-----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, EvgS2I8u874s21dGPqTbtTpbdbfkevBH4ixl51gEvwwZO1V5di8EctNELZOJBrJl SBGkJbU83M/d/h8ULavwEA== 0000928385-98-001919.txt : 19980915 0000928385-98-001919.hdr.sgml : 19980915 ACCESSION NUMBER: 0000928385-98-001919 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980802 FILED AS OF DATE: 19980914 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: 98708727 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 AUGUST 2, 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 September 10, 1998 was 176,774,891. (Exhibit index located on page 20) (Page 1 of 23) 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 ended August 2, 1998 and August 3, 1997..................................... 3 Consolidated Balance Sheets -- August 2, 1998 and April 30, 1998...................... 4 Consolidated Statements of Cash Flows -- Fiscal quarters ended August 2, 1998 and August 3, 1997......................................... 5 Notes to the Consolidated Financial Statements........... 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 11-17 Item 3. Quantitative and Qualitative Disclosure About Market Risk.. 17 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................... 18 Item 5. Other Information.......................................... 18 Item 6. Exhibits and Reports on Form 8-K........................... 18 SIGNATURES............................................................... 19
(Page 2 of 23) PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (Canadian dollars, amounts in thousands except per share data) (Unaudited)
Fiscal quarter ended ---------------------- August 2, August 3, 1998 1997 ---------- ---------- Sales $426,056 $434,738 Cost of sales 176,562 160,730 -------- -------- Gross margin 249,494 274,008 Expenses Selling, general and administrative 129,039 123,857 Research and development 67,156 59,683 -------- -------- Income from operations 53,299 90,468 Interest income 6,611 3,022 Interest expense on long term obligations (6,703) (284) Other expenses (2,433) (2,185) -------- -------- Earnings before income taxes and non-controlling interest 50,774 91,021 Provision for income taxes 14,978 27,034 Non-controlling interest 276 (367) -------- -------- Net earnings 35,520 64,354 Retained earnings, beginning of the period 749,830 768,148 -------- -------- Retained earnings, end of the period $785,350 $832,502 ======== ======== Earnings per share (Note 5) Basic $0.20 $0.37 Fully diluted $0.20 $0.36 Weighted average number of shares Basic 176,105 172,964 Fully diluted 196,750 189,082
See accompanying Notes to the Consolidated Financial Statements. (Page 3 of 23) NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED BALANCE SHEETS (Canadian dollars in thousands)
August 2, April 30, 1998 1998 ----------- ---------- (unaudited) ASSETS Cash and cash equivalents (Note 2) $ 509,366 $ 499,278 Accounts receivable, net of provision for returns and doubtful accounts of $13,951 (April 30, 1998 - $13,067) 431,183 428,527 Inventories (Note 3) 188,617 196,285 Prepaid expenses and other current assets 87,283 77,600 ---------- ---------- 1,216,449 1,201,690 Property, plant and equipment 494,366 450,735 Goodwill (Note 4) 72,238 72,719 Software development costs 30,209 28,299 Future tax benefits 41,152 50,443 Other assets 186,489 162,939 ---------- ---------- $2,040,903 $1,966,825 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 119,692 $ 127,040 Accrued liabilities 108,721 118,771 Income taxes -- 5,851 Current portion of long term obligations 4,273 4,136 ---------- ---------- 232,686 255,798 Long term obligations 395,026 383,311 Future tax obligations 74,223 71,197 Non-controlling interest 25,798 22,899 ---------- ---------- 727,733 733,205 ---------- ---------- Common shares - 176,558,292 outstanding (April 30, 1998 - 175,686,083 outstanding) 476,559 456,510 Accumulated foreign currency translation adjustment 51,261 27,280 Retained earnings 785,350 749,830 ---------- ---------- 1,313,170 1,233,620 ---------- ---------- $2,040,903 $1,966,825 ========== ==========
