price $14,129 $11,144 $34,231 $ 9,714 Maximum incremental contingent payments US$2,595 -- US$10,000 US$1,640 Period over which contingent payment may be made 2 years -- 3 years 2 years Acquisition accounting method Purchase Purchase Purchase Purchase Goodwill amortization period 20 years 20 years 20 years 20 years Investment summary: Non-cash current assets $26,138 $ 6,649 $ 9,984 $ 7,217 Property, plant equipment 3,842 119 6,157 805 Other long term assets 1,393 -- 490 3,950 ------- -------- -------- ------- Non-cash assets acquired 31,373 6,768 16,631 11,972 Current liabilities (8,960) (6,877) (27,017) (9,928) Long term obligations assumed (3,428) -- (6,313) (1,838) ------- -------- ------- ------- Net non-cash assets acquired 18,985 (109) (16,699) 206 Cash (bank indebtedness) acquired (11,320) 3,062 6,165 (1,799) ------ ------- ------- ------- 7,665 2,953 (10,534) (1,593) Non-controlling interest upon acquisition (3,755) -- -- 780 ------- ------- ------- -------- Company's share of assets acquired 3,910 2,953 (10,534) (813) Goodwill upon acquisition 10,219 8,191 44,765 10,527 ------ ------- ------ ------ Total consideration paid $14,129 $11,144 $34,231 $ 9,714 ====== ====== ====== ======= 6. Goodwill April 30, April 30, 1997 1996 -------- ------- Goodwill $133,854 $30,169 Accumulated amortization (8,289) (3,497) -------- ------- $125,565 $26,672 ======= ======
Page 41 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) 7. Software Development Costs
April 30, April 30, 1997 1996 ------ ------ Balance, beginning of the year $18,285 $14,532 Amount capitalized 12,457 10,476 Amortization (8,443) (6,723) ------ ------ Balance, end of the year $22,299 $18,285 ====== ====== 8. Other assets April 30, April 30, 1997 1996 ------ ------ Long term investments Accounted for by the equity method $19,663 $18,796 Accounted for by the cost method 32,931 1,894 ------ ------ 52,594 20,690 Other assets 18,985 8,779 ------ ------ $71,579 $29,469 ====== ======
Investments in associated companies over which the Company has significant influence are accounted for by the equity method and as a result the carrying value equals the Company's proportionate share of the shareholder's equity of the investee company. Investees which the Company does not control or have significant influence over are accounted for by the cost method. 9. Bank Credit Facilities At April 30, 1997 short term bank credit facilities consisted of operating lines of credit in the aggregate amount of $106,135,000, primarily with banks in Canada, the United Kingdom and the United States. At April 30, 1997, Coasin S.A. and Acacia S.A. were utilizing $12,820,000 under these lines of credit. Bank indebtedness is secured by accounts receivable and a general security agreement that includes assets that are not otherwise pledged as security. The Company complies with all covenants and restrictions contained in the credit facilities agreements, including minimum levels of working capital and tangible net worth. Page 42 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) 10. Long Term Obligations
April 30, April 30, 1997 1996 --------- --------- Mortgage $ 283 $2,109 Term loans 15,487 -- Capital lease obligations 2,400 1,053 ------ ----- 18,170 3,162 Less amounts due within one year (7,353) (2,302) ------ ----- Balance, end of the year $10,817 $ 860 ====== =====
The mortgage is secured by office and manufacturing facilities with an aggregate book value of $7,071,000. Future payments under long term obligations and operating leases at April 30, 1997 are as follows.
Principal Amount Minimum on Mortgages Capital Lease Operating and Term Loans Payments Leases --------------- -------- ------ Fiscal 1998 $ 6,428 $1,070 $29,375 Fiscal 1999 3,595 708 26,439 Fiscal 2000 4,007 523 18,902 Fiscal 2001 601 283 12,127 Fiscal 2002 233 165 3,875 Thereafter 906 9 2,998 ------ ----- ------ $15,770 2,758 $93,716 ====== ====== Less imputed interest at 9% (358) ----- $2,400 =====
Interest paid on capital leases was $266,000 (fiscal 1996 -- $218,000; fiscal 1995 -- $571,000). 11. Financial Instruments and Concentration of Credit Risk The Company uses financial instruments, principally forward exchange contracts, in its management of foreign currency exposures. Realized and unrealized foreign exchange contracts are recognized and offset foreign exchange gains and losses on the underlying net asset or net liability position. These contracts primarily require the Company to purchase and sell certain foreign currencies with or for Canadian dollars at contractual rates. At April 30, 1997 the Company had $293,414,000 in outstanding foreign exchange contracts (fiscal 1996 -- $129,899,000). Page 43 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) Several major financial institutions are counterparties to the Company's financial instruments. It is Company practice to monitor the financial standing of the counterparties and limit the amount of exposure to any one institution. The Company may be exposed to a credit loss in the event of nonperformance by the counterparties to these contracts, but does not anticipate such nonperformance. With respect to accounts receivable, concentration of credit risk is limited due to the diverse areas covered by the Company's operations. The Company has credit evaluation, approval and monitoring processes intended to mitigate potential credit risks. Anticipated bad debt loss and product returns have been provided for in the allowance for returns and doubtful accounts. Net additions to the provision for returns and doubtful accounts (fiscal 1997 -- $3,921,000; fiscal 1996 -- $1,436,000) primarily relate to product returns and are charged to sales. The carrying amounts for cash, marketable securities, accounts receivable, accounts payable and accrued liabilities approximate fair market value because of the short maturity of these instruments. 12. Share Capital Authorized An unlimited number of Common Shares. An unlimited number of participating preferred shares, ranking in priority upon distribution of assets over Common Shares, may be issued in series with additional provisions as fixed by the Board of Directors. Stock Split On September 13, 1996 the Board of Directors declared a two for one stock split, effected in the form of a stock dividend, payable October 11, 1996 to shareholders of record on September 30, 1996. All references in the consolidated financial statements with regard to shares outstanding and per share amounts have been restated to reflect the stock split. Employee Stock Option Plans The Company has established the Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan (the "Plan") applicable to full-time employees, directors and consultants of the Company and its subsidiaries. The options under the Plan are granted at the then-current fair market value of the Common Shares of the Company and generally may be exercised in equal proportions during the years following the first, second, third and fourth anniversary of the date of grant, and expire on the fifth anniversary or upon termination of employment. Options granted under the Plan prior to August 1, 1996 generally may be exercised in equal proportions during the years following the first, second and third anniversary of the date of grant, and expire on the fourth anniversary or upon termination of employment. In addition to the number of options outstanding as at April 30, 1997, the number of options which may be granted under the Plan is 8,745,273. Amendments to the Plan related to the vesting period and the number of shares reserved for issuance were approved by the Board of Directors in June 1997 and are subject to shareholder approval. Page 44 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) During the year ended April 30, 1995 the Company's shareholders approved the 1994 Stock Option Amendment Program for all outstanding options (other than those granted to directors) exercisable at prices greater than $20.00 per share. Under the program, the Company amended 4,108,760 options so that each such option has a date of grant of June 23, 1994, the date the program was initiated, and has an exercise price of $20.00 per share, the closing price of the Company's Common Shares on The Toronto Stock Exchange on that date. Activity in the stock option plan is summarized below.
Option Price --------------------------------- Weighted Options Low High Average --------- ------- ------- -------- Options outstanding April 30, 1994 12,207,658 $ 0.95 $43.74 $15.45 Granted during fiscal 1995 5,134,750 $21.65 $28.60 $24.34 Cancelled and expired (400,656) $ 0.95 $43.74 $20.75 Exercised (3,149,680) $ 0.95 $15.17 $ 3.95 --------- Options outstanding April 30, 1995 13,792,072 $ 1.68 $43.74 $16.46 Granted during fiscal 1996 5,193,100 $19.47 $34.73 $26.94 Cancelled and expired (699,804) $ 1.68 $34.23 $24.41 Exercised (5,161,664) $ 1.68 $26.89 $ 9.98 --------- Options outstanding April 30, 1996 13,123,704 $ 4.73 $43.74 $22.73 Granted during fiscal 1997 7,098,800 $30.18 $46.33 $38.89 Cancelled and expired (785,073) $ 4.76 $44.31 $25.74 Exercised (3,182,704) $ 4.73 $34.23 $17.23 --------- Options outstanding April 30, 1997 16,254,727 $19.47 $46.33 $30.72 ========== Option Price --------------------------------- Weighted Options Low High Average --------- ------- ------- -------- Options outstanding April 30, 1996 Vested 3,598,694 $ 4.73 $43.74 $18.23 Unvested 9,525,010 $19.47 $43.74 $24.43 ---------- 13,123,704 $ 4.73 $43.74 $22.73 ========== Weighted average remaining contractual life 2.45 years ========== Options outstanding April 30, 1997 Vested 4,867,116 $19.47 $43.74 $23.99 Unvested 11,387,611 $19.47 $46.33 $30.72 ---------- 16,254,727 $19.47 $46.33 $30.72 ========== Weighted average remaining contractual life 2.14 years ==========
Page 45 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) Stock Based Compensation The Company applies APB 25 and related interpretations in accounting for its Consolidated Key Employee Stock Option Plan. Accordingly, no compensation expense has been recognized for its stock based compensation plan. Had compensation costs for the Company's Consolidated Key Employee Stock Option Plan been determined based on the fair value at the grant date for awards under the Plan, consistent with the methodology prescribed under SFAS 123, the Company's net earnings and earnings per share would have been decreased to the following pro forma amounts.
1997 1996 -------- -------- Net earnings, as reported $156,917 $202,864 Estimated stock based compensation costs (57,398) (19,535) ------- ------- Pro forma net earnings $ 99,519 $183,329 ======= ======= Basic earnings per share 58c $ 1.11 ======= ======= Fully diluted earnings per share 58c $ 1.08 ======= =======
The weighted average fair value of all options granted during fiscal 1997 and 1996 was estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions.
1997 1996 -------- -------- Expected option life, in years 4.3 3.5 Volatility 112.1% 100.2% Risk free interest rate 6.4% 5.5% Dividend yield nil nil
The Black-Scholes model used by the Company to calculate option values, as well as other currently accepted option valuation models, were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated values. Accordingly, Management believes that this model does not necessarily provide a reliable single measure of the fair value of the Company's stock option awards. 13. Sale of Investment in InSoft, Inc. On April 25, 1996, the Company sold its minority equity interest in InSoft, Inc. ("InSoft"), a privately held multimedia software company. The disposition was effected through a merger in which InSoft shares were exchanged for common shares of the acquirer, which are publicly traded. The Company recognized a gain in fiscal 1996 on the sale of its InSoft shares of $12,715,000, representing the excess of the market value of the shares of the acquirer received, discounted to reflect certain restrictions on resale, over the cost to the Company of the InSoft shares exchanged. Page 46 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) 14. Income Taxes The components of the provision for income taxes are as follows:
1997 1996 1995 -------- -------- -------- Current $94,729 $96,180 $85,977 Deferred 22,989 4,599 10,967 ------- ------- ------- $117,718 $100,779 $96,944 ======= ======= =======
The provision for income taxes reported differs from the amount computed by applying the Canadian statutory rate to income before income taxes for the following reasons.
1997 1996 1995 -------- -------- -------- Earnings before income taxes: Domestic $182,745 $155,901 $105,155 Foreign 97,009 149,212 182,198 ------- ------- ------- $279,754 $305,113 $287,353 ======= ======= ======= Statutory income tax rate (Canada) 43.5% 43.5% 43.5% ==== ==== ==== Expected provision for income tax $121,693 $132,724 $124,998 Canadian rate adjustment for research and development activities (5,062) (4,318) (3,754) Canadian rate adjustment for manufacturing and processing activities (15,625) (13,407) (8,286) Loss carryforwards utilized (7,262) -- (352) Foreign tax differential (39,539) (21,686) (17,873) Purchased research and development in process related to UB Networks 42,169 -- -- Non-deductible reserves and surtaxes 21,344 7,466 2,211 ------- ------- ------- Reported income tax provision $117,718 $100,779 $ 96,944 ======= ======= =======
The components of the annual timing differences and the related deferred tax provision are as follows:
1997 1996 1995 -------- -------- -------- Tax depreciation in excess of accounting depreciation $ 4,530 $5,560 $ 6,725 Accounting provisions not deductible 3,570 (5,096) (1,750) Research and development expenses deducted for tax purposes in excess of accounting 2,530 3,440 5,509 Restructuring charges related to UB Networks 13,127 -- -- Losses available to offset future income taxes (768) 695 483 ---- ----- ------ Deferred income tax expense $22,989 $4,599 $10,967 ====== ===== ======
Page 47 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) The components of the deferred tax asset (liability) classified by the source of cumulative timing difference that gave rise to the credit are as follows:
Deferred Tax Asset Deferred Tax Liability --------------------- ---------------------- April 30, April 30, April 30, April 30, 1997 1996 1997 1996 -------- -------- -------- -------- Accounting depreciation in excess of (less than) tax depreciation $ 6,764 $ -- $(31,309) $(20,033) Accounting provisions not deductible 5,539 -- 299 9,408 Research and development expenses deducted for tax purposes less than (in excess of) accounting -- -- (1,807) 723 Net operating losses and restructuring charges related to acquisition of UB Networks 31,102 -- -- -- Other -- -- 378 -- Valuation allowance (6,012) -- -- -- ------ ------ ------- ----- $37,393 $ -- $(32,439) $(9,902) ====== ====== ======= =====
The Company recorded a deferred tax asset for net operating loss carryovers associated with the acquisition of UB Networks. These losses will expire at various dates through the year 2012. The components of the deferred tax asset (liability) classified by the source of timing difference that gave rise to the credit are not materially different from the temporary differences as calculated under the application of U.S. GAAP. At April 30, 1997, the Company had available investment tax credits of approximately $48,592,000 for the reduction of future years Canadian federal income tax liability. These credits expire during the years 2005-2007. Of this amount $20,113,000 has been applied to reduce the deferred tax liability. No recognition has been given in these financial statements to the potential tax benefits associated with the remaining balance of investment tax credits. 15. Earnings per Share Earnings per share has been calculated on the basis of net earnings for the period divided by the daily weighted average number of Common Shares outstanding during the fiscal year. The calculation of fully diluted earnings per share assumes that, if a dilutive effect is produced, all outstanding options had been exercised at the later of the beginning of the fiscal period and the option issue date, and includes an allowance for imputed earnings of $11,589,000 (fiscal 1996 -- $10,469,000; fiscal 1995 -- $6,812,000) derived from the investment of funds which would have been received at an after tax rate of 3.1% (fiscal 1996 -- 4.0%; fiscal 1995 -- 4.0%). Page 48 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) Under accounting principles generally accepted in the United States, earnings per share is calculated using the treasury stock method. The calculation of earnings per share under United States generally accepted accounting principles is as follows:
1997 1996 1995 -------- -------- -------- Net earnings Primary 90(c) $1.19 $1.13 Fully diluted 90(c) $1.17 $1.13 Weighted average number of shares Primary 174,525 170,990 166,646 Fully diluted 174,525 172,780 166,646
16. Related Party Transactions The Company leases facilities in Canada and the United Kingdom from companies controlled by Terence H. Matthews, Chairman of the Board of Directors, Chief Executive Officer and the largest shareholder of the Company, under terms and conditions reflecting prevailing market conditions at the time the leases were entered into. Approximately 343,000 square feet has been leased for various terms expiring between September 1997 and May 2002 at rates between $9.25 and $14.00 per square foot (approximately $3,200,000 per year). During the fiscal year ended April 30, 1996 the Company purchased a facility from a company controlled by Mr. Matthews for its fair market value of $5,244,000. During the fiscal year ended April 30, 1997 the Company paid $2,621,000 for research and development services from associated companies under usual trade terms and conditions (fiscal 1996 -- $507,000). The Company also purchased $8,597,000 of equipment and software from associated companies under usual trade terms, generally for resale (fiscal 1996 -- $7,442,000). The Company sold $20,559,000 of equipment and software to associated companies under usual trade terms, generally for resale (fiscal 1996 -- $1,207,000). The Company has equity interests in these associated companies ranging from 22% to 39% and is represented on the Boards of Directors of these companies. During the fiscal year ended April 30, 1997 the Company purchased approximately $3,393,000 of equipment under usual trade terms and conditions from corporations in which the Company has no equity interest, but for which certain directors of the Company served as chief executive officer and as a director and from corporations for which Terence H. Matthews served as a director (fiscal 1996 -- $944,000). During the fiscal year ended April 30, 1996 the Company performed subcontracted research and development under agreements between the Company and corporations controlled by three directors of the Company (the "R&D Corporations"). Subcontracted research and development under these agreements totalled $3,200,000 for fiscal 1996 (fiscal 1995 -- $4,900,000) and is accounted for as a recovery of gross research and development costs. The period covered by the subcontracted research and development agreements ended in the third quarter of fiscal 1996. The Company will pay a net royalty between 2% and 10%, depending on the level of cumulative royalties paid, on all sales of products developed. Page 49 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data) 17. Business Segment Information The Company operates primarily in one business segment -- the design, manufacture, sale and service of networking systems and devices for data and voice communications. The Company primarily operates in Canada, the United States, Europe, Asia Pacific and Latin America. Inter-segment sales are recorded at cost plus a mark up for development and manufacturing charges.
1997 1996 1995 --------- --------- --------- Sales Canada External customers $ 331,139 $ 217,541 $ 176,468 Inter-segment sales 342,729 250,126 173,014 --------- --------- --------- 673,868 467,667 349,482 --------- --------- --------- United States External customers 351,937 303,505 330,190 Inter-segment sales 31,904 9,570 7,404 --------- --------- --------- 383,841 313,075 337,594 --------- --------- --------- Europe External customers 440,844 273,665 219,535 Inter-segment sales 307,277 142,406 7,906 --------- --------- --------- 748,121 416,071 227,441 --------- --------- --------- Asia Pacific External customers 185,987 104,394 68,529 Inter-segment sales 21,028 204 168 --------- --------- --------- 207,015 104,598 68,697 --------- --------- --------- Latin America External customers 66,820 22,139 5,801 Inter-segment sales 33,447 32,577 20,818 --------- --------- --------- 100,267 54,716 26,619 --------- --------- --------- External customers 1,376,727 921,244 800,523 Inter-segment sales 736,385 434,883 209,310 --------- --------- --------- $2,113,112 $1,356,127 $1,009,833 ========= ========= ========= Operating Income Canada $284,423 $171,367 $116,186 United States 26,847 35,265 91,107 Europe 145,792 111,430 101,142 Asia Pacific 75,260 47,969 30,901 Latin America (9,289) 4,408 4,643 Research and development expenses (155,330) (97,205) (66,066) Purchased research and development in process (96,940) -- -- --------- --------- --------- 270,763 273,234 277,913 Non-operating income 8,990 31,879 9,440 Provision for income taxes (117,718) (100,779) (96,944) Non-controlling interest (5,118) (1,470) (2,019) --------- --------- --------- Net earnings $156,917 $202,864 $188,390 ========= ========= =========
Page 50 NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS April 30, 1997, 1996 and 1995 (Canadian dollars, tabular amounts in thousands except per share data)
1997 1996 1995 ---------- ----------- -------- Identifiable Assets Canada $ 405,126 $ 607,969 $471,826 United States 397,808 184,746 172,085 Europe 370,875 131,885 100,227 Asia Pacific 218,015 130,075 68,837 Latin America 104,879 38,742 14,188 ---------- ----------- -------- $1,496,703 $1,093,417 $827,163 ========== =========== ======== Export sales from operations in Canada (excluding inter-segment sales) were as follows. 1997 1996 1995 ---------- -------- -------- Latin America $169,377 $119,385 $ 85,591 Asia Pacific 49,166 32,902 28,455 ---------- -------- -------- $218,543 $152,287 $114,046 ========== ======== ========
Sales to Siemens A.G. and subsidiaries, generally under OEM arrangements for resale to end users, were 18% of total sales for fiscal 1997. 18. Litigation Subsequent to the close of the fiscal year ended April 30, 1997, Lucent Technologies Inc. ("Lucent Technologies") filed a complaint dated June 24, 1997 in United States District Court in Delaware against the Company and its United States subsidiary, Newbridge Networks Inc. Lucent Technologies manufactures and sells telecommunications systems, software and products, and is both a distributor of the Company's products and a competitor of the Company. The complaint alleges that the Company's manufacture and sale in the United States of Newbridge frame relay and ATM switch products infringe certain United States patent rights claimed by Lucent Technologies, and requests actual and trebled damages in an unspecified amount. The Company is in the process of responding to the complaint, and intends 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 these claims. 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 Page 51 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. On April 10, 1997, the Court issued an order granting in part and denying in part the defendants' motion to dismiss the Second Amended Complaint. Among other things, the Court dismissed with prejudice a substantial portion of plaintiffs' allegations. The Company has served an answer denying plaintiffs' claims. 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 Consolidated Financial Statements. Page 52 SELECTED QUARTERLY FINANCIAL DATA The quarterly financial data for the fiscal years ended April 30, 1997 and 1996 are derived from unaudited consolidated financial statements of the Company which include, in the opinion of Management, all normal and recurring adjustments considered necessary for a fair statement of results for such periods. The selected quarterly financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.
Fiscal 1996 Quarters Ended Fiscal 1997 Quarters Ended -------------------------- -------------------------- Jul 30, Oct 29, Jan 28, Apr 30, Jul 28, Oct 27, Jan 26, Apr 30, 1995 1995 1996 1996 1996 1996 1997 1997 ---- ---- ---- ---- ---- ---- ---- ---- (Canadian dollars, amounts in thousands except per share data) Income Statement Data: Sales $195,510 $217,116 $236,678 $271,940 $286,037 $316,082 $333,267 $441,341 Gross margin 129,546 141,731 154,075 176,147 185,294 203,897 213,261 266,687 Net earnings 37,112 45,376 53,881 66,495 60,801 62,781 63,031 (29,696) Earnings per share Basic 22(c) 27(c) 32(c) 40(c) 36(c) 37(c) 37(c) (17)(c) Fully diluted 22 27 31 38 35 36 36 (17) Weighted average number of shares Basic 165,115 165,864 166,548 167,807 169,228 170,232 170,941 171,701 Fully diluted 178,824 179,637 180,534 181,280 181,710 184,131 185,037 187,456 U.S. GAAP Net earnings/(1)/ $37,112 $45,376 $53,881 $66,495 $60,801 $62,781 $(33,909) $67,244 Net earnings per share/(2)/ Primary 22(c) 27(c) 31(c) 38(c) 35(c) 36(c) (20)(c) 38(c) Fully diluted 22 27 31 38 35 36 (20) 38 Fully diluted US$0.16 US$0.20 US$0.23 US$0.28 US$0.25 US$0.26 US$(0.15) US$0.28 Weighted average number of shares Primary 168,847 167,672 171,158 173,036 174,930 174,747 170,941 176,554 Fully diluted 168,847 167,672 172,729 174,454 174,930 174,747 170,941 176,554
- ---------------------- /(1)/ Under U.S. GAAP, research and development in process acquired by the Company on the acquisition of UB Networks was written off against net earnings upon acquisition in the third quarter of fiscal 1997. Under accounting principles generally accepted in Canada research and development in process acquired by the Company on the acquisition of UB Networks was capitalized upon acquisition and disclosed on the Consolidated Balance Sheet at January 26, 1997. Upon review of the recoverability of the research and development in process, undertaken during the fourth quarter of the fiscal year ended April 30, 1997, the Company determined that the purchased research and development in process no longer met all the criteria for deferral and accordingly the balance has been written off as a charge to earnings for the fourth fiscal quarter. The Company has significantly altered Page 53 product plans associated with the research and development projects and has concluded that recoverability cannot be reasonably regarded as assured. In addition, Management has determined that adequate resources may not be made available in future to complete the projects associated with the purchased in process research and development, as originally defined. /(2)/ See Note 15 to the Consolidated Financial Statements. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. Page 54 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company and their ages at June 19, 1997 are:
Name and Municipality of Residence Age Position - ---------------------------------- --- -------- Terence H. Matthews 54 Chairman of the Board, Chief Executive Kanata, Ontario, Canada Officer and Director Peter Sommerer 48 Vice Chairman of the Board Kanata, Ontario, Canada and Director Peter D. Charbonneau 43 President, Chief Operating Officer Ottawa, Ontario, Canada and Director James C. Avis 47 Executive Vice President, Ottawa, Ontario, Canada Business Development John D. Everard 48 Executive Vice President and General Chepstow, Wales Manager, European Region Conrad W. Lewis 44 Executive Vice President, Business Units Stittsville, Ontario, Canada Constantin S. Loudiadis 48 Executive Vice President and General Ottawa, Ontario, Canada Manager, Asia Pacific Region Scott W. Marshall 43 Executive Vice President, Research and Kanata, Ontario, Canada Development Dr. Donald Mills 63 Vice President, Administration Kanata, Ontario, Canada and Director F. Michael Pascoe 45 Executive Vice President and General Great Falls, Virginia, USA Manager, Americas Region Bruce W. Rodgers 42 Executive Vice President, Operations Richmond, Ontario, Canada Kenneth B. Wigglesworth 33 Vice President, Finance and Kanata, Ontario, Canada Chief Financial Officer
All of the above mentioned executive officers, with the exception of Constantin S. Loudiadis, have been employed by the Company in various capacities during the past five years. Prior to joining the Company in January 1997, Mr. Loudiadis held a variety of positions within the telecommunications group of Bell Canada since 1970, most recently as Vice President, Corporate Development of BCE Mobile Communications Inc. Page 55
Name and Municipality of Residence Age Position - ---------------------------------- --- -------- Dr. Denzil J. Doyle 65 Director Kanata, Ontario, Canada Alan D. Horn 45 Director Toronto, Ontario, Canada Trevor G. Jones 58 Director Willowdale, Ontario, Canada Peter C. Madsen 46 Director Manassas, Virginia, USA Graham C. C. Miller 66 Director Cotuit, Massachusetts, USA Kent H. E. Plumley 60 Director Kanata, Ontario, Canada Daniel C. Rusheleau 46 Director Renfrew, Ontario, Canada Dr. John C. J. Thynne 65 Director London, England
Terence H. Matthews founded the Company in June 1986 and has served as Chairman of the Board, Chief Executive Officer and a Director of the Company since that time. From the inception of the Company to June 1993 Mr. Matthews also served as President. Peter Sommerer has been Vice Chairman of Board of the Company since December 1996 and a Director of the Company since July 1991. From February 1987 to December 1996, Mr. Sommerer held a variety of positions with the Company, most recently as President and Chief Operating Officer. Peter D. Charbonneau has been President and Chief Operating Officer of the Company since December 1996 and a Director since November 1996. From January 1987 to December 1996, Mr. Charbonneau held a variety of positions with the Company, most recently as Executive Vice President and Chief Financial Officer. Dr. Denzil J. Doyle has been a Director of the Company since September 1987. Dr. Doyle has been Chairman of Capital Alliance Ventures Inc., a venture capital company specializing in investments in high technology companies since November 1995, and President of Doyletech Corporation, a consulting corporation specializing in new business ventures, since November 1982. He is also a director of International Datacasting Corporation, a manufacturer of satellite data broadcasting equipment. Dr. Doyle is a member of the Employee Compensation Committee and the Directors' Affairs Committee of the Board of Directors of the Company. Alan D. Horn has been a Director of the Company since July 1991. Mr. Horn has been Vice President, Finance and Chief Financial Officer of Rogers Communications Inc., a communications company, since October 1996. From April 1990 to October 1996 he was President and Chief Operating Officer of Rogers Telecommunications Limited, an investment holding company. He is Chairman of the Audit Committee and a member of the Directors' Affairs Committee of the Board of Directors of the Company. Trevor G. Jones has been a Director of the Company since June 1991. Mr. Jones has been President of JWA Associates, a business consulting company, since April 1991. Mr. Jones is Page 56 Chairman of the Directors' Affairs Committee and a member of the Audit Committee of the Board of Directors of the Company. Peter C. Madsen has been a Director of the Company since September 1987. Mr. Madsen has been President, Chief Executive Officer and a Director of Fastcomm Communications Corporation, a telecommunications company, since September 1992. Mr. Madsen has also been President of Professional Marketing Corporation, a telecommunications equipment distributor, since February 1992. Graham C. C. Miller has been a Director of the Company since September 1987. Mr. Miller has been Chairman of the Board of LTX Corporation, a manufacturer of semiconductor testing equipment, since 1976, and was President and Chief Executive Officer until February 1994. He is a member of the Audit Committee and the Directors' Affairs Committee of the Board of Directors of the Company. Dr. Donald Mills has been Vice President, Administration of the Company since April 1989. Dr. Mills has been a Director of the Company since September 1988. Kent H. E. Plumley has been a Director of the Company since June 1986. Mr. Plumley has been a partner of Osler, Hoskin & Harcourt, Barristers & Solicitors, since May 1990. Mr. Plumley is the Chairman of the Employee Compensation Committee of the Board of Directors of the Company. Daniel C. Rusheleau has been a Director of the Company since September 1987 and is a member of the Employee Compensation Committee. Since October 1993 Mr. Rusheleau has been President and Chief Executive Officer of West End Systems Corp., a communications equipment vendor. From December 1991 to October 1993 he was Vice President, Systems Architecture and Technology of the Company. Dr. John C. J. Thynne has been a Director of the Company since April 1992. Dr. Thynne has been Director General of the Electronic Components Industry Federation (United Kingdom) and Managing Director of Camrose Consultancy Services since January 1991. Dr. Thynne is a member of the Audit Committee of the Board of Directors of the Company. All directors of the Company hold office until the next annual meeting of shareholders or until the election and qualification of their successors. Executive officers of the Company are appointed by and serve at the discretion of the Board of Directors. Item 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference to Exhibit 99 to this Annual Report on Form 10-K, "Statement of Executive Compensation" as set forth in the form of the Company's proxy circular for the annual and special meeting of shareholders to be held on September 4, 1997. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information contained under the sub-captions "Report on Executive Compensation" and "Performance Graph". Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of the Company's Common Shares as at June 12, 1997 (i) by each person known by the Company to own beneficially more than 5% of the Company's Common Shares, (ii) by each of the Company's directors and (iii) by all directors and executive officers of the Company as a group. The information as to beneficial ownership is presented in accordance with the rules and regulations Page 57 under the United States Securities Exchange Act of 1934 and consequently may differ from similar information that appears in the Company's proxy circular prepared in accordance with the Canada Business Corporations Act for the annual and special meeting of shareholders to be held on September 4, 1997.
