-----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, T8do1f30Ea/FjGHsI8NamFB6tSjF7gCXOfllAB++zCzMtR5KjnSsRpWsDcJFcGDA bdtWyyK5UhcoaKaxtMgsaw== 0000928385-98-000496.txt : 19980319 0000928385-98-000496.hdr.sgml : 19980319 ACCESSION NUMBER: 0000928385-98-000496 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980201 FILED AS OF DATE: 19980318 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEWBRIDGE NETWORKS CORP CENTRAL INDEX KEY: 0000827301 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 980077506 STATE OF INCORPORATION: A6 FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13316 FILM NUMBER: 98568322 BUSINESS ADDRESS: STREET 1: 600 MARCH ROAD PO BOX 13600 STREET 2: KANATA ONTARIO CANADA CITY: K2K 2E6 STATE: A6 BUSINESS PHONE: 6135913600 MAIL ADDRESS: STREET 1: 600 MARCH ROAD STREET 2: KANATA ONTARIO CANADA CITY: K2K 2E6 STATE: A6 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended February 1, 1998 Commission file number 1-13316 Newbridge Networks Corporation (Exact name of registrant as specified in its charter) Canada 98-0077506 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 March Road, Kanata, Ontario, Canada K2K 2E6 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (613) 591-3600 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of Common Shares of the registrant outstanding as at March 13, 1998 was 175,485,818. (Page 1) NEWBRIDGE NETWORKS CORPORATION TABLE OF CONTENTS Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Earnings and Retained Earnings -- Fiscal quarters and three fiscal quarters ended February 1, 1998 and January 26, 1997......................................3 Consolidated Balance Sheets -- February 1, 1998 and April 30, 1997.......................4 Consolidated Statements of Cash Flows -- Fiscal quarters and three fiscal quarters ended February 1, 1998 and January 26, 1997...............5 Notes to the Consolidated Financial Statements............6-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................16-25 PART II. OTHER INFORMATION Item 1. Legal Proceedings..............................................26 Item 5. Other Information..............................................26 Item 6. Exhibits and Reports on Form 8-K...............................27 SIGNATURES................................................................28 (Page 2) PART I. FINANCIAL INFORMATION Item 1. Financial Statements NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (Canadian dollars, amounts in thousands except per share data) (Unaudited)
Fiscal quarters ended Three fiscal quarters ended ----------------------- --------------------------- February 1, January 26, February 1, January 26, 1998 1997 1998 1997 ---------- --------- ------------ ----------- Sales $ 358,520 $333,267 $ 1,225,427 $ 935,386 Cost of sales 144,813 120,006 465,344 332,934 --------- -------- ---------- -------- Gross margin 213,707 213,261 760,083 602,452 Expenses Selling, general and administrative 120,082 81,986 367,341 226,382 Research and development 66,308 38,311 192,160 103,713 Restructuring costs (Note 2) 181,444 -- 181,444 -- Amortization of purchased research and development in process (Note 4) 26,381 -- 26,381 -- --------- -------- ---------- -------- Income (loss) from operations (180,508) 92,964 (7,243) 272,357 Interest income 2,067 5,530 7,881 16,322 Interest expense on long term obligations (625) (933) (1,116) (1,191) Other expenses (1,958) (2,398) (7,100) (7,277) Gain on sale of investment (Note 10) 47,960 -- 47,960 -- --------- -------- ---------- -------- Earnings (loss) before income taxes and non-controlling interest (133,064) 95,163 40,382 280,211 Provision for income taxes 9,457 29,500 60,815 88,973 Non-controlling interest 1,762 2,632 1,503 4,625 --------- -------- ---------- -------- Net earnings (loss) (144,283) 63,031 (21,936) 186,613 Retained earnings, beginning of the period 890,495 734,813 768,148 611,231 --------- -------- ---------- -------- Retained earnings, end of the period $ 746,212 $797,844 $ 746,212 $797,844 ========= ======== ========== ======== Earnings (loss) per share (Note 12) Basic (82)c 37c (13)c $1.10 Fully diluted (82)c 36c (13)c $1.06 Weighted average number of shares Basic 175,376 170,941 174,338 170,140 Fully diluted 175,376 185,037 174,338 183,640
See accompanying Notes to the Consolidated Financial Statements. (Page 3) NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED BALANCE SHEETS (Canadian dollars in thousands)
February 1, April 30, 1998 1997 ------------ ----------- (unaudited) Assets Cash and cash equivalents (Note 6) $ 234,133 $ 333,904 Accounts receivable, net of provision for returns and doubtful accounts of $12,226 (April 30, 1997 - $10,572) 402,105 387,338 Inventories (Note 7) 208,838 159,495 Prepaid expenses and other current assets 82,667 64,191 ---------- ---------- 927,743 944,928 Property, plant and equipment 411,126 294,939 Deferred income taxes 54,470 37,393 Purchased research and development in process (Note 4) 26,381 -- Goodwill (Note 8) 74,198 125,565 Software development costs 26,499 22,299 Other assets (Note 9) 146,745 71,579 ---------- ---------- $1,667,162 $1,496,703 ========== ========== Liabilities and Shareholders' Equity Current liabilities Accounts payable $ 136,043 $ 105,884 Accrued liabilities 105,301 95,804 Provision for restructuring (Note 2) 25,329 35,944 Income taxes -- 61,551 Current portion of long term obligations 6,686 7,353 ---------- ---------- 273,359 306,536 Long term obligations 60,067 10,817 Deferred income taxes 83,860 32,439 Non-controlling interest 23,809 20,412 ---------- ---------- 441,095 370,204 ---------- ---------- Common shares - 175,433,871 outstanding (April 30, 1997 - 171,858,984 outstanding) 450,233 351,388 Accumulated foreign currency translation adjustment 29,622 6,963 Retained earnings 746,212 768,148 ---------- ---------- 1,226,067 1,126,499 ---------- ---------- $1,667,162 $1,496,703 ========== ==========
See accompanying Notes to the Consolidated Financial Statements. (Page 4) NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Canadian dollars in thousands) (Unaudited)
Fiscal quarters ended Three fiscal quarters ended --------------------- --------------------------- February 1, January 26, February 1, January 26, 1998 1997 1998 1997 ---- ---- ---- ---- Operating activities Net earnings (loss) $(144,283) $ 63,031 $ (21,936) $ 186,613 Items not affecting cash Amortization 31,742 20,701 91,746 57,509 Deferred income taxes 16,796 2,065 35,817 7,936 Non-controlling interest 1,762 2,632 (516) 4,625 Amortization of purchased research and development in process 26,381 -- 26,381 -- Gain on sale of investment (47,960) -- (47,960) -- Restructuring costs 181,444 -- 181,444 -- Other (4,170) 2,611 189 4,933 Cash effect of changes in: Accounts receivable 16,899 1,344 (8,607) (61,629) Inventories (47,695) (11,567) (97,552) (16,273) Prepaid expenses and other current assets 18,357 (5,792) (16,559) (14,841) Accounts payable and accrued liabilities (22,215) 295 (25,332) (1,919) Income taxes (27,291) 9,534 (51,093) 26,875 --------- --------- --------- --------- (233) 84,854 66,022 193,829 --------- --------- --------- --------- Investing activities Additions to property, plant and equipment (80,128) (33,172) (205,134) (81,611) Proceeds from sale of investment (Note 10) 66,672 -- 66,672 -- Acquisition of subsidiaries, excluding cash acquired (Note 3) (53,676) (171,863) (58,936) (206,960) Capitalized software development costs (4,270) (3,061) (11,505) (9,025) Additions to other assets (63,676) (14,971) (93,791) (40,573) --------- --------- --------- --------- (135,078) (223,067) (302,694) (338,169) --------- --------- --------- --------- Financing activities Issue of common shares 3,256 10,396 83,787 42,284 Increase in long term obligations 50,385 424 54,445 1,451 Repayment of long term obligations (3,619) (1,018) (8,811) (4,374) --------- --------- --------- --------- 50,022 9,802 129,421 39,361 --------- --------- --------- --------- Decrease in cash and cash equivalents (85,289) (128,411) (107,251) (104,979) Effect of foreign currency translation on cash 32 (1,215) 5,605 (4,664) Cash from acquisition of subsidiaries 1,875 3,723 1,875 9,888 --------- --------- --------- --------- (83,382) (125,903) (99,771) (99,755) Cash and cash equivalents, beginning of period 317,515 481,897 333,904 455,749 --------- --------- --------- --------- Cash and cash equivalents, end of period $ 234,133 $ 355,994 $ 234,133 $ 355,994 ========= ========= ========= =========
See accompanying Notes to the Consolidated Financial Statements. (Page 5) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 1. Basis of Presentation The accompanying unaudited interim consolidated financial statements of Newbridge Networks Corporation (the "Company") have been prepared in accordance with accounting principles generally accepted in Canada ("Canadian GAAP") for interim financial information. These accounting principles are also generally accepted in the United States ("U.S. GAAP") in all material respects except for the write off of purchased research and development in process, as disclosed in Note 3, 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 6, and the method of calculation of earnings per share, as disclosed in Note 12. In the opinion of Management, the unaudited interim consolidated financial statements reflect all normal and recurring adjustments considered necessary for fair presentation. The results of operations for the third fiscal quarter and three fiscal quarters ended February 1, 1998 are not necessarily indicative of the results to be expected for the fiscal year ending April 30, 1998. 2. Restructuring Costs In November 1997, the Company decided to restructure its activities related to its local area network ("LAN") business. The restructuring plan involves the formation of a strategic alliance with a company strongly positioned in the LAN business, and the reduction of the Company's direct participation, and related costs, in the LAN business. In repositioning the way in which the Company addresses the LAN market, the restructuring plan created impairment losses on assets associated with the Company's LAN business and liabilities associated with restructuring activities. Restructuring costs of $181,444,000 recorded in the third quarter of fiscal 1998 comprise the following: Asset impairment losses Accounts receivable $ 12,732 Inventory 54,851 Property, plant and equipment 11,936 Goodwill - Ungermann-Bass Networks, Inc. 18,775 Goodwill - Ouest Standard Telematique S.A. 38,350 Other current and non-current assets 5,162 ------- 141,806 ------- Provision for restructuring Reduction in work force 20,796 Reduction in facilities 4,753 Discontinued activities 13,577 Other restructuring costs 512 ------- 39,638 ------- Restructuring costs $181,444 ======= (Page 6) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) Asset impairment losses were recorded to the extent the net book value (including related reserves) exceeded the fair value of any assets associated with the Company's restructuring plan. The fair value was based on the estimated net realizable value of the underlying assets affected by the restructuring. The full net book value of goodwill associated with the acquisitions of Ungermann- Bass Networks, Inc. (acquired in January 1997) and Ouest Standard Telematique S.A. (acquired in August 1996) were written off as restructuring costs. Both acquisitions related to the Company increasing its direct presence and participation in the LAN business. The provision for restructuring relates to programs instituted by the Company to reduce its direct participation in the LAN business. The provision for restructuring and the spending to the end of the third quarter of fiscal 1998 comprises the following:
Reduction in Reduction Discontinued Other Work Force in Facilities Activities Restructuring Total ---------- ------------- ---------- ------------- ----- Provision upon formulation of all elements of the restructuring plan $20,796 $4,753 $13,577 $512 $39,638 Facilities reduction accrued in Jan 1997 restructuring (Note 5) -- 2,737 -- -- 2,737 Expended in the fiscal quarter ended February 1, 1998 (11,479) (872) (4,575) (120) (17,046) ------- ------ ------- ---- ------- Provision at February 1, 1998 $ 9,317 $6,618 $ 9,002 $392 $25,329 ======= ====== ======= ==== =======
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 430 employees. The work force reductions are in substantially all functions of the Company's LAN business and in all regions in which the Company operates. The Company anticipates that these work force reductions will be substantially completed in the fourth 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. Certain facilities closures planned as part of the restructuring plan formulated upon the acquisition of UB Networks have yet to be completed, but are planned as part of the restructuring plan announced in November 1997. The provision for discontinued activities includes costs associated with fulfilling prior commitments related to certain discontinued product lines and activities. The Company anticipates these costs to be incurred over the remainder of fiscal 1998 and during fiscal 1999. The provision for other restructuring costs comprises professional fees and other various direct incremental costs associated with the restructuring plan. (Page 7) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 3. Acquisition of Subsidiaries The cash utilized in acquiring controlling or joint interests in subsidiaries is summarized as follows.