See accompanying Notes to the Consolidated Financial Statements. (Page 4 of 23) NEWBRIDGE NETWORKS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Canadian dollars in thousands) (Unaudited)
Fiscal quarter ended ---------------------- August 2, August 3, 1998 1997 ---------- ---------- OPERATING ACTIVITIES Net earnings $ 35,520 $ 64,354 Items not affecting cash Amortization 38,662 27,556 Future income taxes 14,313 5,158 Non-controlling interest 298 (367) Other (39) 1,979 Cash effect of changes in: Accounts receivable 14,042 (23,980) Inventories 12,737 (29,283) Prepaid expenses and other current assets 932 15,109 Accounts payable and accrued liabilities (26,616) (22,330) Income taxes (12,703) (13,314) -------- -------- 77,146 24,882 -------- -------- INVESTING ACTIVITIES Additions to property, plant and equipment (70,741) (53,643) Capitalized software development costs (5,242) (3,085) Additions to other assets (22,410) (7,560) -------- -------- (98,393) (64,288) -------- -------- FINANCING ACTIVITIES Issue of common shares 18,945 53,580 Increase in long term obligations 16,765 4,060 Repayment of long term obligations (5,462) (1,415) -------- -------- 30,248 56,225 -------- -------- Increase in cash and cash equivalents 9,001 16,819 Effect of foreign currency translation on cash 1,087 3,238 -------- -------- 10,088 20,057 Cash and cash equivalents, beginning of period 499,278 333,904 -------- -------- Cash and cash equivalents, end of period $509,366 $353,961 ======== ========
See accompanying Notes to the Consolidated Financial Statements. (Page 5 of 23) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited interim consolidated financial statements of Newbridge Networks Corporation (the "Company") have been prepared in accordance with accounting principles generally accepted in Canada for interim financial information. These accounting principles are also generally accepted in the United States ("U.S. GAAP") in all material respects except for the disclosure of certain cash equivalents on the Consolidated Balance Sheets and investing activities on the Consolidated Statements of Cash Flows, as disclosed in Note 2, and the method of calculation of earnings per share, as disclosed in Note 5. In the opinion of Management, the unaudited interim consolidated financial statements reflect all normal and recurring adjustments considered necessary for fair presentation. The results of operations for the first fiscal quarter ended August 2, 1998 are not necessarily indicative of the results to be expected for the fiscal year ending May 2, 1999. 2. CASH AND CASH EQUIVALENTS Components of cash and cash equivalents are:
August 2, April 30, 1998 1998 --------- --------- Cash $428,868 $467,464 Held to maturity marketable securities Maturing within one year: Corporate debt securities 71,131 22,447 Available for sale marketable securities Equity securities 9,367 9,367 -------- -------- $509,366 $499,278 ======== ========
Held to maturity marketable securities are investments with original maturities of three months or more. Available for sale marketable securities are common shares of publicly traded companies acquired upon the Company's disposition of minority interests in privately held companies. Under U.S. GAAP, marketable securities would be disclosed as a separate caption on the Consolidated Balance Sheets. (Page 6 of 23) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) Held to maturity marketable securities are carried at amortized cost. The unrealized gains and losses are not included in the Consolidated Statements of Earnings as these gains and losses are unlikely to be realized due to the Company's intent to hold the underlying securities to maturity. Available for sale securities are carried at the lower of cost and market. If the Consolidated Statements of Cash Flows were prepared under U.S. GAAP, purchases, maturities and sales of marketable securities would be disclosed as an investing activity. Disclosure in the Consolidated Statements of Cash Flows prepared under U.S. GAAP would be as follows.