Shares Issuable Within 60 Days Total Shares Shares Currently Upon Exercise Beneficially % of Name and Address Directly Owned of Options/(1)/ Owned Class - ------------------------------------------------------------------------------------------------------------------ Terence H. Matthews 41,088,808 nil 41,104,808/(2)/ 23.78% Kanata, Ontario Donald Mills 1,139,516 8,332 1,166,848/(3)/ * Peter C. Madsen 388,860 10,000 410,060/(4)/ * Kent H. E. Plumley 266,052 25,998 338,788/(5)/ * Peter D. Charbonneau 30,000 44,664 242,364/(6)/ * Peter Sommerer nil 83,330 108,330/(7)/ * Graham C. C. Miller 45,616 24,666 70,282/(8)/ * Denzil J. Doyle 26,000 24,666 54,666/(9)/ * John C. J. Thynne 23,000 24,000 47,000 * Alan D. Horn nil 26,664 26,664 * Trevor G. Jones 8,068 nil 8,068 * Daniel C. Rusheleau 1,000 nil 1,000 * All directors and executive officers as a group (20 persons) 43,409,020 475,642 44,196,498/(10)/ 25.57%
- --------------- * Less than 1% /(1)/ Shares issuable upon exercise of stock options that are exercisable within 60 days of June 12, 1997. /(2)/ Includes 4,974,000 shares owned directly; 16,000 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership; 32,395,988 shares beneficially owned through control of Kanata Research Park Corporation; 1,745,920 shares beneficially owned through control of 2874806 Canada Inc.; 1,770,000 shares beneficially owned through control of 3090-8081 Quebec Inc.; 127,900 shares beneficially owned through 2985314 Canada Inc., and 75,000 shares beneficially owned through 2874814 Canada Inc. /(3)/ Includes 19,000 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership. /(4)/ Includes 11,200 shares beneficially owned through his children, as to which shares he disclaims beneficial ownership. /(5)/ Includes 42,872 shares and 3,866 shares issuable within 60 days upon the exercise of options beneficially owned through his wife, as to which shares and shares issuable upon the exercise of options he disclaims beneficial ownership. /(6)/ Includes 167,700 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership. Page 58 /(7)/ Includes 25,000 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership. /(8)/ Includes 45,616 shares owned jointly with his wife. /(9)/ Includes 4,000 shares beneficially owned through his wife, as to which shares he disclaims beneficial ownership. /(10)/ Includes, in the aggregate, 303,972 shares and 7,864 shares issuable within 60 days of June 12, 1997 upon the exercise of options beneficially owned through spouses and children, as to which shares and shares issuable upon the exercise of options they disclaim beneficial ownership. Except as otherwise indicated, the persons in the table have sole voting and investment powers with respect to all Common Shares beneficially owned by them subject to community property laws where applicable and the information contained in the footnotes to the table. Statements contained in the table as to shares beneficially owned by directors and executive officers or over which they exercise control or direction are, in each instance, based upon information obtained from such directors and executive officers. The Company is not aware of any person except the holder set forth above who beneficially owns or exercises control or direction over shares carrying more than 5% of the votes attached to such shares of the Company as at June 12, 1997. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to Exhibit 99 to this Annual Report on Form 10-K, "Statement of Executive Compensation" as set forth in the form of the Company's proxy circular for the annual and special meeting of shareholders to be held on September 4, 1997. Such incorporation by reference shall not be deemed to specifically incorporate by reference the information contained under the sub-captions "Report on Executive Compensation" and "Performance Graph". Page 59 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) The following financial statements and supplementary data are filed as part of this Report under Item 8:
Page ---- Financial Statements Auditors' Report to the Shareholders......................................29 Consolidated Statements of Earnings and Retained Earnings for the years ended April 30, 1997, 1996 and 1995....................................30 Consolidated Balance Sheets as at April 30, 1997 and 1996................................................31 Consolidated Statements of Cash Flows for the years ended April 30, 1997, 1996 and 1995..............................32 Consolidated Statements of Shareholders' Equity for the years ended April 30, 1997, 1996 and 1995......................33 Notes to the Consolidated Financial Statements............................34 Selected Quarterly Financial Data (unaudited)................................53
(b) The Registrant filed a Current Report on Form 8-K dated January 17, 1997 related to the purchase of Ungermann-Bass Networks, Inc. (c) The following exhibits are filed or incorporated by reference as part of this Report (Exhibit 10.1 is a compensatory plan or arrangement): 3.1 Articles of Amalgamation./(1)/ 3.2 By-Law No. 3. 10.1 Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan, as amended. 10.2 Notice of Intention to make a normal course issuer bid dated August 16, 1996 filed with The Toronto Stock Exchange regarding common share repurchases./(2)/ 10.3-- 10.7 [Reserved] 10.8 Credit Facilities Letter dated June 20, 1994 between Newbridge Networks Corporation and Royal Bank of Canada. /(3)/ 10.9-- 10.13 [Reserved] 10.14 License Agreement effective May 1, 1994 between 2880016 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 2880016 Canada Inc. and Newbridge Networks Corporation. /(4)/ 10.15 License Agreement effective May 1, 1994 between 3015955 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 3015955 Canada Inc. and Newbridge Networks Corporation. /(4)/ Page 60 10.16 License Agreement effective May 1, 1994 between 3028623 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 3028623 Canada Inc. and Newbridge Networks Corporation. /(4)/ 10.17 Lease dated May 29, 1997 for 76,230.65 square feet at 359 Terry Fox Drive, Kanata, Ontario. 10.18 Agreement and Purchase and Sale dated February 16, 1996 for approximately 25,000 square feet at Langstone Business Park, Langstone, Newport, Wales./(5)/ 10.19 Letter Agreement dated May 10, 1995 and Lease dated April 1, 1990 for 4,573 square feet, more or less, at 362 Terry Fox Drive, Kanata, Ontario./(5)/ 10.20 Lease dated May 1, 1995 for 1,882 square feet, more or less, at 362 Terry Fox Drive, Kanata, Ontario./(4)/ 10.21 Lease dated April 1, 1995 for 13,106 square feet, more or less, at 50 Sandhill Road, Kanata, Ontario./(4)/ 10.22 Lease dated April 23, 1997 for 242,856.67 square feet, more or less, at 349 Terry Fox Drive, Kanata, Ontario. 10.23 Sublease dated October 1, 1996 for 20,718 square feet, more or less, at 350 Terry Fox Drive, Kanata, Ontario. 10.24 Non-Competition Agreement between Terence Matthews and Newbridge Networks Corporation dated October 14, 1987. /(6)/ 11.1 Computation of earnings per share under accounting principles generally accepted in Canada. 11.2 Computation of earnings per share under accounting principles generally accepted in the United States. 21 Subsidiaries of the Registrant. 23 Consent of Independent Accountants. 27 Financial Data Schedule 99 "Statement of Executive Compensation" as set forth in the form of the Company's proxy circular for the annual and special meeting of shareholders to be held on September 4, 1997, incorporated by reference in Items 11 and 13 of this Annual Report on Form 10-K, to the extent set forth therein. This exhibit shall not be deemed to be "soliciting material" or to be "filed" with the United States Securities and Exchange Commission for purposes of Section 14 of the United States Securities Exchange Act of 1934, nor shall it be deemed to be a "management proxy circular" for the purposes of soliciting proxies under the Canada Business Corporations Act. _____________________ /(1)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 0-17865) for the fiscal quarter ended July 30, 1994. /(2)/ Incorporated by reference to the Company's Quarterly Report on Form 10-Q (File No. 1-13316) for the fiscal quarter ended July 28, 1996. Page 61 /(3)/ Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 0-17865) for the fiscal year ended April 30, 1994. /(4)/ Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1995. /(5)/ Incorporated by reference to the Company's Annual Report on Form 10-K (File No. 1-13316) for the fiscal year ended April 30, 1996. /(6)/ Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 33-29187) filed on June 8, 1989, as amended. Page 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Date: June 25, 1997 By: /s/ Terence H. Matthews -------------------------------- Terence H. Matthews, Chairman of the Board of Directors and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: June 25, 1997 By: /s/ Terence H. Matthews -------------------------------- Terence H. Matthews, Chairman of the Board, Chief Executive Officer and Director (Principal Executive Officer) Date: June 25, 1997 By: /s/ Kenneth B. Wigglesworth -------------------------------- Kenneth B. Wigglesworth, Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: June 25, 1997 By: /s/ Peter D. Charbonneau -------------------------------- Peter D. Charbonneau, President, Chief Operating Officer and Director Page 63 Date: June 25, 1997 By: /s/ Dr. Denzil J. Doyle ---------------------------------- Dr. Denzil J. Doyle, Director Date: June 25, 1997 By: /s/ Alan D. Horn ---------------------------------- Alan D. Horn, Director Date: June 25, 1997 By: /s/ Trevor G. Jones ---------------------------------- Trevor G. Jones, Director Date: June 25, 1997 By: /s/ Peter C. Madsen ---------------------------------- Peter C. Madsen, Director Date: June 25, 1997 By: /s/ Graham C. C. Miller ---------------------------------- Graham C. C. Miller, Director Date: June 25, 1997 By: /s/ Dr. Donald Mills ---------------------------------- Dr. Donald Mills, Vice President and Director Date: June 25, 1997 By: /s/ Kent H. E. Plumley ---------------------------------- Kent H. E. Plumley, Director Page 64 Date: June 25, 1997 By: /s/ Daniel C. Rusheleau ---------------------------------- Daniel C. Rusheleau, Director Date: June 25, 1997 By: /s/ Peter Sommerer ---------------------------------- Peter Sommerer, Vice Chairman of the Board and Director Date: June 25, 1997 By: /s/ Dr. John C. J. Thynne ---------------------------------- Dr. John C. J. Thynne, Director Page 65 EXHIBIT INDEX
Exhibit No. Page - ------- ---- 3.1 Articles of Amalgamation.(1) 3.2 By-Law No. 3. ............................................................68--79 10.1 Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan, as amended. ........................................................80--93 10.2 Notice of Intention to make a normal course issuer bid dated August 16, 1996 filed with The Toronto Stock Exchange regarding common share repurchases.(2) 10.3-- 10.7 [Reserved] 10.8 Credit Facilities Letter dated June 20, 1994 between Newbridge Networks Corporation and Royal Bank of Canada.(3) 10.9-- 10.13 [Reserved] 10.14 License Agreement effective May 1, 1994 between 2880016 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 2880016 Canada Inc. and Newbridge Networks Corporation.(4) 10.15 License Agreement effective May 1, 1994 between 3015955 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 3015955 Canada Inc. and Newbridge Networks Corporation.(4) 10.16 License Agreement effective May 1, 1994 between 3028623 Canada Inc. and Newbridge Networks Corporation; Development Agreement effective May 1, 1994 between 3028623 Canada Inc. and Newbridge Networks Corporation.(4) 10.17 Lease dated May 29, 1997 for 76,230.65 square feet at 359 Terry Fox Drive, Kanata, Ontario. ..................................................94--134 10.18 Agreement and Purchase and Sale dated February 16, 1996 for approximately 25,000 square feet at Langstone Business Park, Langstone, Newport, Wales.(5) 10.19 Letter Agreement dated May 10, 1995 and Lease dated April 1, 1990 for 4,573 square feet, more or less, at 362 Terry Fox Drive, Kanata, Ontario.(5) 10.20 Lease dated May 1, 1995 for 1,882 square feet, more or less, at 362 Terry Fox Drive, Kanata, Ontario.(4)
Page 66 EX-3.2 2 BY-LAWS NO. 3 EXHIBIT 3.2 Page 68 BY-LAW NO. 3 ------------ A by-law relating generally to the transaction of the business and affairs of NEWBRIDGE NETWORKS CORPORATION ------------------------------ BE IT ENACTED as a by-law of the Corporation as follows: 1- INTERPRETATION -------------- 1.0 Definitions - In the by-laws of the Corporation, unless the ----------- context otherwise requires: "Act" means the Canada Business Corporations Act, and any statute that may be substituted therefor, as from time to time amended; "articles" means the articles attached to the certificate of incorporation dated June 9, 1986 of the Corporation as from time to time amended or restated; "board" means the Board of Directors of the Corporation; "by-laws" means this by-law and all other by-laws of the Corporation from time to time in force and effect; "Corporation" means Newbridge Networks Corporation; "meeting of shareholders" includes an annual meeting of shareholders or a special meeting of shareholders or both, and includes a meeting of any class or series of any class of shareholders; "non-business day" means Saturday, Sunday and any other day that is a holiday as defined in the Interpretation Act (Canada); "recorded address" means in the case of a shareholder the address as recorded in the securities register and in the case of joint shareholders the address appearing in the securities register in respect of such joint holdings or the first address so appearing if there are more than one; and in the case of a Page 69 director, officer, auditor or member of a committee of the board, the latest address as recorded in the records of the Corporation; "signing officer" means, in relation to any instrument, any person authorized to sign the same on behalf of the Corporation by section 2.2 or by a resolution passed pursuant thereto; Words importing the singular number include the plural and vice versa; words importing gender include the masculine, feminine and neuter genders; and words importing persons include individuals, bodies corporate, partnerships, trusts and unincorporated organizations. 2 - BUSINESS OF THE CORPORATION --------------------------- 2.1 Financial Year - Until changed by the board, the financial -------------- year of the Corporation shall end on the 30th day of April in each year. 2.2 Execution of Instruments - The board may from time to time ------------------------ determine the officers or other persons by whom any particular documents or instrument or class of documents or instruments of the Corporation shall be executed and the manner of execution thereof, including the use of facsimile reproductions of any or all signatures and the use of the corporate seal or a facsimile reproduction thereof. 3 - BORROWING AND SECURITIES ------------------------ 3.1 Borrowing Power - Without limiting the borrowing powers of ---------------- the Corporation as set forth in the Act, the board may from time to time: (a) borrow money upon the credit of the Corporation; (b) issue, reissue, sell or pledge, bonds, debentures, notes or other evidence of indebtedness or guarantee of the Corporation, whether secured or unsecured; (c) to the extent permitted by the Act, give, directly or indirectly, financial assistance to any person by means of a loan, a guarantee to secure the performance of an obligation or otherwise; (d) mortgage, hypothecate or otherwise create a security interest in all or any property of the Corporation, owned or Page 70 subsequently acquired, to secure any obligation of the Corporation. Nothing in this section limits or restricts the borrowing of money by the Corporation on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the Corporation. 3.2 Delegation - The board may from time to time by resolution delegate ---------- to a director, a committee of directors or an officer of the Corporation as may be designated by the board all or any of the powers conferred on the board by section 3.1 or by the Act to such extent and in such manner as the board shall determine at the time of each such delegation. 4 - DIRECTORS --------- 4.1 Number of Directors and Quorum - Until changed in accordance with ------------------------------ the Act, the board shall consist of not fewer than the minimum number and not more than the maximum number of directors provided in the articles. Subject to the Act, the quorum for the transaction of business at any meeting of the board shall consist of a majority of directors or such other number of directors as the board may from time to time determine. 4.2 Election and Term - Directors shall be elected yearly to hold ----------------- office until the next annual meeting of shareholders and until their successors are elected. At each annual meeting of shareholders, all the directors then in office shall retire but, if qualified, shall be eligible for re-election. A director not elected for an expressly stated term ceases to hold office at the close of the first annual meeting of shareholders following his election. The number of directors to be elected at any such meeting shall be the number of directors then in office unless the directors otherwise determine. The election shall be by resolution. If directors are not elected at a meeting of shareholders the incumbent directors continue in office until their successors are elected. 4.3 Vacancies - Subject to the Act, a quorum of the directors may fill --------- a vacancy in the board, except a vacancy resulting from a failure of the shareholders to elect the number or minimum number of directors required by the articles. In the absence of a quorum of the board, or if the vacancy has arisen from a failure of the shareholders to elect the number or minimum number of directors required by the articles, the directors then in office shall forthwith call a special meeting of shareholders to fill the vacancy. If the directors fail to call such meeting or if there are no such directors then in office, any shareholder may call the meeting. Page 71 4.4 Place of Meetings - Meetings of the board may be held at the ------------------ registered office of the Corporation or at any other place in or outside Canada. 4.5 Calling of Meetings - Meetings of the board shall be held from ------------------- time to time at such time and at such place as the board, the chairman of the board or any two directors may determine. 4.6 Notice of Meeting - Notice of the time and place of each meeting ----------------- of the board shall be given to each director not less than 48 hours before the time when the meeting is to be held. A notice of a meeting of directors need not specify the purpose of or the business to be transacted at the meeting except where the Act requires such purpose or business to be specified. A director may in any manner waive notice of or otherwise consent to a meeting of the board. Attendance of a director at a meeting of directors is a waiver of notice of the meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. 4.7 Adjourned Meeting - Notice of an adjourned meeting of the board is ----------------- not required if the time and place of the adjourned meeting is announced at the original meeting. 4.8 Chairman - The chairman of any meeting of the board shall be the -------- first mentioned of such of the following officers as have been appointed and who is a director and is present at the meeting: chairman of the board, president, or a vice-president who is a director. If no such officer is present, the directors present shall choose one of their number to be chairman. 4.9 Votes to Govern - At all meetings of the board every question --------------- shall be decided by a majority of the votes cast on the question. In case of an equality of votes the chairman of the meeting (unless precluded from voting pursuant to the Act) be entitled to a second or casting vote. Any question at a meeting of the board shall be decided by a show of hands unless a ballot is required or demanded. 4.10 Conflict of Interest - A director or officer of the Corporation -------------------- who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or proposed material contract with the Corporation shall disclose in writing to the Corporation or request to have entered in the minutes of Page 72 meetings of directors the nature and extent of his interest at the time and in the manner provided by the Act. Any such contract or proposed contract shall be referred to the board or the shareholders for approval even if such contract is one that in the ordinary course of the business would not require approval by the board or the shareholders, and a director interested in a contract so referred to the board shall not vote on any resolution to approve the same except as provided by the Act. 4.11 Remuneration and Expenses - The directors shall be paid such ------------------------- remuneration for their services as the board may from time to time authorize. The directors shall also be entitled to be reimbursed for travelling and other expenses properly incurred by them in attending meetings of the board or any committee thereof. Nothing herein contained shall preclude any director from serving the Corporation in any other capacity and receiving remuneration therefor. 5 - COMMITTEES ---------- 5.1 Committee of Directors - The board may appoint from its members a ---------------------- committee of directors, however designated, and delegate to such committee any of the powers of the board except those which, under the Act, a committee of directors has no authority to exercise. 5.2 Procedure - Unless otherwise determined by the board, each --------- committee shall have the power to fix its quorum at not less than a majority of its members, to elect its chairman and to regulate its procedure. 6 - OFFICERS -------- 6.1 Appointment - The board may from time to time appoint a chief ----------- executive officer, president, one or more vice-presidents (to which title may be added words indicating seniority or function), a secretary, a treasurer and such other officers as the board may determine, including one or more assistants to any of the officers so appointed. The board may specify the duties of and, in accordance with this by-law and subject to the provisions of the Act, delegate to such officers power to manage the business and affairs of the Corporation. An officer may but need not be a director and one person may hold more than one office. 6.2 Officers of Divisions - From time to time the board or, if --------------------- authorized by the board, the chief executive officer, may appoint one or more officers for any division as the board may consider Page 73 appropriate and prescribe their powers and duties and settle their terms of employment and remuneration. 6.3 Powers and Duties of Officers - The powers and duties of all ----------------------------- officers shall be such as the terms of their engagement call for or as the board or chief executive officer may specify. Any of the powers and duties of an officer to whom an assistant has been appointed may be exercised and performed by such assistant, unless the board otherwise directs. 6.4 Agents and Attorneys - The board may from time to time to appoint -------------------- agents or attorneys for the Corporation in or outside Canada with such powers of management or otherwise (including the power to sub-delegate) as may be thought fit. 7 - PROTECTION OF DIRECTORS, OFFICERS AND OTHERS -------------------------------------------- 7.1 Limitation of Liability - Every director and officer of the ----------------------- Corporation in exercising his powers and discharging his duties shall act honestly and in good faith with a view to the best interests of the Corporation and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Subject to the foregoing, no director or officer shall be liable for the acts, receipts, neglects or defaults of any other director or officer or employee, or for joining in any receipt or other act for conformity, or for any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired for or on behalf of the Corporation, or for the insufficiency or deficiency of any security in or upon which any of the moneys of the Corporation shall be invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious acts of any person with whom any of the moneys, securities or effects of the Corporation shall be deposited, or for any loss occasioned by any error of judgement or oversight on his part, or for any other loss, damage or misfortune whatever which shall happen in the execution of the duties of his office or in relation thereto, unless the same are occasioned by his own wilful neglect or default; provided that nothing herein shall relieve any director or officer from the duty to act in accordance with the Act and the regulations thereunder or from liability for any breach thereof. 7.2 Indemnity - Except in respect of an action by or on behalf of the --------- Corporation or body corporate to procure a judgement in its favour, the Corporation shall indemnify a director or officer of the Corporation, a former director or officer of the Corporation, or a Page 74 person who acts or acted at the Corporation's request as a director of officer of a body corporate of which the Corporation is or was a shareholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Corporation or body corporate or by reason of having undertaken such liability; and the Corporation shall with the approval of a court indemnify any such person in respect of an action by or on behalf of the Corporation or body corporate to procure a judgement in its favour, to which such person is made a party by reason of being or having been a director or an officer of the Corporation or body corporate, against all costs, charges and expenses reasonably incurred by such director or officer in connection with such action; if in each case such person: (a) acted honestly and in good faith with a view to the best interests of the Corporation; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing that his conduct was lawful. Notwithstanding the foregoing, the Corporation shall, without requiring the approval of a court, indemnify any person referred to above, in respect of an action by or on behalf of the Corporation or body corporate to procure a judgment in its favour who has been substantially successful on the merits in the defence of any civil, criminal or administration action or proceeding to which such person is made a party by reason of being or having been a director or officer of the Corporation or body corporate, against all costs, charges and expenses reasonably incurred by such person in respect of such action or proceeding, provided that such person has satisfied the appropriate conditions referred to in (a) and (b) above. The Corporation shall also indemnify such person in such other circumstances as the Act permits or requires. Nothing in this by-law shall limit the right of any person entitled to indemnity to claim indemnity apart from the provisions of this by-law. 7.2 Insurance - Subject to the limitations contained in the Act, the --------- Corporation may purchase and maintain insurance for the benefit of any person referred to in section 7.2 as the board may from time to time determine. Page 75 8 - SHARES ------ 8.1 Share Certificates - Every holder of one or more shares of the ------------------ Corporation shall be entitled, at the holder's option, to a share certificate, or to a non-transferable written acknowledgment of the holder's right to obtain a share certificate, stating the number of class or series of shares held by the holder as shown on the securities register. Share certificates and acknowledgments of a shareholder's right to a share certificate, respectively, shall be in such form as the board shall from time to time approve. Any share certificate shall be signed in accordance with section 2.2 and need not be under the corporate seal; provided that, unless the board otherwise determines, certificates representing shares in respect of which a transfer agent and/or registrar has been appointed shall not be valid unless countersigned by or on behalf of such transfer agent and/or registrar. The signature of one of the signing officers or, in the case of share certificates which are not valid unless countersigned by or on behalf of a transfer agent and/or registrar, the signatures of both signing officers, may be printed or mechanically reproduced in facsimile upon share certificates and every such facsimile signature shall for all purposes be deemed to be the signature of the officer whose signature it reproduces and shall be binding upon the Corporation. A share certificate executed as aforesaid shall be valid notwithstanding that one or both of the officers whose facsimile signature appears thereon no longer holds office at the date of issue of the certificate. 9 - DIVIDENDS AND RIGHTS -------------------- 9.1 Dividend Cheques - A dividend payable in cash shall be paid by ---------------- cheque drawn on the Corporation's bankers or one of them to the order of each registered holder of shares of the class or series in respect of which it has been declared and mailed by prepaid ordinary mail to such registered holder at his recorded address, unless such holder otherwise directs. In the case of joint holders the cheque shall, unless such joint holders otherwise direct, be made payable to the order of all of such joint holders and mailed to them at their recorded address. The mailing of such cheque as aforesaid, unless the same is not paid on due presentation, shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Corporation is required to and does withhold. 9.2 Non-Receipt of Cheques - In the event of non-receipt of any ---------------------- dividend cheque by the person to whom it is sent as aforesaid, the Corporation shall issue to such person a replacement cheque for a like Page 76 amount on such terms as to indemnity, reimbursement of expenses and evidence of non-receipt and of title as the board or any officer or agent designated by the board may from time to time prescribe, whether generally or in any particular case. 9.3 Unclaimed Dividends - Any dividend unclaimed after a period of 6 ------------------- years from the date on which the same has been declared to be payable shall be forfeited and shall revert to the Corporation. 10 - MEETING OF SHAREHOLDERS ----------------------- 10.1 Annual Meetings - The board shall call an annual meeting of --------------- shareholders. The annual meeting of shareholders shall be held at such time in each year and, subject to section 10.3, at such place as the board may from time to time determine, for the purpose of considering the financial statements and reports required by the Act to be placed before the annual meeting, electing directors, appointing auditors and for the transaction of such other business as may properly be brought before the meeting provided, in the case of any annual meeting called other than by the board, the board shall approve the submission to the meeting of any question or matter requiring approval of the shareholders. 10.2 Special Meetings - The board shall have power to call a ---------------- special meeting of shareholders at any time. 10.3 Place of Meeting - Meetings of shareholders shall be held at the ---------------- registered office of the Corporation or elsewhere in the municipality in which the registered office is situate or, if the board shall so determine, at some other place in Canada or, if all the shareholders entitled to vote at the meeting so agree, at some place outside Canada and a shareholder who attends a meeting outside Canada is deemed to have so agreed except when such shareholder attends such meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully held. 10.4 Chairman, Secretary and Scrutineers - The chairman of any meeting ----------------------------------- of shareholders shall be the first mentioned of such of the following director or officers as have been appointed and who are present at the meeting: chairman of the board, president, or a director designated by the board. If the secretary of the Corporation is absent, the chairman shall appoint some person, who need not be a shareholder, to act as secretary of the meeting. If desired, one or more scrutineers, who need not be shareholders, may be appointed by the chairman with such duties as the chairman may prescribe. Page 77 10.5 Quorum - A quorum for the transaction of business at any meeting of ------ shareholders shall be five persons present in person, each being a shareholder or representative duly authorized in accordance with the Act entitled to vote thereat or a duly appointed proxy for a shareholder so entitled and together holding or representing by proxy not less than 10% of the outstanding shares of the Corporation entitled to vote at the meeting. If a quorum is present at the opening of the meeting, the shareholders present in person or by proxy may proceed with the business of the meeting even if a quorum is not present throughout the meeting. 10.6 Votes to Govern - At any meeting of shareholders every question --------------- shall, unless otherwise required by the articles or by-laws or by law, be determined by the majority of the votes cast on the question. In case of an equality of votes either upon a show of hands or upon a poll, the chairman of the meeting shall be entitled to a second or casting vote. 10.7 Show of Hands - Subject to the provisions of the Act, any question at ------------- a meeting of shareholders shall be decided by a show of hands unless a ballot thereon is required or demanded as hereinafter provided. Upon a show of hands every person who is present and entitled to vote shall have one vote. Whenever a vote by show of hands shall have been taken upon a question, unless a ballot thereon is so required or demanded, a declaration by the chairman of the meeting that the vote upon the question has been carried or carried by a particular majority or not carried and an entry to that effect in the minutes of the meeting shall be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against any resolution or other proceeding in respect of the said question, and the result of the vote so taken shall be the decision of the shareholders upon the said question. 10.8 Ballots - On any question proposed for consideration at a meeting of ------- shareholders, and whether or not a show of hands has been taken thereon, the chairman may require, or any shareholder or proxyholder entitled to vote at the meeting may require or demand a ballot. A ballot so required or demanded shall be taken in such manner as the chairman shall direct. A requirement or demand for a ballot may be withdrawn at any time prior to the taking of the ballot. If a ballot is taken each person present shall be entitled, in respect of the shares which each person is entitled to vote at the meeting upon the question, to that number of votes provided by the Act or the articles, and the result of the ballot so taken shall be the decision of the shareholders upon the said question. Page 78 11 - REPEAL ------ 11.1 Repeal - Upon this by-law coming into force, By-law No. 2 of the ------ Corporation is repealed. However, such repeal shall not affect the previous operation of such by-law or affect the validity of any act done or right, privilege, obligation or liability acquired or incurred under the validity of any contract or agreement made pursuant to such by-law prior to its repeal. All officers and persons acting under such repealed by-law shall continue to act as if appointed under the provisions of this by-law and all resolutions of the shareholders or board with continuing effect passed under such repealed by-law shall continue good and valid, until amended or repealed, except to the extent inconsistent with this by-law. 12 - EFFECTIVE DATE -------------- 12.1 Effective Date - This by-law shall come into force when enacted by -------------- the directors, subject to the Act. Page 79 EX-10.1 3 EMPLOYEE STOCK OPTION PLAN EXHIBIT 10.1 Page 80 [LOGO OF NEWBRIDGE NETWORKS APPEARS HERE] NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED KEY EMPLOYEE STOCK OPTION PLAN 1. Purpose of the Plan The purpose of the Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan is to develop the interest of and provide an incentive to eligible employees, directors and consultants of Newbridge Networks Corporation (the "Corporation") and its subsidiaries in the Corporation's growth and development by granting to eligible employees, directors and consultants from time to time options to purchase Common Shares of the Corporation, thereby advancing the interests of the Corporation and its shareholders. 2. Definitions In this Plan: (a) "Associates" has the meaning assigned by the Ontario Securities Act; (b) "Board of Directors" means the board of directors of the Corporation; (c) "Committee" means: (i) with respect to Participants, the Employee Compensation Committee of three or more members appointed by the Board of Directors to administer the Plan and the Board of Directors if no Employee Compensation Committee has been appointed; and (ii) with respect to Director Participants, the Board of Directors; (d) "Common Shares" means the common shares of the Corporation; (e) "Corporations Act" means the Canada Business Corporations Act, as amended, and the regulations promulgated thereunder. (f) "Date of Grant" means, for any Option, the date upon which the Option was granted; Page 81 (g) "Director Participant" means a director of the Corporation who is not an employee of the Corporation; (h) "Disability" means permanent and total disability as determined under policies established by the Committee for the purposes of the Plan; (i) "Exercise Period" means, with respect to any Option Shares, the period during which an Optionee may purchase such Option Shares; (j) "Insider" means an insider of the Corporation as defined in the "Employee Stock Option and Stock Purchase Plans, Options for Service and Related Matters" section of The Toronto Stock Exchange Company Manual; (k) "Ontario Securities Act" means the Securities Act, RSO 1990, c.s 5, as amended; (l) "Option" means a non-assignable and non-transferable option to purchase Common Shares granted pursuant to the Plan; (m) "Optionee" means a Participant or a Director Participant who has been granted one or more Options; (n) "Option Shares" means Common Shares which are subject to purchase upon the exercise of outstanding Options; (o) "Participant" means a current or former full-time permanent employee of the Corporation or any of its Subsidiaries or a director (other than a Director Participant) of any Subsidiary of the Corporation, or a person (other than a Director Participant) or corporation or other entity providing consulting or similar services to the Corporation or any of its Subsidiaries; (p) "Plan" means the Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan as set out herein; (q) "Plan Shares" means that number of Common Shares reserved for issuance pursuant to the exercise of stock options in accordance with the terms of the Plan; (r) "Retirement" means retirement from active employment with the Corporation or a Subsidiary in accordance with the Corporation's or Subsidiary's policies from time to time relating to mandatory or early retirement of employees, or with the consent for purposes of the Plan of such officer of the Corporation as may be designated by the Committee, at or after such earlier age and upon the completion of such years of service as the Committee may specify; and Page 82 (s) "Subsidiary" means any corporation in which the Corporation, directly or through one or more corporations which are themselves Subsidiaries of the Corporation, owns 50% or more of the shares eligible to vote at meetings of the shareholders. 3. Eligibility All Participants and Director Participants shall be eligible to participate in the Plan. Eligibility to participate shall not confer upon any Participant any right to be granted Options pursuant to the Plan. The extent to which any Participant shall be entitled to be granted Options pursuant to the Plan shall be determined in the sole and absolute discretion of the Committee. Provided however that: (i) The number of Common Shares reserved for issuance to any one person pursuant to Options shall not exceed 5% of the outstanding issue; and (ii) The number of Common Shares reserved for issuance pursuant to Options granted to Insiders shall not exceed 10% of the outstanding issue; (iii) The number of Common Shares issued to Insiders within a one year period pursuant to the Plan shall not exceed 10% of the outstanding issue; and (iv) The number of Common Shares issued to any one Insider and such Insider's Associates within a one-year period shall not exceed 5% of the outstanding issue. For purposes of the meaning of "outstanding issue" in (iii) and (iv) above, this shall be determined on the basis of the number of Common Shares that are outstanding immediately prior to the share issuance in question, excluding shares issued pursuant to the Plan over the preceding one-year period. 4. Number of Option Shares Available for Grants The Plan Shares shall not exceed 25,000,000 Common Shares, subject to the adjustment of such number pursuant to paragraph 18. No Option may be granted by the Committee which would have the effect of causing the total number of all Option Shares to exceed the number of Plan Shares. Page 83 Upon the expiration, cancellation or termination, in whole or in part, of an unexercised Option, the Option Shares subject to such Option shall be available for other Options to be granted from time to time. 5. Granting of Options The Committee may from time to time grant Options to Participants to purchase a specified number of Common Shares at a specified exercise price per share. The number of Option Shares to be granted, the exercise price, the Date of Grant, and such other terms and conditions of the Option shall be as determined by the Committee. The Committee shall grant Options to Director Participants upon the occurrence of the events set forth in Schedule I to the Plan. For all such Options, the Date of Grant, exercise price and number of Option Shares shall, subject to the adjustment of the number of Option Shares pursuant to paragraph 18, be as set forth in Schedule I, and such other terms and conditions of the Option as determined by the Committee. 6. Exercise Price The exercise price per Common Share purchasable under an Option shall not be lower than the average of the average of the daily high and low board lot trading prices on the Toronto Stock Exchange for the five days preceding the Date of Grant, rounded to the next highest cent. 7. Exercise Period Unless otherwise specified by the Committee at the time of granting an Option, and except as otherwise provided in the Plan, each Option shall be exercisable in the following installments: Page 84