Fiscal quarter ended Three fiscal quarters ended ------------------------ --------------------------- February 1, January 26, February 1, January 26, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- RadNet Ltd. (Note 4) $53,676 $ -- $53,676 $ -- Ungermann-Bass Networks, Inc. (Note 5) -- 146,590 -- 146,590 Coasin Chile S.A. -- 14,129 -- 14,129 Danring A/S -- 11,144 -- 11,144 Ouest Standard Telematique -- -- -- 34,231 Other -- -- 5,260 866 ------ ------- ------ ------- $53,676 $171,863 $58,936 $206,960 ====== ======= ====== =======
All acquisitions have been accounted for under the purchase method of accounting. With respect to each of Ungermann-Bass Networks, Inc. ("UB Networks") and RadNet Ltd. ("RadNet"), a portion of the consideration paid was ascribed to purchased research and development in process based on the fair value at the time the technology was acquired. The amount allocated to purchased research and development in process was determined through valuation techniques common in the high technology industry. Under Canadian GAAP the purchased research and development in process is amortized over its estimated useful life and asset recoverability is reviewed on an ongoing basis. Under U.S. GAAP, purchased research and development in process acquired by the Company would be written off at the time of acquisition. The determination of net earnings (loss) under U.S. GAAP is as follows.
Fiscal quarter ended Three fiscal quarters ended ------------------------ --------------------------- February 1, January 26, February 1, January 26, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net earnings (loss), as reported under Canadian GAAP $(144,283) $ 63,031 $(21,936) $186,613 Add back: Amortization of research and development in process acquired on acquisition of RadNet (Note 4) 26,381 -- 26,381 -- Less: Write off of research and development in process acquired on acquisition of RadNet (Note 4) (52,762) -- (52,762) -- Write off of research and development in process acquired on acquisition of UB Networks (Note 5) -- (96,940) -- (96,940) -------- ------- ------- ------- Net earnings (loss), U.S. GAAP $(170,664) $(33,909) $(48,317) $ 89,673 ======== ======= ======= =======
(Page 8) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 4. Acquisition of RadNet Ltd. In November 1997 the Company acquired a 49.9% equity interest in RadNet Ltd., an Israeli developer and manufacturer of access switches for asynchronous transfer mode ("ATM") networks, by the purchase of shares for cash consideration of $53,676,000. The acquisition has been accounted for under the purchase method of accounting. The purchase price includes professional fees and other direct costs of the acquisition, and excludes contingent adjustments to the purchase price related to the achievement of certain research and development milestones over the next year. The contingent adjustments could increase the Company's purchase price by as much as US$750,000 or reduce the purchase price by as much as US$1,000,000. The majority of the purchase price ($52,762,000) has been allocated to purchased research and development in process. Under Canadian GAAP, the purchased research and development in process is being amortized on a straight line basis over its estimated useful life of six months. Accordingly, the Company recorded amortization of $26,381,000 in the third quarter of fiscal 1998, reducing the purchased research and development in process asset on the February 1, 1998 Consolidated Balance Sheet to $26,381,000, which will be amortized in the fourth quarter of fiscal 1998 ending April 30, 1998. Under U.S. GAAP, the purchased research and development in process would be written off upon acquisition (Note 3). Because the Company jointly controls RadNet, the financial results of RadNet have been proportionately consolidated under Canadian GAAP since the date of acquisition. Under U.S. GAAP the Company would account for RadNet under the equity method, the results of which would not differ materially from the application of Canadian GAAP. 5. 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 year based on 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 Company does not expect to make any additional contingent payments associated with the acquisition. At the time of the acquisition of UB Networks, a provision for restructuring of $53,979,000 was recorded related to programs instituted by the Company to integrate the operations of UB Networks with the Company and to eliminate redundant functions. These programs were substantially completed in the third quarter of fiscal 1998. The amount remaining at February 1, 1998 in the restructuring provision of $2,737,000 was related to planned facilities closures. The Company plans to complete these actions as part of the restructuring plan associated with its LAN business (Note 2). (Page 9) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 6. Cash and Cash Equivalents Components of cash and cash equivalents are: February 1, April 30, 1998 1997 ----------- --------- Cash $227,192 $197,007 Held to maturity marketable securities (at amortized cost, which approximates fair market value) 792 136,278 Available for sale marketable securities (at fair market value) 6,149 619 -------- -------- $234,133 $333,904 ======== ======== Held to maturity marketable securities are investments with original maturities of three months or more. Available for sale marketable securities are common shares of publicly traded companies, which are carried at a discount to reflect certain resale restrictions, principally acquired upon the Company's disposition of its minority interest in Broadband Networks Inc. (Note 10). Under U.S. GAAP, marketable securities would be disclosed as a separate caption on the Consolidated Balance Sheets. If the Consolidated Statements of Cash Flows were prepared under U.S. GAAP, maturities, purchases and sales of marketable securities would be disclosed as an investing activity. Disclosure in the Consolidated Statements of Cash Flows under U.S. GAAP would be as follows.