Fiscal quarter ended ---------------------- August 2, August 3, 1998 1997 --------- -------- Investing activities in short term marketable securities: Held to maturity securities Maturities $ 198 $128,751 Purchases (48,882) (50,018) --------- -------- (48,684) 78,733 Investing activities, as reported (98,393) (64,288) --------- -------- Investing activities, U.S. GAAP $(147,077) $ 14,445 ========= ======== Net increase in cash and cash equivalents, as reported $ 10,088 $ 20,057 Investing activities in short term marketable securities (48,684) 78,733 --------- -------- Net increase in cash and cash equivalents, U.S. GAAP $ (38,596) $ 98,790 ========= ======== 3. INVENTORIES August 2, April 30, 1998 1998 --------- -------- Finished goods $ 133,693 $129,850 Work in process 13,959 18,178 Raw materials 40,965 48,257 --------- -------- $ 188,617 $196,285 ========= ========
(Page 7 of 23) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 4. GOODWILL
August 2, April 30, 1998 1998 -------- --------- Goodwill $ 84,163 $ 83,817 Accumulated amortization (11,925) (11,098) -------- --------- $ 72,238 $ 72,719 ======== =========
5. EARNINGS PER SHARE Basic earnings per share has been calculated as net earnings for the period divided by the daily weighted average number of Common Shares outstanding during the fiscal quarter. Fully diluted earnings per share has been calculated as net earnings plus after tax imputed earnings on the cash which would have been received on the exercise of options, divided by the daily weighted average number of Common Shares and common share equivalents outstanding during the period. Under U.S. GAAP, basic earnings per share has been calculated as net earnings for the period divided by the daily weighted average number of Common Shares outstanding during the fiscal quarter, consistent with the calculation of basic earnings per share under accounting principles generally accepted in Canada. Diluted earnings per share is calculated using the treasury stock method. 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 average of the daily noon buying rates for Canadian dollars in 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 quarter ended -------------------- August 2, August 3, 1998 1997 --------- --------- Earnings per share Basic $0.20 $0.37 ========= ========= Diluted $0.20 $0.36 ========= ========= Earnings per share -- in U.S. dollars Basic $0.14 $0.27 ========= ========= Diluted $0.14 $0.26 ========= ========= Weighted average number of shares Basic 176,105 172,964 ========= ========= Diluted 178,419 179,821 ========= =========
(Page 8 of 23) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 6. RESTRUCTURING COSTS In November 1997, the Company decided to restructure its activities related to its LAN business. The restructuring plan involved 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 it 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 were recorded in the third quarter of the fiscal year ended April 30, 1998. Restructuring activities were essentially completed as planned through the first quarter of fiscal 1999. 7. LITIGATION In the fourth quarter of fiscal 1998 the Company reached an agreement in principle to settle the class action lawsuit which was filed in United States District Court in Washington, D.C. during the fiscal year ended April 30, 1995. The lawsuit 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. Notice of the proposed settlement has been sent to class members. The proposed settlement is subject to review and approval by the Court. The Company recorded the expense in connection with the settlement of $2,642,000 in the fourth quarter of fiscal 1998 representing the direct costs incurred. Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the fiscal year ended April 30, 1998 in United States District Court in Delaware against the Company and its United States subsidiary, Newbridge Networks Inc. Lucent Technologies manufactures and sells telecommunications systems, software and products, and is both a distributor of the Company's products and a competitor of the Company. The complaint alleges that the Company's manufacture and sale in the United States of 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. 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. The Company has filed an answer to the complaint, as well as a counterclaim alleging unfair competition by Lucent Technologies, and intends to defend this action vigorously. 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 9 of 23) NEWBRIDGE NETWORKS CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Canadian dollars, tabular amounts in thousands except per share data) (Unaudited) 8. SUBSEQUENT EVENT On September 9, 1998 the Company announced that it has agreed to sell its majority ownership position in Advanced Computer Communications ("ACC") to Telefonaktiebolaget LM Ericsson for cash proceeds of approximately US$170 million. The Company expects to record a non-recurring gain in the second quarter of fiscal 1999 associated with the transaction, which the Company expects will be closed in October 1998. 9. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the United States Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 requires that an entity recognize all derivative instruments as either assets or liabilities on its balance sheet and requires that the instruments be recorded at fair value. SFAS 133 is effective for fiscal periods beginning after June 15, 1999. The Company is currently assessing the impact that SFAS 133 will have on its financial statements. (Page 10 of 23) 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. RESULTS OF OPERATIONS Sales declined in the first quarter of fiscal 1999 ended August 2, 1998 by 2% compared to sales in the first quarter of fiscal 1997 ended August 3, 1997. The decline in sales combined with a 4% decline in gross margin as a percentage of sales and a $12,655,000 increase in operating expenses, resulted in net earnings of $35,520,000 for the first quarter of fiscal 1999, a decline of 45% below net earnings for the first quarter of fiscal 1998. Net earnings of $35,520,000 for the first quarter of fiscal 1999 represented an increase of 11% over the fourth quarter of fiscal 1998. The increase in net earnings was predominantly due to an increase in sales of 8% in the first quarter of fiscal 1999 compared to the fourth quarter of fiscal 1998. SALES
Fiscal Quarter Ended ---------------------------- Aug 2, Aug 3, % 1998 1997 Decrease -------- -------- -------- (Canadian dollars in thousands) Sales $426,056 $434,738 (2)% ======== ======== ========
The decline in sales in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 was due to a decrease in sales of products based on packet technologies for local area network applications (LAN Packet products), largely offset by increases in sales of products based on packet technologies for wide area network applications (WAN Packet products). Revenues of LAN Packet products declined approximately 70% from the first quarter of fiscal 1998 to the first quarter of fiscal 1999. The decline was the result of sharp decreases in revenue derived from products associated with the former Ungermann - Bass Networks Inc. ("UB") organization, which the Company acquired in January 1997. The Company restructured its activities in the LAN business, including the former UB, in the third quarter of fiscal 1998. LAN Packet products represented approximately 5% of the Company's revenue in the first quarter of fiscal 1999 compared to approximately 15% in the first quarter of fiscal 1998. Sales of WAN Packet products grew approximately 30% in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998. Sales of WAN Packet products represented over 50% total sales in the first quarter of fiscal 1999, compared to approximately 40% of total sales in the first quarter of fiscal 1998. Product line enhancements and new product lines introduced in fiscal 1997 and 1998 resulted in increased sales, predominantly through increased acceptance and demand by carriers throughout the world for the Company's asynchronous transfer mode (ATM) products. (Page 11 of 23) Sales of circuit switched networking products declined 5% relative to sales in the first quarter of fiscal 1998. The Company expects the proportion of sales derived from products based on packet technologies for wide area network applications to continue to increase relative to sales derived from circuit switched networking products in fiscal 1999 when compared to fiscal 1998. As a result, sales growth may be impeded due to longer sales cycles often associated with the adoption of new technologies. The Company's sales in the first quarter to carriers for applications that provide a range of value-added services, such as Virtual Private Networks (VPNs), wide area network support and Internet access, and for resale to end users represented 71% of total sales versus 64% in the first quarter of fiscal 1998. The proportion of revenue derived from carriers increased relative to the first quarter of fiscal 1998 due to the decline in revenues of former UB Networks products, which serve enterprise customers. Deliveries to original equipment manufacturers (OEMs) for carrier customers and deliveries under certain large contracts with carriers contributed significantly to sales in the first quarter of fiscal 1999 and the first quarter of fiscal 1998. Sales to Siemens A.G. and subsidiaries, generally under OEM arrangements for resale to end users, were 14% of total sales for the first quarter of fiscal 1999 and 19% of total sales for the first quarter of fiscal 1998. The sales decrease in the first quarter of fiscal 1999 relative to the first quarter of fiscal 1998 reflects declines in the European Region, associated with the sharp decline in sales of former UB Networks products, and in the Asia Pacific Region, due to the recent downturn in economic activity, net of increased revenues in the Americas region reflecting the increasing demand for WAN Packet products. 