Percentage of Total Number of Option Shares Which May Be Purchased Exercise Period ------------------------------ -------------------------------- 25% From the first anniversary of the Date of Grant to and including the fifth anniversary of the Date of Grant 25% From the second anniversary of the Date of Grant to and including the fifth anniversary of the Date of Grant 25% From the third anniversary of the Date of Grant to and including the fifth anniversary of the Date of Grant 25% From the fourth anniversary of the Date of Grant to and including the fifth anniversary of the Date of Grant
Once an installment becomes exercisable it shall remain exercisable until expiration or termination of the Option, unless otherwise specified by the Committee. Each Option or installment may be exercised at any time or from time to time, in whole or in part, for up to the total number of Common Shares with respect to which it is then exercisable. The Committee shall have the right to accelerate the date upon which any installment of any Option is exercisable. 8. Term of Options Subject to accelerated termination as provided for in the Plan, each Option shall, unless otherwise specified by the Committee, expire on the fifth anniversary of the Date of Grant, provided, however, that no Option may be exercised after the tenth anniversary of the Date of Grant. 9. Exercise of Options An Optionee or the transferee of an Option pursuant to paragraph 14 may, at any time within the Exercise Period elect to purchase all or a portion of the Option Shares which the Optionee is then entitled to purchase by delivering to the Corporation a completed notice of exercise, specifying the Date of Grant of the Option being exercised, the exercise price of the Option and the number of Option Shares the Optionee desires to purchase. The notice of exercise shall be accompanied by payment in full of the purchase price for such Option Shares. Page 85 Payment can be made by cash, certified cheque, bank draft, money order or the equivalent payable to the order of the Corporation. 10. Withholding of Tax If the Corporation determines that under the requirements of applicable taxation laws it is obliged to withhold for remittance to a taxing authority any amount upon exercise of an Option, the Corporation may, prior to and as a condition of issuing the Option Shares, require the Optionee or the transferee of an Option pursuant to paragraph 14 exercising the Option to pay to the Corporation, in addition to and in the same manner as the purchase price for the Option Shares, such amount as the Corporation is obliged to remit to such taxing authority in respect of the exercise of the Option. Any such additional payment shall, in any event, be due no later than the date as of which the applicable amount must be remitted by the Corporation to the appropriate taxing authority. 11. Share Certificates Upon exercise of an Option and payment in full of the purchase price and any applicable tax withholdings, the Corporation shall cause to be issued and delivered to the Optionee within a reasonable period of time a certificate or certificates in the name of or as directed by the Optionee representing the number of Common Shares the Optionee has purchased. 12. Termination of Employment or Services Unless otherwise determined by the Committee, if an Optionee's employment or services as a director or consultant terminate for any reason other than death, Disability or Retirement, any Option held by such Optionee shall expire and be cancelled upon the earlier of the 60th day following such termination or the expiration of the stated term of such Option. Options shall not be affected by any change of employment within or among the Corporation or its Subsidiaries or by termination of services as a director, unless otherwise determined by the Committee, so long as the Participant continues to be an employee of or consultant to the Corporation or a Subsidiary or a director of the Corporation or a Subsidiary. 13. Termination by Reason of Death, Disability or Retirement Unless otherwise determined by the Committee, if an Optionee's employment or services as a director or consultant terminate by reason of death, Disability or Retirement, any Option held by such Optionee shall expire and be cancelled upon the earlier of the 180th day following such termination or the expiration of the stated term of such Option. Page 86 14. Transfer and Assignment Options granted under the Plan are not assignable or transferable by the Optionee or the Optionee's personal representative or subject to any other alienation, sale, pledge or encumbrance by such Optionee except by will or by the laws of intestacy. During the Optionee's lifetime Options shall be exercisable only by the Optionee or the Optionee's personal representatives. The obligations of each Optionee shall be binding on his heirs, executors and administrators. 15. No Right to Employment The granting of an Option to a Participant under the Plan does not confer upon the Participant any right to expectation of employment by, or to continue in the employment of, the Corporation or any Subsidiary, or to be retained as a consultant by the Corporation or any Subsidiary. 16. Rights as Shareholders The Optionee or the transferee of an Option pursuant to paragraph 14 shall not have any rights as a shareholder with respect to Option Shares until the Common Shares have been duly purchased and paid for in accordance with the terms of the Plan. 17. Administration of the Plan The Plan shall be administered by the Committee. No member of the Committee, while a member, shall be eligible to participate in the Plan other than with respect to Options granted as set forth in Schedule I to the Plan. Subject to the terms of the Plan, the Committee shall have the authority to: (a) determine the individuals and entities (from among the class of individuals and entities eligible to receive Options) to whom Options may be granted; (b) determine the number of Common Shares to be subject to each Option; (c) determine the terms and conditions of any grant of Option, including but not limited to (i) the time or times at which Options may be granted; (ii) the exercise price at which Option Shares may be purchased; (iii) the time or times when each Option shall become exercisable and the duration of the Exercise Period; Page 87 (iv) whether restrictions or limitations are to be imposed on Option Shares, and the nature of such restrictions or limitations, if any; and (v) any acceleration of exercisability or waiver of termination regarding any Option, based on such factors as the Committee may determine; (d) interpret the Plan and prescribe and rescind rules and regulations relating to the Plan. The interpretation and construction by the Committee or the Board of Directors of any provisions of the Plan or of any Option granted under it shall be final and binding on all persons. No member of the Committee or the Board of Directors shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it. The day-to-day administration of the Plan may be delegated to such officers and employees of the Corporation or any Subsidiary as the Committee shall determine. 18. Recapitalization and Reorganization The number of Plan Shares, the number of Option Shares subject to each outstanding and unexercised Option and the exercise price for such Option Shares, as well as the number of Option Shares for Director Participants set out in Schedule 1, shall be appropriately adjusted for any change in the Common Shares or in the number of Common Shares outstanding by reason of any stock split, stock dividend on the Common Shares payable in Common Shares other than pursuant to any optional stock dividend program, subdivision, combination, reclassification, amalgamation, arrangement, consolidation, rights or warrant offering to purchase Common Shares at or below market price, or any other relevant change or event affecting the Common Shares. Each adjustment to the exercise price for Option Shares pursuant to this provision shall be calculated and rounded to the nearest higher cent. Any fractional shares which might otherwise become subject to an Option as a result of an adjustment pursuant to this paragraph shall be eliminated without any payment therefor. 19. Conditions of Exercise The Plan and each Option shall be subject to the requirement that, if at any time the Committee determines that the listing, registration or qualification of the Common Shares subject to such Option upon any securities exchange or under any provincial, state or federal law, or the consent or approval of any governmental body, securities exchange, or the holders of the Common Shares generally, is necessary or desirable, as a condition of, or in connection with, the granting of such Option or the issue or purchase of Common Shares thereunder, no such Option may be granted or exercised in whole or in part unless such Page 88 listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. 20. Loans The Board of Directors may, in its discretion, but subject always to section 44 of the Corporations Act, grant loans, on such terms as are permitted by law and the Board of Directors may determine, to Optionees, who are employees of the Corporation or its subsidiaries, to enable them to purchase Option Shares, provided that all Common Shares purchased with the proceeds of such loans shall be held by a trustee until the Corporation has been repaid in full. 21. Notices All written notices to be given by the Optionee to the Corporation shall be delivered personally or by registered mail, postage prepaid, addressed as follows: Newbridge Networks Corporation 600 March Road Kanata, Ontario K2K 2E6 Attention: Secretary Any notice given by the Optionee pursuant to the terms of an Option shall not be effective until actually received by the Corporation at the above address. 22. Corporate Action Nothing contained in the Plan or in an Option shall be construed so as to prevent the Corporation or any Subsidiary of the Corporation from taking corporate action which is deemed by the Corporation or the Subsidiary to be appropriate or in its best interest, whether or not such action would have an adverse effect on the Plan or any Option. Page 89 23. Amendments The Board of Directors shall have the right, in its sole discretion, subject to the prior approval of The Toronto Stock Exchange and, if required, of the holders of Common Shares of the Corporation, to alter, amend, modify or terminate the Plan or any Option granted under the Plan at any time without notice. The Board of Directors shall not, however, alter, amend or modify Schedule I more often than once every six months other than to comport with changes to applicable tax and employee benefit laws and the respective rules and regulations thereunder. No such amendment, however, may, without the consent of the Optionee or the transferee of an Option pursuant to paragraph 14, alter or impair any rights or increase any obligations with respect to an Option previously granted under the Plan. 24. Amendment and Consolidation of Prior Plans This Plan amends, consolidates and restates each of the Newbridge Networks Corporation 1989-1994 Stock Option Plan for United States Subsidiaries, the Newbridge Networks Corporation Canadian Key Employee Stock Option Plan and the Newbridge Networks Corporation United Kingdom Key Employee Stock Option Plan (together, the "Prior Plans"), and the terms and provisions of this Plan shall be deemed to supersede and replace the terms and provisions of each of the Prior Plans. No provision of this Plan, however, may, without the consent of the Optionee, alter or impair any rights or increase any obligations with respect to an option granted under the Prior Plans prior to the effective date of this Plan. 25. Change in Control In the event of a "Change in Control", as defined below, unless otherwise determined by the Committee or the Board of Directors prior to the occurrence of such Change in Control, any Options outstanding as of the date such Change in Control is determined to have occurred and not then exercisable shall become fully exercisable effective one day prior to the date of such Change of Control. In addition, the value of all outstanding Options shall, unless otherwise determined by the Committee or the Board of Directors at or after the Date of Grant, be cashed out on the basis of the "Change in Control Price", as defined below, as of the date such Change in Control is determined to have occurred or such other date as the Committee or the Board of Directors may determine prior to the Change in Control. Outstanding options as of the date of such Change of Control may be cashed out only if the Change in Control Price is higher than the Exercise Price of such outstanding options. Further, the Committee or the Board of Directors shall have the right to provide for the conversion or exchange of any outstanding Options into or for options, rights or other securities in any entity participating in, or resulting from, the Change in Control. Page 90 For purposes of the Plan, a "Change in Control" means the happening of any of the following: (a) When any "person", together with any "affiliate" or "associate" of such person, as such terms are defined by the Corporations Act (other than the Corporation, a Subsidiary or a Corporation employee benefit plan, including any trustee of such plan acting as trustee), or a group of persons acting jointly or in concert with one another, hereafter acquires the "beneficial ownership", as defined in the Corporations Act, of, or control or direction over, directly or indirectly, securities of the Corporation representing 20 percent or more of the combined voting power of the Corporation's then outstanding securities; or (b) The occurrence of a transaction requiring shareholder approval involving the acquisition of the Corporation by an entity other than the Corporation or a Subsidiary through purchase of assets, by amalgamation or otherwise. For purposes of the Plan, "Change in Control Price" means the highest price per Common Share paid in any transaction reported on The Toronto Stock Exchange or paid or offered in any bona fide transaction related to a potential or actual change in control of the Corporation at any time during the preceding 60-day period as determined by the Committee or the Board of Directors. 26. Termination of Plan Except as otherwise provided herein, Options may be granted only within the ten year period from the date the Plan has been adopted by the Board of Directors. The termination of the Plan shall have no effect on outstanding Options, which shall continue in effect in accordance with their terms and conditions and the terms and conditions of the Plan, provided that no Option may be exercised after the tenth anniversary of its Date of Grant. 27. Further Assurances Each Participant or Director Participant shall, when requested to do so by the Corporation, sign and deliver all such documents relating to the granting or exercise of Options deemed necessary or desirable by the Corporation. Page 91 28. Governing Law The Plan is established under the laws of the Province of Ontario, and the rights of all parties and the construction and effect of each provision of the Plan shall be according to the laws of the Province of Ontario. DATED the 21st day of October, 1991, as amended the 13th day of September, 1993, the 6th day of June, 1995, the 5th day of July, 1996 and the 3rd day of June, 1997. NEWBRIDGE NETWORKS CORPORATION /s/ Terence H. Matthews - --------------------------------- Chairman /s/ John A. Farmer - --------------------------------- Secretary Page 92 SCHEDULE I
Reason for Grant Date of Grant Option Grant - ---------------- ------------- ------------ Annual service on Board of Date of each annual meeting of 10,000 Option Shares Directors shareholders at which the Director Participant is elected to the Board of Directors by the shareholders Annual service as member Date of each annual meeting of 2,000 Option Shares of a Standing Committee shareholders following which (other than as Chair) the Director Participants is appointed as a member of a Standing Committee by the Board of Directors Annual service as Chair of Date of each annual meeting of 4,000 Option Shares a Standing Committee Shareholders following which the Director Participant is appointed as Chair of a Standing Committee by the Board of Directors
Notes: 1. A Director Participant must be a member of the Board of Directors or a Standing Committee of the Board of Directors, as the case may be, as of the Date of Grant. 2. The exercise price of Options granted to Director Participants shall not be lower than the average of the average of the daily high and low board lot trading prices of the Common Shares on The Toronto Stock Exchange for the five days preceding the Date of Grant, rounded to the next highest cent. 3. "Standing Committee" of the Board of Directors means a committee formed by the board to meet on a regular basis over an extended period of time, and which is declared by the Board of Directors to be a Standing Committee, and includes the Audit Committee, the Employee Compensation Committee and the Directors' Affairs Committee. Page 93 EX-10.17 4 LEASE DTD 5/29/97 EXHIBIT 10.17 Page 94 THIS INDENTURE made this 29th day of May, 1997. BETWEEN: KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Hereinafter called the "Tenant") OF THE SECOND PART WITNESSETH that in consideration of the rents, covenants, conditions and agreements herein contained, the Landlord and the Tenant covenant and agree as follows: 1.00 LEASED PREMISES The Landlord hereby leases to the Tenant all those premises consisting of the building known municipally as 359 Terry Fox Drive and comprising approximately Seventy-Six Thousand Two Hundred and Thirty point Six Five (76,230.65) rentable square feet of space on the ground floor ("Leased Premises") in the City of Kanata which said building is erected on the lands (herein called the "Lands") described in Schedule "A" annexed hereto. The Leased Premises are more particularly outlined on the floor plan annexed hereto and marked Schedule "B". 1.01 ADDITIONAL DEFINITIONS For the purposes of this Lease and any additions or amendments thereto: (a) "Improvements" means all improvements located on the Lands, including the Building, the parking lot or structure servicing the Building and other facilities and physical structures which are for the exclusive use of occupants of the Building; (b) "Common Areas" means at any time those portions of the Lands and Building not leased or designated for lease to tenants but provided to be used in common by (or by the sublesses, agents, employees, customers or licensees of) Landlord, Tenant and other tenants of the Building, whether or not they are open to general public and shall include any fixtures, chattels, systems, decor, signs, facilities or landscaping contained in those areas or maintained or used in connection with them, and shall be deemed to include the city sidewalks adjacent to the Lands and any pedestrian walkway system (either above or below ground), park, or other public facility in respect of which Landlord is from time to time subject to obligations arising from the Lands and Building. Page 95 (c) "Tenant's Proportionate Share" means seventy-nine percent (79%) provided the said percentage may be varied based on the actual area of the Leased Premises as certified by the Landlord. 2.00 TERM To have and to hold the Leased Premises for and during a period of years, (hereinafter called the "Term") commencing on the 1st day of June, l997 for approximately Fifty-Eight Thousand Two Hundred and Thirty point Six Five rentable square feet and for approximately Eighteen Thousand rentable square feet from the 1st day of August, 1997 or the date the area is substantially complete in accordance with Schedule "G" whichever is the later and from thenceforth next ensuing and fully to be completed and ended on the 31st day of May 2002. 2.01 INABILITY TO GIVE OCCUPANCY It is hereby agreed that if the Landlord is unable to deliver vacant possession of the Leased Premises on the date of commencement of the Term by reason of the Leased Premises or the Building being uncompleted or by reason of any previous tenant or occupant overholding (but not by reason of circumstances beyond the Landlord's control or by reason of the failure of the Tenant to complete Tenant's Work herein or by reason of the Tenant failing on or before the date occurring six (6) weeks prior to the commencement of the Term herein to supply all necessary approvals and specifications which the Landlord requires in order to complete the Leasehold Improvements herein,) the Landlord shall diligently exercise all of its rights to obtain completion and vacant possession of the Leased Premises and the rent payable hereunder shall abate at a rental per day equal to 1/365th of the Annual Rent payable until such completion or vacant possession is obtained but the Landlord shall not be liable to the Tenant for damages of any nature whatsoever and this Lease shall continue in full force and effect subject only to the abatement of rent as aforesaid. 2.02 EARLY OCCUPANCY If the Tenant occupies the Leased Premises prior to the commencement of the Term, then during the period up to the date of commencement the Tenant shall be a tenant of the Landlord subject to all the covenants, conditions and agreements set out in this Lease and at a rental per day equal to 1/365th of the Annual Rent and Additional Rent and such rental shall be paid on or before the commencement of the Term. 2.03 OVERHOLDING If the Tenant shall continue to occupy the Leased Premises after the expiration of this Lease with or without the consent of the Landlord and without any further written agreement, the Tenant shall be a monthly tenant at a rent equivalent to 150% of the Monthly Rent and Additional Rent hereby reserved and subject to all the terms and conditions herein set out except as to length of tenancy. 3.00 RENT - Basic Rent In each year during the Term of this Lease the Tenant covenants and agrees to pay without any set-off or deduction whatsoever, to the Landlord, as rent for the Leased Premises the following: Page 96
Years Rate/sq foot Leased Premises ----- ------------ --------------- 1-5 $9.25 $705,133.51
herein called "Annual Rent". The Annual Rent will be adjusted proportionately for any lease year which is other than twelve months. 3.01 MONTHLY RENTAL The Annual Rent shall be payable in equal monthly installments of Fifty- Eight Thousand Seven Hundred and Sixty-One Dollars and Thirteen Cents ($58,761.13) (hereinafter called the "Monthly Rent") in advance on the first day of each calendar month during the Term. If the Term commences on any day other than the first (1st) or ends on any day other than the last of a calendar month, rent for the fraction of a month at the commencement and at the end of the Term shall be prorated at a rate per day equal to 1/365th of the Annual Rent payable. 3.02 ADDITIONAL RENT The Tenant covenants to pay as additional rent all sums to be paid to the Landlord hereunder including, without limiting the generality of the foregoing, all tax on the Tenant's leasehold improvements, Goods and Services Tax and the Tenant's Proportionate Share of the Tax, Capital Tax, Landlord's Business Tax and Operating Costs (herein called "Additional Rent"). 3.03 ESTIMATED ADDITIONAL RENTALS During the Term, the Tenant shall pay to the Landlord monthly in advance on the 1st day of each and every month during the Term, one-twelfth (1/12) of the amount of such annual Additional Rent as reasonably estimated by the Landlord to be due from the Tenant. Such estimates may be adjusted from time to time and re-adjusted by the Landlord and the Tenant shall pay to the Landlord monthly installments of Additional Rent according to such estimates, as so adjusted. 3.04 DEFICIENCY OF ADDITIONAL RENT If the aggregate amount of such estimated Additional Rent payments made by the Tenant in any year should be less than the Additional Rent due for such year, then the Tenant shall pay to the Landlord as Additional Rent within thirty (30) days of receipt of notice thereof from the Landlord the amount of such deficiency. 3.05 EXCESS OF ADDITIONAL RENTAL INSTALLMENTS If the aggregate amount of such Additional Rent payments made by the Tenant in any year of the Term should be greater than the Additional Rent due for such year, then should the Tenant not be otherwise in default hereunder, the amount of such excess will be applied by the Landlord to the next succeeding installments of such Additional Rent due hereunder; and if there be any such excess for the last year of the Term, the amount thereof will be refunded by the Landlord to the Tenant within thirty (30) days after the completion of the Landlord's year-end audit provided the Tenant is not otherwise in default under the terms of the Lease. Page 97 3.06 PRO-RATING OF ADDITIONAL RENT If only part of any calendar year is included within the Term the amount of the Additional Rent payable by the Tenant for such partial year shall be prorated and shall be based upon the estimates made by the Landlord and upon a final determination of such Additional Rent, the amount remaining unpaid at the termination of this Lease shall, notwithstanding such termination, be adjusted and paid within a reasonable time thereafter. 3.07 PREPAYMENT OF ADDITIONAL RENT Notwithstanding the foregoing, if the Landlord is required to pay any amount, which it is entitled to collect from the tenants of the Building, more frequently than provided for in this Lease or if the Landlord is required to prepay any such amount, the Tenant shall pay to the Landlord its portion of such amount calculated in accordance with this Lease, forthwith upon demand. 3.08 DISPUTE AS TO AMOUNT OF ADDITIONAL RENT In the event of any dispute by the Tenant as to the amount of any Additional Rent claimed by the Landlord or the amount of the Tenant's Proportionate Share thereof, the opinion of the Landlord's auditors shall be conclusive and binding as to the amount thereof for any period to which the opinion relates. 3.09 MANNER AND PLACE OF PAYMENT OF RENT All rent shall, until further written notice is received from the Landlord, be paid by the Tenant without any prior demand therefor to Kanata Research Park Corporation, at par in the City of Ottawa at the principal office of, Kanata Research Park Corporation, 600 March Road, P.O. Box l3600, Kanata, Ontario, Canada K2K 2E6, or at such other place in Canada as Kanata Research Park Corporation may designate in writing from time to time and shall be payable in lawful money of Canada. The Landlord agrees that payments made to Kanata Research Park Corporation pursuant to this Lease shall be deemed to be payments made to the Landlord and the Tenant shall not be required to see to the application thereof. 3.10 DEFAULT Any sums received by the Landlord from or for the account of the Tenant when the Tenant is in default hereunder may be applied at the Landlord's option to the satisfaction, in whole or part, of any of the obligations of the Tenant then due hereunder in such manner as the Landlord sees fit, and regardless of any designation or instructions of the Tenant to the contrary. 3.11 ACCRUAL OF RENT Rent shall be considered as annual and accruing from day to day, and where it becomes necessary for any reason to calculate such rent for an irregular period of less than one (1) year an appropriate apportionment and adjustment shall be made. Where the calculation of any Additional Rent is not made until after the termination of this Lease, the obligation of the Tenant to pay such Additional Rent shall survive the termination of this Lease and such amounts shall be payable by the Tenant upon demand by the Landlord. Page 98 3.12 NET LEASE The Tenant acknowledges and agrees that it is intended that this Lease shall be a completely carefree net lease for the Landlord and that the Landlord shall not be responsible during the Term for any costs, charges, expenses or outlays of any nature whatsoever arising from or relating to the Leased Premises, whether foreseen or unforeseen and whether or not within the contemplation of the parties at the commencement of the Term except as shall be otherwise expressly provided for in this Lease and other than Income Tax due by the Landlord, the Tenant shall be responsible for any business transfer tax, value added tax, multi-stage sales tax, goods and services tax or any other tax or levy on rental income that may be charged, levied or assessed by any government or other applicable taxing authority against the Landlord whether known as a goods and services tax or any other name ("Goods and Services Tax"). 4.00 TENANT'S BUSINESS TAX In each and every year during the Term the Tenant covenants to pay and discharge prior to the same becoming due and payable all taxes, rates, duties and assessments and other charges that may be levied, rated, charged or assessed against or in respect of the Tenant's or other occupant's use and occupancy of the Leased Premises or in respect of the Tenant's or other occupant's leasehold improvements, equipment, machinery, trade fixtures and facilities situate or installed on or in the Leased Premises and every tax and licence fee in respect of any and every business carried on in the Leased Premises or in respect of the use or occupancy thereof by the Tenant (and any and every subtenant, licensee or occupant thereof) whether such taxes, rates, duties, assessments and licence fees are charged by any municipal, parliamentary, school or other body during the term hereby demised. The Tenant will indemnify and keep indemnified the Landlord from and against payment of all loss, costs, charges and expenses occasioned by, or arising from any and all such taxes, rates, duties, assessments, licence fees, and any and all taxes which may in future be levied or charged in lieu of such taxes; and any such loss, costs, charges and expenses suffered by the Landlord may be collected by the Landlord as rent with all rights of distress and otherwise as reserved to the Landlord in respect of rent in arrears. The Tenant further covenants and agrees that upon written request of the Landlord, the Tenant will promptly deliver to the Landlord for inspection receipts for payment of all such taxes, rates, duties, assessments, licence fees and other charges in respect of all improvements, equipment and facilities of the Tenant on or in the Leased Premises or in respect of any business carried on in the Leased Premises which were due and payable up to one (1) month prior to such request. 4.01 LANDLORD'S BUSINESS TAX In the event that there are any taxes, rates, duties, assessments or charges levied, rated, charged or assessed against the Landlord by any municipal or other governmental authority with respect to the Landlord's use or occupancy of any part of the Building or the Land which the Tenant is entitled to use in common with other persons or with respect to any other part of the Building which the Landlord uses or occupies for the purpose of supplying services to the Leased Premises (such taxes, rates, duties, assessments or charges hereinafter called the "Landlord's Business Tax"), then it is agreed that in addition to all other sums, the Tenant is required to pay pursuant to this Lease, the Tenant shall pay to the Landlord as Additional Rent, the Tenant's Proportionate Share of such Landlord's Business Tax. Page 99 4.02 TAX ON TENANT'S LEASEHOLD IMPROVEMENTS The Tenant shall pay to the Landlord as Additional Rent, in respect of each applicable tax year, an amount equal to that portion of the Tax for such tax year, as determined by the Landlord, which may reasonably be regarded as being attributable to the fixtures, improvements, installations, alterations, additions and equipment from time to time made, erected or installed by or on behalf of the Tenant in the Leased Premises. 4.03 PROPERTY TAX "Tax" in this Lease means an amount equivalent to all taxes, rates, duties, levies and assessments whatsoever levied, rated, charged or assessed by any municipal, parliamentary, educational, school or other governmental authority charged upon the Building, the Lands, the property and all improvements now or hereafter appurtenant thereto or upon the Landlord on account thereof including all taxes, rates, duties, levies and assessments for local improvements and including any tax which has been attracted by the Tenant's leasehold improvements and equipment and for which the Tenant is responsible hereunder and excluding any portion of Tax payable solely by any other tenant and excluding any Tax charged against or applicable to the other office buildings constructed on the Lands and the parking spaces (excluding visitor parking) applicable to such buildings and excluding such taxes as corporate income, capital gains, profits or excess profits, taxes assessed upon the income of the Landlord, and shall also include any and all taxes which may in future be levied in lieu of Tax as hereinbefore defined. 4.04 ALLOCATION OF TAX If the Tax or any portion thereof that may be payable by the Tenant by reason of this Lease, depends upon an assessment or an approximation of an assessment which has not been made by the taxing authority or authorities having jurisdiction, the Landlord shall determine the same; any such determination made by the Landlord shall be binding upon the Tenant unless shown to be unreasonable or erroneous in some substantial respect. The Landlord shall have the right from time to time to reasonably allocate and re-allocate Taxes not charged separately to the various buildings (including the Building) and the parking garages located on the Lands. 4.05 SEPARATE SCHOOL TAXES If the Tenant or any subtenant or licensee of the Tenant or any occupant of the Leased Premises shall elect to have the Leased Premises or any part thereof assessed for separate school taxes, the Tenant shall pay to the Landlord, as additional rent, as soon as the amount of the separate school taxes is ascertained, any amount by which the amount of separate school taxes exceeds the amount which would have been payable for Tax had such election not been made and if the Tenant or any subtenant or licensee of the Tenant shall elect to have the Leased Premises or any part thereof assessed for separate school taxes as aforesaid and if such separate school taxes are less than the taxes which would have been payable for school taxes had such election not been made, then and in that event, the Tenant shall be entitled to deduct from the rent for the first month of the year following which such taxes were payable, the amount by which the separate school taxes were less than the amount which would have been payable for school taxes in the year prior to such month. Page 100 4.06 TAX APPEAL Any expense incurred by the Landlord in obtaining or attempting to obtain a reduction in the amount of the Tax or the assessment upon which the Tax may be based, shall be added to and included in the amount of the Tax and if the Tenant shall have paid its Proportionate Share of the Tax and the Landlord shall thereafter receive a refund of any portion of the Tax, the Landlord shall make an appropriate refund to the Tenant. 4.07 CAPITAL TAX "Capital Tax" means the tax or excise imposed or capable of being imposed upon the Landlord by any government authority having jurisdiction which is measured or based in whole or in part upon the taxable capital employed by the Landlord, which said taxable capital shall be deemed to be the cost to the Landlord of said Building and Lands computed as if the amount of such tax were that amount due if the Building and the Lands were the only property of the Landlord, the Landlord was entitled to no capital deduction, investment allowance or any other deduction whatsoever. For the purpose of this paragraph the Term "investment allowance" and "capital deduction" shall be defined by reference to the applicable taxing statute. 5.00 OPERATING COSTS "Operating Costs" in this Lease means the total charges, expenses, costs, fees, rentals, disbursements or outlays incurred, accrued, paid, payable or attributable whether by the Landlord or others on behalf of the Landlord for complete repair, maintenance, operation, cleaning and management of the Building, Lands and all the improvements thereon and the components of each of them (herein collectively called the "Property") such as are in keeping with maintaining the standard of a first class commercial Property so as to give it high character and distinction; and including, without limiting the generality of the foregoing, the cost of all repairs and replacements required for such operation and maintenance, the cost of maintaining and repairing the heating, air-conditioning, ventilating and mechanical systems and equipment in the Building, the cost of operating and maintaining any elevators, (including the cost of service contracts); the costs of providing hot and cold water; the costs of providing electricity not otherwise chargeable to tenants; the costs of all fuel, gas and steam used in heating, ventilating and air-conditioning; the cost of energy conservation devices or equipment; the cost of snow removal; landscape maintenance including the cost of replacing any landscaping on the Lands; the cost of window cleaning; the cost of insurance premiums for fire, casualty, liability, rental and any other insurance coverage maintained by the Landlord in connection with the Property; telephone and other utility costs; the amount paid or payable for all salaries, wages and benefits and other payments paid to or on behalf of persons engaged in the cleaning, supervision, maintenance and repair of the Property (including wages of the on site Property Manager); the cost of accounting services necessary to prepare the statements and opinions for the tenants and to compute the rents and other charges payable by the tenants of the Building and the reasonable cost of collecting and enforcing payment of all amounts payable by the tenants; the cost of porters, guards and other protection services; the cost of providing security services; the cost of garbage or refuse removal from the Building not otherwise chargeable to tenants; the cost of repair and maintenance of the roadways, curbs, paving, walkways, pools, landscaping, lighting and other common facilities and outside areas; cost of services provided for the common use of the tenants; building management (not exceeding the going rate charged by trust companies for building management in the Regional Municipality of Ottawa-Carleton for similar buildings); the cost of service contracts with independent Page 101 contractors and all other expenses, paid or payable by the Landlord in connection with the operation of the Property together with an administration fee equal to fifteen percent of Operating Costs, but such Operating Costs shall not include any interest on any debt or capital; retirement of any debt; any amounts directly chargeable by the Landlord to any tenant or tenants of the Building and the cost of any repairs paid for by insurance proceeds or for which the Landlord was reimbursed by insurance proceeds. 5.01 ALLOCATION OF OPERATING COSTS In determining the Operating Costs attributable to the Building, the Landlord shall have the right from time to time to reasonably allocate and re-allocate such Operating Costs which represent operating costs incurred for facilities or services shared by the Building and such other buildings as are owned or operated by the Landlord and which are not charged or allocated separately against the Building and any such other building or buildings. Any such determination made by the Landlord shall be binding upon the Tenant unless shown to be unreasonable or erroneous in some substantive respect. The Tenant shall have the right to reasonable access to the books and records of the Landlord to conduct an examination and to ascertain whether allocations of Operating Costs made by the Landlord have been made reasonably. 5.02 FULL OCCUPANCY If in any year the Building has not been fully occupied for the whole year, the amount of the Operating Costs for such year may be adjusted by the Landlord, acting reasonably, to an amount which reflects what the amount of the Operating Costs would be if the Building had been fully occupied for the whole year. 5.03 USE OF ELECTRICITY The Tenant shall not, without the Landlord's prior written consent in each instance, connect any additional fixtures, appliances or equipment to the Building's electric distribution system or make any alteration or addition to the electrical system of the Leased Premises existing at the commencement of the Term. If the Landlord grants such consent, the cost of all additional risers and other equipment required therefor shall be paid as Additional Rent by the Tenant to the Landlord upon demand. As a condition to granting such consent, the Landlord may require the Tenant to agree to pay an increase in the Additional Rent for Operating Costs by an amount which will reasonably reflect the increased cost of the Landlord of the additional electrical services to be furnished to the Leased Premises by the Landlord. 5.04 METERS The Tenant covenants to pay for the cost of any additional metering which may be required by the Landlord to be installed in the Building for the purpose of determining the amount of electricity consumed by the Tenant in the Leased Premises. 6.00 ASSIGNING OR SUBLETTING The Tenant covenants that it will not assign or sublet the Leased Premises or any part thereof without the prior written consent of the Landlord, which consent shall not be unreasonably withheld save and except in the event of any of the following, in which case the Landlord may arbitrarily withhold its consent: Page 102 (a) an assignment or sublet of the whole of the Leased Premises, the terms of which have a net present value that are less or more than the net present value of the terms of the Lease (not including the value of initial leasehold improvements, leasing commissions or inducements of any kind under the Lease) and in the latter event if the Landlord consents to such assigned or sublet the Tenant shall pay the increased value to the Landlord as Additional Rent.; (b) a sublet of a part of the Leased Premises; (c) where the assignee or subtenant is then a tenant of the Landlord at the Building and the Landlord has or will have during the next following six (6) months, vacant space for rent in the Building. 