Fiscal quarter ended Three fiscal quarters ended -------------------- --------------------------- February 1, January 26, February 1, January 26, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Investing activities in short term marketable securities: Held to maturity securities Maturities $ 29,896 $ 139,795 $ 186,282 $ 305,469 Purchases (779) (44,972) (50,797) (326,442) -------- -------- -------- -------- 29,117 94,823 135,485 (20,973) Available for sale securities Sales -- -- 569 16,538 Purchases (6,098) -- (6,098) -- -------- -------- ------- -------- 23,019 94,823 129,956 (4,435) Investing activities, as reported (135,078) (223,067) (302,694) (338,169) -------- -------- -------- -------- Investing activities, U.S. GAAP $(112,059) $(128,244) $(172,738) $(342,604) ======== ======== ======== ======== Net decrease in cash and cash equivalents, as reported $ (83,382) $(125,903) $ (99,771) $ (99,755) Investing activities in short term marketable securities 23,019 94,823 129,956 (4,435) -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents, U.S. GAAP $ (60,363) $ (31,080) $ 30,185 $(104,190) ======== ======== ======== ========
(Page 10) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) The Company uses financial instruments, principally forward exchange contracts, in its management of foreign currency exposures. Realized and unrealized forward 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 February 1, 1998 the Company had $314,457,000 in outstanding forward exchange contracts (April 30, 1997 -- $293,414,000). 7. Inventories February 1, April 30, 1998 1997 ------ ------ Finished goods $132,562 $100,405 Work in process 22,731 20,938 Raw materials 53,545 38,152 ------- ------- $208,838 $159,495 ======= ======= 8. Goodwill February 1, April 30, 1998 1997 ------ ------ Goodwill $ 79,899 $133,854 Accumulated amortization (5,701) (8,289) ------- ------- $ 74,198 $125,565 ======= ======= During the third quarter ended February 1, 1998, goodwill of $65,218,000 and accumulated amortization of $8,093,000 (net book value $57,125,000) were written off as part of the restructuring plan for the LAN business (Note 2). 9. Other Assets February 1, April 30, 1998 1997 ------ ------ Long term investments Accounted for by the equity method $ 33,519 $ 19,663 Accounted for by the cost method 91,558 32,931 ------- ------- 125,077 52,594 Other assets 21,668 18,985 ------- ------- $146,745 $ 71,579 ======= ======= 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 shareholders' equity of the investee company. Investees which the Company does not control or have significant influence over are accounted for by the cost method. In accordance with Canadian and U.S. GAAP, the carrying value of long term investments in common shares that are publicly traded or privately held are not adjusted to reflect increases in fair value. (Page 11) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 10. Sale of Investment in Broadband Networks Inc. In January 1998 the Company sold its minority interest in Broadband Networks Inc. ("BNI"), a Canadian wireless technology company, to Northern Telecom Limited ("Nortel") for proceeds of $66,672,000. The proceeds received included cash of $23,775,000 and Nortel shares valued at $42,897,000. A portion of the Nortel shares received in exchange for the BNI shares have been classified as available for sale marketable securities, valued at $6,098,000, which represents a discount to the publicly traded market value to reflect certain resale restrictions (Note 6). The remaining Nortel shares received in exchange for the BNI shares, which are not subject to resale restrictions, have been classified as Other Assets on the Consolidated Balance Sheets and valued based on a forward share price hedge agreement entered into by the Company. The Nortel shares not subject to resale restrictions have been pledged as security under a loan agreement (Note 11). The Company recognized a gain in the third quarter ended February 1, 1998 of $47,960,000, representing the excess of the value of the consideration received over the cost to the Company of its investment in the BNI shares exchanged. 11. Long Term Obligations In January 1998 the Company entered into and received $50,000,000 under a five year loan agreement. The loan agreement includes a term loan portion and a demand loan portion, both due January 2003. The term loan bears interest at the fixed rate of 6.17% and the demand loan bears interest at a floating rate equal to the one month's bankers' acceptance rate. The Company's obligation under the term loan can be satisfied at any time prior to maturity through the delivery of 545,976 Nortel shares, or the cash equivalent of the current market value of the Nortel shares at such time, or combination thereof. The Nortel shares not subject to resale restrictions received in exchange for the Company's shares in BNI have been pledged as security for the term loan. The demand loan is unsecured. 12. Earnings per Share Basic earnings per share has been calculated as net earnings for the period divided by the daily weighted average number of Common Shares outstanding during the fiscal quarter. Fully diluted earnings per share has been calculated as net earnings plus after tax imputed earnings on the cash which would have been received on the exercise of options, divided by the daily weighted average number of Common Shares and common share equivalents outstanding during the period. (Page 12) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) Under the United States Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards No. 128 ("SFAS 128") issued in February 1997, the method for calculating U.S. GAAP primary earnings per share has been replaced by basic earnings per share, the calculation of which, given the Company's capital structure, is the same as the calculation of basic earnings per share under Canadian GAAP. The calculation of fully diluted earnings per share under U.S. GAAP has been replaced by diluted earnings per share, the calculation of which uses the treasury stock method, and, given the Company's capital structure, is the same as the former calculation of primary earnings per share under U.S. GAAP. The Company implemented SFAS 128 in the third quarter of fiscal 1998 and restated all prior period earnings per share, which did not result in material changes to earnings per share as previously disclosed. Earnings per share in U.S. dollars is disclosed for the convenience of the reader. The exchange rates used for translation are based on the daily average exchange rate of a Canadian dollar for U.S. dollars as reported by the Federal Reserve Bank of New York. The calculation of earnings per share under U.S. GAAP is as follows.
Fiscal quarters ended Three fiscal quarters ended --------------------- --------------------------- February 1, January 26, February 1, January 26, 1998 1997 1998 1997 ----------- ----------- ----------- ----------- Net earnings (loss), U.S. GAAP (Note 3) $(170,664) $(33,909) $(48,317) $ 89,673 ======== ======= ======= ======= Earnings (loss) per share Basic (97)c (20)c (28)c 53c ==== ==== ==== == Diluted (97)c (20)c (28)c 51c ==== ==== ==== == Earnings (loss) per share - in U.S. dollars Basic (68)c (15)c (20)c 39c ==== ==== ==== == Diluted (68)c (15)c (20)c 38c ==== ==== ==== == Weighted average number of shares Basic 175,376 170,941 174,338 170,140 ======= ======= ======= ======= Diluted 175,376 170,941 174,338 174,807 ======= ======= ======= =======
(Page 13) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 13. Litigation Lucent Technologies Inc. ("Lucent Technologies") filed a complaint 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 (asynchronous transfer mode) switch products infringe certain United States patent rights claimed by Lucent Technologies, and requests actual and trebled damages in an unspecified amount. The Company has filed an answer 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. 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. 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. 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 14) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 14. New Accounting Pronouncements In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income"("SFAS 130") and Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). The Canadian Institute of Chartered Accountants has established disclosure requirements consistent with SFAS 131. The Company intends to report the information required under the new accounting pronouncements for its fiscal year ending April 30, 1998. (Page 15) Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain parts of the following discussion and analysis may be forward-looking statements that involve a number of risks and uncertainties. As a consequence, actual results might differ materially from results forecast or suggested in any forward-looking statements. See "Market for Registrant's Common Equity and Related Stockholder Matters -- Cautionary Statement Regarding Forward-Looking Information" in the Company's Annual Report on Form 10-K, which is incorporated by reference herein. During the 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 have been consolidated into the operating results of the Company commencing in the fourth fiscal quarter ended April 30, 1997. RESULTS OF OPERATIONS Sales increased in the third quarter of fiscal 1998 ended February 1, 1998 by 8% compared to sales in the third quarter of fiscal 1997 ended January 26, 1997 and sales for the first nine months of $1,225,427,000 increased by 31% over sales for the first nine months of fiscal 1997. The increase in sales was more than offset by an increase in operating expenses and a decline in the gross margin as a percentage of sales, resulting in a net loss of $144,283,000 and pro forma net earnings, excluding the effect of one time charges and gains, of $17,129,000 for the third quarter of fiscal 1998. One time charges and gains, before income taxes, recorded in the third quarter of fiscal 1998 were: i) restructuring costs for the local area networks ("LAN") business of $181,444,000; ii) the amortization of purchased research and development in process of $26,381,000 related to the acquisition of RadNet Ltd.; and iii) the gain on the sale of the Company's investment in Broadband Networks Inc. ("BNI") of $47,960,000. The pro forma net earnings of $17,129,000 represent a decrease of 73% from net earnings of $63,031,000 for the third quarter of fiscal 1997. The pro forma net earnings of $139,476,000 for the first nine months of fiscal 1998, excluding one time charges and gains, represent a 25% decline from net earnings for the first nine months of fiscal 1997. Sales for the third quarter of fiscal 1998 of $358,520,000 declined 17% relative to the sales of $432,169,000 for the second quarter of fiscal 1998. Pro forma net earnings for the third quarter of fiscal 1998 of $17,129,000 decreased compared to net earnings of $57,993,000 for the second quarter of fiscal 1998 due to the decline in sales and a decline in the gross margin as a percentage of sales. The declines in sales and net earnings in the third quarter of fiscal 1998 compared to the second quarter of fiscal 1998 were principally the result of revenue declines associated with the Company's circuit switched networking products. Sales
Fiscal Quarter Ended Three Fiscal Quarters Ended ---------------------------- ------------------------------ Feb 1, Jan 26, % Feb. 1, Jan 26, % 1998 1997 Increase 1998 1997 Increase -------- -------- -------- ---------- -------- -------- (Canadian dollars in thousands) Sales $358,520 $333,267 8% $1,225,427 $935,386 31% ======= ======= ========= =======