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. As is prevalent in emerging segments of the networking industry, a disproportionate amount of the Company's shipments occur in the third month of each fiscal quarter. In addition, customers have the ability to revise or cancel orders and change delivery schedules without significant penalty. As a result, the Company operates without significant backlog and schedules some production and budgets expenses based on forecasts of sales, which are difficult to predict. Unforeseen delays in product deliveries or closing large sales, introductions of new products by the Company or its competitors, seasonal patterns of customer capital expenditures or other conditions affecting the networking industry in particular or the economy generally during any fiscal quarter could cause quarterly revenue and, to a greater degree, net earnings, to vary greatly. Quarterly operating results are consequently difficult to predict, even towards the end of a given fiscal quarter. 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 first quarter of fiscal 1999, the decrease in the value of the Canadian dollar against the Pound Sterling and the U.S. dollar, relative to exchange rates in the first quarter of fiscal 1998, resulted in no material variance in reported sales, gross margin or income from operations. (Page 12 of 23) COST OF SALES AND GROSS MARGIN
Fiscal Quarter Ended -------------------- Aug 2, Aug 3, 1998 1997 -------- -------- (Canadian dollars in thousands) Gross margin $249,494 $274,008 ======== ======== As % of sales 59% 63%
Cost of sales consists of manufacturing costs, warranty expense and costs associated with the provision of services. The decline in the gross margin as a percentage of sales in the first quarter of fiscal 1999 relative to the first quarter of fiscal 1998 was the result of 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, as well as the result of increased competition on product pricing, particularly in the market for products based on packet technologies. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Fiscal Quarter Ended ----------------------------- Aug 2, Aug 3, % 1998 1997 Increase -------- -------- --------- (Canadian dollars in thousands) Selling, general and administrative expenses $129,039 $123,857 4% ======== ======== As a % of sales 30% 28%
Selling, general and administrative expenses increased in the first quarter of fiscal 1999 relative to the first quarter of fiscal 1998 predominantly as a result of increased remuneration costs associated with annual salary increases and additional staff. Incremental hiring was directed at programs to strengthening the sales and support infrastructure throughout the world. The increase in selling, general and administrative expenses as a percentage of sales in the first quarter of fiscal 1999 over the first quarter of fiscal 1998 is the result of the increase in spending and the sales decrease over the same period. Selling, general and administrative expenses as a percentage of sales declined by 1% from the fourth quarter of fiscal 1998. Management anticipates that selling, general and administrative expenses as a percentage of sales will decline in fiscal 1999 relative to fiscal 1998. (Page 13 of 23) RESEARCH AND DEVELOPMENT
Fiscal Quarter Ended ---------------------------- Aug 3, Aug 2, % 1998 1997 Increase ------- ------- -------- (Canadian dollars in thousands) Gross research and development expenditures $83,746 $70,817 18% Investment tax credits (9,112) (8,400) 8% Customer, government and other funding (5,614) (1,502) 274% Net deferral (amortization) of software development costs (1,864) (1,232) 51% ------- ------- Net research and development expenses $67,156 $59,683 13% ======= ======= Gross expenditures as a % of sales 20% 16% Recoveries as a % of gross expenditures 20% 16% Net expenses as a % of sales 16% 14%
Research and development expenditures consist primarily of software and hardware engineering personnel expenses, costs associated with equipment and facilities, and subcontracted research and development costs. The increased costs in the first quarter of fiscal 1999 relative to the first quarter of fiscal 1998 reflect spending to expand the breadth of network solutions for new value-added service capabilities and access technologies, particularly with respect to ATM platforms and network and service management software in carrier and carrier access applications. The majority of the increase was the result of increased engineering personnel and annual salary increases. Recoveries increased as a percentage of gross expenditures in the first quarter of fiscal 1999 compared to the first quarter of fiscal 1998 due to an increase in customer, government and other funding as a proportion of gross research and development expenditures. Based on Management's estimates of the proportion of fiscal 1999 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 1999 to approximate the fiscal 1998 level. The markets for the Company's products are characterized by continuing technological change. The Company plans to increase net research and development spending in absolute dollars in fiscal 1999 relative to fiscal 1998 to address the requirements of carriers as they invest in new infrastructures to meet the challenges of growing demand for new communications services and increased competition. (Page 14 of 23) INTEREST AND OTHER EXPENSES