6.01 REQUEST TO ASSIGN OR SUBLET If the Tenant requests the Landlord's consent to an assignment of this Lease or to a subletting of the whole or any part of the Leased Premises, the Tenant shall submit to the Landlord the name and address of the proposed assignee or subtenant together with a copy of an offer or agreement to assign or sublet or the sublease or assignment and such additional information as to the nature of its business and its financial responsibility and standing (including financial statements) as the Landlord may reasonably require ("required information"). 6.02 ASSIGNMENT The Landlord's consent to any assignment may be conditional upon the assignee entering into an assignment in form and content satisfactory to the Landlord, to perform, observe and keep each and every covenant, condition and agreement in this Lease on the part of the Tenant to be performed, observed and kept including the payment of rent and all other sums and payments agreed to be paid or payable under this Lease on the days and times and in the manner specified. 6.03 CONSENT NOT TO RELEASE TENANT In no event shall any assignment or subletting to which the Landlord may have consented release or relieve the Tenant from his obligations fully to perform all the terms, covenants and conditions of this Lease to be performed. 6.04 NOTICE OF CHANGE OF CONTROL Where there is a change in corporate control of the Tenant, the Tenant shall forthwith so advise the Landlord in writing. 6.05 COST OF CONSENT The Tenant further agrees that prior to any consent for assignment, subletting or change in control being effective and binding upon the Landlord, the Tenant shall pay on demand the Landlord's reasonable costs (including the Landlord's own administrative costs) incurred in connection with the Tenant's request for such consent. 7.00 TENANT'S COVENANTS The Tenant further covenants with the Landlord as follows: Page 103 7.01 TENANT REPAIRS To repair, maintain and keep the Leased Premises and all trade fixtures and improvements therein in good and substantial repair subject only to defects in construction of the structural members of the Building, reasonable wear and tear and damage by fire, lightning and tempest or other casualty against which the Landlord is insured (herein collectively referred to as "Tenant Repair Exceptions"); and that the Landlord may enter and view state of repair and that the Tenant will repair according to notice in writing, except for Tenant Repair Exceptions and that the Tenant will leave the Leased Premises in good repair, except for Tenant Repair Exceptions. Notwithstanding anything hereinbefore contained, the Landlord may in any event make repairs to the Leased Premises without notice if such repairs are, in the Landlord's opinion, necessary for the protection of the Building and the Tenant covenants and agrees with the Landlord that if the Landlord exercises any such option to repair, the Tenant will pay to the Landlord together with the next instalment of Monthly Rent which shall become due after the exercise of such option all sums which the Landlord shall have expended in making such repairs and that such sums, if not so paid within such time, shall be recoverable from the Tenant as rent in arrears. Provided further that in the event that the Landlord from time to time makes any repairs as hereinbefore provided, the Tenant shall not be deemed to have been relieved from the obligation to repair and leave the Leased Premises in a good state of repair. 7.02 RULES AND REGULATIONS That the Tenant and his employees and all persons visiting or doing business with him on the Leased Premises shall be bound by and shall observe rules and regulations annexed hereto or as may hereafter be reasonably set by the Landlord of which notice in writing shall be given to the Tenant and upon such notice being delivered all such rules and regulations shall be deemed to be incorporated into and form part of this Lease. Such rules and regulations shall not be inconsistent with nor derogate from the terms of this Lease and in any event shall apply equally to all tenants of the Building and be non-discriminatory in their application. 7.03 USE OF PREMISES The Leased Premises shall be used only for office and hi-technology manufacturing purposes. 7.04 INCREASE IN INSURANCE PREMIUMS That it will not keep, use, sell or offer for sale in or upon the Leased Premises any article which may be prohibited by any insurance policy in force from time to time covering the Building including any regulations made by any fire insurance underwriters applicable to such policies. In the event the Tenant's occupancy or conduct or business in, or on the Leased Premises, whether or not the Landlord has consented to the same, results in any increase in premiums for the insurance carried from time to time by the Landlord with respect to the Building, the Tenant shall pay any such increase in premiums as Additional Rent within ten (10) days after bills for such additional premiums shall be rendered by the Landlord. In determining whether increased premiums are a result of the Tenant's use or occupancy of the Leased Premises, a schedule issued by the organization computing the insurance rate on the Building showing the various components of such rate, shall be conclusive evidence of the several items and charges which make up such rate. The Tenant shall promptly Page 104 comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Leased Premises. 7.05 CANCELLATION OF INSURANCE If any policy of insurance upon the Building or any part thereof or upon the Lands or any part thereof shall be cancelled or rendered voidable by the insurer by reason of any act, omission or occupation of the Leased Premises or any part thereof by the Tenant, any assignee or subtenant of the Tenant or by anyone permitted by the Tenant to be upon the Leased Premises, and the Tenant, after receipt of notice from the Landlord, shall have failed to immediately reinstate such insurance policies or avoid cancellation of such insurance policies, the Landlord may at its option determine this Lease forthwith by leaving upon the Leased Premises notice in writing of its intention so to do and thereupon rent and any other payments for which the Tenant is liable under this Lease shall be apportioned and paid in full to the date of such determination and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord and the Landlord may re-enter and take possession of the same or the Landlord shall pay any increased cost of such insurance and the Tenant shall pay as Additional Rent, on demand, the amount by which the premiums for such insurance are so increased. 7.06 OBSERVANCE OF LAW To comply promptly at its own expense with all provisions of law including without limitation, federal and provincial legislative enactments, building by-laws, and any other governmental or municipal regulations which relate to the partitioning, equipment, operation and use of the Leased Premises, and to the making of any repairs, replacements, alterations, additions, changes, substitutions or improvements of or to the Leased Premises. And to comply with all police, fire and sanitary regulations imposed by any federal, provincial or municipal authorities or made by fire insurance underwriters, and to observe and obey all governmental and municipal regulations and other requirements governing the conduct of any business conducted in the Leased Premises. Provided that in default of the Tenant so complying the Landlord may at its option where possible comply with any such requirement and the cost of such compliance shall be payable on demand by the Tenant to the Landlord as Additional Rent. 7.07 WASTE AND OVERLOADING OF FLOORS Not to do or suffer any waste or damage, disfiguration or injury to the Leased Premises or the fixtures and equipment thereof or permit or suffer any overloading of the floors thereof; and not to place therein any safe, heavy business machine or other heavy thing without first obtaining the consent in writing of the Landlord; and not to use or permit to be used any part of the Leased Premises for any dangerous, noxious or offensive trade or business and not to cause or permit any nuisance in, at or on the Leased Premises; and without the prior consent in writing of the Landlord, the Tenant will not bring onto or use in the Leased Premises or permit any person subject to the Tenant to bring onto or use on the Leased Premises any fuel or combustible material for heating, lighting or cooking nor will it allow onto the Leased Premises any stove, burner, kettle, apparatus or appliance for utilizing the same and the Tenant will not purchase, acquire or use electrical current or gas for consumption on the Leased Premises except from such supplier thereof as shall have been approved in writing by the Landlord. Page 105 7.08 INSPECTION To permit the Landlord, its servants or agents to enter upon the Leased Premises at any time and from time to time for the purpose of inspection and of making repairs, alterations or improvements to the Leased Premises or to the Building and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. The Landlord, its servants or agents may at any time and from time to time enter upon the Leased Premises to remove any article or remedy any condition which, in the opinion of the Landlord, reasonably arrived at, would be likely to lead to cancellation of any policy of insurance and such entry by the Landlord shall not be deemed to be a re- entry. The Tenant shall, upon written request of the Landlord, produce audited Financial Statements of the Tenant, which statements shall include a Balance Sheet, Income Statement, Statement of Retained Earnings, Statement of Source and Application of Funds. 7.09 INDEMNITY TO LANDLORD To promptly indemnify and save harmless the Landlord for any and all liabilities, damages, costs, claims, suits or actions of any nature or kind including the full cost to the Landlord in resisting or defending the same to which the Landlord shall or may become liable or suffer arising out of or by reason of: (a) any breach, violation or non-performance by the Tenant of any of its covenants and obligations under this Lease; (b) any damage to property while said property shall be in or about the Leased Premises including the systems, furnishings and amenities thereof, as a result of the negligence, misuse or wilful act of the Tenant, its express or implied invitees, licensees, agents, servants or employees; and (c) any injury to any invitee, licensee, agent, servant or employee of the Tenant, including death resulting at any time therefrom, occurring on or about the Leased Premises, the Property or the Lands; and this indemnity shall survive the expiry or sooner determination of this Lease. 7.10 DAMAGE BY TENANT That if the Building including the Leased Premises, the elevators, boilers, engines, pipes and other apparatus (or any of them) used for the purpose of heating, ventilating or air-conditioning the Building or operating the elevators, or if the water pipes, drainage pipes, electric lighting or other equipment of the Building or the roof or outside walls or other parts of the Building will not function properly or become damaged or destroyed through the negligence, carelessness or misuse of the Tenant, or of any of its invitees, licensees, agents, servants, employees, clients, customers or contractors, or through it or them in any way stopping up or injuring any heating, ventilating or air- conditioning apparatus, elevators, water pipes, drainage pipes or other equipment or parts of the Building, the expense of the necessary repairs, replacements or alterations shall be borne by the Tenant and paid forthwith on demand to the Landlord as Additional Rent. Page 106 7.11 TENANT INSURANCE (a) To maintain in force during currency of this Lease at the Tenant's expense insurance policies to cover the following: (i) comprehensive general liability insurance with limits of not less than Five Million Dollars ($5,000,000.00) (including bodily injury and property damage, tenant's legal liability, cross liability and contractual liability) to cover all responsibilities assumed by the Tenant with respect to the use or occupancy of and the business carried on, in or from the Leased Premises, in amounts acceptable to the Landlord; (ii) all risk insurance covering leasehold improvements made or installed by or on behalf of the Tenant in an amount equal to the full replacement value thereof; and (iii) any other insurance that the Landlord (or the Landlord's mortgagee, if any) may reasonably require from time to time in form and amounts and for insurance risks against which a prudent Tenant would protect itself; (b) That all Tenant's insurance required hereunder shall be with insurers and upon terms and conditions to which the Landlord has no reasonable objection. Copies of all policies, or certificates evidencing the insurance or its renewal shall be delivered to the Landlord at the Landlord's request; (c) That all policies of insurance to be maintained by the Tenant shall, in the case of general liability insurance, include the Landlord (and, where applicable, the Landlord's mortgagee) as additional insured and, in the case of all other insurance coverage, contain a waiver by the insurer and Tenant of any rights of subrogation or indemnity or any other claim to which the insurer might otherwise be entitled against the Landlord (and mortgagee) or the agents or employees of the Landlord. All such insurance policies shall also contain a provision prohibiting the insurer from cancelling or altering the insurance coverage without first giving the Landlord thirty (30) days prior written notice thereof; (d) That if the Tenant fails to take out or maintain in force such insurance, the Landlord may take out the necessary insurance and pay the premium therefor and the Tenant shall pay to the Landlord the amount of such premium immediately on demand as Additional Rent; and (e) That if both the Landlord and the Tenant have claims to be indemnified under any such insurance, the indemnity shall be applied first to the settlement of the claim of the Landlord and the balance, if any, to the settlement of the claim of the Tenant. 7.12 NO ABATEMENT OF RENT That there shall be no abatement or reduction of rent and that the Landlord shall not be liable for any damage howsoever caused to property of the Tenant or of any person subject to the Tenant which is in or upon or being brought to or from the Leased Premises or the Building or for personal injury (including death) sustained in any Page 107 manner by the Tenant or any person subject to the Tenant while the Tenant or any such person is on or upon entering or leaving the Leased Premises or Building unless such property damage or personal injury may have been attributable to fault or neglect on the part of the Landlord or of any person for whom the Landlord is at law responsible, and that the Tenant will indemnify and save harmless the Landlord from and against all claims and demands made against the Landlord by any person for or arising out of any such property damage or personal injury. 7.13 EXHIBITING PREMISES To permit the Landlord or its agents or servants to enter and show the Leased Premises, during normal business hours, to prospective purchasers of the Building and may after notice of termination of this Lease has been given or within the last six (6) months of the Term, enter and show the Leased Premises to prospective tenants and erect signs stating that the premises are "To Let". 7.14 TENANT MAINTENANCE That the Tenant will maintain in good repair all plate and window glass, all electrical fixtures, outlets and wiring, all plumbing and plumbing fixtures, all heating equipment and all water and gas piping and outlets within the Leased Premises and that he will make good any damage caused by or resulting from breakage of glass, interference with the electrical, plumbing, heating, water or gas systems of the Building or misuse of any of the equipment, outlets, piping or wiring of any such system by the Tenant or any person subject to the Tenant and the Tenant agrees that he shall prior to taking possession of the Leased Premises inspect the entire Leased Premises and shall be satisfied they are clean and in good order and in a good state of repair, and that all plate and window glass is whole and that the sanitary arrangements in the Building are in satisfactory condition. 7.15 SIGNS The Tenant shall not paint, display, inscribe or place any sign, symbol, notice or lettering of any kind anywhere outside the Leased Premises within the Leased Premises so as to be visible from the outside of the Building with the exception only of an identification sign (which sign shall be subject to the Landlord's written approval as to size, design and location). 7.16 NAME OF BUILDING Not to refer to the Building by any name other than that designated from time to time by the Landlord and the Tenant shall use the name of the Building for the business address of the Tenant but for no other purpose. 7.17 KEEP TIDY The Tenant shall provide its own cleaning and janitorial services. At the end of each business day, the Tenant shall leave the Leased Premises in a tidy condition. 7.18 DELIVERIES The Tenant shall receive, ship, take delivery of and allow and require suppliers or others to deliver or take delivery of merchandise, supplies, fixtures, equipment, Page 108 furnishings, wares or merchandise only through the loading entrance and other facilities provided for that purpose and at the times set by the Landlord. 7.19 NOTICE OF DAMAGE To notify the Landlord promptly of any damage to or defect in the Leased Premises or the Building or any part thereof including any electrical, plumbing, heating, ventilating, air-conditioning, water, sprinkler or gas systems or equipment, or the water pipes, gas pipes, telephone lines or electrical apparatus within or leading to the Leased Premises, and in case of fire to give immediate notice thereof to the Fire Department. 7.20 ALTERATIONS, ETC The Tenant will not make or erect in or to the Leased Premises any installations, alterations, additions or partitions or remove or change the location or style of any installations, alterations, equipment, outlets, piping or wiring relating to the electrical, plumbing, water, gas, air-conditioning, heating or ventilating systems without submitting drawings and specifications to the Landlord and obtaining the Landlord's prior written consent in each instance. The Tenant must further obtain the Landlord's prior written consent to any change or changes in such drawings and specifications submitted as aforesaid. The Tenant's request for such consent shall be in writing and accompanied by an adequate description of contemplated work and with appropriate working drawings and specifications thereof. The Landlord's cost of having its architects or engineers examine such drawings and specifications shall be payable by the Tenant. The Landlord may require that any and all work be performed by the Landlord's contractors or workmen or by contractors or workmen engaged by the Tenant but in each case only under written contract approved in writing by the Landlord and subject to all reasonable conditions which the Landlord may impose and subject to inspection by and reasonable supervision of the Landlord. The Landlord may at its option require that only the Landlord's contractors be engaged for any mechanical, electrical, plumbing, structural or sprinkler work to be done in the Leased Premises. Any work performed by or for the Tenant shall be performed by competent workmen whose labour union affiliations are not incompatible with those of any workmen who may be employed in the Building by the Landlord, its contractors or subcontractors. The cost of all such work and of all materials, labour and services involved therein and of all services, necessitated thereby shall be at the sole cost and expense of the Tenant and shall be completed in a good and workmanlike manner and with reasonable diligence in accordance with the description of the work approved by the Landlord. Any such alterations, additions, and fixtures shall, when made or installed, be and become the property of the Landlord without payment being made therefor; provided that upon the determination of this Lease the Landlord may at its option require the Tenant, or itself at the Tenant's expense, to remove the same and to restore the Leased Premises to the condition in which they were at the commencement of this Lease. 7.21 CONSTRUCTION LIENS The Tenant covenants that he will not suffer or permit during the Term hereof any construction or other liens for work, labour, services or material ordered by him or for the cost of which he may be in any way obligated to attach to the Leased Premises or the Building or the Land and that whenever and so often as any such liens shall attach or claims therefor shall be filed, the Tenant shall within twenty (20) days after the Page 109 Tenant has notice of the claim for lien, procure the discharge thereof by payment or by giving security or in such manner as is or may be required or permitted by law. 7.22 SECURITY The Tenant will maintain on the Leased Premises sufficient moveable property to guarantee the payment of one (1) year's Annual Rent and Additional Rent. 7.23 HAZARDOUS SUBSTANCES (a) The Tenant shall not cause or permit any Hazardous Substances to be brought onto, created in, released or discharged from, placed or disposed of, at or near the Building or Lands; (b) The Tenant shall not cause or permit to occur any violation of any federal, provincial, municipal or local law, ordinance, or regulation, now or hereinafter enacted (the "Laws"), relating to environmental conditions on, under, at, near or about the Building or Lands, or relating to the Landlord, the Tenant or the Building, air, soil or ground water condition, including without limitation, the generation, storage or disposal of Hazardous Substances; (c) For the purposes of this section, "Hazardous Substances" means any substance, or class of substance or mixture of substances which may be detrimental to the environment, plant or animal life, or human health and includes, without limitation, flammable, explosives, or radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals believed to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances and related materials, petroleum and petroleum products, any substance that, if added to water, may degrade or alter or form part of a process of degradation or alteration of the quality or temperature of that water to the extent that it is detrimental to its use by man or by any animal, fish or plant, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority having jurisdiction over the Landlord, the Tenant, the Leased Premises or the Building (the "Authorities"); (d) The Tenant shall, at its own expense, comply with the Laws; (e) The Tenant shall, at its own expense, make all submissions to, provide all information required by, and comply with all requirements of the Authorities under the Laws; (f) The Tenant shall indemnify, defend and hold harmless the Landlord, the Landlord's mortgagees, any manager of the building, and their respective officers, directors, beneficiaries, shareholders, partners, agents and employees, from all fines, suits, procedures, claims and actions of every kind, and all costs associated therewith (including legal fees on a solicitor and his own client basis and consultants' fees) arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Substances that occurs during the Term or any renewal or extension period, at or from the Premises, or which arises at any time from the Tenant's use or occupancy of the Premises, or from the Tenant's failure to Page 110 provide all information, make all submissions, and take all steps required by this Section or by the Authorities; (g) Notwithstanding any other provision of this Lease, if the Tenant creates or brings to the Leased Premises any Hazardous Substances or if the conduct of the Tenant's business shall cause there to be any Hazardous Substances at or near the Leased Premises, or discharged or released on, under or about the Premises, the building or the lands upon which the building is constructed, the air, soil or ground water, then, notwithstanding any rule of law to the contrary, such Hazardous Substances shall be and remain the sole and exclusive property of the Tenant and shall not become the property of the Landlord, notwithstanding the degree of affixation to the Premises of the Hazardous Substances or the goods containing the Hazardous Substances. This affirmation of the Tenant's interest in the Hazardous Substances or the goods containing the Hazardous Substances shall not however prohibit the Landlord from dealing with such material as otherwise provided for in this Lease. 7.24 NUISANCE The Tenant shall not cause or maintain any nuisance in or about the Leased Premises, and shall keep the Leased Premises free of debris, rodents, vermin and anything of a dangerous noxious or offensive nature or which could create a fire hazard (through undue load on electrical circuits or otherwise) or undue vibration, heat or noise. 8.00 LANDLORD'S COVENANTS The Landlord further covenants with the Tenant: 8.01 QUIET ENJOYMENT The Landlord covenants with the Tenant that if the Tenant pays the Annual Rent, Additional Rent and all other sums reserved herein and observes and performs the covenants, conditions and agreements set out in this Lease, the Tenant shall and may peaceably possess and enjoy the Leased Premises during the Term without interruption or disturbance from the Landlord. 8.02 TAXES, ETC To pay or cause to be paid all taxes and rates, municipal, parliamentary or otherwise, including, without limiting the generality of the foregoing, water rates with respect to the Lands, the Building or assessed against the Landlord in respect thereof, except those directly assessed or charged to or payable by the Tenant or assessed or charged with reference to the use or occupation of the Leased Premises and except as otherwise provided in this Lease. 8.03 HEATING AND AIR-CONDITIONING To provide for heating and air-conditioning 24 hours per day and seven (7) days a week so that when heat is reasonably required for the reasonable use of the Leased Premises the Landlord will furnish heat therefor up to a reasonable temperature and when the heating system is not in use and the Landlord considers that air-conditioning is reasonably required it will operate the air-conditioning systems in the Building. The said heating and air-conditioning systems will be maintained by the Landlord during Page 111 normal business hours except during the making of repairs and should the Landlord make default in so doing, it shall not be liable for any indirect or consequential damages for personal discomfort or illness due to such default. The Landlord reserves the right to stop the services of the heating and/or air-conditioning equipment when necessary by reason of any accident or any repairs, alterations or improvements which, in the judgment of the Landlord, are desirable or necessary to be made until such repairs, alterations or improvements shall have been completed. The Landlord shall have no further responsibility or liability for failure to supply the said heating and/or air-conditioning service when prevented from doing so, by strikes or by any cause beyond the Landlord's reasonable control or by orders or regulations by any body or authority having jurisdiction or by other reason of any failure of electrical current, steam or water or suitable power supply or inability upon the exercise of reasonable diligence to obtain such electrical current, steam or water for the operation of the heating or air-conditioning equipment. 8.04 REPAIR OF STRUCTURE To repair, replace and maintain the structural parts of the Building, and to perform such repairs, replacements and maintenance with reasonable dispatch, and in a good and workmanlike manner, at any time and from time to time, and notwithstanding anything contained herein to the contrary, the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. 8.05 DELAYS IN PROVISION OF SERVICES It is understood and agreed that whenever and to the extent that the Landlord shall be unable to fulfil, or shall be delayed or restricted in the fulfilment of any obligation hereunder in respect of the supply or provision of any service or utility or the doing of any work or the making of any repairs by reason of being unable to obtain the material, goods, equipment, service, utility or labour required to enable it to fulfil such obligation or by reason of any statute, law or order-in- council or any regulation or order passed or made pursuant thereto or by reason of the order or direction of any administrator, controller or board, or any governmental department or officer or other authority, or by reason of not being able to obtain any permission or authority required thereby, or by reason of any other cause beyond its control whether of the foregoing character or not, the Landlord shall be entitled to extend the time for fulfilment of such obligation by a time equal to the duration of such delay or restriction, and the Tenant shall not be entitled to compensation for any inconvenience, nuisance, discomfort, direct or indirect or consequential damage or damages thereby occasioned. 9.00 TENANT'S FIXTURES The Tenant may install its usual trade fixtures in the usual manner, provided such installation does not damage the structure of the Leased Premises or the Building and provided further that the Tenant shall have submitted detailed plans and specifications for such trade fixtures to the Landlord and obtained its written consent thereto which consent shall not be unreasonably withheld. 9.01 REMOVAL OF TENANT'S FIXTURES Provided that the Tenant may remove his trade or tenant's fixtures; provided further, however, that all installations, alterations, additions, partitions, and fixtures other than trade or tenant's fixtures in or upon the Leased Premises, whether placed there by the Tenant or the Landlord, shall immediately upon such placement, be the Landlord's Page 112 property without compensation therefor to the Tenant and, except as hereinafter mentioned in this paragraph shall not be removed from the Leased Premises by the Tenant at any time either during or after the term. Notwithstanding anything herein contained, the Landlord shall be under no obligation to repair or maintain the Tenant's installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant or Landlord or third party; and further, notwithstanding anything herein contained, the Landlord shall have the right upon termination of this Lease by affluxion of time or otherwise or within six (6) months thereafter to require the Tenant to remove, or require the Tenant to pay to the Landlord the cost to remove, any installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant, the Landlord or a third party, whether for the Tenant or a previous occupant, and make good any damage caused to the Leased Premises by such installation or removal. 10.00 DAMAGE OR DESTRUCTION OF LEASED PREMISES Provided that if during the continuation of this Lease, the Building or the Leased Premises are destroyed or damaged by any cause whatsoever, then the following provisions shall apply: 10.01 PARTIAL DAMAGE If damage shall occur to the Building or the Leased Premises so that all or part of the Leased Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Landlord's architect, can be substantially repaired under applicable laws and governmental regulations within ninety (90) days from the date of such casualty (employing normal construction methods without overtime or other premium), the Landlord shall cause such damage to be repaired with all reasonable speed. 10.02 TOTAL DAMAGE If the Building or the Leased Premises are damaged to such an extent that the Leased Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Landlord's architect, cannot be substantially repaired under applicable laws and governmental regulations within ninety (90) days from the date of such casualty (employing normal construction methods without overtime or other premium), then either the Landlord or Tenant may elect to terminate this Lease as of the date of such casualty by written notice delivered to the other not more than ten (10) days after receipt of such architect's opinion (failing which the Landlord shall cause such damage to be repaired at its own expense with all reasonable speed). 10.03 OBLIGATION TO REPAIR The Landlord's obligation to repair as set forth in the preceding two paragraphs hereof is conditional upon the Landlord receiving adequate proceeds from policies of insurance maintained in respect of such casualties or, if such proceeds are not made available to the Landlord, the Landlord electing to obtain its own financing for such repairs. In the event that no such proceeds of insurance are available to the Landlord and if the Landlord elects not to obtain its own financing for such repairs, then the Landlord shall, by notice in writing to the Tenant delivered within ten (10) days after receipt of the opinion of the Landlord's architect, notify the Tenant that the Lease is terminated, which termination shall be effective as of the date of such casualty. In Page 113 calculating the amount of insurance proceeds available, the Landlord will be deemed to have received the deductible portion of any insurance policy. 10.04 ABATEMENT OF RENT If the Landlord is required to repair the damage pursuant to the provisions hereof and does not elect to terminate the Lease, the Annual Rent and Additional Rent payable by the Tenant under this Lease shall be proportionately reduced to the extent that the Leased Premises are thereby rendered unusable by the Tenant in its business from the date of such casualty until completion by the Landlord of the repairs to the Leased Premises and the Building so that the Leased Premises are thereafter fully usable by the Tenant in its business. 10.05 DAMAGE TO 50% OF BUILDING Notwithstanding anything otherwise contained in this Lease, if fifty percent (50%) or more of the rentable area of the Building is damaged or destroyed and if, in the reasonable opinion of the Landlord's Architect, the said rentable area cannot be rebuilt or made fit for the purposes of the tenants thereof within ninety (90) days of the date of such casualty, the Landlord may, at its option, terminate this Lease by giving notice of termination to the Tenant within thirty (30) days of the date of such casualty and the Tenant shall, with reasonable dispatch and expedition, but in any event within sixty (60) days after delivery of the notice of termination, deliver up possession of the Leased Premises to the Landlord and the rent and other payments for which the Tenant is liable hereunder shall be apportioned and paid to the date possession is so delivered up. 10.06 COMPLETION OF REPAIR Provided that, if, upon the completion by the Landlord of any repairs required as a result of any such destruction or damage, a dispute shall arise between the Landlord and the Tenant as to whether or not the Leased Premises have been made fit for the purposes of the Tenant under this Lease, the Landlord may, at its option, terminate this Lease by giving thirty (30) days notice to the Tenant and if such notice shall be given this Lease shall, at the expiration of such period, be at an end and the Tenant shall deliver up the Leased Premises to the Landlord or whom it may appoint and the Landlord may, on demand, recover the full rental hereby reserved computed from the date on which such repairs were completed up to the date on which the Tenant is required to vacate. 11.00 LIABILITY FOR DAMAGE TO PROPERTY In the absence of negligence or wilful act or default on the part of the Landlord, its servants, agents or workmen, the Landlord shall not be liable or responsible in any way for any loss, damage or injury to any person or for any loss of or damage to any property belonging to the Tenant, to employees of the Tenant or to any other person while such property is in the Leased Premises or in the Building or in or on the surrounding, Lands and buildings owned by the Landlord, the areaways, the parking garages, the parking areas, lawns, sidewalks, reflective pools, steps, platforms, corridors, stairways or elevators whether or not any such property has been entrusted to employees of the Landlord and without limiting the generality of the foregoing, the Landlord shall not be liable for any damage to any such property caused by theft or breakage or by steam, water, rain or snow which may leak into, issue or flow from any part of the Building or from the water, steam or drainage pipes or plumbing works of Page 114 the Building or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement of any electric or other wiring or for any damage caused by smoke or anything done or omitted by any other tenant in the Building or for any other loss whatsoever with respect to the Leased Premises, goods placed therein or any business carried on therein. 12.00 DEFAULT OF TENANT Provided and it is hereby expressly agreed that if and whenever the Annual Rent or Additional Rent hereby reserved or any part thereof shall not be paid on the day appointed for payment thereof, whether lawfully demanded or not, or in case of breach or non-observance or non- performance of any of the covenants, agreements, provisos, conditions or Rules and Regulations on the part of the Tenant to be kept, observed or performed, or in case the Leased Premises shall be vacated or remain unoccupied for fifteen (15) days or in case the Term shall be taken in execution or attachment for any cause whatever, then and in every such case, it shall be lawful for the Landlord thereafter to enter into and upon the Leased Premises or any part thereof in the name of the whole and the same to have again, repossess and enjoy as of its former estate, anything in this Lease contained to the contrary notwithstanding other than the proviso to this paragraph; PROVIDED that the Landlord shall not at any time have the right to re-enter and forfeit this Lease by reason of the Tenant's default in the payment of the rent reserved by this Lease, unless and until the Landlord shall have given to the Tenant written notice setting forth the default complained of and the Tenant shall have the right during five (5) business days next following the date on such notice to cure any such default in payment of rent. In case without the written consent of the Landlord, the Leased Premises shall be used by any other person than the Tenant or for any other purpose than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or if the Tenant makes any bulk sale, then in any such case this lease shall, at the option of the Landlord, cease and determine and the Term shall immediately become forfeited and void in accordance with the provisions of Section 15, RIGHT OF TERMINATION, herein. 13.00 BANKRUPTCY Provided further that, in case without the written consent of the Landlord, the Leased Premises shall be used by any other person than the Tenant or for any other purposes than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or by the Tenant making any assignment for the benefit of creditors or any bulk sale or become bankrupt or insolvent or take the benefit of any act now or hereafter in force for bankrupt or insolvent debtors, or, if the Tenant is a corporation and any order shall be made for the winding up of the Tenant, or other termination of the corporate existence of the Tenant, then in any such case this Lease shall, at the option of the Landlord, cease and determine and the Term shall immediately become forfeited and void and the then current month's rent and the next ensuing three (3) months rent shall immediately become due and be paid and the Landlord may re-enter and take possession of the Leased Premises as though the Tenant or other occupant or occupants of the Leased Premises was or were holding over after the expiration of the Term without any right whatever. 14.00 RE-ENTRY BY LANDLORD Page 115 The Tenant further covenants and agrees that on the Landlord's becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord, in addition to all other rights, shall have the right to enter the Leased Premises as the agent of the Tenant either by force or otherwise, without being liable for any prosecution therefor and to relet the Leased Premises as the agent of the Tenant, and to receive the rent therefor and as the agent of the Tenant, to take possession of any furniture or other property on the Leased Premises and to sell the same at public or private sale without notice and to apply the proceeds of such sale and any rent derived from reletting the Leased Premises upon account of the rent under this Lease, and the Tenant shall be liable to the Landlord for the deficiency, if any. 15.00 RIGHT OF TERMINATION The Tenant further covenants and agrees that on the Landlord becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord, in addition to all other rights, shall have the right to determine forthwith this Lease and the Term by leaving upon the Leased Premises notice in writing of its intention so to do, and thereupon, rent shall be computed, apportioned and paid in full to the date of such determination of this Lease and any other payments for which the Tenant is liable under this Lease shall be paid and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord, and the Landlord may re-enter and take possession of the same. 16.00 DISTRESS The Tenant waives and renounces the benefit of any present or future statute taking away or limiting the Landlord's right of distress, and covenants and agrees that notwithstanding any such statute, none of the goods and chattels of the Tenant on the Leased Premises at any time during the Term shall be exempt from levy by distress for rent in arrears. In the event that the Tenant shall remove or permit the removal of any of its goods or chattels from the Leased Premises, the Landlord may within thirty (30) days thereafter and if the Tenant is in arrears of rent, seize such goods and chattels wherever the same may be found and may sell or otherwise dispose of the same as if they had actually been distrained upon the Leased Premises by the Landlord for arrears of rent. 17.00 NON-WAIVER No condoning, excusing or overlooking by the Landlord of any default, breach or non-observance by the Tenant at any time or times in respect of any covenant, proviso or condition herein contained shall operate as a waiver of the Landlord's rights hereunder in respect of any continuing or subsequent default, breach or non-observance, or so as to defeat or affect in any way the rights of the Landlord herein in respect of any such continuing or subsequent default or breach, and no waiver shall be inferred from or implied by anything done or omitted by the Landlord save only express waiver in writing. All rights and remedies of the Landlord in this Lease contained shall be cumulative and not alternative. 