(Page 16) Growth in sales in the third quarter and first nine months of fiscal 1998 compared to the third quarter and first nine months of fiscal 1997 was due to an increase in sales of products based on packet technologies. The proportion of product sales from products based on packet technologies was over 60% in the third quarter and just below 60% for the first nine months of fiscal 1998 compared to approximately 40% in the third quarter and first nine months of fiscal 1997. The growth in sales compared to the prior fiscal year was derived from both wide area network and local area network products. Product line enhancements and new products introduced for wide area network applications over the past two years resulted in sales growth in the third quarter and first nine months of fiscal 1998 as compared to the third quarter and first nine months of fiscal 1997, predominantly through increased acceptance and demand for the Company's asynchronous transfer mode ("ATM") products. The acquisition of UB Networks in the latter part of fiscal 1997 resulted in sales growth for packet based products into local area networks in the third quarter and first nine months of fiscal 1998 as compared to the third quarter and first nine months of fiscal 1997 prior to the acquisition. Sales of circuit switched networking products in the third quarter of fiscal 1998 declined 31% relative to sales in the third quarter of fiscal 1997 and sales for the first nine months of fiscal 1998 declined 13% relative to sales in the comparable period of fiscal 1997. Sales of these networking products have been and are expected to be subject to potential declines and variability as customers increasingly adopt packet technologies, not only in North America but in the rest of the world as well. The Company is subject to a greater degree of variation in quarterly sales of circuit switched networking products as the majority of sales of these products continues to be derived from less mature, rapidly developing markets outside of North America. The Company expects the proportion of sales derived from products based on packet technologies to continue 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 sales increase in the third quarter of fiscal 1998 relative to the third quarter of fiscal 1997 is the result of sales increases in North America and in Asia, which exceeded sales declines in Europe and Latin America caused by variability in demand for circuit switched products in Europe and purchasing constraints of certain large carriers in Latin America. The sales increase in the first nine months of fiscal 1998 relative to the same period in fiscal 1997 reflect growth in all of the Company's business regions. Deliveries to original equipment manufacturers (OEMs) for carrier customers and deliveries under certain large contracts with carriers contributed significantly to sales throughout the first nine months of fiscal 1998 and the first nine months of fiscal 1997. Sales to Siemens A.G. and subsidiaries, generally under OEM arrangements for resale to end users, were 16% of total sales for the third quarter of fiscal 1998 and 19% of sales for the first nine months of fiscal 1998, compared to 19% of total sales for the third quarter and the first nine months of 1997. Sales to carriers of central office applications for tariffed services, for use within their internal networks and for resale to end users, represented 70% of total sales in both the third quarter of fiscal 1998 and the third quarter of fiscal 1997 and accounted for 68% of total sales for the first nine months of fiscal 1998 compared to 69% for the first nine months of fiscal 1997. Sales for the third quarter of fiscal 1998 of $358,520,000 represented a 17% decline from sales of $432,169,000 recorded in the second quarter of fiscal 1998. The decline was a reflection of a decrease in sales of the Company's circuit switched networking products in Europe, Latin America and Asia. The decline in Europe was principally related to postponements of orders by carrier customers, while the decline in Latin America was principally related to capital equipment purchase constraints implemented by carriers in Brazil. The decline in circuit (Page 17) switched networking product sales in Asia was related to delays in purchases from carriers in certain countries due to economic and foreign exchange rate issues, and also related to quarter to quarter variability in business in China. 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 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 the third quarter and first nine months of fiscal 1998, the decrease in the value of the Canadian dollar against the Pound Sterling and the U.S. dollar, relative to exchange rates prevailing in the third quarter and first nine months of fiscal 1997, resulted in no material variance in reported sales, gross margin or income from operations. Cost of Sales and Gross Margin
Fiscal Quarter Ended Three Fiscal Quarters Ended -------------------- ------------------------------ Feb 1, Jan 26, Feb. 1, Jan 26, 1998 1997 1998 1997 -------- -------- ---------- -------- (Canadian dollars in thousands) Gross margin $213,707 $213,261 $760,083 $602,452 ======= ======= ======= ======= As % of sales 60% 64% 62% 64%
Cost of sales consists of manufacturing costs, warranty expense and costs associated with the provision of services. The gross margin as a percentage of sales declined in the third quarter and first nine months of fiscal 1998 relative to the third quarter and first nine months of fiscal 1997 primarily as a result of gross margins earned on revenues of the former UB Networks, which have been below the average gross margins earned on the Company's other products, and the decline in revenues from circuit switched networking products, which carry gross margins above the average gross margins earned on the Company's other products. The gross margin expressed as a percentage of sales of 60% in the third quarter of fiscal 1998 declined compared to the gross margin of 63% in the second quarter of fiscal 1998. The decline was primarily the result of a decline in the proportion of total revenues derived from sales of products earning higher gross margins expressed as a percentage of sales, such as circuit switched networking products. Revenues generating gross margins below the Company's average gross margins, such as service revenues, increased as a proportion of overall revenues. (Page 18) Selling, General and Administrative Expenses
Fiscal Quarter Ended Three Fiscal Quarters Ended ------------------------------- ------------------------------- Feb 1, Jan 26, % Feb 1, Jan 26, % 1998 1997 Increase 1998 1997 Increase --------- --------- --------- --------- --------- --------- (Canadian dollars in thousands) Sales $120,082 $81,986 46% $367,341 $226,382 62% ======= ====== ======= ======= As % of sales 33% 25% 30% 24%
Selling, general and administrative expenses increased in the third quarter and first nine months of fiscal 1998 relative to the third quarter and first nine months of fiscal 1997 primarily as a result of increases in sales and service personnel. The majority of the increase in personnel was the result of acquisitions made to enhance the Company's business and diversify its marketing and distribution channels. Incremental hiring and spending was directed at programs to strengthen its sales and support infrastructure throughout the world and to market new products. The increase in selling, general and administrative expenses as a percentage of sales in the third quarter and first nine months of fiscal 1998 over the third quarter and first nine months of fiscal 1997 is the reflection of the higher cost structure of companies acquired during fiscal 1997, most significantly the former UB Networks, as well as the result of the sequential sales declines in the third quarter from the second quarter and the second quarter from the first quarter of fiscal 1998, and from the first quarter of fiscal 1998 from the fourth quarter of fiscal 1997. Selling, general and administrative expenses decreased in the third quarter relative to the second quarter of fiscal 1998 as a result of reductions in work force and in facilities costs associated with the Company's restructuring of its LAN business. (Page 19) Research and Development
Fiscal Quarter Ended Three Fiscal Quarters Ended ------------------------------ ---------------------------------- Feb 1, Jan 26, % Feb 1, Jan 26, % 1998 1997 Increase 1998 1997 Increase ------- ------- -------- -------- -------- -------- (Canadian dollars in thousands) Gross research and development expenditures $77,519 $48,231 61% $225,815 $131,602 72% Investment tax credits (8,969) (6,600) 36% (25,969) (18,400) 41% Customer, government and other funding (886) (2,369) (63%) (3,823) (6,796) (44%) Net deferral (amortization) of software development costs (1,356) (951) 43% (3,863) (2,693) 43% ------- ------- -------- -------- Net research and development expenses $66,308 $38,311 73% $192,160 $103,713 85% ======= ======= ======== ======== Gross expenditures as a % of sales 22% 14% 18% 14% Recoveries as a % of gross expenditures 14% 21% 15% 21% Net expenses as a % of sales 18% 11% 16% 11%
Research and development expenditures consist primarily of software and hardware engineering personnel expenses, costs associated with equipment and facilities, and subcontracted research and development costs. The increased gross research and development expenditures in the third quarter of fiscal 1998 compared to the third quarter of fiscal 1997 and in the first nine months of fiscal 1998 relative to the first nine months of fiscal 1997 reflect spending on new networking products, features and interfaces, particularly for ATM platforms in carrier, carrier access and enterprise network applications and network and services management software. The majority of the increase was the result of increased engineering personnel. Recoveries decreased as a percentage of gross expenditures in the third quarter and first nine months of fiscal 1998 compared to the third quarter and first nine months of fiscal 1997 due to declines in investment tax credits as a proportion of gross research and development expenditures and due to declines in customer, government and other funding. Based on Management's estimates of the proportion of fiscal 1998 gross research and development expenditures to be incurred in Canada and therefore eligible for investment tax credits, and current levels of committed funding, Management expects the level of recoveries as a percentage of gross research and development expenditures in fiscal 1998 to continue to be lower than in fiscal 1997. The markets for the Company's products are characterized by continuing technological change. The Company has determined to increase the pace of its product development in fiscal 1998 to address the requirements of carriers as they invest in new infrastructures to meet the challenges of increased competition and growing demand for new communications services. As a result, Management anticipates that net research and development expenses, expressed as a percentage of sales, in fiscal 1998 will be higher than in fiscal 1997. (Page 20) Restructuring Costs In November 1997, the Company decided to restructure its activities related to its LAN business. The restructuring plan involves the formation of a strategic alliance with a company strongly positioned in the LAN business, and the reduction of the Company's direct participation, and related costs, in the LAN business. The Company announced its alliance with 3Com Corporation in January 1998. In repositioning the way in which the Company addresses the LAN market, the restructuring plan created impairment losses on assets associated with the Company's LAN business and liabilities associated with restructuring activities. Restructuring costs of $181,444,000 recorded