Fiscal Quarter Ended ----------------------------- Aug 2, Aug 3, % 1998 1997 Increase -------- -------- --------- (Canadian dollars in thousands) Interest income $ 6,611 $ 3,022 118% Interest expense on long term obligations (6,703) (284) 2260% Other expenses (2,433) (2,185) 11%
Interest income and interest expense on long term obligations for the first quarter of fiscal 1999 both increased compared to the first quarter of fiscal 1998 primarily as a result of interest income earned and interest expense incurred on the proceeds of the issuance of US$225,000,000 of Senior Notes due 2003 at the end of the fourth quarter of fiscal 1998. Other expenses represented less than 1% of sales in the first quarters of fiscal 1999 and fiscal 1998. INCOME TAXES
Fiscal Quarter Ended -------------------- Aug 2, Aug 3, 1998 1997 ------ ------ Income tax rate 30% 30%
The composite rates of income tax for fiscal the first quarter of fiscal 1999 and the first quarter of fiscal 1998 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 rates of income tax will be primarily due to the relative profitability of operations and the national tax policies in each of the various countries in which the Company operates. Management believes that the composite rate of income tax will remain lower than the statutory rate because of the availability of deductions related to manufacturing and processing activities and research and development expenditures in Canada as well as other tax planning measures undertaken by the Company. NON-CONTROLLING INTEREST The non-controlling interests' share of subsidiary net earnings of $276,000 in the first quarter of fiscal 1999 relates primarily to net earnings of Coasin S.A., a Chilean systems integrator of networking products. The non-controlling interests' share of subsidiary net losses of $367,000 in the first quarter of fiscal 1998 relate primarily to Transistemas S.A., an Argentine systems integrator of networking products. The Company has a 51% equity interest in each of Coasin S.A. and Transistemas S.A. NET EARNINGS Sales decreased in the first quarter of fiscal 1999 ended August 2, 1998 by 2% compared to sales in the first quarter of fiscal 1998 ended August 3, 1997. The sales decline of 2% for the first quarter of fiscal 1999 relative to the first quarter of fiscal 1998 combined with a decline in the gross margin as a percentage of sales of 4% and a 7% increase in operating expenses, resulted in net earnings of $35,520,000 for the first quarter of fiscal 1999, a decrease of 45% below net earnings for the first quarter of fiscal 1998. (Page 15 of 23) FINANCIAL CONDITION During the first quarter of fiscal 1999 ended August 2, 1998 working capital increased from $945,892,000 to $983,763,000. As at August 2, 1998 the Company had $509,636,000 of cash and cash equivalents, which represented an increase of $10,088,000 during the first quarter of fiscal 1999. Cash flow from operations of $77,146,000 during the quarter, due mainly to net earnings of $35,520,000 and improvements in certain working capital ratios, was largely offset by additions to property, plant and equipment of $70,741,000. Two principal components of the Company's working capital are accounts receivable and inventory. Management believes that the payment terms and conditions extended to the Company's customers, arrangements with the Company's suppliers, and the levels of inventory the Company carries relative to its levels of sales are consistent with practices generally prevailing in the networking industry. In April 1998 the Company issued US$225,000,000 of Senior Notes due 2003 bearing a coupon rate of 6.51%. The Senior Notes require semi-annual payments of interest only, with the principal due at maturity. The Company's obligation under the Senior Notes can be satisfied at any time prior to maturity subject to a make whole provision. The Senior Notes are unsecured. In January 1998 the Company borrowed $50,000,000 under a long term 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 5.46% and the demand loan bears interest at a floating rate equal to the one month's bankers' acceptance rate. The term loan requires semi-annual payments of interest only, with the principal due at maturity. The Company's obligation under the term loan can be satisfied at any time prior to maturity subject to a make whole provision. The demand loan requires monthly payments of interest only, with the principal due at maturity. Existing short term bank credit facilities consist of operating lines