18.00 CHANGES TO BUILDING The Landlord hereby reserves the right at any time and from time to time to make changes in, additions to, subtractions from or rearrangements of the Building including, without limitation, all improvements at any time thereon, all entrances and exits thereto, and to grant, modify and terminate easements or other agreements Page 116 pertaining to the use and maintenance of all or parts of the Building and to make changes or additions to the pipes, conduits, utilities and other necessary building services in the Leased Premises which serve other premises, provided that prior to the commencement of the Term, the Landlord may alter or relocate the Leased Premises to the extent found necessary by the Landlord to accommodate changes in construction design or facilities including major alterations and relocations. The Landlord agrees that in performing such alterations, it shall do so in a manner so as to minimize any material interference with the Tenant's use and enjoyment of the Leased Premises. 19.00 SEVERANCE OF LAND The Landlord shall have the right from time to time to sever (for purposes of sale, lease, mortgage, charge or otherwise) any part or parts of the Land or any buildings or improvements thereon, including the creation of rights-of-way, easements and parking arrangements which the Landlord deems necessary and the Tenant hereby consents to any such severance and agrees to execute, at no cost to the Landlord, any documents or consents which the Landlord may request for these purposes. If any part or parts of the Land or the buildings or improvements on the lands are so severed and are deemed by the Landlord to no longer form part of the property, such part or parts shall be excluded from the Lands and the property for the purposes of this Lease at the time designated by the Landlord and the Tenant shall when requested by the Landlord, execute, at no cost to the Landlord, a release of any interest in the Lands so excluded. 20.00 COSTS OF COLLECTION The Tenant shall pay, as Additional Rent, all costs, expenses and legal fees (on a solicitor and his client basis) that may be incurred or paid by or on behalf of the Landlord in enforcing the covenants and provisions of this Lease. 21.00 PROFITS AND REMEDIES BY LANDLORD In addition to all rights and remedies available to the Landlord under the provisions of this Lease or by statute or the general law in the event of any default by the Tenant of the provisions of this Lease: 21.01 PAYMENTS TO THIRD PARTIES The Landlord shall have the right at all times to remedy or attempt to remedy any default of the Tenant, and in so doing, may make any payments due or alleged to be due by the Tenant to third parties and may enter upon the Leased Premises to do any work or other things therein, and in any such event, all costs and expenses of the Landlord in remedying or attempting to remedy such default shall be payable by the Tenant to the Landlord forthwith upon demand as Additional Rent. 21.02 NON-PAYMENT OF ADDITIONAL RENT The Landlord shall have the same rights and remedies in the event of any non-payment by the Tenant of any amounts payable by the Tenant under any provision of this Lease and the parking agreement as in the case of non- payment of rent and may be recovered by the Landlord as rent by any and all remedies available to the Landlord for the recovery of rent in arrears. Page 117 21.03 INTEREST ON ARREARS The Landlord shall, if the Tenant shall fail to pay any Monthly Rent, Additional Rent or other amounts from time to time payable by it to the Landlord hereunder promptly when due, be entitled to interest on all such Annual Rent, Additional Rent and other amounts which are unpaid and overdue under this Lease and the parking agreement, such interest to be compounded monthly thereon and to be computed at a rate equal to two percent (2%) per annum in excess of the minimum lending rate to prime commercial borrowers from time to time charged by the Royal Bank of Canada or such other chartered bank as the Landlord may designate, from the date upon which such Monthly Rent, Additional Rent and other amounts was due until actual payment thereof. 22.00 NOTICE Any notice required or contemplated by any provisions of this Lease shall be given in writing, enclosed in a sealed envelope addressed, in the case of notice to the Landlord c/o Kanata Research Park Corporation, 600 March Road, P.O. Box l3600, Kanata, Ontario, Canada, K2K 2E6 and in the case of notice to the Tenant, to it at the Leased Premises in the event of a notice of distress and otherwise to it at 600 March Road, P.O. Box l3600, Kanata, Ontario, Canada, K2K 2E6 and mailed by registered mail, postage prepaid or telefaxed. The time of giving of such notice shall be conclusively deemed to be, if mailed the third (3rd) business day after the day of such mailing, if telefaxed, the next business day following the date sent as evidenced by the sender's transmittal record. Such notice shall also be sufficiently given if and when the same shall be delivered, in the case of notice to the Landlord, to an executive officer of the Landlord, and in the case of notice to the Tenant, to him personally or to an executive officer, manager or a person who appears to be in charge, of the Tenant if the Tenant is a corporation. Such notice, if delivered, shall be conclusively deemed to have been given and received at the time of such delivery. If, in this Lease, two or more persons are named as Tenant, such notice shall also be sufficiently given if and when the same shall be delivered personally to any one of such persons. Provided that either party may, by notice to the other, from time to time, designate another address in Canada to which notices mailed more than ten (10) days thereafter shall be addressed. The word "notice" in this paragraph shall include any request, demand, direction, or statement in this Lease provided or permitted to be given by the Landlord to the Tenant or by the Tenant to the Landlord. 23.00 SUBORDINATION, POSTPONEMENT, ATTORNMENT The Tenant shall promptly upon the written request of the Landlord, enter into an agreement: (a) subordinating the Term and the rights of the Tenant hereunder to any mortgage, charge, ground lease, trust deed or debenture present or future and all renewals, modifications, replacements or extensions thereof, which may affect the Leased Premises, the Property, the Lands or the Building; (b) agreeing that the Term hereof shall be subsequent in priority to any such mortgage, charge, ground lease, trust deed or debenture; provided that the Tenant's obligations under this paragraph shall be conditional upon any such mortgagee or secured party entering into a non-disturbance agreement with Page 118 the Tenant under which the Tenant's continued possession of the Leased Premises is ensured notwithstanding any act taken by the mortgagee or secured party. 23.01 TENANT'S RIGHT TO POSSESSION Notwithstanding any postponement or subordination referred to herein, the Tenant acknowledges that its obligations under this Lease shall remain in full force and effect notwithstanding any action at any time taken by a mortgagee, chargee or ground lessor to enforce the security of any mortgage charge, ground lease, trust deed or debenture; provided, however, that any postponement or subordination given hereunder shall reserve to the Tenant the right to continue in possession of the Leased Premises under the terms of this Lease so long as the Tenant shall not be in default hereunder. 23.02 ATTORNMENT BY TENANT The Tenant, whenever requested by any mortgagee (including any trustee under a deed of trust and mortgage), chargee or ground lessor, shall attorn to such mortgagee, chargee or ground lessor as a tenant upon all the terms of this Lease. 24.00 CERTIFICATE The Tenant agrees that he will at any time and from time to time upon not less than five (5) days' prior notice execute and deliver to the Landlord or any mortgagee of the Lands (including a deed of trust and mortgage) a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the modifications and that the same is in full force and effect as modified), the amount of the Annual Rental then being paid hereunder, the dates to which the same, by instalments or otherwise, and other charges hereunder have been paid, and whether or not there is any existing default on the part of the Landlord of which the Tenant has notice. 25.00 REGISTRATION The Tenant covenants and agrees with the Landlord that the Tenant will not register this Lease in this form in any Registry Office or the Land Titles Office. If the Tenant desires to make a registration for the purposes only of giving notice of this Lease, then the parties hereto shall contemporaneously with the execution of this Lease execute a short form thereof solely for the purpose of supporting an application for registration of notice thereof. 26.00 PLANNING ACT Where applicable, this Lease shall be subject to the condition that it is effective only if The Planning Act, 1983, as amended is complied with. Pending such compliance the Term and any renewal thereof shall be deemed to be for a total period of one (1) year less than the maximum lease Term permitted by law without such compliance. 27.00 TRANSFER BY LANDLORD In the event of a sale, transfer or lease by the Landlord of the Building, the Lands or a portion thereof containing the Leased Premises or the assignment by the Landlord of this Lease or any interest of the Landlord hereunder, the Landlord shall, without further written agreement, to the extent that such purchaser, transferee or lessee has become bound by the covenants and obligations of the Landlord hereunder, be freed, Page 119 released and relieved of all liability or obligations under this Lease incurred or arising after the date of such sale, transfer or lease. 28.00 NO ADVERTISING OF LEASED PREMISES The Tenant shall not print, publish, post, display or broadcast any notice or advertisement to the effect that the whole or any part of the Leased Premises are for rent, and it shall not permit any broker or other person to do so without the consent in writing of the Landlord. 29.00 TIME OF ESSENCE Time shall be of the essence of this Lease. 30.00 LAWS OF ONTARIO This Lease shall be deemed to have been made in and shall be construed in accordance with the Laws of the Province of Ontario. 31.00 SEVERABILITY OF COVENANTS The Landlord and the Tenant agree that all of the provisions of this Lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate paragraph hereof. Should any provision or provisions of this Lease be illegal or not enforceable it or they shall be considered separate and severable from the Lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. 32.00 HEADINGS The captions appearing in the margin or the headings contained in this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease or of any provision hereof. 33.00 SCHEDULES The following Schedules attached hereto form part of this Lease: Schedules: "A", "B", "C", "D", "E" "F" and "G" 34.00 LEASE ENTIRE AGREEMENT The Tenant acknowledges that there are no covenants, representations, warranties, agreements or conditions expressed or implied, collateral or otherwise forming part of or in any way affecting or relating to this Lease save as expressly set out in this Lease and that this Lease constitutes the entire agreement between the Landlord and the Tenant and may not be modified except as herein explicitly provided or except by subsequent agreement in writing of equal formality hereto executed by the Landlord and the Tenant. Page 120 35.00 INTERPRETATION IN THIS INDENTURE: (a) "herein", "hereof", "hereby", "hereunder", "hereto", "hereinafter", and similar expressions refer to this indenture and not to any particular paragraph, section or other portion thereof, unless there is something in the subject matter or context inconsistent therewith. (b) "business day(s)" means any of the days from Monday to Friday of each week inclusive unless such day is a statutory holiday or public holiday. (c) "normal business hours" means the hours from 8:00 a.m. to 6:00 p.m. on business days. 36.00 SUCCESSORS This indenture and everything herein contained shall enure to the benefit of and be binding upon the respective heirs, executors, administrators, permitted successors and assigns, of the Tenant and other legal representatives as the case may be, of each and every of the parties hereto, and every reference herein to any party hereto shall include the heirs, executors, administrators, permitted successors, assigns and other legal representatives of such party, and where there is more than one tenant or there is a female party or a corporation, the provisions hereof shall be read with all grammatical and gender changes thereby rendered necessary and all covenants shall be deemed joint and several. Page 121 37.00 JOINT AND SEVERAL COVENANT If more than one person executes this Lease as Tenant, each such person shall be bound jointly and severally with the other(s), waiving the benefit of division and discussion, for the fulfilment of all of the obligations of Tenant hereunder. IN WITNESS WHEREOF the parties hereto have hereunto affixed their corporate seals duly attested to by the hands of their proper signing officers authorized in that behalf. SIGNED, SEALED AND DELIVERED ) in the presence of: ) KANATA RESEARCH PARK ) CORPORATION ) ) ) c/s ) Per: /s/ Bronwen A. Heins ) ------------------------------------------ ) Name: Bronwen A. Heins ) Title: Corporate Secretary ) I have the authority to bind the corporation ) ) NEWBRIDGE NETWORKS ) CORPORATION ) ) ) c/s ) Per: /s/ Donald Mills ) ------------------------------------------ ) Name: Donald Mills ) Title: Vice President, Administration ) ) ) Per: /s/ Peter Nadeau ) ------------------------------------------ ) Name: Peter Nadeau ) Title: Vice President, Legal Services ) )I/We have the authority to bind the corporation. Page 122 SCHEDULE "A" ------------ LEGAL DESCRIPTION ----------------- Monmouth Building - 359 Terry Fox Drive FIRSTLY: Parcel 8-4, Section March 4, Part of Lot 8, Concession 4, formerly Township of March, now in the City of Kanata, Regional Municipality of Ottawa Carleton, designated as Part 1, Plan 4R-12934 (Part of PIN 04517-0468) SECONDLY: Parcel 2-1, Section 4M-642, Block 2, Registered Plan 4M-642, City of Kanata designated as Parts 2, 3, 4, 5, 6 & 7 on Plan 4R-12934 Subject to an easement over the said Part 5 on Plan 4R-12934 Subject to an easement over the said Part 3 on Plan 4R-12934 (Part of PIN 04517-0489) Page 123 SCHEDULE "B" ------------ FLOOR PLAN ---------- Page 124 SCHEDULE "C" ------------ RULES AND REGULATIONS --------------------- The Tenant and its invitees and employees shall observe the following rules and regulations (as added to, amended or modified from time to time by the Landlord). 1. The sidewalks, entrances, elevators, stairways, passageways, shipping areas and corridors of the Building shall not be obstructed or used for any other purpose by the Tenant than for ingress and egress to and from the Leased Premises; the Tenant shall not place or allow to be placed in such areas or facilities any waste paper, garbage, refuse or anything that shall tend to make them appear unclean or untidy. 2. The Tenant and its employees shall use washrooms only for the purpose for which they were designed and nothing shall be placed in toilets that might cause them to block. 3. The Tenant shall not make any noise which might disturb other tenants and no animals or bicycles or other vehicles other than appropriate vehicles for the Tenant's use shall be brought into the Leased Premises or the Building. 4. The Leased Premises shall not be used as overnight sleeping accommodation, for public sales nor for entertaining purposes. 5. The Tenant shall make arrangements with the Landlord ahead of time to install any machines or equipment which may substantially increase the load on the electrical systems, installations will not be made until the Landlord's consent is obtained. 6. Windows will not be left open so as to admit rain or snow. 7. The Tenant will not alter any existing locks nor will any additional locks or similar devices be attached to any door or window without the Landlord's written consent. 8. Keys or other devices which are made available to the Tenant for the purpose of providing access to the exterior doors of the Building shall not be duplicated and shall be returned to the Landlord immediately upon termination of the Lease. 9. All adjustments to mechanical equipment such as thermostats, radiators, diffusers, etc. shall be made by the Landlord's staff and no one else. 10. It shall be the responsibility of the Tenant to prevent any person from throwing objects out of windows or into the ducts or stairwells of the Building, and the Tenant shall pay for any cost, damage or injury resulting from any such acts. 11. The Tenant shall provide adequate receptacles for garbage, refuse and waste paper and all such garbage, refuse and waste paper shall be placed in such containers. The Leased Premises shall be kept in a tidy, healthy and clean condition. 12. The Tenant shall not bring upon the Leased Premises any safes, heavy equipment, motors or any other thing which might overload floors or damage the Leased Premises or the Building. Page 125 13. The Tenant shall not use or keep inflammable materials in the Leased Premises. 14. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. 15. Smoking is prohibited in all common areas of the Building. The foregoing rules and regulations, as from time to time amended, are not necessarily of uniform application, but may be waived in whole or in part in respect of other tenants without affecting their enforceability with respect to the Tenant or the Leased Premises. There is no obligation on the Landlord to enforce the rules and regulations, and the Landlord shall not be liable by reason of their non-enforcement. Page 126 SCHEDULE "D" ------------ PARKING ------- 1. During the Term the Landlord hereby agrees to allow the Tenant, its employees, agents and invitees shall park their vehicles in the parking facilities located on the Lands ("parking facilities"). 2. The Landlord shall not be responsible for any theft, loss or damage to the Tenant's vehicles whatsoever, or for injury to the Tenant or others in the parking facilities. 3. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. Page 127 SCHEDULE "E" ------------ OPTION TO RENEW --------------- 1. Provided the Tenant is in good standing, during the Term has not been in substantial default under this Lease and has not assigned this Lease or sublet all or a portion of the Leased Premises, the Tenant shall have and is hereby granted an option to renew this Lease for a further term of five (5) years provided that in order to exercise this option, the Tenant shall be required to give to the Landlord notice of the exercise of such option in writing not less than six (6) months prior to the date of expiry of the initial Term. 2. Any renewal pursuant to this proviso shall be on the same terms and conditions contained in this Lease except: (a) there shall be no additional right of renewal, and no Leasehold Improvements; (b) the Annual Rent payable by the Tenant for such renewal period shall be in accordance with rates for similar premises in a similar location and as agreed upon by the Landlord and Tenant and shall in no event be less than the Annual Rent paid during the last year of the Term; such agreement to be reached not later than three (3) months prior to the expiry of the original Term. Failing such agreement, either party shall submit the matter to arbitration in accordance with the following terms: The dispute shall be submitted to a single arbitrator to be agreed upon by the parties, provided that if a single arbitrator cannot be agreed upon by the parties hereto within ten (10) days after the appointment of a single arbitrator has been requested by one of the parties in writing, then the dispute shall be referred to a board of three arbitrators, one to be appointed by each of the Landlord and the Tenant and a third arbitrator to be appointed by the first two arbitrators in writing; and if either the Landlord or the Tenant shall refuse or neglect to appoint an arbitrator within ten (10) days after the other party shall have appointed an arbitrator and shall have served a written notice upon the party so refusing or neglecting to appoint an arbitrator requiring such party to make such appointment, then the arbitrator first appointed shall, at the request of the party appointing him, proceed to hear and determine the dispute as if he were a single arbitrator appointed by both the Landlord and the Tenant for that purpose. If two arbitrators are so named within the time prescribed and they do not agree within a period of ten (10) days upon the appointment of the third arbitrator, then upon the application of either the Landlord or the Tenant, the third arbitrator shall be appointed by a Judge of the Ontario Court (General Division). The determination which shall be made by the said arbitrators or a majority of them, or by the single arbitrator, as the case may be, shall be final and binding upon the parties hereto and the costs of the arbitration and remuneration of the third arbitrator, if any, shall be borne equally between the parties hereto, each of the parties bearing the remuneration of the arbitrator appointed by it. The provisions of this paragraph shall be deemed to be submission to arbitration within the provisions of The Arbitration Act of ---------------------- Ontario and any statutory modification or re-enactment thereof; ------- provided that any limitation on the remuneration of arbitrators imposed by such legislation shall not have application to any arbitration proceeding commenced pursuant to this paragraph. Page 128 SCHEDULE "F" ------------ LEASEHOLD IMPROVEMENTS ---------------------- The Landlord will, at its cost, design the Tenant's space with the Tenant's co-ordination. The Landlord shall, construct on behalf of the Tenant and install on a turnkey basis to building standards, those leasehold improvements agreed upon by both Landlord and Tenant as chosen from the Landlord's samples. Page 129 SCHEDULE "G" ------------ ADDITIONAL TERMS ---------------- Notwithstanding anything contained in the Offer to the contrary the Tenant will not be required to pay Annual Rent or Additional Rent on that portion of the Leased Premises known as the second expansion space of Eighteen Thousand (18,000) rentable square feet until August 1, 1997 or upon substantial completion in accordance with the Construction Lien Act of Ontario whichever is the later. Page 130 DATED the 29th day of May, 1997. BETWEEN: KANATA RESEARCH PARK CORPORATION OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION OF THE SECOND PART - -------------------------------------------------------------------------------- L E A S E - -------------------------------------------------------------------------------- Prepared by: Bronwen A. Heins Date Edited: Disk Reference: Monmouth.lse Page 131 KANATA RESEARCH PARK CORPORATION AND NEWBRIDGE NETWORKS CORPORATION 1.00 LEASED PREMISES............................................................ 1.01 ADDITIONAL DEFINITIONS..................................................... 2.00 TERM....................................................................... 2.01 INABILITY TO GIVE OCCUPANCY................................................ 2.02 EARLY OCCUPANCY............................................................ 2.03 OVERHOLDING................................................................ 3.00 RENT - Basic Rent.......................................................... 3.01 MONTHLY RENTAL............................................................. 3.02 ADDITIONAL RENT............................................................ 3.03 ESTIMATED ADDITIONAL RENTALS............................................... 3.04 DEFICIENCY OF ADDITIONAL RENT.............................................. 3.05 EXCESS OF ADDITIONAL RENTAL INSTALLMENTS................................... 3.06 PRO-RATING OF ADDITIONAL RENT.............................................. 3.07 PREPAYMENT OF ADDITIONAL RENT.............................................. 3.08 DISPUTE AS TO AMOUNT OF ADDITIONAL RENT.................................... 3.09 MANNER AND PLACE OF PAYMENT OF RENT........................................ 3.10 DEFAULT.................................................................... 3.11 ACCRUAL OF RENT............................................................ 3.12 NET LEASE.................................................................. 4.00 TENANT'S BUSINESS TAX...................................................... 4.01 LANDLORD'S BUSINESS TAX.................................................... 4.02 TAX ON TENANT'S LEASEHOLD IMPROVEMENTS..................................... 4.03 PROPERTY TAX............................................................... 4.04 ALLOCATION OF TAX.......................................................... 4.05 SEPARATE SCHOOL TAXES...................................................... 4.06 TAX APPEAL................................................................. 4.07 CAPITAL TAX................................................................ 5.00 OPERATING COSTS............................................................ 5.01 ALLOCATION OF OPERATING COSTS.............................................. 5.02 FULL OCCUPANCY............................................................. 5.03 USE OF ELECTRICITY......................................................... 5.04 METERS..................................................................... 6.00 ASSIGNING OR SUBLETTING.................................................... 6.01 REQUEST TO ASSIGN OR SUBLET................................................ 6.02 ASSIGNMENT AGREEMENT....................................................... 6.03 CONSENT NOT TO RELEASE TENANT.............................................. 6.04 NOTICE OF CHANGE OF CONTROL................................................ 6.05 COST OF CONSENT............................................................ 7.00 TENANT'S COVENANTS......................................................... 7.01 TENANT REPAIRS............................................................. 7.02 RULES AND REGULATIONS...................................................... 7.03 USE OF PREMISES............................................................ 7.04 INCREASE IN INSURANCE PREMIUMS............................................. 7.05 CANCELLATION OF INSURANCE.................................................. 7.06 OBSERVANCE OF LAW.......................................................... 7.07 WASTE AND OVERLOADING OF FLOORS............................................ 7.08 INSPECTION................................................................. 7.09 INDEMNITY TO LANDLORD...................................................... Page 132 7.10 DAMAGE BY TENANT........................................................... 7.11 TENANT INSURANCE........................................................... 7.12 NO ABATEMENT OF RENT....................................................... 7.13 EXHIBITING PREMISES........................................................ 7.14 TENANT MAINTENANCE......................................................... 7.15 SIGNS...................................................................... 7.16 NAME OF BUILDING........................................................... 7.17 KEEP TIDY.................................................................. 7.18 DELIVERIES................................................................. 7.19 NOTICE OF DAMAGE........................................................... 7.20 ALTERATIONS, ETC........................................................... 7.21 CONSTRUCTION LIENS......................................................... 7.22 SECURITY................................................................... 7.23 HAZARDOUS SUBSTANCES....................................................... 7.24 NUISANCE................................................................... 8.00 LANDLORD'S COVENANTS....................................................... 8.01 QUIET ENJOYMENT............................................................ 8.02 TAXES, ETC................................................................. 8.03 HEATING AND AIR-CONDITIONING............................................... 8.04 REPAIR OF STRUCTURE........................................................ 8.05 DELAYS IN PROVISION OF SERVICES............................................ 9.00 TENANT'S FIXTURES.......................................................... 9.01 REMOVAL OF TENANT'S FIXTURES............................................... 10.00 DAMAGE OR DESTRUCTION OF LEASED PREMISES.................................. 10.01 PARTIAL DAMAGE............................................................ 10.02 TOTAL DAMAGE.............................................................. 10.03 OBLIGATION TO REPAIR...................................................... 10.04 ABATEMENT OF RENT......................................................... 10.06 COMPLETION OF REPAIR...................................................... 10.05 DAMAGE TO 50% OF BUILDING................................................. 11.00 LIABILITY FOR DAMAGE TO PROPERTY.......................................... 12.00 DEFAULT OF TENANT......................................................... 13.00 BANKRUPTCY................................................................ 14.00 RE-ENTRY BY LANDLORD...................................................... 15.00 RIGHT OF TERMINATION...................................................... 16.00 DISTRESS.................................................................. 17.00 NON-WAIVER................................................................ 18.00 CHANGES TO BUILDING....................................................... 19.00 SEVERANCE OF LAND......................................................... 20.00 COSTS OF COLLECTION....................................................... 21.00 PROFITS AND REMEDIES BY LANDLORD.......................................... 21.01 PAYMENTS TO THIRD PARTIES................................................. 21.02 NON-PAYMENT OF ADDITIONAL RENT............................................ 21.03 INTEREST ON ARREARS....................................................... 22.00 NOTICE.................................................................... 23.00 SUBORDINATION, POSTPONEMENT, ATTORNMENT................................... 23.01 TENANT'S RIGHT TO POSSESSION.............................................. 23.02 ATTORNMENT BY TENANT...................................................... 24.00 CERTIFICATE............................................................... 25.00 REGISTRATION.............................................................. 26.00 PLANNING ACT.............................................................. 27.00 TRANSFER BY LANDLORD...................................................... 28.00 NO ADVERTISING OF LEASED PREMISES......................................... 29.00 TIME OF ESSENCE........................................................... 30.00 LAWS OF ONTARIO........................................................... 31.00 SEVERABILITY OF COVENANTS................................................. 32.00 HEADINGS.................................................................. 33.00 SCHEDULES................................................................. 34.00 LEASE ENTIRE AGREEMENT.................................................... Page 133 35.00 INTERPRETATION............................................................ 36.00 SUCCESSORS................................................................ 37.00 JOINT AND SEVERAL COVENANT SCHEDULE "A".................................................................... - ------------ SCHEDULE "B".................................................................... - ------------ SCHEDULE "C".................................................................... - ------------ SCHEDULE "D".................................................................... - ------------ SCHEDULE "E".................................................................... - ------------ SCHEDULE "F".................................................................... - ------------ SCHEDULE "G".................................................................... - ------------ Page 134 EX-10.22 5 LEASE DTD 4/23/97 EXHIBIT 10.22 Page 135 THIS INDENTURE made this 23rd day of April, 1997. BETWEEN: KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Hereinafter called the "Tenant") OF THE SECOND PART WITNESSETH that in consideration of the rents, covenants, conditions and agreements herein contained, the Landlord and the Tenant covenant and agree as follows: 1.00 LEASED PREMISES The Landlord hereby leases to the Tenant all those premises consisting of the building known municipally as 349 Terry Fox Drive and comprising approximately two hundred and forty-two thousand eight hundred and fifty-six point six seven (242,856.67) square feet (herein called either the "Leased Premises" or the "Building") in the City of Kanata which said building is erected on the lands (herein called the "Lands") described in Schedule "A" annexed hereto. The Leased Premises are more particularly outlined on the floor plan annexed hereto and marked Schedule "B". 1.01 ADDITIONAL DEFINITIONS For the purposes of this Lease and any additions or amendments thereto: (a) "Improvements" means all improvements located on the Lands, including the Building, the parking lot or structure servicing the Building and other facilities and physical structures which are for the exclusive use of occupants of the Building; (b) "Common Areas" means at any time those portions of the Lands and Building not leased or designated for lease to tenants but provided to be used in common by (or by the sublesses, agents, employees, customers or licensees of) Landlord, Tenant and other tenants of the Building, whether or not they are open to general public and shall include any fixtures, chattels, systems, decor, signs, facilities or landscaping contained in those areas or maintained or used in connection with them, and shall be deemed to include the city sidewalks adjacent to the Lands and any pedestrian walkway system (either above or below ground), park, or other public facility in respect of which Landlord is from time to time subject to obligations arising from the Lands and Building. Page 136 (c) "Tenant's Proportionate Share" means one hundred percent (100%) provided the said percentage may be varied based on the actual area of the Leased Premises as certified by the Landlord. 2.00 TERM To have and to hold the Leased Premises for and during the Term, (hereinafter called the "Term") of five (5) years to be computed from the 1st day of June, l997 or from the date the Tenant takes occupancy of the Leased Premises, whichever is sooner, and from thenceforth next ensuing and fully to be completed and ended on the 31st day of May 2002. 2.01 INABILITY TO GIVE OCCUPANCY It is hereby agreed that if the Landlord is unable to deliver vacant possession of the Leased Premises on the date of commencement of the Term by reason of the Leased Premises or the Building being uncompleted or by reason of any previous tenant or occupant overholding (but not by reason of circumstances beyond the Landlord's control or by reason of the failure of the Tenant to complete Tenant's Work herein or by reason of the Tenant failing on or before the date occurring six (6) weeks prior to the commencement of the Term herein to supply all necessary approvals and specifications which the Landlord requires in order to complete the Leasehold Improvements herein,) the Landlord shall diligently exercise all of its rights to obtain completion and vacant possession of the Leased Premises and the rent payable hereunder shall abate at a rental per day equal to 1/365th of the Annual Rent payable until such completion or vacant possession is obtained but the Landlord shall not be liable to the Tenant for damages of any nature whatsoever and this Lease shall continue in full force and effect subject only to the abatement of rent as aforesaid. 2.02 EARLY OCCUPANCY If the Tenant occupies the Leased Premises prior to the commencement of the Term, then during the period up to the date of commencement the Tenant shall be a tenant of the Landlord subject to all the covenants, conditions and agreements set out in this Lease and at a rental per day equal to 1/365th of the Annual Rent and Additional Rent and such rental shall be paid on or before the commencement of the Term. 2.03 OVERHOLDING If the Tenant shall continue to occupy the Leased Premises after the expiration of this Lease with or without the consent of the Landlord and without any further written agreement, the Tenant shall be a monthly tenant at a rent equivalent to 150% of the Monthly Rent and Additional Rent hereby reserved and subject to all the terms and conditions herein set out except as to length of tenancy. 3.00 RENT - Basic Rent In each year during the Term of this Lease the Tenant covenants and agrees to pay without any set-off or deduction whatsoever, to the Landlord, as rent for the Leased Premises the following: Page 137
Years Rate/sq foot Leased Premises ----- ------------ --------------- 1-5 $9.40 $2,282,852.60