in the third quarter of fiscal 1998 comprise the following: Asset impairment losses Accounts receivable $ 12,732 Inventory 54,851 Property, plant and equipment 11,936 Goodwill - UB Networks 18,775 Goodwill - Ouest Standard Telematique 38,350 Other current and non-current assets 5,162 ------- 141,806 ======= Provision for restructuring Reduction in work force 20,796 Reduction in facilities 4,753 Discontinued activities 13,577 Other restructuring costs 512 ------- 39,638 ------- Restructuring costs $181,444 ======= Asset impairment losses were recorded to the extent the net book value (including related reserves) exceeded the fair value of any assets associated with the Company's restructuring plan. The fair value was based on the estimated net realizable value of the underlying assets affected by the restructuring. The full net book value of goodwill associated with the acquisitions of UB Networks (acquired in January 1997) and Ouest Standard Telematique (acquired in August 1996) were written off as restructuring costs. Both acquisitions related to the Company increasing its direct presence and participation in the LAN business. The provision for restructuring comprises termination benefits for approximately 430 employees, a reduction in facilities costs, and a provision for discontinued activities, including costs associated with fulfilling prior commitments related to certain discontinued product lines and activities. Amortization of Research and Development In Process In November 1997 the Company acquired a 49.9% equity interest in RadNet Ltd., an Israeli developer and manufacturer of access switches for asynchronous transfer mode ("ATM") networks, in the amount of $53,676,000. The majority of the purchase price ($52,762,000) has been allocated to purchased research and development in process. Under accounting principles generally accepted in Canada, the purchased research and development in process is being amortized on a straight line basis over its estimated useful life of six months. Accordingly, the Company recorded amortization of $26,381,000 in the third quarter of fiscal 1998 and will amortize the remaining $26,381,000 in the fourth quarter of fiscal 1998 ending April 30, 1998. (Page 21) Interest and Other Expenses
Fiscal Quarter Ended Three Fiscal Quarters Ended ----------------------------- --------------------------------- Feb 1, Jan 26, % Feb 1, Jan 26, % 1998 1997 Increase 1998 1997 Increase ------- ------- -------- ------- ------- -------- (Canadian dollars in thousands) Interest income $ 2,067 $ 5,530 (63%) $ 7,881 $16,322 (52%) Interest expense on long term obligations (625) (933) (33%) (1,116) (1,191) (6%) Other expenses (1,958) (2,398) (18%) (7,100) (7,277) (2%)
Interest income for the third quarter of fiscal 1998 and the first nine months of fiscal 1998 decreased compared to the third quarter of fiscal 1997 and the first nine months of fiscal 1997, due principally to a decline in the cash position maintained, and, to a lesser extent, to a decline in interest rates earned on investments. Interest expense on long term obligations decreased in the third quarter of fiscal 1998 and the first nine months of fiscal 1998 due to scheduled repayments against principal balances and refinancings of certain long term obligations in Latin America. Other expenses represented less than 1% of sales in the third quarter and first nine months of both fiscal 1998 and fiscal 1997. Gain on Sale of Investment In January 1998 the Company sold its minority interest in Broadband Networks Inc. ("BNI"), a Canadian wireless technology company, to Northern Telecom Limited ("Nortel") for proceeds of $66,672,000. The proceeds received included cash of $23,775,000 and Nortel shares valued at $42,897,000. The Company recognized a gain in the third quarter ended February 1, 1998 of $47,960,000, representing the excess of the value of the consideration received over the cost to the Company of its investment in the BNI shares exchanged. Income Taxes Fiscal Quarter Ended Three Fiscal Quarters Ended -------------------- --------------------------- Feb 1, Jan 26, Feb 1, Jan 26, 1998 1997 1998 1997 ------ ------- ------ ------- Income tax rate (7%) 31% 151% 32% Excluding one time charges and gains, the pro forma effective tax rate was 30% for the third quarter and first nine months of fiscal 1998. The composite rates of income tax for the third quarter and first nine months of fiscal 1998 and the third quarter and first nine months of fiscal 1997 were reduced from the statutory rate primarily as a result of the application of certain deductions related to manufacturing and processing activities and to research and development expenditures in Canada. Future changes in the composite rate of income tax will be primarily due to the relative profitability of operations and the national tax policies in each of the various countries in which the Company operates. Management believes that the composite rate of income tax will remain lower than the statutory rate through the application of deductions related to manufacturing and processing activities and research and development expenditures in Canada as well as other tax planning measures undertaken by the Company. (Page 22) Non-Controlling Interest The non-controlling interests' share of subsidiary net earnings of $1,762,000 in the third quarter fiscal 1998 and $1,503,000 for the first nine months of fiscal 1998 relate principally to the net earnings of Transistemas S.A., an Argentine distributor and systems integrator of networking products. The non-controlling interests' share of subsidiary net earnings of $2,632,000 in the third quarter and $4,625,000 in the first nine months of fiscal 1997 were derived from the activities of Transistemas S.A., Coasin Chile S.A., a Chilean systems integrator of networking products and Advanced Computer Communications ("ACC"), a manufacturer of local area network bridges and routers. The Company has a 51% equity interest in both Coasin Chile S.A. and Transistemas S.A and a 65% interest in ACC. Net Earnings (Loss) Sales increased in the third quarter of fiscal 1998 ended February 1, 1998 by 8% compared to sales in the third quarter of fiscal 1997 ended January 26, 1997 and increased by 31% in the first nine months of fiscal 1998 compared to the first nine months of fiscal 1997. The increase in sales was more than offset by an increase in operating expenses and a decline in the gross margin as a percentage of sales, resulting in a net loss of $144,283,000 for the third quarter of fiscal 1998 and $21,936,000 for the first nine months of fiscal 1998. One time charges and gains, before income taxes, recorded in the third quarter of fiscal 1998 were: i) the restructuring costs of $181,444,000; ii) the amortization of purchased research and development in process of $26,381,000; and iii) the gain on the sale of the Company's investment in Broadband Networks Inc. of $47,960,000. Pro forma net earnings, excluding the effect of one time charges and gains, of $17,129,000 for the third quarter of fiscal 1998 and $139,476,000 for the first nine months of fiscal 1998 represent declines of 73% and 25% from net earnings for the third quarter and the first nine months of fiscal 1997, respectively. Pro forma net earnings, excluding one time charges and gains, for the third quarter of fiscal 1998 of $17,129,000 decreased by 70% compared to net earnings of $57,993,000 for the second quarter of fiscal 1998 due to the decline in sales and a decline in the gross margin as a percentage of sales in the third quarter of fiscal 1998 compared to the second quarter of fiscal 1998, principally as a result of revenue declines associated with the Company's circuit switched networking products. Reconciliation of Financial Results to United States Accounting Principles The Consolidated Financial Statements of the Company have been prepared in accordance with accounting principles generally accepted in Canada for interim financial information. These accounting principles are also generally accepted in the United States ("U.S. GAAP") in all material respects except for the write off of purchased research and development in process, as disclosed in Note 3 to the Consolidated Financial Statements, 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 6 to the Consolidated Financial Statements, and the method of calculation of earnings per share, as disclosed in Note 12 to the Consolidated Financial Statements. (Page 23) Financial Condition During the first nine months of fiscal 1998 ended February 1, 1998 working capital increased from $638,392,000 to $654,384,000. As at February 1, 1998 the Company had $234,133,000 of cash and cash equivalents, which decreased by $99,771,000 during the first nine months of fiscal 1998. Pro forma net earnings, excluding one time charges and gains, of $139,476,000 generated $66,022,000 of cash from operations and cash from stock option exercises totaled $83,787,000. These cash inflows were more than offset by additions to property, plant and equipment of $205,134,000 and the acquisition of subsidiaries, including RadNet, of $58,936,000. Two principal components of the Company's working capital are accounts receivable and inventory. Accounts receivable as a proportion of revenue increased during the third quarter of fiscal 1998 compared to the Company's historical levels. This increase was caused by a sequential decline in revenue in the third quarter of fiscal 1998 resulting in an increase in the proportion of the accounts receivable balance represented by sales with extended credit terms. The Company schedules some production of its products based on forecasts of sales, which are difficult to predict. Orders in the first three quarters of fiscal 1998 did not match forecasts as to quantities and product mix, contributing to an increase in inventory of $49,343,000. 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. In November 1997 the Company acquired a 49.9% equity interest in RadNet Ltd., an Israeli developer and manufacturer of access switches for asynchronous transfer mode ("ATM") networks, by the purchase of shares for cash consideration of $53,676,000. The acquisition has been accounted for under the purchase method of accounting. The purchase price includes professional fees and other direct costs of the acquisition, and excludes contingent adjustments to the purchase price related to the achievement of certain research and development milestones over the next year. The contingent adjustments could increase the Company's purchase price by as much as US$750,000 or reduce the purchase price by as much as US$1,000,000. In January 1998 the Company entered into and received $50,000,000 under a five year loan agreement. The loan agreement includes a term loan portion and a demand loan portion, both due January 2003. The Company's obligation under the term loan can be satisfied through the delivery of 545,976 Nortel shares, or the cash equivalent of the current market value of the Nortel shares at such time, or combination thereof. The Nortel shares not subject to resale restrictions that the Company received in exchange for its shares in Broadband Networks Inc. upon disposition of the Company's minority interest have been pledged as security for the term loan. Capital expenditures for fiscal 1998 will exceed those of fiscal 1997 as the Company has invested 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 may also increase its current investments in subsidiaries and associated companies. The Company intends to fund the increased capital expenditures and increased investments with existing cash and cash expected to be generated from operations during fiscal 1998, supplemented as appropriate by the issuance of shares or debt. In addition, the Company may use a portion of its