of credit with certain banks in the aggregate amount of $176,079,000, primarily with banks in Canada, the United Kingdom, the United States, Chile and Brazil. At August 2, 1998, $11,148,000 was being utilized under these credit facilities, of which $10,771,000 was attributable to Coasin S.A. and Acacia S.A. The Company has a 51% equity interest in each of Coasin S.A, and Acacia S.A. On September 9, 1998 the Company announced that it has agreed to sell its majority ownership position in Advanced Computer Communications ("ACC") to Telefonaktiebolaget LM Ericsson for cash proceeds of approximately US$170 million. The Company expects to record a non-recurring gain in the second quarter of fiscal 1999 associated with the transaction, which the Company expects will be closed in October 1998. Management anticipates that the level of capital expenditures for fiscal 1999 will approximate the level of capital expenditures incurred in fiscal 1998. The Company may also increase its current investments in associated companies. The Company intends to fund capital expenditures and investments with existing cash and cash expected to be generated from operations during fiscal 1999, supplemented as appropriate by divestitures or the issuance of shares or debt. In addition, the Company may use a portion of its cash resources to extend or enhance its business and diversify its marketing and distribution channels through acquisitions of or investments in businesses, products or technologies or through the formation of strategic partnerships with other companies. 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 (Page 16 of 23) adequate to meet its operating and capital expenditure requirements through the end of fiscal 1999 and into the foreseeable future. YEAR 2000 Over a year ago, the Company commenced a program to address potential problems associated with what is commonly known as the "Year 2000" issue". The Company's program entails a comprehensive review of its supporting information systems, products, and the Company's suppliers, to prepare for the Year 2000 date change. Management believes that the costs of carrying out the program will not have a significant impact on the results of operations. However, there can be no assurance that these costs will not be greater than anticipated, nor that preventative actions undertaken will be completed before problems associated with the Year 2000 date change occur. To date the Company has reviewed all of its major product offerings currently available and the majority are Year 2000 compliant, certain other product offerings are being reviewed for compliance. Some discontinued product offerings will either not be evaluated for compliance or are already known to be non- compliant. The Company has made available a Year 2000 Date Compliance Product List to all customers, potential customers and the public in general which identifies the compliance status of all of the Company's products including discontinued products (http://www.newbridge.com/year2000). The Company has also completed the identification phase of determining which software and microprocessor dependent systems are being used by each of the functional areas of the Company that could be affected by the Year 2000 date change. The Company is taking preventative action in those cases where systems have been found not to be Year 2000 compliant either by replacing those systems or upgrading to compliant versions offered by suppliers. The process of obtaining information on Year 2000 from certain suppliers of these systems has not been completed. The Company is still assessing the potential impact the Year 2000 will have on its suppliers and customers and is currently not able to determine the effect on its operations and financial condition if key suppliers or customers do not adequately prepare for the Year 2000 date change on a timely basis. Failure of suppliers on which the Company relies or customers to address this issue in a timely manner could result in a material financial risk to the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK No material changes have occurred to the quantitative and qualitative disclosures about market risk as disclosed in the Company's Annual Report on Form 10-K for the year ended April 30, 1998. (Page 17 of 23) PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the fourth quarter of fiscal 1998 the Company reached an agreement in principle to settle the class action lawsuit which was filed in United States District Court in Washington, D.C. during the fiscal year ended April 30, 1995. The lawsuit 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. Notice of the proposed settlement has been sent to class members. The proposed settlement is subject to review and approval by the Court. The Company recorded the expense in connection with the settlement of $2,642,000 in the fourth quarter of fiscal 1998 representing the direct costs incurred. Lucent Technologies Inc. ("Lucent Technologies") filed a complaint during the fiscal year ended April 30, 1998 in United States District Court in Delaware against the Company and its United States subsidiary, Newbridge Networks Inc. Lucent Technologies manufactures and sells telecommunications systems, software and products, and is both a distributor of the Company's products and a competitor of the Company. The complaint alleges that the Company's manufacture and sale in the United States of 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. 