herein called "Annual Rent". The Annual Rent will be adjusted proportionately for any lease year which is other than twelve months. 3.01 MONTHLY RENTAL The Annual Rent shall be payable in equal monthly installments of One Hundred and Ninety Thousand Two Hundred and Thirty-Seven Dollars and Seventy-Two Cents ($190,237.72) (hereinafter called the "Monthly Rent") in advance on the first day of each calendar month during the Term. If the Term commences on any day other than the first (1st) or ends on any day other than the last of a calendar month, rent for the fraction of a month at the commencement and at the end of the Term shall be prorated at a rate per day equal to 1/365th of the Annual Rent payable. 3.02 ADDITIONAL RENT The Tenant covenants to pay as additional rent all sums to be paid to the Landlord hereunder including, without limiting the generality of the foregoing, all tax on the Tenant's leasehold improvements, Goods and Services Tax and the Tenant's Proportionate Share of the Tax, Capital Tax, Landlord's Business Tax and Operating Costs (herein called "Additional Rent"). 3.03 ESTIMATED ADDITIONAL RENTALS During the Term, the Tenant shall pay to the Landlord monthly in advance on the 1st day of each and every month during the Term, one-twelfth (1/12) of the amount of such annual Additional Rent as reasonably estimated by the Landlord to be due from the Tenant. Such estimates may be adjusted from time to time and re-adjusted by the Landlord and the Tenant shall pay to the Landlord monthly installments of Additional Rent according to such estimates, as so adjusted. 3.04 DEFICIENCY OF ADDITIONAL RENT If the aggregate amount of such estimated Additional Rent payments made by the Tenant in any year should be less than the Additional Rent due for such year, then the Tenant shall pay to the Landlord as Additional Rent within thirty (30) days of receipt of notice thereof from the Landlord the amount of such deficiency. 3.05 EXCESS OF ADDITIONAL RENTAL INSTALLMENTS If the aggregate amount of such Additional Rent payments made by the Tenant in any year of the Term should be greater than the Additional Rent due for such year, then should the Tenant not be otherwise in default hereunder, the amount of such excess will be applied by the Landlord to the next succeeding installments of such Additional Rent due hereunder; and if there be any such excess for the last year of the Term, the amount thereof will be refunded by the Landlord to the Tenant within thirty (30) days after the completion of the Landlord's year-end audit provided the Tenant is not otherwise in default under the terms of the Lease. Page 138 3.06 PRO-RATING OF ADDITIONAL RENT If only part of any calendar year is included within the Term the amount of the Additional Rent payable by the Tenant for such partial year shall be prorated and shall be based upon the estimates made by the Landlord and upon a final determination of such Additional Rent, the amount remaining unpaid at the termination of this Lease shall, notwithstanding such termination, be adjusted and paid within a reasonable time thereafter. 3.07 PREPAYMENT OF ADDITIONAL RENT Notwithstanding the foregoing, if the Landlord is required to pay any amount, which it is entitled to collect from the tenants of the Building, more frequently than provided for in this Lease or if the Landlord is required to prepay any such amount, the Tenant shall pay to the Landlord its portion of such amount calculated in accordance with this Lease, forthwith upon demand. 3.08 DISPUTE AS TO AMOUNT OF ADDITIONAL RENT In the event of any dispute by the Tenant as to the amount of any Additional Rent claimed by the Landlord or the amount of the Tenant's Proportionate Share thereof, the opinion of the Landlord's auditors shall be conclusive and binding as to the amount thereof for any period to which the opinion relates. 3.09 MANNER AND PLACE OF PAYMENT OF RENT All rent shall, until further written notice is received from the Landlord, be paid by the Tenant without any prior demand therefor to Kanata Research Park Corporation, at par in the City of Ottawa at the principal office of, Kanata Research Park Corporation, 600 March Road, P.O. Box l3600, Kanata, Ontario, Canada K2K 2E6, or at such other place in Canada as Kanata Research Park Corporation may designate in writing from time to time and shall be payable in lawful money of Canada. The Landlord agrees that payments made to Kanata Research Park Corporation pursuant to this Lease shall be deemed to be payments made to the Landlord and the Tenant shall not be required to see to the application thereof. 3.10 DEFAULT Any sums received by the Landlord from or for the account of the Tenant when the Tenant is in default hereunder may be applied at the Landlord's option to the satisfaction, in whole or part, of any of the obligations of the Tenant then due hereunder in such manner as the Landlord sees fit, and regardless of any designation or instructions of the Tenant to the contrary. 3.11 ACCRUAL OF RENT Rent shall be considered as annual and accruing from day to day, and where it becomes necessary for any reason to calculate such rent for an irregular period of less than one (1) year an appropriate apportionment and adjustment shall be made. Where the calculation of any Additional Rent is not made until after the termination of this Lease, the obligation of the Tenant to pay such Additional Rent shall survive the termination of this Lease and such amounts shall be payable by the Tenant upon demand by the Landlord. Page 139 3.12 NET LEASE The Tenant acknowledges and agrees that it is intended that this Lease shall be a completely carefree net lease for the Landlord and that the Landlord shall not be responsible during the Term for any costs, charges, expenses or outlays of any nature whatsoever arising from or relating to the Leased Premises, whether foreseen or unforeseen and whether or not within the contemplation of the parties at the commencement of the Term except as shall be otherwise expressly provided for in this Lease and other than Income Tax due by the Landlord, the Tenant shall be responsible for any business transfer tax, value added tax, multi-stage sales tax, goods and services tax or any other tax or levy on rental income that may be charged, levied or assessed by any government or other applicable taxing authority against the Landlord whether known as a goods and services tax or any other name ("Goods and Services Tax"). 4.00 TENANT'S BUSINESS TAX In each and every year during the Term the Tenant covenants to pay and discharge prior to the same becoming due and payable all taxes, rates, duties and assessments and other charges that may be levied, rated, charged or assessed against or in respect of the Tenant's or other occupant's use and occupancy of the Leased Premises or in respect of the Tenant's or other occupant's leasehold improvements, equipment, machinery, trade fixtures and facilities situate or installed on or in the Leased Premises and every tax and license fee in respect of any and every business carried on in the Leased Premises or in respect of the use or occupancy thereof by the Tenant (and any and every subtenant, licensee or occupant thereof) whether such taxes, rates, duties, assessments and license fees are charged by any municipal, parliamentary, school or other body during the term hereby demised. The Tenant will indemnify and keep indemnified the Landlord from and against payment of all loss, costs, charges and expenses occasioned by, or arising from any and all such taxes, rates, duties, assessments, license fees, and any and all taxes which may in future be levied or charged in lieu of such taxes; and any such loss, costs, charges and expenses suffered by the Landlord may be collected by the Landlord as rent with all rights of distress and otherwise as reserved to the Landlord in respect of rent in arrears. The Tenant further covenants and agrees that upon written request of the Landlord, the Tenant will promptly deliver to the Landlord for inspection receipts for payment of all such taxes, rates, duties, assessments, license fees and other charges in respect of all improvements, equipment and facilities of the Tenant on or in the Leased Premises or in respect of any business carried on in the Leased Premises which were due and payable up to one (1) month prior to such request. 4.01 LANDLORD'S BUSINESS TAX In the event that there are any taxes, rates, duties, assessments or charges levied, rated, charged or assessed against the Landlord by any municipal or other governmental authority with respect to the Landlord's use or occupancy of any part of the Building or the Land which the Tenant is entitled to use in common with other persons or with respect to any other part of the Building which the Landlord uses or occupies for the purpose of supplying services to the Leased Premises (such taxes, rates, duties, assessments or charges hereinafter called the "Landlord's Business Tax"), then it is agreed that in addition to all other sums, the Tenant is required to pay pursuant to this Lease, the Tenant shall pay to the Landlord as Additional Rent, the Tenant's Proportionate Share of such Landlord's Business Tax. Page 140 4.02 TAX ON TENANT'S LEASEHOLD IMPROVEMENTS The Tenant shall pay to the Landlord as Additional Rent, in respect of each applicable tax year, an amount equal to that portion of the Tax for such tax year, as determined by the Landlord, which may reasonably be regarded as being attributable to the fixtures, improvements, installations, alterations, additions and equipment from time to time made, erected or installed by or on behalf of the Tenant in the Leased Premises. 4.03 PROPERTY TAX "Tax" in this Lease means an amount equivalent to all taxes, rates, duties, levies and assessments whatsoever levied, rated, charged or assessed by any municipal, parliamentary, educational, school or other governmental authority charged upon the Building, the Lands, the property and all improvements now or hereafter appurtenant thereto or upon the Landlord on account thereof including all taxes, rates, duties, levies and assessments for local improvements and including any tax which has been attracted by the Tenant's leasehold improvements and equipment and for which the Tenant is responsible hereunder and excluding any portion of Tax payable solely by any other tenant and excluding any Tax charged against or applicable to the other office buildings constructed on the Lands and the parking spaces (excluding visitor parking) applicable to such buildings and excluding such taxes as corporate income, capital gains, profits or excess profits, taxes assessed upon the income of the Landlord, and shall also include any and all taxes which may in future be levied in lieu of Tax as hereinbefore defined. 4.04 ALLOCATION OF TAX If the Tax or any portion thereof that may be payable by the Tenant by reason of this Lease, depends upon an assessment or an approximation of an assessment which has not been made by the taxing authority or authorities having jurisdiction, the Landlord shall determine the same; any such determination made by the Landlord shall be binding upon the Tenant unless shown to be unreasonable or erroneous in some substantial respect. The Landlord shall have the right from time to time to reasonably allocate and re-allocate Taxes not charged separately to the various buildings (including the Building) and the parking garages located on the Lands. 4.05 SEPARATE SCHOOL TAXES If the Tenant or any subtenant or licensee of the Tenant or any occupant of the Leased Premises shall elect to have the Leased Premises or any part thereof assessed for separate school taxes, the Tenant shall pay to the Landlord, as additional rent, as soon as the amount of the separate school taxes is ascertained, any amount by which the amount of separate school taxes exceeds the amount which would have been payable for Tax had such election not been made and if the Tenant or any subtenant or licensee of the Tenant shall elect to have the Leased Premises or any part thereof assessed for separate school taxes as aforesaid and if such separate school taxes are less than the taxes which would have been payable for school taxes had such election not been made, then and in that event, the Tenant shall be entitled to deduct from the rent for the first month of the year following which such taxes were payable, the amount by which the separate school taxes were less than the amount which would have been payable for school taxes in the year prior to such month. Page 141 4.06 TAX APPEAL Any expense incurred by the Landlord in obtaining or attempting to obtain a reduction in the amount of the Tax or the assessment upon which the Tax may be based, shall be added to and included in the amount of the Tax and if the Tenant shall have paid its Proportionate Share of the Tax and the Landlord shall thereafter receive a refund of any portion of the Tax, the Landlord shall make an appropriate refund to the Tenant. 4.07 CAPITAL TAX "Capital Tax" means the tax or excise imposed or capable of being imposed upon the Landlord by any government authority having jurisdiction which is measured or based in whole or in part upon the taxable capital employed by the Landlord, which said taxable capital shall be deemed to be the cost to the Landlord of said Building and Lands computed as if the amount of such tax were that amount due if the Building and the Lands were the only property of the Landlord, the Landlord was entitled to no capital deduction, investment allowance or any other deduction whatsoever. For the purpose of this paragraph the Term "investment allowance" and "capital deduction" shall be defined by reference to the applicable taxing statute. 5.00 OPERATING COSTS "Operating Costs" in this Lease means the total charges, expenses, costs, fees, rentals, disbursements or outlays incurred, accrued, paid, payable or attributable whether by the Landlord or others on behalf of the Landlord for complete repair, maintenance, operation, cleaning and management of the Building, Lands and all the improvements thereon and the components of each of them (herein collectively called the "Property") such as are in keeping with maintaining the standard of a first class commercial Property so as to give it high character and distinction; and including, without limiting the generality of the foregoing, the cost of all repairs and replacements required for such operation and maintenance, the cost of maintaining and repairing the heating, air-conditioning, ventilating and mechanical systems and equipment in the Building, the cost of operating and maintaining any elevators, (including the cost of service contracts); the costs of providing hot and cold water; the costs of providing electricity not otherwise chargeable to tenants; the costs of all fuel, gas and steam used in heating, ventilating and air-conditioning; the cost of energy conservation devices or equipment; the cost of snow removal; landscape maintenance including the cost of replacing any landscaping on the Lands; the cost of window cleaning; the cost of insurance premiums for fire, casualty, liability, rental and any other insurance coverage maintained by the Landlord in connection with the Property; telephone and other utility costs; the amount paid or payable for all salaries, wages and benefits and other payments paid to or on behalf of persons engaged in the cleaning, supervision, maintenance and repair of the Property (including wages of the on site Property Manager); the cost of accounting services necessary to prepare the statements and opinions for the tenants and to compute the rents and other charges payable by the tenants of the Building and the reasonable cost of collecting and enforcing payment of all amounts payable by the tenants; the cost of porters, guards and other protection services; the cost of providing security services; the cost of garbage or refuse removal from the Building not otherwise chargeable to tenants; the cost of repair and maintenance of the roadways, curbs, paving, walkways, pools, landscaping, lighting and other common facilities and outside areas; cost of services provided for the common use of the tenants; building management (not exceeding the going rate charged by trust companies for building management in the Regional Municipality of Ottawa-Carleton for similar buildings); the cost of service contracts with independent Page 142 contractors and all other expenses, paid or payable by the Landlord in connection with the operation of the Property together with an administration fee equal to fifteen percent of Operating Costs, but such Operating Costs shall not include any interest on any debt or capital; retirement of any debt; any amounts directly chargeable by the Landlord to any tenant or tenants of the Building and the cost of any repairs paid for by insurance proceeds or for which the Landlord was reimbursed by insurance proceeds. 5.01 ALLOCATION OF OPERATING COSTS In determining the Operating Costs attributable to the Building, the Landlord shall have the right from time to time to reasonably allocate and re-allocate such Operating Costs which represent operating costs incurred for facilities or services shared by the Building and such other buildings as are owned or operated by the Landlord and which are not charged or allocated separately against the Building and any such other building or buildings. Any such determination made by the Landlord shall be binding upon the Tenant unless shown to be unreasonable or erroneous in some substantive respect. The Tenant shall have the right to reasonable access to the books and records of the Landlord to conduct an examination and to ascertain whether allocations of Operating Costs made by the Landlord have been made reasonably. 5.02 FULL OCCUPANCY If in any year the Building has not been fully occupied for the whole year, the amount of the Operating Costs for such year may be adjusted by the Landlord, acting reasonably, to an amount which reflects what the amount of the Operating Costs would be if the Building had been fully occupied for the whole year. 5.03 USE OF ELECTRICITY The Tenant shall not, without the Landlord's prior written consent in each instance, connect any additional fixtures, appliances or equipment to the Building's electric distribution system or make any alteration or addition to the electrical system of the Leased Premises existing at the commencement of the Term. If the Landlord grants such consent, the cost of all additional risers and other equipment required therefor shall be paid as Additional Rent by the Tenant to the Landlord upon demand. As a condition to granting such consent, the Landlord may require the Tenant to agree to pay an increase in the Additional Rent for Operating Costs by an amount which will reasonably reflect the increased cost of the Landlord of the additional electrical services to be furnished to the Leased Premises by the Landlord. 5.04 METERS The Tenant covenants to pay for the cost of any additional metering which may be required by the Landlord to be installed in the Building for the purpose of determining the amount of electricity consumed by the Tenant in the Leased Premises. 6.00 ASSIGNING OR SUBLETTING The Tenant covenants that it will not assign or sublet the Leased Premises or any part thereof without the prior written consent of the Landlord, which consent shall not be unreasonably withheld save and except in the event of any of the following, in which case the Landlord may arbitrarily withhold its consent: Page 143 (a) an assignment or sublet of the whole of the Leased Premises, the terms of which have a net present value that are less or more than the net present value of the terms of the Lease (not including the value of initial leasehold improvements, leasing commissions or inducements of any kind under the Lease) and in the latter event if the Landlord consents to such assigned or sublet the Tenant shall pay the increased value to the Landlord as Additional Rent.; (b) a sublet of a part of the Leased Premises; (c) where the assignee or subtenant is then a tenant of the Landlord at the Building and the Landlord has or will have during the next following six (6) months, vacant space for rent in the Building. 6.01 REQUEST TO ASSIGN OR SUBLET If the Tenant requests the Landlord's consent to an assignment of this Lease or to a subletting of the whole or any part of the Leased Premises, the Tenant shall submit to the Landlord the name and address of the proposed assignee or subtenant together with a copy of an offer or agreement to assign or sublet or the sublease or assignment and such additional information as to the nature of its business and its financial responsibility and standing (including financial statements) as the Landlord may reasonably require ("required information"). 6.02 ASSIGNMENT The Landlord's consent to any assignment may be conditional upon the assignee entering into an assignment in form and content satisfactory to the Landlord, to perform, observe and keep each and every covenant, condition and agreement in this Lease on the part of the Tenant to be performed, observed and kept including the payment of rent and all other sums and payments agreed to be paid or payable under this Lease on the days and times and in the manner specified. 6.03 CONSENT NOT TO RELEASE TENANT In no event shall any assignment or subletting to which the Landlord may have consented release or relieve the Tenant from his obligations fully to perform all the terms, covenants and conditions of this Lease to be performed. 6.04 NOTICE OF CHANGE OF CONTROL Where there is a change in corporate control of the Tenant, the Tenant shall forthwith so advise the Landlord in writing. 6.05 COST OF CONSENT The Tenant further agrees that prior to any consent for assignment, subletting or change in control being effective and binding upon the Landlord, the Tenant shall pay on demand the Landlord's reasonable costs (including the Landlord's own administrative costs) incurred in connection with the Tenant's request for such consent. 7.00 TENANT'S COVENANTS The Tenant further covenants with the Landlord as follows: Page 144 7.01 TENANT REPAIRS To repair, maintain and keep the Leased Premises and all trade fixtures and improvements therein in good and substantial repair subject only to defects in construction of the structural members of the Building, reasonable wear and tear and damage by fire, lightning and tempest or other casualty against which the Landlord is insured (herein collectively referred to as "Tenant Repair Exceptions"); and that the Landlord may enter and view state of repair and that the Tenant will repair according to notice in writing, except for Tenant Repair Exceptions and that the Tenant will leave the Leased Premises in good repair, except for Tenant Repair Exceptions. Notwithstanding anything hereinbefore contained, the Landlord may in any event make repairs to the Leased Premises without notice if such repairs are, in the Landlord's opinion, necessary for the protection of the Building and the Tenant covenants and agrees with the Landlord that if the Landlord exercises any such option to repair, the Tenant will pay to the Landlord together with the next instalment of Monthly Rent which shall become due after the exercise of such option all sums which the Landlord shall have expended in making such repairs and that such sums, if not so paid within such time, shall be recoverable from the Tenant as rent in arrears. Provided further that in the event that the Landlord from time to time makes any repairs as hereinbefore provided, the Tenant shall not be deemed to have been relieved from the obligation to repair and leave the Leased Premises in a good state of repair. 7.02 RULES AND REGULATIONS That the Tenant and his employees and all persons visiting or doing business with him on the Leased Premises shall be bound by and shall observe rules and regulations annexed hereto or as may hereafter be reasonably set by the Landlord of which notice in writing shall be given to the Tenant and upon such notice being delivered all such rules and regulations shall be deemed to be incorporated into and form part of this Lease. Such rules and regulations shall not be inconsistent with nor derogate from the terms of this Lease and in any event shall apply equally to all tenants of the Building and be non-discriminatory in their application. 7.03 USE OF PREMISES The Leased Premises shall be used only for office and hi-technology manufacturing purposes. 7.04 INCREASE IN INSURANCE PREMIUMS That it will not keep, use, sell or offer for sale in or upon the Leased Premises any article which may be prohibited by any insurance policy in force from time to time covering the Building including any regulations made by any fire insurance underwriters applicable to such policies. In the event the Tenant's occupancy or conduct or business in, or on the Leased Premises, whether or not the Landlord has consented to the same, results in any increase in premiums for the insurance carried from time to time by the Landlord with respect to the Building, the Tenant shall pay any such increase in premiums as Additional Rent within ten (10) days after bills for such additional premiums shall be rendered by the Landlord. In determining whether increased premiums are a result of the Tenant's use or occupancy of the Leased Premises, a schedule issued by the organization computing the insurance rate on the Building showing the various components of such rate, shall be conclusive evidence of Page 145 the several items and charges which make up such rate. The Tenant shall promptly comply with all reasonable requirements of the insurance authority or of any insurer now or hereafter in effect relating to the Leased Premises. 7.05 CANCELLATION OF INSURANCE If any policy of insurance upon the Building or any part thereof or upon the Lands or any part thereof shall be cancelled or rendered voidable by the insurer by reason of any act, omission or occupation of the Leased Premises or any part thereof by the Tenant, any assignee or subtenant of the Tenant or by anyone permitted by the Tenant to be upon the Leased Premises, and the Tenant, after receipt of notice from the Landlord, shall have failed to immediately reinstate such insurance policies or avoid cancellation of such insurance policies, the Landlord may at its option determine this Lease forthwith by leaving upon the Leased Premises notice in writing of its intention so to do and thereupon rent and any other payments for which the Tenant is liable under this Lease shall be apportioned and paid in full to the date of such determination and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord and the Landlord may re-enter and take possession of the same or the Landlord shall pay any increased cost of such insurance and the Tenant shall pay as Additional Rent, on demand, the amount by which the premiums for such insurance are so increased. 7.06 OBSERVANCE OF LAW To comply promptly at its own expense with all provisions of law including without limitation, federal and provincial legislative enactments, building by-laws, and any other governmental or municipal regulations which relate to the partitioning, equipment, operation and use of the Leased Premises, and to the making of any repairs, replacements, alterations, additions, changes, substitutions or improvements of or to the Leased Premises. And to comply with all police, fire and sanitary regulations imposed by any federal, provincial or municipal authorities or made by fire insurance underwriters, and to observe and obey all governmental and municipal regulations and other requirements governing the conduct of any business conducted in the Leased Premises. Provided that in default of the Tenant so complying the Landlord may at its option where possible comply with any such requirement and the cost of such compliance shall be payable on demand by the Tenant to the Landlord as Additional Rent. 7.07 WASTE AND OVERLOADING OF FLOORS Not to do or suffer any waste or damage, disfiguration or injury to the Leased Premises or the fixtures and equipment thereof or permit or suffer any overloading of the floors thereof; and not to place therein any safe, heavy business machine or other heavy thing without first obtaining the consent in writing of the Landlord; and not to use or permit to be used any part of the Leased Premises for any dangerous, noxious or offensive trade or business and not to cause or permit any nuisance in, at or on the Leased Premises; and without the prior consent in writing of the Landlord, the Tenant will not bring onto or use in the Leased Premises or permit any person subject to the Tenant to bring onto or use on the Leased Premises any fuel or combustible material for heating, lighting or cooking nor will it allow onto the Leased Premises any stove, burner, kettle, apparatus or appliance for utilizing the same and the Tenant will not purchase, acquire or use electrical current or gas for consumption on the Leased Premises except from such supplier thereof as shall have been approved in writing by the Landlord. Page 146 7.08 INSPECTION To permit the Landlord, its servants or agents to enter upon the Leased Premises at any time and from time to time for the purpose of inspection and of making repairs, alterations or improvements to the Leased Premises or to the Building and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. The Landlord, its servants or agents may at any time and from time to time enter upon the Leased Premises to remove any article or remedy any condition which, in the opinion of the Landlord, reasonably arrived at, would be likely to lead to cancellation of any policy of insurance and such entry by the Landlord shall not be deemed to be a re- entry. The Tenant shall, upon written request of the Landlord, produce audited Financial Statements of the Tenant, which statements shall include a Balance Sheet, Income Statement, Statement of Retained Earnings, Statement of Source and Application of Funds. 7.09 INDEMNITY TO LANDLORD To promptly indemnify and save harmless the Landlord for any and all liabilities, damages, costs, claims, suits or actions of any nature or kind including the full cost to the Landlord in resisting or defending the same to which the Landlord shall or may become liable or suffer arising out of or by reason of: (a) any breach, violation or non-performance by the Tenant of any of its covenants and obligations under this Lease; (b) any damage to property while said property shall be in or about the Leased Premises including the systems, furnishings and amenities thereof, as a result of the negligence, misuse or wilful act of the Tenant, its express or implied invitees, licensees, agents, servants or employees; and (c) any injury to any invitee, licensee, agent, servant or employee of the Tenant, including death resulting at any time therefrom, occurring on or about the Leased Premises, the Property or the Lands; and this indemnity shall survive the expiry or sooner determination of this Lease. 7.10 DAMAGE BY TENANT That if the Building including the Leased Premises, the elevators, boilers, engines, pipes and other apparatus (or any of them) used for the purpose of heating, ventilating or air-conditioning the Building or operating the elevators, or if the water pipes, drainage pipes, electric lighting or other equipment of the Building or the roof or outside walls or other parts of the Building will not function properly or become damaged or destroyed through the negligence, carelessness or misuse of the Tenant, or of any of its invitees, licensees, agents, servants, employees, clients, customers or contractors, or through it or them in any way stopping up or injuring any heating, ventilating or air- conditioning apparatus, elevators, water pipes, drainage pipes or other equipment or parts of the Building, the expense of the necessary repairs, replacements or alterations shall be borne by the Tenant and paid forthwith on demand to the Landlord as Additional Rent. Page 147 7.11 TENANT INSURANCE (a) To maintain in force during currency of this Lease at the Tenant's expense insurance policies to cover the following: (i) comprehensive general liability insurance with limits of not less than Five Million Dollars ($5,000,000.00) (including bodily injury and property damage, tenant's legal liability, cross liability and contractual liability) to cover all responsibilities assumed by the Tenant with respect to the use or occupancy of and the business carried on, in or from the Leased Premises, in amounts acceptable to the Landlord; (ii) all risk insurance covering leasehold improvements made or installed by or on behalf of the Tenant in an amount equal to the full replacement value thereof; and (iii) any other insurance that the Landlord (or the Landlord's mortgagee, if any) may reasonably require from time to time in form and amounts and for insurance risks against which a prudent Tenant would protect itself; (b) That all Tenant's insurance required hereunder shall be with insurers and upon terms and conditions to which the Landlord has no reasonable objection. Copies of all policies, or certificates evidencing the insurance or its renewal shall be delivered to the Landlord at the Landlord's request; (c) That all policies of insurance to be maintained by the Tenant shall, in the case of general liability insurance, include the Landlord (and, where applicable, the Landlord's mortgagee) as additional insured and, in the case of all other insurance coverage, contain a waiver by the insurer and Tenant of any rights of subrogation or indemnity or any other claim to which the insurer might otherwise be entitled against the Landlord (and mortgagee) or the agents or employees of the Landlord. All such insurance policies shall also contain a provision prohibiting the insurer from cancelling or altering the insurance coverage without first giving the Landlord thirty (30) days prior written notice thereof; (d) That if the Tenant fails to take out or maintain in force such insurance, the Landlord may take out the necessary insurance and pay the premium therefor and the Tenant shall pay to the Landlord the amount of such premium immediately on demand as Additional Rent; and (e) That if both the Landlord and the Tenant have claims to be indemnified under any such insurance, the indemnity shall be applied first to the settlement of the claim of the Landlord and the balance, if any, to the settlement of the claim of the Tenant. 7.12 NO ABATEMENT OF RENT That there shall be no abatement or reduction of rent and that the Landlord shall not be liable for any damage howsoever caused to property of the Tenant or of any person subject to the Tenant which is in or upon or being brought to or from the Lease Premises or the Building or for personal injury (including death) sustained in any Page 148 manner by the Tenant or any person subject to the Tenant while the Tenant or any such person is on or upon entering or leaving the Leased Premises or Building unless such property damage or personal injury may have been attributable to fault or neglect on the part of the Landlord or of any person for whom the Landlord is at law responsible, and that the Tenant will indemnify and save harmless the Landlord from and against all claims and demands made against the Landlord by any person for or arising out of any such property damage or personal injury. 7.13 EXHIBITING PREMISES To permit the Landlord or its agents or servants to enter and show the Leased Premises, during normal business hours, to prospective purchasers of the Building and may after notice of termination of this Lease has been given or within the last six (6) months of the Term, enter and show the Leased Premises to prospective tenants and erect signs stating that the premises are "To Let". 7.14 TENANT MAINTENANCE That the Tenant will maintain in good repair all plate and window glass, all electrical fixtures, outlets and wiring, all plumbing and plumbing fixtures, all heating equipment and all water and gas piping and outlets within the Leased Premises and that he will make good any damage caused by or resulting from breakage of glass, interference with the electrical, plumbing, heating, water or gas systems of the Building or misuse of any of the equipment, outlets, piping or wiring of any such system by the Tenant or any person subject to the Tenant and the Tenant agrees that he shall prior to taking possession of the Leased Premises inspect the entire Leased Premises and shall be satisfied they are clean and in good order and in a good state of repair, and that all plate and window glass is whole and that the sanitary arrangements in the Building are in satisfactory condition. 7.15 SIGNS The Tenant shall not paint, display, inscribe or place any sign, symbol, notice or lettering of any kind anywhere outside the Leased Premises within the Leased Premises so as to be visible from the outside of the Building with the exception only of an identification sign (which sign shall be subject to the Landlord's written approval as to size, design and location). 7.16 NAME OF BUILDING Not to refer to the Building by any name other than that designated from time to time by the Landlord and the Tenant shall use the name of the Building for the business address of the Tenant but for no other purpose. 7.17 KEEP TIDY The Tenant shall provide its own cleaning and janitorial services. At the end of each business day, the Tenant shall leave the Leased Premises in a tidy condition. 7.18 DELIVERIES The Tenant shall receive, ship, take delivery of and allow and require suppliers or others to deliver or take delivery of merchandise, supplies, fixtures, equipment, Page 149 furnishings, wares or merchandise only through the loading entrance and other facilities provided for that purpose and at the times set by the Landlord. 7.19 NOTICE OF DAMAGE To notify the Landlord promptly of any damage to or defect in the Leased Premises or the Building or any part thereof including any electrical, plumbing, heating, ventilating, air-conditioning, water, sprinkler or gas systems or equipment, or the water pipes, gas pipes, telephone lines or electrical apparatus within or leading to the Leased Premises, and in case of fire to give immediate notice thereof to the Fire Department. 7.20 ALTERATIONS, ETC The Tenant will not make or erect in or to the Leased Premises any installations, alterations, additions or partitions or remove or change the location or style of any installations, alterations, equipment, outlets, piping or wiring relating to the electrical, plumbing, water, gas, air-conditioning, heating or ventilating systems without submitting drawings and specifications to the Landlord and obtaining the Landlord's prior written consent in each instance. The Tenant must further obtain the Landlord's prior written consent to any change or changes in such drawings and specifications submitted as aforesaid. The Tenant's request for such consent shall be in writing and accompanied by an adequate description of contemplated work and with appropriate working drawings and specifications thereof. The Landlord's cost of having its architects or engineers examine such drawings and specifications shall be payable by the Tenant. The Landlord may require that any and all work be performed by the Landlord's contractors or workmen or by contractors or workmen engaged by the Tenant but in each case only under written contract approved in writing by the Landlord and subject to all reasonable conditions which the Landlord may impose and subject to inspection by and reasonable supervision of the Landlord. The Landlord may at its option require that only the Landlord's contractors be engaged for any mechanical, electrical, plumbing, structural or sprinkler work to be done in the Leased Premises. Any work performed by or for the Tenant shall be performed by competent workmen whose labour union affiliations are not incompatible with those of any workmen who may be employed in the Building by the Landlord, its contractors or subcontractors. The cost of all such work and of all materials, labour and services involved therein and of all services, necessitated thereby shall be at the sole cost and expense of the Tenant and shall be completed in a good and workmanlike manner and with reasonable diligence in accordance with the description of the work approved by the Landlord. Any such alterations, additions, and fixtures shall, when made or installed, be and become the property of the Landlord without payment being made therefor; provided that upon the determination of this Lease the Landlord may at its option require the Tenant, or itself at the Tenant's expense, to remove the same and to restore the Leased Premises to the condition in which they were at the commencement of this Lease. 7.21 CONSTRUCTION LIENS The Tenant covenants that he will not suffer or permit during the Term hereof any construction or other liens for work, labour, services or material ordered by him or for the cost of which he may be in any way obligated to attach to the Leased Premises or the Building or the Land and that whenever and so often as any such liens shall attach or claims therefor shall be filed, the Tenant shall within twenty (20) days after the Page 150 Tenant has notice of the claim for lien, procure the discharge thereof by payment or by giving security or in such manner as is or may be required or permitted by law. 7.22 SECURITY The Tenant will maintain on the Leased Premises sufficient moveable property to guarantee the payment of one (1) year's Annual Rent and Additional Rent. 7.23 HAZARDOUS SUBSTANCES (a) The Tenant shall not cause or permit any Hazardous Substances to be brought onto, created in, released or discharged from, placed or disposed of, at or near the Building or Lands; (b) The Tenant shall not cause or permit to occur any violation of any federal, provincial, municipal or local law, ordinance, or regulation, now or hereinafter enacted (the "Laws"), relating to environmental conditions on, under, at, near or about the Building or Lands, or relating to the Landlord, the Tenant or the Building, air, soil or ground water condition, including without limitation, the generation, storage or disposal of Hazardous Substances; (c) For the purposes of this section, "Hazardous Substances" means any substance, or class of substance or mixture of substances which may be detrimental to the environment, plant or animal life, or human health and includes, without limitation, flammable, explosives, or radioactive materials, asbestos, polychlorinated biphenyls (PCBs), chemicals believed to cause cancer or reproductive toxicity, pollutants, contaminants, hazardous wastes, toxic substances and related materials, petroleum and petroleum products, any substance that, if added to water, may degrade or alter or form part of a process of degradation or alteration of the quality or temperature of that water to the extent that it is detrimental to its use by man or by any animal, fish or plant, and substances declared to be hazardous or toxic under any law or regulation now or hereafter enacted or promulgated by any governmental authority having jurisdiction over the Landlord, the Tenant, the Leased Premises or the Building (the "Authorities"); (d) The Tenant shall, at its own expense, comply with the Laws; (e) The Tenant shall, at its own expense, make all submissions to, provide all information required by, and comply with all requirements of the Authorities under the Laws; (f) The Tenant shall indemnify, defend and hold harmless the Landlord, the Landlord's mortgagees, any manager of the building, and their respective officers, directors, beneficiaries, shareholders, Page 151 partners, agents and employees, from all fines, suits, procedures, claims and actions of every kind, and all costs associated therewith (including legal fees on a solicitor and his own client basis and consultants' fees) arising out of or in any way connected with any deposit, spill, discharge, or other release of Hazardous Substances that occurs during the Term or any renewal or extension period, at or from the Premises, or which arises at any time from the Tenant's use or occupancy of the Premises, or from the Tenant's failure to provide all information, make all submissions, and take all steps required by this Section or by the Authorities; (g) Notwithstanding any other provision of this Lease, if the Tenant creates or brings to the Leased Premises any Hazardous Substances or if the conduct of the Tenant's business shall cause there to be any Hazardous Substances at or near the Leased Premises, or discharged or released on, under or about the Premises, the building or the lands upon which the building is constructed, the air, soil or ground water, then, notwithstanding any rule of law to the contrary, such Hazardous Substances shall be and remain the sole and exclusive property of the Tenant and shall not become the property of the Landlord, notwithstanding the degree of affixation to the Premises of the Hazardous Substances or the goods containing the Hazardous Substances. This affirmation of the Tenant's interest in the Hazardous Substances or the goods containing the Hazardous Substances shall not however prohibit the Landlord from dealing with such material as otherwise provided for in this Lease. 7.24 NUISANCE The Tenant shall not cause or maintain any nuisance in or about the Leased Premises, and shall keep the Leased Premises free of debris, rodents, vermin and anything of a dangerous noxious or offensive nature or which could create a fire hazard (through undue load on electrical circuits or otherwise) or undue vibration, heat or noise. 8.00 LANDLORD'S COVENANTS The Landlord further covenants with the Tenant: 8.01 QUIET ENJOYMENT The Landlord covenants with the Tenant that if the Tenant pays the Annual Rent, Additional Rent and all other sums reserved herein and observes and performs the covenants, conditions and agreements set out in this Lease, the Tenant shall and may peaceably possess and enjoy the Leased Premises during the Term without interruption or disturbance from the Landlord. Page 152 8.02 TAXES, ETC To pay or cause to be paid all taxes and rates, municipal, parliamentary or otherwise, including, without limiting the generality of the foregoing, water rates with respect to the Lands, the Building or assessed against the Landlord in respect thereof, except those directly assessed or charged to or payable by the Tenant or assessed or charged with reference to the use or occupation of the Leased Premises and except as otherwise provided in this Lease. 8.03 HEATING AND AIR-CONDITIONING To provide for heating and air-conditioning 24 hours per day and seven (7) days a week so that when heat is reasonably required for the reasonable use of the Leased Premises the Landlord will furnish heat therefor up to a reasonable temperature and when the heating system is not in use and the Landlord considers that air-conditioning is reasonably required it will operate the air-conditioning systems in the Building. The said heating and air-conditioning systems will be maintained by the Landlord during normal business hours except during the making of repairs and should the Landlord make default in so doing, it shall not be liable for any indirect or consequential damages for personal discomfort or illness due to such default. The Landlord reserves the right to stop the services of the heating and/or air-conditioning equipment when necessary by reason of any accident or any repairs, alterations or improvements which, in the judgment of the Landlord, are desirable or necessary to be made until such repairs, alterations or improvements shall have been completed. The Landlord shall have no further responsibility or liability for failure to supply the said heating and/or air-conditioning service when prevented from doing so, by strikes or by any cause beyond the Landlord's reasonable control or by orders or regulations by any body or authority having jurisdiction or by other reason of any failure of electrical current, steam or water or suitable power supply or inability upon the exercise of reasonable diligence to obtain such electrical current, steam or water for the operation of the heating or air-conditioning equipment. 