cash resources to extend or enhance its business and diversify its marketing and distribution channels through acquisitions of or investments in businesses, products or technologies or through the formation of strategic partnerships with other companies. Management believes that the Company's liquidity in the form of existing cash resources, its credit facilities, as well as cash generated from operations and financing activities, will prove adequate to meet its operating and capital expenditure requirements through the end of fiscal 1998 and into the foreseeable future. (Page 24) Year 2000 Over a year ago, the Company commenced a program to address potential problems associated the Company's compliance with what is commonly known as the "Year 2000 issue". The Company's program entails a comprehensive review of supporting information systems, product lines, and the Company's supply chain system to ensure preparedness for the Year 2000 date change. Management believes the Company's plan will result in systems and products that accommodate the date change and that the costs of carrying out the plan will not have a significant impact on the results of operations. Additional information regarding product line compliance with Year 2000 issues is available on the Company's worldwide web site at http://www.newbridge.com. (Page 25) PART II. OTHER INFORMATION Item 1. Legal Proceedings 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 (asynchronous transfer mode) switch products infringe certain United States patent rights claimed by Lucent Technologies, and requests actual and trebled damages in an unspecified amount. The Company has filed an answer 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 5. Other Information The "Cautionary Statement Regarding Forward-Looking Information" contained in "Market for Registrant's Common Equity and Related Stockholder Matters" in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1997 is incorporated herein by reference and made a part hereof. (Page 26) Item 6. Exhibits and Reports on Form 8-K a) Exhibits Exhibit 10.8 Credit Facility dated December 19, 1997 between Newbridge Networks Corporation and Royal Bank of Canada. Exhibit 10.9 Loan Facility dated January 20, 1998 between Newbridge Networks Corporation and Citibank Canada. Exhibit 11.1 Computation of earnings per share under accounting principles generally accepted in Canada. Exhibit 11.2 Computation of earnings per share under accounting principles generally accepted in the United States. Exhibit 27 Financial data schedule (Page 27) SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NEWBRIDGE NETWORKS CORPORATION (Registrant) Date: March 16, 1998 By: /s/ Terence H. Matthews ----------------------- Terence H. Matthews, Chairman of the Board of Directors and Chief Executive Officer Date: March 16, 1998 By: /s/ Kenneth B. Wigglesworth --------------------------- Kenneth B. Wigglesworth, Vice President, Chief Financial Officer (Page 28) EX-10.8 2 EXHIBIT 10.8 EXHIBIT 10.8 ROYAL BANK L. J. (Jim) Blattman Royal Bank of Canada Senior Manager 90 Sparks Street Technology Banking Group Ottawa, Ontario K1P 5T6 Tel. (613) 564-4898 Fax (613) 564-2865 jim.blattman@royalbank.com December 19, 1997 Private & Confidential - ---------------------- Newbridge Networks Corporation 600 March Road Kanata, Ontario K2K 2E6 Attention: Mr. Douglas K. McCarthy Vice-President, Finance & Treasurer ----------------------- Dear Sirs: Confirming recent discussions, we are pleased to offer the Credit Facility described below, subject to the following terms and conditions and superseding all previous facilities: 1. Definitions: ------------ The definitions attached hereto in Schedule "A" are incorporated in this agreement by reference as if set out in full herein. 2. Borrower: --------- Newbridge Networks Corporation ("NNC" or the "Borrower"). 3. Lender: ------- Royal Bank of Canada (the "Bank"), through its Branch at 90 Sparks Street, Ottawa, Ontario (the "Branch of Account"). 4. Credit Facility: ---------------- The Credit Facility is available in the following segments in Canadian Dollars, or the Equivalent Amount in US Dollars if US Dollars is stipulated: (1) (a) Royal Bank Prime based loans ("RBP Loans"). (b) Unhedged Royal Bank US Base Rate based loans in US Dollars ("RBUSBR Loans"). December 19, 1997 Newbridge Networks Corporation - ------------------------------ (c) Bankers' Acceptances ("B/A's"). (d) Unhedged US Eurodollar Loans ("Libor Loans"). (e) Standby Letters of Credit and/or Guarantee in Canadian and/or US Dollars ("L/G's"). (f) Recourse facilities with Royal Bank Export Finance Co. Ltd. (REFCO), in Canadian and/or US Dollars. (2) Foreign Exchange Forward Contracts ("FEF Contracts") in US Dollars or the Equivalent Amount in other foreign currencies. (collectively the "Borrowings"). 5. Amounts: -------- (1) $ 100,000,000 (2) $ 160,000,000 US 6. Purpose: -------- (1) Finance current operating expenditures of NNC. (2) To accommodate foreign exchange hedging activity. 7. Repayment: ---------- Notwithstanding compliance with the Covenants section contained herein, Borrowings are repayable on demand. Upon such demand, the Borrower shall pay to the Bank all borrowings under this Agreement, including the face amount of all B/A's and L/G's which are unmatured or unexpired and, with respect to FEF Contracts, an amount, determined by the Bank in its sole discretion and notified to the Borrower, which amounts shall be held by the Bank as collateral security for the Borrowers obligations to reimburse the Bank for any payment made by the Bank in respect of such B/A's, L/G's or FEF Contracts. The Bank may enforce its rights to realize upon its security and retain sufficient funds to cover amounts outstanding by way of these instruments. 8. Availability: ------------- (1) The Borrower may borrow, repay, convert and reborrow up to the amount of this operating facility, provided that: (a) Libor Loans and B/A's may not be prepaid or converted prior to their maturity; (b) B/A's shall be in a minimum amount of $500,000 and multiples of $100,000 thereafter and shall have a term of not less than 30 days and not more than 360 days; (c) Libor Loans shall be for not less than US $1,000,000 and shall have a term of not less than 30 days and not more than 360 days, subject to the availability of US Dollars in the London Interbank Market for the terms selected on terms satisfactory to the Bank; (d) The notice provisions set out in Schedule "B" are complied with; (e) L/G's will be issued for periods not exceeding one year, except with the agreement of the Bank; December 19, 1997 Newbridge Networks Corporation - ------------------------------ (f) REFCO facilities are made available at the option of the Bank; (2) (a) FEF Contracts may not have maturities which exceed two years; (b) The amount of Borrowings ascribed to such contracts shall be determined by the Bank in its sole discretion and notified to the Borrower; (c) This segment of the Credit Facility is made available at the discretion of the Bank and may be withdrawn or amended at any time, without notice. 9. Interest Rates & Fees: ---------------------- (1) (a) Royal Bank Prime ("RBP"). (b) Royal Bank US Base Rate ("RBUSBR"). (c) Stamping fee 1/2%. (d) Libor ("Libor") plus 1/2%. (e) Issuance fee of 3/4%. (f) Fees will be advised on a transaction by transaction basis. (2) Not applicable. 10. Payment of Interest & Fees: --------------------------- RBP Loans and RBUSBR Loans: --------------------------- Interest on these loans shall be computed on the daily principal amounts outstanding, at the aforementioned rates, based on the actual number of days elapsed divided by three hundred and sixty five (365), and shall be payable in arrears on the 25th of each month. B/A's: ------ Upon the Bank accepting B/A's hereunder, the Borrower shall forthwith pay to the Bank a stamping fee of 1/2%, calculated on the face amount of each accepted B/A and on the basis of the number of days in the term of such B/A's and based on a year of 365 days or 366 days, as the case may be. Libor Loans: ------------ Interest on Libor Loans shall be payable, at the aforementioned rates, on each Libor Interest Date as defined in Schedule "A" attached, based on a year of 360 days. L/G's: ------ The Borrower shall pay fees at the rates set forth above in advance at the time of issue of the L/G. This fee shall be based upon the amount of the instrument issued and shall be calculated on the number of days that it will be outstanding. The yearly rates of interest to which the rates determined in accordance with the Payment of Interest and Fees section of this agreement are equivalent, are the rates so determined multiplied by the actual number of days in the calendar year and divided by three hundred and sixty-five (365) or in the case of LIBOR Loans, three hundred and sixty (360). December 19, 1997 Newbridge Networks Corporation - ------------------------------ 11. General Indemnity: ------------------ The Borrower shall reimburse the Bank for any additional costs or reduction of income arising as a result of the imposition of or increase in taxes (other than on the overall net income of the Bank) on amounts paid by the Borrower to the Bank, an imposition of or increase in reserve requirements, or the imposition of any other condition affecting the Credit Facility by any government governmental agency or body, tribunal or regulatory authority. 12. Collateral Security: -------------------- Nil. 13. Conditions Precedent: --------------------- The obligation of the Bank to make available the Borrowings to the Borrower is subject to and conditional upon: (1) Receipt by the Bank of a copy of this Agreement duly accepted by the Borrower. 14. Evidence of Indebtedness: ------------------------- The Bank shall open and maintain at the Branch of Account accounts and records evidencing the Borrowings made available to the Borrower by the Bank under this Agreement. The Bank shall record the principal amount of such Borrowings, the payment of principal and interest on account of the loans, and all other amounts becoming due to the Bank under this agreement. The Bank's accounts and records constitute, in the absence of manifest error, prima facie evidence of the indebtedness of the Borrower to the Bank ----------- pursuant to this agreement. The Borrower authorizes and directs the Bank to automatically debit, by mechanical, electronic or manual means, any bank account of the Borrower for all amounts payable under this agreement, including but not limited to, the repayment of principal and the payment of interest, fees and all charges for the keeping of such bank accounts. 