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. The Company has filed an answer to the complaint, as well as a counterclaim alleging unfair competition by Lucent Technologies, and intends to defend this action vigorously. 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, 1998 is incorporated herein by reference and made a part hereof. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Exhibit 11.1 Computation of earnings per share under accounting principles generally accepted in Canada. Exhibit 11.2 Computation of earnings per share under accounting principles generally accepted in the United States. Exhibit 27 Financial data schedule (Page 18 of 23) 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: September 10, 1998 By: /s/Terence H. Matthews ---------------------- TERENCE H. MATTHEWS, Chairman of the Board of Directors and Chief Executive Officer Date: September 10, 1998 By: /s/Kenneth B. Wigglesworth -------------------------- KENNETH B. WIGGLESWORTH, Vice President, Chief Financial Officer (Page 19 of 23) EXHIBIT INDEX
Page No. -------- 11.1 Computation of earnings per share under accounting principles generally accepted in Canada 21 11.2 Computation of earnings per share under accounting principles generally accepted in the United States 22 27 Financial data schedule 23
(Page 20 of 23) EX-11.1 2 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 -------------------- Aug 2, Aug 3, 1998 1997 -------- -------- BASIC EARNINGS PER SHARE Net earnings $ 35,520 $ 64,354 ======== ======== Common Shares outstanding at the beginning of the period 175,686 171,859 Weighted average number of Common Shares issued during the period 419 1,105 -------- -------- Weighted average number of Common Shares outstanding during the period 176,105 172,964 ======== ======== Basic earnings per share $0.20 $0.37 ======== ======== FULLY DILUTED EARNINGS PER SHARE Earnings before imputed earnings $ 35,520 $ 64,354 After tax imputed earnings from the investment of funds received through dilution 6,817 3,979 -------- -------- Adjusted net earnings $ 42,337 $ 68,333 ======== ======== Weighted average number of Common Shares outstanding during the period 176,105 172,964 Weighted average common share equivalents based on conversion of outstanding stock options 20,645 16,118 -------- -------- Weighted average number of Common Shares and equivalents outstanding during the period 196,750 189,082 ======== ======== Fully diluted earnings per share $0.20 $0.36 ======== ======== EARNINGS PER SHARE EXPRESSED IN U.S. DOLLARS Daily average exchange rate of a Canadian dollar for U.S. dollars as reported by the Federal Reserve Bank of New York $0.6817 $0.7242 Basic earnings per share, in U.S. dollars $0.14 $0.27 ======== ======== Fully diluted earnings per share, in U.S. dollars $0.14 $0.26 ======== ========
(Page 21 of 23) EX-11.2 3 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 -------------------- Aug 2, Aug 3, 1998 1997 -------- -------- EARNINGS PER SHARE (U.S. GAAP - BASIC) Net earnings $ 35,520 $ 64,354 ======== ======== Weighted average number of Common Shares outstanding during the period 176,105 172,964 ======== ======== Earnings per share (U.S. GAAP) $0.20 $0.37 ======== ======== EARNINGS PER SHARE (U.S. GAAP - DILUTED) Net earnings $ 35,520 $ 64,354 ======== ======== Weighted average number of Common Shares outstanding during the period 176,105 172,964 Net effect of dilutive stock options and shares, based on the treasury stock method 2,314 6,857 -------- -------- Weighted average number of Common Shares and equivalents outstanding during the period 178,419 179,821 ======== ======== Earnings per share (U.S. GAAP) $0.20 $0.36 ======== ======== EARNINGS PER SHARE EXPRESSED IN U.S. DOLLARS Daily average exchange rate of a Canadian dollar for U.S. dollars as reported by the Federal Reserve Bank of New York $ 0.6817 $ 0.7242 Basic earnings per share (U.S. GAAP), in U.S. dollars $0.14 $0.27 ======== ======== Diluted earnings per share (U.S. GAAP), in U.S. dollars $0.14 $0.26 ======== ========
(Page 22 of 23) EX-27 4 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 ENDING AUGUST 2, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 CANADIAN DOLLARS 3-MOS AUG-02-1998 MAY-01-1998 AUG-02-1998 0.6817 428,868 80,498 444,334 13,151 181,617 1,216,449 958,676 464,310 2,040,903 232,686 0 0 0 476,559 836,611 2,040,903 426,056 0 176,562 372,757 2,433 0 6,703 50,774 14,978 35,520 0 0 0 35,520 0.20 0.20
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