8.04 REPAIR OF STRUCTURE To repair, replace and maintain the structural parts of the Building, and to perform such repairs, replacements and maintenance with reasonable dispatch, and in a good and workmanlike manner, at any time and from time to time, and notwithstanding anything contained herein to the contrary, the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort occasioned thereby. 8.05 DELAYS IN PROVISION OF SERVICES It is understood and agreed that whenever and to the extent that the Landlord shall be unable to fulfil, or shall be delayed or restricted in the fulfilment of any obligation hereunder in respect of the supply or provision of any service or utility or the doing of any work or the making of any repairs by reason of being unable to obtain the material, goods, equipment, service, utility or labour required to enable it to fulfil such obligation or by reason of any statute, law or order-in-council or any regulation or order passed or made pursuant thereto or by reason of the order or direction of any administrator, controller or board, or any governmental department or officer or other authority, or by reason of not being able to obtain any permission or authority required thereby, or by reason of any other cause beyond its control whether of the foregoing character or not, the Landlord shall be entitled to extend the time for fulfilment of such obligation by a time equal to the duration of such delay or restriction, and the Tenant Page 153 shall not be entitled to compensation for any inconvenience, nuisance, discomfort, direct or indirect or consequential damage or damages thereby occasioned. 9.00 TENANT'S FIXTURES The Tenant may install its usual trade fixtures in the usual manner, provided such installation does not damage the structure of the Leased Premises or the Building and provided further that the Tenant shall have submitted detailed plans and specifications for such trade fixtures to the Landlord and obtained its written consent thereto which consent shall not be unreasonably withheld. 9.01 REMOVAL OF TENANT'S FIXTURES Provided that the Tenant may remove his trade or tenant's fixtures; provided further, however, that all installations, alterations, additions, partitions, and fixtures other than trade or tenant's fixtures in or upon the Leased Premises, whether placed there by the Tenant or the Landlord, shall immediately upon such placement, be the Landlord's property without compensation therefor to the Tenant and, except as hereinafter mentioned in this paragraph shall not be removed from the Leased Premises by the Tenant at any time either during or after the term. Notwithstanding anything herein contained, the Landlord shall be under no obligation to repair or maintain the Tenant's installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant or Landlord or third party; and further, notwithstanding anything herein contained, the Landlord shall have the right upon termination of this Lease by affluxion of time or otherwise or within six (6) months thereafter to require the Tenant to remove, or require the Tenant to pay to the Landlord the cost to remove, any installations, alterations, additions, partitions and fixtures or anything in the nature of a leasehold improvement made or installed by the Tenant, the Landlord or a third party, whether for the Tenant or a previous occupant, and make good any damage caused to the Leased Premises by such installation or removal. 10.00 DAMAGE OR DESTRUCTION OF LEASED PREMISES Provided that if during the continuation of this Lease, the Building or the Leased Premises are destroyed or damaged by any cause whatsoever, then the following provisions shall apply: 10.01 PARTIAL DAMAGE If damage shall occur to the Building or the Leased Premises so that all or part of the Leased Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Landlord's architect, can be substantially repaired under applicable laws and governmental regulations within ninety (90) days from the date of such casualty (employing normal construction methods without overtime or other premium), the Landlord shall cause such damage to be repaired with all reasonable speed. 10.02 TOTAL DAMAGE If the Building or the Leased Premises are damaged to such an extent that the Leased Premises are rendered untenantable by damage from fire or other casualty which, in the reasonable opinion of the Landlord's architect, cannot be substantially repaired under applicable laws and governmental regulations within ninety (90) days from the Page 154 date of such casualty (employing normal construction methods without overtime or other premium), then either the Landlord or Tenant may elect to terminate this Lease as of the date of such casualty by written notice delivered to the other not more than ten (10) days after receipt of such architect's opinion (failing which the Landlord shall cause such damage to be repaired at its own expense with all reasonable speed). 10.03 OBLIGATION TO REPAIR The Landlord's obligation to repair as set forth in the preceding two paragraphs hereof is conditional upon the Landlord receiving adequate proceeds from policies of insurance maintained in respect of such casualties or, if such proceeds are not made available to the Landlord, the Landlord electing to obtain its own financing for such repairs. In the event that no such proceeds of insurance are available to the Landlord and if the Landlord elects not to obtain its own financing for such repairs, then the Landlord shall, by notice in writing to the Tenant delivered within ten (10) days after receipt of the opinion of the Landlord's architect, notify the Tenant that the Lease is terminated, which termination shall be effective as of the date of such casualty. In calculating the amount of insurance proceeds available, the Landlord will be deemed to have received the deductible portion of any insurance policy. 10.04 ABATEMENT OF RENT If the Landlord is required to repair the damage pursuant to the provisions hereof and does not elect to terminate the Lease, the Annual Rent and Additional Rent payable by the Tenant under this Lease shall be proportionately reduced to the extent that the Leased Premises are thereby rendered unusable by the Tenant in its business from the date of such casualty until completion by the Landlord of the repairs to the Leased Premises and the Building so that the Leased Premises are thereafter fully usable by the Tenant in its business. 10.05 DAMAGE TO 50% OF BUILDING Notwithstanding anything otherwise contained in this Lease, if fifty percent (50%) or more of the rentable area of the Building is damaged or destroyed and if, in the reasonable opinion of the Landlord's Architect, the said rentable area cannot be rebuilt or made fit for the purposes of the tenants thereof within ninety (90) days of the date of such casualty, the Landlord may, at its option, terminate this Lease by giving notice of termination to the Tenant within thirty (30) days of the date of such casualty and the Tenant shall, with reasonable dispatch and expedition, but in any event within sixty (60) days after delivery of the notice of termination, deliver up possession of the Leased Premises to the Landlord and the rent and other payments for which the Tenant is liable hereunder shall be apportioned and paid to the date possession is so delivered up. 10.06 COMPLETION OF REPAIR Provided that, if, upon the completion by the Landlord of any repairs required as a result of any such destruction or damage, a dispute shall arise between the Landlord and the Tenant as to whether or not the Leased Premises have been made fit for the purposes of the Tenant under this Lease, the Landlord may, at its option, terminate this Lease by giving thirty (30) days notice to the Tenant and if such notice shall be given this Lease shall, at the expiration of such period, be at an end and the Tenant shall deliver up the Leased Premises to the Landlord or whom it may appoint and the Landlord may, on demand, recover the full rental hereby reserved computed from the Page 155 date on which such repairs were completed up to the date on which the Tenant is required to vacate. 11.00 LIABILITY FOR DAMAGE TO PROPERTY In the absence of negligence or wilful act or default on the part of the Landlord, its servants, agents or workmen, the Landlord shall not be liable or responsible in any way for any loss, damage or injury to any person or for any loss of or damage to any property belonging to the Tenant, to employees of the Tenant or to any other person while such property is in the Leased Premises or in the Building or in or on the surrounding, Lands and buildings owned by the Landlord, the areaways, the parking garages, the parking areas, lawns, sidewalks, reflective pools, steps, platforms, corridors, stairways or elevators whether or not any such property has been entrusted to employees of the Landlord and without limiting the generality of the foregoing, the Landlord shall not be liable for any damage to any such property caused by theft or breakage or by steam, water, rain or snow which may leak into, issue or flow from any part of the Building or from the water, steam or drainage pipes or plumbing works of the Building or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement of any electric or other wiring or for any damage caused by smoke or anything done or omitted by any other tenant in the Building or for any other loss whatsoever with respect to the Leased Premises, goods placed therein or any business carried on therein. 12.00 DEFAULT OF TENANT Provided and it is hereby expressly agreed that if and whenever the Annual Rent or Additional Rent hereby reserved or any part thereof shall not be paid on the day appointed for payment thereof, whether lawfully demanded or not, or in case of breach or non-observance or non-performance of any of the covenants, agreements, provisos, conditions or Rules and Regulations on the part of the Tenant to be kept, observed or performed, or in case the Leased Premises shall be vacated or remain unoccupied for fifteen (15) days or in case the Term shall be taken in execution or attachment for any cause whatever, then and in every such case, it shall be lawful for the Landlord thereafter to enter into and upon the Leased Premises or any part thereof in the name of the whole and the same to have again, repossess and enjoy as of its former estate, anything in this Lease contained to the contrary notwithstanding other than the proviso to this paragraph; PROVIDED that the Landlord shall not at any time have the right to re-enter and forfeit this Lease by reason of the Tenant's default in the payment of the rent reserved by this Lease, unless and until the Landlord shall have given to the Tenant written notice setting forth the default complained of and the Tenant shall have the right during five (5) business days next following the date on such notice to cure any such default in payment of rent. In case without the written consent of the Landlord, the Leased Premises shall be used by any other person than the Tenant or for any other purpose than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or if the Tenant makes any bulk sale, then in any such case this lease shall, at the option of the Landlord, cease and determine and the Term shall immediately become forfeited and void in accordance with the provisions of Section 15, RIGHT OF TERMINATION, herein. 13.00 BANKRUPTCY Provided further that, in case without the written consent of the Landlord, the Leased Premises shall be used by any other person than the Tenant or for any other purposes Page 156 than that for which the same were let or in case the Term or any of the goods and chattels of the Tenant shall be at any time seized in execution or attachment by any creditor of the Tenant or by the Tenant making any assignment for the benefit of creditors or any bulk sale or become bankrupt or insolvent or take the benefit of any act now or hereafter in force for bankrupt or insolvent debtors, or, if the Tenant is a corporation and any order shall be made for the winding up of the Tenant, or other termination of the corporate existence of the Tenant, then in any such case this Lease shall, at the option of the Landlord, cease and determine and the Term shall immediately become forfeited and void and the then current month's rent and the next ensuing three (3) months rent shall immediately become due and be paid and the Landlord may re-enter and take possession of the Leased Premises as though the Tenant or other occupant or occupants of the Leased Premises was or were holding over after the expiration of the Term without any right whatever. 14.00 RE-ENTRY BY LANDLORD The Tenant further covenants and agrees that on the Landlord's becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord, in addition to all other rights, shall have the right to enter the Leased Premises as the agent of the Tenant either by force or otherwise, without being liable for any prosecution therefor and to relet the Leased Premises as the agent of the Tenant, and to receive the rent therefor and as the agent of the Tenant, to take possession of any furniture or other property on the Leased Premises and to sell the same at public or private sale without notice and to apply the proceeds of such sale and any rent derived from reletting the Leased Premises upon account of the rent under this Lease, and the Tenant shall be liable to the Landlord for the deficiency, if any. 15.00 RIGHT OF TERMINATION The Tenant further covenants and agrees that on the Landlord becoming entitled to re-enter upon the Leased Premises under any of the provisions of this Lease, the Landlord, in addition to all other rights, shall have the right to determine forthwith this Lease and the Term by leaving upon the Leased Premises notice in writing of its intention so to do, and thereupon, rent shall be computed, apportioned and paid in full to the date of such determination of this Lease and any other payments for which the Tenant is liable under this Lease shall be paid and the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord, and the Landlord may re-enter and take possession of the same. 16.00 DISTRESS The Tenant waives and renounces the benefit of any present or future statute taking away or limiting the Landlord's right of distress, and covenants and agrees that notwithstanding any such statute, none of the goods and chattels of the Tenant on the Leased Premises at any time during the Term shall be exempt from levy by distress for rent in arrears. In the event that the Tenant shall remove or permit the removal of any of its goods or chattels from the Leased Premises, the Landlord may within thirty (30) days thereafter and if the Tenant is in arrears of rent, seize such goods and chattels wherever the same may be found and may sell or otherwise dispose of the same as if they had actually been distrained upon the Leased Premises by the Landlord for arrears of rent. Page 156 17.00 NON-WAIVER No condoning, excusing or overlooking by the Landlord of any default, breach or non-observance by the Tenant at any time or times in respect of any covenant, proviso or condition herein contained shall operate as a waiver of the Landlord's rights hereunder in respect of any continuing or subsequent default, breach or non-observance, or so as to defeat or affect in any way the rights of the Landlord herein in respect of any such continuing or subsequent default or breach, and no waiver shall be inferred from or implied by anything done or omitted by the Landlord save only express waiver in writing. All rights and remedies of the Landlord in this Lease contained shall be cumulative and not alternative. 18.00 CHANGES TO BUILDING The Landlord hereby reserves the right at any time and from time to time to make changes in, additions to, subtractions from or rearrangements of the Building including, without limitation, all improvements at any time thereon, all entrances and exits thereto, and to grant, modify and terminate easements or other agreements pertaining to the use and maintenance of all or parts of the Building and to make changes or additions to the pipes, conduits, utilities and other necessary building services in the Leased Premises which serve other premises, provided that prior to the commencement of the Term, the Landlord may alter or relocate the Leased Premises to the extent found necessary by the Landlord to accommodate changes in construction design or facilities including major alterations and relocations. The Landlord agrees that in performing such alterations, it shall do so in a manner so as to minimize any material interference with the Tenant's use and enjoyment of the Leased Premises. 19.00 SEVERANCE OF LAND The Landlord shall have the right from time to time to sever (for purposes of sale, lease, mortgage, charge or otherwise) any part or parts of the Land or any buildings or improvements thereon, including the creation of rights-of-way, easements and parking arrangements which the Landlord deems necessary and the Tenant hereby consents to any such severance and agrees to execute, at no cost to the Landlord, any documents or consents which the Landlord may request for these purposes. If any part or parts of the Land or the buildings or improvements on the lands are so severed and are deemed by the Landlord to no longer form part of the property, such part or parts shall be excluded from the Lands and the property for the purposes of this Lease at the time designated by the Landlord and the Tenant shall when requested by the Landlord, execute, at no cost to the Landlord, a release of any interest in the Lands so excluded. 20.00 COSTS OF COLLECTION The Tenant shall pay, as Additional Rent, all costs, expenses and legal fees (on a solicitor and his client basis) that may be incurred or paid by or on behalf of the Landlord in enforcing the covenants and provisions of this Lease. 21.00 PROFITS AND REMEDIES BY LANDLORD In addition to all rights and remedies available to the Landlord under the provisions of this Lease or by statute or the general law in the event of any default by the Tenant of the provisions of this Lease: Page 158 21.01 PAYMENTS TO THIRD PARTIES The Landlord shall have the right at all times to remedy or attempt to remedy any default of the Tenant, and in so doing, may make any payments due or alleged to be due by the Tenant to third parties and may enter upon the Leased Premises to do any work or other things therein, and in any such event, all costs and expenses of the Landlord in remedying or attempting to remedy such default shall be payable by the Tenant to the Landlord forthwith upon demand as Additional Rent. 21.02 NON-PAYMENT OF ADDITIONAL RENT The Landlord shall have the same rights and remedies in the event of any non-payment by the Tenant of any amounts payable by the Tenant under any provision of this Lease and the parking agreement as in the case of non-payment of rent and may be recovered by the Landlord as rent by any and all remedies available to the Landlord for the recovery of rent in arrears. 21.03 INTEREST ON ARREARS The Landlord shall, if the Tenant shall fail to pay any Monthly Rent, Additional Rent or other amounts from time to time payable by it to the Landlord hereunder promptly when due, be entitled to interest on all such Annual Rent, Additional Rent and other amounts which are unpaid and overdue under this Lease and the parking agreement, such interest to be compounded monthly thereon and to be computed at a rate equal to two percent (2%) per annum in excess of the minimum lending rate to prime commercial borrowers from time to time charged by the Royal Bank of Canada or such other chartered bank as the Landlord may designate, from the date upon which such Monthly Rent, Additional Rent and other amounts was due until actual payment thereof. 22.00 NOTICE Any notice required or contemplated by any provisions of this Lease shall be given in writing, enclosed in a sealed envelope addressed, in the case of notice to the Landlord c/o Kanata Research Park Corporation, 600 March Road, P.O. Box l3600, Kanata, Ontario, Canada, K2K 2E6 and in the case of notice to the Tenant, to it at the Leased Premises in the event of a notice of distress and otherwise to it at 600 March Road, P.O. Box l3600, Kanata, Ontario, Canada, K2K 2E6 and mailed by registered mail, postage prepaid or telefaxed. The time of giving of such notice shall be conclusively deemed to be, if mailed the third (3rd) business day after the day of such mailing, if telefaxed, the next business day following the date sent as evidenced by the sender's transmittal record. Such notice shall also be sufficiently given if and when the same shall be delivered, in the case of notice to the Landlord, to an executive officer of the Landlord, and in the case of notice to the Tenant, to him personally or to an executive officer, manager or a person who appears to be in charge, of the Tenant if the Tenant is a corporation. Such notice, if delivered, shall be conclusively deemed to have been given and received at the time of such delivery. If, in this Lease, two or more persons are named as Tenant, such notice shall also be sufficiently given if and when the same shall be delivered personally to any one of such persons. Provided that either party may, by notice to the other, from time to time, designate another address in Canada to which notices mailed more than ten (10) days thereafter shall be addressed. The word "notice" in this paragraph shall include any request, demand, direction, or statement in this Lease provided or permitted to be given by the Landlord to the Tenant or by the Tenant to the Landlord. Page 159 23.00 SUBORDINATION, POSTPONEMENT, ATTORNMENT The Tenant shall promptly upon the written request of the Landlord, enter into an agreement: (a) subordinating the Term and the rights of the Tenant hereunder to any mortgage, charge, ground lease, trust deed or debenture present or future and all renewals, modifications, replacements or extensions thereof, which may affect the Leased Premises, the Property, the Lands or the Building; (b) agreeing that the Term hereof shall be subsequent in priority to any such mortgage, charge, ground lease, trust deed or debenture; provided that the Tenant's obligations under this paragraph shall be conditional upon any such mortgagee or secured party entering into a non-disturbance agreement with the Tenant under which the Tenant's continued possession of the Leased Premises is ensured notwithstanding any act taken by the mortgagee or secured party. 23.01 TENANT'S RIGHT TO POSSESSION Notwithstanding any postponement or subordination referred to herein, the Tenant acknowledges that its obligations under this Lease shall remain in full force and effect notwithstanding any action at any time taken by a mortgagee, chargee or ground lessor to enforce the security of any mortgage charge, ground lease, trust deed or debenture; provided, however, that any postponement or subordination given hereunder shall reserve to the Tenant the right to continue in possession of the Leased Premises under the terms of this Lease so long as the Tenant shall not be in default hereunder. 23.02 ATTORNMENT BY TENANT The Tenant, whenever requested by any mortgagee (including any trustee under a deed of trust and mortgage), chargee or ground lessor, shall attorn to such mortgagee, chargee or ground lessor as a tenant upon all the terms of this Lease. 24.00 CERTIFICATE The Tenant agrees that he will at any time and from time to time upon not less than five (5) days' prior notice execute and deliver to the Landlord or any mortgagee of the Lands (including a deed of trust and mortgage) a statement in writing certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the modifications and that the same is in full force and effect as modified), the amount of the Annual Rental then being paid hereunder, the dates to which the same, by instalments or otherwise, and other charges hereunder have been paid, and whether or not there is any existing default on the part of the Landlord of which the Tenant has notice. 25.00 REGISTRATION The Tenant covenants and agrees with the Landlord that the Tenant will not register this Lease in this form in any Registry Office or the Land Titles Office. If the Tenant desires to make a registration for the purposes only of giving notice of this Lease, then the parties hereto shall contemporaneously with the execution of this Lease execute a Page 160 short form thereof solely for the purpose of supporting an application for registration of notice thereof. 26.00 PLANNING ACT Where applicable, this Lease shall be subject to the condition that it is effective only if The Planning Act, 1983, as amended is complied with. Pending such compliance the Term and any renewal thereof shall be deemed to be for a total period of one (1) year less than the maximum lease Term permitted by law without such compliance. 27.00 TRANSFER BY LANDLORD In the event of a sale, transfer or lease by the Landlord of the Building, the Lands or a portion thereof containing the Leased Premises or the assignment by the Landlord of this Lease or any interest of the Landlord hereunder, the Landlord shall, without further written agreement, to the extent that such purchaser, transferee or lessee has become bound by the covenants and obligations of the Landlord hereunder, be freed, released and relieved of all liability or obligations under this Lease incurred or arising after the date of such sale, transfer or lease. 28.00 NO ADVERTISING OF LEASED PREMISES The Tenant shall not print, publish, post, display or broadcast any notice or advertisement to the effect that the whole or any part of the Leased Premises are for rent, and it shall not permit any broker or other person to do so without the consent in writing of the Landlord. 29.00 TIME OF ESSENCE Time shall be of the essence of this Lease. 30.00 LAWS OF ONTARIO This Lease shall be deemed to have been made in and shall be construed in accordance with the Laws of the Province of Ontario. 31.00 SEVERABILITY OF COVENANTS The Landlord and the Tenant agree that all of the provisions of this Lease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate paragraph hereof. Should any provision or provisions of this Lease be illegal or not enforceable it or they shall be considered separate and severable from the Lease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision or provisions had never been included. 32.00 HEADINGS The captions appearing in the margin or the headings contained in this Lease have been inserted as a matter of convenience and for reference only and in no way define, limit or enlarge the scope or meaning of this Lease or of any provision hereof. Page 161 33.00 SCHEDULES The following Schedules attached hereto form part of this Lease: Schedules: "A", "B", "C", "D", "E" and "F" 34.00 LEASE ENTIRE AGREEMENT The Tenant acknowledges that there are no covenants, representations, warranties, agreements or conditions expressed or implied, collateral or otherwise forming part of or in any way affecting or relating to this Lease save as expressly set out in this Lease and that this Lease constitutes the entire agreement between the Landlord and the Tenant and may not be modified except as herein explicitly provided or except by subsequent agreement in writing of equal formality hereto executed by the Landlord and the Tenant. 35.00 INTERPRETATION IN THIS INDENTURE: (a) "herein", "hereof", "hereby", "hereunder", "hereto", "hereinafter", and similar expressions refer to this indenture and not to any particular paragraph, section or other portion thereof, unless there is something in the subject matter or context inconsistent therewith. (b) "business day(s)" means any of the days from Monday to Friday of each week inclusive unless such day is a statutory holiday or public holiday. (c) "normal business hours" means the hours from 8:00 a.m. to 6:00 p.m. on business days. 36.00 SUCCESSORS This indenture and everything herein contained shall enure to the benefit of and be binding upon the respective heirs, executors, administrators, permitted successors and assigns, of the Tenant and other legal representatives as the case may be, of each and every of the parties hereto, and every reference herein to any party hereto shall include the heirs, executors, administrators, permitted successors, assigns and other legal representatives of such party, and where there is more than one tenant or there is a female party or a corporation, the provisions hereof shall be read with all grammatical and gender changes thereby rendered necessary and all covenants shall be deemed joint and several. Page 162 37.00 JOINT AND SEVERAL COVENANT If more than one person executes this Lease as Tenant, each such person shall be bound jointly and severally with the other(s), waiving the benefit of division and discussion, for the fulfilment of all of the obligations of Tenant hereunder. IN WITNESS WHEREOF the parties hereto have hereunto affixed their corporate seals duly attested to by the hands of their proper signing officers authorized in that behalf. SIGNED, SEALED AND DELIVERED ) in the presence of: ) KANATA RESEARCH PARK ) CORPORATION ) ) ) c/s ) Per: /s/ Bronwen A. Heins ------------------------------------------ ) Name: Bronwen A. Heins ) Title: Corporate Secretary ) I have the authority to bind the corporation ) ) NEWBRIDGE NETWORKS ) CORPORATION ) ) ) c/s ) Per: /s/ Donald Mills --------------------------------------- ) Name: Donald Mills ) Title: Vice President, Administration ) ) ) Per: /s/ Peter Nadeau ---------------------------------------- ) Name: Peter Nadeau ) Title: Vice President, Legal Services ) )I/We have the authority to bind the corporation. Page 163 SCHEDULE "A" ------------ LEGAL DESCRIPTION ----------------- Swansea Building - 349 Terry Fox Drive FIRSTLY: Part of Forced Road, Also being a Quarter Sessions Road, known locally as Sandhill Road being formerly in the Township of March, now in the City of Kanata, designated as Parts 20 & 21 on Plan 4R-12934 (Part of PIN 04517-0585) SECONDLY: Parcel 8-2, Section March 4, Part Lot 8, Concession 4, designated as Parts 22, 23, 24 and 25 on Plan 4R-12934 (PIN 04517-0469) THIRDLY: Parcel 2-1, Section 4M-642, Part of Block 2, Registered Plan 4M-642, City of Kanata, designated as Parts 8, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18 & 19 on Plan 4R-12934 Subject to an easement as in Instrument Number LT911185 over the said Parts 16, 17 and 19 on Plan 4R-12934 and Subject to an easement as in Instrument Number LT623394 over the said Part 10 on Plan 4R-12394 (Part of PIN 04517-0489) Regional Municipality of Ottawa Carleton, Land Titles Office of Ottawa Carleton No. 4 Page 164 SCHEDULE "B" ------------ FLOOR PLAN ---------- Page 165 SCHEDULE "C" ------------ RULES AND REGULATIONS --------------------- The Tenant and its invitees and employees shall observe the following rules and regulations (as added to, amended or modified from time to time by the Landlord). 1. The sidewalks, entrances, elevators, stairways, passageways, shipping areas and corridors of the Building shall not be obstructed or used for any other purpose by the Tenant than for ingress and egress to and from the Leased Premises; the Tenant shall not place or allow to be placed in such areas or facilities any waste paper, garbage, refuse or anything that shall tend to make them appear unclean or untidy. 2. The Tenant and its employees shall use washrooms only for the purpose for which they were designed and nothing shall be placed in toilets that might cause them to block. 3. The Tenant shall not make any noise which might disturb other tenants and no animals or bicycles or other vehicles other than appropriate vehicles for the Tenant's use shall be brought into the Leased Premises or the Building. 4. The Leased Premises shall not be used as overnight sleeping accommodation, for public sales nor for entertaining purposes. 5. The Tenant shall make arrangements with the Landlord ahead of time to install any machines or equipment which may substantially increase the load on the electrical systems, installations will not be made until the Landlord's consent is obtained. 6. Windows will not be left open so as to admit rain or snow. 7. The Tenant will not alter any existing locks nor will any additional locks or similar devices be attached to any door or window without the Landlord's written consent. 8. Keys or other devices which are made available to the Tenant for the purpose of providing access to the exterior doors of the Building shall not be duplicated and shall be returned to the Landlord immediately upon termination of the Lease. 9. All adjustments to mechanical equipment such as thermostats, radiators, diffusers, etc. shall be made by the Landlord's staff and no one else. 10. It shall be the responsibility of the Tenant to prevent any person from throwing objects out of windows or into the ducts or stairwells of the Building, and the Tenant shall pay for any cost, damage or injury resulting from any such acts. 11. The Tenant shall provide adequate receptacles for garbage, refuse and waste paper and all such garbage, refuse and waste paper shall be placed in such containers. The Leased Premises shall be kept in a tidy, healthy and clean condition. 12. The Tenant shall not bring upon the Leased Premises any safes, heavy equipment, motors or any other thing which might overload floors or damage the Leased Premises or the Building. Page 166 13. The Tenant shall not use or keep inflammable materials in the Leased Premises. 14. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. 15. Smoking is prohibited in all common areas of the Building. The foregoing rules and regulations, as from time to time amended, are not necessarily of uniform application, but may be waived in whole or in part in respect of other tenants without affecting their enforceability with respect to the Tenant or the Leased Premises. There is no obligation on the Landlord to enforce the rules and regulations, and the Landlord shall not be liable by reason of their non-enforcement. Page 167 SCHEDULE "D" ------------ PARKING ------- 1. During the Term the Landlord hereby agrees to allow the Tenant, its employees, agents and invitees shall park their vehicles in the parking facilities located on the Lands ("parking facilities"). 2. The Landlord shall not be responsible for any theft, loss or damage to the Tenant's vehicles whatsoever, or for injury to the Tenant or others in the parking facilities. 3. The Landlord shall have the right to establish rules and regulations governing the use of the parking facilities from time to time and the Tenant hereby agrees to observe and abide by all such rules and regulations. Page 168 SCHEDULE "E" ------------ OPTION TO RENEW --------------- 1. Provided the Tenant is in good standing, during the Term has not been in substantial default under this Lease and has not assigned this Lease or sublet all or a portion of the Leased Premises, the Tenant shall have and is hereby granted an option to renew this Lease for a further term of five (5) years provided that in order to exercise this option, the Tenant shall be required to give to the Landlord notice of the exercise of such option in writing not less than six (6) months prior to the date of expiry of the initial Term. 2. Any renewal pursuant to this proviso shall be on the same terms and conditions contained in this Lease except: (a) there shall be no additional right of renewal, and no Leasehold Improvements; (b) the Annual Rent payable by the Tenant for such renewal period shall be in accordance with rates for similar premises in a similar location and as agreed upon by the Landlord and Tenant and shall in no event be less than the Annual Rent paid during the last year of the Term; such agreement to be reached not later than three (3) months prior to the expiry of the original Term. Failing such agreement, either party shall submit the matter to arbitration in accordance with the following terms: The dispute shall be submitted to a single arbitrator to be agreed upon by the parties, provided that if a single arbitrator cannot be agreed upon by the parties hereto within ten (10) days after the appointment of a single arbitrator has been requested by one of the parties in writing, then the dispute shall be referred to a board of three arbitrators, one to be appointed by each of the Landlord and the Tenant and a third arbitrator to be appointed by the first two arbitrators in writing; and if either the Landlord or the Tenant shall refuse or neglect to appoint an arbitrator within ten (10) days after the other party shall have appointed an arbitrator and shall have served a written notice upon the party so refusing or neglecting to appoint an arbitrator requiring such party to make such appointment, then the arbitrator first appointed shall, at the request of the party appointing him, proceed to hear and determine the dispute as if he were a single arbitrator appointed by both the Landlord and the Tenant for that purpose. If two arbitrators are so named within the time prescribed and they do not agree within a period of ten (10) days upon the appointment of the third arbitrator, then upon the application of either the Landlord or the Tenant, the third arbitrator shall be appointed by a Judge of the Ontario Court (General Division). The determination which shall be made by the said arbitrators or a majority of them, or by the single arbitrator, as the case may be, shall be final and binding upon the parties hereto and the costs of the arbitration and remuneration of the third arbitrator, if any, shall be borne equally between the parties hereto, each of the parties bearing the remuneration of the arbitrator appointed by it. The provisions of this paragraph shall be deemed to be submission to arbitration within the provisions of The Arbitration Act of ---------------------- Ontario and any statutory modification or re-enactment thereof; ------- provided that any limitation on the remuneration of arbitrators imposed by such legislation shall not have application to any arbitration proceeding commenced pursuant to this paragraph. Page 169 SCHEDULE "F" ------------ LEASEHOLD IMPROVEMENTS ---------------------- The Landlord shall, construct on behalf of the Tenant and install on a turnkey basis those leasehold improvements agreed upon by both Landlord and Tenant as chosen from the Landlord's samples. The turnkey cost shall include the Landlord's administrative costs which relate to the work. The Tenant shall pay to the Landlord on or before the commencement of the Term the sum of One Million Nine Hundred Thousand Dollars ($1,900,000.00) towards the costs of such leasehold improvements. Page 170 DATED the 23rd day of April, 1997. BETWEEN: KANATA RESEARCH PARK CORPORATION OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION OF THE SECOND PART - ------------------------------------------------------------------------------- L E A S E - ------------------------------------------------------------------------------- Prepared by: Bronwen A. Heins Date Edited: Disk Reference: Swansea.lse Page 171 KANATA RESEARCH PARK CORPORATION AND NEWBRIDGE NETWORKS CORPORATION 1.00 LEASED PREMISES......................................................... 1.01 ADDITIONAL DEFINITIONS.................................................. 2.00 TERM.................................................................... 2.01 INABILITY TO GIVE OCCUPANCY............................................. 2.02 EARLY OCCUPANCY......................................................... 2.03 OVERHOLDING............................................................. 3.00 RENT - Basic Rent....................................................... 3.01 MONTHLY RENTAL.......................................................... 3.02 ADDITIONAL RENT......................................................... 3.03 ESTIMATED ADDITIONAL RENTALS............................................ 3.04 DEFICIENCY OF ADDITIONAL RENT........................................... 3.05 EXCESS OF ADDITIONAL RENTAL INSTALLMENTS................................ 3.06 PRO-RATING OF ADDITIONAL RENT........................................... 3.07 PREPAYMENT OF ADDITIONAL RENT........................................... 3.08 DISPUTE AS TO AMOUNT OF ADDITIONAL RENT................................. 3.09 MANNER AND PLACE OF PAYMENT OF RENT..................................... 3.10 DEFAULT................................................................. 3.11 ACCRUAL OF RENT......................................................... 3.12 NET LEASE............................................................... 4.00 TENANT'S BUSINESS TAX................................................... 4.01 LANDLORD'S BUSINESS TAX................................................. 4.02 TAX ON TENANT'S LEASEHOLD IMPROVEMENTS.................................. 4.03 PROPERTY TAX............................................................ 4.04 ALLOCATION OF TAX....................................................... 4.05 SEPARATE SCHOOL TAXES................................................... 4.06 TAX APPEAL.............................................................. 4.07 CAPITAL TAX............................................................. 5.00 OPERATING COSTS......................................................... 5.01 ALLOCATION OF OPERATING COSTS........................................... 5.02 FULL OCCUPANCY.......................................................... 5.03 USE OF ELECTRICITY...................................................... 5.04 METERS.................................................................. 6.00 ASSIGNING OR SUBLETTING................................................. 6.01 REQUEST TO ASSIGN OR SUBLET............................................. 6.02 ASSIGNMENT AGREEMENT.................................................... 6.03 CONSENT NOT TO RELEASE TENANT........................................... 6.04 NOTICE OF CHANGE OF CONTROL............................................. 6.05 COST OF CONSENT.........................................................