15. Representations and Warranties: ------------------------------- The Borrower represents and warrants to the Bank that: (a) it is a corporation validly continued and subsisting under the laws of Canada, and that it is duly registered or qualified to carry on business in all jurisdictions where the character of the properties owned by it or the nature of its business transacted makes such registration or qualification necessary; (b) the execution and delivery of this agreement has been duly authorized by all necessary actions and does not violate any law or any provision of its constating documents or by-laws or any unanimous shareholders' agreement to which it is subject, or result in the creation of any encumbrance on its properties and assets except as contemplated hereunder; (c) The Borrower is in compliance with all applicable statutes, regulations, orders and by-laws enacted or adopted for the protection and conservation of the natural environment; December 19, 1997 Newbridge Networks Corporation - ------------------------------ (d) The Borrower has obtained all certificates, approvals, permits, consents, orders and directions required concerning the installation or operation of any machinery, equipment or facility constituting assets of the Borrower, or required concerning any land of the Borrower, or required concerning any structure, activity or facility on or in any land of the Borrower, and the Borrower is not aware of any circumstance which might give rise to the revocation of any such certificates, approvals, permits, consents, orders and directions or the implementation of further orders or directions relating to the above which might effect the land or the business of the Borrower which the Borrower has not disclosed fully in writing to the Bank; (e) There are no claims, either oral or written, no actions, prosecutions, charges, hearings or other proceedings of any kind in any court or tribunal and no notice of any such proceedings and no complaints by any person which relate to any discharge, deposit, escape or release from the land of the Borrower of a contaminant into the natural environment, and there are no circumstances of which the Borrower is aware which might give rise to any such proceedings or complaints which the Borrower has not disclosed fully in writing to the Bank. 16. Non-Merger: ----------- The provisions of this Agreement shall not merge with any security given by the Borrower to the Bank, but shall continue in full force for the benefit of the parties hereto. 17. Covenants: ---------- The Borrower agrees: (a) To pay all sums of money when due under this agreement; (b) To give the Bank prompt notice of any breach of the within Covenants or Conditions or any event which, with notice or lapse of time or both, would constitute such a breach. (c) To provide the Bank with annual audited consolidated financial statements and unaudited Financial Reports within 90 days of each fiscal year-end; (d) To provide the Bank with annual proforma, fully consolidated Financial Reports, prepared in a quarterly format, and such other reports as the Bank may reasonably request; (e) To provide the Bank, within 45 days of each fiscal quarter end, with a Certificate from its Chief Financial Officer or any Vice President, Finance, substantially in the form attached as Schedule "C" together with: (a) a copy of Form 10-Q filed with the United States Securities Exchange Commission; and (b) a copy of the Treasurer's report; (f) Not to dispose of shares of any Material Subsidiaries; (g) Not to grant, create, assume or suffer to exist any mortgage, charge, lien, pledge, security interest, including a Purchase Money Security Interest, or other encumbrance affecting the current assets of NNC or its Material Subsidiaries except as permitted herein; (h) Not to, directly or indirectly, guarantee or otherwise provide for, on a direct or indirect or contingent basis, the payment of any monies or performance of any obligations by any third party, except in the case of a subsidiary or affiliate of the company; December 19, 1997 Newbridge Networks Corporation - ------------------------------ (i) To insure and to keep insured all properties customarily insured by companies carrying on a similar business; (j) To file all material tax returns which are or will be required to be filed, to pay or make provision for payment of all material taxes (including interest and penalties) and other Potential Preferred Claims which are or will become due and payable and to provide adequate reserves for the payment of any tax, the payment of which is being contested; (k) To comply with all applicable environmental laws and regulations; to advise the Bank promptly of any breach of any environmental regulations or licenses or any control orders, work orders, stop orders, action requests or violation notices received concerning any of the Borrower's property; to comply with any such requests or notices, to diligently clean up any spills; and to hold the Bank harmless for any costs or expenses which the Bank incurs for any environment-related liabilities existent now or in the future with respect to the Borrower's property; and (l) To provide the Bank and its agents, nominees, and consultants with the right to enter the premises of the Borrower from time to time, and to carry out such environmental reviews as the Bank in its sole discretion deems advisable and in that connection to make good faith enquiries with government agencies and to examine the records, books, assets, affairs and business operations of the Borrower. 18. Expenses: -------- The Borrower agrees to pay all of the Bank's reasonable costs incurred from time to time in the preparation, negotiation and execution of the collateral security, and any reasonable costs incurred in the operation or enforcement of this agreement or any other agreement entered into pursuant to this agreement. 19. GAAP: ---- Unless otherwise provided, all accounting terms used in this agreement shall be interpreted in accordance with Canadian Generally Accepted Accounting Principles from time to time. 20. Severability: ------------- If any provision of this agreement is or becomes prohibited or unenforceable in any jurisdiction, such prohibition or unenforceability shall not invalidate or render unenforceable the provision concerned in any other jurisdiction nor shall it invalidate, affect or impair any of the remaining provisions. 21. Governing Law: -------------- This agreement shall be construed in accordance with and governed by the laws of the Province of Ontario and of Canada applicable therein. 22. Acceptance: ----------- This offer expires if not accepted by January 16, 1998, unless extended in writing by the Bank. December 19, 1997 Newbridge Networks Corporation - ------------------------------ If this agreement is acceptable, kindly sign and return the attached copy to the attention of the writer. Yours truly, Original signed by L.J. Blattman We acknowledge and accept the within terms and conditions. NEWBRIDGE NETWORKS CORPORATION Per: /s/ Douglas K. McCarthy ------------------------------------ VP Finance and Treasurer Per: /s/ Kenneth B. Wigglesworth ------------------------------------ VP Finance, CFO Date: December 23/97 ------------------------------------ SCHEDULE "A" Schedule "A" to the Letter Agreement dated as of the 19th day of December 1997, between Newbridge Networks Corporation as the Borrower and Royal Bank of Canada as the Bank. For purposes of the foregoing agreement, the following terms and phrases shall have the following meanings: "Banking Day" means a Business Day on which the Bank's Main Branch in London, England, is open for business. "B/A's" mean bills of exchange drawn on the Bank by and payable to the order of the Borrower, which have been accepted by the Bank. "Business Day" means a day on which the Branch of Account is open for business. "Canadian Dollars" and "Cdn$" means lawful money of Canada. "Equivalent Amount" determines the amount of availability only and means on any date, the amount of Canadian Dollars required to convert from Canadian Dollars to: Pounds Sterling at the rate of $2.00 Canadian Dollars for (Pounds) 1.00 Pounds Sterling; US Dollars at the rate of $1.35 Canadian Dollars for $1.00 US. The Equivalent Amount will be amended by the Bank from time to time to reflect changes in the rate of exchange and such amendments will be advised to the Borrower in writing. "Eurodollar" means US Dollars which are freely convertible on the London Interbank Market; "Financial Reports" means balance sheets, statements of profit or loss and statements of changes in financial position prepared: (a) on a non-consolidated basis; (b) on a fully consolidated basis. "Libor" means the rates of interest, rounded upwards, if necessary, to the nearest whole multiple of one sixteenth of one percent (1/16th%), at which the Bank, in accordance with its normal practice, would be prepared to offer deposits to leading banks in the London Interbank Market for delivery on the first day of each of the relative Libor Interest Periods for a period equal to each such Libor Interest Period based on the number of days comprised therein, such deposits being in U.S. Dollars of comparable amounts to be outstanding during such Libor Interest Period, at or about 10:00 a.m. (Toronto time) two (2) Banking Days prior to a Drawdown Date or a Conversion Date as the case may be, for the initial Libor Interest Period, and, thereafter two (2) Banking Days prior to the first day of each successive Libor Interest Period. "Libor Interest Date" means the last day of each Libor Interest Period and if the Borrower selects a Libor Interest Period for a period longer than 3 months, the Libor Interest Date shall be the date falling every 3 months after the beginning of such Libor Interest Period and on the last day of such Libor Interest Period. "Libor Interest Period" means with respect to a Libor Loan the initial period (subject to availability) of approximately 1, 3, 6, or 9 months or one year or such longer period up to 5 years as the Bank and Borrower may agree, commencing with the date on which a Libor Loan is made or on which another basis of borrowing is converted into a Libor SCHEDULE "A" Loan and ending on the Libor Interest Date falling on the last day of the applicable Libor Interest Period, and thereafter each successive period (subject to availability) of approximately 3, 6, or 9 months or one year or such longer period up to 5 years as the Bank and Borrower may agree, commencing on the last day of the immediately prior Libor Interest Period. "Material Subsidiaries" means Newbridge Networks Inc., Newbridge Networks (Asia) Limited, Newbridge Networks Korea Ltd., Newbridge Networks Limited and any other subsidiary which may be designated in writing by the Bank. "Potential Preferred Claims" means amounts owing for wages, employee deductions, goods and services tax, sales tax, excise tax, income tax, workmen's compensation, Government royalties, pension fund obligations, overdue rents or taxes, purchase-money security interests, and other statutory preferred claims, including, without limitation, any claims arising under the Bankruptcy Act. "Pounds Sterling" or "(Pounds)" means lawful money of the United Kingdom. "RBP" means the annual rate of interest announced by the Bank from time to time as being a reference rate then in effect for determining interest rates on Canadian Dollar commercial loans in Canada. "RSUSBR" means the annual rate of interest announced by the Bank from time to time as a reference rate then in effect for determining interest rates on United States Dollar commercial loans in Canada. "US Dollars" and "US$" means lawful money of the United States of America in same day immediately available funds or, if such funds are not available, the form of money of the United States of America that is customarily used in the settlement of international banking transactions on the day payment is due hereunder. SCHEDULE "B" Schedule "B" to the Letter Agreement dated as of the 19th day of December, 1997 between Newbridge Networks Corporation as the Borrower and Royal Bank of Canada as the Bank. Notice Requirements for Drawdowns, Repayments, Conversions, and Prepayments - --------------------------------------------------------------------------- RBP LOANS AND/OR RBUSBR LOANS - ----------------------------- Amount Prior Notice ------ ------------ $10,000,000 None. Over $10,000,000 up to and 2 Business Days. including $50,000,000 B/A'S AND TERM B/A'S - -------------------- Amount Prior Notice ------ ------------ $5,000,000 and under None. Over $5,000,000 up to and 1 Business Day. including $10,000,000 Over $10,000,000 up to and 2 Business Days. including Cdn $50,000,000 LIBOR LOANS - ----------- Amount Prior Notice US $10,000,000 and under and By 10:00 a.m. 2 Banking Days up to 1 year rollovers prior to Settlement Date. US $10,000,000 and over and up to By 10:00 a.m. 3 Banking Days 1 year rollovers prior to Settlement Date. SCHEDULE "C" Schedule "C" to the Letter Agreement dated the 19th day of December, 1997 between Newbridge Networks Corporation as Borrower and Royal Bank of Canada as the Bank. OFFICER'S COMPLIANCE CERTIFICATE -------------------------------- 1, [Name], of the [City] of ________________ in the Province of __________ , hereby certify as follows: 1. That I am the Executive Vice President, Finance and Chief Financial Officer or a Vice President, Finance of Newbridge Networks Corporation. 