Page 172 7.00 TENANT'S COVENANTS...................................................... 7.01 TENANT REPAIRS.......................................................... 7.02 RULES AND REGULATIONS................................................... 7.03 USE OF PREMISES......................................................... 7.04 INCREASE IN INSURANCE PREMIUMS.......................................... 7.05 CANCELLATION OF INSURANCE............................................... 7.06 OBSERVANCE OF LAW....................................................... 7.07 WASTE AND OVERLOADING OF FLOORS......................................... 7.08 INSPECTION.............................................................. 7.09 INDEMNITY TO LANDLORD................................................... 7.10 DAMAGE BY TENANT........................................................ 7.11 TENANT INSURANCE........................................................ 7.12 NO ABATEMENT OF RENT.................................................... 7.13 EXHIBITING PREMISES..................................................... 7.14 TENANT MAINTENANCE...................................................... 7.15 SIGNS................................................................... 7.16 NAME OF BUILDING........................................................ 7.17 KEEP TIDY............................................................... 7.18 DELIVERIES.............................................................. 7.19 NOTICE OF DAMAGE........................................................ 7.20 ALTERATIONS, ETC........................................................ 7.21 CONSTRUCTION LIENS...................................................... 7.22 SECURITY................................................................ 7.23 HAZARDOUS SUBSTANCES.................................................... 7.24 NUISANCE............................................................... 8.00 LANDLORD'S COVENANTS.................................................... 8.01 QUIET ENJOYMENT......................................................... 8.02 TAXES, ETC.............................................................. 8.03 HEATING AND AIR-CONDITIONING............................................ 8.04 REPAIR OF STRUCTURE..................................................... 8.05 DELAYS IN PROVISION OF SERVICES......................................... 9.00 TENANT'S FIXTURES....................................................... 9.01 REMOVAL OF TENANT'S FIXTURES............................................ 10.00 DAMAGE OR DESTRUCTION OF LEASED PREMISES............................... 10.01 PARTIAL DAMAGE......................................................... 10.02 TOTAL DAMAGE........................................................... 10.03 OBLIGATION TO REPAIR................................................... 10.04 ABATEMENT OF RENT...................................................... 10.05 DAMAGE TO 50% OF BUILDING.............................................. 10.06 COMPLETION OF REPAIR................................................... 11.00 LIABILITY FOR DAMAGE TO PROPERTY....................................... 12.00 DEFAULT OF TENANT...................................................... 13.00 BANKRUPTCY............................................................. 14.00 RE-ENTRY BY LANDLORD................................................... 15.00 RIGHT OF TERMINATION................................................... 16.00 DISTRESS...............................................................
Page 173 17.00 NON-WAIVER............................................................. 18.00 CHANGES TO BUILDING.................................................... 19.00 SEVERANCE OF LAND...................................................... 20.00 COSTS OF COLLECTION.................................................... 21.00 PROFITS AND REMEDIES BY LANDLORD....................................... 21.01 PAYMENTS TO THIRD PARTIES.............................................. 21.02 NON-PAYMENT OF ADDITIONAL RENT......................................... 21.03 INTEREST ON ARREARS.................................................... 22.00 NOTICE................................................................. 23.00 SUBORDINATION, POSTPONEMENT, ATTORNMENT................................ 23.01 TENANT'S RIGHT TO POSSESSION........................................... 23.02 ATTORNMENT BY TENANT................................................... 24.00 CERTIFICATE............................................................ 25.00 REGISTRATION........................................................... 26.00 PLANNING ACT........................................................... 27.00 TRANSFER BY LANDLORD................................................... 28.00 NO ADVERTISING OF LEASED PREMISES...................................... 29.00 TIME OF ESSENCE........................................................ 30.00 LAWS OF ONTARIO........................................................ 31.00 SEVERABILITY OF COVENANTS.............................................. 32.00 HEADINGS............................................................... 33.00 SCHEDULES.............................................................. 34.00 LEASE ENTIRE AGREEMENT................................................. 35.00 INTERPRETATION......................................................... 36.00 SUCCESSORS............................................................. 37.00 JOINT AND SEVERAL COVENANT.............................................
SCHEDULE "A"................................................................. - ------------ SCHEDULE "B"................................................................. - ----------- SCHEDULE "C"................................................................. - ------------ SCHEDULE "D"................................................................. - ------------ SCHEDULE "E"................................................................. - ------------ SCHEDULE "F"................................................................. - ------------
Page 174 EX-10.23 6 SUBLEASE DTD 10/1/96 EXHIBIT 10.23 Page 175 THIS AGREEMENT made the 1st day of October, 1996 BETWEEN: CROSSKEYS SYSTEMS CORPORATION, (Hereinafter called the "Sublandlord") OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION (Hereinafter called the "Subtenant") OF THE SECOND PART AND: KANATA RESEARCH PARK CORPORATION (Hereinafter called the "Landlord") OF THE THIRD PART SUBLEASE WHEREAS by written Lease dated the 1st day of May, 1996 (the "Headlease"), Kanata Research Park Corporation leased to the Sublandlord, all those premises comprising all of the building known municipally as 350 Terry Fox Drive, (the "Building") in the City of Kanata as more particularly described in the Headlease (the "Leased Premises"). AND WHEREAS the Subtenant has agreed to sublet a portion of the Leased Premises comprising twenty thousand and seven hundred and eighteen (20,718) usable [twenty-two thousand one hundred and forty-nine (22,149) rentable] square feet of space on the third (3rd) floor of the Building as shown on the floor plan attached hereto as Schedule "A" (the Sub-leased Premises") and the Sublandlord has agreed to grant a sublease (the "Sublease") of the Sub-leased Premises upon the following terms and conditions. NOW THEREFORE in consideration of the rents, covenants and conditions herein reserved and contained, the parties agree as follows: Page 176 1. (a) The Sublandlord hereby subleases the Sub-leased Premises to the Subtenant for a term of one (1) year commencing on the 1st day of October, 1996 and ending on the 30th day of September, 1997, unless earlier terminated in accordance with the terms hereof. (b) The Subtenant shall pay to the Sublandlord as rent for the Sub-leased Premises, and for the non-exclusive use of the common areas on the floor of the Building on which the Sub-leased Premises is located (which common area allocation is six point nine-one (6.91%) percent ), shall be as follows:
Rental Rate Per Sq. For Sub-leased Common Total Per ------------------ -------------- ------ --------- Term Ft. Per Annum Premises Area Annum ---- ------------- -------- ---- ----- 1 $11.25 $233,077.50 $16,098.75 $249,176.25
"Basic Rent" plus Goods and Services Tax, payable in advance on the first day of each calendar month during the term of the Sublease. The Subtenant shall pay the Basic Rent. 2. In addition the Subtenant covenants and agrees to pay to the Sublandlord all Occupancy Costs and Other Costs as defined in the Headlease on a proportionate share basis. 3. The Subtenant's proportionate share shall be that fraction the numerator of which is the usable area of the Sub-leased Premises and the denominator of which shall be the usable area of the Building expressed as a percentage ("Proportionate Share"). Calculated in accordance with the foregoing the Subtenants Proportionate Share is twenty-four point zero eight (24.08%) percent. 4. Until otherwise notified by the Sublandlord the Subtenant shall make all of its rent payments directly to the Headlandlord in the same manner and pursuant to the same covenants and obligations as set out in the Headlease, however, such direct payment shall in no way derogate from the Sublandlord's covenants and obligations under the Lease. 5. The Subtenant covenants with the Sublandlord as follows: (a) To pay rent as aforesaid. (b) To use the Sub-leased Premises only for offices only. (c) The Subtenant agrees that this Sublease shall be deemed to contain all the provisions of the Lease except those which are inconsistent with the provisions of this Sublease as though they were set forth and contained in this Sublease and all references to "Landlord" and "Tenant" shall read, "Sublandlord" and "Subtenant". Page 177 (d) The Subtenant covenants and agrees with the Sublandlord that it shall be bound by and shall fulfil all of the obligations of the Sublandlord under the Lease as if it had been named "Tenant" thereunder, save and except for the amounts of rent payable which shall be as set out herein. (e) In its use of the Sub-leased Premises, wherever under the Headlease a consent of the Landlord would be required, to obtain the consent of the Sublandlord, and where appropriate, the Landlord. (f) To indemnify and save harmless the Sublandlord from any and all claims made against the Sublandlord by the Landlord or others as a result of a contravention by the Subtenant of his covenants herein contained. (g) Not to assign the Sublease or sublet any part of the Sub-leased Premises without the prior written consent of the Sublandlord and Landlord, such consent to be subject to the same terms and conditions as contained in the Headlease. (h) The Subtenant agrees to accept the Sub-leased Premises in their current condition. (i) The Subtenant covenants that it has received and reviewed the Headlease. 6. The Sublandlord covenants and agrees with the Subtenant: (a) To pay the Annual Rent and the Occupancy Costs and Other Costs reserved by the Headlease and to perform and observe the covenants on the Sublandlord's part under the Headlease, so far as such covenants are not required to be performed and preserved by the Subtenant, and at all times to keep the Subtenant indemnified against all actions, expenses, claims and demands on account of the non-performance by the Sublandlord of its obligations. (b) For quiet enjoyment. (c) That it will not amend or surrender the Headlease during the term of this Sublease. 7. The Landlord hereby consents to this Sublease, it being understood that the Landlord in granting this consent does not thereby acknowledge or approve of or agree to be bound by any of the terms of the Sublease as between the Subtenant and the Sublandlord save for the direct payment of the rent by the Subtenant to it. It is understood and agreed by the parties that notwithstanding such direct payment the Sublandlord shall remain liable for all payments of rent as set out in the Headlease directly to the Landlord on the dates specified therein it being the responsibility of the Sublandlord to ensure that the Subtenant makes all payments. The Landlord shall be under no obligation to notify the Sublandlord that the Subtenant is in default of its payment(s) and any such default shall be Page 178 deemed to be a default of the Sublandlord pursuant to the provisions of the Headlease. 8. Time shall be of the essence of this Sublease. 9. This Sublease shall be deemed to have been made and shall be construed in accordance with the laws of the Province of Ontario. 10. The Sublandlord and the Subtenant agree that all of the provisions of the Sublease are to be construed as covenants and agreements as though the words importing such covenants and agreements were used in each separate paragraph hereof. Should any provision or provisions of this Sublease be illegal or not enforceable, it or they shall be considered separate and severable from the Sublease and its remaining provisions shall remain in force and be binding upon the parties hereto as though the said provision had never been included. 11. The Sublandlord and Subtenant agree that there are no covenants, representation, agreements, warranties or conditions in any way relating to the subject matter of this Sublet whether express or implies, collateral or otherwise, except those set forth in this Sublease. 12. The Sublandlord and the Subtenant agree that this Sublease constitutes the entire agreement between the Sublandlord and executed by the Subtenant and the Sublandlord. Page 179 THIS Sublease shall enure to the benefit of and be binding upon the Sublandlord and the Subtenant, their respective heirs, executors, administrators, successors and permitted assigns. IN WITNESS WHEREOF the parties hereto have hereunto affixed their corporate seals duly attested to by the hands of their proper signing officers authorised in that behalf. SIGNED, SEALED AND DELIVERED ) in the presence of: ) SUBLANDLORD: ) CROSSKEYS SYSTEMS ) CORPORATION ) ) ) ) Per: /s/ John Selwyn ----------------------------- ) Name: John Selwyn c/s ) Title: Chief Executive Officer ) ) ) SUBTENANT: ) NEWBRIDGE NETWORKS ) CORPORATION ) ) Per: /s/ Kenneth B. Wigglesworth ----------------------------- ) Name: Kenneth B. Wigglesworth c/s ) Title: Vice President, Finance, Chief Financial Officer ) ) ) ) LANDLORD: ) KANATA RESEARCH PARK ) CORPORATION ) ) ) Per: /s/ Bronwen A. Heins ----------------------------- ) Name: Bronwen A. Heins c/s ) Title: Corporate Secretary ) Page 180 SCHEDULE "A" Floor Plan ---------- DATED the 1st day of October, 1996. ================================================================================ BETWEEN: CROSSKEYS SYSTEMS CORPORATION OF THE FIRST PART AND: NEWBRIDGE NETWORKS CORPORATION OF THE SECOND PART ================================================================================ SUBLEASE ================================================================================ Prepared by: BRONWEN A. HEINS Edit Date: Disk Reference: X-KEYS\SUBLEASE.AGT \NEWBRIDGE Page 181 EX-11.1 7 COMPUTATION OF EARNINGS PER SHARE 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)
for the fiscal quarter ended for the fiscal year ended ---------------------------- ------------------------- Jul 28, Oct 27, Jan 26, Apr 30, Apr 30, Apr 30, Apr 30, 1996 1996 1997 1997 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- Basic earnings per share Net earnings $60,801 $62,781 $63,031 $(29,696) $156,917 $202,864 $188,390 ====== ====== ====== ====== ======= ======= ======= Common Shares outstanding at the beginning of the period 168,676 169,754 170,741 171,279 168,676 164,515 161,565 Weighted average number of Common Shares issued during the period 552 478 200 422 1,834 1,327 1,326 ------- ------- ------- ------- ------- ------- ------- Weighted average number of Common Shares outstanding at the end of the period 169,228 170,232 170,941 171,701 170,510 165,842 162,891 ======= ======= ======= ======= ======= ======= ======= Basic earnings per share 36(c) 37(c) 37(c) (17)(c) 92(c) $1.22 $1.16 == == == == == ==== ==== Fully diluted earnings per share Earnings before imputed earnings $60,801 $62,781 $63,031 $(29,696) $156,917 $202,864 $188,390 After tax imputed earnings from the investment of funds received through dilution 2,883 2,715 2,693 3,298 11,589 10,470 6,812 ------ ------ ------ ------- ------- ------- ------- Adjusted net earnings $63,684 $65,496 $65,724 $(26,398) $168,506 $213,334 $195,202 ====== ====== ====== ======= ======= ======= ======= Weighted average number of Common Shares outstanding at the end of the period 169,228 170,232 170,941 171,701 170,510 165,842 162,891 equivalents based on conversion of outstanding stock options 18,482 13,899 14,096 15,755 14,085 13,823 12,932 ------- ------- ------- ------- ------- ------- ------- Weighted average number of Common Shares and equivalents outstanding at the end of the period 181,710 184,131 185,037 187,456 184,595 179,665 175,823 ======= ======= ======= ======= ======= ======= ======= Fully diluted earnings per share 35(c) 36(c) 36(c) (17)(c) 91(c) $1.19 $1.11 == == == == == ==== ==== 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 $0.7309 $0.7322 $0.7406 $0.7284 $0.7344 $0.7345 $0.7248 Basic earnings (loss) per share, in U.S. dollars 26(c) 27(c) 27(c) (13)(c) 68(c) 90(c) 84(c) Fully diluted earnings (loss) per share, in U.S. dollars 26(c) 26(c) 26(c) (13)(c) 67(c) 87(c) 80(c)
Page 182 EX-11.2 8 COMPUTATION OF EARNINGS PER SHARE 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)
for the fiscal quarter ended for the fiscal year ended ---------------------------- ------------------------- Jul 28, Oct 27, Jan 26, Apr 30, Apr 30, Apr 30, Apr 30, 1996 1996 1997 1997 1997 1996 1995 ---- ---- ---- ---- ---- ---- ---- Earnings per share (U.S. GAAP - Primary) Net earnings $60,801 $62,781 $(33,909) $67,244 $156,917 $202,864 $188,390 ====== ====== ====== ====== ======= ======= ======= Weighted average number of Common Shares outstanding at the end of the period 169,228 170,232 170,941 171,701 170,510 165,842 162,891 Net effect of dilutive stock options and shares to be issued in settlement of litigation, based on the treasury stock method 5,702 4,515 -- 4,853 4,015 5,148 3,755 ------- ------- ------- ------- ------- ------- ------- Weighted average number of Common Shares outstanding at the end of the period as adjusted 174,930 174,747 170,941 176,554 174,525 170,990 166,646 ======= ======= ======= ======= ======= ======= ======= Earnings per share (U.S. GAAP) 35(c) 36(c) (20)(c) 38(c) 90(c) $1.19 $1.13 == == == == == ==== ==== Earnings per share (U.S. GAAP - Fully Diluted) Net earnings $60,801 $62,781 $(33,909) $67,244 $156,917 $202,864 $188,390 ====== ====== ====== ====== ======= ======= ======= Weighted average number of Common Shares outstanding at the end of the period 169,228 170,232 170,941 171,701 170,510 165,842 162,891 Net effect of dilutive stock options and shares to be issued in settlement of litigation, based on the treasury stock method 5,702 4,515 -- 4,853 4,015 6,938 3,755 ------- ------- ------- ------- ------- ------- ------- Weighted average number of Common Shares outstanding at the end of the period as adjusted 174,930 174,747 170,941 176,554 174,525 172,780 166,646 ======= ======= ======= ======= ======= ======= ======= Earnings per share (U.S. GAAP) 35(c) 36(c) (20)(c) 38(c) 90(c) $1.17 $1.13 == == == == == ==== ==== 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 $0.7309 $0.7322 $0.7406 $0.7284 $0.7344 $0.7345 $0.7248 Primary earnings (loss) per share, in U.S. dollars 25(c) 26(c) (15)(c) 28(c) 66(c) 87(c) 82(c) Fully diluted earnings (loss) per share, in U.S. dollars 25(c) 26(c) (15)(c) 28(c) 66(c) 86(c) 82(c)
Page 183 EX-21 9 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF NEWBRIDGE NETWORKS CORPORATION The names of certain other subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted.
Jurisdiction Name of of Incorporation Subsidiary or Organization - ---------- --------------- Newbridge Networks Inc. Delaware Newbridge Networks Limited England and Wales Newbridge Networks (Asia) Limited Hong Kong Advanced Computer Communications California Transistemas S.A. Argentina Newbridge Networks Telecomunicacoes Ltda. Brazil Newbridge Networks de Mexico, S.A. de C.V. Mexico Newbridge Networks S.A. France Ouest Standard Telematique, S.A. France Newbridge Networks (Middle East) WLL Bahrain Newbridge Networks Japan KK Japan Newbridge Networks Australia (Pty.) Limited Australia Newbridge Networks Korea Ltd. Korea Newbridge Networks Venezuela, S.A. Venezuela Newbridge Networks GmbH Germany Newbridge Networks Ireland Ltd. Ireland Newbridge Networks (Pty) Ltd South Africa Newbridge Networks International Corporation Barbados Newbridge (Barbados) Corporation Barbados Newbridge Networks S.p.A. Italy Newbridge Networks GmbH (Austria) Austria Coasin Chile S.A. Chile Acacia Limited Barbados Newbridge Networks (APL) L. BHD Malaysia Danring A/S Denmark
Page 184 EX-23 10 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Newbridge Networks Corporation (the "Company") on Form S-8 (File Nos. 33-51538, 33-55964, 33-68710, 33-78276, 33-89624, 33-97472, 333-2446, and 333-30777) of our report dated June 2, 1997 (June 24, 1997 for Note 18), included herein, on our audit of the consolidated financial statements of the Company, which are included in this Annual Report on Form 10-K dated July 14, 1997, as included in Item 8 herein. /s/ Deloitte and Touche Deloitte & Touche Chartered Accountants July 14, 1997 Ottawa, Canada Page 185 EX-27 11 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet, consolidated statement of earnings and consolidated statement of cash flows included in the Company's Form 10-K for the period ending April 30, 1997, and is qualified in its entirety by reference to such financial statements. 1,000 CANADIAN DOLLARS 12-MOS APR-30-1997 MAY-01-1996 APR-30-1997 0.7319 197,007 136,897 397,910 10,572 159,495 944,928 622,949 328,010 1,496,703 306,536 0 0 0 351,388 775,111 1,496,703 1,376,727 0 507,588 1,105,964 9,615 0 1,351 279,753 117,718 156,917 0 0 0 156,917 0.90 0.90
EX-99 12 STATEMENT OF EXECUTIVE COMPENSATION EXHIBIT 99 Page 187 STATEMENT OF EXECUTIVE COMPENSATION Composition of the Employee Compensation Committee The Employee Compensation Committee of the Board of Directors (the "Committee") is comprised of three directors of the Corporation who are neither officers nor employees of the Corporation or its subsidiaries. The members of the Committee are Mr. Kent Plumley, the Chairman of the Committee, Dr. Denzil Doyle and Mr. Daniel Rusheleau. As established by the Board of Directors, the terms of reference for the Committee include overall review of current compensation policies and processes to ensure that (i) the Chief Executive Officer and the other Executive Officers are fairly and competitively compensated; (ii) human resources development, succession planning and performance evaluation programs are established and operating effectively throughout the Corporation and (iii) the Corporation's Consolidated Key Employee Stock Option Plan (the "Consolidated Plan") is properly administered. Report on Executive Compensation The establishment of salary levels for the executive officers of the Corporation is the responsibility of the Chairman and Chief Executive Officer, together with the President and Chief Operating Officer in the case of those Executive Officers reporting to him; all are subject to review by the Committee. Salaries are reviewed annually and are based on individual performance against specific goals or overall accomplishment, the extent of individual responsibility and comparisons with salaries paid in the industry. On occasion a bonus may be awarded to an individual Executive Officer in recognition of a specific achievement. A significant component of Executive Compensation consists of grants of stock options under the Consolidated Key Employee Stock Option Plan (the "Consolidated Plan"). Options are granted primarily based on the extent of individual responsibility and performance and on occasion are granted to attract new executives and to recognize job promotions. While the cash compensation of executives is generally believed to be below industry norms in relation to the size and profitability of the Corporation, stock options provide a substantial connection between the total long term remuneration of Executive Officers and corporate performance as reflected in the market value of the Corporation's Common Shares, as well as to directly align the interests of Executive Officers with those of the shareholders. Options vest after one year and have a maximum term of five years from the date of grant. Shareholders will be asked to approve certain amendments to the Consolidated Plan including amendments to the vesting period (see heading "Resolution No. 1 - Amendment to Newbridge Networks Corporation Consolidated Key Employee Stock Option Plan" below). The exercise price is equal to the average of the average of the daily high and low board lot trading prices on The Toronto Stock Exchange for the five days preceding the date of grant. The value of the options granted to Executive Officers depends on the market price of the Common Shares of the Corporation. Options are not transferable and may be exercised only for so long as the optionholder remains an employee subject to certain exceptions such as death, disability or retirement. When an option is exercised, the Common Shares must be paid for in full. The Corporation implemented the Newbridge Group Retirement Savings Plan/Deferred Profit Sharing Plan effective January 1, 1997 (the "Group Plan"). Full-time and permanent part-time employees of the Corporation in Canada are eligible to participate in the Group Plan. Employees may contribute a percentage of annual earnings (within the limits prescribed by current Canadian income tax legislation) and the Corporation will, on a matching basis, contribute an amount equal to 50% of the employees contribution, up to a maximum amount equal to 5% of annual salary, into a deferred profit sharing plan. The Group Plan requires two years of membership from the date of enrollment before the contributions made by the Corporation vest to an employee. The Board of Directors established the level of compensation to be paid to the Chairman and Chief Executive Officer (the "CEO") in 1991 at an amount considered to be reasonable, fair and equitable. Although the compensation of the CEO has been reviewed since that time, the CEO has declined to receive any increase in his annual cash compensation or stock options under either the Consolidated Plan or its predecessor plans. The foregoing has been furnished by the members of the Employee Compensation Committee of the Board of Directors: Mr. Kent Plumley (Chairman) Dr. Denzil Doyle, Mr. Daniel Rusheleau. Page 188 Summary Compensation Table The following table states the compensation paid for each of the Corporation's three most recently completed financial years to the Chief Executive Officer and the next four most highly compensated Executive Officers (the "Named Executive Officers") during the fiscal year ended April 30, 1997.
- -------------------------------------------------------------------------------------------------------------------------- Long Term Annual Compensation Compensation -------------------------------------- ------------ All Name and Principal Fiscal All Other Securities Under Other Position Year Salary Bonus Compensation/(1)/ Options Granted/(2)/ Compensation - -------------------------------------------------------------------------------------------------------------------------- Terence H. Matthews /(3)/ 1997 $175,790 -- $22,584 -- -- Chairman of the Board 1996 $149,791 -- $47,105 -- -- & CEO 1995 $148,800 -- $49,878 -- -- Peter Sommerer 1997 $209,511 -- $7,043 70,000 -- Vice Chairman of the 1996 $211,147 -- $3,472 40,000 -- Board 1995 $194,372 -- $3,342 20,000 -- F. Michael Pascoe 1997 $231,880 -- $13,525 20,000 $31,814/(5)/ Executive Vice President 1996 $231,438 -- $9,400 42,000 $16,869/(5)/ and General Manager 1995 $234,872 -- $9,443 12,000 $30,444/(5)/ Americas Region John Everard 1997 $258,875 -- $29,860 40,000 $20,710/(4)/ Executive Vice President 1996 $237,574 -- $27,902 12,000 $19,006/(4)/ and General Manager 1995 $215,987 -- $21,395 10,000 $13,291/(4)/ European Region Scott Marshall 1997 $202,413 -- $10,063 20,000 -- Executive Vice President 1996 $135,243 -- $6,308 96,000 -- Research & Development 1995 $136,270 -- $6,279 16,000 -- - --------------------------------------------------------------------------------------------------------------------------
(1) Except as specifically disclosed, the value of each Named Executive Officer's perquisites and other benefits was less than the lesser of (i) $50,000 and (ii) 10% of such officer's total annual salary and bonus. The amounts paid under "All Other Compensation" to Mr. Matthews, Mr. Sommerer, Mr. Pascoe, Mr. Marshall and Mr. Everard principally represent payments for automobile leases unless otherwise indicated. (2) During the fiscal year ended on April 30, 1997, the Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend. The numbers shown in the table for previous years have been adjusted to reflect the stock split. Each option entitles the holder to acquire the indicated number of Common Shares. Particulars of stock options are provided under the heading "Stock Options". (3) Terence H. Matthews' compensation is paid by means of a management fee to a company which is controlled by Mr. Matthews. (4) Amounts paid to Mr. Everard under "All Other Compensation" represent contributions paid into a Retirement Benefit Plan on Mr. Everard's behalf, which Plan is available to all employees of the Corporation's United Kingdom subsidiary. Under the Plan the employer contributed 8% of the Executive Officer's pensionable earnings. Benefits payable upon retirement under the Plan are derived from a pension annuity policy purchased from an insurance company. Page 189 (5) Amounts paid to Mr. Pascoe under "All Other Compensation" represent, in part, the Corporation's share of contributions paid into a 401(k) retirement benefit plan on Mr. Pascoe's behalf, which plan is available to all employees of the United States subsidiary. Under the plan, the employer contributed 50% of the first 6% of the employees base salary contributed to the plan. The balance of the amount disclosed under "All Other Compensation" represents employer contributions paid for health and disability insurance. [In 1995, the amount disclosed under "All Other Compensation" includes relocation benefits paid to Mr. Pascoe. Stock Options The following table provides details of grants of options to purchase Common Shares of the Corporation to each of the Named Executive Officers during the fiscal year ended April 30, 1997:
- ------------------------------------------------------------------------------------------------------------------- Securities % of Total Exercise Market Value Expiration Name Under Options Granted Price of Securities Date Options to Employees in per Underlying Granted Financial Year Security Options on Date of Grant - ------------------------------------------------------------------------------------------------------------------- Terence H. Matthews -- -- -- -- -- Peter Sommerer 20,000 .281% $30.18 $30.18 July 26/00 50,000 .704% $38.86 $38.86 Jan. 6/02 F. Michael Pascoe 20,000 .281% $30.18 $30.18 July 26/00 John Everard 40,000 .563% $30.18 $30.18 July 26/00 Scott Marshall 20,000 .281% $30.18 $30.18 Jan. 6/02 - -------------------------------------------------------------------------------------------------------------------
Page 190 The following table provides details of exercises of stock options by each of the Named Executive Officers during the fiscal year ended April 30, 1997 and the fiscal year end value of unexercised stock options based on the closing price of $44.60 per Common Share on April 30, 1997:
- ----------------------------------------------------------------------------------------------------------------- Securities Aggregate Unexercised Value of Acquired Value Options Unexercised Name on Exercise Realized Exercisable(E) in-the-Money Unexercisable(U) Options Exercisable [E] Unexercisable [U] - ----------------------------------------------------------------------------------------------------------------- Terence H. Matthews -- -- -- -- Peter Sommerer 132,000 $3,805,920 [E] 59,996 [E] $1,143,185 [U] 120,004 [U] $1,856,899 F. Michael Pascoe - - [E] 35,332 [E] $844,707 [U] 58,668 [U] $1,232,832 John Everard 10,666 $232,476 [E] 2 [E] $49 [U] 54,668 [U] $928,303 Scott Marshall 92,000 $2,744,385 [E] 42,664 [E] $841,162 [U] 89,336 [U] $1,438,757 - -----------------------------------------------------------------------------------------------------------------
Compensation of Directors Non-employee directors of the Corporation ("Director Participants") receive an option to purchase 10,000 Common Shares under the Consolidated Plan on the date of each annual meeting of shareholders at which such director is elected to the Board of Directors. A Director Participant who is appointed to the Audit Committee, the Employee Compensation Committee, the Directors' Affairs Committee or any future committee established by the Board of Directors and declared by the Board of Directors to be a standing committee ("Standing Committee"), other than as Chair of such Standing Committee, receives an option to purchase 2,000 Common Shares upon annual appointment to a Standing Committee. A Director Participant who is appointed Chair of a Standing Committee receives an option to purchase 4,000 Common Shares upon annual appointment as Chair. Directors are entitled to reimbursement of all expenses for attendance at Board and Standing Committee meetings. Directors do not receive a fee for attendance at meetings of the Board of Directors or Committees thereof. During the fiscal year ended April 30, 1997 Director Participants as a group received options to purchase 277,000 Common Shares at a weighted average exercise price of $38.06 per share. During the fiscal year ended April 30, 1997, Director Participants as a group exercised options to purchase 257,998 Common Shares. The aggregate market value of these Common Shares as at the respective dates of purchase, less the exercise price, was $1,809,500. As at June 12, 1997, 12 Director Participants held options to purchase 672,670 Common Shares. Directors' and Officers' Liability Insurance The Corporation maintains Directors' and Officers' Liability Insurance in the amount of US$15,000,000 for the benefit of the directors and officers of the Corporation and its subsidiaries. During the fiscal year ended April 30, 1997, the amount of premium paid under the policy was US$1,041,021 which covers a 3 year period from November 1, 1996 to November 1, 1999. No portion of the premium was paid by the directors and officers of the Corporation. The policy provides for a retention of US$1 million for each loss claimed by the Corporation. The by-laws of the Corporation generally provide that the Corporation shall indemnify a director or officer of the Corporation against liability incurred in such capacity including acting at the Corporation's request as director or officer of another corporation, to the extent permitted or required by the CBCA. Performance Graph The following graph compares the cumulative return on $100 invested in Common Shares of the Corporation with selected indices, assuming reinvestment of all dividends. The Corporation's management consistently cautions that Page 191 the stock price performance shown in the graph below should not be considered indicative of potential future share price performance. Comparison of Cumulative Total Return Among Newbridge, NYSE Composite Index, Pacific Stock Exchange Technology Index and TSE 300 Index for the period May 1, 1992 to April 30, 1997 [LINE GRAPH APPEARS HERE]
- ------------------------------------------------------------------------------------------------------------------- April '92 April '93 April '94 April '95 April '96 April '97 - ------------------------------------------------------------------------------------------------------------------- Newbridge $100 $455 $812 $493 $1,024 $1,042 - ------------------------------------------------------------------------------------------------------------------- Pacific Stock $100 $111 $139 $190 $264 $298 Exchange Technology Index - ------------------------------------------------------------------------------------------------------------------- NYSE Composite $100 $107 $110 $121 $154 $183 - ------------------------------------------------------------------------------------------------------------------- TSE 300 Index $100 $113 $127 $128 $156 $178 - -------------------------------------------------------------------------------------------------------------------
Interest of Insiders in Material Transactions The Corporation leases facilities in Canada and the United Kingdom from companies controlled by Terence H. Matthews, Chairman of the Board and Chief Executive Officer and the largest shareholder of the Corporation, under terms and conditions reflecting prevailing market conditions at the time the leases were entered into. Approximately 343,000 square feet has been leased for various terms expiring between September 1997 and May 2002 at rates between $9.25 and $14.00 per square foot (approximately $3,200,000 per year). During the fiscal year ended April 30, 1996 the Corporation purchased a facility from a company controlled by Mr. Matthews for its fair market value of $5,244,000. During the fiscal year ended April 30, 1997, the Corporation paid $2,621,000 for research and development services from associated companies under usual trade terms and conditions (fiscal 1996 -- $507,000). The Corporation also purchased $8,597,000 of equipment and software from associated companies under usual trade terms, generally for resale (fiscal 1996 -- $7,442,000). The Corporation sold $20,559,000 of equipment and software to associated Page 192 companies under usual trade terms, generally for resale (fiscal 1996 -- $1,207,000). The Corporation has equity interests in these associated companies ranging from 22% to 39% and is represented on the boards of directors of these companies. During the fiscal year ended April 30, 1997, the Corporation purchased approximately $3,393,000 of equipment under usual trade terms and conditions from companies in which the Corporation has no equity interest, but for which certain directors of the Corporation served as chief executive officer and as a director and from corporations for which Terence H. Matthews served as a director (fiscal 1996 -- $944,000). During the fiscal year ended April 30, 1996, the Corporation performed subcontracted research and development under agreements between the Corporation and corporations controlled by three directors of the Corporation. Subcontracted research and development under these agreements totalled $3,200,000 for fiscal 1996 (fiscal 1995 -- $4,900,000) and is accounted for as a recovery of gross research and development costs. The period covered by the subcontracted research and development agreements ended in the third quarter of fiscal 1996. The Corporation will pay a net royalty between 2% and 10%, depending on the level of cumulative royalties paid, on all sales of products developed. Certain officers and directors of the Corporation and members of their immediate families own Common Shares in entities in which the Corporation also owns Common Shares. The Corporation has a policy that all transactions between the Corporation and it's officers, directors, principal shareholders or their affiliates, including the extension of any credit, will be on terms no less favourable to the Corporation than could be obtained from unrelated third parties and will be approved by a majority of the Board of Directors and a majority of the Corporation's disinterested directors. Page 193 -----END PRIVACY-ENHANCED MESSAGE-----