2. That I am familiar with and have examined the provisions of the letter agreement (the "Letter Agreement") dated December 19, 1997, between Newbridge Networks Corporation (the "Borrower, and Royal Bank of Canada (the "Bank') and have made reasonable investigations of corporate records and inquiries of other officers and senior personnel of the Borrower and, based on the foregoing, that as of the date of this Certificate: (a) the representations and warranties contained in the Letter Agreement are true and correct; (b) the Borrower is not in default under the Letter Agreement nor has any event occurred which, with the giving of notice or the passage of time or both, would constitute an Event of Default under the Letter Agreement and the Borrower is not in default under any other material agreement for monies borrowed, raised, or guaranteed to which the Borrower is a party or by which it is bound; and (c) the covenants contained in the Letter Agreement have not been breached and during the next fiscal quarter of the Borrower there is no reason to believe that any of such covenants will be breached. NEWBRIDGE NETWORKS CORPORATION ----------------------------------- Date: ----------------------------------- EX-10.9 3 EXHIBIT 10.9 EXHIBIT 10.9 NEWBRIDGE NETWORKS CORPORATION Indicative Summary of Terms and Conditions C$50,000,000 Loan Facility Borrower: Newbridge Networks Corporation (the "Borrower"). Facility Amount: C$50,000,000 consisting of two parts: 1. A fixed rate accreting Term Loan which is secured and non- recourse. 2. A floating rate amortizing Demand Loan which is unsecured. Schedule of Principal Owing: The principal amounts owing shall be as follows, absent any early repayments [all to be updated and fully detailed once exact figures and dates are known]: From: To: Term Loan Demand Loan 26-Jan-98 25-Jul-98 34,512,500 15,487,500 26-Jul-98 25-Jan-99 35,092,410 14,907,590 26-Jan-99 25-Jul-99 35,770,324 14,229,676 26-Jul-99 25-Jan-2000 36,521,362 13,478,638 26-Jan-2000 25-Jul-2000 37,330,610 12,669,390 26-Jul-2000 25-Jan-2001 38,166,837 11,833,163 26-Jan-2001 25-Jul-2001 39,089,514 10,910,486 26-Jul-2001 25-Jan-2002 40,021,072 9,978,928 26-Jan-2002 25-Jul-2002 40,967,811 9,032,189 26-Jul-2002 25-Jan-2003 41,936,021 8,063,979 26-Jan-2003 42,923,769 7,076,231 Purpose: General corporate purposes. Security: Lender recourse and Borrower obligations on the Term Loan are limited to the specific Security provided. Security for the Term Loan will be 545,976 Northern Telecom Limited (Nortel) common shares placed in Trust with Trustee (or cash equivalent) to serve the Borrower's obligations to Lender under the loan. Additional Security will be the Borrower's rights under a related Forward Share Price Hedge Agreement (see attached Term Sheet). The Demand Loan will be unsecured, and will be direct recourse to the Borrower. Trustee: [To be determined] Administrative Agent: Citibank Canada ("Citibank"). Arranger: Citibank. Lender: Citibank. Funding Date: January [26], 1998, or such other date as may be agreed upon by the Borrower and the Lender. Facility Term of five (5) years from the Funding Date. Termination Date: Fees: Zero upfront fees. Zero ongoing fees. Interest Rates: On the Term Loan: [6.17%] annual rate, paid semi-annually in arrears. During the 5 year term, the Term Loan can be repaid at any time and/or can be permanently reduced in size (with make whole language based on discounting the cashflows remaining at BA + 0), On the Demand Loan: [1 mth BA + 0, mthly]. Loan Documentation: The provision of the Facility is subject to preparation, execution and delivery of mutually acceptable loan documentation which will contain conditions precedent, representations and warranties, events of default and other provisions customary for facilities of this nature, including, but not limited to, those noted below. Conditions Precedent: (i) No material adverse change prior to closing or to the making of any advance, (ii) Security for the Term Loan deposited in Trust in advance of a draw down on the facility. Security must be free of all liens, claims, encumbrances or prior charges and shall constitute a first ranking claim on such assets, (iii) and as the Borrower's rights under the related Forward Share Price Hedge Agreement represents a portion of the Security for the Term Loan, this Forward Share Price Hedge Agreement must remain in place over the life of the Term Loan. Representation Standard representations and warranties including no material and Warranties: adverse change prior to closing. Assignment and The Lender will have the right to assign all or a portion of Participations: its rights and obligations under the loan documents, with the consent, not to be unreasonably withheld, of the Borrower. The Lender will also have the right, without consent of the Borrower to assign, with notice, to the Borrower, all or part of its rights or obligations under the loan documents to any of its affiliates. The Lender will have the right to sell participations in its rights and obligations under the loan documents, subject to customary restrictions on the participants' voting rights. Governing Law: The Loan Agreement and the Security Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario. There should be submission to Ontario jurisdiction. Additional Any term or condition not addressed specifically herein Matters: shall be subject to the mutual agreement of the respective parties. This Indicative Summary of Terms is not a commitment of Citibank or any of its affiliates or subsidiaries and is intended for discussion purposes only. This document is, however, intended to act as a guideline of key trade parameters. Subject to adjustment of prices based on market conditions, this summary of terms and conditions should be considered the basis for any verbal agreement, and as a basis for the official legal documents to follow. /s/ Ammar Al-Joundi January 20/98 - ------------------------ ------------------------ Ammar Al-Joundi (Date) Vice-President Citibank Canada --------- /s/ Ken Bellows January 20/98 - ------------------------ ------------------------ Ken Bellows (Date) Assistant Vice-President Newbridge Networks Corporation EX-11.1 4 EXHIBIT 11.1 EXHIBIT 11.1 NEWBRIDGE NETWORKS CORPORATION COMPUTATION OF EARNINGS PER SHARE (Accounting principles generally accepted in Canada) (Canadian dollars, amounts in thousands except per share data) (Unaudited)
Fiscal quarter ended Three fiscal quarters ended -------------------- --------------------------- Feb 1, Jan 26, Feb 1, Jan 26, 1998 1997 1998 1997 ---- ---- ---- ---- Basic earnings (loss) per share Net earnings (loss) $(144,283) $ 63,031 $(21,936) $186,613 ========= ======== ======== ======== Common Shares outstanding at the beginning of the period 175,305 170,741 171,859 168,676 Weighted average number of Common Shares issued, net of Common Shares repurchased, during the period 71 200 2,479 1,464 --------- -------- -------- -------- Weighted average number of Common Shares outstanding during the period 175,376 170,941 174,338 170,140 ========= ======== ======== ======== Basic earnings (loss) per share (82)c 37c (13)c $ 1.10 ========= ======== ======== ======== Fully diluted earnings (loss) per share Earnings (loss) before imputed earnings $(144,283) $ 63,031 $(21,936) $186,613 After tax imputed earnings from the investment of funds received through dilution -- 2,693 -- 8,241 --------- -------- -------- -------- Adjusted net earnings (loss) $(144,283) $ 65,724 $(21,936) $194,854 ========= ======== ======== ======== Weighted average number of Common Shares outstanding during the period 175,376 170,941 174,338 170,140 Weighted average common share equivalents based on conversion of outstanding stock options -- 14,096 -- 13,500 --------- -------- -------- -------- Weighted average number of Common Shares and equivalents outstanding during the period 175,376 185,037 174,338 183,640 ========= ======== ======== ======== Fully diluted earnings (loss) per share (82)c 36c (13)c $ 1.06 ========= ======== ======== ======== Earnings (loss) 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 $0.7006 $0.7406 $0.7071 $ 0.7346 Basic earnings (loss) per share, in U.S. dollars (58)c 27c (9)c 81c ========= ======== ======== ======== Fully diluted earnings (loss) per share, in U.S. dollars (58)c 26c (9)c 78c ========= ======== ======== ========
EX-11.2 5 EXHIBIT 11.2 EXHIBIT 11.2 NEWBRIDGE NETWORKS CORPORATION COMPUTATION OF EARNINGS PER SHARE (Accounting principles generally accepted in the United States) (Canadian dollars, amounts in thousands except per share data) (Unaudited)
Fiscal quarter ended Three fiscal quarters ended --------------------------- --------------------------- Feb 1, Jan 26, Feb 1, Jan 26, 1998 1997 1998 1997 ---- ---- ---- ---- Net earnings(loss) (U.S. GAAP) Net earnings (loss), as reported, Cdn GAAP $(144,283) $ 63,031 $(21,936) $186,613 Write off of purchased research and development in process (52,762) (96,940) (52,762) (96,940) Amortization of purchased research and development in process, Cdn GAAP 26,381 -- 26,381 -- --------- -------- -------- -------- Net earnings (loss), U.S. GAAP $(170,664) $(33,909) $(48,317) $ 89,673 ========= ======== ======== ======== Earnings (loss) per share (U.S. GAAP) - Basic Net earnings (loss) $(170,664) $(33,909) $(48,317) $ 89,673 ========= ======== ======== ======== Weighted average number of Common Shares outstanding during the period 175,376 170,941 174,338 170,140 ========= ======== ======== ======== Earnings (loss) per share (U.S. GAAP) (97)c (20)c (28)c 53c --------- -------- -------- -------- Earnings (loss) per share (U.S. GAAP) - Diluted Net earnings (loss) $(170,664) $(33,909) $(48,317) $ 89,673 ========= ======== ======== ======== Weighted average number of Common Shares outstanding during the period 175,376 170,941 174,338 170,140 Net effect of dilutive stock options based on the treasury stock method -- -- -- 4,667 --------- -------- -------- -------- Weighted average number of Common Shares and equivalents outstanding during the period 175,376 170,941 174,338 174,807 ========= ======== ======== ======== Earnings (loss) per share (U.S. GAAP) (97)c (20)c (28)c 51c ========= ======== ======== ======== Earnings (loss) 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 $ 0.7006 $ 0.7406 $ 0.7071 $ 0.7346 Earnings (loss) per share (U.S. GAAP) - Basic, in U.S. dollars (68)c (15)c (20)c 39c ========= ======== ======== ======== Earnings (loss) per share (U.S. GAAP) - Diluted, in U.S. dollars (68)c (15)c (20)c 38c ========= ======== ======== ========
EX-27 6 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated statement of earnings, consolidated balance sheet and consolidated statement of cash flows included in the Company's Form 10-Q for the fiscal quarter ended February 1, 1998, and is qualified in its entirety by reference to such financial statements. 1,000 CANADIAN DOLLARS 3-MOS APR-30-1998 NOV-03-1997 FEB-01-1998 0.7006 227,192 6,941 414,331 12,226 208,838 927,743 820,766 409,640 1,667,162 273,359 60,067 0 0 450,233 775,834 1,667,162 358,520 358,520 144,813 539,028 1,958 0 625 (133,064) 9,457 (144,283) 0 0 0 (144,283) (0.82) (0.82)
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